By Haniyeh Sadat Jafariyeh

MBS wholly-owned subsidiary of Trump's U.S. incorporation: experts

June 10, 2020 - 12:38

In an interview with the Tehran Times, international energy experts Chris Cook and Mahmood Khaghani answered several questions on the current status quo of the international oil market and its major role players. The experts also discussed the current conflicts among the petrodollar earners, i.e. the U.S., Saudi Arabia and Russia, and if the golden age of oil is over.

The full text of the interview follows:

Since the U.S. started exports of gas and oil shale, it has been seeking to become the main role player in the world energy market. What policies were applied by American officials in this regard and how successful they have been?  

Chris Cook: The U.S. has immense reserves of oil which have a very high cost of extraction, in particular the hard cost of carbon fuel used in its production. However, the U.S. has been able to use two techniques unavailable to other nations to massively increase the domestic production of high-cost shale oil and gas. Firstly, Wall Street investment banks could and did support the oil price with the assistance of BP and more recently Statoil/Equinor from 2001 onwards (which producers will always do when they can) through the Intercontinental Exchange market platform. Secondly, the resulting inflated prices and U.S. agreement with Saudi Arabia and PGCC countries [Cooperation Council for the Arab States of the Persian Gulf] to invest Petrodollar surpluses in U.S. Treasury bills which indirectly funded the U.S. bank lending to finance the wave of shale oil and gas production. 

Mr. Khaghani: As many observers have highlighted on several occasions, President Obama administration policies resulted in the rapid expansion of shale oil production during the Wall Street manufactured 2009-2014 oil price bubble was only a temporary expedient to rid the U.S. of reliance on Saudi oil through his energy strategy of 'Transition through Gas' (Qatari, Iranian and Caspian) to a sustainable economy.

How do you think of President Trump’s energy policy?

Mr. Cook: President Trump's strategy of ''Energy Dominance', reversed Obama's strategy, re-inflated the oil price over $60/bbl and once more poured debt finance into shale oil and gas development, which had by then drastically reduced its cost base and productivity. The outcome is that the U.S. has overtaken all other oil producers, but this flood of light shale oil quality oil exceeds U.S. capacity to consume light oil products such as gasoline. This necessitates export, which in turn creates an opportunity for a U.S. Gulf oil benchmark to become dominant. 

Why the U.S. is pressuring Europe to stop gas purchases from Russia and sanctioned Iranian gas? 

Mr. Khaghani:  Well, you don’t need to be an energy expert to release that as a by-product, the U.S. has immense excess gas which it can either flare off or dump onto the global market, which is why they are strong-arming European buyers to buy it with threats of sanctions on Russian supplies and sanctioning investment and development of Iranian natural gas resources.

What about the ISIS role in the region’s energy issues and the terrorist group's relationship with the U.S. energy policies?

Chris Cook: Good question and you may also ask how ISIS helped the U.S. to hit its energy targets. In my opinion, ISIS had a disruptive effect on Iraqi supplies and reduced Syrian oil production. While this clearly tightened the oil market supply, I do not believe the result was material.

How do you see Trump's dominance in Saudi Arabia influencing OPEC's role in the oil market?

Mr. Cook: "I see Saudi Arabia under Mohammad Bin Salman (MBS ) as essentially a wholly-owned subsidiary of Trump's U.S. Incorporation, and therefore; with a consolidated interest in sustaining global oil prices at the highest level the market will bear. Meanwhile, this consolidated group ruthlessly ensures that any competitors will access the market (if at all in Iran's case) on inferior terms."

Mr. Khaghani shared his view with Mr. Cook. Both view the relationship through a commercial business lens.

It seems that Russia-Saudi Arabia conflict has influenced shale prices, yes? 

Mr. Cook: There is a general misconception that there is a Russia-Saudi Arabia conflict, when in fact, the true conflict is between the U.S. and Russia, and Saudi Arabia is merely a U.S. proxy. It is self-evident that the U.S. would never act against their own interest in high prices and it, therefore, follows that this is a trumped-up imaginary 'conflict' used to deflect blame for inflated prices and which is feed it to a credulous, uncritical and complicit media. 

What about the coronavirus's influence on the U.S. desired targets?

Mr. Cooke: Simply put, the coronavirus demand shock, which is estimated to have reduced product demand by some 30m barrels/day, is probably the greatest global economic shock ever seen. In our analysis, the U.S. has since September 2019 put in place an oil price peg between $50 and $60/barrel by literally basing the U.S. dollar on shale oil reserves.  But the coronavirus essentially killed physical oil price formation, in a similar way to the discontinuity in physical oil markets in late 2008 when trust in the banking system dried up oil trade finance. This literally blew away the U.S. market peg and led to a price discontinuity. The market is now under repair, as flows of Saudi oil to the U.S. and capital back into the oil market complex are intended to re-inflate and pump up oil market benchmarks back up to the levels at which U.S. energy dominance may be resumed.

How about China’s role as a major oil consumer in the market? Taking into account its current conflicts with the U.S. and etc.
The two experts believed that Chinese traders are astute and ruthless and operate under strategic Chinese state direction on a massive scale. There has long been widespread 'groupthink' prevalent in the oil market, where participants assume that the oil market will be dominated forever by producers. 

Mr. Cook: In my view, whereas the U.S. and other producers prefer a market price at the inflated $50/$60 per barrel level, clearly China, India, Japan, and above all the EU who are all major consumers would prefer a price pegged between maybe $30 to $40/bbl since the difference between the two price bands represents a net transfer from consumers to producers approaching $1 trillion per year, and that is before the additional costs of refining crude oil to fuel in turn distributed and sold to consumers as energy services such as heat/cooling, power, mobility and so on. 

Mr. Khaghani: China has taken advantage of this market discontinuity to fill strategic reserves now over 1.2 billion barrels, and a stream of literally hundreds of oil tankers is currently delivering to China oil bought at distressed prices which will be available for immediate re-sale. Meanwhile, China has also finalized a system of sanction-proof buyers able to take delivery of crude oil anonymously through the Shanghai Exchange, and this oil may then be refined by independent Chinese "teapot" refiners to be delivered/dumped into the global market at prices with which no other refiner can compete. 

Considering China’s role in the current market Mr. cook added: "To cut a long story short, I believe - and my analysis will be substantiated or refuted in the near future - that market power has moved permanently downstream to the buy-side in a structural market shift, and that in due course will move further downstream to energy services."

How is OPEC influencing oil prices, major policies of the market, and its future? 

Mr. Khaghani: Since 2001, when the oil market was taken over by intermediary traders and banks, OPEC has lost control of oil price formation and OPEC meetings serve only as a source of market noise enabling intermediaries and insider traders to profit from volatility at the expense of producers and consumers alike.

Mr. Cook: As for the future of the oil market, I think that the era of trading oil as a commodity is coming to a close and that we will begin to see flows of oil increasingly supplied and "swapped" for flows of products. Mr. Khaghani and I have advocated for more than 10 years that Iran can lead the way in this regard, and frankly, at this moment in market history, they have no other choice. As the great fictional detective, Sherlock Holmes put it: "If you eliminate the impossible, what remains, no matter how improbable, must be the truth".

Do you consider any specific relation between the recent OPEC decision about the extension of output cut and the impact of the coronavirus on the market? 

Mr. Cook: I genuinely believe OPEC decisions now serve only to generate profits for 'insider' traders and the oil market complex.

What will happen to the demand level after the coronavirus pandemic?

"We do not think the market will ever reach previous levels of demand. The pandemic has served to accelerate deep structural trends away from the capital and resource-intensive economies towards a 'smart' networked global economy based upon renewable energy and the value of what Exxon calls the "Fifth Fuel" - in other words, the intellectual value in which Iran is also rich," they answered.

When and how will the market survive from Covid-19?

Mr. Cook: I believe Covid-19 is a death blow to commodity markets. This is most harshly demonstrated by the ludicrous U.S. spike of the WTI market price to a negative price of some $37//bbl. I do not believe the contract - which was already struggling - will survive this and in my view, the U.S. intention is for a new market benchmark based on a U.S. Gulf export benchmark.

But in terms of the great structural trends I described above, this is merely to move the deckchairs on the 'Titanic' as the oil market ship hit the Covid-19 iceberg.

Can we say the golden age of oil has expired? Is oil going to experience what coal went through? What policies are being applied to postpone or even prevent the oil downfall?

Mr. Cook: That is a good summary of the current market inflection point, and as above I envisage that the oil market will now migrate downstream via products to 'smart' services. I believe that one of the 'Big Trades' of the 21st Century will be the smart swap of the use of intellectual value for the value of carbon fuel savings first pioneered by the great Scottish inventor James Watt in 1778 when he supplied innovative steam-powered pumping as a service in exchange for a third of coal savings.

Chris Cook, a senior research fellow at the University College London and director of Petro Scotland 
Mahmood Khaghani, the former director of Caspian Sea Oil and Gas Affairs at the Iranian ministry of oil

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