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BUSINESS & ECONOMY

USA-KSA Energy War and Global Energy Crisis

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By Syed Raiyan Amir

The response of the USA to OPEC and its partner’s plan to reduce output by two million barrels per day was strong enough to suggest an uptick in hostilities with oil producers, particularly Saudi Arabia. Despite the fact that the decision was well anticipated, Washington saw it as a strong indication from its Gulf allies that they are not likely to comply with USA’s requests to continue oil production. In fact, it has started a war between the two major oil powers to make a serious impact on the energy regime. Hence the tug of war has an impact on the global energy domain since these two are the principal role player in the energy regime.

However, prior to the 2020 election, current US President Joe Biden urged to charge Saudi prince Mohammed bin Salman for the Jamal Khashoggi issue. The Trump era was quite friendly with the Saudi government. So, to confront Donald Trump Biden used the anti – Saudi stance in the 2020 election. Even the US government published a report on the issue after Biden was elected as the president. But the Ukraine war changed the landscape of global politics by introducing the energy crisis. To maintain a balanced price inside the USA, the Biden administration requested the KSA to put a bridle on the price. But despite having kept the USA’s urge the OPEC plus decided to hold the production of 2-million-barrel oil per day. It will help to move the price upward since the downward price of oil was alarming for the OPEC members. The rising oil price can determine the interim election in the USA. Hence the US responded strongly. But the KSA maintained its position. However, here the action of the two big powers in terms of energy will facilitate another round of energy crisis in the global market. The following portions will discuss the issue and what ramifications it will bring.

Strong Stance of the KSA

Suhail Al-Mazrouei, the energy minister for the Emiratis, stated to reporters following the Vienna summit that OPEC took action to assure that producers would continue to invest in new oil supply. “They have their own stories, too, in Europe,” he continued, “and in Russia. We cannot support either this nation or that nation. Moreover, Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, ruled out whatever political purpose and impliedly rejected the notion that the resolution entailed any hostility toward the US or other purchasers, claiming it was not done in defense of Russia. These portray that the KSA is not showing its intent in a hostile manner rather it wants to deal the tension through diplomatic channel.

NOPEC: Reappearing on the Set

The No Oil Producing or Exporting Cartels (NOPEC) bill will allow the U.S. attorney general to sue OPEC or its members, such as Saudi Arabia, in federal court. Other producers like Russia, which works with OPEC in wider group known as OPEC+ to withhold output, could also be sued.

The decision to reduce oil production, however, has already caused President Joe Biden to express his “disappointment,” adding that he would be exploring at “alternatives” to increase inventories. Hence, National Security Advisor Jake Sullivan and Director of the National Economic Council Brian Deese, two senior officials, issued a joint statement urging the White House to rethink its position and support the so-called NOPEC bill, which would hold the oil-producing cartel legally responsible for any price collusion.

Releasing Strategic Reserve: Not an Optimistic Option

The Biden administration’s alternative choice is to increase the amount of oil that is released from the strategic reserve, which is currently at its lowest levels since 1984. A previously stated release of tens of millions of barrels had no effect on the market, but further releases could lead to a supply surplus that would support further OPEC production cutbacks.

The Russia Factor

Washington commentators spouted accusations of Saudi Arabia “siding with Russia” after the OPEC+ announcement of relatively small production cuts. In a statement, the Saudi foreign minister revealed that the U.S. asked OPEC+ to delay announcing its production cut by a month and said that he rejects such “dictates” from Washington.

Moreover, according to OPEC, the decision is simply technical and for maintaining market stability. However, the US administration was enraged because Alexander Novak, the deputy prime minister of Russia and minister of energy, was present at the OPEC+ summit in Vienna. According to sources at OPEC, the US attempted to exert pressure on Austria to forbid his attendance, but OPEC+ members vowed to relocate the organization’s headquarters from there if its integrity was not upheld.

According to analysts, rising oil prices prior to a price cap would be advantageous for Russia, the largest non-OPEC producer. At least the discount starts at a higher price level if Russia is forced to sell oil below market value. Early in the year, high oil prices somewhat offset the sales Russia lost as Western consumers avoided its supplies. Additionally, the nation has been successful in redirecting almost two thirds of its traditional Western sales to buyers in nations like India.

However, as oil prices and sales volumes dropped, Moscow’s revenue from oil decreased from $21 billion in June to $19 billion in July to $17.7 billion in August, according to the International Energy Agency. The price limitations would further undermine a significant source of income since oil and gas revenues account for one-third of Russia’s federal budget.

Ramifications: “Weaponization of Oil”

The world will experience a surge in demand for oil. Besides, the global politics will divide into two separate blocs, though already the polarization is vivid enough. There are other ramifications of the war.

Firstly, The Biden administration plans to “re-evaluate” America’s eight-decade-old alliance with Saudi Arabia because of last week’s OPEC+ decision to cut oil production. But the White House posturing looks like a bid to distract from the effects at home of Washington’s failure to pursue a successful transition to clean energy.

Immediately following the OPEC+ decision, Roger Diwan, an analyst with S&P Global Commodity Insight, claimed in a note that the cuts represented a “weaponization of oil” and that the meeting’s timing and location were an intentional signal: The deputy prime minister of Russia, who is subject to US sanctions, was present to discuss limiting the oil supply as winter approaches and Russia has already militarized its gas deliveries to Europe. The confrontational course taken by Saudi Arabia will increase the price risk for oil.

Secondly, a shift in the gulf’s policy domain will be experienced. Some in the US perceived the decision as a failure of Biden’s Gulf policy because it was taken just over two months after Biden’s meeting with Saudi Crown Prince Mohamed bin Salman in Jeddah. The ruling Democratic Party was anxious about the Congressional midterm elections in addition to the conflict in Ukraine and the economic sanctions against Russia. With opinion surveys indicating that Republicans might win majorities in both the House and the Senate, high gas prices at the pump only worsen their already bleak prospects.

Thirdly, Saudi Arabia’s energy minister cautioned in a deliberate response to the American response that US-led plans for a price ceiling on Russian shipments are fanning the uncertainty that prompted OPEC+ to its largest output cut in two years. The perception that the next two months would be “a period of uncertainty” is increased by “the lack of details and the lack of clarity” regarding how the price ceiling will be put into place. People have no idea how the market or the participants would respond.

Fourthly, according to some Gulf sources, the “strategic alliance” between the US and Gulf nations will prevent the situation from turning into a full-blown energy crisis. They even assert that everything will “cool off” following the midterm elections later this month.

Sixthly, the USA will search for alternative sources in the African region for maintaining supply-chain of oil and gas. The visit of Biden to the African states was a sign of newer sources to ensure the security of commodities like oil.

Finally, the energy war is empowering the movement for renewable energies facilitated by the USA inside and outside the USA. The initial election mandate for the US president was to enable more renewable energy sources.

Moreover, higher oil prices will unavoidably exacerbate the inflation problem that central banks around the world are trying to solve, and they will affect the decision to raise interest rates even further to slow down the economy. That might increase the price of gasoline globally and intensify an energy crisis in Europe and the rest of the world that is mostly related to Russian reductions in natural gas supplies used for heating, electricity, and manufacturing.

In the end, it is a reality for the developing and underdeveloped nations, that they will suffer the most. Reserve shortage, high inflation, high food price, and a prolonged energy crisis are what they might expect from the situation.

Courtesy: Modern Diplomacy


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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