Middle East Sovereign Wealth Funds Benefit from Oil Price Surge
Posted on 10/03/2021
Just a few years ago, media “energy experts” wrote off oil. For the rising price of oil, gas, coal, and power prices, and global consumers’ demand of fossil fuels, times have changed with COVID, rampant inflation, Biden’s stark withdrawal on Trump’s oil and gas production policies, large public institutional investors adopting the Paris Climate Change framework, and the adoption of Western countries looking to shun fossil fuels. In a u-turn from months ago, petrodollars are flowing into Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates. For Saudi Arabia, it is earning more money from oil exports than at any time since 2018. The U.S. is not the only superpower seeing inflation in energy prices. China and the rest of Europe are feeling the energy price pain. China Vice Premier Han Zheng issued an order at an emergency meeting with state-owned asset regulator and economic planning agencies that blackouts will not be tolerated. European countries are facing shortages with greater gas imports during the high-demand winter months. For example, wholesale gas prices in the United Kingdom skyrocketed by 70% in August 2021.
For oil and gas-based sovereign wealth funds, including Norway Government Pension Fund Global, sustained higher oil and gas prices equals larger balance sheets. This is truly a gift for their coffers and expect more activity in these massive institutional investors if the price of fossil fuels remains higher than each country’s break-even energy benchmark points.
The global price of oil is now pushing above US$ 80 per barrel, a far cry from the US$ 20 per barrel days. OPEC and its allies are now in the driver’s seat, as the Biden administration shut down the Keystone pipeline and advanced policies against the U.S. oil and gas industries, while prodding U.S. companies to join in the climate energy transition. Russia is leading OPEC+ and the cartel agreed in July 2021 to boost output by 400,000 barrels per day every month until at least April 2022 to phase out 5.8 million barrels per day of existing cuts. U.S. oil inventories have drawn down nearly 73 million barrels so far in 2021, well below pre-pandemic figures. U.S. President Joe Biden has tried to persuade OPEC in increasing production, thus tying America’s future with Middle East oil again.
Russia
Russian President Vladimir Putin has ordered the government to think about limiting the spending of Russia’s National Wealth Fund (National Welfare Fund). Current Russian law permits the Russian government to spend money from the sovereign fund above a threshold of assets equal to 7 percent of gross domestic product (GDP) held by the fund. Putin is keen on moving that threshold amount at 10% of GDP. Despite oil prices going back up, Putin is concerned that the global energy transition from carbon sources could threaten the country’s finances within a decade.
