Paul Horsnell
Global Head of Commodities Research for Standard Chartered

OPEC and non-OPEC countries will meet in Vienna this week to decide whether to cut oil production to prop up tumbling prices. This comes amid high output from Saudi Arabia, Russia and the U.S. and slowing demand for oil in several non-OECD countries.

On this edition of the Columbia Energy Exchange, host Jason Bordoff talks to Paul Horsnell, global head of commodities at Standard Chartered Plc, a multinational banking and financial services company based in London. Previously, Paul was managing director and head of commodities research at Barclays Capital, head of energy research at JPMorgan and assistant director for research at the Oxford Institute for Energy Studies.

Paul and Jason got together in Vienna ahead of the OPEC meeting to discuss the decline in oil prices over the past few months, the impact of rising U.S. shale oil production, President Trump’s pressure on Saudi Arabia for lower prices, Russia’s role in decisions on oil production and other market developments. They addressed, too, what might be expected of this significant meeting.



Jason Bordoff:  Hello and welcome to Columbia Energy Exchange.  A weekly podcast from the Center on Global Energy Policy at Columbia University.  I’m Jason Bordoff.  Since early October, oil prices have been in free fall dropping more than 30%.  OPEC and non-OPEC countries come together later this week to decide whether to cut production to prop up prices.  I had the chance last week on the margins of a technical meeting at OPEC in Vienna to catch up with Paul Horsnell known to many people who look at oil markets closely.  Paul is the global head of commodities at Standard Chartered.  We had the chance to sit down and talk about what’s happening with oil prices and what to expect at this week’s meeting.  Paul has been studying oil markets for over three decades prior to joining Standard Chartered.  He studied energy and commodities at Barclays, at JPMorgan and at the Oxford Institute for Energy Studies.  Few people have been studying oil markets and oil prices for as long as Paul has and can bring the same historical perspective to help us understand what is happening today.  So, it’s great to have a chance to catch up with him and I hope you enjoy this conversation.  Paul Horsnell, thanks for joining us on Columbia Energy Exchange.



Paul Horsnell:  It’s a pleasure.



Jason Bordoff:  So we’re sitting here in Vienna, the home of OPEC where lots of people who pay attention to oil markets and even those who don’t like the U.S.  president who pays attention to gasoline prices.  So, indirectly to oil markets are paying a lot of attention to what’s gonna happen here next week in Vienna when OPEC and importantly non-OPEC countries relatively new phenomenon come together to decide whether to cut production given the fall we’ve seen in prices.  So just set the groundwork for our listeners by helping people understand why this has become so relevant? Why oil prices have fallen so quickly in the last just month or two? And then let’s talk about what might happen next week?



Paul Horsnell:  Yeah.  Short history of oil over the past three months, I think two phases.  Phase one, OPEC and its partners urgently trying to increase production, ready to make up for the losses of production from Iran and Venezuela.  So very much a mode of wishing to increase, wishing to feeding any disbalance in the market by adding more supply.  Moving away from their previous agreements, calling us a halt on the psychology of the previous cycle.  So we ar supposing to the up wave.  And then phase two is being the last few weeks which I think have been a realization of OPEC that actually nowhere move back into the previous mode.  Need to remove some of those supplies that have been brought on over the past few months back off the market to get to a better balance for next year.  And there is lots of stuff below that.  But it’s essentially a reappraisal of supply and demand for fundamentals.



Jason Bordoff:  And that obviously is something OPEC does often.  This has been a pretty quick turnaround.  I think the last time I was in Vienna was around six months ago.  The OPEC seminar and that was when prices were rising and there was a lot of pressure including from the U.S.  president publicly and privately.  Calling on OPEC members to put more supply in the market because gasoline prices were starting to rise.  I think the Saudi oil minister said, we stand ready to do whatever is necessary and signal that production would rise significantly.  And have followed through on that.  Put a lot more supply and that’s been the cause of this price collapse.  Do people just misjudge what the demand outlook would be or how much shale would surge, I mean, it was only six months ago that OPEC decided to put a lot more supply and non-OPEC countries like Russia and do we just get that wrong and flood the market?



Paul Horsnell:  No, not dramatically.  I mean, this is the old market.  So things, move to relatively small amounts of the margin.  You don’t have to change or supply and demand views by say half a million difference on view on demand.  Half a million on supply then.  You’ve got to change the mode and it sort of changes its own at OPEC meetings.  But I think, you know, if we are looking for what has changed with the margin.  Demand views have become more bearish.  There is no doubt on that.  I don’t think anything fundamentally has moved on the demand numbers.  We were bearish about demand now really from the middle of the year.  You know, the numbers haven’t changed much.  But perhaps consensus have continued to move down.  And on the supply side, the latest leg have been U.S.  shale which is, I think beaten all of the forecasts to the upside in terms of supply.  Not just an additional pressure.  So, it’s not a huge, this isn’t like global financial crisis or the Asian financial crisis.  It’s not a huge great gap opening up between supply and demand.  But enough of a change since the last OPEC meeting to change that psychology.  It is almost binary.  It’s from all that we need to do something to stop prices from overheating down to low.  We need to do something to stop prices from under shooting further.  So a few hundred thousand barrels but…



Jason Bordoff:  And shale has been a big part of that, right.  I mean, we’ve seen 2 million barrel a day change in crude production, almost 3 million in total liquids production.  There is a huge numbers.  If you look at OPEC production, tell me, if I have this right.  It hasn’t changed enormously because we’ve seen a surge from suppliers like Saudi Arabia.  But a decline in Iran which people knew was coming because of sanctions.  The bulk of the additional supply we’ve seen has just been shale exceeding expectations.  What does that tell us about where shale is going from here and what does that tell us about the situation OPEC countries will face moving forward? Are we in this perpetual cycle where shale surges and they need to decide whether to cut production and let shale keep growing which was the conversation we were having four years ago in 2014?



Paul Horsnell:  Yeah, I think, it’s… There is a broader issue.  Are we just locked into do this constant sort of, you know, you feel like two grand whole days and we have some meetings which, this trail is going to UN.  So, one journalist last week talking about wave of biblical proportions.  Do tend to get a little bit carried away.  And then the other one is that shale isn’t going to provide enough and are we just gonna switch between these.  I think let’s break it.  Let’s sort of go back on, now has it been, how strong has been the shale appraise over the last past six months? When we gone down into the numbers, we’ve found some surprising results.  We’ve taken the production results of all the shale companies, all the independent U.S.  companies and we found that actually they are growing at a fairly steady pace.  Over Q3, they grew about 4.4%.  Now slightly slower than Q2 when they grew at 4.5%.  That’s really good growth but it hasn’t suddenly out its game.  What change between now it’s really been the international majors.  The domestic U.S.  production fell during the year.  It increased by about 10% over the case of Q3.  So that was the additional _____ [00:07:18].



Jason Bordoff:  If I’m right, that’s not all shale.  We saw gulf of Mexico.



Paul Horsnell:  Gulf of Mexico is a very large part of it.  Some _____ [00:07:24] shale honestly one of the big developments at the industry level has been the majors getting more involved in shale and particularly through the Permian Basin.  But the largest push on that was actually Gulf of Mexico which is as traditional as you can get and that is deep water conventional old production.  Very long lags and part of it is base effects from last year but overall, I think shale has just been growing at a nice steady pace.  It’s doing what it has been doing.  There hasn’t been any massive great acceleration.  But because of that switch particularly in gulf of Mexico, the U.S.  numbers have certainly performed in Q3.



Jason Bordoff:  If it is attributed to that surge in gulf of Mexico production which were these longer cycle investments that doesn’t necessarily tell us that shale can grow at this rate.



Paul Horsnell:  Precisely and then I think the evidence is that with _____ [00:08:16] prices north of 60 shale companies could keep this kind of 4.5% quote-unquote growth going virtually indefinitely.  73 over the course of next year.  Now, roll on, you know, are we gonna put in 4.5% growth for each of the next four quarters with _____ [00:08:35] 50? No.  I should think within that 50 shale starts sorting out to itself and it will, the current issues come in.  Completion activity will start to fall off.  You will start to see, you know, just the first stages of another substantial downturn.  Some of these prices and prices below.  So, there are some, they would say, look actually OPEC can just, just wait for shale to decelerate.  I think they are going to do more.  I think they probably needs be more productive.  Oil will come off the market.  But there is this close relationship between shale growth and the level of prices and there is a danger to some of the over reacting, say, hey prices is too high in shale growth accelerated.  Some will say, probably not.  And shale growth is just doing what it is and it can continue.  But shale is difficult.  It takes, it does take a lot of effort.  It does take a lot of capital.



Jason Bordoff:  A lot of questions about to what extent changes in interest rates or at least demands for capital discipline will slow things down.



Paul Horsnell:  Absolutely.  If you look at what Wall Street has done to, you know, catalyzation of shale companies.  They’re not terribly impressed.  They want to high prices and even less impressed at low prices.  So there is this sort of fundamental shake out.  I think capping of the industry.  And the people I find that are the most down beat on shale and actually the shale producers themselves and they are the ones who appreciates under these financing issues.  You know, know that there is a big difference between the real sweet spots and moving away from those in the key areas.  And so, the analysts and I think the Wall Streets analysts who are most gung ho on shale and the industry itself is a bit more measured.  It’s much more give us the price and we can with a lot of work, a lot of effort, a lot of technology thrown at it, you know, continue to generate these kind of four five percent and per quarter growth rates.



Jason Bordoff:  How much of the recent downturn we’ve seen, all the price movements in general.  This debate about how much they are driven by financial trading activity, speculative behavior of the markets versus just the supply and demand fundamentals.  Help people understand that.



Paul Horsnell:  Yeah, I mean, they may not serve.  The key point is that you know a movement in prices does reflect that change in view about the fundamentals primarily.  The move away from the cycle that you have the market that wanted more supply from OPEC to one that wanted less supply out from OPEC.  So that’s the key change in all levels.  Within that, so the price dynamics are clearly influenced by trading patterns, by who’s trading by perhaps more speculative views on price based on, if you want supply and demand.  Speculation, it doesn’t come out for vacuum.  It’s related to views on how _____ [00:11:40] fit together.  So, I mean, you can see that increase the speed of the fall.  I think it’s led to prices over shooting a bit.  50 TI and I’d be happy if more at 60 at this particular point that, you know that’s just suggesting the last ten dollars and they have been bent down to market dynamics.  What’s specially down there is certainly a strong move to the short sight from institutional investors and hedge funds.  Now they are taking a view of the market.  I think very much based on president Trumps tweets and the view that the U.S.  doesn’t have a lower preferred oil price that we’re not too worried about taxes and that the president is pressing for a lower.  That’s, I think where that domestic flow comes.



Jason Bordoff:  And that’s been a big factor.  The change in market perception that the U.S.  is going to use its leverage to push producers to give supply in the market.  That has a material impact in your view.



Paul Horsnell:  Yeah, I think it has because there was always, I mean, the U.S.  also had a lowest price that they wanted to fund.  They knew that the low levels, the administration would be worried not only about its domestic agenda because $50 is bad for Texas, bad for Oklahoma bad for North Dakota.  But also the impact across the world generally on producers, all of those low prices.  And I think what’s been questioned probably incorrectly is maybe the U.S.  now isn’t worried about that would be prepared to see, doesn’t have a concept for flaw idea floor prices.



Jason Bordoff:  And just so people know that if listeners haven’t sort of been following Trump’s oil tweets closely.  There was a period over the last year where when prices got to roughly $80.  You’d see the president tweet about concern about high oil prices but then recently even with prices that are at low level around 60 or 65.  The president also saying keep the supply up.  We need lower prices.



Paul Horsnell:  Exactly it and even at 55 and it wasn’t just saying no, job done great we have lower prices.  It was small.  That sort of perception that again we are not looking for soft landing to floor that.  So and that played some role in that swift inspected.  There have been also and this is where we get to the kind of insight based role in some of the financial instruments bit.  I think, there have been some big effects coming through from options positions.  What that arises from is where the shale industry hedged.  Now, you’ve drawn the hope if you were that the shale industry, it’s hedging at high prices.  It is that makes sense.  What’s actually happened is that, done relatively little hedging at the high price.  A lot of the hedging was done between about 45 and 55 TI.  That’s where the pitfalls are.  That’s the flaws which companies are trying to protect.  Now, when prices were high, not because that, it’s a long way off markets were very volatile.  The banks don’t have to do an awful lot of protection of their own positions in order to give that not bailout.



Jason Bordoff:  But as prices fall things go beyond the hook.



Paul Horsnell:  That’s exactly it and even worse, if they fall quickly and with a large increase in volatility, these things that look as if, they don’t matter, you don’t need to _____ [00:15:08] protection for, suddenly, you’re crashing into them rather quickly.  You do need to start protection.  That protection is actually selling oil contracts.  So, you’re hedging your obligations to producers other options.  So it is all a little bit technical but it’s one of the reasons why you’ve had those days where prices we thought, this is low and then suddenly, it falls another three, four dollars in a day.  It’s that sort of dynamic that’s playing on.  So, it’s the financial, yes it does, can exaggerated, it can lead to some over shooting.  Certainly can generate some really wild days in terms of these, some of the technicalities of it.  But in terms of the _____ [00:15:52] has it caused prices to fall? No.



Jason Bordoff:  Fundamentally, it’s either an oversupply.



Paul Horsnell:  Fundamentally, move into that, so yes.



Jason Bordoff:  And you made this point about sort of the perception that pressure from the U.S.  might have an impact.  It plays out in this broader context of the fact that in response to the murder of Jamal Khashoggi the journalist, the U.S. congress is potentially gonna take some further actions, is discussing further actions toward the kingdom of Saudi Arabia.  Does that affect the way people think about the leverage that the U.S.  has or the difficulty that OPEC might have in cutting production in the face of pressure from the U.S.?



Paul Horsnell:  I think it is certainly true that the big disrupter in the market this year has been president’s Trump and the U.S.  administration.  Most of these things, anything that’s changed there, you know, quite often there is the White House has been at the heart of that.  So that perception that now this is a change in U.S.  policy that this, that there is this constant vocalization that, I think that is going to happen and market is being a big change and you’ve been in White House.  So, you know, it’s actually not that big change.  There is always was a vocalization, there always was, not on Twitter but there always was a constant dialogue between the U.S.  and producers that has been for 30-40 years.  This is nothing new at all.  The U.S.  has never been shy on those communications to express its desires.  So that bit isn’t new.



Jason Bordoff:  Nothing, there is nothing new.  I agree with you about the U.S.  administration, the U.S.  president publicly or privately asking particularly the king of Saudi Arabia that the health of the global economy would be improved if we didn’t _____ [00:17:46].



Paul Horsnell:  That’s it.  That’s a public vocalization which is new and that’s, and that’s got to, I think last year, the average of all that, actually didn’t have much of a Twitter feed on the screen.  I mean, some did, some didn’t.  It’s only when it become, this year only nine tweets.  There were none on the oil last year.  There have been nine this year.  You know, those have moved the market and they’ve moved the market increasingly.  And why they have this increasing impact, I think has been that working away on, hang on the oil price areas, you know, the U.S.  is not just a player but we’ve got somebody who is trying to give the view that he’s driving the price.  And so that, no, I think does rework the view.  They do get down to the market questioning, you know, is OPEC brave enough quite.  Most of the members won’t pick, don’t worry too much about situation.  It just raises into the market perception that you can find the face of president Trump.



Jason Bordoff:  In the context of these broader political dynamics that are playing out and one of the, it’s not just OPEC as we said before.  It’s OPEC plus Russia is hugely important player in the way that is relatively new.  How do you think Russia views the oil market, views the pros and cons of high versus lower prices? What do you expect them? Are they ready to cut production at these levels?



Paul Horsnell:  I think the Russians are perfectly ready to sort of reactivate a deal similar to the deal they had before.  Again, it’s extreme and what now rising, falling prices are less an issue than just these extremes of prices being and absolutely seen as two high or too low.  I think one is just starting to get to where we are now in a 50 TI.  That starts hurting.  So whether they are, they are not gonna come out and say, we are hurting.  But it does hurt.  And particularly in a broader political context.



Jason Bordoff:  Producer revenue at the country level.  Thy Physical balance _____ [00:19:53] what the western oil and gas companies are doing okay.



Paul Horsnell:  Oh, yes and there is a difference, I mean during the insulation, you can get from your own industry instrument, you know, you can sort of know, this doesn’t hurt.  But all other things being equal would you prefer to have prices $10 high? Yes, of course, you would.  Did the Russians, whether Russians ever really hawkish on prices? No, they will never be.  They’ve always been fairly _____ [00:20:18] in terms of very revealing price but in for that Russian view, current prices are just getting there and the feeling of that being driven by the U.S.  is again another thing that most southern countries have wanted to sort of react to.  So, there is that sort of interplay between where is Russia’s positioning itself relative to the U.S.  in terms of its relation to some of these key producers and as you said, that’s new.  That’s something.



Jason Bordoff:  And how much is the concerns about emerging market currency risks, the trade war that the U.S.  has taken on China among others, is that affecting the demand outlook and how much is that playing into this price collapse?



Paul Horsnell:  I think, it’s clearly been an important driver of the market perception that demand outlook has worsened.  Again, with reason to be negative about the demand outlook because of Trump’s position on trade for quite a long time.  But it does seem to snowball to the point now where that’s a major down driver.  And again, the constant theme here we always come back to the oval office.  There is, whether it’s market fears about the demand outlook because of U.S.  trade policy or if it is on some of these political aspects and some of the supply dynamics.  It does again come back to Twitter becoming a very useful way of looking at the oil market which is a very…



Jason Bordoff:  And it’s as you said, there is nothing new about the U.S.  policymakers, oil politicians wanting lower energy prices in the  United States.  And that helps consumers at the pump to be sure in terms of the broader impact of higher versus lower gasoline prices on the U.S.  economy.  Do we need to think about that differently in a world where the U.S.  is almost a net zero importer? Is there a too low price for the U.S.  economy now as well as a too high price.



Paul Horsnell:  Oh, yeah, I think there always was.  And that’s even when the net imports were growing.  The it’s a _____ [00:22:16] but in short the major impact of lower prices on a one year basis is still good for U.S.  GDP.  Once you get into year two, it starts becoming negative and it starts becoming negative because what you are doing effectively by changing the oil price is moving into distribution in the U.S.  You’ve effectively pulling money out of the Midwest and you’re giving it to the East Coast and the West Coast.  So the big energy, net energy consumers, East Coast and West Coast big net energy producers in the Midwest.  So it has those sort of strong income distribution impacts.  Now, generally, you think of Republican president with is quite interested in the Midwest bit and so therefore there would be some point where complaints of Midwest about how bad level prices are for them start having a bit more political purchase.  That hasn’t happens so far.  I think it will happen but for the moment, the policy driven by the view that it’s unambiguously good for the U.S.  to have low prices.  I think, it’s actually unambiguously bad below 50 because it really does, it starts giving the geese that lay the golden eggs.  It really does hamper shale production.  It’s bad for credit market.  It’s bad for equity markets.  It’s bad for series of U.S.  allies and not just the energy producers, so again, this extremes, and the markets don’t mind bit in the middle but extreme high, that in terms of the impacts on other markets.  Extreme lows in prices again, markets don’t like that.  We have that extreme low.  In fact, if we are having this conversation ten years ago, if we could listen from ten years ago this conversation, the way we would be most perplexed is, they just said $50 was extremely low.  How can $50 be extremely low? That has been that remapping.



Jason Bordoff:  And that’s good historical perspective and I wanted to put this conversation in a little bit of a historical context for listeners partly because you know, few people have been looking at oil markets as closely for as long as you have writing one of the more influential books with the legendary _____ [00:24:27] on price formation a quarter century ago.  So in that time, I don’t mean to date, sorry about that.  Talk a little bit, well first talk about OPEC as an institution and over the last 20, 25 years, you know why is everyone still coming together in Vienna next week? Does it, in what way is it, does it, the question of does OPEC, how relevant it is? Does it still matter? The way these meetings work, tell people a little bit what happens here next week and then what you look forward for the influence that OPEC as an institution has an oil market.  How is that more or less how has it changed over time?



Paul Horsnell:  Yeah, people come _____ [00:25:11] it’s nice and the cake is good, the food is good.  It’s Christmas and the lights are on although pretty.  But people come here because it’s a very good place to meet each other, to get some good information really across not just on OPEC but broadly across the market.  So there is that element of information exchange which always goes on in the OPEC meetings.  So I think people would keep on coming almost regardless.  I mean, times have changed.  It’s because of all the changes you’ve already mentioned when you talked about the change in politics and the Russians, the change in shale.  Now the change in the information flow, everything speeding up, Twitter got up there.  Now, we’ve moved away from what I perhaps did 25 years ago which was to sometimes have to have make some very large adjustments on supply demand intake and big decisions in terms of balances for the coming year and often with very limited information.  But there were rather big political pieces and the internal dynamics of OPEC were key part of that.  So it always with country X and country Y be able to come to compromise over this issue when they have got over on that issue.  So it was much more about those internal OPEC dynamics.  I think moving on, the internal OPEC dynamics are, you know, these are very disparate countries but actually they are not bad at all.  Now, it’s rare to have that level of internal _____ [00:26:52] that we had 20, 30 years ago.  It’s a much more consensus driven.  They know what they are needing to do.  Their information flows are much better.  There is much broader arrangement of information.  Generally, the adjustments being made are more finances and they are not sort of these huge great changes.  My…



Jason Bordoff:  That means there is less influence, if you’re not talking three, four million barrels a day cuts and you don’t have five or six million barrels a day of spare capacity.  Does that just mean you’re kind of managing a much narrow range? Does that limit the influence?



Paul Horsnell:  I don’t think it does because market is moving on relatively small amounts of margin.  So it doesn’t have to be these sort of dumbing, great adjustments political reduction.  It is of certain amounts of setting the tone of the market.  It is, you know providing a level of assurance for the market that balance will be met and we are in a surplus market, are we in a deficit market.  So, I think the influence is still there.  And even in the world of shale, in fact, there is a lot of interest in OPEC meeting again one of the roles that, you know, OPEC is still the marginal producer.  The amount of oil that OPEC can take off the market or bring on the market over the course of a month, two months is much more than shale can.  Because shale incrementally just keeps going.  It’s not, it’s not a month and month reaction to prices in market fundamental in the same way that OPEC is.  So oddly enough, I think there is more consensus about the importance of OPEC than in fact it was 20 years ago.  Some of the more flagrantly anti-OPEC rhetoric has well, with a few exception has more or less, I think melted away and see what OPEC is a stabilizer for the oil market.  It plays an important role.  Most consumer governments actually like OPEC because it’s stable.



Jason Bordoff:  Well, let me ask you about that because we did see that play out over the last couple of years, oil prices fell to I think a low of $27 before OPEC stepped in two years after they didn’t do anything and November 2014 to cut production bring prices back up.  And then as prices begin to surge this past summer, put more supply in the market to stem that increase, providing some stability.  That’s sort of the thesis of you know, _____ [00:29:17] who wrote a book, a book series with Columbia University, talked about how the problem of not having an entity whether it’s the Texas railroad commission or John Rockefeller or OPEC helping to balance markets.  So, you know, you made the point about consumer countries and their view of OPEC which is often at least in U.S.  rhetoric negative.  There is a perception since the 1970s of a cartel controlling prices.  There is an OPEC legislation.  But do you think, people would miss OPEC if it wasn’t there to help bring balance to the market or not?



Paul Horsnell:  Yeah, I think if it wasn’t there then we would invent something else to take its place.  That would be something that market is marginal.  I mean, today, I mean, the railroad commission was a good example of 1930s.  But, only this week, the[00:30:07] has been talking of government mandated cuts in production in order to particular issues in Alberta at the moment.  But no, governments do realize that no, these extremes can be extremely damaging.



Jason Bordoff:  Oil prices have fallen almost $10 or maybe below.



Paul Horsnell:  Almost $10 fall and with those kinds of levels government do come in.  There is a desire for stability.  Again within those bounds, getting rid of these lower bids.  So within that, you know, I think OPEC can be probably rightly proud to say that, you know, we have been a stabilizing force.  We have managed the markets through some of these extremes.  But, it’s a difficult message perhaps to get through to consumers that producer cartel actually has some benefits.  And that’s been an issue for OPEC not for the whole of its but certainly over the course since 1973.  Now to get through that this is an organization that isn’t there to scout the consumer and if anything.  It can provide some very strong benefits.  Over that period, the people who really scout the consumers go something constrain the government over taxation and most of what the consumer will pay particularly in Europe, it’s government tax.  It’s going to their own tax.  The amount that actually ends up in hands of the producers is very small indeed.  In fact, I can think, you can’t think of many commodities, things that are going to the supermarket in Vienna to buy where the proportion of the price that actually ends up in the hands of the people actually produced it.  It’s so small.  So there is a big mismatch between perceptions and reality on here.  But overall OPEC’s main aim and where it’s best is rescuing the market from these extreme highs and lows.  Memorably for it in terms of this tea bag theory of OPEC now which is OPEC is an organization which like a tea bag works best in hot water.  So it needs that, it needs a major problem to really show its best.  When things are in the middle everybody is happy.  If it doesn’t really have to do anything.  It’s not, now there is little nudges.  What really brings it out is situations, I think rather like the current one where the markets are looking to this has been caused by weak global economy, whether it’s been caused by the supply from a particular area.  Now, that’s where OPEC is…



Jason Bordoff:  Now, people listening may not know.  Tell people who _____ [00:32:45] was and what you learnt from him?



Paul Horsnell:  Yes, Robert _____ [00:32:48] was the first head of the Oxford University for energy studies.  An Oxford academic who wrote a series of very pioneering books on understanding although oil markets and I think he had this, perhaps had a view on OPEC how it works and how if it’s seen with the oil market perhaps, it’s more coherent and earlier than anybody else.  So just that clarity of thought that Robert had, it has been really, now one of the great analysts together there with people like Morris Adelman and Paul Frankel as those who have first sort of taken all analysis and turned it into something which, you know, really did have some academic backbone and strength.



Jason Bordoff:  And as I mentioned, you know, 25 years ago, you wrote this book on price formation with him.  What’s still relevant about it and what’s changed most significantly since you wrote that?



Paul Horsnell:  Yeah, and that was, to get some of those really about the system then which was, you know, based around rents and most of the world _____ [00:34:03] in the Americas.  Oddly enough, I think the general view there is the transition of markets then from the point where OPEC was actually calling out the prices and wasn’t particularly market related in its prices through to market related pricing.  That basic structure stay the same.  What’s changed that is, it’s on the details of the volume of trading how trading is carried out.  The people who are trading.  Banks became very, very powerful players and became less powerful players.  Trading companies have become less powerful, now have become powerful again.  You know the growth of screen based trading, introducing some of the black boxes and so called CTAs and a more automated trading.  So all these new things in there.  But the basic structure of the market which is one where that is some free trading market which is then a benchmark, then the rest of the world rather takes on to that.  That basic structure is still there and now has been going for about, you know, already since 86, 87.



Jason Bordoff:  And I dated you, I’m sorry by saying how long you’ve been doing this.  But for people who haven’t studied oil market history, what do you think they get most wrong when you read the commentary today out there?



Paul Horsnell:  Well, that’s a very good question.  I think further back again to _____ [00:35:35] book which I think lays out the myths and you know, where things have, it’s extremely good work if anybody hasn’t read that.  It really does different background.  I think what’s the most wrong is, it’s back to OPEC and that sort of some _____ [00:35:59] may have in just what is OPEC there for, how does it operate, how is policy formed? How these bits fit together.  That’s still the major, I think concern.  It’s very dangerous to get your all analyst and analysis mixed up with your nationality.  Now, there is a danger of that, that you can see a group, not us.  And so therefore they must be against us.  And you still see that kind of writing that start separating our place into good and bad and that’s…



Jason Bordoff:  Is it the last gasp though of people sort of enjoying coming to Vienna, the world is moving to electric vehicles and increased concern about climate change? So, is future of oil demand going to make all of these less relevant?



Paul Horsnell:  People have been writing, yeah, just sort of signaling the death of OPEC for about 30 years and yeah, it’s if anything that the snowball seems to be growing bigger these events they seem to get more attention.  But ultimately yes, we are moving to, you know, we are looking 50 years down the road, no, there is an energy transition going on.  I think the caution that these transitions are not always quick and we may see some quick transitions to specific like coals, the overall future of fuel market is that it’s going to get bigger for a couple of decades yet.  Certainly expect to, it’s going to be a larger oil demand in 2013 than there is now.  I think it starts getting a bit more interesting around about 2040, then you can start seeing.  But that gives us at least another ten years of coming to Vienna and a little bit more beyond.  And I suspect after that.  _____ [00:37:50] come to the end of Christmas just to go shopping and eat cakes.  So…



Jason Bordoff:  It’s a nice place.  Obviously a lot of uncertainty about exactly when that, you know, how long that transition will take to play out.  So we’re talking just in our last minute, it’s Wednesday.  This lay on Monday and then about next week, will be the OPEC meeting.  So a lot can change by the time _____ [00:38:12] there could have been ten more tweets.  Maybe this will be irrelevant.  But to put you on the spot, what do you expect to happen next week at the OPEC meeting?



Paul Horsnell:  Yeah, someone is trying to judge an OPEC meeting weeks in advance is rather like saying who is gonna win the super when you don’t know who is gonna be in the superbowl, you know.  There is a lot of more information, that’s coming from next week.  But I think the fundamental thing is…



Jason Bordoff:  Including the G20 this week.



Paul Horsnell:  Yes.  I think fundamentals will come through is a desire to take all of the market, again just now that we have moved since June from the mode of adding to subtracting.  The kind of amounts that affect to reductions and the market is looking for is somewhere in the region of one million to one and a half million barrels a day.  But that can come up in all kinds of different ways.  You can get to that one and a half.  It doesn’t necessarily just have to be a bold announcement, hey we are going to reduce a million and a half.  There are other ways around it.  But something that brings OPEC supply down to roughly the expected call on the credit for next year would be again, in that order and magnitude if that isn’t delivered then that something which is liable to keep prices for a little bit longer here and the pure fundamentals today, I think argue that prices should be $10 higher to get that $10 back, you know, a strong key from OPEC would be, would hasten that.  If we don’t get that strong key from OPEC then it may take a little bit longer to restore that fundamental value.



Jason Bordoff:  Well, we wrote, as you said that Bob’s book with our book series on crude volatility and that’s proved to be timely given some of the volatility we have seen.  So I’m sure there will be more reason to talk about these issues and hopefully, we can have you back to talk more.  Paul Horsnell, thanks so much for making time to be with us today.  Thanks to all of you for listening until next time, I’m Jason Bordoff.  For more information about Columbia Energy Exchange and the Center on Global Energy Policy, visit us online at or follow us at Columbiauenergy on social media.  We’ll see you next week.