I would like to draw your attention to India and China. You mentioned that the Chinese demand will slowly plateauing out and Indian demand will start kicking in. Now, China is a much bigger economy than India, both in real terms and in absolute terms. Do you think the drop in the Chinese demand will be compensated by India or India is too small to have that kind of a demand or delta impact?
Dr Fereidun Fesharaki: Let me give you some numbers. Last year, Chinese demand grew by 1.6 million barrels per day. Indian demand grew by 250,000, almost 1:8 in size. This year, Chinese demand grew by 450,000, India’s by 250,000-300,000. So, the gap is narrowing. But India is too far behind China to fill the gap left by China. India will continue to grow and be a very important player in the global market. But in terms of the mega scale and size impacting the global market it is still very far behind China.

I would like to draw your attention again to two geopolitical issues. One, Russia versus Ukraine. Second, what is happening in the Gaza Strip. So, let us first talk about Russia versus Ukraine. From a demand and from a geopolitical risk standpoint, do you think Russia-Ukraine is more like yesterday’s headline for the oil market?
Dr Fereidun Fesharaki: It never had any impact anyway. What people sometimes misunderstand is that there are no sanctions against Russian oil anywhere in the world, except in Europe and in the US, Canada and Australia. But there are no sanctions. There are sanctions on the prices that people can pay for Russian oil. And those price limits basically have failed.

So whatever the Europeans used to buy, now is sold to China and India with no problem. People who make money are the shippers because transportation has become much more complicated with longer distances. So, unless there is an impact on the supply source, I don’t think the market will be affected. You have all these problems in Ukraine. You have the Red Sea issues. You have the Gaza Strip. The price of oil has not really jumped very much, maybe $2-3. Because in the backdrop, there is this 6 million barrels per day excess capacity that OPEC is holding and everybody knows that if there is a dramatic loss of supply, OPEC plus will increase production to replace it.

In your newsletter, you have mentioned that the world should get ready for the greatest wave of LNG supply ever. Why is that?
Dr Fereidun Fesharaki: The global LNG market today produces 408 million tonnes. Within a span of two to three years, this will jump by 200 million tonnes. So, it is like the global oil market. Oil production is increasing by 50 million barrels per day, everybody would shudder. But this is on a similar scale that the increase in production is so dramatic. But the demand for LNG is not going to peak, not until 2050 and even then, it will be flat.

So, because of that, this additional huge volume which comes will create a surplus for a number of years. But after that, we will have another round of shortages, so the price of LNG will be going up much more up and down than the price of oil because there is no OPEC plus to manage it. It is very much in the hands of the market. LNG is sold in three different ways, either by oil indexation, in that case OPEC is important because they have an impact on the price of oil; second is by indexation to the Henry Hub in the United States; and third is by spot price. In Asia, 80% of the sales of LNG are by long-term contracts, only 20% by spot. In South Asia – Pakistan, India, and Bangladesh depend more on the spot. So, it may be good news for them that the spot prices will go lower down post 2026 and that they can come in but these will not last because a lot of new demand gets generated when the price is low and that would push the prices up by itself.It is also believed that there is going to be a renewed focus on gas as an alternate source, which is especially for power plants, where thermal-based power plants are getting replaced by gas, which is considered to be a much cleaner source of production or source of energy. Do you see this impacting gas prices exponentially in coming years?
Dr Fereidun Fesharaki: Actually, in the power sector, gas and coal have already replaced oil. So, there is very little oil fire in power plants. In the United States and Europe, it is zero. And in Japan, it is next to zero. In Korea, it is next to zero. In India, it is still very limited. Coal still plays a very key role, but the tragedy in India is that there is 30 gigawatts of gas-fired capacity which is not because the price of gas seems to be too high for the consumers. And whatever scenario we think about, coal is always cheaper than gas. You cannot make gas compete with coal. So, only the environmental regulations will force more use of gas as compared to coal. But oil is already out of the game. Oil is for the industrial sector and for the transportation sector, insofar as the power sector is concerned, it has already lost the game some time ago.

Meanwhile, we continue to focus on Russia and OPEC and what essentially Middle East producers are doing. The US also has surplus oil. They are a net exporter of oil now and their capacity is much more than what the demand is. The US is the world’s largest economy. They are dominant in terms of using ‘sanctions’ and deciding which country can export, which country cannot. Given that the US has surplus oil now, how will that change the dynamics?
Dr Fereidun Fesharaki: Let me clarify that the US still is a net importer, not a net exporter. But US oil production is about 13 million barrels per day and consumption is nearly 20 million barrels per day. So a lot of oil is still imported in the US. The question is that in the US, most of its own oil is not used by its own refineries, because they prefer to export it as the quality is not matching the type of quality of the crude that the refineries need.

Refineries need heavy crudes and a lot of US oil is light crude. So, if you add the crude and petroleum products combined, the US is probably the largest exporter in the world, but it is also the largest importer in the world or close to the import levels of China. But at the end of the day, the US government has no role in the oil and gas sector. The government controls the flows by sanctions. The US government power is outside the US, not inside the US.

You have been making a case that the golden era for refining is coming. But the trend in the GRM is in November, they were at $4.9, they went up to $9, and have come down to $4. Why is there so much volatility in global refining margins?
Dr Fereidun Fesharaki: $4 or $5 is great. When we have something like $9, which was in 2022, that is the wrong benchmark. Those things happen for a variety of reasons on a temporary basis. But the GRMs are pretty strong. Gasoline cracks now, it is $15-20 a barrel. Diesel cracks are in double digits. So, the refining business is doing pretty good.

One of the unexpected developments, which we certainly did not forecast is the accuracy of hitting the Russian refineries by the Ukrainian drones. Up to a million barrels per day of Russian refineries are out of commission and this means that Russian exports of refined products have fallen quite dramatically and that has helped the margins. But the key issue is that nobody is building new refineries in the world today.

Demand still has to grow 6 million barrels per day before it peaks. In that environment, those who have refineries will benefit. And in India, there are lots of expansions taking place. But for the big refineries, like the West Coast refinery, those ideas are already dead. Nobody is looking at that anymore. Big grassroot refineries are not going to happen.

If you look at Reliance as the economically conscious company, they are not planning to add any more refineries. They are trying to go more into petrochemicals and into hydrogen. So, the key issue at the end is that when you do not have new refineries coming in and the demand is growing, it does create a golden age for refining, at least for the period of 2024, 2025, 2030. After that, the golden age will disappear.

Still, the margins will be okay, as many refineries in Europe and the US will end up closing. But in Asia, outside of Japan, and some refineries in China, everybody continues. Nobody ever thinks about shutting down a refinery in India. Refineries in India are often run at above 100%, which is unusual. Nobody else in the world does it like this. So, India is short and either has to be supplied by Reliance or Nayara or has to import. But the markets are very brisk in India and the refining companies in India make plenty of money.