WEBVTT - How a Fund Manager's Trying to Fix Some of the Mideast's Issues 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.480 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:26.639 T dot com put Knowledge to Work. Hello and welcome 0:00:26.640 --> 0:00:30.000 to another edition of the Odd Thoughts Podcast. I'm Tracy 0:00:30.040 --> 0:00:34.239 Alloway and I'm Joe Wisenthal. So, Joe, do you know 0:00:34.440 --> 0:00:37.680 It's been almost a year to the day that I've 0:00:37.720 --> 0:00:41.320 been living out in the Middle East. I did the 0:00:41.360 --> 0:00:43.840 time has I'm trying to think. I was gonna say 0:00:43.840 --> 0:00:46.519 time has flown by, but I don't know, but that 0:00:46.560 --> 0:00:49.120 would be the opposite of it's felt so long. It's 0:00:49.120 --> 0:00:52.519 felt like an eternity. I can't believe it's it's I 0:00:52.560 --> 0:00:54.600 can't believe it's only been a year because it just 0:00:54.600 --> 0:00:56.760 seems like an eternity since you were here. Is that 0:00:56.920 --> 0:00:58.320 I'm trying to think of? Which is the way to 0:00:58.360 --> 0:01:02.560 frame it? Yeah? Good, save, I think, Okay, okay, right? 0:01:02.840 --> 0:01:05.160 I mean that actually means that we've been doing Odd 0:01:05.160 --> 0:01:08.440 Thoughts um internationally for longer than we actually did it 0:01:08.480 --> 0:01:11.040 together in the same studio, which is kind of amazing 0:01:11.120 --> 0:01:13.920 when you think about it. That is, uh, that is 0:01:13.959 --> 0:01:15.959 pretty amazing. All right. What's the point though, what's the 0:01:15.959 --> 0:01:18.680 point of this intro? Okay, So when you think about 0:01:18.680 --> 0:01:22.399 the Middle East, obviously a lot of people think about 0:01:22.440 --> 0:01:26.640 it as a rather troubled region. What are some of 0:01:26.680 --> 0:01:29.399 the major issues that spring to mind when you think 0:01:29.440 --> 0:01:33.560 of the Middle East. Well, obviously one of them from 0:01:33.560 --> 0:01:37.920 an economic standpoint is the reliance of many countries on 0:01:38.200 --> 0:01:42.840 oil and the future of the petroleum economy. And then, 0:01:42.840 --> 0:01:44.840 of course, you know what you were saying, is the 0:01:44.959 --> 0:01:50.000 troubled aspects the sort of continued tension regarding you know, 0:01:50.000 --> 0:01:53.560 political systems and stuff like that. I think you want 0:01:53.600 --> 0:01:57.320 to say religion as well, right that as well? Yeah, 0:01:57.640 --> 0:01:59.520 all of that, all of that when I think of 0:01:59.560 --> 0:02:02.880 the Middle all of that seems combined, the tension of 0:02:03.080 --> 0:02:08.639 religious interest, political interest opening up to sort of attempts 0:02:08.639 --> 0:02:12.520 at democracy, and a version of capitalism all seemed to 0:02:13.080 --> 0:02:16.120 um to swirl around when I think of what's going 0:02:16.160 --> 0:02:18.120 on in the Middle East. All right, well, um, to 0:02:18.240 --> 0:02:21.160 celebrate my one year anniversary, I guess we're going to 0:02:21.240 --> 0:02:25.520 be discussing all these issues with someone in finance who 0:02:25.639 --> 0:02:29.080 is trying to solve pretty much all of them, so 0:02:29.360 --> 0:02:32.840 quite a hefty task, as you might imagine. That does 0:02:32.919 --> 0:02:35.960 sound like that does sound like a hefty task. Alright, 0:02:36.360 --> 0:02:38.720 we're going to have on in Mad most Stack. He 0:02:39.000 --> 0:02:42.760 is the co chief investment officer for Capricorn Fund Managers 0:02:42.880 --> 0:02:45.080 and really I think one of the smartest guys around 0:02:45.080 --> 0:02:47.679 when it comes to emerging markets, and Mad thanks so 0:02:47.800 --> 0:02:50.920 much for coming on. That's my pleasure. Two kind so 0:02:51.080 --> 0:02:53.600 emad uh. We got to it a little bit in 0:02:53.639 --> 0:02:56.600 the intro, but for the past year I've really had 0:02:56.639 --> 0:03:00.360 a front row seat, um to see the impact of 0:03:00.480 --> 0:03:03.880 low oil prices on golf economies and a lot of 0:03:03.919 --> 0:03:09.040 these economies have really built themselves around the energy industry 0:03:09.080 --> 0:03:11.480 and it's really interesting to see them try to wean 0:03:11.520 --> 0:03:15.519 themselves off of it. Now, why is it so or 0:03:15.639 --> 0:03:19.680 seemingly so difficult for them? Well, I think that ultimately, 0:03:19.760 --> 0:03:22.359 what you have is you've had a very established social 0:03:22.400 --> 0:03:24.920 contract for a number of years, and this is something 0:03:24.960 --> 0:03:27.400 we've seen across the world. It's like, what is the 0:03:27.480 --> 0:03:31.040 fundamental basis of your relationship with the governments In the 0:03:31.040 --> 0:03:33.560 Middle East, it was a case of they extracted energy 0:03:33.600 --> 0:03:38.640 rents and they provided almost a jobs guarantee for their citizens, 0:03:38.760 --> 0:03:42.600 and they bought an expatriate labor to actually have productive work. 0:03:43.160 --> 0:03:45.320 That's being rewritten now because it's a question of can 0:03:45.360 --> 0:03:47.840 you keep on with these public sector jobs, in particular 0:03:48.120 --> 0:03:50.840 when the oil prices have collapsed such a degree. Is 0:03:50.880 --> 0:03:53.400 this a cyclical collapse where the all price is going 0:03:53.440 --> 0:03:55.480 to fIF deal, go back to andrew and then you 0:03:55.480 --> 0:03:58.240 know it'll keep on weaving or is it permanently at 0:03:58.280 --> 0:04:01.160 fifty dollars or lower? And that's a that's really concerned 0:04:01.200 --> 0:04:04.400 them because they're like, maybe we can't afford to employ 0:04:04.440 --> 0:04:07.000 these millions of young people who are kind of coming through. 0:04:07.760 --> 0:04:10.160 You know, when you think about there's a sort of 0:04:10.160 --> 0:04:13.760 a famous fact that economies that are highly dependent on 0:04:13.960 --> 0:04:18.440 natural resources they get trapped. They get these overvalued currencies, 0:04:18.680 --> 0:04:24.239 they get overly dependent on that specific resource. The rest 0:04:24.279 --> 0:04:27.240 of the economy kind of atrophies. If you're not in 0:04:27.320 --> 0:04:32.159 that resource, then you really have nothing going for you. Um, 0:04:32.279 --> 0:04:37.400 you know, this idea of transitioning away from oil dependency, 0:04:37.560 --> 0:04:39.880 is it really plausible. I mean, it's a great thing 0:04:39.920 --> 0:04:43.239 to talk about diversifying the economy, but is it something 0:04:43.279 --> 0:04:46.719 that can actually be done. Well, you know, necessity is 0:04:46.720 --> 0:04:50.080 the mother of invention. Um. I think all economies, when 0:04:50.160 --> 0:04:53.880 then the core driver starts to come away, the question 0:04:53.920 --> 0:04:56.400 marks always can it rebalance? I mean China has been 0:04:56.440 --> 0:05:01.480 reliant upon debt plus obviously the base growth effect. These 0:05:01.520 --> 0:05:04.400 ones have been reliant upon the resource curse. Can they 0:05:04.520 --> 0:05:06.960 move away? And I think you need two things. First 0:05:06.960 --> 0:05:08.720 of all, you need to have that like impetus and 0:05:08.760 --> 0:05:11.159 then you need someone with a very strong hand to 0:05:11.279 --> 0:05:13.480 push it through. If you look at country like Abu 0:05:13.560 --> 0:05:16.280 Dabbi and Kuwait, they have so much cash that for 0:05:16.320 --> 0:05:18.960 the moment, the impetus isn't really there. You look at 0:05:18.960 --> 0:05:21.760 someone like Saudi Arabia. It's coming from a very low base, 0:05:21.880 --> 0:05:25.040 but there's tremendous potential for reformation there. And you have 0:05:25.160 --> 0:05:28.920 this millennial Deputy Crown Prince Mohammad been Salman really trying 0:05:28.960 --> 0:05:32.560 to push through everything possible in terms of societal economic, 0:05:33.080 --> 0:05:36.080 kind of corporate reformation there around COO I, p O 0:05:36.160 --> 0:05:39.000 S and things like that. Will they be successful, Well, 0:05:39.040 --> 0:05:41.839 they're not going to achieve vision because it's just far 0:05:41.920 --> 0:05:45.039 too aggressive, but definitely you will have improvement from where 0:05:45.040 --> 0:05:47.200 we are now, because you have to have improvement from 0:05:47.200 --> 0:05:49.880 where we are now or you're going to have increasing 0:05:49.920 --> 0:05:53.680 social tension. I'm glad you brought up Saudi Aramco. This 0:05:53.760 --> 0:05:57.880 is a huge story both in golf markets and internationally. 0:05:58.080 --> 0:06:01.039 It's the listing of Saudi Arabia be as state owned 0:06:01.040 --> 0:06:04.280 oil company, and I'm glad you brought it up because 0:06:04.320 --> 0:06:07.080 I wanted to pick up on your point earlier. Do 0:06:07.120 --> 0:06:10.240 you think the downturn in oil prices is cyclical or 0:06:10.360 --> 0:06:13.440 is it something more structural, because there are some analysts 0:06:13.440 --> 0:06:17.919 who have talked about Saudi Arabia listing Aramco because the 0:06:17.960 --> 0:06:24.080 country basically thinks that oil demand is eventually going to peak. Well, 0:06:24.080 --> 0:06:26.400 I mean, I think that if you are a sensible 0:06:26.480 --> 0:06:29.000 leader of a country that's so reliant on oil with 0:06:30.000 --> 0:06:33.200 revenues coming from it, you do need to diversify. I 0:06:33.200 --> 0:06:36.080 think realistically, the Southies don't know. Nobody knows if this 0:06:36.160 --> 0:06:39.280 is cyclical or secular um, but you have to be 0:06:39.320 --> 0:06:42.040 prepared for these eventualities. And what South Arabia is effectually 0:06:42.080 --> 0:06:44.360 doing if you read between the Lions for their kind 0:06:44.360 --> 0:06:47.920 of pension fund, putting two trillion dollars offshore, kind of 0:06:47.920 --> 0:06:50.560 trying to get FDI to come in and stabilize the 0:06:50.600 --> 0:06:53.560 real because all receipts aren't there is. They're trying to 0:06:53.600 --> 0:06:58.000 shift from basically having oil rents to having rents extracted 0:06:58.040 --> 0:07:01.440 from dividends and you know, from the creativity of others abroad. 0:07:01.560 --> 0:07:03.359 I mean, this is why they're investing in things like 0:07:03.480 --> 0:07:06.479 Uber with three billion dollars. They will eventually invest in 0:07:06.520 --> 0:07:09.680 companies like Tesla. I'm sure they're gonna do massive investment 0:07:09.680 --> 0:07:12.520 into US infrastructure. I mean, there was a hundred billion 0:07:12.520 --> 0:07:15.120 dollar fund with soft Bank. Half of that of which 0:07:15.120 --> 0:07:17.520 they're providing, forty five billion dollars is going to go 0:07:17.600 --> 0:07:19.680 into the US. So I think it's they're just trying 0:07:19.680 --> 0:07:23.239 to swap some cash flows now just in case, because 0:07:23.280 --> 0:07:24.920 they don't want to be caught out, just as they've 0:07:24.920 --> 0:07:26.960 been caught out over the last few years, and now 0:07:27.040 --> 0:07:28.960 is the time to do it when the pressure is on, 0:07:29.400 --> 0:07:31.920 so they can make these social changes as well as 0:07:31.920 --> 0:07:35.400 economic changes. I get that idea that they have all 0:07:35.480 --> 0:07:38.320 this cash and what they want to do is have 0:07:38.480 --> 0:07:42.560 all these investments abroad and then hopefully those investments pay 0:07:42.560 --> 0:07:44.880 off and they pay a recurring dividend and that sort 0:07:44.880 --> 0:07:49.080 of replaces the you know, the month the money they 0:07:49.080 --> 0:07:51.800 get all the time from oil, But what about long 0:07:51.920 --> 0:07:54.840 term in terms of the domestic economy, in terms of 0:07:54.880 --> 0:07:58.080 all these people, uh, in terms of jobs and stuff 0:07:58.080 --> 0:08:01.520 like that. New industry, it's just there any thought or 0:08:01.560 --> 0:08:05.400 is there any progress being made to uh new domestic 0:08:05.440 --> 0:08:08.440 industries that will replace oil if the eventually sort of 0:08:08.440 --> 0:08:13.320 fades away. I mean, definitely, there's obviously massive plans and 0:08:13.400 --> 0:08:15.160 things like that, But the bottom line is you've got 0:08:15.240 --> 0:08:19.240 six d seven hundred thousand young Saudis coming through, increasing 0:08:19.280 --> 0:08:22.160 amounts of women in the workforce. Need to create jobs 0:08:22.200 --> 0:08:23.960 for them. And what they're trying to do is they're 0:08:23.960 --> 0:08:27.120 trying to cluster around big industries and really encourage Sames 0:08:27.160 --> 0:08:29.760 to come through. Whether or not be successful, I think 0:08:29.800 --> 0:08:31.880 it's going to take time. I mean, you can't change 0:08:31.880 --> 0:08:35.840 the mentality of a country overnight from basically being guaranteed 0:08:35.840 --> 0:08:38.280 a public sector job with six of Saudis in the 0:08:38.280 --> 0:08:41.160 public sector to having to work in the private sector. 0:08:41.520 --> 0:08:44.440 But you know, initiatives such as saying, well, foreigners are 0:08:44.440 --> 0:08:46.720 no longer allowed to work in Mores, it must be 0:08:46.760 --> 0:08:49.400 Saudis and things like that, they're kind of stealth tacks 0:08:49.440 --> 0:08:52.640 on the private center. But they are getting more people 0:08:52.800 --> 0:08:55.840 into the workforce who are Saudies. But like I said, 0:08:55.880 --> 0:08:58.240 this thing is going to take time, and the question 0:08:58.280 --> 0:09:00.839 mark is do they have enough time? UM? I think 0:09:00.840 --> 0:09:03.120 the jury is still out on that. So let's take 0:09:03.120 --> 0:09:06.840 a step back, because of course, diversifying the economy and 0:09:06.920 --> 0:09:10.360 building up domestic industries is something that's going to take time. 0:09:10.440 --> 0:09:12.640 You can't really snap your fingers and have it happen. 0:09:13.040 --> 0:09:17.560 Let's talk about the low oil prices themselves. UM. This 0:09:17.640 --> 0:09:21.240 is obviously a hot topic in markets, and it seems 0:09:21.280 --> 0:09:22.840 like not a day goes by that we don't have 0:09:22.880 --> 0:09:26.360 a headline that says something about OPEC versus the US 0:09:26.440 --> 0:09:31.080 shale industry, and a headline questioning opex ability to actually 0:09:31.120 --> 0:09:36.040 impact prices in the face of rising American production. What 0:09:36.200 --> 0:09:41.040 power do Middle East producers actually have when it comes 0:09:41.080 --> 0:09:45.280 to influencing the price of a barrel of crude? I mean, 0:09:46.200 --> 0:09:47.920 I think, just on one quick final point about the 0:09:47.960 --> 0:09:50.439 previous thing, the template there is Dubai, where it took 0:09:50.440 --> 0:09:53.280 about ten years to rediversify because they ran out of oil. 0:09:53.679 --> 0:09:56.240 Now hopping on to see the question you just asked, Look, 0:09:56.760 --> 0:09:58.920 OPEC is not a cartel. There have been lots of 0:09:58.960 --> 0:10:03.839 studies done. It's just too diversive. There's too many competing interests. 0:10:03.880 --> 0:10:06.120 Everyone's kind of tapped out when all prices are low 0:10:06.480 --> 0:10:08.520 because they overspend when all prices are high for it 0:10:08.559 --> 0:10:11.640 to be a cartel um what it approximates in kind 0:10:11.679 --> 0:10:15.080 of economic terms of the Stackleberg competition and what happens 0:10:15.080 --> 0:10:17.719 there is the leader moves and everyone else follows. But 0:10:17.840 --> 0:10:19.920 the only way that kind of they can punish, in 0:10:19.920 --> 0:10:22.400 this case Saudi Arabia everyone for not following is to 0:10:22.480 --> 0:10:25.800 just increase production and collapse the prices. And that's kind 0:10:25.800 --> 0:10:30.280 of like what you saw when Saudi Arabia wants to 0:10:30.280 --> 0:10:33.360 try and push out shale. But also it played out 0:10:33.360 --> 0:10:36.200 the scenarios if we cut, are we going to get 0:10:36.240 --> 0:10:38.200 into repeat of the nineties when we went from like 0:10:38.240 --> 0:10:40.040 ten million pounds and to two and a half million 0:10:40.080 --> 0:10:42.520 barrels and everyone else will cheat and Shell will just 0:10:42.559 --> 0:10:44.320 come and take the money that we're leaving on the table. 0:10:45.040 --> 0:10:48.880 That was the dynamic in two thousand and fourteen. Right now, 0:10:49.720 --> 0:10:51.520 I don't think anyone is thinking that there won't be 0:10:51.559 --> 0:10:54.200 an extension of the Opeqe cut and it has stabilized 0:10:54.240 --> 0:10:58.320 all prices. Why is that it's because Aman, Saudi everyone 0:10:58.360 --> 0:11:00.720 are starting to cash in on the long term cash 0:11:00.720 --> 0:11:05.520 flows of the oil production through bond issuances and equity issuances, 0:11:05.520 --> 0:11:08.440 So the payoff structure for them is different. You know, 0:11:08.920 --> 0:11:11.120 it costs Satibe a four and a half billion dollars 0:11:11.120 --> 0:11:13.320 a quarter at fifty dollar oil to cut to the 0:11:13.320 --> 0:11:15.800 amount that they have. They're just raised the seventeen billion 0:11:15.840 --> 0:11:18.040 dollar bond, you know, the around co I p O 0:11:18.080 --> 0:11:21.520 of fifty undred billion dollars crystallized. The payoff is very 0:11:21.520 --> 0:11:23.400 different to the extent that I think they can cut 0:11:23.440 --> 0:11:26.840 probably two million barrels by themselves if they really really 0:11:26.840 --> 0:11:29.600 need to and still come out ahead on cash terms. 0:11:30.200 --> 0:11:32.320 That would impact the market because the oil market is 0:11:32.360 --> 0:11:35.640 fascinating because you have ninety six million barrels of production 0:11:35.960 --> 0:11:38.720 but over supplies only one two million barrels in each direction. 0:11:39.080 --> 0:11:42.400 But the price moves, it doubles, it halves. It's incredibly 0:11:42.400 --> 0:11:45.880 sensitive to small shifts in production. It's just that OPEC 0:11:45.920 --> 0:11:49.200 can't get his act together to actually synchronize that usually 0:11:49.559 --> 0:11:51.680 and definitely to over extend from where they are now. 0:11:51.920 --> 0:11:54.319 So moving from one point two million barrels to two 0:11:54.720 --> 0:11:56.440 you'd need to see the op price drop below forty 0:11:56.440 --> 0:11:59.080 again probably as an example. So they're kind of in 0:11:59.080 --> 0:12:02.600 the comfort zone. So just to be clear, going back 0:12:02.600 --> 0:12:05.440 to what you said, what's different now is the ease 0:12:05.559 --> 0:12:08.679 with which the oil producing countries are able to monitor 0:12:08.800 --> 0:12:12.320 his future production via the bond market, which sort of 0:12:12.520 --> 0:12:15.959 makes it a little more economical to hold production down. 0:12:16.559 --> 0:12:19.319 My understanding that right, Yeah, I think that it's a 0:12:19.440 --> 0:12:23.040 change in mentality. Um, you know, they didn't know what 0:12:23.120 --> 0:12:26.720 the elasticity of shale would be. They've got some points 0:12:26.720 --> 0:12:28.960 of that. You start to see us, she'll come back online, 0:12:28.960 --> 0:12:31.520 but obviously the easiest stuff and you're not getting into 0:12:31.559 --> 0:12:34.400 the hardest stuff and oil service companies prices are going 0:12:34.520 --> 0:12:37.360 up and things like that. But they didn't know what 0:12:37.400 --> 0:12:40.800 that response function would be, and the payoff was just different. 0:12:40.840 --> 0:12:43.800 Now they've done all the groundwork, led by Saudi Arabia, 0:12:44.200 --> 0:12:47.280 they can start having these cash flows because really without 0:12:47.280 --> 0:12:49.680 Saudi Arabia you can't have any cuts. So it comes 0:12:49.679 --> 0:12:52.480 down to the South Arabia want cuts or not. That's why, 0:12:52.520 --> 0:12:54.920 like I said, if you model it as a Stackleberg competition, 0:12:55.320 --> 0:13:00.000 which is one where everyone follows the leader as it were, Um, 0:13:00.080 --> 0:13:02.520 because if Sally didn't move, you wouldn't have an ipeck deal. Right, 0:13:03.280 --> 0:13:06.760 let's pause for a second and take a short break 0:13:06.800 --> 0:13:09.520 to hear from our sponsor. But first we want to 0:13:09.520 --> 0:13:11.520 take a quick moment to let you know about something 0:13:11.760 --> 0:13:16.600 really new that's cool from Bloomberg. Starting right now, you 0:13:16.640 --> 0:13:19.280 can use our io s app or Google Chrome extension 0:13:19.360 --> 0:13:22.679 to scan the news, look at any story on any website, 0:13:22.720 --> 0:13:27.400 and instantly bring up news and information from Bloomberg relevant 0:13:27.400 --> 0:13:29.640 to what you're reading about. Yeah, it's pretty cool. So 0:13:29.720 --> 0:13:32.280 it means that no matter where you're reading the news, 0:13:32.440 --> 0:13:36.440 you can basically bring all the data information that's on 0:13:36.480 --> 0:13:41.400 the Bloomberg with you. It's kind of fun to test out, right, Joe. Right, 0:13:41.400 --> 0:13:44.080 So if you're reading a story about Tesla or Microsoft 0:13:44.320 --> 0:13:47.960 or Apple or Facebook, or if you're reading something about 0:13:47.960 --> 0:13:52.760 oil as been related to today's episode, you can immediately 0:13:53.040 --> 0:13:55.640 bring up news and data from Bloomberg. And of course 0:13:55.720 --> 0:13:57.760 we have all the news and data in the world. 0:13:58.120 --> 0:14:01.240 It's really awesome. You should go out by downloading the 0:14:01.280 --> 0:14:04.679 iOS app or search the Bloomberg extension on the Chrome 0:14:04.720 --> 0:14:07.600 Store to try it out. Yeah, and it's called lens. 0:14:07.640 --> 0:14:10.440 We should probably say what it's called right, all right, right, 0:14:10.559 --> 0:14:14.079 it's called lens. Learn more at Bloomberg dot com slash land, 0:14:17.880 --> 0:14:20.080 but knowledge to work and grow your business with c 0:14:20.240 --> 0:14:24.440 I T. From transportation to healthcare to manufacturing. C i 0:14:24.480 --> 0:14:28.240 T offers commercial lending, leasing, and treasury management services for 0:14:28.360 --> 0:14:31.240 small and middle market businesses. Learn more at c I 0:14:31.280 --> 0:14:39.000 T dot com. Put knowledge to work, and we are 0:14:39.080 --> 0:14:43.560 back with ammad most ack of Capricorn fund Management. Aman, 0:14:43.680 --> 0:14:46.880 you are just making the point that the price of 0:14:47.000 --> 0:14:51.160 oil or oil prices tend to be very, very affected 0:14:51.200 --> 0:14:55.800 by relatively small swings in production two million barrels. I 0:14:55.840 --> 0:14:59.320 think you said. If that's the case, then how come 0:14:59.520 --> 0:15:04.840 ope can't get its act together and actually control the 0:15:04.920 --> 0:15:07.480 price of oil in the way that some people you 0:15:07.480 --> 0:15:10.520 know used to think that it actually did well. I 0:15:10.560 --> 0:15:13.960 think that if you look historically at proper cartels, diamond 0:15:14.120 --> 0:15:19.240 in etcetera, the cartel members typical control of the market, 0:15:19.760 --> 0:15:22.160 but the dynamics were a bit different. In the case 0:15:22.200 --> 0:15:24.760 of Opeque and oil. What they're really focusing on at 0:15:24.760 --> 0:15:27.080 the moment is the supply side of things, and the 0:15:27.280 --> 0:15:31.120 methodology in terms of OPEC cuts is a very crude methodology. 0:15:31.240 --> 0:15:34.200 You know, we will cut one point two million barrels 0:15:34.200 --> 0:15:37.040 over the next six months. That's the current cut. That's 0:15:37.080 --> 0:15:40.000 cost them ten and a half billion dollars of lost 0:15:40.560 --> 0:15:44.000 income from the barrels they didn't produce and sell. If 0:15:44.040 --> 0:15:47.440 you assume fifty dollar oil, if the market shifts, if 0:15:47.640 --> 0:15:49.720 you know there's too much heavy versus light, where there 0:15:49.720 --> 0:15:53.120 any cutting heavy crude, they can't really adapt for that, 0:15:53.480 --> 0:15:56.400 and you can't really enforce it either. The enforcement this 0:15:56.440 --> 0:15:58.360 time in terms of compliance, so that should been very 0:15:58.360 --> 0:16:01.160 good compared to previous cuts. But then when once party 0:16:01.160 --> 0:16:03.760 starts cheating, historically everyone starts cheating and then it's just 0:16:03.800 --> 0:16:06.320 sadly left by themselves at two and a half million 0:16:06.360 --> 0:16:08.720 barrels while they were on kind of makes merry with 0:16:08.760 --> 0:16:11.520 lots and lots of cash because you don't find out. 0:16:11.560 --> 0:16:13.320 I mean, we've seen all these discussions about the OPEC 0:16:13.400 --> 0:16:15.960 monitoring and things like that, and loads of people say, well, 0:16:15.960 --> 0:16:18.080 this is the number, rock saying no, this is the number. 0:16:18.320 --> 0:16:20.080 It takes two to three months to actually see if 0:16:20.080 --> 0:16:23.080 anyone's cheating. So it just doesn't have the enforce ability. 0:16:23.120 --> 0:16:26.360 It doesn't have adaptability. Um, and that's why it's so 0:16:26.400 --> 0:16:29.040 difficult to really get everyone together on the same page 0:16:29.200 --> 0:16:33.400 unless they're terrified. So let's go back. When we started 0:16:33.640 --> 0:16:38.880 the episode, Tracy introduced you as someone who had was 0:16:38.920 --> 0:16:43.360 working on the solutions to some of the region's biggest 0:16:43.880 --> 0:16:47.000 vexing problems. And so let's get into this from an 0:16:47.040 --> 0:16:52.600 oil perspective. How could the Mid East oil producers sort 0:16:52.600 --> 0:16:56.560 of rearrange their affairs such that they didn't get you know, 0:16:56.920 --> 0:17:00.200 such that they weren't so susceptible to these traps. Yeah, 0:17:00.240 --> 0:17:01.600 I mean, I'm just trying to give my kind of 0:17:01.640 --> 0:17:04.080 tuppence and try and help out wherever I can. But 0:17:04.119 --> 0:17:07.000 my suggestion is what I call the tactical Petroleum Fund, 0:17:07.480 --> 0:17:11.960 which is to flip the focus from supply onto demand 0:17:12.359 --> 0:17:17.399 and effectually can create a marginal consumer for oil. So 0:17:17.520 --> 0:17:19.560 rather than have this very blunt instrument where you cut 0:17:19.640 --> 0:17:22.399 x million barrels and you lose ten billion dollars every 0:17:22.440 --> 0:17:26.800 single six months, Instead, if the aim is to remove 0:17:26.880 --> 0:17:29.840 barrels from the market now because you think now there's 0:17:29.880 --> 0:17:32.240 over supply, in the future, there will be under supply 0:17:32.520 --> 0:17:35.280 because you're not doing the investments the trillions of dollars 0:17:35.320 --> 0:17:38.320 that have been canceled to maintain the future supply in 0:17:38.480 --> 0:17:41.560 the face of declining production, because you know, you lose 0:17:41.600 --> 0:17:43.920 four or five million barrels a year from existing fields 0:17:43.920 --> 0:17:46.720 of production. That's huge and shall can fill some, but 0:17:46.720 --> 0:17:49.679 it can't fill that oil. Um my sugestion is that 0:17:49.880 --> 0:17:53.280 rather than cut you know, exper cent of your production, 0:17:53.800 --> 0:17:57.639 put half of that amount equivalent, produce a maximum and 0:17:57.680 --> 0:18:00.200 put it into a fund. And then what the fund 0:18:00.240 --> 0:18:02.000 can do is the fund can leverage up two to 0:18:02.080 --> 0:18:04.600 three times because you can effectually head against the oil 0:18:04.600 --> 0:18:09.359 price dropping and go out and purchase barrels from the 0:18:09.400 --> 0:18:12.639 market and move them off the market being available to 0:18:12.680 --> 0:18:15.639 the market. Because the most fascinating thing for me, for 0:18:15.800 --> 0:18:18.080 the oil prices and the oil market is that not 0:18:18.160 --> 0:18:21.080 every barrel is equal. When you get a headline out 0:18:21.119 --> 0:18:24.360 of Iraq, you know, che hun Kirkuk pripelines down four 0:18:24.400 --> 0:18:26.560 hundred thousand bows a two hundred thousand bollars a day, 0:18:26.800 --> 0:18:30.320 or Nigerian crew down three hundred thousand bollars day, the 0:18:30.359 --> 0:18:33.199 market often doesn't even flinch a little bit of a 0:18:33.200 --> 0:18:37.520 shift on us shell and the market goes ballistic. Oil 0:18:37.640 --> 0:18:40.639 in a strategic petroleum reserve is treated as effectually not 0:18:40.680 --> 0:18:43.600 available to the market. Oil in US inventories, which is 0:18:43.600 --> 0:18:46.320 the current focus, is treated as massively available to the market. 0:18:46.840 --> 0:18:48.919 So what you need to do is effectually create a 0:18:48.920 --> 0:18:51.919 buffer stock, just like Joseph in the Bible, you know, 0:18:52.040 --> 0:18:54.520 with the seven years of beasts and seven years of famine, 0:18:54.800 --> 0:18:57.480 whereby you take these barrels and you just move them 0:18:57.480 --> 0:19:00.440 off the market. And because you don't actually care about 0:19:00.480 --> 0:19:03.800 going to zero on that fund, there are so many 0:19:03.840 --> 0:19:06.199 ways you can do it, and you can really have 0:19:06.400 --> 0:19:08.040 things like if you've got too much light oil, you 0:19:08.080 --> 0:19:10.119 can move the light toil too much heavy, or you 0:19:10.160 --> 0:19:12.520 can move the heavy oil. If the oil curve and 0:19:12.560 --> 0:19:14.840 the oil market is not in oversupply, you don't make 0:19:14.880 --> 0:19:19.159 any purchases. You know, you have that flexibility and importantly 0:19:19.200 --> 0:19:22.400 you have enforceability because it's not a case of two 0:19:22.400 --> 0:19:25.520 months later have you cut production, no, it's have you 0:19:25.560 --> 0:19:29.280 paid at the start of this month yes or no? Um. 0:19:29.280 --> 0:19:31.440 So it's also a lot fairer because for example, now 0:19:31.480 --> 0:19:35.720 Saudi Arabia is cutting. They produce thirty percent of production, 0:19:35.920 --> 0:19:38.520 but they're bearing to the cost of this OPEC cut. 0:19:39.359 --> 0:19:43.840 So realistically, given the dynamics within Opeque, and you know 0:19:43.880 --> 0:19:45.520 what we've seen so far. What do you think are 0:19:45.560 --> 0:19:48.760 the chances that they would do something like this, because 0:19:48.880 --> 0:19:52.199 in some ways it means you have to seed a 0:19:52.240 --> 0:19:55.800 little bit of influence to an independent party, right like 0:19:55.800 --> 0:19:58.800 I'm assuming the oil fund would be somewhat independent from 0:19:58.880 --> 0:20:02.640 individual producers. Yeah, I mean, I think the typical way 0:20:02.680 --> 0:20:05.480 that these types of buffer stock systems, although there hasn't 0:20:05.520 --> 0:20:08.359 been coming quite like this given the interesting nature of 0:20:08.359 --> 0:20:11.200 the all market is that anyone who participates gets a 0:20:11.280 --> 0:20:12.960 vote and a share, and you get kind of a 0:20:13.040 --> 0:20:15.440 view into that. It becomes a bit of an invisible 0:20:15.480 --> 0:20:17.760 hand in the market. And what it can do is 0:20:17.760 --> 0:20:20.240 it can smooth out the volatility of the price, but 0:20:20.320 --> 0:20:22.320 then if you start to get greedy, you will eventually 0:20:22.320 --> 0:20:26.159 get taken out. Um. I think probably the optimal solution is, 0:20:26.200 --> 0:20:28.720 once they've gained through the scenarios and you know, the 0:20:28.800 --> 0:20:31.199 lessoners can do this at home, just introduced this as 0:20:31.240 --> 0:20:33.760 a player into the game. It works out a lot 0:20:33.760 --> 0:20:36.600 better financially is to have a hybrid system whereby you 0:20:36.640 --> 0:20:38.840 have an opequ cut just as you have now, but 0:20:38.880 --> 0:20:40.919 then you introduce this as a small player in the 0:20:40.960 --> 0:20:43.960 market and see where is it balancing. Just like Saudi 0:20:43.960 --> 0:20:46.320 Arabia want to see how is shail going to balance 0:20:46.359 --> 0:20:49.280 the market, because it becomes very interesting there. So you 0:20:49.280 --> 0:20:51.400 don't it's not either all you can have a hybrid, 0:20:51.680 --> 0:20:54.040 but I think in the long term this well, you 0:20:54.040 --> 0:20:57.359 can show mathematically, you can show qualtitatively, this is a 0:20:57.400 --> 0:21:01.240 superior option than very crude OPEC cut. Let's take a 0:21:01.359 --> 0:21:04.560 turn a little bit from this tracy. And also in 0:21:04.600 --> 0:21:06.480 the beginning we were talking about some of the other 0:21:06.640 --> 0:21:11.880 tensions that existed in the region, beyond just the challenges 0:21:12.280 --> 0:21:15.719 of oil economics, the questions about the long term viability, 0:21:16.160 --> 0:21:19.080 the sort of game theory, aspects of how the OPEC 0:21:19.119 --> 0:21:22.560 countries deal with each other. There's obviously a lot of 0:21:22.560 --> 0:21:29.080 issues related to politics, religion, There's the refugee crisis emanating 0:21:29.119 --> 0:21:31.520