Seeking Alpha Article – https://seekingalpha.com/news/4012973-exxon-saudi-aramco-ceos-refute-forecasts-for-peak-oil-demand?lctg=626fcf8c8f7f1c6677068fd9&mailingid=32757025&messageid=wall_street_breakfast&serial=32757025.2223025&userid=56458384&utm_campaign=wsb_09_19_2023&utm_medium=email&utm_source=seeking_alpha&utm_term=wall_street_breakfast
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Ben Fraser: Welcome back to another episode of the Invest Like a Billionaire podcast. I am your co host, Ben Fraser, joined by fellow co host, Bob Fraser. Today we’re doing another Top of Mind. So these are short and to the point topics of discussion that we’re reading, seeing, and things we’re kind of having conversations about offline that we love to share with our listeners. And, you know, a topic that is just kind of front and center for a lot of reasons, especially it’s something, you know, the consumers are feeling when they’re going to the gas station every couple of days, filling up their pump and seeing those prices tick up.
And, you know, we’ve seen this happen, you know, last summer, and it’s really a long term thesis that we’ve been talking about on our podcast. Some of this won’t be new, but it’s interesting to kind of see what’s happening in real time. So, What’s happening, Bob? We got oil prices going up. We’ve been hearing about OPEC cutting production.
Meanwhile, you know, we’re saying we don’t need to drill. We don’t need more fossil fuels. Like what, how do we make sense of all what’s going on here?
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Bob Fraser: Will prices hit 100 a barrel this year, right? That’s a question a lot of people are asking. In fact, I was just on the phone with a Wall Street Journal reporter yesterday, and he was asking that question, what was our forecast on energy prices?
And and so it’s very interesting, you know, there was a, there was a brand new article coming out. By, at, from oil price. com and they point out that there’s, there’s supply, supply shortages elsewhere, everywhere. So let me see here. It, it says, It says what all the forecasters have in common is that all of them point out a discrepancy between the demand for oil, which has remained strong and supply, which has become increasingly constrained and at a time when governments and the West are making a huge effort to reduce that demand and supply as well.
So this is something we pointed out well over a year ago that you’re seeing, that we, we’ve seen for the last couple of years. Demand has exceeded supply and so we’re seeing oil inventories dropping. I mean, right, right now, the oil inventories in Cushing Texas or sorry in Cushing, Oklahoma are hitting, I mean, the tank bottoms, they’re just empty.
And we continue to see draws. And we’ve been saying this all along. That basically you’re seeing oil supplies, because it’s been under invested, the investment globally in energy has dropped by almost 50 percent since the peak years in 2014. And so you see this supply curve that’s just dropping like this.
And as long as… And if demand stays below it, you know, then it’s, it’s not going to be a problem, but it’s pushing up against it right now. And that’s the problem. And so we’re, we’re seeing tightness in every area of, of, of this, of this of the energy patch. The EIA just reported that oil production, the Energy Information Administration reported that oil production from the US shale patch was set to decline in October from September after the September average also declined from August.
So we’re seeing, we’re seeing declines. And so, so the big question is, well, aren’t people going to pump more, right? Aren’t people going to, you know, prices go high? I mean, we’re right now in the oil business and the, you know, and the profits are much sweeter. Right. So, but what’s happening is it takes a long time to develop an oil field.
You can’t just turn it on. And so, that’s the problem. It takes a long time to develop these things. Plus, as I was pointing out to the wall street journal journalist you know, you’ve got, you’ve got in the past, a lot of this stuff has been. You know, the drilling is very capital intensive and debt is much harder to find.
Equity is much harder to find for these things. A lot of investors have pulled back because of the political heat and you know, and I mean, it was, it was, it was just in 2020, so three years ago, Biden was basically comparing Oil pumpers to war profiteers and threatening punitive windfall taxes. And then California, they passed the windfall tax, right?
For oil. So it’s like you’re evil if you’re producing oil. Then he comes in two years later and he’s, then you’re evil. He says the oil companies in his state of the union talked about how oil companies were evil because they weren’t pumping enough. Right? Which is it, right? Which is it? And meanwhile, John Kerry is rebuking, you know, earlier this year, rebuking oil companies BP and Chevron for their investment in oil and gas, right?
To go and develop oil and gas fields. He’s rebuking them for that. Well, which is it? Which do we want? I mean, really the, the, the, the administration’s oil policies are, are completely nonsensical and, and self defeating. I mean, so if you’re an oil, oil developer, what do you do? I mean, you know, what do you do?
You know, meanwhile, there’s still, you know, there’s a lot of scars in the oil industry from the 2016 crash, I don’t know if you guys remember, but, but in 2009, you know, we really, that was really the beginning of the shale revolution and this, and this, you know, began to just take off like crazy. The shale revolution, and develop, develop, develop, develop, borrow money, build out these oil fields, and then it kind of hit a bubble, and then it crashed, and in 2016 it crashed, and partly the Saudis were trying to do this, they were, they were, they were, they pumped like crazy to basically punish the shale patch for, you know, taking over their crown.
And, and they worked. And so oil prices crashed to, you know, I believe it was in the 20s, somewhere, depending on which oil price metric you, you’re watching. Well, bankruptcies galore all across the oil patch. Bankruptcies, you know, defaulted debt. And so people are now, the oil patch is like, we’re not doing that again.
We’re not doing that. And then in 2020, you actually saw oil prices go negative during COVID for, you know, a day. And they’re, so everybody’s like, We don’t know, you know, you add, you, you add the whole, you know, oil price volatility to the political nonsensicalness and, and, and, and the political demonization of, of, of oil producers.
And, you know, everybody’s just very cautious to do anything. And ready, you know, happy to let some profits roll in without, without really expanding supply. So, to me what’s
Ben Fraser: So fascinating about it is, I mean, it’s really become, you know, fossil fuels have become front and center political issue. And because of that, it’s this hypocritical oscillation of, Whatever narrative is going to serve the current political agenda, right?
So it’s, you know, when our prices are lower, it’s, Oh, let’s go beat up on the oil companies and serve, you know, the you know, other programs we want to go to support alternative energy sources and green energy, which, Hey, we’ve said all the time that that’s great. We should be doing that too. But then when.
You know, it’s pretty, pretty apparent that supply is limited and we’re seeing oil rig counts go down, we’re seeing production going down, and it’s, to your point, inelastic, it’s not something that gets turned on all of a sudden. So now they flip the switch and say, oh, well these, you know, companies are not doing their job in producing enough now, the customers and consumers are, you know, suffering the pain of it, but it’s, it’s…
It’s so ideologically driven and zooming out to kind of the capital market side of this because there’s been a lot of scars in the industry, but now the ESG narrative, which has really taken hold really the past, you know, five or so years where they’re really having requirements as these big capital allocators in the black stones of the world, they have to invest in ESG driven initiatives as part of the mandates that are being put on them.
And. Just from the PR headlines and investing in the environmental societal governance standards that are very, you know, supportive of degree energy. And so it’s left this huge gap. We’ve shown these charts before, you know, in different webinars we’ve done, but the, you know, not only the supply decreasing, but the private equity funding of new production, which has been the big driver of new production for the past decade plus.
That almost evaporated. I mean, it’s it’s
Bob Fraser: not non-existent and and the big guys the majors are not, you know Every time they try to drill they’re getting rebuked and you know, so what do you do? You know, they’re trying to convert. I mean they’re they’re you know doing green energy stuff But don’t you want your oil companies trying to find oil, you know so here, here, here’s a quote from the chief executive of Aramco, which is the Saudi oil company, who has been a critic of, of the, of the current energy transition as it’s being conducted, said this, he said, the current transition shortcomings are already causing mass confusion across industries that produce and or rely on energy.
Long term planners and investors do not know which way to turn. So Nasser said at the World Petroleum Institute in Canada. Exxon’s CEO was more succinct, quote, if we don’t maintain some level of investment in the industry, you end up running short of supply, which leads to high prices, end quote. And that’s a scenario that’s currently unfolding.
So there’s not sufficient investment. This article goes, goes on to talk about, and you know, here, here’s, here’s what the chief chair of Canada’s Synovus told Reuters, if you want to add a hundred thousand barrels a day of production. You’re going to spend billions and billions of dollars.
So, you know, so people are just like, do you want us to drill, do you want us to not drill? You know? And, and
Ben Fraser: Meanwhile, I mean. What’s the incentive for these oil companies to go and spell this CapEx if they’re just gonna get, you know, their wrist slapped. Meanwhile they’re making
Bob Fraser: windfall tax, you know,
Ben Fraser: And yeah, it’s, it’s, it’s a good time to not do anything right as the prices are going up and they’re in a good position.
So what’s the incentive for them? Right. And it’s, and so it’s just a fascinating time in the industry and we’ve been talking about it for a while, but, You know, it is an incredible time to be investing in this space because of all these dynamics going on. Even if
Bob Fraser: You don’t believe Investors have, have fled.
And that’s exactly the time, right? When there’s blood in the streets, that’s when you want to be, be buying, right? And that’s, there is, you know, so there’s, you know, huge misunderstandings in the market. You know you know, I, I’ll tell you a funny story. I was just at a, speaking at a investment conference last week and sharing some, you know, the economic insights and And one guy looked at me, and I was talking about oil and gas, he looked at me confused, and he said, Well, what about, what about, you know, renewables and, you know, aren’t we, aren’t we mostly all renewable now?
And I, and I said, absolutely not. And he’s like, what, what do you mean? And I said, 17 percent of, of, of, you know, of energy usage or energy source comes from renewables. 17, one, seven. And he was like, what, what, you know, and he said, what about EVs? And I said, what about them? And I said, well, they’re about 6 percent of vehicles sold in America last year.
He said. Oh, okay. And, but aren’t they, they’re a hundred percent free, right? And I said, well, no, where, where does an electric vehicle get its energy from? And he looked at me again, confused. And he says, well, we plug it into the wall. And, and I said, well, and where, where does the, where does electricity come from the wall?
And he said, well, from a plant. And I said, that’s right. And how does the plant make electricity? Long silence, long silence. I don’t know. I mean, I had no idea how a plant produces electricity. Well, it turns out it’s mostly coal and secondarily natural gas, all fossil fuels. And he was like, why has no one told us this?
I mean, there really is a massive misunderstanding about the energy transition and there’s real confusion. I mean, you look at. You know, the Democrats now are reeling because, you know, they want high energy prices. Okay, the liberals want, the climate change folks want high energy prices. Why? Because it helps facilitate a transition, right?
If oil is 200 a barrel, well, that makes alternatives a whole lot more attainable. But on the other hand, it makes life a whole lot more miserable, right? So all of a sudden, if you’re paying 10 a gallon at the pump… Well, I mean, that really hurts people and if you’re, you know, can’t heat your house, et cetera.
So, there’s, there really are two minds right now and, and, you know, and it’s, the policy shows that it’s just complete confusion. So you know, but there’s, there’s no, there’s no question we need fossil fuels. And interesting, you mentioned EST. So I’m just reading this morning an article on the Goldman Sachs CEO is backing away from ESG.
He basically said, You know, we need fossil fuels. You know, he, he, he said, here’s, here’s what he said. He said, this is Solomon, the CEO of Goldman Sachs said, quote, traditional energy companies are hugely important to the global economy and they’re hugely important to them. Hook is important to Goldman Sachs.
We’re going to continue to finance traditional companies for a long time. We recognize there needs to be a transition over time, but that transition is going to take time. He had it. So, I mean, so he’s backing away from the ESG initiative and saying, you know, this, you know, the goals are aspirational and they’re great.
But the reality just isn’t there yet. And that’s really where we stand. I mean, who, who wants to burn fossil fuels forever? Right. You know, we definitely need to quit. Okay. But on the other hand, do we really want to go back to the dark ages? Right. And that’s what, so it seems a lot of the extremists are saying, you know, let’s stop pumping well and let’s all.
Lock our cars up and ride horses. I don’t know what you know, you know ground all the airplanes And of course, I mean, it’s just kind of nonsense really that’s really what we need to do and you know Turn off our factories and everyone would starve. I mean, you know, it’s just it’s not real All right, and that’s what these activists are Or, or trying to see it happen.
Ben Fraser: Yeah, I mean there’s a whole other side of this too, it’s probably beyond the time we have to dive into this episode, but if you look at what has been the primary driver of, you know, global human flourishing and advancement in technology and bringing developed countries into being developed countries is cheap energy and access to cheap energy.
It’s the number one way of doing that and fossil fuels. You know, oil is the most you know, easiest to transport energy and the most energy dense resource that we found today. There’s nothing that can even get close to comparing with it. And it’s just, obviously we need to go after these bigger, longer term goals, but we need to be realistic in the transition and not just.
You know, do this complete switch because it’s not, it can’t happen overnight. It’s, you know, functionally it cannot happen. So,
Bob Fraser: I mean, we’ve been trying to do this transition since the seventies, the oil embargo, the Arab oil embargo of the seventies. And you know, so what are we at 50 years now and we’ve got 17 percent renewables.
I mean, you know, we’ve got a long way to go, you know, and, and I was thinking about this earlier. Okay. You think about a windmill, here’s the ultimate, you know, taking wind and making beautiful clean energy. Okay. But. Okay, well it was made, you know, they had to steal, well they had to get iron ore, and that iron ore mine runs 100 percent on diesel trucks, and diesel cranes, and diesel everything to load it, and then it’s all transported by…
By rail to the smelter, right, which is a diesel, diesel train and the smelter all run off coal and in smelting this, this ore produces pig iron. And then, it goes from there to a, to a factory that produces steel. And again, that’s all run by coal and oil. And then once the steel is made, well, then it’s rolled, you know, and it’s formed and forged and all that is coal.
And then they. Then it’s put on trucks. This giant windmill is put on a truck, and it’s all diesel powered, and it runs to its location. It’s going to be erected, and then it’s erected by a… By, you know, a diesel crane and then it still takes something like 700 gallons of oil per year for lubrication.
I was just researching this. Do you know that? The windmills, you know, it’s like as much as we try, right? And I’m not bagging on windmills. We need it, I like windmills, but the truth is. They need oil, a ton of fossil fuels to work and that’s, that’s as optimistic as it gets, right? I mean, I wish there were better answers.
I’m an engineer, right? I’m an engineer and a scientist by training and I wish there were better answers, but the answers are not quick and they’re not, they’re not easy. And I wish there were. So yeah, we, we are, we are probably in for it, you know, so my conclusion to the Wall Street Journal guy was, I don’t think we’re going to see oil prices sustain above a hundred.
I think that’s probably the cap for this year because the Saudis don’t want to wake up the energy patch, right? In America. Exactly. So they’re going to, they’re going to keep it sleeping. And, and they, they’re gonna, you know, they would probably prompt more to keep prices below 100 to stop the old patch from waking up is my, my best guess.
But we’re going to see continued high energy prices really from now until reinvestment begins. Seriously, reinvestment begins in the home. All right.
Ben Fraser: Well, hopefully you got a few good nuggets out of this episode. We always appreciate you listening and writing to us. If you have other things that you’re seeing, reading and have questions on be sure to subscribe if you are not already leaving a review, if you can help share the word and tune in next time.
Thanks so much.