Oil and gas prices have been on the rise, but what does this mean for passive investors?
Download Bob’s slides or watch Ben Fraser and Bob Fraser as they delve into more macroeconomic trends in the oil and gas industry, current market events, and analyze Goldman Sachs’ Global Investment Research since 1998. Don’t miss this episode as they explore why passive investors should win by diversifying their portfolio like Warren Buffett.
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Breaking Down the Brewing Energy Crisis and Opportunities feat. Bob Fraser and Ben Fraser
Ben Fraser: Welcome back to the Invest Like a Billionaire podcast. I am co-host Ben Fraser, joined by fellow co-host.
Bob Fraser: Bob Fraser.
Ben Fraser: And today we are going to dive some more into economics. Everyone’s favorite topic, right? So, you know, if you listen to last week’s episode Bob kind of dove into just at a high level, what’s causing high gas prices, right.
And some of the economics and, and things going on in the market right now. And part of the whole goal of this podcast is finding and identifying trends that are going on in the market at a macro level. And really trying to uncover opportunities for investors. And so one of the things we’re seeing right now is obviously high inflation, right?
We’re seeing this high inflationary environment. We haven’t seen this in a long time. One of the biggest contributors to that is high oil prices. And so it’s caused us to really take a deeper look at what’s going on in the market. Is there some, some deeper things going on, some bigger trends at play that can create opportunities for investors.
And so we’re gonna kind of do you know, a 2.0 today on the oil and gas market, just the energy market in general. And Bob’s got some, some great research that he’s put together. So again, if you are listening to this, you’ll be able to, to get a lot of it from the audio, but we definitely recommend it if you can.
Watch this on YouTube, we are gonna be sharing some slides and going through a few charts. So those that are listening, maybe we’ll go back and watch it later on. But Bob, do you wanna jump in and share some of the things that you’ve been, been reading about and.
Bob Fraser: Yeah, let’s do it. So I’m gonna share a couple. Couple slides here for us. And we’re gonna take a
look at kind of the energy dynamics as Ben said. And it’s pretty amazing as we’ve been researching this we are seeing a global mega shift happening in the energy market. It predated the war with the Russian Ukraine war, but it’s going to it, it’s also been exacerbated by that.
So we’re gonna look at some of the dynamics and really evaluate energy as an investment. Opportunity here. And our conclusion just to jump ahead is that we’re gonna see high energy prices for the foreseeable future. And let’s look at some of the dynamics here. So on this chart, This is a chart of global oil and gas investment.
So this is the billions of dollars that are being put into energy projects globally. This is across the globe and you notice it is increasing from 2010 to 2014. And to a trillion over trillion dollars per year in 2014, and then suddenly 2015 took a massive dive and it’s kept dropping until 2020 down 55%.
That is incredible. Now this matters because if you’re not putting money into an old fund, if you’ve got a million acres, it’s gonna take billions of dollars and many years to develop that. So if you do not do that, you will have five – ten years from then you will have a shortfall.
You do not have enough capacity because you haven’t developed enough capacity. So this really matters. So here, so what happened in 2014? There became this dominant narrative that was really a brand new narrative that fossil fuels had reached peak demand. And as surprising as that may sound, it’s not that unreasonable.
Okay. Because fossil fuels conservation has been working, low population growth and low economic growth throughout the Obama era reduced demand. And so you saw demand really flattening. And then of course it’s wishful thinking too, the greens, really, and all of us are green.
It, to some degree, really would like it to be so narrative that fossil fuels reach peaked demand. So what happened is all the large energy companies. Began to divert investment to green energy projects and, we’re sustainable, renewable type projects and stopped investing in big big other projects.
So if you believe that you’re, the demand for your product is gonna go down, are you gonna, are you gonna invest in a 50 billion development plan, to build those, that product, the, so that’s what happens. Does that make sense? And so people started disinvesting because of this narrative simultaneously at the same time, the environmentalists and ESG initiatives began focusing on not just reducing fossil fuel consumption. Which is great. Let’s not consume as many fossil fuels, but also on fossil fuel supply investment.
Lets reduce the availability of fossil fuels. Let’s restrict availability by one financing. So John Kerry has been on a mission to stop large banks from financing fossil fuel investment pro projects. There’s been a lot of notorious kind of pulling of auctions of public lands and licensing and all this other stuff.
And so the idea is, Hey, we don’t, this is dirty. We don’t like fossil fuels, so let’s not allow it to be developed. Which, we could come to regret. This is, it remains to be seen. You reduce supply, you’re gonna get one thing and that’s high prices. And maybe that’s the objective because high prices for oil will increase demand for other, solar and renewable new, makes other things more attractive financially.
So could be that’s the aim, but whatever. Whatever the case is simultaneously. We’ve just seen this dramatic reduction in supply and ability to produce fossil fuels. So long term investments have declined down 55% from 2014. As a result global energy production today is severely C supply constrained with a prospect of no rapid increases.
You simply can’t turn the spigot on now. The narrative goes or a common narrative goes that Saudi Arabia does have the ability to turn the spigot up or down. But that is actually hotly contested because Saudi Arabia definitely overstates their reserves and they overstate their capacity.
So that’s debatable whether they can, or they can’t, but every time, then they’ve said we’re. Turn up supplies they rarely have, and they really haven’t been able to. So what’s happening is we have this scenario where production today is severely constrained because of basically six years of seven years of disinvestment.
In energy production. And we, this kind of wrongheaded belief and it just op it’s overly optimistic belief that we’re weaning ourselves off fossil fuels. Meanwhile now comes, so this, we have this super slow economic growth period during the Obama administration. Very slow recovery.
If you remember slow demand, and now all of a sudden hit, hit the stimulus and the booming resurging kind of economy in demand, creating demand against hitting up against basically pretty massively supply constrained market. And that’s what happened now.
Throw in Russian Ukraine. Okay. So that’s the scenario we get.
So we’ve been alerted and started doing some research and believe that energy represents a very good investment opportunity at this. In our history. So let’s hit another slide here. So for the last two years now, so that’s the big picture kind of zeroing in the last two years.
What we’ve seen is that oil production has not kept pace with post COVID demand. So we show basically here since mid 2020, a stock draw, meaning energy inventories are being drawn down and it’s consistently being drawn down. It’s not being replenished. So you’re creating just shortages, right?
There’s inventory, draw inventory, draw. What happens after six quarters of inventory draws, you run out of inventory. And so what’s happening is global inventory supplies today are at a record low. And again, now throw the Russian war and the Ukraine and the subsequent embargo has created a global energy supply shock.
Now a lot of people are hoping for a quick resolution. I believe even if there is a quick resolution. You’re not gonna see a reversion to a pre-war scenario because of basically de Russification of energy, right? People, no one’s gonna want Russian energy. Certainly not the Europeans who are the most threatened.
You look at the native countries, Poland has been invaded by Russia. I don’t know how many. And, they know what they know where their threat is coming from. And the last thing they want to do is have their oil be at risk. And so Europe is gonna dramatically want to get free of Russian energy and they have very limited ability to do.
We’ll see. So huge shortfalls in inventory. So this is from Goldman Sachs, who is one of the best research firms, a big wall street bank, Goldman Sachs investment research. And here’s their little chart. This kind of blew up. This is global inventories including product on the water storage containers.
And there’s this little red bar here and you can see inventories have just been going negative really since April of 2020.
Ben Fraser: Negative inventory just means that they’re drawing on the reserves. Is that good?
Bob Fraser: Drawing on inventory, right? Negative inventory builds. So here’s some of the quotes, quote oil inventories are at record lows and will take oil price above $140 a barrel to rebuild. Wow. And today just for context, oil is at $98. So it’s a 40% increase in oil and so that’s one pretty shocking.
Here’s another quote, supply remains elastic to higher prices. Okay. So Ben, you know what that means? What does that mean?
Ben Fraser: Right. Right. So the higher prices will not result in an increased supply. So
Bob Fraser: So even when, even if prices hit 130, $135 a barrel, there’s no additional supply.
Why not because there just is no additional supply. There’s no spigots to turn on. So when it says it’s in elastic demand, that’s what it means. There is no additional supply to turn on. And if the world decides we need more oil, And, Carrie gets off his mission and people decide to start reinvesting.
It still takes many years to develop the capacity. And America is one of the few places that has lots of additional capacity. Lot of places do not. So what happens is what they’re basically saying is that $140 a barrel is where you’ll start to see demand destruction. What that means is that prices at the pump get so high people will stop driving.
And so it destroys demand because of the high prices. Now, maybe this is what people want on the environmental side, but it is, it’s pretty devastating economically to our industry. There’s pluses and minuses here. Alright. Third quote, the negative global growth impulse remains insufficient to rebalance inventories at current prices.
And here’s what that means. Even an economic slowdown. So the big question is whether a recession is coming or if a recession is coming. Won’t that decrease demand enough to bring prices down and Goldman’s answer is no, it will not. Negative growth. Impulse is not sufficient to rebalance inventories at current prices.
It simply is not enough.
Ben Fraser: And I think it’s an important point to kind of zone in on a little bit, because I’ve heard that argument many times from different people talking about, Hey, if we’re in a recession, that’s going to decrease demand for oil. And that will soften the prices a little bit, but to Goldman’s point.
And what I’m picking up from that is because we’re so backlogged in our inventories and we’ve exhausted a lot of the reserves, not only just to kind of get back to, or to meet demand, but also to get back to. We have to get the reserves. It’s gonna take some time to rebuild those, even if demand is reduced.
And so, the impact of constrained supply is gonna be a greater force than potential demand destruction. Is that accurate?
Bob Fraser: That’s it. And you also have to consider that demand is global. So the fact that even if America has a recession America’s not the world’s largest energy consumer. So what about China as their economy is rebounding and India and other places.
Ben Fraser: Which interestingly I thought of the day, China is not having the same inflationary environment that we’re having in the us. Right. So it’s a different economic kind of environment right now. There.
Bob Fraser: Okay. And the fourth quote, this is again, a stunner. The market will not build sufficient spare capacity by the end of 2023, extending the bull market into 2024 plus. So basically they’re saying that this inventory shortfall is so severe. We’re seeing 2024 plus and our prediction at Aspen is that it’s beyond that.
They’re being conservative here, so we’ve got a pretty big bull market. And at Aspen, what we want to do is be, we want to be ahead of the game. And yeah, maybe you’re. Fill in your tank. And someone was telling me, I think they put $200 in their field tank the other day, and it’s extremely painful when what you want to do as an investor is get on the other side of that. Be the guy that’s supplying. gas to the tank.
And that’s exactly what we wanna be doing. So inflation is hurting. Let’s be on the side that’s not being hurt by inflation and is benefiting from inflation.
So we wanna, for every problem in pain, there is a way to turn that into a win and we can only play the cards we’ve been dealt. We can’t create new cards. So we’re playing the cards we’ve been dealt and that’s what we’re doing here.
All right. Next slide. So this is also from Goldman. This is super interesting here. You see basically 20 years of data and energy prices are an extreme backwardation and this is a very rare phenomenon and it’s an extreme right now. Meaning oil price delivered today is priced much higher than all oil price is being delivered a year from.
Okay, that’s called backwardation. So normally oil prices go up over time to reflect storage costs. The fact that I could buy today, put it in a tank, deliver it in the air and I pay my storage costs and I’m, and it shouldn’t be a break. Even that’s theoretical. So being in backwardation is one extremely rare, and it represents, or it basically is an indication of the extreme tightness in the oil market right now that there is simply not enough oil to be delivered to people who want it now, and they don’t want it a year from now.
They need it today. You can see here right now, the months, the delivery months are roughly 30% higher for Brett. Meaning people are paying a 30% premium to get oil today from what they could, they would pay if they could wait a year to get it. And this is yeah, 13 month time spreads.
So this is if they waited a year, they could save 30%, but they can’t wait a year. So again, what does that tell you? Extreme tightness in the oil markets.
So what does this mean? So extreme tightness in the oil market historically such supply shortages have led to large increases in the price of oil.
Makes sense. So here it goes back to 1990s. What is this? 1998. Yeah. So what they’re showing here in the red. So this light blue line is this backward. It’s when the three, the front month to three year forward time spread. So this is when the time spreads the backwardation gets high.
Look what happens to the oil price? So here’s the oil price. So when the backwardation of this little line here, when it’s above zero, it means it’s in backwardation and look what happens to the oil price. So look at what happens to the oil price all through here. Look what happens all through here. Massive.
Increase in the oil price right here goes into backwardation again, massive oil price spike here goes into backwardation again, massive oil price spike here at backwardation. Again, massive oil price spike, and right here as well. So any time you see this tightness it’s historically meant oil price dynamics do oil price hikes going up.
So it makes sense, right?
Ben Fraser: Yep.
Bob Fraser: So that’s pre-war right now. Now look at adding the Russia Ukraine war outcomes, and this is really really troubling. And this slide is from Peter Zhan. And from a presentation he did. So it’s got a brand new book out, which I’m looking forward to reading and what this is, it shows basically the current oil flow.
So each line rep represents oil flows. . And so you see a lot of Saudi Arabia, primarily Saudi Arabia’s oil going mostly to Asia. Oil flows coming from the United States. People may not realize it, but the United States has been an oil exporter since the 90s and the largest producer of oil in the world.
And because of the shell revolution. So it flows today. Some of our oil goes to Europe, some goes to Asia, some goes to Canada, Saudi Arabia and oil goes to Europe, primarily going to Asia, primarily some to Europe. And then we have a fair amount of production coming out of Africa, Nigeria, and some of the oil rich areas of west Africa going to Asia and to, to Europe.
Okay. And primarily Europe does not have an energy source in Europe, except for this north sea field up here. Between the UK and Norway here, they don’t have energy in Europe. And so their primary energy supply has been coming from Russia. Of course if this gets cut off and if this becomes a, they can’t import, you’re having a severe energy crisis in Europe, severe, and it’s already there’s dire warnings coming out as the Nord stream gas project has been cut off.
That you, German industry is gonna not, there’s just no PLA no way to replace this. And so natural gas especially has the disadvantage of being hyper local, right? So oil, you can put in a, one of, thousands of tankers and ship anywhere you want in the world. Gas is not its gas. It’s big, it’s voluminous.
It’s difficult for you. Can’t really ship it. Gas goes in pipelines, which means you’ve gotta build a point to point pipe. And there’s not a ton of those or you need to compress it and freeze it and cool. It. Until it becomes liquid, that’s called LNG or liquid national, natural gas, and then you put it in tankers and you can ship it.
But LNG, there’s very few tankers and there’s very few terminals, LNG terminals, both for creating LNG, loading it and for shipping it and offloading it. It’s just the infrastructure just isn’t there. And the US is one of the world’s largest gas producers. Because it’s a byproduct of the shale.
But it’s, and that’s why our gas prices are gas. Natural gas prices are so low relative to Asia and Europe. We’re, I think running around $5 per thousand cubic feet right now in Europe and Asia it’s five times that much. Because they just don’t have a lot of gas flow.
Ben Fraser: So, so we’re already seeing, I mean, Russian oil trading had a pretty steep discount because of the geopolitical issues going on. But what you’re saying, in addition to that, Production coming out of Russia is gonna be severely constrained as well.
Bob Fraser: So well production coming out of Russia. So Germany decides. What if they shut off the oil flows and what if Germany refuses to buy Russian oil? Okay. So Russian oil, if you look at this chart here, there’s this little X here, Russian oil flows primarily to Europe, and then a small amount goes to China, very small amount, but you can’t simply reverse these flows.
There’s a whole infrastructure here. That’s goes from Siberia westward. You can’t simply say, oh yeah, we’re gonna go. We’re gonna start shipping from the Tundra. Millions of barrels per day across 5,000 miles of Siberia. To the east, east coast of Russia. Okay. You can’t do that. So there’s, those flows don’t reverse easily. And so there’s simply not a lot of places for Russian oil to go in the absence of this. So what’s gonna have to happen is basically to, to divert this energy crisis flows are gonna have to be diverted from Africa and the middle east to Asia.
These kinds of flow. and flows from the US have to be increased. And all that, by the way, takes flows away from Asia. Somewhere there’s simply going to be an industrial potential fallout in recession. Industrial production hits. In Europe and or in Asia, depending on how this energy crisis is resolved.
So we have a pretty severe crisis and we don’t know how it’s, how it’s gonna play out. So if war ends I guarantee you Russian oil is still gonna be a taboo and people are gonna want to Europe up is gonna want to de-risk themselves by setting them free of Russian oil even if four ends, a war doesn’t end.
This is gonna continue to be, weapon oil, energy is gonna be weaponized as an economic weapon, and you’re gonna see massive E either way. You’re gonna see this kind of map wanting to be redrawn increasing flows from the United States. And increasing flows and diverting flows from Africa and Saudi Arabia into Europe, which today go primarily to Asia.
So you’re, somebody is gonna have a shortfall and here’s the next slide and this is Peter Zeihan, though, how the energy map is being redone in 2025. So three years from now basically sees all flows, being diverted, African flows, being diverted, basically to Europe and sees Saudi Arabian flows being diverted to Europe and Asia suffering primarily from the lack of energy.
He also shows us exports are being stopped and in the case of high oil prices, right? Will the president who has executive authority has the ability to bar exports. So it used to be illegal to, for the, for any US producer to export. Used to be illegal and it was simply made illegal.
I can’t remember. I believe that was a few years back in the Trump administration, but literally by executive order, they could turn that off. So if oil energy prices are high in the United States will the United States turn off energy flows, exports to keep. And that will depress us energy prices at the expense of world oil prices and really at the expense of the world economy.
Because if those flows stop it just creates even more shortage right. Throughout the rest of the world in Asia, Asia and Europe. So we are at, this is honestly the worst time for, this 10 year period where this disinvestment was really the worst thing that could possibly happen.
So there’s gonna be, need to be a massive reinvestment in in um, in oil and gas. And while we wished the green revolution was here. Fully it simply isn’t and it’s simply not ready and to try and just, if we’re weaning the world off oil tomorrow, you’re going back to the dark ages here.
So a little bit troubling and again, one of the things you can be sure everybody’s gonna need is energy. And so potentially, it’s just a great investment and I believe that prices are gonna remain high. And that it’s a good investment. And of course, even buffet has now been investing in energy, so he’s got a lot of forward thinking.
So here’s our kind of summary of what we believe where we believe we’re at here. We expect energy prices to remain elevated well into 20, 24 and beyond. So I don’t see this being resolved really in, within five or six years. Because. Of the systemic shortages that have been built into the system.
Energy prices will not revert to normal, even if the war ends due to the de-diversification of energy demand and energy policy, Europe is going to want to free themselves from a Russian gun to their head. AI could, I could pull oil anytime I want and destroy you. Who wants that?
So they’re gonna want to get rid of it energy disinvestment combined with ESG and the global environmental movements focused on supply reduction instead of just demand reduction, ensures energy prices will remain high. Basically it’s really this, energy and this environmentalism while it’s, maybe morally nice and wonderful it’s impractical as it stands.
And we gotta, we need to have a more balanced policy that balances long term goals with short term goals.
Ben Fraser: Right.
Bob Fraser: And here’s the final thought is that energy is the mother of all commodities. And what I mean by that is all other commodities require it. Okay. For example, wheat if you need diesel fuel.
Lots and lots of diesel fuel to run your farm equipment, to produce that you need, for steel or mining or anything else, you need massive amounts of fossil fuel. So energy is the mother of all commodities. So if energy prices remain stubbornly high, it ensures inflation is gonna remain stubbornly high.
And so I believe we’re gonna continue to see an inflationary impulse. In the next decade because primarily of energy prices, if not any other reasons, just because of energy prices alone, because it is the ultimate commodity. So the bottom line is: I believe energy is a great investment at this time and represents a good opportunity for investors to get in and we’re gonna be evaluating some opportunities and ways to play this trend that are very attractive.
Ben Fraser: Yeah, well, this is very, very interesting. I mean, it’s interesting to me to see the trends that seem pretty obvious when you kind of put it together like this, but it’s not being talked about, right? No, no. One’s really you know, sounding the alarm like, Hey, we’re at a, we’re kind of at a pretty big crossroads of a potentially big crisis of energy that is gonna have an impact everywhere. I mean, we’re already seeing it in inflation, right? It’s been the biggest contributor to inflation and everyone’s surprised that inflation keeps remaining high and it’s, you
This is one, one of the, the big reasons.
Bob Fraser: We live in the information age but it’s not really the information age, it’s the noise age and just the amount of noise and just printed word and opinion. And it’s not information, it’s not truly digested well thought out information. . And so that’s why, our focus is getting data and analyzing data to, to get the storylines.
And I like to look at big data, right? I like to look at long data because those trends, the little waves come and go, the tides. You can make a lot of predictions that work on tides coming in, and I wanna know what the tides are doing. So this is a tide and there’s actually other trends that we could talk about in future podcast two, and one is food prices.
And so one of the other dynamics here. Russia is the world’s one of the world’s largest exporters of a number of not only wheat and grains, but also of a lot of metals and fertilizer. So they’re the largest exporter of fertilizer in the world. You think fertilizer doesn’t matter, but fertilizer matters a great deal without fertilizer.
Your crop harvest will drop 50 to 80% depending on your region. and they’re the largest producer and they’re really, there’s no replacement. I think they produce close to 40% of all global fertilizer. So you just remove, this is enormous adding in that they also are large producers of lithium and nickel and chromium.
And a lot of the metals used in steel and in renewables. So renewable energy. So we’ve got a pretty major shift in global economics that we are at the very beginning of right now. And it is, it’s geopolitical as so much of the world is and so much of economics.
Ben Fraser: Yeah.
Bob Fraser: So we’re gonna see, so we need to talk about that in, in future podcasts, but we’re about to see, some real transitions and hopefully this will be resolved, without a lot of crisis or that, but we could see global food crisis in addition to an energy crisis and. We need to really get a handle on the Russia situation.
They’re just a massive exporter of raw materials. So yeah. Interesting
Ben Fraser: Very interesting.
Well, we appreciate you all tuning into this episode and we actually have these slides up on the website. So if you go to the billionaire podcast.com, you can download these slides and, and follow along on the charts. And again, we always appreciate your feedback and reviews on the platforms.
You listen to this podcast and we can continue to grow the audience and share this information. More people. So stay tuned for future episodes.
Bob Fraser: If people want to be on our investor list and find out about some of the stuff that we’re uncovering.
Ben Fraser: Yeah. So go to AspenFunds.us. And at the top you can see the invest button or offerings button, and click on that and join our investor club. And you’ll get notified as we come up with new investment opportunities and be first to know about those. So thanks again for listening
Bob Fraser: Thanks everybody.