Nearly everyone is asking, “What’s the deal with gas prices?” Most Americans are feeling the pinch, while energy bills and gasoline prices have been skyrocketing for months. So, what is causing such a dramatic increase in energy prices? Is the Ukraine invasion solely to blame for rising energy prices? In this week’s Top of Mind episode, co-hosts Bob Fraser and Ben Fraser delve into the statistics behind the stories, examining relevant data, major economic results, macro trends, and other critical themes in the energy sector.

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What’s Causing High Gas Prices

Ben Fraser: Welcome back to the Invest Like a Billionaire™ Podcast. Thanks for listening. And today’s episode is gonna be in our Top of Mind series. So this is a series that we try to put out a few times a month. These are shorter podcasts that are little nuggets that we are wanting to share with our listeners things that we’re reading, things that we’re noticing, trends that we’re seeing in the market.

And one of the things that is on the top of mind of most people right now is gas prices. If you filled up your tank and your car, your truck recently, you are feeling the pain and what we wanted to do today, we were read a lot just in just the energy sector right now and wanted to just discuss some of the things that we’re seeing and what is causing this huge spike in energy pricing.

Bob, what is going on?

Bob Fraser: Yeah. So, this is such an interesting time. I’ve been reading a ton of articles and a ton of research on oil and gas. And we’re seeing prices right now around $120 a barrel. And what’s happening. Of course the big story is, the invasion of Ukraine and what’s happened. Most of Europe is dependent on Russia for their natural gas supply and their oil supply.

And so now Europe is appalled and all of Eastern Europe was invaded by Russia. So they’re terrified of Russia. So they’re wanting to distance themselves from Russia and now Russia has shown itself to be a bad actor. They’re so, they’re driving hard for energy independence from Russia.

And right now Russian oil is trading about a $30 discount, $30 barrel discount from other oil. And so what’s happened is the end of the global free trade in oil. So now all the oil map, the oil trade map is being completely rewritten. And so now oil is being rerouted all across the country.

So, we’re seeing going, we’re seeing demand for non-Russian oil increasing and demand for Russian oil decreasing and, all so, we’re seeing this as really a structural change in the oil market. So I’ve been one that has not been very bullish on oil prices over the long haul because of technology.

Technology is simply unlocking more and more barrels but that takes time, right? That takes a lot of time. And so there, so what happens is there’s a shock to the market and at the same. At the same time. We’re not seeing the U.S. producers and the other producers increasing dramatically.

So, the last time oil spiked up like this a few years back, we saw us oil producers ramp up production dramatically. They simply opened the spigot and started, massively producing oil. And, driving oil prices down. And we’re not seeing that now, and we’re not seeing that now.

And what’s happened is, a lot of the oil companies got smacked down and when oil went down, And also we’re seeing this ESG initiative. It’s environmental, social, and governance kind of ratings that are happening, but there’s a huge push in the ESG movement or environmental movement to limit fossil fuel production. And the idea is that if you limit production, somehow you’ll limit consumption and it’s flawed, obviously if they want, if you wanna slow, if you wanna slow consumption. Then slow consumption, but simply limiting production is only gonna create shortages that drive up oil price, which yes, will it’ll, there’ll be demand destruction as prices hit the moon.

But that’s a flawed idea. So there’s this whole idea to stop production. And you saw it with the recent administration not approving oil exploration in different areas, shutting down pipelines, this kind of thing. You’ve also seen it in John Kerry, who’s the environmental representative for the current administration, is literally going around to the banks and telling all the major banks to not fund fossil fuel production. As well as, a lot of the big majors they’re investing very heavily in renewables, which is admirable. We definitely want more renewables. But they’re defunding production and exploration and development of fossil fuels. And they’re not recognizing that you can’t just turn off fossil fuels today, as much as you want to you can’t without creating disruption.

So, what’s happened is we’ve seen capacity reduction in oil refineries. Okay. It happened through COVID. As well as nuclear power plants have been decommissioned and oil production has simply not been invested in. And so all because of this in that backdrop comes the Ukrainian crisis and this desire to get away from this kind of supply squeeze. You’ve got this systemic lack of investment in the future fossil fuels production meeting a supply shock coming out of Russia. And it’s not going away anytime soon.

It takes a while to ramp up production. So the administration is of two minds, right? We hate fossil fuels. Let’s not do any more fossil fuels. And then holy crap, fossil fuels are exploding in, in, in price. Let’s get more fossil fuels, but not from America. Let’s go to Saudi Arabia, Venezuela, these police states with horrible human rights, and let’s ask them to ramp up production.

So it’s ridiculous what’s happening, but bottom line is: it looks like we are gonna be having structural high prices in oil for the time being until investment is ramped up and until, the administration gets a little more friendly to production allowing the banks to finance production and getting these all these big companies that are been on this ESG craze to actually invest a sufficient funds in development of fossil fuels. And what people may not realize is that America is actually the world’s largest oil producer. We have taken over the title. And we’ve thought for years, the marginal production increases. If you want more production, you go to Saudi Arabia and say, Hey, up your production. But, truly America is actually the number one producer.

And, by the way, it doesn’t require shipment, it’s not subject to piracy available tankers, et cetera, it’s here. We really need to ramp up production in the U.S. And it’s also clear it’s making a huge opportunity for small U.S. producers who are not playing this ESG game, and who are happy to invest in production.

So very interesting what’s happening.

Ben Fraser: Yeah. It seems like it’s been a very shortsighted approach to our reliance on oil for energy and the hatred for fossil fuels. That’s a whole other topic, but the transition is gonna take time there. There’s still some inherent disadvantages to renewables that we haven’t solved yet, it’s this very short sided approach. And to your point, they’ve put themselves in a big pickle. Meanwhile, we have some other major supply challenges abroad and it seems to me that. We’re also seeing some structural changes in regards to Russian oil, right?

Because whether the war in Ukraine ends here soon or not, I think the stigma with Russian oil will remain and European countries will not want to do that. So there’s gonna be some changes that are gonna change the power centers of oil production. How do you think that also plays into the kind of supply side of this conversation as well.

Bob Fraser: It definitely does. It’s gonna create a surplus of Russian oil and gas and a deficit of non-Russian oil and gas because no one wants Russian oil and gas. Right now, most of it’s going to India and China who are stepping up in, in Asia who are stepping up hungry for, cheap and taking advantage.

The cheap oil and don’t care about the invasion of Ukraine. But yeah, it’s definitely structural changes happening in the oil industry. Here’s another nuance. So everybody thinks about oil but one of the key fossil fuels is natural gas, and this is gas coming out of oil wells.

But it doesn’t, you don’t stick it into a barrel. All natural gas has to be run through pipelines. So there has to be an infrastructure that’s literally point to point. So natural gas ends up being local, right? All natural gas consumption is local. It’s not really shipped.

So in order to ship it, what they have to do is they basically compress it and freeze it until it becomes a liquid. And it’s called LNG liquid, natural gas, and then they put it on specialized tankers that keep it cool. and basically ship it overseas, but it’s a very expensive process and it’s a difficult process. And what people may not realize is that America is the Saudi Arabia of natural gas. We have tons and tons of natural gas. And so the prices are super high. Traditionally been about $2 per thousand cubic feet. $2 per a thousand cubic feet in natural gas. Whereas in Europe it’s been five, seven times higher and in Japan and other places that don’t have natural gas so there’s a huge disparity.

And so the LNG guys are basically taking this natural gas. Compressing it, shipping it and making the spread, but natural gas now has spiked up. It’s gone up four times in value. So it’s becoming, not an afterthought for local oil producers, but actually a real revenue source. So we’re gonna see LNG becoming more and more of a factor.

But yeah, we just saw LNG prices crash recently and that’s because one of the big LNG factories had an explosion and it shut down for 90 days again, it’s could it get any worse, and but there, There’s not a lot of these LNG terminals that have the te have the infrastructure produce LNG from natural gas. So huge structural changes are happening in the oil industry.

Ben Fraser: Yeah we, just saw too, Goldman Sachs just released their projections on oil prices price per barrel to peak at potentially as high as $160 price per barrel over the summer because of demand. So it’s, unprecedented. It’s not something we’ve seen in a long time.

Bob Fraser: It’s unprecedented and the green revolution as admirable as it is, part of the problem. And so they’re shuttering they’re literally predicting power brownouts this summer. If we have a hot summer and meanwhile, they’re shuttering nuclear power plants and turning all it. It’s, just, it’s like we’re not meeting the energy needs and they’re not replacing the energy fast enough with green energy. And, so this kind of religious desire to, to solve the to create. Renewables is, it’s too much.

It’s let’s do it. Everyone agrees that we’ve gotta get away from fossil fuels, right? Who, wants to just do more fossil fuels forever, but we have to be smart and only limit fossil fuel production in so far as renewables are coming on board and that hasn’t been happening.

We’re gonna have huge shortages in power and in natural gas and in gasoline refinery, really the entire energy stack of electricity production to oil to diesel and gasoline refining, all this capacity has been hampered by, the desire to get away from fossil fuels.

And again, they’re confusing fossil fuel demand with fossil fuel supply and reducing supply does not reduce demand, except if you create a ton of pain, so it’s just a little misguided and unfortunately the poorest Americans are gonna feel, the greatest pain as they are now.

When it costs you a hundred dollars, to Fill your tank. Wow. One of the other things that, that this is gonna massively affect is inflation because the mother of all commodities is energy.

Energy is the main thing that drives crop production, right? Is that drives manufacturing. so if energy goes up in price and if it stays high, it’s gonna drive high prices in everything. And so we are gonna see persistent inflation as long as oil prices remain elevated. So all, in all, it’s a, it’s a perfect storm and this whole world was set up with this these structural kind of weaknesses supply concerns. And then now you add this Ukrainian shock and all of a sudden exposes the structural problem.

Ben Fraser: Yeah, it’s fascinating. There’s, a lot going on and this is something that we’re, paying attention to and potentially even seeing some opportunities as investors. So thanks for joining on this little episode, we’re definitely gonna be diving more into it in in a greater way in the future episodes and appreciate you listening.