What is your crystal ball saying – crude headed higher or lower?
Dr Fereidun Fesharaki: In the short-term, it is heading higher to $85 to $87 and it went down because of the sentiment and the stock market crash when all commodities went down. But the reality is that fundamental supply-demand is still very strong for the remainder of this year. Next year will not be so good, but this year we are looking at $85-87 a barrel.When you say that the fundamentals are indicating that oil should go higher, what exactly are you referring to?
Dr Fereidun Fesharaki: Referring to the demand on the one side, inventories in OECD countries, and the balance between supply and demand. The balance between supply and demand is still pretty tight. The demand has weakened a little bit in the past couple of months, but still very strong. When we look at these fundamentals, it still looks upwards. But this is through the end of this year. Next year will not be the same.
How much importance would you pay to the current political situation in the Middle East and the impact it could have on oil production per se?
Dr Fereidun Fesharaki: At the moment, there is a lot of trouble in the Middle East, but there is no impact on any supply source. Iran has promised to attack Israel for vengeance following the killing of the Hamas leader in Iran. The market is waiting for that. If they do it and suddenly the Israelis attack the Iranian oil fields, then there could be a substantial increase. But we need to keep in mind that OPEC plus now has six million barrels per day of excess capacity. So, even if some volumes are lost in any geopolitical problem, OPEC plus countries can make it up. That is the reason why the markets are not so sensitive to political problems, because they know of this huge capacity in the market.
How exactly do you see the US presidential election impacting the future of fossil fuels? If Donald Trump comes back, what would be the impact? If Kamala Harris and the Democrats come back, what will that do?
Dr Fereidun Fesharaki: Well, of course, Trump loves the oil industry, so it is always good for the oil industry to have him as president. But can he do something to increase US oil production? The answer is no. The US oil production will peak in about three years and then it will go sideways and slightly down. So, I do not think presidential elections are going to help that. But will Trump try to reimpose tough sanctions on Iran for exports? That may make a difference. When Trump was president, Iran was exporting less than 500,000 barrels per day. Now exports are nearly two million barrels per day, because Biden decided to turn a blind eye and allow the exports to go on to make sure that the price of oil is low for the American consumer just before the presidential election.Thankfully the oil from Russia, that supply chain, has not been disrupted. Do you think irrespective of what is happening between Russia and Ukraine right now, there would be no supply disruption?
Dr Fereidun Fesharaki: No, there will be no supply disruption. Remember that Europeans and Americans plus Australia and Canada imposed sanctions on Russian oil, but that Russian oil all went up to India and China. So, it is a big swimming pool, the oil market, and if you take one bucket from one side and put it on another side, still the same pool. So, nobody wants to reduce the Russian flows because that will send the prices up. People want the Russians to export but make less money. And, if you look at the prices they charge India now, it is only a few dollars discount. So, there are no big discounts left anymore. Even in Iranian exports to China, discounts are very small. So, an attempt to make the Russians make less money has already failed.
Your view has been that gas prices could remain low for long. Is there any reason to revisit that earlier thesis of yours?
Dr Fereidun Fesharaki: That will happen in 2026. At the moment, gas prices are strong, spot prices are strong, and contract prices are strong. But after 2026-27, there is a huge amount of gas coming in and everything is in motion. So, there is no need to revisit the old theory that will happen in 2026-27 for four to five years.
As technology improves, and we have seen in every other major commodity, the technology and cost of production in a sense it changes. Does that also hold for oil and gas and especially crude that technology and application will change the cost and more and more discoveries could happen?
Dr Fereidun Fesharaki: Well, the higher the price of oil, the more incentive to produce, but we need to keep in mind that one of the factors, which nobody thought about earlier, is the cost of carbon. If you want to remove carbon, it costs, and that cost supports higher prices of oil. So, carbon removal from oil production and oil refining will make oil more expensive for the consumer.
What is your understanding of China and especially the Chinese economy in terms of their crude demand?
Dr Fereidun Fesharaki: I think the impact on oil demand in China is not so important. What is important is the fact that the Chinese oil demand will peak by 2027-28, because of the electric vehicles (EVs). Already in China, 30-35% of all cars are electric vehicles and they have amazing infrastructure that is put in place. The Chinese oil demand is slowing down, not just because of the economy, but because of the massive intervention of the state, particularly the gasoline and diesel markets, and by creating all these electric vehicles and charging stations all over the place. The Chinese demand for the last 20 years has been supporting the oil market. The US oil production for the past 10 years, 15 years, have been supporting the global supply. Strangely enough, both the Chinese demand and the US supply peak about the same time and that is somewhere between 2027-2028.Given that EV is now increasing in terms of the new proposition, how will that impact the long-term trends for oil and crude?
Dr Fereidun Fesharaki: We have another five million barrels per day of oil demand to be generated by the early 2030s and after that oil demand peaks. But there is not going to be a collapse in oil demand. Oil demand will go down slowly, and mainly gasoline will go down, and then diesel will go down. But when we talk about EVs, we have to remember, EVs in China have been very effective.
In the United States, which is the largest gasoline market in the world, with nine million barrels per day demand, the gasoline market is bigger than all the 27 countries of the European community. EV penetration in the US is not doing very well. It is about 10% and now maybe declining a little bit because of the lack of infrastructure. Also, some of the EV cars are too expensive or too inconvenient for the range of drive.
In the US you drive long distances and you need to have access to charging stations and that is a big problem. So, EVs are not doing so well everywhere, but they are doing very well in China because of the government intervention, which has made them a great success.
So, you expect oil prices in the short term to go higher, settle closer to $90 rather than $75. Can I say that?
Dr Fereidun Fesharaki: That is correct. Yes. But only this year. Next year, it will be more like $75-80.
But where do you think the crude trajectory is headed?
Dr Fereidun Fesharaki: The long-term price will be about $70 a barrel in real terms and this view holds for the next 20 years. Increasing carbon costs are supporting crude prices. But we do not see the prices going below $70, we do not see a $40, $50, $30 oil anymore. When it gets to $70, it will be defended by OPEC. And the market can balance at those prices. So, the trajectory is to go down from $85-90, to $75-80 and then $70-75 and then around $70. That is a sustainable price for the longer term.
When you say the long-term trajectory for oil is down, is this largely based on demand or do you expect some breakthrough in technology?
Dr Fereidun Fesharaki: No, it is based on demand. Technology is already included. One of the big question marks is the additional electricity demand which will be generated by artificial intelligence and the data centres. That will impact the gas prices more than the oil prices. But there is a huge additional demand for gas being generated that nobody is talking about that. And we need to be aware that all these new fantastic technologies require a lot of energy. They are not going to work on solar. They are going to work on gas and they will play a very important role in future gas pricing.