The Energy Sector & Policy Frameworks with Dr. Omar Al-Ubaydli, Director of Studies & Research, DERASAT

Dr. Al-Ubaydli demonstrates his expertise in the energy sector in this episode of Non-Beta Alpha by highlighting some of the difficult choices that are facing world governments.
Due to the indigenous shock of COVID-19, policy makers have been forced to establish priorities: elderly versus young lives, lives versus livelihoods, health care spending versus non-healthcare spending. These are questions that Dr. Omar Al-Ubaydli and his team at the DERASAT Think Tank in Bahrain have taken very seriously. It is not often that you consider the monetary value of human life, but given current circumstances, that may be the best way to deduce an optimal solution for policy makers.

Along with highlighting some of the difficult choices that are facing world governments, Dr. Al-Ubaydli also demonstrates his expertise in the energy sector in this episode of Non-Beta Alpha. As discussed in previous episodes, oil supply is abundant, and its lagging demand is not resulting in negative oil prices. Dr. Al-Ubaydli ensures listeners that this is a natural trend experienced by many industries, it just appears worrisome due to the appeal of energy assets.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode, we have Omar Al-Ubaydli calling in from Bahrain. He’s the director of economics at Derasat, a think tank in Bahrain. Today, we’re going to talk about how to value a human life, the cold economics facing policy makers today, and a little bit about what’s going on in the energy markets. This is Non-Beta Alpha.

Achmed:                           I guess I didn’t know. I guess I didn’t know.

Ryan Morfin:                    Omar, welcome to the show. Thanks for joining us this morning.

Omar Al-Ubaydli:            My pleasure.

Ryan Morfin:                    So Omar, you’re an economist and you do policy analysis amongst other things. You wrote a very interesting article that caught my attention about a week or two ago, about a framework for policy makers and for the general public to start to evaluate the risks of this crisis. And, I was wondering if you could go into a little bit about the article and a little bit about your analysis, because I think it’s a very insightful and timely conversation for us to have.

Omar Al-Ubaydli:            I’d be happy to. Thanks for your interest. So, basically, the departure point is that in lay people’s terms, in lay conversations, it’s common for people to come up with phrases such as, you can’t put a price on human lives and human lives are precious and we must protect lives at all cost, things like this. That’s okay, when you’re discussing things in a coffee shop or in a bar, but if you’re trying to choose policies, you’ve got to do a lot better than that, because the reality is that policy makers are currently having to make very tough decisions and they’re facing very arduous trade offs between things such as the lives of the elderly versus the lives of the young, lives versus livelihoods, health spending versus non-health spending.

Omar Al-Ubaydli:            And, in order to do that effectively, you have to have a way of basically valuing people’s lives financially. There’s no way around that. And, this is not something new. This is another part of the [inaudible 00:02:52]. People might think this is something that coronavirus is pushing us towards some sort of mercenary treatment, evaluation of people’s lives.

Omar Al-Ubaydli:            On the contrary, economists and social scientists, actuarial scientists have been evaluating people’s lives for decades and that’s been something that’s been used in policy for many, many years and a simple example, I read in an article the other day is the speed limit. If you want to have very, very low number of traffic fatalities, you could have the speed limit as 10 miles an hour everywhere and have almost no fatal crashes.

Omar Al-Ubaydli:            We clearly don’t have 10 mile an hour speed limits. You have 55, 60, 65, 70 and that indicates a willingness to tolerate higher incidents of deaths in exchange for traffic moving at a reasonable pace. People have to get from A to B, commerce, livelihoods and so on and so forth. So really, this technique’s existed and we’ve been using it for a very long time, and the article is about how do we do it? How do we come up with a valuation of life? Is it just something very abstract, a bunch of philosophers sitting in a room exchanging ideas, or is there some standard method, and I talk about those methods.

Ryan Morfin:                    So, you talk about a risk based approach on probabilities, and I think one of the big questions that at least I have is that there isn’t enough testing at scale, so we just don’t really have a good set of data on what the mortality risk is, or you’re probably more familiar and closer to data sets than I am. Is that a true comment and what are your thoughts on it?

Omar Al-Ubaydli:            So first of all, one of the key ways you use to estimate a value of life, is as you mentioned the risk based method. So, if you ask someone how you would just pay to avoid certain death, that’s not a very useful question, because everyone’s willing to surrender more or less, whatever they have to avoid certain death. But what you can say is, how much you’re willing to pay to, for example, avoid a one percent increase in your life [inaudible 00:05:04] death or something like that.

Omar Al-Ubaydli:            And, in that case, once you have a way of assessing how much people value a certain increase in their life and their just staying alive, you can then go from that to a value of life itself. So, these techniques estimate the value of life. How do you then apply that to the coronavirus. Then you need, as you say, something approaching accurate probabilities associated with the different outcomes in order to be able to implement this.

Omar Al-Ubaydli:            So, for example, let’s say that I worked out, usually the estimates come out to five million dollars a life when you use these actuarial techniques. So, if a life is worth five million dollars, then you can start saying something like, “Well, testing costs this much or 10 days in an ICU costs this much or 1000 ventilators cost this much, and they will save this many lives, therefore is it worth it?” And, I can do my trade offs.

Omar Al-Ubaydli:            But, a critical ingredient to making those assessments is having some accurate data on the likelihood of dying from COVID or the rate at which it spreads and how those likelihoods, how sensitive they are to various policies debated. So for example, it might be the case that someone who is over the age of 60 has a five percent chance of dying from COVID if you have social distancing implemented, whereas they may have a 50 or 50% likelihood of dying if you don’t have social distancing, and you need those inputs in order to be able to make your assessments and make your final decisions.

Omar Al-Ubaydli:            And, at the moment, as you intimated, a lot of those important data points are missing. We have set estimates. We have a lot of intelligent people dedicated to using existing data and updating that data to produce more and more accurate estimates, but the reality is that there’s still a lot we don’t know about coronavirus.

Omar Al-Ubaydli:            I think the World Health Organization, a couple of weeks ago put out a circular saying it was too early to be talking about things like immunity passports, because we don’t even have any definitive evidence that people who have coronavirus can’t get it again. So, we’re still at a very early stage in terms of … that doesn’t mean we don’t make decisions. We still have to make decisions and we have to do the best we can in terms of getting probability data, but we also have to be cognizant of the fact that our estimates are going to need to be revised, high frequency, as more and more data come in.

Ryan Morfin:                    No doubt. This is just ball parking the number, five million per life. Question for you is, this terrible disease is ravaging the older demographic. That five million per life, does that diminish as you get older? Is it based off of an earnings profile, or is it based off of … how are you building up that value?

Omar Al-Ubaydli:            So, the base value is, definitely. So, you get contingency tables. So for example, that five million might be for something like a healthy adult in their 20s. And then, that changes as things like their age profile changes. So for example, it would be discounted heavily is someone is 75 or 80 years old because that person that’s old would not be willing to pay that much to extend their likelihood of survival by a certain percentage point because they know that they’re approaching death anyway.

Omar Al-Ubaydli:            So yes, so all these things, the five million I gave is a generic average across, if you picked someone at random from the population. But, the more data you give, there are ways of adjusting that value. If they have for example, a medical condition, for example if somebody has cancer, then obviously, they’re likely to die for reasons unrelated to whatever intervention you’re considering, and so the value of their life will be lower than it will be for someone who has a clean slate of health.

Ryan Morfin:                    Yeah, I know. So, it really is the insurance companies and how they look at that kind of risk. And, the other question I had for you is, as these, what we’ll call, externalities of catching the virus, the US military saying if you’ve caught the virus you can’t apply to become part of the military. There may be long term effects on health care costs.

Ryan Morfin:                    How should, I guess, the recovery of the individual at a certain inflection point, there will be a diminished value to the life going forward. We don’t know what that is. I don’t think we have enough data to understand, but there may be really negative implications in having caught this and recovered from it. What data points or how do you think the framework should be designed to evaluate the quality of life or the productivity of that life post COVID?

Omar Al-Ubaydli:            I was reading an article actually this morning saying that people have incorrectly dichotomized COVID to saying either you die or you get better, and the person writing the article, who is speaking from his own experience said that actually a significant percentage have long term complications such as kidney problems or liver problems that require constant medical attention which therefore impact quality of life, value of life and all sorts of other potential choices they have before them.

Omar Al-Ubaydli:            So again, and it sounds like a bit of a cop out, but in reality we still don’t know. But the good news is, that as you no doubt see when you open your web browser, the amount of research resources being dedicated for studying COVID is immense. You talk about all the best medical schools, all the best health department, public health departments in all the universities in the world, are literally dedicating their resources to this.

Omar Al-Ubaydli:            You have governments, civil society, the amount of data being … and money, and financial and human resources being allocated to understanding this disease, it’s long term implications, it’s short term implications, and how to combat it is something unprecedented. I’ve been in professional research for almost 20 years, and I’ve never seen a top garner this much attention. So, we will have something approaching definitive answers to the questions you’ve been posing within something as short as a year I’d imagine.

Ryan Morfin:                    Wow, that could be a long time, but I think as we’re starting to realize that as populations reopen, like in Germany or South Korea or even here in the US, these outbreaks keep bubbling up, this could be a new equilibrium stable state where we’re having a reduction in productivity due to shelter in place. So, as you’re looking at it from an economic analysis, and so let’s just assume that worst case scenario is, there’s no vaccine on the horizon, anti-virals are not being produced at levels that are meaningful, and now this is a new environment that we’re in where you really do have to keep your distance globally.

Ryan Morfin:                    Travel’s curtailed. What would policy makers need to start wrapping their heads around in terms of trying to reboot the economy, or is it helicopter money, everybody gets basic income? What is the way to bridge us either to a solution or to a new normal, to a new operating posture?

Omar Al-Ubaydli:            Well, first of all, you have to realize that many countries, including soon the OECD countries, don’t have the resources to keep up this steroid injections for the economy. So pretty soon, the hands could be forced and as many poorer countries which didn’t even have a lot then in the first place or had a half hearted lockdown because people have to be able to eat. They have to be able to get a basic standard of living.

Omar Al-Ubaydli:            In places like the UK or the US, people have some savings and they can rely on the government to give them stimulus checks that allow them to purchase food, but can’t say the same of many other countries. So, it could be the case that regardless of whatever policy the government wants to do in terms of curtailing or mitigating the spread of the disease, the hand is forced and they have to lift social distancing because people have got to eat.

Omar Al-Ubaydli:            At the moment, people are willing to tolerate social distancing, partially out of self preservation. And, partially out of obedience or wanting to go along with what society needs. But, it wouldn’t surprise me if after six months, people are like, “I’ve had it. I’m going to take my chances.” And, if you look at the mortality tables for a significant proportion of the population, I’m not a public health expert, but for a specific percent of the population, the mortality risk seems to be quite low and if it doesn’t seem like there’s a vaccine coming on the horizon, for many people they’ll just be like, “Well, I’m going to go with it. I’ll get the disease. I’ll be sick for however long it is and I’ll take my chances.”

Omar Al-Ubaydli:            So, whatever master plan the governments have, may be out of the window just because people will be like, screw it. But, let’s assume that doesn’t happen, and let’s assume that the governments are capable of maintaining control and enforcing some degree of social distancing. Then I think, you have some fundamental questions. The estimates on the impact, on certain key sectors like aviation, tourism, they’re virtually terminal or crippling.

Omar Al-Ubaydli:            And then, you have to worry about how you’re going to find jobs for all these sorts of people and it’s not just these industries. You’ve got all sorts of upstream and downstream sectors. For example, I’m based in Bahrain. Aviation is important not just because tourism is important to this region, but also because aviation is a significant source of the global demand for petroleum products.

Omar Al-Ubaydli:            So, we’re hurting because oil prices are down, partially because so many fleets are grounded. And, there I think to be honest, the longer this crisis goes, the longer societies and governments are going to head towards a situation where they’re like, “We’re just going to have to behave as if the disease isn’t there, because there’s no point in trying to work around it. It’s not going to be workable.”

Omar Al-Ubaydli:            Now, that’s all based on the worst case scenario which you presented, which is if there’s not a vaccine and the treatments are failing. It does seem, giving the volume of resources being thrown at finding vaccines and finding treatments, it does seem quite plausible that something will be found sooner rather than later. But, you never know.

Ryan Morfin:                    Yeah, no, I’m a hyper realist when it comes to these things and I’m praying to God that they do find something, because the outcome on the other side of that coin is not a good one. I’m a realist in the sense that they still haven’t found a vaccine for HIV and I know they’re two completely separate viruses, but there’s not a lot of good data points on RNA viral infection vaccines.

Ryan Morfin:                    And so, that leads me to start preparing for maybe a new operating posture which we’ve done, and I think a lot of businesses will do. But, I think as you’re saying, the cost. I’m not sure what the recent, maybe you have a better number for us, but total GDP of the world, what that looks like relative to the damage that this has wreaked havoc on. I don’t know if economists are starting to size the total loss of value in the global economy.

Omar Al-Ubaydli:            [crosstalk 00:17:53] three percent decrease in growth for the economy this year, which means that for advanced economies, that’s enough to pull many of them into negative growth for this year. But for countries that are still growing, that are lower income and growing quickly like China or India, they’ll still have positive growth, but just not as positive as before. But yeah, at the moment, there seems to be a consensus around three percent decline in global economic growth compared to what it was expected to be.

Ryan Morfin:                    And so, the analysis that I think is interesting is three percent of the total nominal amount of economic value in the world being reduced per year, until we find a new normal, versus the death toll of I guess what is an older demographic, right, they have a 15% death rate if you’re over 60, mortality rate if you’re over 60.

Ryan Morfin:                    I’m just wondering at what stage are we going to start to hear policy makers get political pressure from two different demographics? You got an older demographic who’s severely at risk, a younger demographic where if you’re under 50, they say right now in the US, you have less than a one percent chance of going to the hospital if you catch this.

Ryan Morfin:                    The friction, I think’s going to happen is, as the economy starts to sink, what the trade offs are going to be, how policy makers should be digesting the economic impact to future worker in generations versus the cost of an accelerated demise or accelerated mortality of an older generation. It’s going to be one of the most difficult conversations in the history of humanity, I think.

Omar Al-Ubaydli:            Yeah, it is going to be a difficult conversation, but I think what people are trying to do is take steps that eliminate the need for the trade off. So, I’ll illustrate what I mean by that. At the middle of March, there was an op ed in the New York Times by Paul Romer, who’s a Nobel Prize winning economist, and Garber, who’s the MD provost of Harvard University, and the subtitle for their article was, if we carry on like this, the economy will die.

Omar Al-Ubaydli:            Now, the article was not about we need to lift, open the economy, because there will be no jobs to go back to, the article was about what we should be doing in order to avoid this trade off. And by that I mean, investing in contact tracing and testing and things like this, and immunity passports, and so on and so forth.

Omar Al-Ubaydli:            So, I think that the direction, it’s unlikely that we’ll be in a situation where we have to starkly choose between opening the economy, saving people’s livelihoods versus saving the lives of the old. It’s unlikely that, because there are so many ways of alleviating that trade off, such as isolating, tracking, tracing, testing, and so on and so forth, and I’m not just saying that as rhetoric. People are going in that direction.

Omar Al-Ubaydli:            Now, what I think will, people are watching very closely, is the experience of A, developing countries which have not been able to impose a lockdown or a meaningful lockdown, and B, the case of Sweden or in South Korea, where they’ve had no lockdown and Sweden have explicitly rejected having a harsh lockdown. And, if it turns out that not imposing a lockdown doesn’t cause anywhere near as many deaths as some of the doomsayers would have you think, then I think we’ll see, I think, a readjustment of policy positions towards opening up the economy.

Ryan Morfin:                    Yeah, I know and Switzerland is starting to roll out contact tracing. The Chinese have, obviously they have the CCTV cameras and they’ve been ahead of the curve on using those apps. I think in the absence of a cure, I think that’s going to have to be the new norm and I know people here in the US, it’s interesting, are talking about privacy concerns, this and that, but I just don’t know how you have a public health response if you can’t track density and new hot spots.

Ryan Morfin:                    In the US, I don’t know if you guys have seen this or had this happen in your region, but we’re using cellphone data from towers to figure out the density and the location of people and it’s predicting a lot of new hot spots popping up in the next few weeks here in the Midwest of the country of the United States. I think it’s going to pour cold water unfortunately, on a lot of people’s optimism, which I think taking a cold math approach like you’ve proposed and it’s not a bad thing, it’s just a realistic thing, gets people to start putting their arms around the risk and quantifying the dollars and the probabilities.

Ryan Morfin:                    Maybe I can switch gears a little bit. How have things been going in the Middle East with coronavirus and there’s been a terrible outbreak in Iran, but how is the general sentiment in the GCC and how is life in Bahrain and how has it changed?

Omar Al-Ubaydli:            In the Gulf countries, governments have been relatively proactive. The infection rates are quite high in a per capita basis, especially in Bahrain. But, the fatality rates are very, very low. And again, I’m not a public health expert, but I think there’s several factors that I’m getting a sense of that contribute to that.

Omar Al-Ubaydli:            One is that in the Gulf countries, you have a very high percentage of the population is migrant workers. And, migrant workers are first of all, people who are a working age, so that means you’ve got the demographic profile skewed towards people who are young. And secondly, in order to get a visa to be a migrant worker in a Gulf country, you have to pass a health test.

Omar Al-Ubaydli:            And so, you already screen out a large number of medical conditions which tend to be co-morbidity factors in coronavirus, so you don’t have people with major respiratory problems or [inaudible 00:24:32] problems or renal problems and so on and so forth. So, you’ve already got defacto a younger and healthier population than you’ll find in lots of other countries and you’ve got relatively proactive garments and together these things have meant the fatality rates are very low thankfully.

Omar Al-Ubaydli:            But, people are quite … we happen to be a quite physical society in the sense that we’re like the Italians. We kiss, we hug, we’re not like the Swedes or the Japanese who are quite standoffish, and so there’s a big concern among the population about what life will be like after this. Are we going to be able to shake hands with you? Are we going to be able to kiss people? Are we going to be able to do the things that we’ve been used to doing for years, and then there’s also significant economic concern and austerity has been imposed, or is in the process of being imposed in all of the Gulf countries and that’s really worrying people a lot.

Ryan Morfin:                    Yeah, and this is going to, I think, also have an impact on population growth as well, which population growth and productivity gains are two major factors in economic macro GP models. Has there been any talk about what economists or labor economists think about the impact to population growth? It seems that this is probably going to put a stunt on that. I don’t know what your thoughts are.

Omar Al-Ubaydli:            I think in most economies, it’s definitely put a brake on population growth, because first of all, people aren’t getting married. You can’t get married now, because you can’t even find their prospective partner and even if they can, I’m sure you’ve also heard of marriages being called off and engagements being called off. So, in Bahrain at the moment, you can’t even do the marriage paperwork to try and even get married.

Omar Al-Ubaydli:            So first of all, people aren’t getting married, and then those who aren’t getting married are putting off child bearing, getting pregnant, because they would go to the hospital. They don’t want to have to visit clinics and expose the mother and child to the risk. So, you’ve got that, which is definitely going to have an impact.

Omar Al-Ubaydli:            And then obviously, further down the line, with the increased economic uncertainty, that will surely, for middle and high income countries, increased economic uncertainty means fewer children because people will be looking to save their money for a rainy day and create buffers rather than bear the expense. Children are, to some extent, a normal good and you need to have certain minimum level of income in order to be able to afford them in western societies.

Omar Al-Ubaydli:            In developing countries, it’s different. Especially in some of the poorer countries, you find in sub Sahara Africa, we have high birth rates. I’m not sure what the calculus there would be for having children, but it wouldn’t surprise me if the COVID has an ambivalent effect on it because birth rates there are significantly higher.

Ryan Morfin:                    So, in the austerity that you mentioned about governments and even households, how should one think of the framework in which you reallocate resources or dip deeply into savings or printing money in the government standpoint, to go in and actually flood resources into the healthcare space. Where is the tipping point of where you’re having marginal impact as well as, at what point do you say, “You know what? We can’t spend any more money.”

Omar Al-Ubaydli:            Well, I think that some of the European countries have actually successfully decreased their debt to GDP in the last five years, so they’ve given themselves a little bit of moving. But, the US is going … the public debt in the US is already high and in a place like Japan, in Japan it’s got 220% debt to GDP. And, I think the stimulus package is going to increase that by another 20%.

Omar Al-Ubaydli:            So, you’re really getting to a stage now where the people are going to start to wonder about the solvency of western governments. And, that’s why I think that the big hope is that either the disease doesn’t turn out to be as bad as everyone thinks, a herd immunity turns out to be a good solution, or that some sort of other solution comes up, because at current spending levels, 2021 can’t be like 2020.

Omar Al-Ubaydli:            There’s just going to be, it’s just fiscally not sustainable and governments will have to change their root policies or face crushing debt servicing and will have to slash … It’d be counterproductive because they’ll have to slash public programs in order just to service their debt.

Ryan Morfin:                    Well, we’re starting to see municipalities, former residents of yours, Illinois, start to play poker with the federal government about municipal bankruptcy. I think people don’t realize how close we are to some really bad outcomes on public finance and so, I think these conversations are timely and critical because you keep printing money and like you said, people start to question, besides the consumer is questioning if the economic environment’s safe to reengage, investors buying the debt may start to question quite accurately that we’re way over leveraged.

Omar Al-Ubaydli:            And, you mentioned the municipalities, they can play poker with their federal government, because federal government is big compared to the municipalities. Who’s the federal government going to play poker with? No one can bail out the US federal government. So, there’s no soft landing there.

Ryan Morfin:                    Yeah, and that’s what’s concerning is if we get to that level where there’s a debasing of a currency, then I think it’s all bets are off, and I don’t know if that’s where people, these cryptocurrency folks say, “We told you so,” or if it leads to some type of regional or global conflicts.

Omar Al-Ubaydli:            [crosstalk 00:31:31] geopolitical aspect as you said, because a significant about of this debt is held by Chinese. It’s held by outside investors and I don’t imagine the Chinese are going to be particularly happy if the US defaults on its debt and they’re just going to be like, “Oh well, I guess we should’ve been more prudent in our investment,” no. There’ll be a price to pay.

Ryan Morfin:                    Well, it’s interesting. So, there’s a lot of hedge funds who have been, in the last few years, aggressively dogging Argentina for their debt in a mercantilist type of fashion, and I think it’s an interesting data point for investors globally to pay attention to of how that’s played out.

Ryan Morfin:                    It’s been short of conflict, and I mean short, because the hedge funds have sent mercenary sailors to go grab vessels from Argentinian navy. So, this is an interesting dichotomy of the old world that we lived in where you could print money and get away with it because you had economic growth and what happens when you take the growth engine out of the equation. You have a stark reminder of who’s swimming naked on the public finance side.

Ryan Morfin:                    Well so, this printing of money, one question I have for you, and this is an important question for central bank policy is, all this printing of money and as you made the comment and I’ve used in the past too, this kind of steroid injection from central banks into the economies of the west, at what point should we start to see inflation, because it seems like we’ve got a deflationary environment and we may go into negative interest rates, and maybe share your thoughts as an economist on those issues.

Omar Al-Ubaydli:            So, yeah, usually you’d expect quantitative easing whether it’s 15th century debasing of the physical currency or 20th century Wiemar Republic printing money to lead to inflation in consumer prices. But as you noted, we’ve had this concern since 2008 because there was a huge, there was unprecedented quantitative easing in the global financial crisis. But, we haven’t seen any consumer price inflation of note.

Omar Al-Ubaydli:            At the moment, as you say, if anything, prices seem to be heading down. So, a good question is, where is all this money going? But, if you want to know where it’s going, just look at the stock market. You’ve seen asset prices have been rising at an absurd rate, and I think it’s just completely unsustainable.

Omar Al-Ubaydli:            The last five, 10 years, there’s been a very long bull run, and every time it looks like it’s going to correct, it then picks up again, and all the liquidity the government is injecting or the central bank, I should say, the Federal Reserves, is injecting in businesses again, I imagine will work it’s way to assets again, especially because assets are easy to buy and trade and also people are fearful so they want to save and people can’t buy consumer goods because of the lockdowns and the social distancing.

Omar Al-Ubaydli:            So, I don’t think there’ll be conventional consumer price inflation for a while. That doesn’t mean that there isn’t a problem. The problem is that you’ve got huge asset inflation, which is creating asset bubbles, and these asset bubbles are creating a systemic risk in our financial system because with the Basal three, reserve requirements and so on, all sorts of financial institutions, households and private sector entities basically have balance sheets which are highly exposed to the stock market, and if a correction happens, you’re going to have a collapse in consumer spending and investment and a massive strain on the financial system including probably wide scale bankruptcies in funds, in financial intermediaries, with all sorts of terrible knock on effects.

Omar Al-Ubaydli:            So, to answer your question concisely, we are having inflation. We have been having inflation, it’s just it’s been in a class of assets rather than consumer goods, and there will be a price to pay for that once these bubbles eventually are forced to burst.

Ryan Morfin:                    So, all the money’s been propping up financial assets, and that’s where the inflation is, and so, these aren’t real earnings returns. These are central bank inflated returns and the stock market. I totally concur.

Omar Al-Ubaydli:            And, there was going to be a correction maybe a couple of years ago, but then Trump did the corporate tax cuts and so that gave them another little boost forwards. But, the writing’s on the wall. There’s going to be, of course nobody knows exactly when it’s going to happen. But the P ratios, there’s no way you can justify these kind of performance of the stocks based on any sort of tangible operational success that these companies are showing.

Ryan Morfin:                    Yeah, no, we’re on the precipice of some major companies, I think, and like you said, some of the terminal industries, travel, tourism, hotel, even energy. And so, maybe we can shift the policy a little bit to energy, because I know you do a lot of energy policy, being based in the Gulf.

Ryan Morfin:                    I get it that demand is curtailed, but some of these pricing metrics, negative dollars for oil due to storage capacity concerns, what are your thoughts on what’s going on? This seems like a surreal environment for energy crisis.

Omar Al-Ubaydli:            Well, I think the reality is that there’s just too many people making … if you’re talking about the oil part of the energy equation, natural gas energy, those are different things, but comes to oil, there’s just too many people making oil and there’s just not enough demand. And what this means is the higher cost producers need to go out of the market. And, this is being accelerated by the fact that demand is temporarily low, but this is very normal.

Omar Al-Ubaydli:            This happens in all markets all the time. The difference with oil is that it’s a sexy commodity, and it’s one that has geostrategic importance, and it’s one that is related to, it’s a linchpin of various geopolitical relationships and then you’ve got the journalists who cover it, have for many years, their living is based on sexing this thing up. If we were facing the same structural problems in the cotton industry, then it wouldn’t be headline news or-

Ryan Morfin:                    No offense to all of our folks in Georgia who grow cotton.

Omar Al-Ubaydli:            So yeah. So basically, there’s going to be a correction. It’s going to be painful, but it’s completely normal and happens in industries all the time. You look at the list of producers, whether it’s PCs or whether it’s cars or whether it’s … When I was growing up, already the UK’s car industry was in massive decline.

Omar Al-Ubaydli:            It started, that decline, in the ’60s and ’70s. Not everybody can make everything, and that’s part of the normal part of the economic cycle. It just happens to be over exposed in the case of oil.

Ryan Morfin:                    Well, and you mentioned natural gas, and there’s a dichotomy there. How is the natural gas market playing out in the Middle East?

Omar Al-Ubaydli:            So, natural gas is, so the production cycle for natural gas is fundamentally different. You don’t have some of the key production constraints you that you have for [inaudible 00:39:20] oil in the gas industry. For example, in oil, activating an oil field can take, setting aside shale oil, conventional oil can take up to five years, and then also closing down, if you close down certain oil fields, you can’t restart them.

Omar Al-Ubaydli:            So, this is where you get these huge cycles in oil production and where you get cycles of production, and therefore in price. Gas is a lot more flexible and a lot more amenable and a lot more responsive to market conditions. So, you don’t have these huge cycles.

Omar Al-Ubaydli:            And then secondly, gas as an input, is a much lower input than oil, and so it has less geostrategic importance. So, it’s not such a geostrategically inflammatory issue. Oil gets used in fuel, gets used in energy production, it gets used in plastics and a much wider range of goods.

Omar Al-Ubaydli:            Gas is used much more primarily in energy production. And so as I say, although it is important geostrategically, it’s not as important as something like oil, so it doesn’t get dragged into this to-ing and fro-ing. You don’t see something like the US Saudi relationship being affected by gas prices.

Ryan Morfin:                    Well, I’d ask you, so this is obviously a cyclical issue, oversupply, demand dramatically reduced. How long do you think it is until we see a, we’ll call it, a clearing of the market of the high cost producers. How long will this take to clean up the supply problem?

Omar Al-Ubaydli:            Well, the problem is that under normal circumstances, the US, it’s producers would go bankrupt and then that’d be the end of that. But now, governments across the world have started to become much more mercantilistic, economic nationalists I would say, and it’s populist governments, and they like bailing out what they regard to be strategically important industries and oil has successfully marketed itself as a strategically important industry to the US government even though it doesn’t actually have many jobs in the large scheme of things in the US.

Omar Al-Ubaydli:            And so, you’ve got people like Ted Cruz and his pals in a place like Texas, Oklahoma, Dakotas and so on, who are quite happy to string this out for as long as they can direct government funds in that direction. So, this is going to take a lot longer to clear out than it should and then you’ve also got these Congressmen and Senators using their political clout to force or to pressure the oil producing countries including Saudi Arabia to decrease their production to extend the life of these high cost shale producers.

Omar Al-Ubaydli:            So, this is a mess and it’s not operating anywhere near as efficiently as something like the market for laptops or the market for cars, where high cost producers would go out and nobody will bat an eye.

Ryan Morfin:                    Well Omar, and I know you’re a very quantitative guy. I’ll shift the conversation to one final question. What are some of the silver linings that you see in the global economy, if any, and what books are you reading to either sharpen your curiosity or sharpen your research?

Omar Al-Ubaydli:            So, the silver linings, I’d say first of all on the environmental front, I would say that there’s a chance, so people have picked and have learnt that maybe they don’t need to consume as much as they have been used to consuming. And analogously, they’ve realized that people have been forced to invest in tele-working and working from home technologies and so on. And so, there will be potentially a lot more of that going on in a way that is both a better congestion and better for the environment, less wasteful and so on.

Omar Al-Ubaydli:            So, those are two general positives I would take from it. In addition to that, I would say that in governments where there’s good leadership, there has been … so this is something I wrote an article about recently. If you have a government, with have a good leader, but you’ve got a deep state which has been dragging a leader back, this crisis is an opportunity for them to clean house because when you’re outside the crisis, it’s hard to clean a house when your government, especially the deep state positions, because it’s very hard to show who’s doing the job properly [crosstalk 00:44:22].

Omar Al-Ubaydli:            But when you’ve got something like the coronavirus, you can see who’s competent and who’s not competent clearly, and that could give good leaders the political capital they need to just get rid of some of these impediments-

Achmed:                           Papa.

Omar Al-Ubaydli:            … to good governance. Sorry, one second.

Achmed:                           Papa, [crosstalk 00:44:42] hi.

Ryan Morfin:                    No, no worries. Who’s that?

Omar Al-Ubaydli:            That’s my son Achmed. Sorry for-

Ryan Morfin:                    Hey, hello. No, no, no. Hello.

Achmed:                           [crosstalk 00:44:54] a rainbow to [crosstalk 00:44:56]

Ryan Morfin:                    Hello from the US.

Omar Al-Ubaydli:            I’ll come in a minute okay? So yeah, so for certain leaders, but if you’ve got a bad leader don’t expect-

Achmed:                           No, no wait. I show the-

Omar Al-Ubaydli:            Sorry, one second Ryan, let me just go to-

Ryan Morfin:                    No worries, no worries, no worries, yeah. Well, Omar’s making a great point about leadership in a vacuum and leadership in a pandemic. It is definitely going to call into question, I think the … the point about deep state, the water coming out so that deep state is exposed.

Omar Al-Ubaydli:            So that’s, if you have a good leader and a bad deep state, this your time to clean house. But, if you happen to have a bad leader, it’s not going to get any better. You’re still stuck in the same situation and you can work out who I’m referring to in these situations, but as I say, and the reason I mention this is because in the Middle East you do have the situation where you’ve got some good young leaders, but crappy social services, and you see the leaders now being able to seize control and be like, “Come on, enough of this nonsense.”

Ryan Morfin:                    And, any books that you’re reading that you think are of interest?

Omar Al-Ubaydli:            So, at the moment, not really anything directly related to the coronavirus, but I have actually been reading a book recently on artificial intelligence. That’s not anything particularly new. I think everybody knows about that, but I think that the scope of these technologies is going to increase because we’re going to digitize things more than before and the more things are digitized, the more data you have, the more you can feed these machines to take positions and hopefully make things more efficient.

Ryan Morfin:                    Omar, thank you so much for joining us. We appreciate your insights. Would love to have you back in a few months as things continue to evolve and thanks for your time. Appreciate you.

Omar Al-Ubaydli:            My pleasure.

Ryan Morfin:                    Thanks. Thanks for watching Non-Beta Alpha and before we go, please remember to subscribe and leave us a review on Apple podcast or our YouTube channel. This is Non-Beta Alpha. Now you know.

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