The Global Economy Meets an Energy Shock

Okay, good morning and good afternoon or good evening to everyone who's joining us for this webinar on the global economy meets an energy shock. My name is Antonio Fatas. I'm a professor of economics here at INSEAD. And this is a webinar that we have launched a little bit in the last minute as a reaction to what is happening out there in the global economy and this this sort of news every day on on what is sort of changes in the perception of what is happening to the war in the Middle East to the price of energy, to the price of oil. And we decided that it would be a good opportunity for us to look back and see what is happening and sort of see what is going on in the coming months ahead.

Now, this is a situation which is the world has gone through this before. We've talked many times about supply shock, energy price shocks. We've seen them obviously in the 1970s. We've seen them afterwards. This time, like any other time, this is slightly different. It's not exactly the same situation. There's a military conflict that involves, of course, many countries and there's a negotiation going on about when the war will end.

Now, a lot of the uncertainty that is happening today, in particular for people like myself, economists, is trying to understand what is happening to the energy market. It is not just about policies. It is not just about the standard economic variables. It's also what is happening, of course, to the price of energy. There's a lot of confusion when we look at the news about how the energy market works. The signals that we're getting, is the price of oil really going up? What are the future prices giving us versus the current ones? So, there's a lot of questions about the what is going on in the energy market.

So, because of that reason, I decided to invite an expert in energy markets to sort of help me navigate that uncertainty. We're going to talk about the world economy, but we can only do it if we understand better what is happening in energy markets. So, it's a great pleasure to introduce my guest today, which is Adi Imsirovic. Adi is someone who I met a time ago, in fact, playing soccer, uh, when we were in graduate school, and then we reconnected at some point. We found each other by pure chance in in Singapore. Now, he happens to be an expert in energy markets, so he's the perfect person to have here today. Uh, he's someone who has a PhD in economics, a master's degree in energy economics, and he's a guest lecturer at energy systems at University of Oxford. Now, he has a a long background when it comes to the energy industry, uh, and he has been in this industry for many years, but he's also been writing about this industry. He's written articles, he's written reports, and he's written a couple of books as well. And I recommend for anyone who's interested in in his views that you follow him on social media because he has great opinions on that.

Now, we plan to talk the two of us for about half an hour, and then the last 15 minutes will be all about Q&A. So, anyone who has questions, please start posting them on the Q&A functionality. We'll be looking at those, and at some point later, we'll be looking at at at sort of those questions and trying to answer whatever questions you have. So, let me pass it to Adi, and he'll do a presentation. I'll do mine, and then we'll have a chat plus the Q&A.

Adi. Thanks very much, Antonio. It's a great pleasure to be, um, here, uh, your guest. Um, I think, um, I I apologize a little bit about some noise because I'm at a conference where I was speaking this morning, but the good news, the very good news is that I'm actually at Chelsea Football Stadium, uh, and, um, I've I've having a pretty good time here with some colleagues. Anyway, we'll start with the energy, um, the, um, we'll go to the next slide. Essentially, I think it's very important to understand how we got here. That's a very big start. Uh, before the war, um, the balances were actually very, very, uh, positive and buoyant. There was, uh, an expectation of a huge oversupply in, especially in the Q2, uh, second quarter of this year. So, IEA in February actually projected that there's going to be an oversupply so big of some 4. 4 and 1/2 or 4.6 to be more precise million barrels a day. And if you can see on the chart on the right, there will be a big difference between supply and demand resulting in building up stocks. And we'll come in a minute stocks being absolutely essential to driving the price of the oil.

Next slide. So, we were essentially in a situation where we be we were expecting to have a so-called contango market where the front prices are below futures by heads. And oil price was only about $60 barrel. Now, we entered the year with exceptionally high stocks. We can see on the chart on the right IEA that we we got slowly throughout the last year we're building that stock. And we came up to almost 8 and 1/2 billion barrels of overall stocks globally. Now, global stocks total stocks are not particularly useful. I think it's very important so I'll just stop throwing the price. I'll just have a few words about that. First of all, most of our stocks about 7 billion most of those 8. 4 billion were actually absolutely necessary for the oil market function or system or oil industry. That's essentially oil which is in ships, in transit, some minimum levels in tanks, tank farms, oil in the refineries, oil in the pipelines. So, that's oil without which the system won't work. Then on top of that we have strategic stocks, government stocks or for example I uh sort of members of IEA or OECD countries uh are required to uh keep 90 days worth of stocks as an emergency supply. And we had I'll we'll mention that a little bit later on. We had a big release by the IEA. Coordinated release. Then we have um our commercial stocks. Are the last ones. Those are stocks that purely uh discretionary where companies decide depending on the price and market circumstances whether they keep stocks or not.

Next slide, please. Um This is important because um and now we'll just move to the war actually and see what happens. Uh I am not going to bore you too much with details. You've seen that a lot on the news, but essentially the closure of Hormuz shut about 20% of global oil supply. Of course, I'm focusing now on oil. We don't have time to go through everything else, but gas was similarly affected. Um on the other other things like um I think Antonio will probably mention a few other commodities. But um essentially um the the the key to understanding what's happening is that this is a logistical problem. It's not a lack of oil. Uh it's not a production problem, but logistics. And that's key to prices which I'm going to actually spend some time on cuz there's a lot of misunderstanding why the futures prices didn't um follow the physical prices as much as as they should as some people felt they should have. In any case, 20% uh use some rough numbers. Total global demand is about just over 100 million barrels. An easy number to work with. 20% is 20 million. Now, we did not lose 20 million barrels of oil. That's very important to understand. What happens is that um um the Kingdom of Saudi Arabia have a big pipeline. You can see it in the chart. It's the orange line going from Ras Tanura down to Yanbu in the Red Sea. That pipeline is was not used very much other than for local refineries before, but it was built as a strategic asset. Essentially, it was ramped up to 7 million barrels. All of it was for export, only about 5 million, but that really, really helped Saudi Arabia move most, if not most of its exports into the Red Sea. The second pipeline is if you look at where the UAE is, there's a little green line. That's a pipeline so-called Habshan Fujairah, Habshan Fujairah pipeline, that normally carries about 1 and 1/2 million barrels, but it was ramped up to about 1.7 million barrels. That really helped the Emirates export a good chunk of their production as well. Um also keep in mind the fact that Iran up until um Trump administration put a blockade on on Iranian exports, which is quite recent, a couple of weeks ago, throughout March, Iran was exporting 2 plus million barrels. So, when you do some simple maths here, you see that we originally in early March lost only about 11 million out of those 20. Uh currently it's more like 13 because if you add Iranian barrels, 13, 13 and 1/2, it's very arguable. But at the same time, what was very, very positive is that some other producers ramped up their production. We'll come back to that a little bit later. So, essentially, the physical Brent, which is a benchmark dated Brent, uh, TTF, which is a Dutch benchmark for natural gas, the price has roughly doubled, which is a huge hit to to the consumers and the economies on which we're obviously going to spend most of the rest of the they're still talking about. Um IEA uh came out on March 11th with a huge release of 400 million barrels of emergency oil. It's the largest ever uh release of oil in in history of International Energy Agency work. So, that really helped and alleviated a lot the situation in the last 2 months. So, if you want to use sort of a parallel um an idea of what's been happening in the last 2 months, it's a little bit like somebody who has lost their job, but uh has has has has got a big fat paycheck. So, we continued to use the oil because we had this release. We had some uh oil coming out of the Persian Gulf through other means. Uh but, we were slowly drawing down the stocks, which actually increased prices a lot and um uh result of which there was some demand destruction. That demand destruction originally wasn't that big. It was only about 2.8 million barrels in March. This is the latest estimate that I could find by JP Morgan. Um uh it's about 4 and 1/2 million April and 5 and 1/2 million expected to be May if it continues.

Next, please. So, impact on the oil market. Well, geographically, the impact of main impact was really on Asia because about 90% 80 to 90% of all that oil was going to Asia in the first place. Obviously, we can talk about this forever, but the biggest impact was on those Asian Asian countries that didn't have large stocks. Uh and of course, those countries that that didn't have large stocks, they are other than say North Korea and Japan, wealthy places that where the keeping stock is is very very expensive um very costly in in most time value of money and the loss of investment. Um and uh and that security is expensive. And of course countries like Bangladesh, Pakistan, and so many countries Southeast Asia were really severely hit by by the situation. There were some price anomalies as well. Uh um Dubai benchmark, which is a Asian benchmark for oil, um the um the the governors of of that benchmark, if you will let me use that word, is S&P 500 or Platts. What they've done, actually, they decided to take out of the assessment price assessment all of the oil that was loaded in the Persian Gulf. So, that that really decimated that contract by more than a half. And obviously, um I think it left it very vulnerable to squeeze. And I don't know if it was real squeeze or alleged squeeze or whatever happened, uh nobody can find out until you see the actual data from the participants, but Dubai physical Dubai actually traded well over $60 above its its own uh benchmark swaps, which was absolutely massive. Brent actually uh did something similar, not as much, and physical Brent traded for a period of time in March uh over $30 over its own futures, which was at the time June futures. Um and and there's a lot of discussion whether it was right or not. Of course, markets are not perfect and and uh and opportunistic traders, if they see good opportunity, they will nudge the market over their own way. But essentially, this is you can see on the right graph, this is essentially how market structure works. Uh you would have futures market, let's say in July, which is now the front month, it's it's loading oil in July, which means delivery in August or even September. And you know what? When you have this crisis this kind of crisis that is not supply per se driven, it's a crisis. Nobody's going to worry about September, October. Everyone is worried about now. And this is why Dated Brent the uh the choice uh uh for most uh traders they should go and buy very very very prompt oil. Of course, there was a bit of sense of panic as well. And I used to supply a refinery before, actually several refineries. And when the refinery tells you, "We need that oil." Well, you just go out and buy it, whatever you have to pay. Anyway, let's uh move move on uh to the next slide. Uh essentially um uh the the volatility was another uh uh victim. Normally, oil trades of volatility implied volatility is about 30%. It went to well over 100%, 110%. It was huge. Uh the graph on the left shows the WTI. Also, the other thing that made uh life very difficult for most people who are actually running this oil. Now, we're talking about real that, you know, my friend Antonio is really interested in is is like this. Um you you you see the headline figures uh of the paper market because it's a it's a market that we can all kind of check on on the web. Uh we don't see physical market, but physical markets were a little bit different, quite a lot of it different. Uh I started talking about Dated being $30 at one stage over futures. But on top of that, you have a premium. So, for quality premium, so for example, Nigerian oil was trading up to $15 over Dated Brent. So, if you say 30 + 15 is $45, almost $50 over over underlying paper or futures market. So, that the refiner is actually paying much more than what you saw on your screens. When the oil was 120, they were probably paying over $150 of physical oil. On top of that, you've got two more factors. One is the freight rates. You can see the graph with time tanker rates. Okay, I've used the extreme example here. But actually, some of the rates increased fivefold. On top of that, add the additional cost of insurance. So, refineries got decimated. Actually, in Europe, uh refinery margins went sharply negative. So, these are all the big impacts. Uh next slide, please.

Um So, essentially, um so, what what's been happening? Um Well, you can spend a long time on this, but you can see the graph on the left. The stocks have been falling because we have been literally eating up the the the the sort of emergency stocks, and the 400 million uh barrels and IEA released were eaten up very, very quickly. Uh some by some calculation, um we shall eat up about a billion barrels of oil by mid-this month. And by the end of this month, you If you can recall, I was saying there's about 1.4 billion of stocks that we could really use before we really uh reach the critical levels, what we call operational floor, beyond which actually, you you get refinery shutting down, pipeline shutting down, and the whole system slowly shutting down. Those critical levels um are about 7 billion. And they reached if the Strait of Hormuz is not opened sometimes by the end of um this month, early June by some calculations. Then, there was a very good paper, by the way, in February in uh ECB bulletin talking about nonlinearities. That's That's the level at which these non I mean, most of of of the price reactions in oil are nonlinear anyway. But particular non linearity would would kick in due to various types of risk. Then, as a result, you can see the right graph. Um I think this is the latest one I could get. This is from Bloomberg sites. Uh with various scenarios, uh the longer this this obviously lasts, the longer we are at the critical level. Uh and the and the more likely the prices are going to go up, and they're cumulative, obviously. The longer the whole um stoppage lasts, the the higher the prices. So, I would leave to that and pass it on to Antonio, and happy then to chat about any of these issues.

Okay, thank you, Harry. Uh that was very clear, although I think you had a a tough task, which is trying to understand what is happening in this market in the middle of all the news that we're seeing as we speak. Again, before this webinar, Harry and I were exchanging messages about just happening in the market as as we're about to start the webinar, and the price of oil is falling because the expectations are somehow the war will be over soon. But again, we've seen this before. Now, the question is whether this is happening again or not. Now, let me share my slides for a second. Uh I'll talk a little bit about sort of the economic side of the of this equation, which is given the state of the energy market, what is likely to happen uh to the economy.

Now, I think I have an easier job that that Harry has because in many ways, uh again, this is a a typical sort of oil price shock. Economists like to talk about oil price shocks versus other shocks, supply versus demand. Now, this is the price of oil in real terms uh through, obviously, many decades. And those vertical lines are the episodes where the US went into a recession. Many of those recessions were global, so it's not just about the US. Uh and you can see before many recessions, you see spikes in the price of oil. And there's always this idea that the price of oil is crucial to understand some of these events. Now, I'm less convinced about that. It is true that in the 1970s, the increase in the price of oil, of course, is very much linked to those recessions. But when you get to more recent events, say 2007, the price of oil did increase before the the global financial crisis, but it was more because of the demand, meaning the economy was growing really fast, and it's not that that was the cause of the recession itself. So again, how much prices of oil can cause a recession or not, it it really depends case by case. Every time it's different. Now, we're seeing prices going up at the end of my chart here today. Of course, so far we haven't seen any increase in price which is that dramatic historically, but again, the point that Adi makes is a very important one. Non-linearities, if this continues for a while, what does it mean?

Now, if I think about the mechanics of energy shocks in the economy, again, to me this is straightforward. For people who import countries that import energy, we become poorer. And I know this statement you can read it in many ways. People say, "Okay, inflation goes up. My purchasing power is going down." Sure. The way I read it is a different one. My real GDP, my level of development, my level of of wealth has gone down. Now, that means we need to internalize that. And in many cases, internalizing the fact that real income has decreased is harder, and we have to talk about policies. I'll talk about those in a second. Now, those who export oil or energy, if they can export it, and that's a question obviously for the region, you're richer. So this is a positive event, not a negative event. Now, there's an element that affects everyone negatively, which is inflation. So inflation is higher everywhere. But again, in the countries that export oil, inflation is higher where people in principle could be richer because on average real income is going to increase. So it's a very asymmetric event. Uh for some people, obviously, the pain is going to be very large. For others, the pain is going to be much smaller.

Now, Adi mentioned this briefly. I'm not going to show you data, uh, but there's also an element here, which is goes beyond the price of oil. There is a question of which energy in which region, which energy at which time, and the fact that there's a set of other commodities that also going through the same area of the world that are being affected. So, not everything is summarized just by one number, the price of oil. Depending on where you are in the world today, the type of shortages we have are very different. And we've been talking on the media about these. Again, it's not so much about pricing, it's about rationing, it's about whether we have enough fuel to flight over the next months or not, and whether the US can provide that fuel or not. So, I think these elements here that go beyond just staring at the price of oil.

Now, there's been this analysis, and Adi was doing a little bit calculations like that in some of these calibrations. It's like, how much will the price go up? Uh the price of oil. And here you have sort of two dimensions to think about that. One is on the vertical axis, how long this is going to last, how bad is it going to be, is it going to last for months, is it going to last for days, is it going to be over tomorrow? So, as you go down, you you're thinking of a scenario of a longer event. And then on the on the horizontal axis, the three columns, the question is, how easy is for all of us to adjust? So, if we have to adjust to a shortage of X percent of the supply, how elastic are we able to be? I mean, can I stop driving? Is that easy? If I see the price going up a little bit, will I stop consuming energy at home? So, the higher the elasticity, the first column, the less you're going to see a shock, because then it's easier to adjust. The lower the elasticity, the bigger the shock will be. And these are the type of a scenarios we have all been doing with a lot of uncertainty. Why? Because the world has changed. Some of the elasticity we we knew in the 1970s was very low. It was very hard to react to changes in the price of oil. Today, we're a lot more elastic. Using those supplies and those resources and reserves that we have, as Adi was mentioning, is a way to add elasticity and to stay on the top left corner as opposed to the bottom right corner where things could get very nasty. So, intensity, length of the event, combined with how do we think about elasticity are key about a scenarios.

Now, if you look at the world a few months ago, I think I was showing a slide like this when I did a webinar in this context in January, we've been forecasting business as usual for the next years. Again, for 2026, 2027, we expected the world to grow somewhere around 3.something. That was sort of the what we expected. Now that we bring this show to to the world, how how do our forecasts change with a scenario that says energy's going to be more expensive than before? Now, let me show you the scenarios that the IMF just put forward about 2 weeks ago. So, the way you read at these numbers, the blue column is the pre-conflict forecast for 2026 and 2027, growth and inflation. Then you have three other columns in green, what they call the reference, the baseline scenario. I'll tell you in a second what that means. And then they have two other scenarios which are more dramatic. Now, here is where my life is very easy, meaning as the scenario get worse, what happens? Growth comes down and inflation goes up. Now, there's a little bit of a non-linearity. If you move to a scenarios which are more dramatic and the war lasts longer, then growth is going to be affected in a way which is really significant. And we're talking about inflation rates that are going be a lot higher.

Now, these are the aggregate numbers. When you start looking at regions, you get something which is not a surprise. So, if you look just at growth, how much has growth been revised? This is the baseline scenario, not the adverse or the severe. So, for energy exporters, growth has either not changed or increased for some emerging markets. So, EM means emerging markets, LIDCs low-income and developing countries, AEs advanced economies. For energy importers, you see obviously decreases in the growth forecast. Now, they're not very large in the baseline scenario. We're talking about 0.5 at most. And this is for 2026. Of course, in the region, the forecast has changed significantly. We're talking about a two percentage point decrease in growth rate. So, overall lower growth, overall higher inflation, and when it comes to growth, very much a very diverse view depending on where you are.

Now, let me show you a very similar a study done by the European Central Bank, which just focuses on Europe. So, Europe is an importing energy, so you're likely to see a bigger effect on growth. And they do the same three scenarios, baseline, adverse, and severe. And here you can have a sense of how they think about scenarios according to the price of oil. So, this is the baseline. The baseline says, "Okay, oil has gone up to 90 or more, but it's going to come down very fast over 2026 and go back to sort of baseline in a year's time." Now, what happens to growth? Not much. So, growth goes down. You see a little bit of an effect here, but we're talking about 0.something lower than 0.2 lower than what we thought. What happens to inflation? Again, inflation is here. That's where we are. It goes up by one point, and that's it. Now, what if you assume that the price of oil stays higher for longer, say $120, and sort of comes down and lower over time. Then growth becomes negative in the euro area. So here's where you see the moment you start pushing the price for a few more months, then the effects are very visible and then we talk about dynamics which again whether you want to call this a recession or almost a recession, that's what you see. Inflation goes up not by two one point but two points. And if you go to what they call the severe scenario which is much more dramatic, 140 for the price of oil coming down really slowly, then we have a serious recession. Now we have growth becoming seriously negative for a while and inflation can go up up to four points. So again I think this has been the forecast that the IMF has done, the European Central Bank has done, the OECD. Again it's all about these scenarios and it's all about the same story, lower growth in countries that import energy, higher inflation anywhere else.

Now let me say a couple of things about policies and then I'll stop. What do central banks have to do? Well banks have to react to increases in prices, inflation at a time where inflation is higher than the target in some economies, in particular countries like the UK or the US. So that is tough because you don't have any slack. Of course we throw immediately the word stagflation which means recession combined with inflation. Again we're not there yet. You would have to go to one of the adverse scenarios to think about a stagflation but it could happen if the conflict continues. Now central banks in principle they have the the mandate to ignore these supply shocks. Again that's how we think about it. They're going to be temporary. You don't want to overreact and cause a recession by raising interest rates. But I have to say that this might be a difficult business for central banks today because they did that during COVID and it didn't work very well. During COVID remember they said inflation is going to be transitory, don't worry about it. It wasn't that transitory. So I think there is a question of are the expectations of the central bank inflation anchor, are they credible? And to me, this is a big question in particular in some countries. If you look at 10-year interest rates, which is a measure of how much the market trust central banks, they're becoming up after the war started both in Europe, in the UK, and in the US. They're coming up a little bit faster in the UK, where I think the signal might be a little bit more worrisome. None of these levels are dramatic. Again, we've seen levels like this before, but if you look in particular the UK and to some extent the US, you've seen half a point or more than a half a point in the UK going up. Again, this is a signal that maybe there's some issue with credibility. If central banks have to fight inflation, it's going to be tricky.

Now, let me say just one thing about fiscal policy and I'll stop. Again, we're going to ask governments, we have asked already, to minimize the cost of the crisis, but one has to be very careful. One cannot deny that if we are poorer, we are poorer. There's no way to just throw money at the problem and pretend that an economy does not need to adjust somehow to this shock. Again, we would like to obviously minimize the cost on individuals, in particular those with low income who have sort of a bigger pain coming out of these energy increases, but at the same time you have to adjust. And if we need somehow to reduce the demand, keeping the prices stable is not a solution for the short term or for the medium term.

Now, that's what I wanted to share with all of you in terms of my thoughts about policy. What we're going to do is two things. Alli and I will have a conversation as I keep reading the questions that I see on the right-hand side, and then we'll go back and forth between some of our questions and the questions that I see there. I'm going to ask Alli a question that I've seen in the chat, but I also have in myself, which is what What the the influence on all this scenario? The fact that the UAE has announced that they're leaving OPEC. Is it related? Does it in any way change the way we think about the medium-term scenario for energy markets?

Yeah. Well, first of all, the reasons for leaving are political and economic reasons. Now, I I'm not going to ponder on political reasons. I'll leave it to others. I'm not a political commentator. Economic reasons are I've I've done so one of my students was doing dissertation comparing UAE with the Saudi energy transition. UAE is way ahead of everyone all the oil Gulf producers in terms of energy transition. They they've been in the renewables for over 10 years now with various companies. So, they really what they want they want to basically they see the light at the end of the tunnel. Basically, they're saying, "Okay, we see finite uh time for oil to be exploited. We are going to go full out producers as much as we can and invest that money into other things that that are far more lucrative and and we want to modernize our place. Essentially, they're saying goodbye to being a petrostate." So, now consequences consequences By the way, I think it was in the press. I didn't say it, but essentially they've been producing a lot less than they could. They've been pressed by the Saudis for many many years, but they they can produce up to 5 million barrels of maybe a little bit less than that, but they produces only about 3 3.5 3.7. So, then all their capacity was sitting there doing nothing. So, and I think the political situation was just the last straw. Um consequences very important short-term none. Mark, you can see it in the market price. It didn't budge at all simply because we are short of oil. So, if if UAE want to produce more, great. And and and also even And the war stops tomorrow, I think consequences will be relatively muted because I was talking about close to a billion barrels that we need to now restock. To build up those stocks again, our US SBI is particularly only about half full. Anyway, according to the war, we are not full. So, I think that's one big thing. Uh so, no very little that we'll notice for the time being, but long-term massive massive impact. Uh UAE is not a huge producer, maybe up to 4% of the global production, but it's just they uh a giant within OPEC. They are one of the you know, sort of Gulf countries. I used to call them last lieutenants of of the Saudis. Okay? They they are there. They always supported OPEC. I mean, they're an hugely important player. So, the fact that they're going out now to produce, they'll basically go saying, "We're going full out." For those of you I've I've I've actually been multitasking a little bit while you're talking, Antonio, because I've seen I know your presentation. I answered a few questions. There's today in the FT uh the the ambassador of UAE in Washington wrote an op-ed an article, brilliant. Basically confirmed what I what I wrote about a week ago. Basically saying, "We see oil just as a means to development and we want to develop as soon as we can and basically produce as much as we can, which means in the long run, less cohesion within OPEC. Maybe, but I mean, beginning I actually said this could be a beginning of the end of OPEC, but just the beginning. It's not going to happen overnight. And basically a lot cheaper oil uh in future. Okay?

Okay, that's good. Let me pick a question which is both about economics, but also about the energy market. So, I'll answer the economics part, you answer the second for part. It's a little bit about how pessimistic optimistic we should be or we have been over the last days. And clearly you see online and when you see actions, you see a little bit of two extremes, right? So you see the extreme that says again for the international agency international energy office is this is the worst energy shock we've ever had. In particular when you ask people in energy markets immediately you think this is going to really at some point explode in front of our face. At the same time when you look at economic numbers, somebody's asking about the stock market everything seems to be fine. So all the stock market seems to be dismissing everything that that is happening.

Now I'll answer the question on the on the stock market and I'll let Adi say something about the pessimism about energy markets. Now to me the stock market again I've talked about this in in the last months certain in the last year or so again once it is starts what it has been doing for a while a really optimistic view of the future which is not driven by energy but driven by artificial intelligence and other trend it is really really hard to sort of get their attention into something else. That's that's my view. This is not investment advice but it is a fact that you see the bad news. Yes, they hit the market but there's a tendency to sort of find a way to say okay, they're not so bad. We going to be fine. Now we've seen that over the last years with several events not just this one and I'm seeing the same attitude now. Now it could be that this works. Again it could be that the world truly resolves over the next days and this is fine. At the same time the stock market should be pricing some of the risk. So there is a scenario which everything works but there's no scenario where everything is so much better than before. So you if you have the other scenarios which are risky, something could go wrong. Again it might be a low probability but something could go wrong in this event. I think you would assume that the stock market prices some of that risk. Again I get a sense that we not pricing risk anymore in the stock market. We trying as much as possible to think about how can we go back to the baseline, which is this is a great time to invest because we have artificial intelligence. I see a disconnect. I I cannot explain it except as much as I said now.

And let me pass it to Ari again just to see to calibrate some of these really pessimistic views you get from people in the industry and people on the sort of more the economic side of the stock market seem to say, "Oh, these guys are too pessimistic." I don't know if you have a view on that.

Yeah, well, thanks for that. I think I think the interesting thing I'll just mention a little bit the stock market because I'm obviously as a former oil trader. Uh and and traders are not necessarily economists. They they just act on base of expectations. And I think one of the probably potential answers is that the administration of Donald Trump is being seen as being friendly to the stock market. And that's one of the reasons I think that the response of the futures market for oil has been so muted because they always believed in this taco trade, you know, Trump always chickens out. Uh they they realized and they they may well be unfolding as we speak because for the first time I saw yesterday in the US average petrol prices or gas prices as they say uh were four and a half dollar dollars per gallon. So, that that's super super high and I think you know, they are respond responding to that. Um it it turns of it turns of pessimism actually before I talk about the sort of pessimism about the oil market, I must throw a little bit of optimistic light. I think this is probably the best advert that renewables have ever had. Because right now renewables are equated with energy security and that's not been the case in the past. In fact, if you look at the old OPEC announcement, there was always like, "Oh, we are a reliable partner. We are reliable energy, you know, we we have sort we are there for you to supply you and and suddenly you see where we are. It's not very good. But I think I the market may just end up being happy-go-lucky if if we end this conflict because uh if we were if if oil does not come out until the end of this month, somewhere in June, we are could be seeing some very, very ugly things. We could be seeing prices easily, I think, over 115 futures, physical being a lot higher than that. And the the consequence of all that be terrible because we're simply down to very, very low stocks. Um especially, I mean, you and I are in Europe and and there was one of the questions about jet fuel. The Middle East countries, they the crude oil that comes from the Middle East is very rich in what we call distillates, middle distillates, and that's jet and diesel. Uh so, we're using A, the crude oil that's rich in distillates. B, they also export a lot of distillates. Especially Europe, uh UK was a big importer for of of jet fuel from uh from from the Middle East. And that's definitely already, I mean, the flights in Middle East has been demand destruction. I mean, I think um one of the Middle Eastern airlines, I won't name them, they announced like 30,000 cancellations. And some flights are being canceled. Uh and we will see that demand destruction. Uh on another let me try and be a little bit positive again. But I was just speaking about this earlier on. The first ones who got to get destroyed demand is you've seen petrochemicals. Okay, they had to basically reduce their runs, less uh ethylene and so on. Well, I always throw this positive spin on that. Uh plastics uh not recycled well. We recycle about 70% aluminum, 70-80% of steel, most paper, most things. Plastics are recycled less than 10%. You know, if we were to recycle plastics to up to 80-90% like we do other commodities, we could destroy 5 million barrels of demand over overnight and actually make the planet look better, healthier, and safer. So, I would like to leave it at on that positive spin.

Yeah. Yeah. That's good. I mean, let me I'm reading a few questions where people are asking us to predict a few things that are hard to predict. I mean, I see a question about the UK stock market and and real estate in the UK in the UK. Again, one thing that I want to stress again, you said it earlier and I will say it as well. And this is both from the energy market on the economic side is the non-linearity. Uh again, there are scenarios where where things end fast and we forget this event as a blip. But if you add another 4 weeks, then the energy market would look very, very different. And it's not just a little bit different. We've gone through a few weeks already. But the moment you start adding weeks, we get into territory where things get exploding. And same from an economic point of view, a little bit of inflation is manageable. A lot of inflation is not. So, again, when you think about a scenario, unfortunately, that's the way we we have to think about it. It's very hard to give a forecast. It's very hard to think inflation is going to be X. But if you ask me about my concerns today versus a month from now if we are having the same conversation, they're going to be increasing at a very fast pace.

Now, I want to touch on a point that you said which I think is important. To what extent this could be a catalyst to for the energy transition to renewables, right? Uh And I think I see two sides of this. One, yes, and I can see some evidence that in some countries people are rushing to buy electric vehicles. You see an explosion of electric vehicle sales as we speak. At the same time, you also have countries which might do the opposite, at least in the short term because they feel, "Hey, this is a wake-up call. I need to have energy controlled by myself." And the closest thing I have that I can control is coal. Uh again, I cannot do an energy transition tomorrow to sun uh to solar, so I'm going to use coal like crazy. So, I think you're going to have a little bit of both, right? At least in the short term. Um I I can just add to what you said. It was I think I liked two points that you mentioned, really important ones. The first point is is that I think you said during your presentation that we haven't been here before. And we haven't been here before. This is by far the biggest oil shock ever of all times by on the long margin, okay? Secondly, talking about nonlinearities because obviously because being in oil, I've spent a lot of time on these curves and the the the the the curves are not only nonlinear, but that those elasticities that you talked about, they also change along the curve. As you go along the curve. So, supply curve for oil is usually very elastic at the beginning for a long, long way, and then suddenly starts getting inelastic, goes up, and then gets almost totally inelastic at some point. So, where demand crosses that uh supply curve is is absolutely essential. We you have to know where you are on that curve to actually see the the the results of of that. So, um I I think that's that's really really really valid point. Just and those nonlinearities we are going line with we haven't been here. So, um and I think what worries me, and these are things that kind of it should be worrying about uh things that we haven't been here in terms of that. This is true also for the climate change. We're pushing the world to to level where non-linearity linearities are equally kicking in. And we don't we we just potentially even though the the best scientist out there just don't know. And just taking the risk, I mean in in real life you wouldn't do it. If you knew that there were sharks in the sea you you wouldn't go and swim. But we kind of taking chances a little bit too much. Yeah.

Okay, thank you Eddie. We're right on time. We promised it would be 45 minutes. So we made it all the way. Apologies there's a lot of questions. Some good questions but we wanted to keep it short so that everyone can continue with their daily tasks today. Thank you very much. Again we'll continue doing webinars like these for for our inside community and anyone else who wants to to come. And of course thank you very much to my guest today Eddie. Again it was very useful to have him on board. Always great pleasure talking to you Antonio. Thanks. >> Okay. Bye-bye Eddie. Bye-bye. Bye.