Anas F. Alhajji is the chief economist for NGP Energy Capital Management in Irving, Texas, and its affiliate, Natural Gas Partners. His research focuses on U.S. natural gas issues, market trends for world oil supply and demand, and liquefied natural gas (LNG). His articles on these topics have appeared in more than 10 languages and his work has been cited in 25 books.

Born in Syria and educated in Saudi Arabia and the U.S., Alhajji served as a professor of economics at Ohio Northern University, holding the George Patton Chair of Business and Economics. Previously, he worked at the University of Oklahoma for two years and the Colorado School of Mines for four. He holds a master's degree and a Ph.D in economics, specializing in energy economics, from the University of Oklahoma.

He also was an honorary associate at the Center for Energy, Petroleum and Mineral Law at Dundee University in Scotland.

At press time, Alhajji had just returned from a tour of the Middle East, as well as a 10-city U.S. tour to visit some of NGP's clients and portfolio-company executives, speaking on the recent Middle East tensions, the direction of oil prices and world demand, and many other geopolitical issues.

"The speed of building new, energy-intensive industries in the oil-producing countries is higher than the speed of building renewables or fuel alternatives in the consuming countries. This might lead to oil shortages in the future," says Anas F. Alhajji, chief economist, NGP Energy Capital Management.

Investor: What was the purpose of your latest tour in the Middle East?

Alhajji: Given the type of business we do at NGP, we must study oil and gas issues all the time and related economic and political factors. We talk to decision-makers in the OPEC countries to see what they're thinking. We try to go there on a regular basis, to get a feel for the market. We had already scheduled this trip before the revolutionary activities began. Of course those events made it much more exciting than usual, and the schedule changed a lot while I was there.

Investor: What are some key take-aways from your trip?

Alhajji: My main conclusion is that whatever is going on in the Arab world is not about politics or economics or Facebook. While these factors played a part in the demonstrations, it was about freedom, freedom, freedom. This is a clash of generations, a clash between the young people and their parents and grandparents. They have two different mentalities and cannot communicate, even if they are at the same table.

The uncertainties and risks will be here for a long while, whether or not they remove or replace the leaders of the country.

Investor: What is your outlook, then?

Alhajji: We need clarification on some legal issues governing oil contracts between the international oil companies and the host countries, even if the current crises in Libya, Egypt, and Yemen are resolved. One main factor not related to the uprisings is the increase in oil consumption in the OPEC countries—it is lowering oil exports and causing power outages. This is going to continue for some time.

Investor: You say that oil production in Libya won't recover. Why not?

Alhajji: For a couple of reasons. First is the destruction we've seen. Plus, our experience with other countries is that when their production is taken off line due to damaged facilities, it takes at least three years to get back.

Second, all the expat workers have left. For them to come back, the oil companies will need to see a stable, clear, legal regime. Once the dust settles, if Qadhafi is removed, some people will question the validity of the oil contracts. They'll need clarity on the legal issues.

Investor: Are you more hopeful about Egypt?

Alhajji: There was no destruction (of oil facilities), but we do have a problem here. We should pay more attention to this fact: when you have a revolution, the level of nationalism in a country then becomes very high, and for this to fade away can take as long as 15 years. It is very hard for them to open up to foreigners now.

Investor: What future do you see in Iraq?

Alhajji: Iraq can double its production by 2017, to reach 5 million barrels a day, but it cannot reach the announced 12-million-a-day target they have been talking about. The recent increase in Iraqi oil production should not be used to show that Iraq can reach 12 million a day by 2017. To increase production there by 200,000 barrels daily is not such a big deal. Even Bozo the Clown can increase production by a few hundred thousand barrels in Iraq.

Investor: What drives high oil prices?

Alhajji: There are what I call four vicious cycles. First, there is the relationship between oil prices and energy consumption in the oil-producing countries. Second is the relationship between oil prices and the economic diversification in those countries. Third is the relationship between prices and the value of the U.S. dollar. Fourth, you have the relationship between prices and the fiscal and monetary policy of the oil-consuming countries.

These four factors are supporting high oil prices. This excludes, by the way, all the geopolitical events taking place and the effects of natural events such as what happened in Japan.

Investor: Do you believe in this $10-a-barrel fear factor?

Alhajji: Look at it this way: We see demonstrations in nine countries that all produce oil and we've lost Libyan oil and Ivory Coast oil and some from Tunisia and Yemen; and we have economic growth in China still rampant. So, to me, it is surprising that oil has stayed in a range of $100 to $110 and is not higher.

Markets still respond to fundamentals. What we can say is that if the fundamentals support $70 to $90, then anything above that is related to geopolitics and Japan.

Investor: What of demand in the producing countries?

Alhajji: The problem is, as oil prices go up, so do revenues to the governments, and their spending goes up, their economies grow, and you have a population boom at the same time. The combination of economic and population booms leads to higher consumption of oil, gas and electricity. As a result, exports decline and less oil is available to the world, and then prices go up again. This is the first vicious cycle I mentioned.

The second cycle is this: those countries have seen oil at $10, and $140, and then down to $75. They have seen their economies so volatile, they've decided to diversify. They are taking that oil money and spending it somewhere else and not just on building more oil-production capacity. That is a negative part of nationalism. As oil prices go up and they get more revenue, they keep diversifying.

There is a serious problem with the rhetoric they hear about energy independence in the U.S. and Europe and the large subsidies that these governments provide for biofuels that compete with oil. The producing countries are diversifying into their own industries that will use oil and gas. They are saying, "If you do not want my oil in the future, I will export it to you embedded in the form of something else, such as plastics."

The speed of building new, energy-intensive industries in the oil-producing countries is higher than the speed of building renewables or fuel alternatives in the consuming countries. This might lead to oil shortages in the future.

Investor: You mentioned electricity. How does that figure in?

Alhajji: We've seen some NOCs (national oil companies) divert oil to fuel their power plants, especially in the summer, and that reduces exports. We've seen an increase in the use of private power generators fueled by diesel, because people cannot get power otherwise. Some of these generators are large, the size of a good-sized room, so their diesel consumption is up.

The third thing sounds funny, but it's true: During a blackout, families drive around in their SUVs that have air conditioning, until the power comes back on. This drives up gasoline consumption.

No one in the world has counted this increase in consumption. Everyone has underestimated power consumption, and therefore oil and gas consumption, in the Middle East.

Investor: You have said the world's energy data and forecasting are flawed.

Alhajji: Generally speaking I think all the models are flawed. This is one of the hottest issues we should focus on. I think it is contributing to higher oil prices, because all the models assume that OPEC will make up the difference in production.

People model world oil demand and non-OPEC behavior, they subtract estimated non-OPEC production from estimated demand and say, "This is how much OPEC will produce." They do this without looking at OPEC behavior and its internal consumption.

For example, the EIA estimates that OPEC will supply an additional 11 million barrels per day by 2035, which is the difference between their estimated global demand and the estimated non-OPEC supply. But OPEC cannot deliver this amount. OPEC needs to produce an additional 11 million barrels per day plus the loss in production from decline rates in current production. This amount might reach 28 million barrels per day. Since most of the spending in the next five years is on natural gas and the downstream, OPEC cannot deliver the expected amount.

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