TEHRAN - The oil selloff only two weeks into the seemingly inauspicious 2016 continues to spook global energy markets, causing oil prices to dip to a 12-year low. There have been numerous, yet different speculations over the underlying reasons behind the energy mayhem. Some see the downturn in the Chinese economy as the cause and some others think that restless pumpjacks of the OPEC kingpin Saudi Arabia are mainly to blame for the situation.

In an exclusive interview with Professor Chris Cook, senior research fellow at University College London (UCL), and Mahmoud Khaghani, international energy expert, the Tehran Times has addressed the issue of volatile oil markets. In what follows, a transcript of the interview has been given.


Tehran Times: Welcome to the Tehran Times Mr. Cook and Mr. Khaghani.

Tehran Times: This is an interesting time for energy markets in Iran and the region, is it not?

Khaghani: Indeed it is, for a number of reasons. On the one hand, there is a tense geopolitical situation as the implementation day (of the Joint Comprehensive Plan of Action worked out between Iran and the 5+1 group over Iran’s nuclear program) for the ending of many sanctions (imposed on Iran) appears to be imminent, while, on the other hand, Saudi Arabia in particular appears to be increasingly volatile both in domestic and international relationships.

Tehran Times: Then there is the matter of the oil market...Mr. Cook?

Cook: As we speak the oil price has dipped below $30 per barrel, as we have long predicted it would in the absence of production cuts. Due to years of sanctions, Iran has become more resilient to such extremes than other nations, and it is no surprise that Saudis, whose expenditure has been extremely high, particularly on unnecessarily complex weaponry, are feeling the pain.

Tehran Times: But is this not the result of the Saudi strategy to maximise production so as to increase market share and to attack competitors such as Russia and Iran?

Cook: It is said that there are always two reasons: the reason given and the real reason. In fact, Saudi Arabia and other Persian Gulf States bought (and then sold forward as a 'hedge') massive amounts of crude oil earlier this year at $50 to $60 per barrel in order to support the price. Unfortunately for them, the market glut is such that there is insufficient storage to accommodate further purchases, and so, they are now delivering this inventory of prepaid oil into the market, depressing the price.

Tehran Times: Are you saying the Saudis and the Persian Gulf states have been manipulating the oil market?

Cook: Indeed, I believe this policy commenced when President Obama came to office in 2009. The evidence is now overwhelming, and this assumption accounts for market events in a way which no other explanation can do. If there is one thing that the history of commodity markets tells us, from cocoa to coffee, and from diamonds to metals, it is that if producers CAN support market prices, then they WILL. The metal market in tin was supported by producers for decades until the price eventually collapsed literally overnight in 1985 when the producers' funds ran out in the face of oversupply. Similarly the metal market in copper was supported by Sumitomo's trader Yasuo Hamanaka for 10 years.

Tehran Times: Many commentators say that the price could fall as low as $10 per barrel and could stay low for years. Gentlemen, what is your view?

Khaghani: I have no doubt that in the absence of coordinated production cuts, the price will plunge further, and doubters should note that we have seen $10 oil as recently as 1998.

Cook: I concur, and moreover, as and when production cuts are made, it is my view that while the price will rise again, once the price reaches $50 per barrel, there is an enormous amount of crude oil production which becomes viable above that level.

Khaghani: The Saudi's formerly had an oil minister who wisely observed that the Stone Age did not end for lack of stones and that the age of Oil will not come to an end because of a shortage of oil, but rather because high prices make viable energy efficiency investment and new renewable energy production which substitutes for oil.

Tehran Times: Is this not the reason for your presence in Tehran, Mr. Cook?

Cook. It is one of the reasons for the Ministry of Energy's kind invitation. I have also been invited to contribute to an energy efficiency workshop at the forthcoming 7th CNG conference this week. Here I will be making the point that investment in energy efficiency is one of the greatest business opportunities of the 21st Century.

Tehran Times: Why do you say this?

Cook: For the simple economic reason that the more expensive carbon fuels like natural gas become, priced in dollars, then the more dollar profits are to be made from savings which I think of as 'NegaBarrels'.

Tehran Times: I am not familiar with the expression, Mr. Cook. Could you enlighten our readers?

Cook: While power capacity is measured in MegaWatts, a U.S. expert in sustainable energy, Amory Lovins, refers to the reduction of the requirement for power as 'NegaWatts', which has become a term describing energy savings. I have simply extended the expression to describe savings of barrels of oil.

Tehran Times: Mr. Khaghani, such investment is difficult using conventional methods and instruments, is it not?

Khaghani: It is, but in fact there is nothing new about the structures and instruments Mr. Cook and I will be outlining this in meetings with the Ministry of Energy. The concept of regional energy swaps which I was involved in pioneering with the Caspian Oil Swap years ago has now been plagiarised by the U.S. in an oil swap with Mexico. Equally an innovative gas to power energy category swap of Iran's gas for Armenia's power is now being developed further through a recently signed MOU among Iran, Armenia, Georgia and Russia, to create the potential for a Northern Energy Corridor.

We believe that such a partnership approach to energy cooperation is the sort of policy minister Zanganeh means when he refers to Energy Diplomacy. This is particularly the case when the new South Pars Phases 15 and 16 are considered, where the most energy efficient approach is perhaps to prefer CNG over LNG and local exports, either directly or through gas to power to Iran's regional neighbours instead of transporting gas thousands of kilometres at vast cost.

Cook: I would add the interesting historical fact that the famous Scottish engineer, James Watt, did not simply sell ownership of his innovative steam engine to the owners of English tin mines so that they could pump out water. What he did was to give them the use of the engine in exchange for a third of the coal which they saved when they used it.

Moreover, in my historical research at University College London (UCL), I have established that the prepay credit instrument, now re-emerging in use, actually pre-dates modern finance. This simple concept of prepayment for future energy production or savings gives rise to 'energy loans' where the return is not in dollars or euros but is in the intrinsic value of energy which may be priced in dollars or euros.

Tehran Times: Is this instrument relevant to Iran's domestic policy?

Cook: That is a very astute question. Rather than paying energy subsidies in cash printed by the Central Bank of Iran which tends to cause inflation, it would be possible to distribute to Iranians an energy dividend which would be paid in energy credits. These credits could be used wastefully, but most people would probably conserve these valuable assets and either exchange them or invest them in the energy sector through energy loans.

Khaghani: Perhaps I may observe that this would be an excellent idea in the context of the shortfall in government revenues due to plunging oil revenues.

Tehran Times: So could you summarise your message in a couple of simple sentences, Mr. Cook?

Cook: Indeed, my message to Iran's energy policy makers is simply this. Firstly, make best use of your carbon fuels while they last by applying a 'least carbon fuel cost' economic principle rather than a 'least dollar or euro cost' principle. Secondly, why own energy assets when you can simply have the use of them? And why sell oil at crazy low prices when you can simply supply it in exchange for a flow of products, or rights to products?

Editor: Thank you very much, gentlemen and I wish you every success