There has been recent turbulence in the oil & gas market. In past episodes, we’ve analyzed the current environment. In this episode, we brought in an oil & gas expert to discuss the long-term supply and demand imbalance, the bumpy transition to green energy, and how geopolitical issues will rewrite the global supply. Join in as Bob Fraser and Ben Fraser interview energy analyst Robin Winkle of Glenloch Energy to hear about the future of the energy industry.
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Oil & Gas Economics: What the Future Holds feat. Robin Winkle
We’ve got another really great episode for you today. We brought on an amazing guest Robin Winkle who works at Glenloch Energy, which is an oil and gas advisory firm. And he’s really been tracking what’s going on in the energy markets.
So we’ve been in a series of these podcasts on energy as we’re uncovering some of these very unique things that are going on. And so some of the things Robin talks about are. Kind of forecast for the near term the next year. But really we spend a lot of time on the long-term forecast of the demand and the supply and what’s happening, not just in the US, but globally and how the maps are being redrawn.
And it’s a really fascinating discussion. Another, just angle to view this is a series on energy that we’ve been doing for a little while. Bob, did you get anything else out of this interview? This is a must, must listen. If you want to understand what happened in the oil industry and what is happening and really along with our view of the energy is really gonna be a great place, a long term investment for the foreseeable future.
So you gotta hear it from the horse’s mouth, an energy analyst who has been in the space for decades. Awesome. Hope you enjoy the episode!
Welcome back to the Invest Like a Billionaire Podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. And today we are joined by Robin Winkle on the podcast. Robin, thanks so much for joining us today. Thank you very much, Ben, Bob, thanks for the opportunity to speak. Yeah.
So Robin is a managing partner at Glenloch Energy, and he’s been in the energy space for many decades and really has expertise on the market and the economics surrounding the oil and gas markets, which is something we’ve been talking about for a while. And if you listen to some of the recent episodes that Bob and I have done.
We’ve been talking about some of these things that are creating potential long-term systemic challenges in the energy space. And we’re, even calling an energy crisis, our buddying crisis. And we wanted to bring on an expert that has a background in this space to talk more about what’s going on.
So Robin, give us a little bit of background on you. How’d you end up where you’re at and excited to jump in? Oh, thank you very much, Ben. It’s always a little concerning when you start the background and are interested in working internationally. At the time I graduated, which was decades ago oil and gas was a good place to go. So I spent most of my career working overseas. Mainly for shell. So I spent time building offshore platforms and planning, offshore platforms, and then I moved into more business development type roles around economics and so forth.
So I did that until about 10 years ago. When we landed in Houston. And by that time I got married, had some kids, and decided to stay. Shell had some different ideas, so they thought perhaps overseas again. And you decided that was maybe the time to, so I then a company called for about four years and they look to call it the Russian company.
I’m sure you are. You’re familiar. And they had bought us company with a lot of exploration acreage in west Africa and they needed someone to build a development capability for them. So they brought me in to do that. I did that for a few years, and then I decided to go back to school, did an MBA thought, and started consulting company while I’m doing that.
And I never really stopped. So I’ve been doing this for about five years now and yeah, it’s. It’s had some good years in 2018 and 19. And as you can imagine, some not-so-good years in 2020 and 20, but I think things are starting to look up again. No, it’s good to be back out there and talking to people about these things.
We are in such an extraordinary time right now. And I think oil for most people who are maybe not really in the middle of observing oil, it got pretty sleepy. The market was kinda like, yeah, there’s oil there. And, but what’s happened is with oil prices suddenly rising and then.
Then on top of that the Russian question it’s at the top of everybody’s mind. And as, as we’ve started to do research, we’ve uncovered, woken up to the fact that there are some real issues in the oil sector and real opportunities. And so it’s kind of a shocker, as I’ve discovered, we were really since 2015, the amount of investment.
The oil sector globally has dropped by over half. Yeah, that’s correct. And that’s insane. That’s nuts because, unlike any other sector, this it’s not like building bridges or something. If you’re not investing because it’s a depleting resource, if you’re not investing, you’re losing you’re actually losing ground.
So in, in current production. And so what, how do we get there, and what’s happening right now? I think if you go back to you talked about, so the kind crest of the, in terms of investment was 20. And if you go back to the early two thousand, which was when I started industry the industry had come off a period of very low prices where it had basically wasn’t investing enough.
And then for 2000 through the 20 had this huge expansion and you may remember peak oil. I’m not sure if you remember that phrase. So sure. Around the two thousands peak oil was the issue we were gonna run out of. That didn’t happen. But what happened was the shell revolution happened instead exactly.
In the course of that, you huge of investment, both convent and unconventional you situation in the market was basically over. And when that happens, price is. And it obviously takes a while for that to correct. So 2015 through 2019, you had this big drop off investment, as you said, by about half.
And that kind of corrected that glove. If you go to where we were, 2019, I would say things were not that healthy for the industry. We still had oversupply. And then we had COVID and that was a kind of a really dramatic event. In fact, you had two things you had COVID and just before you had COVID you had OPEC declaring a price war on the us.
So you had this, if you go back through the 2014 to 20 OPEC was reducing its production shale production came on and yeah, basically early 2020 they said enough is enough. We’re gonna open the taps, we’re gonna flood the market, the price collapsed, and then COVID hit. Lockdowns hit and demand went from a hundred million barrels a day overnight to 70, which has just never happened before.
And if you remember, that was also the period where we actually saw negative oil prices. That’s never before amazing. It was quite incredible. So that occurred. And that, I think that was really when I started looking at things and trying to understand what was going.
Because, yeah. Where are we? And that I think served to correct the market. So investment collapsed. Anyone who could basically shut up investment did, and shale is a little bit different from conventional oil and gas in the response time is much faster. So you can turn on investment more quickly and you get production more quickly.
You can also turn it off more quickly and that production falls away more quickly. And that’s what we. In the 2020. So since then, what we’ve seen is, OPEX stepped in they brought production down. And what we’re starting to see now is that demand has come back supply is struggling to keep.
So I’d say, where we sit right now for the market is pretty much balanced. So supply and demand, it’s about a hundred million barrels a day. And, that’s about where we were in 19. If you look at most of the major forecasts of the IA and OPEX example, they’re looking at two to 3% demand growth next year.
That’s much more than we’ve seen historically, you’re talking about maybe one, 1.2% oil demand growth. So we’re seeing, that faster return in demand, but we’re also seeing supplies really struggling to keep up. So OPEC is currently producing about 2.9 million barrels a day, less than it’s supposed to be.
So it’s struggled all year to meet. And so I think we’re in a situation where, in the near term, I think we’re looking to fairly tight market and, there are all kinds of reasons for that. So if you, we talked about investment, so if you invest in oil and gas in the last decade, you didn’t do very well.
Certainly for something that’s considered to. I was at a meeting earlier this year where it was actually referring to as the evil act, the production of oil and gas was the evil act. didn’t you didn’t gain any kinda investment premium for participating in the evil act. In fact, you probably did better if you stayed outta it.
So you’re seeing a lot of the shell companies that, that you are familiar with, which really flooded the market and saw of that investment. They’ve been very restrained in terms of how they’ve invested and how they’ve brought that back. So just to add to the narrative, right?
So going back to 2015, there was also, in addition to the kind of dynamics that you mentioned, there was also a narrative began to emerge. That we had reached peak demand for fossil fills. And it’s laughable now, but the idea we’re all going green and green is gonna work.
And, the developed world is plateauing a course that was in the context of a very slow, a, the great recession of the Obama years as we would, as I call it. So very slow demand growth. And. So yeah, we are all gonna go green. And then as part of that narrative, all the majors, because of the ESG initiatives, as Wal started coming to the forefront, they started, they got all the board of directors that were environmentalists, et cetera.
And so they’ve started taking their capital instead of investing it in In growth initiatives, right? Development initiatives. They put it into green initiatives, which, you can argue, whether that they should have done that or not but they took away investment from traditional fossil fuel investment into perspective, green things that, that have far less Production capacity, right?
There’s far less impact doesn’t move the needle as far as demand where the fossil fuels would’ve. It was, it’s like this perfect storm of narrative that happened right. To reduce the the supply. Yeah. I think that’s true. I think if you look at the I age long term forecasts, they have three forecasts.
And if you look at the net zero forecast, they. That’s not actually a prediction of oil demand. That’s what has to happen to oil demand to achieve net zero in, in, so that’s a different thing. It’s not really a forecast. And that shows if you follow that forecast shows an extremely, a very dramatic decline in oil demand.
It’s declined already now. That’s not actually what we’re seeing in practice. And I think that the as we’ve gone through from 2015 to today, You’ve seen the, sort of the gap begin to open with what’s happening in terms of demand versus what has to happen for net zero. There’s this there’s this ongoing conversation about keeping it within sight.
I think, realistically, if you look at what actually has to happen to achieve that, that, that forecast I don’t really think it’s in. Okay. So just for the for the those of us that don’t understand what really net zero is, and the EIA, just give us a little bit more background on, okay.
On the net zero forecast, some of the dynamics there, because I think this is a narrative that most people think that, Hey, we are getting green and it’s working. And so just give us a little more background on what is net zero. What are the EIA net zero forecast. And what are some of the dynamics there?
Okay. The international energy agency was set up in the seventies during the last oil crisis. That was the oil crisis that was driven by the Gulf states basically shutting in demand. The I, yeah, the was basically formed with a group of member countries to help manage oil. So it manages things like storage, for example.
And since then, of course it’s mandated, grown substantially and it’s now main mission. It’s more centered on helping to achieve the goals of the Paris agreement. So it’s talking about helping to basically show the way to get to net zero. So the idea of net zero is that by 2050, the world should.
Not be emitting any net CO2, so you can still emit some CO2, but you have to then extract that in some way. So that can be either through, planting trees or carbon capture or something like that. And so that is seen to be the target that we have to reach in order to limit limit global warming.
So that’s where that framework comes from and what the I’s been doing is it’s actually got an extremely detailed model, a very detailed forecast that shows. What each sector has to do to achieve that outcome. I’m most familiar with the oil one. So I think the IA Trump last year, that to achieve net zero you have to stop developing oil and gas today.
So what that means is if you have existing production, yes. That can continue. But no new development or exploration, so no new Wells. And as you mentioned, Bob, at the beginning, it’s an extractive industry. Underlying declines are estimated to be about 5% a year, which means that if the world’s producing a hundred million barrels a day and you stop investing next year will be producing 95 and then, 19, so on kinda falls away.
So that’s the kinda a, that’s the picture. If you say, is it realistic? Is it realistic? It sounds insane because there’s not enough green replacement, right? Yeah. Yeah. I think if you look at it, if you look at report I think about 60% of the reduction in carbon emissions comes from technology that doesn’t currently exist and what you have to do in terms.
Moving the economy to that place in terms of rolling out electric vehicles and renewable energy. And, you start to you have to restrict people’s lives to an extent that I think might be difficult in a democracy. So for example, do you really need to fly four times a year and you start to get into this?
Are we gonna start rationing flights and that kinda thing? So it’s quite it’s really quite an extreme. So the cost of doing this, depending how you calculated something between three and 8 trillion a year so it’s a huge thing and I. I, I think, honestly, it’s just, you look at, it’s just too expensive.
Okay. And it’s too expensive, but is it even realistic? It, it presupposes demand decreasing and it’s not so no. How do they deal with that? The. Is the idea that no let’s go net zero and that means we’re gonna stop investing in energy production, meaning, and then we’re gonna start seeing declines.
Therefore we’ll see prices accelerate to the moon destroying demand, and we will turn our cars in and start buying horses at donkeys. And we won’t fly. We don’t fly anywhere anymore, is that what they’re anticipating is? Yeah. Let’s destroy demand. By destroying supply. Is that the concept?
I think that maybe was the concept, if you, no one told the American voted on that.
Just Kings out there. I guess the wannabe elites, right? Yeah. I guess the kinda unfortunate thing about it is when you talk about CO2 emission, the oil production of oil and gas does not emit a lot of CO2. It’s using the oil and gas as it’s supposed to be used, emit CO2.
And so that means if you wanna stop emitting CO2. You need to basically everyone needs to stop using oil and gas and that’s, there’s not really in my, any way to do that. A very good replacement for that right now. No, there isn’t. But from a political point of view, rather than saying to everyone, you need to stop using oil and gas by imposing say attacks on carbon, which would be, a rational way to do that.
They, as you’ve said they’ve basically attacked. Through a combination of regulation some pretty ferocious rhetoric as well about, we’re moving away from yeah. The evil activity here. You’re evil actor, fossil fuel extractor, and you’re yeah. To try. And to deinvest from the.
Wasn’t John Kerry, running around trying to get banks to not to defund and not fund new oil and gas investment. Yes. Yes. Wasn’t this, isn’t this just still ongoing. He’s still doing this. Yes. Oh my God. While they’re asking Venezuela to boost production, and with all their human rights, horrible track record and oh my.
That’s the problem. I think you’ve you hit the nail on head, though. If you push, if you impact supply before you’ve reduced demand, you have what we have today, which is, skyrocketing prices. So it’s the secret agenda. No one talks about it.
They just whisper, Hey, this is what’s gonna happen. And we all know, but no one’s ever saying that. Yeah. I think Joe Biden did, I think he was in Japan and he accidentally admitted.
Are gonna be required to to get you to net zero. He said, it’s gonna be tough for a while but we’re gonna get there, yeah. It’s everybody’s what are you talking about? So it’s this kind of a lead the Davos crowd, if you will, or creating this secret agenda.
And it involves basically, we’re gonna, we’re gonna take oil prices to the moon and that’ll destroy demand. And it will, it will, oh, absolutely. If it costs you, $500 to fill your gas tank, you’re not gonna be driving very far. No, you might start looking at donkeys and horses, yeah. To get around down yeah. That’s exactly right. But I think, I think this year, perhaps I’m a little hopeful has been something of a realization. People are just not gonna, they’re not gonna go this way. They’re not gonna go there double or not. Yeah. Once it starts. Cause the thing about, oil and gas is they feed to everything.
Yeah. Whenever you transport anything, plastics any kind of mobility, those costs will eventually feature the system. If you look at inflation, the largest component right now is energy.
Yeah. And energy is I call it the mother of all commodities because everything takes oil. If you’re gonna produce grain you’re gonna, you’re gonna use diesel powered harvesters, Everything takes oil and transportation, even windmills. You’re gonna put in a new windmill while you’re gonna, you’re gonna, you’re gonna create that steel and a blast furnace.
That’s coal fired. And then you’re gonna, you’re gonna transport that on a convoy of trucks that are all diesel and hoist it on a diesel powered crane. And you’re gonna do that every 15 years. Yeah. To, It. So it takes this massive amount of oil. And so if oil prices are high and well, one if oil is not around, you can’t even do grain.
And at this point, at least and if oil prices are high, everything is gonna be high. So in doing this, you’re basically ensuring and elevated. Price regime and very inflationary price regime. And so this is what we’re, where we’re ending up. And it seems to be, this is by design at least partially I think you narrative
Green energy is not only clean, but it’s also cheaper. And in order to present it in that way, You’ve gotta be very selective in how you look at what it costs. Yeah. Take wind power, for example, it probably is cheaper to build a windmill and have it run for 15 years, probably cheaper than building a gas power station and buying the gas to supply it, but that doesn’t account for the fact that you have to have a redundant source of power for when the wind is not blowing.
And so if you factor that. I’ve seen between the economists, for example, that wind power is closer to nuclear in terms of cost. I think people have been told this is cheaper. But I don’t think it actually is. And if it was, we’d be doing it already, Yeah. And, solar’s coming along, but it’s still more expensive and takes a lot of real estate.
And there’s only certain geographies that are suitable. People forget this. They’re trying to put solar in Northern Germany. Good luck. That’s like. The north pole practically. There’s not a lot of sun up there. Yeah. And so people are there’s wishful thinking more than there is mathematics sometimes in, in the green crowd.
And here’s a stat that I ran across. So last year, 4.4% of new vehicle sales. In America or EVs 4.4, but used 65% of global lithium production. Yeah. Which was a record. Yeah. And it was, I think is the EIA that was saying, we need a 40 times growth in lithium. Yeah. And something like 20 X in copper.
Yeah. And which is, are all very dirty industries by the way, and require oil. Or in the intensive industry. Yes. And so we’re seeing, again, there’s this reality that you can’t get a lithium mine permitted right now there’s two lithium mines in America that can’t get permitted because of environmentalists.
Yeah. Imposing it. And, but these are the same environmentalists that are telling us we’re gonna be all on EVs that you can’t create without lithium. So there’s just really. Some nonsensical thinking that’s happening. And I’m an engineer by background. So I just think practical, idealism takes you so far.
I idealism gets you excited, but it has been workable right at the end of the day. . Yeah. And so we’re missing the mark in, in, everyone wants to be green, who doesn’t wanna be green. I wanna be green, but it’s not ready yet. And and. I think there was a paper earlier this year by baker seed at rice, and they about valley of energy transition.
There’s not enough oil and gas supply costs going up. People are talking about brown ads and black ads. People can’t buy a vehicle. That they can afford without subsidies and so on. The kind of it’s over promise and the over promise and the implications and impact of the over promise may actually set back the whole transition significantly.
We’re. Normal people say, no, I don’t want a green transition. I need to put affordable fuel in my car to go to work. Yeah. I’m happy for example, to fund a green transition, but not if it costs me five or thousand a year to do it. Just not something. So go ahead, Beth. I was gonna say it.
It’s interesting. Going back to one thing you said earlier where the IEA. Three different projections, right? And the one you spoke about, which is the one that’s, purporting this green energy transition is pretty unrealistic. And that’s, to satisfy all the, the green pun that, so to speak and to satisfy this narrative, but the reality, and you said earlier that demand is actually projected to increase.
So it’s this false narrative. Hey, this is what we’re doing. This is good, but it’s separated from reality. And the fact that they have three different projections is comical to me that that’s right. You have your wishful projections and your real ones and right. And let’s plan on the wishful ones, have no basis in reality.
The real one is called stated policies. So the real one is basically it’s supposed to reflect what’s currently happening in the. And that projects demand will continue to grow to the mid 2030s. And at that point, wow. OPEC and the IA, they just, it kind of flat lines.
Like they’re not really sure what’s gonna happen next mean projection projecting is difficult. So I think I give them that, but the yeah, they are generally speaking, looking at demand growth, at least, 10, 15. I think I’d like to transition there. We’ve talked about kind the current environment, but where do you see this going long term, say five, five to 10 years in this kind of current environment that we’ve talked about, under capitalized reinvestment into new production and kind of this forced transition to green that maybe unrealistic.
Meanwhile, we already sit at pretty elevated oil prices and gas prices. What, where does it go from here? I’ve been seeing headlines of oh, energy prices of ease pretty heavily since the highs a month ago. And we’re going back in the right direction. And so it’s kinda oh, we got over that hump, but are we over the hump or is this, you know what’s gonna happen from here?
I think you’ve got you’ve got a couple of things there what’s kinda medium terms of say through the mid thirties. But you’ve also got the kinda the price will bounce up and down throughout the year, based on event. So if we think about the medium term first I think my expectation is we are gonna see still increasing demand, and I think we’re gonna see a return in.
So I think we are gonna see money going back into oil and gas. And I think if you look at some of the signals coming from Europe, for example take shell. So they had a called Jack in the north sea that was not permitted. So it’s a gas field and it was not given permission to proceed.
That was reversed by the UK government. So now its it’s permit that it’s going forward. Once they turn off the oil from Russia or they gas from Russia, like from Russia, Hey, maybe we need gas from somewhere else. Yeah. There, that kind of. Switch, it’s just, it’s the reality, as you said, but you’re an engineer.
It’s kinda, you can take the politics of it so far, but eventually yeah. You need the fuel from somewhere and so I, I think we are starting to see that happen. I think, one of the interesting things is what’s gonna happen to the big international companies. So I think Bob, you made the point earlier that they have.
Trying to transition some actually they’ve been trying to transition at different speeds. So the European majors have been going further and faster, I think because the political environment they exist in is simply demanding it. Whereas if you think about Exxon and Chevron and Cono here, they’ve been more.
Okay. Maybe look at things that are adjacent to our competence. We intend to remain as oil and gas companies. So I think you do have a kinda divergence there. I think some of the hostility perhaps to the industry has maybe started to E a little bit. So I think you are going to see more willingness to invest, certainly for the next decade.
I think what you’re gonna start to see with international companies is they’re gonna start thinking. About their exploration portfolio around the mid twenties. So if you think about the life cycle of oil and gas projects, if you start exploring for something in, you, maybe expect a discovery in 30 and it maybe comes on in the late thirties.
That’s perhaps as late as you wanna think about doing things. So I think you’re gonna. A continued reluctance to explore outside existing basins, but I think you’re gonna see some more money going development. So I do expect to come back. I think the, but that takes a while to your, that takes a while.
What we’ve seen with shale is after a very drill baby drill period, which was, quite well documented where it was all about growth and land capture. It’s now much more of a a mature industry. That’s really throwing off cash. So I think you can and you see now they’re not cranking up a production.
No, because they got punished for doing that twice, right? Yeah. By the market, got the SmackDown and they’re like, okay. Fool me once fool me twice, but I’m not gonna do this again. Yeah. I was talk talking with a guy who’s a consultant in Andrew space and Houston, a lot of the kind of majors are reluctant to.
Lever up. So basically to add debt to their balance sheets yeah. To create more cash because they, they’re a little gun shy after what happened a couple years ago and then just the overall kind of narrative toward not drilling. They’re more reluctant to maybe drill cuz debt can be used to accelerate the drilling and other things.
So it’s, there still seems to be a reluctance that may take a while to. Shift back to the exploring production mindset. You are you seeing that as well? You’re on the advisory side. Yes. That’s
just blow off cash and and that’s what everyone’s been doing. And. What happens when you have periods of high prices that cash stops to build up, you return it to investors, you pay down debt, and then you start to think, okay, what do we do now? And you’ve probably seen some of the headlines, oil companies are profitable prices, very high people are suffering.
That’s a, having record profits while people are talking about energy crisis, Is really not a good place to be. So I think you’re gonna start to see I think some investment. Yeah. I think you are gonna start to increased investment. Yeah. Just because no one likes the narrative. Yeah, exactly.
No one likes the narrative. And I think, you have Joe Biden going to, as you said, Venezuela and Saudi Arabia, I’m saying, can you please boost production? I think there is. There is a sense that perhaps the hostility of the industry is kinda beaming back a little bit, because there really is no alternative right now to, to that oil and gas supply.
And so demonizing the industry is just gonna, is just gonna drive up prices. So I think you are gonna see investment return. Now, if it gonna be 1.1 trillion a year that’s probably more than we need, but it’s probably gonna be more than it’s. One of the other thing to think about is who is gonna be making that investment because a lot of the major oil companies it really isn’t greenwashing.
They are very serious about this transition. They’re turning themselves into utilities, almost in an attempt to survive in, in the long run and using the legacy oil and gas business to kinda fund it. So you might see some new entrants coming. You may also see national companies, I think kinda stepping in and they may be the really big winners here.
They may be the ones who who actually end up holding the line, show the production, and then the national companies, meaning, meaning who national companies. So for example Saudi Aramco, Saudi it’s extremely well run company, very capable. You also have.
There are lots of them Petro example in Brazil is grow production. Yeah, I think you might see those companies because they have capability and they also don’t have the same sort of pressure ESG pressure to, to exit the industry. I think you also say, I think perhaps XON and Chevron, there’s a question mark in my mind about whether.
The competence you have as an oil company, really transitions to being what is essentially utility, is that is that a viable shift for the company? And I think that’s maybe still an open question and that’s why you start the season. Agreed how these companies are working. So now your kind of near term outlook is a little different than what I’ve, what I was expecting and what I’ve been reading.
So you, I dunno if you’ve seen the latest research from Goldman Sachs. They’re calling for $140 bear oil. They’re basically saying for the last two years, production has not matched. Demand and that we’re basically on, the inventory has been steadily declining yeah. For a little over, over two years now.
And in fact that mark the market is so tight right now. That’s why you’re seeing pretty much ex the most extreme tango and the futures markets that you’ve ever seen. And that’s. Basically the oil for near term delivery is much more expensive than oil for long term delivery. Yeah. It’s because of the tightness of the market.
And every time that happens, they point out their traders point out that basically is signaling higher oil prices. So my expectation has been for higher or higher oil prices in the near term because of basically. The shortage in inventory and their statement also is that they don’t believe production can be increased in the near term.
That there’s no more spigots to turn on that it’s been turned on as much as it can do. Of course, the wild card is, we’re on people think that Saudi Arabia can. I don’t they I think they’re at max production and then Russia. So what, why are we differing in our near term view?
So I think if we set aside so let’s set aside things about Russians. So I think, what we have is, as I say, it’s a market that this year is essentially balanced. I agree. It’s. I think things have come down a little bit recently because people are expecting lower economic growth over the next couple of years, perhaps a recession in the us.
And so demand estimates have been aging down, but I think this year, I think we’re more or less. Okay. I think the next two years is when we’re gonna see things get, get really tight because we’re seeing that demand growth come in that two to 3% demand. And I do agree that there’s a really big question mark about, so the only people who really have spec capacity plus, and there’s a really big question mark, about how much spec capacity they genuinely do have.
And that’s because there’s been this lag between what we’ve said we can produce and what we are producing. Now, most of that lag. So most of the Gulf states, I think their targets. So if you think about Saudi Arabia, the Emirates Q eight has struggled. I think they have some spec capacity, but we don’t know how much.
I think what really throws things off though, is you take that base picture and then you bring in what’s happening with Russia. You go back three or four months, the IEA expected Russian sanctions to knock 3 million barrels a day off global supply. And that, there really is no replacement for.
And so what we’ve seen is that really hasn’t happened. So what’s happened is the oil has it’s maybe been sold somewhere else. It’s maybe been sold at a discount, but the markets kinda rotated. So rather than selling to Europe and the us Russian food is flowed that to Indian China, if Russian sanctions ramp up.
So if there really is that kind of, if they really can stop those exports. Yes. I think you’ll see one 40 you’ll maybe see higher than one 40, because you’ll actually be, yeah. You’ll be seeing physical shortage. And if you look at, global storage, it is, it’s now below five year average.
I so yeah, there’s not much of a much of a sort of margin there. Okay. So we’re just coming up to the end of our time here, but, oh, sorry. The energy map is clearly being redrawn. So let’s talk about Europe. You’re a Brit, right? So you’ve got a little bit of the north sea oil and, but the rest of Europe pretty much, there’s no energy, except what comes a little bit from America.
A little bit from Africa, a little bit from Saudi Arabia and most from Russia, that map is being redrawn and the Europeans have, it’s suicidal what they’ve done as far as. Their support for Ukraine, suicidal, economically. As and if they continue on this path, which it’s, I don’t know, my tea leaves don’t tell me which way they’re gonna go, but there they’re literal.
There’s gonna be a massive energy shortage there. Isn’t you have to take oil from. From from existing places, primarily Asia is the only place that you know, that they’re gonna lose their oil supply. So it’s clearly the energy map is being redrawn. And as a Brit, maybe you can speak to, what is Europe going to stand fast on this?
And if so, how is the global energy trade map going to shift? And can it even sustain. I think that’s an excellent question. So if we kinda think about Europe right now you have to differentiate between oil and gas. So oil is much easier to store and transport than gas.
And so it’s much easier to redirect those flows than that, that, but somebody still has, if somebody’s a loser, somebody is a loser. Yes. But you can ship oil. The us to Europe, for example far more quickly than you can ship L from the us Europe. And Europe is in energy production terms now in net import Norway, the really the biggest of Britain is the next beyond that there’s not a lot of domestic production Grogan against shore gastro in Europe’s being closed or is shutting down now.
And probably won’t reopen. And so the kind of crunch for you right now is really gas and how you redirect gas flows. And the unfortunate thing is you can do that. So you can take supply from the us. So you can build an L and G facility. You can take supply from north Africa, but even that takes years, L and G facilities are massive, expensive, difficult to make that.
That is the problem. So it’s not just so say it’s a four year build. But you also have to permit it, which is, not an impossible it’s years to get these things off the ground. So there’s no kinda quick LNG solution. There’s build outs going on in that’s build outs going on here, but that’s not gonna deliver things quickly.
Pipelines are quicker, again, not immediate. So I think what the what they’re facing in Europe now is the reality, is that okay, maybe we’re looking at coal again, maybe we’re earning oil and gas, power stations, nuclear so the nuclear fleet needs to be extended, but I think, you are also gonna have to see changes in behavior.
Talk about, they’re not heating swimming pools and turning down the lights and, thermostats and that kinda thing. I think that’s a. The unfortunate thing about gas is because your pipeline are linked buyer and seller, in, in the main, in Europe to Russia, you really you don’t have a lot of recourse.
The unfortunate thing is Russia makes far more money from oil and gas. It can afford to they turn it off. They don’t lose. But Europe loses. Yes it’s I don’t see how this doesn’t create an economic crisis in Europe, just the loss of gas alone, because it’s so neat.
It’s so used in industry, right? Yep. And in, All kinds of plastics, production and all kinds of industrial processes, and there is no replacement. So you’re gonna see a major kind of industrial setback in Europe. And I don’t see that global supplies can fill the gap and gas or oil. Do you think, you’re not a politician, do you think Europe is gonna stay the course and stay the, stay, the sanctions, route support sanctions and and And if so, can they weather it?
I’m not a politician. I think they will. I think they’ll stay the course. They do seem very resolute. Yeah. So it’s a continent with a lot of history and when things like this happen, people can still look back and remember, the forties and the twenties. I think there will weather course.
I think there will be a tremendous amount of pain. And I think, what they’re gonna have to do for power generation and heating is really gonna, you’re gonna be forced to move actually away from, to dirtier sources, coal, for example, coal. Yeah. And you’re gonna have to accept nuclear power, I think as well.
Yeah. If you talk about CO2 emission, Ultimately the base load solution currently is nuclear. So power is one thing, but what about oil? Oil is the, there’s no replacement for oil as far as transportation, right? No not today. No, but as I say oil, you can redirect oil flows.
Relatively simply, but from who from where. So what ends up happening is that, Russia sells its crude instead of selling it to Europe and the us, it sells it to India or China. And the crude that China, India would’ve bought from the USOs Africa is redirected to Europe. So you see this kinda rotation in supply.
So it’s a little bumpy. Your view is they can weather it, but it’s gonna be very painful. I think the is much more of an issue. It’s gonna be very painful. And I think it’s really brought security of supply to the forefront, which is something that in the us the us has a tremendous strategic advantage.
It’s the world’s biggest oil. Know, produces vast quantities of gas. That’s an incredible advantage that that Europe doesn’t have. And actually that China doesn’t have either. Yeah. I think it’s important that there is the big winner is gonna be the us. It really is. It be and us energy because yeah.
Yeah. We don’t have oil transportation issues. Yeah. And Wow. So interesting. It should be as long as we don’t hobble the industry over the next few years. Yeah. It’s important to remember that being self-sufficient is it’s valuable and yeah. Awesome. Robin, this has been very enlightening, and really appreciate you coming on the podcast.
If you’re okay with it I love the white papers that you wrote on your 2022 forecast and your long-term demand for oil. And we might put in the show notes for listeners to be able to read and see some of the work you’ve done. And then what’s the best way for folks to reach out to you?
They can go on the site and there are links there. They can contact me. And, yeah. So thank you. Thank you much for the time I thoroughly enjoyed the discussion. Thank you, Bob. Thank you, Ben. Thanks, Robin.
Wow. That was really fun. That was a great conversation. A lot of meat, my head’s spinning with all the things that he was saying and just really looking at, these pieces and these layers that are just continuing to add to the dilemma that we are seeing.
And unfortunately, we’ll probably see for some. It’s really fascinating time. Hopefully, enjoy this episode and as always, we appreciate your support. If you could leave us a review that definitely helps us get more visibility to share this content with more listeners. So thanks again, tune in next time.