This is an edited transcript of our podcast episode with Anas Alhajji, world-renowned energy markets expert, researcher, author, and a speaker. In this podcast we discuss false ideas around what drives oil prices, what supply and demand drivers matter, why OPEC doesn’t matter, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Josef’s Background and Career Path
Bilal Hafeez (04:07):
Now on to this episode’s guest Josef Ackermann. Joe is a former Chairman of the Management Board and Group Executive Committee at Deutsche Bank. Under his leadership in the 2000s, Deutsche Bank became one of the top investment banks in the world. He also managed Deutsche Bank through the Global Financial Crisis. After he stepped down from Deutsche Bank, Joe went on to become the Chairman of the Board of Directors of the Bank of Cyprus until 2019. Joe studied Economics, Social Sciences at the University of St. Gallen where he earned his Doctorate. Now onto our conversation.
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This is an edited transcript of our podcast episode with Anas Alhajji, world-renowned energy markets expert, researcher, author, and a speaker. In this podcast we discuss false ideas around what drives oil prices, what supply and demand drivers matter, why OPEC doesn’t matter, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Introduction to Anas Alhajji
Bilal Hafeez (00:01):
Welcome to Macro Hive Conversations with Bilal Hafeez. We aim to bring you the best macro to help you successfully invest in financial markets. For our latest analysis, visit macrohive.com. Another wild week, this time with an equity route and growing energy problems. I think understanding China is key in all of this. So we published our take on China on the Macro Hive Prime site. We also have a piece on all the debt ceiling dynamics in the US and a piece on the global chip shortage, but the piece I’m most excited about is our new piece on Bitcoin, where we look at flow dynamics within Bitcoin markets, whether it’s behavior of HODLers or institutional investors. It’s a great piece for all who are interested in crypto. Finally, I’ve written a deep dive on energy markets. It’s available to our institutional or professional members. So, if you’re interested in the note, then drop me an email on email@example.com, that’s B-I-L-A-L at macrohive.com. You can get access to the rest of the articles and our member Slack room as a member of Macro Hive Prime when you sign up at macrohive.com. The first month is free, and then it’s only the cost of a few weekly cappuccinos. It’s well worth it and many call Macro Hive the hidden gem for investors. Once again, sign up at macrohive.com.
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Now onto this episode’s guest Dr. Anas Alhaji. He’s a leading energy markets expert and advises governments, companies, financial institutions on energy markets. He focuses on oil and gas markets, energy geopolitics, energy security, and the impact of disruptive tech on the supply and demand of energy. He’s a managing partner of Energy Outlook Advisors and was previously the chief economist of NGP Energy Capital Management. Before moving to industry, Anas taught economics at the University of Oklahoma, the Colorado School of Mines and Ohio Northern University. And just a note on the podcast. I actually recorded the podcast before the recent blow up in energy markets, but Anas’ outlook is remarkably prescient, especially in relation to the impact of climate change policies and the importance of China in relation to energy supply and demand. So onto our conversation. So welcome, Anas, to our podcast show. It’s a great honor to have you on.
Anas Alhajji (03:55):
Bilal Hafeez (03:56):
Great. I like to ask all my guests something about their origin story before we go into the subject at hand. And so it’ll be useful for me and also for our listeners to know, where did you go to university? What did you study there? Was it inevitable that you’ll end up in a career focusing on the energy sector? What’s your story?
Where it Started for Anas
Anas Alhajji (04:13):
Well, for the sake of time, I’m just going to kind of start from a certain point in my life. I was studying economics and law when the chairman of the department basically instituted a new curriculum that included two courses in petroleum economics. And the reason why because his PhD was in petroleum economics from French. So I got fascinated by it and I decided to specialize in it. When I was in my fourth year in college, I told him I want to finish my graduate studies in petroleum economics and energy. And he said, “Well, give me a couple of days, I will let you know which universities are the best in the world so you can apply to those university.” And a few days later, he came up with a list and he said, “Look, the number,” that was like 1988. And he said, “The number one university in the world, in this field today is the University of Oklahoma, and number two is this, number.” He give me a list for about five and he said, “You should apply for those five.” And I was lucky enough from the first time I applied to the University of Oklahoma, which was number one, I got accepted.
Bilal Hafeez (05:20):
And why Oklahoma? Why is Oklahoma so strong in petroleum economics and energy?
Anas Alhajji (05:25):
Oklahoma because it is a major oil and gas producing state in the United States. It started really early. At the same time, there was a major focus on preparing engineers and others for the industry locally. So that’s how it started. So they had really good program. They are still among the top four in the world until today. The problem with all those fields that they go up and down with oil price. And when oil prices go up, you have very active departments. And when oil prices decline, you have almost dead departments. So that’s how it started. After I finished my PhD and my PhD dissertation basically was on the oil market and on the link between market structure, OPEC and exchange rates. So when people see me on Twitter talking about exchange rates and the dollar and all that stuff, they kind of some of them get surprised, say, “Why you are talking about exchange rates.” Well, that was part of my dissertation.
Then I taught at the University of Oklahoma for a couple of years, then move to Colorado School of Mines, which is another prestigious university and considered among the top four in the world when it comes to the petroleum and energy industry. After that, I got another job in Ohio, again, teaching at the university. When I was in Ohio, I got kind of cold email, one line email. There is no hello. There is no good morning, whatever, no greetings. I said, “We are looking for an economist or chief economist to head this department for this company.” And I wasn’t out at that time. So I replied and said, “I am not interested, but I do have a list which is ogel.org, which is Oil, Gas, and Energy Law out of the Dundee University. I can post that announcement for you.” And he said second day, because of the time difference, I received a email that replied the second day. He said, “You don’t understand. The CEO asked for you by name.”
Anas Alhajji (07:19):
I said, “Okay, now everything’s changed.” So I moved to the private sector, to private equity. I spent several years there. They were amazing years with amazing experiences, especially with shale and what’s going on in various plays, et cetera. Then I left and I started my own little things. I wear several hats right now, but I’m still doing the same old research that I used to do.
False Ideas About What Drives Oil Prices
Bilal Hafeez (07:43):
That’s great. Okay. Yeah, I’m sure there’s a lot more you could tell us, but we won’t have enough time to go through everything. I guess one question I always have when we talk about a market like oil is, is it possible to have a framework for trying to understand oil or forecast oil? I mean, you talked about some of the microstructure or the underlying structure. There’s also the macro, the dollar. I mean, how do you look at coming up with?
Anas Alhajji (08:07):
Okay, well, let’s start from the basic, having a data set and some knowledge of econometrics does not get you anywhere, having a data set and some knowledge of finance does not get you anywhere because to really have a successful model, and I claim to have one of the best models in the world, to have a successful model, you need to have the theory behind it. You have to have a theory. And the theory has to match the data, has to match the outcome of those models. If they don’t fit, they don’t fit. Because if you want to grab a data set and say, “Well, I can do this because I know some statistics” and you know nothing about the oil market, you fall into really ugly, nasty traps. And we have this on database. I see it almost on databases, especially from people who work for banks and others.
To give you some examples, if you run a correlation or causality tests between the number of traffic lights in a city and the number of cats, you get some really good results with very good correlations and very high R squared, but does that mean anything? Okay, you have more population, you have more cats, you have more traffic lights. A lot of people are doing exactly that with the oil market. And that’s why we end up with all kind of forecasts, extreme forecasts, some really kind of weird results and people making some conclusions that are completely off. And as a result of this, for example, if you look at some of the published articles, you’ll see that OPEC power was at its peak in the middle of the 1980s when the market collapsed. How OPEC is at its peak when you have a market collapse and oil prices are at between three and $9. They got the results, they have a data set it, and they run the model and they ended up with that result.
But the fact is it does not match theory. In theory, you cannot have a market collapse and a cartel at the same time. Or we have some published articles where people talked about how OPEC controlled the market in the 60s, but OPEC members never controlled any reserves at that time. It was the international oil companies that controlled the reserves. They were just getting payments from the companies. So how they ended up with such numbers and models and publications while OPEC never owned the reserve. So they need to know the history, they need to know what’s going on in the industry. So these are the basic frameworks when we do the modeling that you need to know other things before you even start modeling.
Bilal Hafeez (10:39):
Otherwise you end up data mining spurious correlations, and you’ll just end up with just anything, results that don’t mean anything.
Anas Alhajji (10:45):
Correct. So for example, there are many cases where they say, “Look, we got this result,” and my reply will be, “Hold on just a second. We have a major problem here, simply because the Reagan administrative basically liberated energy prices in the United States that month. And that’s the result of market deliberation. Has nothing to do with OPEC. Has nothing to do with anything else.” So knowing this is very important, knowing the politics of it is very important. For example, there are some ideas that are out there that are completely wrong. For example, I always get those replies on the internet. I am bullish because the Saudis need $80 to balance their budget.
Bilal Hafeez (11:22):
Actually, that’s a very common one, actually. Yeah. Those kind of fiscal targets. Yeah.
Anas Alhajji (11:26):
Yes. Well, that’s nonsense because the Saudis been running budget deficit for 21 years at one time straight. So how you are going to explain those 21 years then? So knowledge of the history, knowledge of the politics, knowledge of the market is very important before you even start modeling. One of the major problems in those models for example is, and that’s why the exchange rates matter in this case, for example, they are modeling the Algerian behavior within OPEC, how Algeria behave within OPEC and then they are using the US GDP deflator in the model, you are using US inflation rate. How dare do you use inflation rate for the US for Algeria? And they say, “Well, because it’s pricing in dollar.” Well, it’s pricing in dollar, that’s a completely different story here. But we have all kind of mistakes like this simply because of the lack of knowledge. Then a lot of people do not understand, this is another mistake. They don’t understand the type of cost in the oil industry.
Anas Alhajji (12:26):
So someone say, “Oh, the extraction cost in Saudi Arabia is $2. And then the price is 80. Therefore they are making $78 profit or something like this.” Well, the cost of extraction is really the cost of moving the oil from this point to this point. But what of the price of oil itself as a resource that is owned by the Saudi public and by the Saudi state? So, these basic economics 101 ideas are very important before even we start modeling and forecasting.
What Supply and Demand Drivers Matter
Bilal Hafeez (12:55):
Yeah. And so in your view, what are some of the important things to look at? I mean, you’ve mentioned kind of OPEC fiscal targets, as some of these are not relevant and some others are.
Anas Alhajji (13:06):
Well, generally speaking, there are well known variables that have to be in any model. Okay? And those variables have to be real variables. We cannot assume, and like the IEA does a lot of work like this recently on climate change. And it’s mostly assumption. They just assume this and assume this. We have to have real data. And on the demand side, one of the most important variables basically is, generally speaking that’s what people use. They use GDP growth and they use population growth. In my case, basically, population growth is useless. We have to look at organisation. On GDP, one of the problems we have is we have to add technology because of the enhanced efficiency over time. And we have to look at the sectorial division of this GDP to find out how things are working over time. So just having GDP growth is not enough. On the supply side we need costs. The data is very poor on costs. For me personally, it took me almost a year when I was doing my dissertation, just to construct the cost curves for OPEC members.
Bilal Hafeez (14:07):
Why is it so difficult to find the cost curve?
Anas Alhajji (14:10):
Because most of it is secret. We don’t know exactly what the cost is. National oil companies are not going to give you that. So it took me almost a year just to construct a cost curve. And then with that cost curve, there are some serious issues you have to consider. For example, Russia is not worried about being invaded by someone else, and therefore they have what we call the normal military expenditures. Venezuela historically was under the protection of the United States, does not have to build a massive army to defend itself because of the treaty between Venezuela and the United States. But for some countries like the countries in the Gulf, they have to spend more on military and others basically to protect themselves. So there is a margin here that is really literally to defend that oil.
And therefore, that cost has to go to the cost of production, because if that oil was not there, this extra spending on military will not be there. So, part of it basically is we have to go through this and kind of make calculations on what part of the military expenditure basically we can assign to the cost of oil production.
Why OPEC Doesn’t Matter
Bilal Hafeez (15:17):
Okay. And then organisations like OPEC and OPEC Plus, I mean, are they significant when you look at this or is that more like a secondary factor that you overlay?
Anas Alhajji (15:25):
Well, it’s not a secondary factor. Here is the fact about OPEC first and then we talk about OPEC Plus. The fact is OPEC itself never been an influential organisation because it never acted together. OPEC was an umbrella where some influential members operated beneath, but as an organisation, it failed. It failed to achieve its objectives. It failed to act together, et cetera, et cetera. The mere fact that we have OPEC Plus today is a proof that OPEC was not effective. Otherwise, if it was effective, why you go for OPEC Plus? Therefore the idea of using the term cartel by some media outlet and I know some journalists use it on purpose and just because they like it, there is no proof in economics or economic theory that OPEC is a cartel. This is a mistake, but some journalists basically decided to use it anyway because they feel they have to use it. But the fact is it’s completely incorrect and they cannot even answer any questions regarding this and whether they really understand what cartel means in economics.
Bilal Hafeez (16:32):
And so when you hear about OPEC meetings in Vienna and so on, and there’s a lot of media attention on those events, and then there’s announcements afterwards, in your view, you can’t take it too seriously, or you have to take it with a pinch of salt, I guess.
Anas Alhajji (16:46):
No, not really. I mean, you have to look at who are the influential actors within that. The focus is on the subgroup and sometimes only one country. So to lump sum everyone and the OPEC or OPEC Plus does not give you good modeling. You cannot get good results in the forecast, but if you focus on the subgroups, you get way, way better results than focusing on the group as a whole.
Why Peak Oil is Wrong
Bilal Hafeez (17:08):
Okay. Yeah. And when one looks at oil over the last few decades, we’ve gone through a phase where people talked about peak supply in oil, peak oil, that we’re going to run out of oil. More recent times, there’s peak demand, that we’re, we’re no longer going to demand oil. What do you think about these ideas of peak something?
Anas Alhajji (17:26):
Generally speaking, we have a serious problem with both ideas. And for those who are interested, I posted a lot of things regarding this on my Twitter account and on my website, one of them was a review of a book on peak oil. And the issue here is let’s talk about the supply side first or the production. Those who talk about production basically, they’ve been proven wrong for many, many decades. Just to give you an idea, oil was discovered in Pennsylvania in 1859 in commercial quantities. The first talk about end of oil, not even peak of oil, was a year later in 1860.
Bilal Hafeez (18:01):
Is that right? It was that soon after?
Anas Alhajji (18:03):
And it started after that, we have studies. We have articles in 1890, I think 1898, where the first major scientific article was published about the end of oil and that oil will end in the United States in 1920. And then they kept moving that, and we are now in the 21st century and they are still talking about it. The problem with now, those who believe in peak oil production, there are not one group. There is a spectrum of them, okay, so there are two ends. If you go to the extreme, the most classical ones, they don’t believe in two things. They don’t believe in technology and they don’t believe in the role of investment. Then you move to the other side. They do believe in the role of technology, but they don’t believe in economic principles and investment. So we still have problems with those thoughts. One of this strangest things I found reviewing the literature of peak oil, that the specialists in it, if you look at the books and the articles were two or three, and the other 15 people have nothing to do with the oil industry at all.
Why Bearish Oil Demand Forecasts on ESG/Climate Change are Wrong
Bilal Hafeez (19:02):
Oh, interesting. Okay. So the kind of outsiders who look into this.
Anas Alhajji (19:05):
Correct. The other one on the peak oil demand, as you know, this is being tested as we speak today. I don’t believe in it. I never believed in it. I believe in slower growth. And I do have enough evidence to show that point. Those who claim that demand already peaked or is going to peak in the next five years, they used what we call an economics static model. What that static model means like, “Okay, I’m going to have 50 million cars. 50 million cars are going to lead to a decline of, let’s say, 3 million barrels a day.” And they subtract that from the current demand and they stop. Okay, that’s kind of, I don’t expect even my students in Econ 101 to use that level of thinking, but it seemed like it is common. Any way you look at it we have serious problems with the forecasts. Even those who are promoting electric vehicles, if you look at their forecast for electric vehicles, there are many mistakes in them, and there is exaggeration of the impact of electric vehicles on oil demand.
Here I would like to distinguish between the two. I am not about exaggeration of the number of electric vehicles that will be on the road in 30 years or 40 years. I’m talking about the exaggeration of their impact, that there is a big difference here. To give you a couple of points. For example, one of the main issues today, if you look at various reports, electric vehicles mean everything. A scooter is electric vehicle, a bike, an electric bike is electric vehicle. So from an oil demand point of view, we have to really define, we have to have kind of a threshold to say, “Okay, from here to here, these are the electric vehicle that we are talking about,” which means that it has to be mostly a four wheel vehicle with a certain power, certain consumption until we study the impact.
Then you take it a step farther and say, okay, well, and this is a true case where without mentioning names at all, one of the major reports that’s being produced and highly marketed in the media counted, we have a big city in one big country that starts switching its buses to electric, and they estimated that the demand for oil, once the city switches, the demand for oil would decline by 60,000 barrel a day. That’s a complete lie. And I say lie, because it is a lie. I told those people, contacted them. I told them, “Look, this city uses natural gas buses. They use CNG buses. They don’t use diesel. They don’t use gasoline. And therefore you cannot claim that switching to electric buses is going to reduce oil demand. It reduces gas, natural gas demand.” They knew it, but they insisted on publishing the report anyway to show this massive success of electric vehicles lowering oil demand.
To give you another number, if all of the European Union switch all the cars to electric and let’s say that will take 30 to 40 years, that will reduce oil demand by seven to 8 million barrels a day during this period, seven to 8 million. Well, India alone will add seven to 8 million during this period of demand. So ignoring the other side in this case, and just looking at it in a static way is completely unacceptable in this case. So according to my model, and according to the numbers that are published by the other side, by the way, I’m not even using my own numbers, just to give you another number for oil demand, oil demand in 2019 was 100 million barrels a day, which we are going to reach according to the IEA, according to OPEC, we are going to reach at the end of 2022. Again, that proves that demand is going to continue to grow. But if you look at that 100 million and to keep world oil demand at 100 million barrels a day until 2050, we need 700, at least we need 700 million electric vehicles on the road by that time. We are still not even at 20 right now, not even at 20 million. We need 700 million vehicles just to keep oil demand at 100. Here is another message for those who are divesting from oil, or they don’t want to invest in oil because they are scared. I think one of the best investments coming up in the coming decades is going to be oil and gas and here is why. To have that 100 million barrels a day by 2050, starting today, all of it has to be fresh oil. So imagine the trillions of dollars needed throughout this period just to supply 100 million by that time. Now let’s go with their forecast. Some of them there said oil demand is going to decline by 30 million relative to 2019, we are going to end up with 70 million by 2050. That’s fine.
All that 70 million is going to be fresh oil. We still need trillions of dollars to produce it. And lower demand for oil does not mean lower prices because we have to look at the supply side. If prices are to crash because of switching, then many expensive plays around the world are going to exit the market. So we could end up with 70 million barrels a day production and demand by 2050, which mean that we have 30 million decline by that time and lose all those 30 millions and still have $100 oil real terms by that time. So it does not mean a decline in oil price.
How Governments and Companies are not Acting on Carbon Neutrality
Bilal Hafeez (24:12):
I mean, you’ve kind of touched on this already, but there is this big movement to divest away from oil as part of the ESG movement, as climate change talk as well. How do you think about this sort of conceptually that there’s this intention to reduce carbon? Oil has carbon. And so, there has to be some reduction and oil is the big target here.
Anas Alhajji (24:31):
I’m sorry, I’m smiling at the question because I’ve been working on this for the last probably 12 weeks or so, and the results are really laughable. And the reason why this is when we talk about both the ESG and the carbon neutrality. The first fact is countries or governments, let’s say governments, not countries, governments and companies announced the date for their carbon neutrality. And most of them said 2030 or 40 or 50, kind of a rounded number. The problem is all of them announced this without knowing how to get there. What is the cost and who is going to pay? Those three facts alone tells you what the future is. Now you go to the details and look at what companies are doing. When I say companies, I’m not talking about only the oil and gas companies, I’m talking about all the companies in the world, especially those who committed to a specific date on carbon neutrality.
I wish I can show a slide, probably would keep for another show. I have a slide, a one presentation, one slide, basically that’s one hour presentation, talks about the behaviour of the companies on how to achieve carbon neutrality and achieve those ESG goal. You can lump sum them under five policies. And I usually, I like this approach because can people remember this better, I designate each one by an animal. Anyway, if you look at those approaches, basically there is a common thing among most of them is that companies are saying, “Look, let’s look at what I’ve been doing that fit with the green requirements or ESG for the last 40, 50 years.” And some companies, some retail companies are to come back and say, “Oh, we have all those skylights. They’ve been there in our stores for the last 50 years.” These can be claimed toward their carbon neutrality, but they already been there, which means we’re not going to see an actual reduction in carbon.
And then some companies with massive campuses saying, “Look, I have 2000 trees on my campus. Let’s count that.” Well, they absorb carbon. They are counting that. Some companies are saying now, “Look, I already asked 50% of my labour force to work from home. Otherwise they would have commuted to work. So let’s count that commute CO2 emissions and count it toward our goal.” So you can see where the accounting games are. Okay? So we talk about ESG and carbon neutrality. Some of it is going to happen, but that’s only the low hanging fruit. Companies are going to go, for example, you can go for more efficient cooling. You can use sensors for lights, you can use other things that increases, enhances the efficiency. These are low hanging fruits, converting things to hydrogen or whatever. All of these are low hanging fruit. No one is going to go for the middle of the tree or the top of that tree, because that’s costly. So there will be some improvement, but the rest of it is going to be kind of Enron type games.
Bilal Hafeez (27:17):
Yeah, yeah, yeah. I mean, there seems to be a lot of marketing and it seems to be a big branding exercise around a lot of this ESG.
Anas Alhajji (27:23):
Correct. So I’m a company and I support certain environmental organisation and I’ve been doing this for the last 30 years. All of a sudden, now I can claim that. This organization, without naming names, this organisation plants a million trees a year and I support it. I give them $10,000 every year. I’m going to claim that towards my carbon, but I’ve been doing it all along. Okay. And then you have other companies who are divesting from their assets. Divestment does not lead to lower carbon production or emission simply because they sold it to someone else. And that someone else may not be as sophisticated as the original company, may not have the same technology or the same thinking as the original, or it could be in another country far away, no one can see and they can emit even more. So the divestment does not solve this problem. What I call scavengers, the case where they claim the skylights and all that stuff, I call them scavengers, that’s not going to reduce carbon.
The low hanging fruit is going to reduce carbon a little bit, but generally speaking, these are not going to lead to major changes in lowering carbon, but companies are going to change their behaviour. This will lead us to one result, which is kind of very fascinating result. If you sum up all the claims of lower carbon by the companies and compare it to the actual decline, it will be in multiples. When I talk about multiples could be 100 times, hundreds of times, or probably thousands of times. So the sum of what the companies are claiming is way, way, way larger than reality because a company that divests is going to claim that as a reduction in carbon, but there is no reduction in carbon. Companies that are the scavengers that are claiming everything they’ve been doing for the last 40 years, that does not reduce carbon, but on paper, it’s reducing carbon for the company. So the sum of the reduction in carbon of the companies is going to be way, way higher than the actual reduction.
How Iran Oil Supply has Continued Despite Sanctions
Bilal Hafeez (29:16):
And how about things like carbon pricing? Europe has a carbon pricing program. China has some version of one as well. There’s, some talk in the Biden administration about this, although hasn’t really been pushed forward as much, but do you have a view on that?
Anas Alhajji (29:29):
As you know, these are different programs like in some countries where they take the carbon from here and whatever money collected and they give it to the other side. So some side is subsidising the other. Others basically are just the government is benefiting, et cetera. Look, there is one fact about this, that whenever you have government intervention in any of those markets, you have a black market and no one is paying attention to the black market. Look at what the, I use this example, has nothing to do with oil and gas and energy, but I want is it because this happened yesterday. As you know, the Biden administration allowed international travellers to come to the United States on the condition that they have to be fully vaccinated and they have to show proof that they have a negative test. Well, we already have a massive black market around the world, even around some airports in some countries, people will provide that to you as long as you pay for it.
So the Biden administration yesterday, they just give, ’twas God’s gift to the gangs that fake these thing. So the Biden administration basically should have really added that any fake documents basically will prohibit the person from entering the United States, they will be returned on the next flight, or they’ll be fined like $10,000 or other things, et cetera, to prevent this. Otherwise they just created a big market for the gangs and the same thing for carbon. We are going to see all kinds of games being played. Look, if Iran was able to fool people and fool the government and fool investors for many, many years, we are going to see the same thing with carbon.
Bilal Hafeez (31:03):
Yeah, no, that’s a fair point. And speaking about Iran, if we, if we look at the players in the oil market, there’s obviously Saudi, Russia and the US are some of the biggest producers. What’s your sense on the sort of trends on their production side? I mean, do they have different dynamics or are they just following the market?
Anas Alhajji (31:20):
This is kind of a nice transition from in the black market to Iran because they are related. Let me give background here to the audience, because this is very important. Historically, there were sanctions on Iraq, not Iran, on Saddam Hussein, and we ended up with this oil for food deal where, which is kind of just saying oil for food is very painful. And I don’t know those people at the United Nations who accepted, given the name, how they speak about the humanitarian issue. This was kind of a really a black spot in the history of the humanity to end up with something called oil for food. Anyway. So, Saddam Hussein basically would sell the oil and then the United Nations will collect the money and then divide it into three boxes. One will go for Kuwait for reparations. One will for the cost to run the program, et cetera, the United Nations, and one will go to the Iraqi government.
And when they give it to the Iraqi government, basically they don’t give them cash. They tell them, “Okay, what do you want to buy, sugar? Okay, you buy it. And then I will pay. You want to buy wheat? You buy it.” And so Saddam saying wanted to buy other things and he couldn’t. So the only way he can do it is literally to smuggle oil. And at certain times he was smuggling hundreds of thousands barrels a day and getting the money in cash to buy whatever he wants. And ironically, he just got out of the war with Iran. It’s what the Iranians were helping him because there is a lot of money involved. So the Iraqi oil will be smuggled through Iran and then through other Gulf countries to the world. And this went on for several, several years. Well, guess what? When they imposed sanctions on Iran, the Iranians were already experts at that. Okay. So they played all kind of games basically to sell their oil.
And then China interfered in this and the more sanctions and the harder it gets, basically China was helping in so many ways, including in term of technology. So they helped the Iranians with that. So Iran always produced and exported, whatever they can. It’s not like they wanted to produce this and export it and they couldn’t because of sanctions. The sanctions never been effective. And other countries in the region basically were participating in this because a lot of money was involved, a lot of money. So they always produce and exported whatever they can. What that means is lifting the sanctions all of a sudden has no impact because the oil is already there in the market. The only impact could be for a short period when you have this floating storage, let’s say 40 million, 50 million or whatever, that will get to the market and 20 days later, it’s over. It will take time, take investment.
It will take other things for Iran to be able to increase production and export. However, if you look at what they developed in the last four or five years in term of oil fields, it was very clear that they invested strategically and not economically. And this is a very important point because it seems that the Iranian leadership assumes that those sanctions will always come back. And if they always come back, then it’s more important for me to find ways to get my oil out then to produce the cheapest oil. Because if you are going to focus on the cheapest oil, that’s economics, but what’s the advantage of focusing on the cheapest fields when you cannot get that oil out? So they focus on certain fields where they know for sure they can sell their oil and that’s a strategic decision.
Bilal Hafeez (34:32):
Okay. Understood. And so in terms of some of these smaller players then, so your view would be Iran, there isn’t like new Iranian oil to come into the market. It’s already been introduced to the market, but how’s Saudi or Russia responded to this?
Anas Alhajji (34:49):
Well, the fact is, I mean, whenever the Iranians basically reduced their production, the others jumped in and took market share from Iran. So let’s be kind of clear on that. They benefited from that and the numbers basically support that. If Iran wants to come back, well, then they have to come back to OPEC and negotiate their quota because there is no quota for Iran, even Libya does not have quota. Venezuela does not have quota right now, but they need to come back basically and talk about the quota and whether they’re going to comply or not. I don’t think that the Iranians, once they have the capacity and the ability to export, they’ll abide by OPEC quota. I don’t think so. I think they will look at it. We suffered for too long and therefore, this is a compensation for what we suffered.
The only thing is they need the investment and that investment, because one of the things we learned from the Iranian history in the last 15 years or so, cannibalisation of the equipment was the name of the game. So yes, you might end up with a field with, let’s say, 50 wells. Well, probably 30 of them already been cannibalised to make the others survive.
Oil Underinvestment in Oil Producing Nations
Bilal Hafeez (35:51):
Okay. Understood. Yeah. And you mentioned some of these smaller countries like Venezuela, Libya. I mean, what’s the production outlook like for those countries?
Anas Alhajji (36:00):
For Libya, the potential of going back to 1.7 or 1.8 is very high. The problem is Libya is still unstable, unstable, not because of the politics, even because of the investment and money. If the national oil company does not get the money that was promised from the government, then they cannot pay the workers. And where they’ve seen several strikes, recent months by the workers, just stopping the port or stop working simply because they’re not being paid or their health services basically were not delivered or whatever. So the national oil company and others, they need the money aside from the political stability. As for Venezuela, Venezuela can go back to about 1 million barrels a day easily with just lifting the sanctions and some same people basically working in the leadership to bring it back. But other than that, they need massive investment and probably kind of a new, comprehensive energy policy for the country because this idea of I have over 300 million barrels of reserves, billion, sorry, of reserves that need to be developed.
Some of those reserves basically probably will never be developed and probably they need to refocus their investment based on crude quality, rather than just that oil there. And they need to produce. They need massive investment. It’s very hard to see them going up substantially, even if the sanctions are lifted.
Bilal Hafeez (37:25):
I mean, it seems like there’s a thread that runs through some of these countries, which is the lack of investments. So it seems like in many of these countries, that just hasn’t been enough investment or smart investments, should I say.
Anas Alhajji (37:35):
Well, that’s absolutely the case for since 2015 after the price collapsed, basically investment being declining. And the problem with oil is you need maintenance on one side and you need to replenish what you produce on the other. So you need massive investment. We are not seeing that investment or investment growth that way. Hopefully, and in my view, if you look at the forward curve and you look at that next 24 months, and if the strip in the next 24 months is above 70, and I’m talking about brent here, I think we are going to see massive investment being made, but we need to see that strip not only next month or the next three months.
Saudi, US, and Russia oil Supply Outlook
Bilal Hafeez (38:16):
And how does investment look in Saudi, in Russia and the US? Has it also been weak since 2015?
Anas Alhajji (38:21):
Well, the Saudis already made their decision that they are going to expand or they are expanding their capacity from 12 million to 13 million. That’s under construction. That’s going to happen. So this is a done deal. In the US, basically it’s all a function of that strip and the reason why, because we have companies that divested. We have private equity and we have banks. The banks stopped. Private equity are trying to hunt. So there is not enough money to develop those reserves so they can depend on cash flow, but that cash flow has to be split by investors and reinvestment. And the only way they can do that, and there is enough money, if oil prices remain above $70 for the next 24 months or more because they can hedge and then they can guarantee the money. And in this case, we’ll see growth. Because what I’m saying here is most of the investment, reinvestment, will come from cash flow, not from others.
One more thing here we are going to watch for, this is going to create a great opportunity. You heard about Shell divesting and Conoco basically taking over, Conoco Phillips. We might see other countries basically jumping in and that might create some problems for some Republicans in particular, who are going to see the involvement of those countries in the oil sector in the United States is not healthy. And we might see some problems because of that. So we’ll see, because there are rumours that some oil producing countries are shopping around shale.
Bilal Hafeez (39:48):
And, and shale is the big story for the us. That’s the main thing we should think about.
Anas Alhajji (39:53):
And the Gulf of Mexico.
Bilal Hafeez (39:54):
And the Gulf of Mexico course. Yeah. And is there anything to say about Russia, anything important going on there?
Anas Alhajji (39:59):
Well, Russia basically, let’s remember the oldest oil fields in the world are in Russia and the previous Soviet republics. Oil was discovered in the area even before the United States. I mean the first commercial oil discoveries happened in Baku even before Pennsylvania in the United States. People knew oil for thousands of years in these regions. So some of those fields are really old and they are the oldest and some of them basically got exhausted during the Soviet era, but with various factors, including the decline in the ruble helped the Russian oil industry prosper. And this is one of the issues, probably the audience would be interested in this point. The reason why always Russia opposed cuts or big cuts within OPEC Plus and they wanted moderate prices because their fear that the prices go too high, the ruble will go higher. And if the ruble goes higher, about 60, 65% of the cost of the oil companies in Russia are ruble based.
The Artic Oil Play
Anas Alhajji (40:55):
So they may not benefit from the higher price because their costs going to go up. So there is kind of a range where they do the best and they were trying to keep that range. Otherwise, if they go above it, they lose. If they go below it, they lose. So for Russia right now, there are two matter that we are watching. The first one is investment in the Arctic Circle and the North Pole and whether that’s going to bring fresh oil to the region. It’s going to be a little bit more expensive than usual, but if the price is right, it’ll be developed if they find it. And the other issue for the Russian basically is if the ice melts and then they can ship their oil to Europe easily with minimum cost, because they can compete with a lot of countries around the world if the ice is melted. At least two, three months out of the year, that will help Russian oil industry and Russian LNG big time. Okay. On the Arctic basically, as you know, there are many countries involved and those countries have different point of views.
Some of it are looking at it from a strategic point of view. Others are looking at it from literally natural resource point of view. The most striking one is the Norwegian view because see, the Norwegians, despite appearing green, they are going to develop, they already kind of, I think they have 136 blocks in the Arctic circle that already basically being developed as we speak. So while they are trying to look green, they are really developing all resources and their production might increase substantially if they are able to find large fields. At the same time, we’ve seen the elections just about what 10 days ago, a week ago in Norway and we have this new mix where they are greener than the previous government on one side, but they want to support the labour movement because most of the workers work for the oil industry. So they need more oil. But the fact is from us as watching outside, the only way you can support the green revolution in their way is to produce more oil.
China’s Dominance in Oil Markets
Bilal Hafeez (42:48):
Okay. That’s quite a paradox there. And then on the demand side, yeah. How important is China? Because obviously China’s huge economy. It imports, obviously, import of oil. And so how do you look at China? Is that really the big swing variable on the demand side?
Anas Alhajji (43:02):
Big time, big time. In fact, China changed our modelling of the oil market completely from the way we’ve been doing it for the last 50 years. And very few people basically are paying attention to this. One of the major issues right now is China is so big and so influential, it can really play what we call the kind of monopsony role or they call it a, it has special name. I forgot it right now, which is we have a oligopoly and we have monopoly on one side, as you know, and then we have monopsony and there are various names on the other side. But the idea here is in oligopoly, you have few producers controlling the market. In monopsony and its various forms, you have only one consumer or one buyer or only few buyer. And this buyer, who is China basically, that’s so big that it can pressure the producers and pressure prices and what we’ve seen in recent years and probably you’ve seen some of my tweets.
I was predicting this in 2020 that China is going to use the SPR to influence the market and that happened that China built massive SPR. No one knows exactly the amount of that SPR, but unlike the United States, the SPR of the United States controlled by law, so the president of the United States have the authority to release oil only under emergency. Now politicians can play with the word emergency little bit, but still we have a law that govern that use it during emergency. Well, China has no laws to govern that. So when prices went above 70, they went to the SPR and they dumped oil on the market.
That reduced China’s imports and the moment China’s imports decreased, oil prices either did not continue going up or declined. So China is playing a role no other country ever played in the oil market. And I think they are working on this to perfect it in the future. There are many models that even I played with some to see what they can do.
There are many models that can be played basically and played forever. And the reason why they can play it forever because of seasonality of demand, because demand increases in the summer, then decline after that and then goes up again so they can play the seasonality and sell and buy. The only counter to that is if OPEC Plus try to play the game on the other side and that’s the only way they can stop China.
Bilal Hafeez (45:17):
Okay. Yeah. Yeah. But that requires coordination and that’s unclear. Okay. That’s very interesting. And just a related point, and this is as a market watcher, one is, you often hear news about SPR releases, which is fine, but then also we have the weekly numbers in inventory build and inventories falling in the US and so on. Are those sorts of stats important to follow or not if you’re an oil watcher?
Anas Alhajji (45:38):
Absolutely. Absolutely. They are important simply because traders who are the, what we call the, I mean the speculators, that’s what they do. They sell and by pay per barrel. So it becomes very important for them to get those numbers. There are two points I would like to mention. Basically one of them is there is this dispute on, we get the API, the American Petroleum Institute storage numbers on Tuesday, Tuesday afternoon, and then we get the EIA numbers on Wednesday morning and which one is more accurate. If you talk to the API people, they say our numbers are more accurate, but they are voluntary and about 90% basically submit their numbers. The EIA is mandatory and therefore people think, okay, they are getting a hundred percent numbers and therefore they are more accurate. I am of the view that probably the API numbers are more accurate simply because they are done voluntarily, all the studies and everything I read showed that whenever the government mandates something, people will come up with numbers. Okay.
So reporting is one thing. The accuracy of reporting is another. The other view is really what matters is what the market believe in. Whether that number is accurate or not, it doesn’t matter. If the market believes in it. That’s what it is. The second point I would like to go back to the China point because I think the audience need to hear this. One of the major issues, and I tweeted about this yesterday, that one key word we are going to hear a lot in the next few months, given what we have the energy crisis in Europe, given the energy crisis in China right now and all the supply chain problems, we are going to hear about private generation. We’ve seen it before. We are going to see it more. We are going to see a private generation in China. Why private generation is important. You asked me about demand before. One of the problems with private generation is most private generation uses fuel oil and diesel.
Anas Alhajji (47:24):
And we don’t know about it until after the fact, okay? It’s not like refineries. You go and sign in and tell people, okay, I’m going to demand this. And then you see the ship and you follow trackers, basically can track those shipments and all this stuff. This is completely different. And we don’t know about it until it’s over. And what history told us basically is all of a sudden, at the end of the month, we realise whoa, demand for diesel went up in China by 500,000 barrels a day and no one will expecting that because of private generation, because there is not enough electricity there.
The Rise of Private Generators
Bilal Hafeez (47:53):
And by private generation, you mean power generators that people, factories will use off their own or households will use like you have in lots of emerging markets.
Anas Alhajji (48:01):
Correct. Correct. So what I’m going to give you, yes. I’m going to give you true example because I’ve done field investigation on this in several countries. Okay. You have a factory in China that has orders for the next three years. And because of power shortages, the government told them, “Oh, you can open only five days a week. You have to close, mandatory closing for today because we’re not going to give you power.” Okay? Well, the owner of the factory can say, “Well, that’s fine. If you are going to force me to close, because you’re not going to give me power, I can bring private generator and operate those two days,” and everyone is going to do the same and that need diesel. And that’s why we don’t know about it until after the fact. In some countries without mentioning names, when they built those big towers and et cetera, et cetera, after they finished, they found out that they don’t have enough power.
They developed whole areas like small towns and they found out they don’t have enough power. So you go to the beach area in those countries and there are all kind of restaurants, but there is no power. How they are operating? Oh, they have private generator. That’s how those restaurants make money. Now the owners of the buildings, they are borrowed a lot of money from the banks. They finish the building on the idea that “I’m going to offer it for rent and then I’m going to take that rent every month and pay my payments to the bank. Otherwise, now I am in trouble. I might end up in bankruptcy because I’m not able to pay anything. I would rather go,” and literally that’s what happened. They went to Poland, they went to Czechoslovakia, to Romania and they bought all those old generators, each generator probably bigger than a bedroom. They shipped them to those countries. Now you need backup.
So most of those building basically would have two generators outside those buildings just to make sure that they have electricity so people can rent and they can pay the bank so they won’t go bankrupt. Now with what’s happening in Europe and what’s happening in the Middle East, what’s happening in several areas in Latin America and in China, we are going to see a return to private generation and return to private generation is very positive for oil. Unfortunately, we will not know about it until after the fact.
Bilal Hafeez (49:56):
Yeah. And you think this could even happen in the Western European economies?
Anas Alhajji (50:00):
Oh, absolutely. Look at California.
Bilal Hafeez (50:02):
Yep. That’s true. Yep. Yep. Yeah. The lines between developed markets, developed and emerging markets, lines all being blurred now in terms of these sorts of things.
Anas Alhajji (50:11):
When you don’t have power, everyone is third world country.
Bilal Hafeez (50:14):
Exactly. Yeah. Yeah. And from our conversation, it seems to me like you’re quite bullish on the price of oil in the foreseeable future. Is that a fair characterisation?
Anas Alhajji (50:25):
Yes. But not necessarily in the next few months at all. I’m talking about long term, yes. Not in the next few. Next few months, we need to be very careful.
Bilal Hafeez (50:33):
Yep. Understood. Okay. That’s great. I mean, we’ve jumped around lots of different topics. And so now I’d like to bring it down to some more personal questions. One question I always like to ask all my guests, what’s the best investment advice that you’ve ever received?
Anas Alhajji (50:47):
The best investment advice basically was kind of a very funny one was before you click, before you click, leave the room and come back after five minutes.
Bilal Hafeez (50:57):
Okay. That’s great. Yeah. I can see that. Yeah, that’s good. That’s a very good piece of advice. And then the other question I wanted to ask was in terms of how do you manage your information and research flow, because it’s quite easy to be overwhelmed, especially if you just things on the internet, social media and so on? I mean, do you have a system to try to sort of filter your sources?
Anas Alhajji (51:17):
I do, but one of my problems is my priorities change often, even on hourly basis. I think the fastest information is from the credible sources on Twitter. That’s really the fastest one to get in term of being fast, but still the old way, the best way, which is the personal connection. I mean, that’s really the best way. The other issue I would like to point out here is, of course, social media kind of affected our behaviour in various ways. And that’s unfortunate because most of it is negative. To me, if someone opposes me or opposes my idea, as long as they are presenting the alternative in a polite way, how I might change my behaviour completely and change my thinking and I might adopt their view. I have no problem with that. I am at the end. My background is in academia and that’s what, what people in academia do. You present ideas and you shred them into pieces. No problem. Don’t personalise them.
Don’t take it personally, et cetera, et cetera. The problem is with social media now is becoming more personal and we are not taking advantage of it to the maximum in term of exchange of ideas. That’s why there are certain people I have very high respect for because when they don’t agree, they present the ideas and the logic, et cetera, cetera. And some of them basically talk about it privately, et cetera, no personal attacks, nothing, but there are a lot of benefits from social media in term of information and the flow of information.
Book that Anas rates: Kuwait in the Time of British Empire (Khajah)
Bilal Hafeez (52:46):
That’s great. I’m also a big fan of books. I’m always looking out for good books to read. Are there some books that have really stood out for you, influenced you over your career or some books you’ve read recently that really stood out?
Anas Alhajji (52:56):
Well, generally speaking, I don’t want to promote books basically. I have many of them around. I think when it comes to the oil industry, the best books basically are the older books and mostly in history books. My Kuwaiti friend Muhsen Ali Khajah just published a book and he sent me a copy and it is really a fascinating book and it is on Kuwait’s history. But most of it is really oil history.
Bilal Hafeez (53:22):
It was called Kuwait in the Time of British Empire.
Anas Alhajji (53:25):
But if you look at it, basically almost three quarters of it is on the oil history. And the oil history for me is really fascinating. And it influenced me. All those books on oil history influenced me in so many ways. And I believe that it gives me a more wise view of what’s happening in the oil market today than anything else. So those older historical books, of course this is new, but it talks about what happened in the past because to understand the behaviour of oil companies, you need to study all their behaviour, not what’s happening in the boardroom in the last year or so. You need to know. For example, I mean, this is one of the facts that people do not know. People accuse the oil producing countries of ignoring the environment. Well, Kuwait cut its own production in 1971 for environmental reasons. Before even we heard about the EPA, before we heard about the environmental Kuwait cut production because of that. So this information is extremely important.
To give you another example, always in the media, they talk about the possibility of Iran blocking the Hamas strike. Well, read the history because if you read the history, you find out that it’s never been blocked ever, despite all the wars. I mean, we have major, major wars even before the wars of our times, we talk about the Portuguese and the Dutch and other, et cetera. No one was able to. So why all of a sudden, just because we hit Iran, all of a sudden we say, “Oh, they’re going to block it,” because that’s the whole advantage. Never been blocked. And if you go through history, you find out that on sanctions, the British were able to sanction and literally block all Iranian exports, but how? Not by just imposing sanctions and say, “Okay, I’m imposing sanctions. I’m going to follow the financial transactions.” They sent their navy literally. And they blocked the ports and they blocked the Gulf and they followed every ship and they literally took over the ships.
So they used military to force the sanctions to work. So for sanctions to work, you need to do what the British did. So we have a lesson in history to learn here. That’s why we talked earlier about how Iran was able to smuggle its oil, but they were not able to do it when the British were in control because the British basically literally boarded ships and they took over and there is an old story about, I forgot whether it was a Portuguese or Italian ship that they confiscated because it carried the Iranian oil. So history becomes important for those events.
Bilal Hafeez (55:46):
Yeah, absolutely. Yeah. And now, I assume lots of listeners now will want to follow you in some way. If people wanted to follow your work, reach out to you, what’s the best way of them to be able to do that.
Anas Alhajji (55:56):
I’m very active on Twitter simply because it’s faster. Literally. That’s what it is. And my handle is at A-N-A-S-A-L-H-A-J-J-I, which means that’s my first name and my last name, Anas Alhajji. I have a website with the same name too.
Bilal Hafeez (56:13):
I’ll add the links to the show notes so people can click on it. Yeah.
Anas Alhajji (56:16):
And the point I would like to share with the audience here at the end of this, I post a lot of news items and comments in Arabic. Twitter has a translate function. Just use that. You will really enjoy it. I mean, this is one of the best things at Twitter is you can translate. And even if you open the links that I put there, you can use Chrome or any other things to switch to another language. Some of the materials basically are unique literally, breaking news that’s not in English. It’s not than any other language. So translation becomes the key here.
Bilal Hafeez (56:47):
No, that’s very good point. That’s what I tend to do with your tweets. And I find it with other countries as well, like in Chinese or something, the Chinese sources. I mean, there’s a certain arrogance in the English speaking world that the best information’s only in English, but there’s really good information locally in other languages and Google Translate translates everything, which is quite amazing.
Anas Alhajji (57:08):
And not only that, basically, since I’ve been doing this, following this for the last 10 years or so, the translation Google improves substantially in the last two years. I mean, I am really amazed the accuracy of the translation. We still have problems with multiple use words. So you might end up with some jokes basically the way get translated. I will tell you a joke just happened two days ago. And I think the audience will love this. The Sudanese government confiscated the assets of a Saudi businessman. His name is Juma Al Juma. Okay. As you know, Juma is the name of the day, which is the Friday. Okay. And very common name. And his name is Juma Al Juma. So news website basically took their news from Arabic and they were talking about this man whose name is Friday Friday.
Bilal Hafeez (57:55):
Friday Friday. That’s great.
Anas Alhajji (57:57):
So there are those multiple use words that still have problems with translation.
Bilal Hafeez (58:00):
Thank you. Well, that’s excellent. It’s great speaking to you. I really enjoyed that conversation and I just wanted to extend a big thanks.
Anas Alhajji (58:06):
Thank you. I really appreciate it. It was a pleasure.
Bilal Hafeez (58:09):
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