Top of Mind: How Will Middle East Conflict Impact Oil Prices?

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Ben Fraser: Welcome back to another episode of the invest like a billionaire podcast. Today, we’ve got a top of mind episode for you, and we’re going to be reacting to a question that we have been getting from our investor base and listeners probably multiple times a day for the past week or two. It’s making headlines, right?

The Middle Eastern conflict with Israel. I swore a lot of things we get, go into that around, but really focus on energy. Because we’ve talked about energy a lot. This is a big area that we see opportunity, but how does this impact the thesis that we’ve been talking about for a while? So let’s dive right in.

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Bob Fraser: So as everybody’s aware Hamas invaded Israel, and of course it’s the Middle East, and the major oil producing areas of the world.

So the big question is, yeah, what’s going to happen to the oil price? I’ll give you the short answer, and that is not yet. Not yet. It’s going to affect the oil price. But it, could it? Absolutely. Just as a reminder, I don’t know if anybody was around in 1973. I actually was, and Israel retaliated, they did a big counteroffensive very similar to what’s happening now in 1973.

And it sparked the Arab

oil embargo where OPEC basically embargoed oil exports and put the world into a massive recession. Okay. The big question out there is what are people thinking? What is Saudi Arabia thinking? Now today. OPEC is not the force that they were in 1973. So OPEC is still a large oil producer, but they’re no longer the dominant force.

They only produce I think Saudi Arabia only produces about 15 percent of the world’s oil. So it doesn’t 

Ben Fraser: I think it’s an important point to make because most people don’t realize when we’re talking, different conferences and events. And you ask, who’s the world’s largest oil producer?

No one realizes that it’s the U. S. 

Bob Fraser: People still don’t realize that. Yeah. So just today, the stats came out that the U. S. produce is producing 13. 2 million barrels per day, a record. So literally U. S. is setting production records right now. Yeah, and the world’s largest oil producer, I think it’s about 40 percent more than Saudi Arabia.

So people don’t realize this. So the bottom line is, there’s no question Saudi is a very big actor on the oil stage, but they’re not the oil actor they were in 1973. So big question, what’s, what is Saudi Arabia thinking? So prior to this war. Saudi Arabia and Israel were having normalization talks.

They were actually talking about, normalizing relations and, re approachment and super positive, it would de escalate everything and then this war happens. In fact, that could be one of the causes of the war is that, to basically… But, put a kibosh on the talks between Saudi Arabia and Israel.

So that’s happened now. And there’s also a question on Saudi Arabia’s leadership, right? So Saudi Arabia is in the middle of a transition where the new Saudi prince is really stepping forward and taking leadership. But, most people believe that he’s ready to move on and, hey let’s move forward and not worry about the previous conflict of the last decades.

I’m oversimplifying where the old guard is very much opposed to Israel and all that. So the big question is how much authority does, how much say does the new guy have relative to the old guy. So we’ll see. And so far, it’s pretty silent out there.

So we’re, so right now it’s not a big deal. One, because it’s a little teeny war, relative to something like World War II or something. It doesn’t use a, doesn’t create a lot of extra demand, for oil, number one. Now, if the entire world globalized their, mobilized their armed forces, including the United States, the Navy, the Air Force, and the Army yeah, it’s going to drive demand.

But it really doesn’t. It’s a very small conflict that doesn’t significantly impact demand. What about supply? Will it change supply? And the answer is, Israel is really not an oil producer. They actually produce only about 6, 000 barrels per day relative to, 89 million barrels per day global production.

So yeah they don’t count. So if their oil production gets disrupted, it’s a nothing, so they’re there, around the horn of Africa is the Strait of Hormuz and then there’s the Suez Canal, which cuts through Egypt, right through Egypt. And it’s, that’s literally right where the conflict is Gaza is right there at the border of Egypt and Saudi Arabia.

So it’s right there. So there’s the Suez Canal cut through. But again, what you got to realize is the oil market is humongous, right? So roughly 5 percent of the oil is transported across the oceans. It goes through the Suez Canal. So again, it’s significant, but it’s not complete, it’s not the majority of the supply. And it’s not that apocalyptic scenario, right? It’s just, it would be a problem. So that one is the Strait of Hormuz and, or the Suez Canal, what happens there. Right now it’s not closed. Could it be, the Palestinians, Hamas is not very sophisticated militarily.

They don’t have an air force or a Navy to go shut things down. And presumably that would be a very, a lame exercise. Anyhow, when you’ve got an American aircraft carrier there what are they going to do? This is You know, the world’s most powerful force, mobile force is sitting there So I don’t think they could do anything as is but if the if it escalated, you know could there be you know big problems and you know I will you know, I don’t think Saudi Arabia would actually want the Suez to be close because they, a lot of their oil flows through there to Europe and to the United States.

So who knows? The other big question is Iran. And here’s some of the conflicts. Anyone who knows the history of the Middle East, there’s the Sunni and the Shia and the Shiites, Iranians are Shiites and they’re considered heretics by the Sunnis. Major heretics, right?

It’s not just, Hey, you’re just a little, it’s another denomination. They’re Anti. And Iran is backing Hamas, but Hamas is Sunni. What’s going to happen if Saudi Arabia sees a lot of Sunnis being killed? Honestly, I think a lot of it depends on it, and I’m not a geopolitical commentator, but I think a lot of it depends on how brutal.

Israel’s responses, right? If the world turns against them, I think we could see this escalate and Saudi Arabia could get the world’s attention to the atrocities by squeezing the oil price. Could Iran invade or get involved in the conflict? It’s a little hard to imagine that happening.

They’re already such a pariah. They don’t really have the ability to project power militarily; they’re primarily a terrorist nation. They just fund. These things and again, they are, they’re anti Sunni, which is Hamas. They’re backing Hamas only just as a chaos creator. I don’t think they’re.

Really excited about Hamas, right? So again, this is just my, my, my speculations. And then the other side, okay, that’s the possible, that’s the possible loss of the production side. But what about the other side? It’s possible if oil goes into above the hundred dollar range, that the Saudis would actually start, boosting production, and bring it down.

And who knows? Because they don’t want to, they like a high oil price because it’s more money in their pocket, but too high, you push the world into recession and then their demand goes down and crashes. Pockets. So it’s a little balanced. And what’s happening, ever since the shale revolution, in the mid 2000s there in America, we’re no longer dependent on Saudi oil and then neither is the world really.

So who knows? But the bottom line is. It’s a non factor today. Could it be a factor? It definitely could, but it would require significant amounts of escalation. And so we’ll see. 

Ben Fraser: Even to your earlier point, if there is a significant amount of escalation, the impact really from a supply standpoint would be a lot less than it was in the seventies when the U. S. wasn’t a dominant player in space. And, if we have higher oil prices above a hundred dollars, I’m not really sure where that kind of price point to rebuild inventories and to stoke more development, but it might actually create more supply, not just in Saudi, but other places.

Bob Fraser: But as we’ve pointed out in our megatrends talk, and if you haven’t heard that you’re listening to this, you haven’t heard that you definitely need to go do that. I’ll listen to the Megatrends talk so that they, that even if prices spike up, we’re not going to see an increase in supply globally because there just is not a lot of capacity to do that.

And why is that? Because the world has stopped spending money. To develop oil fields and if you stop spending money, decline because everything is being depleted.

Ben Fraser: It’s fascinating. Obviously, we’re early at the point of this conflict. And so a lot of things to bear out here, but wanted to provide some early insights as we are getting a lot of questions. And so we do appreciate those that have reached out that are asking the questions.

We love to be responsive when it’s helpful and hopefully this was helpful. Interesting. And if you haven’t watched the full Megatrends presentation, we go very in depth on the energy case. And again, we ultimately want to be sellers of oil. We think the probability of prices going to the upside is very high and a good place to be as a capital.

Bob Fraser: When you say sellers of oil you don’t mean selling oil investments. 

Ben Fraser: Yeah. I, We want to be producing oil and selling it to the market. 

Bob Fraser: Yeah. It’s, if you’re not, if you’re not slaying an oil right now, you’re going to regret it. You want to be in the oil space as an investor. Yeah. 

Ben Fraser: If you want to just really quickly comment on natural gas, because a lot of times a lot of people conflate the two or I would say oil and gas investing and it’s the two kinds of totally different commodities.

And I do know natural gas has. It’s spiked a lot recently, oil has remained high, a little bit higher than it was, before the conflict, but not dramatically. You want to just touch on natural gas. 

Bob Fraser: Yeah. So natural gas is very different from oil. Very different. So natural gas is extremely volatile.

It will spike up a hundred percent and then drop a hundred percent. It’s just, it’s over the map. And the reason is that natural gas. is primarily a local commodity. It can’t be shipped unless you do, you basically put it in a giant industrial, refinery size freezer compressor to turn it into liquid.

And this is like taking oxygen and turning it into liquid. Okay. It takes an enormous amount of energy and there’s very little capacity to do this. And then it’s loaded into special tankers called LNG tankers. That ships it and keeps it cold. This is basically refrigerator tankers, and it’s extremely expensive, and there’s very few of these things.

And so natural gas really must be piped in a pipe. It does, you can’t put it into a truck. You can’t really put it into a ship unless it’s one of these specialized ships. You can’t put it into an airplane. So all transportation, 100 percent of transportation. is powered by oil, liquid oil, because it has extremely high energy density.

A little gallon of oil or whatever has an enormous energy potential. Whereas a cubic foot of natural gas, you think about it, it’s a big gaseous cube, a balloon full of natural gas has far less energy and it’s got a lot of volume. And not that much energy. So it’s great if you can pipe it from where it’s produced to where it’s consumed.

So most natural gas in America goes into industrial production. It’s used to produce plastics. It goes into our power plants. We were laughing the other day at a guy, talking about, we, we asked him where do power plants work, he was talking about electric vehicles and where does he get his electricity, he said from the wall.

And he said, where does the wall get its electricity from the power plant and where does the power plant give its electricity? And he was befuddled. And it turns out it’s primarily coal and secondarily natural gas. And so these natural gas, just big turbines that burn natural gas or boil, or create, steam from water and turn giant turbines that turn generators that produce electricity.

So it is the, and the thing about natural gas production is it can be spun up and spun down. So these turbines, you literally just turn it on and it starts producing electricity. You turn, people start turning off their air conditioners, you turn it off, and so coal takes much longer to turn on and off.

So it. Natural gas is the kind of marginal producer, but just your marginal supply in electric production. And the other thing that people need to realize, is why, so natural gas, the price. I haven’t seen what the price is recently, but a month ago it was, 2.

50 in the United States, but it’s roughly four or five times that much in Europe and in Asia typically. And the reason is they don’t have any of their own and it has to come in through, through, these expensive means. So again, it just, America is the Saudi Arabia of natural gas and coal by the way.

So yeah, so very different commodities. If you believe in energy and you want to invest in oil, then I would suggest you invest in oil. All right. 

Ben Fraser: The other ones. If you’re enjoying this podcast please leave a review, and share it with a friend. We always appreciate that. And please subscribe if you’re not and tune in for the next episode later this week.

Thanks so much for joining.