January 20, 2020 • 45 mins
The inconvenient truth of oil is that it is still the lifeblood of industrialized nations -- and the price, politics and pollution of it matters. A lot. But one of the funny things about oil is how everyone who dares to make predictions has one thing in common: They’re wrong. In this episode, Bethany talks with Liam Denning, a well-known Bloomberg opinion columnist covering energy, mining and commodities.
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Speaker 1 (00:01):
I'm Bethany McClain, and this is making a killing interviews,
exploring the headlines you thought you understood, and finding the
long term lessons we can all learn from today's business stories.
I'm at Bethany mactwelve on Twitter. So here's a really
inconvenient truth. Oil is still the lifeblood of industrialized nations.
(00:22):
From driving your car to heating your home, to getting
those Amazon packages delivered to charging all your devices, modern
life still depends on fossil fuels. One of the funny
things about energy markets is how everyone who dares to
make predictions usually has one thing in common. They're wrong.
Most famously was two thousand and five's Twilight in the Desert.
(00:44):
It was written by a really serious, smart analyst, and
he predicted rising oil prices due to sharply declining Saudi production.
In the mid nineteen nineties, there were congressional hearings featuring
politicians and economists who were hand ringing over pending shortages
of both oil and natural gas in the US. Then
came the shale revolution, better known as fracking, and now
(01:07):
everyone thinks we have a plethora of both. The Trump
administration even calls them Freedom molecules. In other words, the
conventional wisdom is often wrong. So here's today's conventional wisdom
about oil prices. Global oil supply is supposed to continue
to rise rapidly, thanks in part to substantial growth coming
from US frackers, so prices are supposed to stay low.
(01:31):
Likely we won't ever have to worry about oil price
shocks again because the frackers will keep prices low, and
by the time that runs out, renewables will for sure
if kicked in, the days of fear and trembling about
oil price shocks are over. But are they really their
skepticism about what will happen if investors stop funding the
money losing shale industry. Conversely, if prices do stay really
(01:54):
low or the age of renewables does come quickly, that
poses some risks of its own. What does that mean
for Saudi Arabia, which depends on oil revenues defund its
economy and keep its society stable, and right now is
trying to take its massive state owned oil company, Saudi
Aramco public. It was supposed to be the biggest IPO ever.
(02:16):
If there were easy answers, history shows that'd likely be wrong.
But I'm delighted to talk through the topic with Liam Denning,
who is a well known Bloomberg opinion columnists covering energy,
mining and commodities. He previously worked at The Wall Street
Journal in the Financial Times, and like me, he was
once a Goldman Sachs investment banker. So, Liam, why would
you look historically has it been so difficult to predict
(02:38):
the direction of energy prices? Why are people mostly wrong?
Partly because, like any commodity, any sort of disruption can
cause prices to fluctuate one way or the other. I
think it's also because energy, because it's so central to
modern society, is a highly politicized commodity. It's often forgotten
(03:00):
and we focus on companies like Exomobile or Chevron that
they're actually a tiny part, a relatively small part of
the global oil business. A lot of it is really
still controlled by state owned entities like Saudi Aramco or
state like controlled entities like the Russian oil companies. So
(03:20):
it really sits at the intersection of the economy and
politics in a way that is somewhat unique in the
business world. Would you say, I would say so, yeah.
I mean, I think anything that touches upon what we
eat or how we heat ourselves or get around is
going to be ultimately a political thing. So what's the
debate today? It seems like we've switched from this idea
(03:43):
of peak supply, this idea made famous by Twilight in
the Desert, that we are going to run out of
oil and natural gas, to a different concept, and almost
the opposite concept, right, which is peak demand. Yeah, we've
we've gone from an age of scarcity to an age
of abundance, or at least that's what everybody thinks. That's
what everybody thinks, you know. And I think it's it's
(04:04):
important to distinguish really what abundance means. I think it's
fair to say, in purely geological terms, we will probably
never run out of oil and gas below the ground.
I think it's fairly well established that there is just
a hell of a lot there. What it really boils
down to is the demand there for it, and also
(04:27):
is the capsule there to fund it? And you know,
and I think shale has actually been a great example
of how that dynamic plays out. And what do you mean,
because investors have been willing to fund the shale industry
despite the fact that it doesn't make money. Yeah, I mean,
what ails the US oil and gas business is that
(04:47):
technologically it is brilliant. It has been able to effectively
pick itself up from thirty years of decline and turn
itself into the biggest force in the global energy business
in the space of a decade, mainly for fracking, right
and pas on that just from just to tell people
what it is and how why it's changed things so dramatically. Yeah,
(05:08):
So essentially the US oil business has gone from being
a conventional oil business, which was centered mainly on some
declining onshore assets the Gulf of Mexico which had kind
of boomed in the late seventies and into the eighties,
and Alaska. Those are all now either flat or declining. Really,
(05:29):
and what's happened is the US independent oil and gas
business unlocked the code of fracking, which is essentially, you
drill down into the source rock of oil and gas
and you pump a bunch of fluids and propints into
it and break apart the rock and you release a
lot more oil and gas. And back to your point,
it's it's a pretty enormous technological achievement, right. Whatever the
(05:53):
questions about the environment and other things, which we'll get
to But that's a pretty enormous technological achievement. Yeah. I mean,
the industry has been playing around with fracking, you know,
for at least about forty or fifty years. It was
only really in the you know, the first decade of
this century that companies like Mitchell Energy Chesapeake Energy really
(06:13):
began to get things going. And it's only in the
past decade that it's really taken off with oil production.
It was previously a gas thing. So you're come back
to your point about how shale is emblematic of the
US of the industry overall. Yeah, So the industry has
been technologically brilliant. Financially it's been a disaster. You know.
What's really happened is, you know, in some ways, I
(06:34):
see the frackers as being a little like Tesla or
Uber or we Work. Even what you've seen is the
US engage in a massive grab for market share in
the global oil and gas business, mostly financed by third
party capital. So it's not necessarily the venture capital that
we've seen with companies like we Work. It's very accommodating
(06:58):
high yield debtmark and the equity market and private equity
and private equity as well and what they've done is
they've essentially allowed these companies to outspend their cash flow
based on a story like all these companies don't worry
about the fact that we're outspending capital now because we're
growing into things and the more market share we take
(07:18):
eventually will be fantastically profitable. And I think what's happened,
particularly over the last year or so is that's kind
of hit the wall. Why did it hit the wall
now when that dynamic was always in place. In other words,
it's not like these companies once made money and then
they stopped. Why did investors start believing partly it was
an OPEC thing? You know, if you go back to
Thanksgiving twenty fourteen, that's that famous OPEC meeting where OPEC
(07:41):
decided to kill you as shale, right, it wasn't going
to cut production, it was going to let prices fall
and the shale industry would be devastated. What we've seen
is actually a capital markets stepped in and twenty sixteen,
which was when oil briefly dipped below thirty dollars a barrel,
is also, to my recollection, the biggest year ever for
(08:06):
emp excy fundraising. If you can imagine it actually happened
just as oil hit its lowest point, and it's because
investors were used to this cycle playing out where all
prices drop, stocks become cheap, and then everyone gets ready
for the next up cycle. The next up cycle hasn't happened. Uhha.
So that's why now you have this this brewing skepticism.
(08:28):
How does that play into the bigger picture? Because the
markets are counting on continued growth from US shale, right
And I think it's a fascinating thing because we tend
to think of it through an environmental lens, and we'll
get to that, but there's this this very economic lens
to think of it through, too, which is that these
companies don't make money and the market stops funding them
(08:48):
and their supply starts to go down. What does that
do to this dynamic where everybody's predicting that oil prices
will stay low exactly? I mean, this is the big
debate now amongers of supply and demand. It seems the
big agencies that we usually look to for forecasts, so
you know, OPEC, the I, the EIA in the US
(09:10):
are all still reasonably convinced that US shale supply will
prove resilient. Now there's a little complication in twenty twenty,
and that we're also expecting a big wave of NONWUS shale,
non OPEC production to come through in places like Brazil Norway.
This is all stuff that got teed up when all
(09:32):
prices were at one hundred bucks a barrel and is
now starting to come through because these conventional projects take
so long to debate, multiple years to bring on stream. Yeah,
so twenty twenty is looking bad anyway, no matter in
terms of all prices, no matter what happens with shale.
The big question is will the capital spiggot being turned
(09:54):
off cause US shale production to go from this one
million barrels a day extra every year down to you know,
five hundred thousand barrels or even zero? And what do
you do You think that's likely and what's what's the
effect if that does happen? So is it likely? It
seems to me almost certain that the EMP business has
(10:18):
to scale back, and that's certainly the message that's coming
out from a lot of the companies. Only this morning
I was listening to the CONCO kind of ten year plan,
and most of that plan boils down to things look
very uncertain. All you can do is try and keep
your costs down. So you have to imagine that, given
that this is a business that's mostly driven by its
(10:40):
access to capital, that it has to scale back in
some way. Having said that, I probably would have said
almost the same thing in twenty fifteen, right, and somehow
it managed to prove us all wrong. So I think
that that factor has to be borne in mind in
terms of what it would do well. For one thing,
(11:01):
it would allow OPEC to claw back a bit of
the power that it's lost over the past few years
in terms of trying to support all prices. In an
extreme scenario, if you had us supply growth suddenly flip
and everyone couldn't count on it, you have the potential
(11:21):
then for a pretty serious increase in all prices. I
think though, that this cycle would be different from the
last cycle that we had if that was to play out.
In other words, prices wouldn't shoot over one hundred dollars
a barrel because there's more flexibility in the system. It's
it's it's less where the price would settle, it's more
what the impact of that would be. Because I think
(11:44):
when all prices last peaked above a hundred bucks a
barrel and then collapse. I think we were all in
the mindset that all prices, you know, were still stuck
in the usual cycle, that they would go above a hundred,
come down, go above a hundred, come down. I think
this time, if we were to see all prices jump
above a hundred bucks a barrel, given what's happened in
(12:07):
the last few years in terms of two main things.
One is greater awareness of what climate change is doing
to us, and secondly this changing relationship between the US
and the Middle East, I think another superspike in all
prices is probably the worst thing that could happen to
the old market. We elaborate on that. Why Well, if
(12:29):
you go back to two thousand and eight, which is
the last time I would say politically the US was
serious about dealing with climate change. You may remember there
was a carbon pricing bill that died in the Senate,
but there was a bill right there, at least was
a bill. What was interesting about that time was that
there was an alignment between environmentalists on one hand and
(12:52):
you know, the kind of security hawks on the other.
Because people were getting worried about our dependence on this
fractious area called the Middle East for US supply. What's
different this time, I think is if we were to
get another one hundred dollars a barrel superspike in all prices,
it would absolutely lend more credence to the environmentalist movement,
(13:13):
particularly because in the intervening decade we've seen the cost
of alternative technologies drop dramatically, so electric vehicles no longer
seem fantastical. Renewable energy is pretty cheap now. But I
think we would also see that security element come back,
but with a crucial twist, which is, these days the
US does not see itself as quite so dependent on
(13:37):
the Middle East in certain respects. As we can see,
particularly with the current administration, it is pulling back in
all sorts of ways, in part because of these freedom molecules,
as the Trump administration calls them, right, what did you
call them? Freedom frack? Freedom fracking. Yes, that's a path
that administrations in the past have not pursued, and that
(13:57):
well they weren't able to. But the Obama aministration pretty
explicitly did not want to use energy as a geopolitical weapon.
How big a change is it in US policy to
have the Trump administration using it so explicitly. Oh, that's enormous.
I mean, I think the standard US policy on energy
markets posts the seventy three crisis was to essentially use
(14:20):
markets and diversification and you know, protecting global trade to
manage its energy exposure, almost like an investor diversifies their
portfolio to manage their risk. We've now seen that flip
and the US is actually saying the speech. I think
it was the speech that Mike Pompeo gave it Serial
(14:40):
Week earlier this year, where you know, he actually talked
about values being attached to US energy exports and using
those exports to export American values. I mean, that's a
that's a huge change in the old market we've had
it gone back to a more mercantilis framework. You had
it in one of your pieces, and he' said we're
not just exporting American energy, We're exporting our commercial value
(15:03):
system to our friends and to our partners. Our model
matters now, frankly more than ever in an era of
great power, rivalry and competition, and they're using their energy
to destroy ours. It was quite a strongly worded speech. Yeah,
not great if you're in Europe, of its name. No,
isn't there a risk to that if fracking companies do
turn out to be well, I suppose it's not clear
(15:24):
what the fate of Tesla and Uber is, but it's
certainly clear what the fate of we Work is. If
the analogy does hold and fracking companies turn out to
be potentially like we Work and they can never make money,
isn't that a dangerous game for the US to be playing?
It is? I mean, we have to consider how it
would play out. I mean, the thing is the thing
with the US fracking business is we tend to think
(15:45):
of it in all or nothing terms. So if a
bunch of frackers can't make their debt payments they go bankrupt,
what does that mean? Really, it doesn't necessarily mean production
goes to zero. The assets change hands. Whoever ends up
owning the assets wants those assets to produce, and actually,
once you take the burden of debt off them, in
(16:06):
some ways, there are actually better position to keep producing.
It is dangerous in the sense that the US is
being overconfident. Yeah, I think in its energy independence or
dominance dream that it has now, the US is not
energy independent. Yes, next year, technically it will become a
(16:27):
net oil exporter for the first time in decades, it
will still be importing millions of barrels of crude oil
a day, because that's just how the oil system works.
You know, there are different grades, there are different prices
on offer. There's a reason we haven't embraced autarchy. It's
generally not good for the economy. And isn't the concept
(16:48):
of energy independence itself somewhat flawed given that we live
in a global economy, and so even if we were
producing enough energy to fund all our needs, we're not
producing enough to ask fund Asia's needs. So Asia's dependent
on the Middle East, We're dependent on Asia. Isn't there
something sort of flawed at the heart of that notion
in today's very global economy? There is if you believe
(17:11):
in a very global economy. I mean, I would say
all the signals coming out of the Trump administration is
that it doesn't believe in a global economy. It believes
in great power rivalry and trade barriers and reverting back
to a trading system that sort of predates the Bretton
(17:34):
Woods arrangements at the end of the Second World War.
It made sense in the past for the US to
guarantee Middle Eastern oil supplies because it was dependent on
it and its allies that we're helping it face off
against the Soviet Union would dependent on it. That world
no longer holds, and I think what we've seen with Obama,
(17:54):
to be honest with regards to the Middle East, but
we've seen it massively accelerate under Trump. The US is
just stepping back from a lot of the arrangements that
used to underwrite. And as somebody who's covered the energy
markets now on the banking side and then as a
journalist for almost two decades, how big a change is this.
I mean, it's a completely changed world. We have become
(18:15):
used to the idea that as volatile as energy markets
can be, undergoding it all were some constants. US security guarantees,
free trade, freedom of navigation. Those are the things that
enable us to go from a ten million barrel a
day world to one hundred million barrel a day world.
(18:37):
I'm not sure we can necessarily count on oil demand
continuing to grow in a world that's changed. It's really
interesting because it goes back to your point about oil
sitting at this intersection of both economic factors and political factors.
And if the economic factors were always volatile, the political
ones were in a sense more constant, Right, they were
(18:59):
more fixed, And they're both completely wildly unpredictable. Absolutely, And
also obviously the third element is we've begun to price
in the thing that's always been there but which we
always ignored, which is the environmental cost. I wanted to
go back to something you'd said earlier, which is, which
is interesting in a tiny bit counterintuitive, but not once,
(19:19):
but that higher oil prices actually can be really good
for the advent of renewables, right. And so in some
ways the fact that prices are low as a result
of fracking has been a benefit to all of us,
a benefit to our pocketbooks, but it's also sort of
thwarted into him that would be to our long term benefit. Right,
Is that the right way of thinking about it? Yeah?
I think so. I mean I think particularly in terms
(19:41):
of gas, right, I mean, the cheap gas that's come
from the fracking revolution obliterated the US coal industry. Yeah,
but it also presents a fairly formidable challenge to renewables.
And in some ways we're reaching a point in certain
markets where renewables is if that's a word true target
these days is less coal and it's more natural gas.
(20:03):
So do you believe, because there's such heated debate about this,
is natural gas a bridge fuel to a cleaner future?
I mean, I think the problem with the whole bridge
fuel thing is it's a blanket term. It's obviously a
nice selling point that Chesapeake among other companies used to push.
I think gas plays a useful role in balancing renewables.
(20:25):
I think in certain markets. You know, if you look
at places like China or India, it can play a
much more aggressive role, partly because you still have a
lot of coal fired power there. The downside for those countries,
I think China in particular is for them they still
look at they look at gas, and yes it helps
them on the coal side, but they're still dependent on
(20:46):
energy imports. And this comes back to the geopolitical aspect
of all this is, you know, if you're a planner
in Beijing, yes, on the one hand, you definitely want
to clean up the air in your major cities. What
you really don't want to do is repeat what the
US did in the twentieth century and become dependent on
places like the Middle East or countries that might turn
(21:07):
hostile to you for your energy. And so when people,
for example say, well, you know, we can be bullish
on fossil fuels because China and India still need to
industrialize and get up to our consumption levels that we've
had in the West, I think it's a mistake because
there really is no guarantee that they're going to repeat
the model of development that the West had in the
(21:28):
twenty They're actually trying to learn from the past instead
of repeating the mistakes of the past. That's really interesting.
When I was doing my book about energy, I put
a lot of work into trying to figure out when
the dawn of the age of renewables would be and
figured out at least that just like with energy markets,
no one really knows when it will be. Is that
still the case or do you feel like now you
(21:49):
have a sense of when we might be able to
see the end of the fossil fuel industry. I mean,
I think we're already at the dawn of it, definitely.
And the way I think about that is looking at
marginal change. So already you see renewable power and even
things like electric vehicles are still tiny parts of the
overall market. But when you look at their share of
(22:11):
the growth in the overall energy or automobile market. They're
already at more than fifty percent in a lot of
major markets. So to my mind, when new technologies begin
to capture a bigger share of growth, that's when they
start to attract more capital. It's almost like a self
fulfilling cycle. I mean, I think there's a reason why
(22:31):
big incumbent car makers who are selling eighty odd million
new internal combustion engine cars a year globally are putting
the vast majority of their R and D spending into
electric vehicles, which maybe a tiny part of their sales now,
but they clearly see as being the way things are going.
It's a very talent statistic, I think. In terms of
(22:53):
looking towards peak demand. I try not to give hard
and fast date because you'll be wrong on that, because
I will be wrong. But I think, you know, look
back over the past decade, you go back to November
two thousand and nine, it'd be really hard to predict
what has happened. I mean, the energy business has changed
(23:14):
out of all recognition. The idea that we would end
the decade with Saudi Aramco trying and failing to sell
itself to international investors, to me, is just wild. It's
almost certain to me that when we get to November
twenty twenty nine, there will have been enormous changes in
the energy business, and given the underlying dynamics, I would
(23:35):
guess those changes tend more towards the peak demand end
of things. Yeah, it's shocking when you look back to
the late two thousands, right, and the hand ringing from
Congress about US shortages of oil and natural gas, and
now the US is the world's biggest producer of crude oil, right.
I mean, it's just it's astonishing how different things are
from from where they were supposed to be. Before we
(23:56):
get to Saudi Aramco, I wanted to ask a last
question about renewables. Would you say that if India and
China do want to not repeat the mistakes the US
made as its economy was industrializing, if they could put
their investment instead in renewables, that they could actually avoid
our trajectory. Is the technology there that that's doable? The
technology is there that they can certainly start doing it now?
(24:19):
I mean, if you look at the price statistics and
the projections from Bloomberg's own Bloomberg New Energy Finance. I
mean they foresee, essentially China and India are the ballgame
when it comes to renewables because they still have growing
energy needs, they have enormous pollution problems, and they have
this added geopolitical issue of becoming dependent on places like
(24:43):
the Middle East when they don't necessarily have a giant
navy to help them with that. The weird thing is
China is in the uncomfortable position right now of depending
more and more on Middle Eastern oil and by definition,
depending on the US Navy to keep the sea lanes clear.
That's a really strange dynamic. That's certainly not something they
want to be dependent on for a long time. But
(25:04):
yet we have to do that, contrary to some of
the other moves and the Trump administration. We almost have
to do that because we're dependent on imports from China. Right.
So it's not as if we're doing that in an
altruistic sense. We're doing that because we need to economically speaking.
Oh yeah, and I mean it was never altruistic. I mean,
(25:26):
you know, it had a strategic game and the strategic
games of change. Yes, certainly. So let's let's go back
to Saudi Aramco, because that is completely fascinating, and even
in the last I think you wrote a piece, even
in the last four or five years, it's astonishing how
that's changed. And so maybe that's also a way to
help see how the energy markets have changed so dramatically.
(25:47):
So tell us about Saudi Aramco then and now and
what happened in the interim. So Saudi Aramco is obviously
it's the foundation of the Saudi Arabian economy. More importantly,
it's the vital part of the social contract between the
ruling family and this young, fast growing population. And if
(26:10):
we go back to twenty fourteen, which is when all
prices collapse, I think at that time the view was
Sadi Aramco was still essentially the top dog in OPEC,
which was still seen as the top dog in the
all market, and if things were going to play out
in the normal way, it was about to go through
a period of low revenues and then the cycle would
(26:32):
come back up and we'd be back to what we
were doing before. I think a few things have changed.
One is OPEC has lost any sort of control it
had over the oil market. I mean to me, even
though you know the lights havn't exactly been switched off
in the ballroom in Vienna. But to me, OPEC is
basically dead, and is that essentially a function of US fracking.
(26:54):
It's a function of US fracking. I think it's also
a function of the fact that outside of Saudi Arabia
and a few of the Gulf monarchies, let's face it,
most OPEC members it's not that they struggle to you know,
stay within their quotas, it's that they struggle to produce.
They're royal. I mean, you look at the tragic situation
(27:14):
in Venezuela. Yes, it's Saudi Arabia and a lot of
walking wounded countries in OPEC. And I think the fact
that they've had to come up with this thing called
plus where they embrace Russian that's that's right, that's including
the other ten countries that are helping them keep a
lid on production. Yea. The very fact that that exists
(27:35):
now tells you that OPEC as an entity is pretty
much dead. And that's another shocking dynamic rate that you
would have predicted a decade ago. So back back to
a Ramca, I think you wrote a piece. It's still
the most profitable company in the world. Apparently from what
we can see into its numbers. Yes, but yet it's
not able to go public at nearly the valuation that
(27:55):
Mohammed bin Salman had once predicted. He'd said two trillion
dollars and where are we now? So the range they've
got now is about one point six to one point
seven trillion, But that is predicated on selling only about
one half percent the company into the Saudi Arabian domestic
stock market, which has a free float which is smaller
than exomobiles market cap, And so that basically means it
(28:18):
doesn't then the numbers aren't real. No, I mean I
characterize it as more of a sort of elaborate form
of taxation than a real IPO. Explain that. Why an
elaborate form of taxation. Well, essentially you're going to sell
it to a lot of domestic shareholders, so you'll have
the retail part of that, and they're being lent money
by Saudi banks to help fight to help fund their
(28:39):
share purchases. And then you have a lot of rich
Saudi families who you know, I think it's fairly safe
to say have been encouraged by the regime to participate
at a certain price, But doesn't that in some ways
obviate the purpose of the IPO. At least the purpose
of the IPO of a Ramco as I understood it
was to provide the funding to help transitions Audi Rabe's
(29:00):
economy away from dependence on oil because right now, even
at current oil prices, they can't fund their social spending.
Right NF prices plumb, it further adoe to renewables. What happens.
But if you're effectively making your own population by the shares,
isn't that why bother? Yes? Good question. I think they
obviously felt like they needed to go ahead with it.
(29:22):
I think in a normal situation the IPO would have
been pulled. They've sort of failed on every aspect of
what this was supposed to achieve. It was supposed to
mark the kind of reform of the Saudi economy and
provide a lot of funding to help with that. As
it turns out, it's not going to help beyond You know,
twenty five billion is not to be sneezed at, but
(29:43):
it's definitely not what they were planning on doing. There's
no big kind of global coming out party because it's
not being marketed outside the country. And I think what
this gets back to is, on any given measure, Aramco
is fantastically profitable. It's margins, it's return on capital, everything
just blows away the rest of the competition in the
(30:06):
our business. But the difference is if you look at
a company like you know, an XON or a BP
or something like that, their profits are smaller. But on
the other hand, they don't have to fund an entire
country with those profits. And that's a Ramco's issue, and
it's the reason the valuation wouldn't get to where they
wanted it to be, because, yes, the cash flows are enormous,
(30:29):
but if you're a fund manager sitting in London on
New York, you're going to put a pretty high discount
rate on that because you know that what you're buying
isn't just an our company. What you're also buying is
a stake in that thing known as the Saudi Reform Project.
I saw that line in one of your pieces about
how that was a Ramco's purpose, right funding an entire country.
It's it's very, very different. Why has the investment community's
(30:51):
attitude toward a Ramco change so dramatically in recent years
such that excitement about this mammoth IPO of this profitable
company became skepticism. Is that partly what we've seen about
from the Saudi regime. Is it also a commentary on
the dawn of the age of renewables, just as much
as the auto manufacturers moving to electric carses Or is
(31:12):
it both? I think it's all those things. I mean,
I think it's partly it was missold to my mind
that IPO should have happened after a long period of reform.
It should have been the capstone of reform. It should
not not the the kind of teaser for reform, because
what you're essentially asking people to do is to buy
(31:32):
a stake in the promise of reform. It would have
been a much easier sell if the Saudi Arabian government
could have pointed to a bunch of positive changes and
then said, okay, now we're going to sell you part
of our oil company. Their fixation right, and that again,
you know, just served to emphasize exactly what you were
(31:53):
buying into. This obsession with the two trillion dollar figure
was clearly clearly kind of spiked the ball in the process.
And then I think the growing awareness that something will
have to be done to address climate change is also
weighing on people's minds. And you know, if you're a
fund manager, I mean maybe in New York, I think,
(32:13):
particularly in a city like London, you're going to have
a tough job saying to people I'm buying into sixty
odd years worth of crude oil reserves at a time
when the scientists of the IPCC are telling us that
if we don't stop burning this stuff within the next
fifteen to twenty years, we're dead. That's a real change,
(32:35):
isn't it. Because maybe I'm being too harsh, but I
would have said five years ago, even three years ago,
investors wouldn't have given a dam and now they do.
Is that fair? That's certainly the impression I have. I mean,
it's been one of the biggest changes in the past
few years, is just how much momentum the movement to
do something about climate change has gained, and just also
(32:58):
the attack and politics of it. I mean, we talked
earlier about the carbon tax bill in two thousand and nine.
I mean, to be, that's only ten years ago. That
seems almost quaint. Now. Yes, people still talk about a
carbon tax, and I think it remains probably the most
important tool that we can use. But the argument has
moved way beyond that. You look at what was being
(33:21):
talked about by Democratic presidential candidates, what's being talked about
at individual city levels, and in some ways, you know,
the industry has only itself to blame on this. It
has spent a good thirty years obfruskating the argument, blocking action,
and what that's done is it's kind of like pulling
back on an elastic and when that elastic band snaps,
(33:45):
it's going to blow way past things like carbon taxes
and go direct for things like gasoline car bands in
major cities, which we're already seeing talked about in Europe.
Obviously progress, But why is there this split that you've
mentioned and written about between the big oil comes and
the frackers about the idea of a carbon tax. Oh?
I think it's about time horizons. Okay, you know, so
(34:06):
the fracas, especially these days, I mean, they don't really
look beyond the next twelve months, right, because what they
want to do is make sure that they can balance
their spending. The larger oil companies tend to have much
longer time horizons decades, and they're starting to care that
they and we are still around in decades. Well, yeah,
they're starting. I mean what they're thinking about is does
(34:29):
this company have a viable business model ten years from now?
You know, can we really attract the attention and capital
we need from investors in a world where demand may
not have plummeted, but demand has stopped growing. That's just
not something they've had to deal with before. It's actually
really interesting because I mean, the world moves forward and
(34:51):
fits and starts forward and backwards. Right that even though
there has been this change on the part of investors,
you've had growing up concurrently with that US frackers, right,
which only exists because investors had until recently been very
willing to fund them, right. Yeah. And so you have,
just as the big oil majors are starting to think
more long term about these these consequences, you have this
(35:13):
other industry that has grown up in parallel, right, that
is sort of thwarting all of that. And by the
effect it's had on oil prices, the way in which
it's lower oil prices, that has pushed back perhaps some
of the work that would have been done on renewables. Yeah, no,
I think you know, it's interesting to watch the majors
coming into shale. They sort of ignored it. Yes, for
a long time time. It's a business model that that
(35:36):
isn't really suited to very large companies, which have tended
to be more focused on pulling off gigantic, multi year projects.
But now they're saying, well, you know, we can actually
go in and make this work economically. And if you
look at Exxon and Chevron, they are all in on
shale and saying that, unlike to date, they will actually
(35:59):
turn this into a profitable cash generating business. I mean,
the jury is out on that for now. I think,
you know, one of the things that's happened with the
fracas in particular, is people used to look past the
bad capsule management because they would say, well, even if
these guys are paying themselves too much, and even if
(36:21):
they tend to, you know, go way way over their
heads when there's a boom, when the oil price goes up,
I'll make out like a bandit. But what I've noticed,
particularly in the last eighteen months or so, investors are
no longer pricing in that oil option. They are no
longer saying, well, bad as this company is. When all
goes back to eighty ninety one hundred bucks I'll still
(36:43):
make a profit. They're just not banking on that anymore.
That's a really interesting change too. And perhaps you could
argue that big oil getting interested in fracking might create
a longer term orientation around it. Right, So perhaps you
could argue even if they can't, even if it turns
out they can't make money at it, the other that
having them step in and invest in it will actually
(37:03):
be good for the world. Is that to naive a
point of view, good for the world in the sense
of keeping supply good, good for the world in the
sense of being a bit more responsible, being a bit
more long term in their view of it, instead of
being being operating on a tomorrow or twelve month horizon
like the frackers do. Yeah. Possibly, I mean, I think
the bull argument for the major's going into shale is
(37:24):
that it will extend the life of the resource. Yea,
that you may not get so many years where production
grows at a million barrels a day, but you'll have
a long period where it grows at five or six
hundred thousand barrels a day because they'll dump all the
bad acorage, they'll focus on the good acorage, and they'll
approach it in a more methodical manner. And yes, on
the environmental side, they will. They'll be better about flaring,
(37:47):
and they'll be more responsible with their fluids because they
care more about their brand, etc. Etc. Are you surprised
when you look back that it was the Obama administration
that overturned the ban on exports and is that thing
that surprised you and that you think matters or do
you think it's small enough that it's irrelevant. I don't
think it's irrelevant. It didn't surprise me a huge amount.
(38:10):
Obama obviously, early in his administration there was this push
to do something on climate change, once most of his
political capsule had been burned on healthcare reform, that focus
on climate change and doing something about carbon emissions. Kind
of it didn't fall away because obviously we still had
action aimed at cleaning up power plant emissions and that
(38:34):
sort of thing. But it was definitely it was opportunity downgraded,
and in fact, overturning the export ban was done in
exchange for some concessions from Republicans on other environmental measures,
and I think it was it was a big deal
because it allowed the fracking boom to continue. I mean,
if you know if you go back to before the
(38:55):
export ban, the differential between US OR prices and international
loop all prices would had blown out to an enormous extent,
and you would have definitely seen a lot of companies
either go under or have to scale back drilling because
they just weren't getting the prices they needed. It's just fascinating.
It's back to your point about how much politics matters
in this industry once again. Right to believe that the
(39:18):
export band over to the overturning of the historic forty
year export band actually had something to do with healthcare
re form, right, I mean, that's that's politics and spades.
So I wanted to before we finished up. I wanted
to go back to Saudi Aramco because it seems to
me that it's it's easy from a sort of naive,
perhaps naive perspective, to say, oh, how great that they
(39:40):
can't take a ramco public. It's a commentary on the
repressive Saudi regime that needs to change. But given how
much the regime has been dependent on oil revenues and
would be dependent on a ramco to continue to essentially
fund social stability, is this something we should be celebrating
or is this something that's actually a little bit dangerous. Oh,
(40:00):
it's it's it's quite dangerous. I mean, I think ever
since I think it was January twenty sixteen when Prince
Mohammad been Salmon gave that initial interview where he laid
out this vision. You know, when you have a regime
that is quite ossified, that depends on you know, a
rentier economy, has been quite repressive. The most dangerous moments
(40:24):
for those regimes is when they embrace reform, because that's
when the cracks can begin to appear, because everything has
been kind of suppressed. That you hold out this vision
of what can be and you start to tinker with
the machinery of the state, and at quite a fundamental level,
you know, listing Saudi Aramco and potentially laying out all
(40:46):
its secrets to a global investor audience, which didn't quite
happen in the end, but it was held out there.
That's a big move, and I think it spoke to
the pressures on the regime. I mean, I think like
the oil market since the Second World War, in some respect,
Saudi Arabia is a product of this kind of packs
Americana oil dependent global economy that we've had for the
(41:10):
past seventy years or so. And I think they saw
the writing on the wall in terms of all prices
not necessarily roaring back in the way they used to
the US, not necessarily as interested in the Middle East
as it was, and so they had to change. But
the problem is when you've been the sort of embodiment
of not changing so that long, you then seek to
(41:32):
change yourself. That's a very dangerous moment. And then, particularly
as we've discussed the way in which it went, where
it's almost a version of the Emperor has no clothes, right,
Instead of having it be the two trillion dollar deal
of the century, it's turned out to be quite a
bit less than that, right, Yeah, those are all the
risks you run. And you know, Saudi Arabia, like you know,
(41:54):
a lot of it's it's peers in the Middle East,
you know, and has essentially had this social contract, which
is the government will provide a lot of funding for
things and a lot of subsidies. You know, look at
the riots in Iran over moving the gasoline price up
from a few cents to twenty cents or whatever the
price is. Yeah, those things matter, and when you start
(42:16):
to tinker with them. It can unleash you forces that
you've kept down for a long time. It's a really
interesting way of thinking about this and where we are now,
because I think we do tend to celebrate the advent
of renewables is entirely a good thing, and from some
standpoints it is. And you had a great quote from
Thomas Edison in one of your recent pieces. But in
(42:37):
some sense, as we so often do, we're also not
thinking through all of these broader ramifications. Right, what does
this US led oil based world economy? What does it
mean when that starts to fall apart? Yeah, well, I
think with any big change in the underlying geopolitical architecture,
there's going to be winners and losers. You know, the
oil age elevated a place like Saudi Arabia from relative
(43:00):
obscurity to a you know, not a superpower, but definitely
a global power. There's a reason it has retained that
spare capacity to maintain its relevance, and it's kind of
hand on the tiller of the global economy. Likewise, as
the energy system shifts to other technologies, that's going to
(43:20):
create relative winners and losers as well. The US is
in the fairly enviable position of if it uses the
opportunity correctly of you know, having the opportunity to be
a winner. In either case. It does have large natural resources,
but it also has amazing technological capability deep capsule markets.
(43:42):
It can win in either scenario, but that won't hold
true for a lot of other places. I think it's
back to your point about how things are changing now
in a way that is just the piece of change
is just is just dramatic. Thank you so much for coming.
Thank you. I always love it when I think I'm
thinking broadly about a topic, but it turns out there
is so much more, and that I was actually thinking
(44:04):
quite narrowly, perhaps because of my previous work on fracking.
I'm obsessed with the lack of profitability of these companies,
are they we works as leam asked, and what that
may mean for oil prices. But really this is just
part of a much bigger issue. The entire framing of
our world as a US led, oil driven global economy
(44:25):
is changing drastically, and that has huge ramifications for economies
and for politics. All that we know for sure is
that in a decade we'll look back and be shocked
at what we didn't see. Making a Killing is a
co production of Pushkin Industries and Talk and Blade. It's
produced by Ruth Barnes and Laura Hyde. My executive producers
(44:47):
are Alison McClean no relation in Making Casey. The executive
producer at Pushkin is Mia Loebell. Engineering by Jason Rostkowski.
Our music is by Jed Flood. Special thing to Jacob
Weisberg at Pushkin and everyone on the show. I'm Bethany McClain.
Thanks so much for listening. Find me on Twitter at
(45:07):
Bethany mac twelve and let me know which episodes you've
most enjoyed.
I'm Bethany McClain, and this is making a killing interviews,
exploring the headlines you thought you understood, and finding the
long term lessons we can all learn from today's business stories.
I'm at Bethany mactwelve on Twitter. So here's a really
inconvenient truth. Oil is still the lifeblood of industrialized nations.
(00:22):
From driving your car to heating your home, to getting
those Amazon packages delivered to charging all your devices, modern
life still depends on fossil fuels. One of the funny
things about energy markets is how everyone who dares to
make predictions usually has one thing in common. They're wrong.
Most famously was two thousand and five's Twilight in the Desert.
(00:44):
It was written by a really serious, smart analyst, and
he predicted rising oil prices due to sharply declining Saudi production.
In the mid nineteen nineties, there were congressional hearings featuring
politicians and economists who were hand ringing over pending shortages
of both oil and natural gas in the US. Then
came the shale revolution, better known as fracking, and now
(01:07):
everyone thinks we have a plethora of both. The Trump
administration even calls them Freedom molecules. In other words, the
conventional wisdom is often wrong. So here's today's conventional wisdom
about oil prices. Global oil supply is supposed to continue
to rise rapidly, thanks in part to substantial growth coming
from US frackers, so prices are supposed to stay low.
(01:31):
Likely we won't ever have to worry about oil price
shocks again because the frackers will keep prices low, and
by the time that runs out, renewables will for sure
if kicked in, the days of fear and trembling about
oil price shocks are over. But are they really their
skepticism about what will happen if investors stop funding the
money losing shale industry. Conversely, if prices do stay really
(01:54):
low or the age of renewables does come quickly, that
poses some risks of its own. What does that mean
for Saudi Arabia, which depends on oil revenues defund its
economy and keep its society stable, and right now is
trying to take its massive state owned oil company, Saudi
Aramco public. It was supposed to be the biggest IPO ever.
(02:16):
If there were easy answers, history shows that'd likely be wrong.
But I'm delighted to talk through the topic with Liam Denning,
who is a well known Bloomberg opinion columnists covering energy,
mining and commodities. He previously worked at The Wall Street
Journal in the Financial Times, and like me, he was
once a Goldman Sachs investment banker. So, Liam, why would
you look historically has it been so difficult to predict
(02:38):
the direction of energy prices? Why are people mostly wrong?
Partly because, like any commodity, any sort of disruption can
cause prices to fluctuate one way or the other. I
think it's also because energy, because it's so central to
modern society, is a highly politicized commodity. It's often forgotten
(03:00):
and we focus on companies like Exomobile or Chevron that
they're actually a tiny part, a relatively small part of
the global oil business. A lot of it is really
still controlled by state owned entities like Saudi Aramco or
state like controlled entities like the Russian oil companies. So
(03:20):
it really sits at the intersection of the economy and
politics in a way that is somewhat unique in the
business world. Would you say, I would say so, yeah.
I mean, I think anything that touches upon what we
eat or how we heat ourselves or get around is
going to be ultimately a political thing. So what's the
debate today? It seems like we've switched from this idea
(03:43):
of peak supply, this idea made famous by Twilight in
the Desert, that we are going to run out of
oil and natural gas, to a different concept, and almost
the opposite concept, right, which is peak demand. Yeah, we've
we've gone from an age of scarcity to an age
of abundance, or at least that's what everybody thinks. That's
what everybody thinks, you know. And I think it's it's
(04:04):
important to distinguish really what abundance means. I think it's
fair to say, in purely geological terms, we will probably
never run out of oil and gas below the ground.
I think it's fairly well established that there is just
a hell of a lot there. What it really boils
down to is the demand there for it, and also
(04:27):
is the capsule there to fund it? And you know,
and I think shale has actually been a great example
of how that dynamic plays out. And what do you mean,
because investors have been willing to fund the shale industry
despite the fact that it doesn't make money. Yeah, I mean,
what ails the US oil and gas business is that
(04:47):
technologically it is brilliant. It has been able to effectively
pick itself up from thirty years of decline and turn
itself into the biggest force in the global energy business
in the space of a decade, mainly for fracking, right
and pas on that just from just to tell people
what it is and how why it's changed things so dramatically. Yeah,
(05:08):
So essentially the US oil business has gone from being
a conventional oil business, which was centered mainly on some
declining onshore assets the Gulf of Mexico which had kind
of boomed in the late seventies and into the eighties,
and Alaska. Those are all now either flat or declining. Really,
(05:29):
and what's happened is the US independent oil and gas
business unlocked the code of fracking, which is essentially, you
drill down into the source rock of oil and gas
and you pump a bunch of fluids and propints into
it and break apart the rock and you release a
lot more oil and gas. And back to your point,
it's it's a pretty enormous technological achievement, right. Whatever the
(05:53):
questions about the environment and other things, which we'll get
to But that's a pretty enormous technological achievement. Yeah. I mean,
the industry has been playing around with fracking, you know,
for at least about forty or fifty years. It was
only really in the you know, the first decade of
this century that companies like Mitchell Energy Chesapeake Energy really
(06:13):
began to get things going. And it's only in the
past decade that it's really taken off with oil production.
It was previously a gas thing. So you're come back
to your point about how shale is emblematic of the
US of the industry overall. Yeah, So the industry has
been technologically brilliant. Financially it's been a disaster. You know.
What's really happened is, you know, in some ways, I
(06:34):
see the frackers as being a little like Tesla or
Uber or we Work. Even what you've seen is the
US engage in a massive grab for market share in
the global oil and gas business, mostly financed by third
party capital. So it's not necessarily the venture capital that
we've seen with companies like we Work. It's very accommodating
(06:58):
high yield debtmark and the equity market and private equity
and private equity as well and what they've done is
they've essentially allowed these companies to outspend their cash flow
based on a story like all these companies don't worry
about the fact that we're outspending capital now because we're
growing into things and the more market share we take
(07:18):
eventually will be fantastically profitable. And I think what's happened,
particularly over the last year or so is that's kind
of hit the wall. Why did it hit the wall
now when that dynamic was always in place. In other words,
it's not like these companies once made money and then
they stopped. Why did investors start believing partly it was
an OPEC thing? You know, if you go back to
Thanksgiving twenty fourteen, that's that famous OPEC meeting where OPEC
(07:41):
decided to kill you as shale, right, it wasn't going
to cut production, it was going to let prices fall
and the shale industry would be devastated. What we've seen
is actually a capital markets stepped in and twenty sixteen,
which was when oil briefly dipped below thirty dollars a barrel,
is also, to my recollection, the biggest year ever for
(08:06):
emp excy fundraising. If you can imagine it actually happened
just as oil hit its lowest point, and it's because
investors were used to this cycle playing out where all
prices drop, stocks become cheap, and then everyone gets ready
for the next up cycle. The next up cycle hasn't happened. Uhha.
So that's why now you have this this brewing skepticism.
(08:28):
How does that play into the bigger picture? Because the
markets are counting on continued growth from US shale, right
And I think it's a fascinating thing because we tend
to think of it through an environmental lens, and we'll
get to that, but there's this this very economic lens
to think of it through, too, which is that these
companies don't make money and the market stops funding them
(08:48):
and their supply starts to go down. What does that
do to this dynamic where everybody's predicting that oil prices
will stay low exactly? I mean, this is the big
debate now amongers of supply and demand. It seems the
big agencies that we usually look to for forecasts, so
you know, OPEC, the I, the EIA in the US
(09:10):
are all still reasonably convinced that US shale supply will
prove resilient. Now there's a little complication in twenty twenty,
and that we're also expecting a big wave of NONWUS shale,
non OPEC production to come through in places like Brazil Norway.
This is all stuff that got teed up when all
(09:32):
prices were at one hundred bucks a barrel and is
now starting to come through because these conventional projects take
so long to debate, multiple years to bring on stream. Yeah,
so twenty twenty is looking bad anyway, no matter in
terms of all prices, no matter what happens with shale.
The big question is will the capital spiggot being turned
(09:54):
off cause US shale production to go from this one
million barrels a day extra every year down to you know,
five hundred thousand barrels or even zero? And what do
you do You think that's likely and what's what's the
effect if that does happen? So is it likely? It
seems to me almost certain that the EMP business has
(10:18):
to scale back, and that's certainly the message that's coming
out from a lot of the companies. Only this morning
I was listening to the CONCO kind of ten year plan,
and most of that plan boils down to things look
very uncertain. All you can do is try and keep
your costs down. So you have to imagine that, given
that this is a business that's mostly driven by its
(10:40):
access to capital, that it has to scale back in
some way. Having said that, I probably would have said
almost the same thing in twenty fifteen, right, and somehow
it managed to prove us all wrong. So I think
that that factor has to be borne in mind in
terms of what it would do well. For one thing,
(11:01):
it would allow OPEC to claw back a bit of
the power that it's lost over the past few years
in terms of trying to support all prices. In an
extreme scenario, if you had us supply growth suddenly flip
and everyone couldn't count on it, you have the potential
(11:21):
then for a pretty serious increase in all prices. I
think though, that this cycle would be different from the
last cycle that we had if that was to play out.
In other words, prices wouldn't shoot over one hundred dollars
a barrel because there's more flexibility in the system. It's
it's it's less where the price would settle, it's more
what the impact of that would be. Because I think
(11:44):
when all prices last peaked above a hundred bucks a
barrel and then collapse. I think we were all in
the mindset that all prices, you know, were still stuck
in the usual cycle, that they would go above a hundred,
come down, go above a hundred, come down. I think
this time, if we were to see all prices jump
above a hundred bucks a barrel, given what's happened in
(12:07):
the last few years in terms of two main things.
One is greater awareness of what climate change is doing
to us, and secondly this changing relationship between the US
and the Middle East, I think another superspike in all
prices is probably the worst thing that could happen to
the old market. We elaborate on that. Why Well, if
(12:29):
you go back to two thousand and eight, which is
the last time I would say politically the US was
serious about dealing with climate change. You may remember there
was a carbon pricing bill that died in the Senate,
but there was a bill right there, at least was
a bill. What was interesting about that time was that
there was an alignment between environmentalists on one hand and
(12:52):
you know, the kind of security hawks on the other.
Because people were getting worried about our dependence on this
fractious area called the Middle East for US supply. What's
different this time, I think is if we were to
get another one hundred dollars a barrel superspike in all prices,
it would absolutely lend more credence to the environmentalist movement,
(13:13):
particularly because in the intervening decade we've seen the cost
of alternative technologies drop dramatically, so electric vehicles no longer
seem fantastical. Renewable energy is pretty cheap now. But I
think we would also see that security element come back,
but with a crucial twist, which is, these days the
US does not see itself as quite so dependent on
(13:37):
the Middle East in certain respects. As we can see,
particularly with the current administration, it is pulling back in
all sorts of ways, in part because of these freedom molecules,
as the Trump administration calls them, right, what did you
call them? Freedom frack? Freedom fracking. Yes, that's a path
that administrations in the past have not pursued, and that
(13:57):
well they weren't able to. But the Obama aministration pretty
explicitly did not want to use energy as a geopolitical weapon.
How big a change is it in US policy to
have the Trump administration using it so explicitly. Oh, that's enormous.
I mean, I think the standard US policy on energy
markets posts the seventy three crisis was to essentially use
(14:20):
markets and diversification and you know, protecting global trade to
manage its energy exposure, almost like an investor diversifies their
portfolio to manage their risk. We've now seen that flip
and the US is actually saying the speech. I think
it was the speech that Mike Pompeo gave it Serial
(14:40):
Week earlier this year, where you know, he actually talked
about values being attached to US energy exports and using
those exports to export American values. I mean, that's a
that's a huge change in the old market we've had
it gone back to a more mercantilis framework. You had
it in one of your pieces, and he' said we're
not just exporting American energy, We're exporting our commercial value
(15:03):
system to our friends and to our partners. Our model
matters now, frankly more than ever in an era of
great power, rivalry and competition, and they're using their energy
to destroy ours. It was quite a strongly worded speech. Yeah,
not great if you're in Europe, of its name. No,
isn't there a risk to that if fracking companies do
turn out to be well, I suppose it's not clear
(15:24):
what the fate of Tesla and Uber is, but it's
certainly clear what the fate of we Work is. If
the analogy does hold and fracking companies turn out to
be potentially like we Work and they can never make money,
isn't that a dangerous game for the US to be playing?
It is? I mean, we have to consider how it
would play out. I mean, the thing is the thing
with the US fracking business is we tend to think
(15:45):
of it in all or nothing terms. So if a
bunch of frackers can't make their debt payments they go bankrupt,
what does that mean? Really, it doesn't necessarily mean production
goes to zero. The assets change hands. Whoever ends up
owning the assets wants those assets to produce, and actually,
once you take the burden of debt off them, in
(16:06):
some ways, there are actually better position to keep producing.
It is dangerous in the sense that the US is
being overconfident. Yeah, I think in its energy independence or
dominance dream that it has now, the US is not
energy independent. Yes, next year, technically it will become a
(16:27):
net oil exporter for the first time in decades, it
will still be importing millions of barrels of crude oil
a day, because that's just how the oil system works.
You know, there are different grades, there are different prices
on offer. There's a reason we haven't embraced autarchy. It's
generally not good for the economy. And isn't the concept
(16:48):
of energy independence itself somewhat flawed given that we live
in a global economy, and so even if we were
producing enough energy to fund all our needs, we're not
producing enough to ask fund Asia's needs. So Asia's dependent
on the Middle East, We're dependent on Asia. Isn't there
something sort of flawed at the heart of that notion
in today's very global economy? There is if you believe
(17:11):
in a very global economy. I mean, I would say
all the signals coming out of the Trump administration is
that it doesn't believe in a global economy. It believes
in great power rivalry and trade barriers and reverting back
to a trading system that sort of predates the Bretton
(17:34):
Woods arrangements at the end of the Second World War.
It made sense in the past for the US to
guarantee Middle Eastern oil supplies because it was dependent on
it and its allies that we're helping it face off
against the Soviet Union would dependent on it. That world
no longer holds, and I think what we've seen with Obama,
(17:54):
to be honest with regards to the Middle East, but
we've seen it massively accelerate under Trump. The US is
just stepping back from a lot of the arrangements that
used to underwrite. And as somebody who's covered the energy
markets now on the banking side and then as a
journalist for almost two decades, how big a change is this.
I mean, it's a completely changed world. We have become
(18:15):
used to the idea that as volatile as energy markets
can be, undergoding it all were some constants. US security guarantees,
free trade, freedom of navigation. Those are the things that
enable us to go from a ten million barrel a
day world to one hundred million barrel a day world.
(18:37):
I'm not sure we can necessarily count on oil demand
continuing to grow in a world that's changed. It's really
interesting because it goes back to your point about oil
sitting at this intersection of both economic factors and political factors.
And if the economic factors were always volatile, the political
ones were in a sense more constant, Right, they were
(18:59):
more fixed, And they're both completely wildly unpredictable. Absolutely, And
also obviously the third element is we've begun to price
in the thing that's always been there but which we
always ignored, which is the environmental cost. I wanted to
go back to something you'd said earlier, which is, which
is interesting in a tiny bit counterintuitive, but not once,
(19:19):
but that higher oil prices actually can be really good
for the advent of renewables, right. And so in some
ways the fact that prices are low as a result
of fracking has been a benefit to all of us,
a benefit to our pocketbooks, but it's also sort of
thwarted into him that would be to our long term benefit. Right,
Is that the right way of thinking about it? Yeah?
I think so. I mean I think particularly in terms
(19:41):
of gas, right, I mean, the cheap gas that's come
from the fracking revolution obliterated the US coal industry. Yeah,
but it also presents a fairly formidable challenge to renewables.
And in some ways we're reaching a point in certain
markets where renewables is if that's a word true target
these days is less coal and it's more natural gas.
(20:03):
So do you believe, because there's such heated debate about this,
is natural gas a bridge fuel to a cleaner future?
I mean, I think the problem with the whole bridge
fuel thing is it's a blanket term. It's obviously a
nice selling point that Chesapeake among other companies used to push.
I think gas plays a useful role in balancing renewables.
(20:25):
I think in certain markets. You know, if you look
at places like China or India, it can play a
much more aggressive role, partly because you still have a
lot of coal fired power there. The downside for those countries,
I think China in particular is for them they still
look at they look at gas, and yes it helps
them on the coal side, but they're still dependent on
(20:46):
energy imports. And this comes back to the geopolitical aspect
of all this is, you know, if you're a planner
in Beijing, yes, on the one hand, you definitely want
to clean up the air in your major cities. What
you really don't want to do is repeat what the
US did in the twentieth century and become dependent on
places like the Middle East or countries that might turn
(21:07):
hostile to you for your energy. And so when people,
for example say, well, you know, we can be bullish
on fossil fuels because China and India still need to
industrialize and get up to our consumption levels that we've
had in the West, I think it's a mistake because
there really is no guarantee that they're going to repeat
the model of development that the West had in the
(21:28):
twenty They're actually trying to learn from the past instead
of repeating the mistakes of the past. That's really interesting.
When I was doing my book about energy, I put
a lot of work into trying to figure out when
the dawn of the age of renewables would be and
figured out at least that just like with energy markets,
no one really knows when it will be. Is that
still the case or do you feel like now you
(21:49):
have a sense of when we might be able to
see the end of the fossil fuel industry. I mean,
I think we're already at the dawn of it, definitely.
And the way I think about that is looking at
marginal change. So already you see renewable power and even
things like electric vehicles are still tiny parts of the
overall market. But when you look at their share of
(22:11):
the growth in the overall energy or automobile market. They're
already at more than fifty percent in a lot of
major markets. So to my mind, when new technologies begin
to capture a bigger share of growth, that's when they
start to attract more capital. It's almost like a self
fulfilling cycle. I mean, I think there's a reason why
(22:31):
big incumbent car makers who are selling eighty odd million
new internal combustion engine cars a year globally are putting
the vast majority of their R and D spending into
electric vehicles, which maybe a tiny part of their sales now,
but they clearly see as being the way things are going.
It's a very talent statistic, I think. In terms of
(22:53):
looking towards peak demand. I try not to give hard
and fast date because you'll be wrong on that, because
I will be wrong. But I think, you know, look
back over the past decade, you go back to November
two thousand and nine, it'd be really hard to predict
what has happened. I mean, the energy business has changed
(23:14):
out of all recognition. The idea that we would end
the decade with Saudi Aramco trying and failing to sell
itself to international investors, to me, is just wild. It's
almost certain to me that when we get to November
twenty twenty nine, there will have been enormous changes in
the energy business, and given the underlying dynamics, I would
(23:35):
guess those changes tend more towards the peak demand end
of things. Yeah, it's shocking when you look back to
the late two thousands, right, and the hand ringing from
Congress about US shortages of oil and natural gas, and
now the US is the world's biggest producer of crude oil, right.
I mean, it's just it's astonishing how different things are
from from where they were supposed to be. Before we
(23:56):
get to Saudi Aramco, I wanted to ask a last
question about renewables. Would you say that if India and
China do want to not repeat the mistakes the US
made as its economy was industrializing, if they could put
their investment instead in renewables, that they could actually avoid
our trajectory. Is the technology there that that's doable? The
technology is there that they can certainly start doing it now?
(24:19):
I mean, if you look at the price statistics and
the projections from Bloomberg's own Bloomberg New Energy Finance. I
mean they foresee, essentially China and India are the ballgame
when it comes to renewables because they still have growing
energy needs, they have enormous pollution problems, and they have
this added geopolitical issue of becoming dependent on places like
(24:43):
the Middle East when they don't necessarily have a giant
navy to help them with that. The weird thing is
China is in the uncomfortable position right now of depending
more and more on Middle Eastern oil and by definition,
depending on the US Navy to keep the sea lanes clear.
That's a really strange dynamic. That's certainly not something they
want to be dependent on for a long time. But
(25:04):
yet we have to do that, contrary to some of
the other moves and the Trump administration. We almost have
to do that because we're dependent on imports from China. Right.
So it's not as if we're doing that in an
altruistic sense. We're doing that because we need to economically speaking.
Oh yeah, and I mean it was never altruistic. I mean,
(25:26):
you know, it had a strategic game and the strategic
games of change. Yes, certainly. So let's let's go back
to Saudi Aramco, because that is completely fascinating, and even
in the last I think you wrote a piece, even
in the last four or five years, it's astonishing how
that's changed. And so maybe that's also a way to
help see how the energy markets have changed so dramatically.
(25:47):
So tell us about Saudi Aramco then and now and
what happened in the interim. So Saudi Aramco is obviously
it's the foundation of the Saudi Arabian economy. More importantly,
it's the vital part of the social contract between the
ruling family and this young, fast growing population. And if
(26:10):
we go back to twenty fourteen, which is when all
prices collapse, I think at that time the view was
Sadi Aramco was still essentially the top dog in OPEC,
which was still seen as the top dog in the
all market, and if things were going to play out
in the normal way, it was about to go through
a period of low revenues and then the cycle would
(26:32):
come back up and we'd be back to what we
were doing before. I think a few things have changed.
One is OPEC has lost any sort of control it
had over the oil market. I mean to me, even
though you know the lights havn't exactly been switched off
in the ballroom in Vienna. But to me, OPEC is
basically dead, and is that essentially a function of US fracking.
(26:54):
It's a function of US fracking. I think it's also
a function of the fact that outside of Saudi Arabia
and a few of the Gulf monarchies, let's face it,
most OPEC members it's not that they struggle to you know,
stay within their quotas, it's that they struggle to produce.
They're royal. I mean, you look at the tragic situation
(27:14):
in Venezuela. Yes, it's Saudi Arabia and a lot of
walking wounded countries in OPEC. And I think the fact
that they've had to come up with this thing called
plus where they embrace Russian that's that's right, that's including
the other ten countries that are helping them keep a
lid on production. Yea. The very fact that that exists
(27:35):
now tells you that OPEC as an entity is pretty
much dead. And that's another shocking dynamic rate that you
would have predicted a decade ago. So back back to
a Ramca, I think you wrote a piece. It's still
the most profitable company in the world. Apparently from what
we can see into its numbers. Yes, but yet it's
not able to go public at nearly the valuation that
(27:55):
Mohammed bin Salman had once predicted. He'd said two trillion
dollars and where are we now? So the range they've
got now is about one point six to one point
seven trillion, But that is predicated on selling only about
one half percent the company into the Saudi Arabian domestic
stock market, which has a free float which is smaller
than exomobiles market cap, And so that basically means it
(28:18):
doesn't then the numbers aren't real. No, I mean I
characterize it as more of a sort of elaborate form
of taxation than a real IPO. Explain that. Why an
elaborate form of taxation. Well, essentially you're going to sell
it to a lot of domestic shareholders, so you'll have
the retail part of that, and they're being lent money
by Saudi banks to help fight to help fund their
(28:39):
share purchases. And then you have a lot of rich
Saudi families who you know, I think it's fairly safe
to say have been encouraged by the regime to participate
at a certain price, But doesn't that in some ways
obviate the purpose of the IPO. At least the purpose
of the IPO of a Ramco as I understood it
was to provide the funding to help transitions Audi Rabe's
(29:00):
economy away from dependence on oil because right now, even
at current oil prices, they can't fund their social spending.
Right NF prices plumb, it further adoe to renewables. What happens.
But if you're effectively making your own population by the shares,
isn't that why bother? Yes? Good question. I think they
obviously felt like they needed to go ahead with it.
(29:22):
I think in a normal situation the IPO would have
been pulled. They've sort of failed on every aspect of
what this was supposed to achieve. It was supposed to
mark the kind of reform of the Saudi economy and
provide a lot of funding to help with that. As
it turns out, it's not going to help beyond You know,
twenty five billion is not to be sneezed at, but
(29:43):
it's definitely not what they were planning on doing. There's
no big kind of global coming out party because it's
not being marketed outside the country. And I think what
this gets back to is, on any given measure, Aramco
is fantastically profitable. It's margins, it's return on capital, everything
just blows away the rest of the competition in the
(30:06):
our business. But the difference is if you look at
a company like you know, an XON or a BP
or something like that, their profits are smaller. But on
the other hand, they don't have to fund an entire
country with those profits. And that's a Ramco's issue, and
it's the reason the valuation wouldn't get to where they
wanted it to be, because, yes, the cash flows are enormous,
(30:29):
but if you're a fund manager sitting in London on
New York, you're going to put a pretty high discount
rate on that because you know that what you're buying
isn't just an our company. What you're also buying is
a stake in that thing known as the Saudi Reform Project.
I saw that line in one of your pieces about
how that was a Ramco's purpose, right funding an entire country.
It's it's very, very different. Why has the investment community's
(30:51):
attitude toward a Ramco change so dramatically in recent years
such that excitement about this mammoth IPO of this profitable
company became skepticism. Is that partly what we've seen about
from the Saudi regime. Is it also a commentary on
the dawn of the age of renewables, just as much
as the auto manufacturers moving to electric carses Or is
(31:12):
it both? I think it's all those things. I mean,
I think it's partly it was missold to my mind
that IPO should have happened after a long period of reform.
It should have been the capstone of reform. It should
not not the the kind of teaser for reform, because
what you're essentially asking people to do is to buy
(31:32):
a stake in the promise of reform. It would have
been a much easier sell if the Saudi Arabian government
could have pointed to a bunch of positive changes and
then said, okay, now we're going to sell you part
of our oil company. Their fixation right, and that again,
you know, just served to emphasize exactly what you were
(31:53):
buying into. This obsession with the two trillion dollar figure
was clearly clearly kind of spiked the ball in the process.
And then I think the growing awareness that something will
have to be done to address climate change is also
weighing on people's minds. And you know, if you're a
fund manager, I mean maybe in New York, I think,
(32:13):
particularly in a city like London, you're going to have
a tough job saying to people I'm buying into sixty
odd years worth of crude oil reserves at a time
when the scientists of the IPCC are telling us that
if we don't stop burning this stuff within the next
fifteen to twenty years, we're dead. That's a real change,
(32:35):
isn't it. Because maybe I'm being too harsh, but I
would have said five years ago, even three years ago,
investors wouldn't have given a dam and now they do.
Is that fair? That's certainly the impression I have. I mean,
it's been one of the biggest changes in the past
few years, is just how much momentum the movement to
do something about climate change has gained, and just also
(32:58):
the attack and politics of it. I mean, we talked
earlier about the carbon tax bill in two thousand and nine.
I mean, to be, that's only ten years ago. That
seems almost quaint. Now. Yes, people still talk about a
carbon tax, and I think it remains probably the most
important tool that we can use. But the argument has
moved way beyond that. You look at what was being
(33:21):
talked about by Democratic presidential candidates, what's being talked about
at individual city levels, and in some ways, you know,
the industry has only itself to blame on this. It
has spent a good thirty years obfruskating the argument, blocking action,
and what that's done is it's kind of like pulling
back on an elastic and when that elastic band snaps,
(33:45):
it's going to blow way past things like carbon taxes
and go direct for things like gasoline car bands in
major cities, which we're already seeing talked about in Europe.
Obviously progress, But why is there this split that you've
mentioned and written about between the big oil comes and
the frackers about the idea of a carbon tax. Oh?
I think it's about time horizons. Okay, you know, so
(34:06):
the fracas, especially these days, I mean, they don't really
look beyond the next twelve months, right, because what they
want to do is make sure that they can balance
their spending. The larger oil companies tend to have much
longer time horizons decades, and they're starting to care that
they and we are still around in decades. Well, yeah,
they're starting. I mean what they're thinking about is does
(34:29):
this company have a viable business model ten years from now?
You know, can we really attract the attention and capital
we need from investors in a world where demand may
not have plummeted, but demand has stopped growing. That's just
not something they've had to deal with before. It's actually
really interesting because I mean, the world moves forward and
(34:51):
fits and starts forward and backwards. Right that even though
there has been this change on the part of investors,
you've had growing up concurrently with that US frackers, right,
which only exists because investors had until recently been very
willing to fund them, right. Yeah. And so you have,
just as the big oil majors are starting to think
more long term about these these consequences, you have this
(35:13):
other industry that has grown up in parallel, right, that
is sort of thwarting all of that. And by the
effect it's had on oil prices, the way in which
it's lower oil prices, that has pushed back perhaps some
of the work that would have been done on renewables. Yeah, no,
I think you know, it's interesting to watch the majors
coming into shale. They sort of ignored it. Yes, for
a long time time. It's a business model that that
(35:36):
isn't really suited to very large companies, which have tended
to be more focused on pulling off gigantic, multi year projects.
But now they're saying, well, you know, we can actually
go in and make this work economically. And if you
look at Exxon and Chevron, they are all in on
shale and saying that, unlike to date, they will actually
(35:59):
turn this into a profitable cash generating business. I mean,
the jury is out on that for now. I think,
you know, one of the things that's happened with the
fracas in particular, is people used to look past the
bad capsule management because they would say, well, even if
these guys are paying themselves too much, and even if
(36:21):
they tend to, you know, go way way over their
heads when there's a boom, when the oil price goes up,
I'll make out like a bandit. But what I've noticed,
particularly in the last eighteen months or so, investors are
no longer pricing in that oil option. They are no
longer saying, well, bad as this company is. When all
goes back to eighty ninety one hundred bucks I'll still
(36:43):
make a profit. They're just not banking on that anymore.
That's a really interesting change too. And perhaps you could
argue that big oil getting interested in fracking might create
a longer term orientation around it. Right, So perhaps you
could argue even if they can't, even if it turns
out they can't make money at it, the other that
having them step in and invest in it will actually
(37:03):
be good for the world. Is that to naive a
point of view, good for the world in the sense
of keeping supply good, good for the world in the
sense of being a bit more responsible, being a bit
more long term in their view of it, instead of
being being operating on a tomorrow or twelve month horizon
like the frackers do. Yeah. Possibly, I mean, I think
the bull argument for the major's going into shale is
(37:24):
that it will extend the life of the resource. Yea,
that you may not get so many years where production
grows at a million barrels a day, but you'll have
a long period where it grows at five or six
hundred thousand barrels a day because they'll dump all the
bad acorage, they'll focus on the good acorage, and they'll
approach it in a more methodical manner. And yes, on
the environmental side, they will. They'll be better about flaring,
(37:47):
and they'll be more responsible with their fluids because they
care more about their brand, etc. Etc. Are you surprised
when you look back that it was the Obama administration
that overturned the ban on exports and is that thing
that surprised you and that you think matters or do
you think it's small enough that it's irrelevant. I don't
think it's irrelevant. It didn't surprise me a huge amount.
(38:10):
Obama obviously, early in his administration there was this push
to do something on climate change, once most of his
political capsule had been burned on healthcare reform, that focus
on climate change and doing something about carbon emissions. Kind
of it didn't fall away because obviously we still had
action aimed at cleaning up power plant emissions and that
(38:34):
sort of thing. But it was definitely it was opportunity downgraded,
and in fact, overturning the export ban was done in
exchange for some concessions from Republicans on other environmental measures,
and I think it was it was a big deal
because it allowed the fracking boom to continue. I mean,
if you know if you go back to before the
(38:55):
export ban, the differential between US OR prices and international
loop all prices would had blown out to an enormous extent,
and you would have definitely seen a lot of companies
either go under or have to scale back drilling because
they just weren't getting the prices they needed. It's just fascinating.
It's back to your point about how much politics matters
in this industry once again. Right to believe that the
(39:18):
export band over to the overturning of the historic forty
year export band actually had something to do with healthcare
re form, right, I mean, that's that's politics and spades.
So I wanted to before we finished up. I wanted
to go back to Saudi Aramco because it seems to
me that it's it's easy from a sort of naive,
perhaps naive perspective, to say, oh, how great that they
(39:40):
can't take a ramco public. It's a commentary on the
repressive Saudi regime that needs to change. But given how
much the regime has been dependent on oil revenues and
would be dependent on a ramco to continue to essentially
fund social stability, is this something we should be celebrating
or is this something that's actually a little bit dangerous. Oh,
(40:00):
it's it's it's quite dangerous. I mean, I think ever
since I think it was January twenty sixteen when Prince
Mohammad been Salmon gave that initial interview where he laid
out this vision. You know, when you have a regime
that is quite ossified, that depends on you know, a
rentier economy, has been quite repressive. The most dangerous moments
(40:24):
for those regimes is when they embrace reform, because that's
when the cracks can begin to appear, because everything has
been kind of suppressed. That you hold out this vision
of what can be and you start to tinker with
the machinery of the state, and at quite a fundamental level,
you know, listing Saudi Aramco and potentially laying out all
(40:46):
its secrets to a global investor audience, which didn't quite
happen in the end, but it was held out there.
That's a big move, and I think it spoke to
the pressures on the regime. I mean, I think like
the oil market since the Second World War, in some respect,
Saudi Arabia is a product of this kind of packs
Americana oil dependent global economy that we've had for the
(41:10):
past seventy years or so. And I think they saw
the writing on the wall in terms of all prices
not necessarily roaring back in the way they used to
the US, not necessarily as interested in the Middle East
as it was, and so they had to change. But
the problem is when you've been the sort of embodiment
of not changing so that long, you then seek to
(41:32):
change yourself. That's a very dangerous moment. And then, particularly
as we've discussed the way in which it went, where
it's almost a version of the Emperor has no clothes, right,
Instead of having it be the two trillion dollar deal
of the century, it's turned out to be quite a
bit less than that, right, Yeah, those are all the
risks you run. And you know, Saudi Arabia, like you know,
(41:54):
a lot of it's it's peers in the Middle East,
you know, and has essentially had this social contract, which
is the government will provide a lot of funding for
things and a lot of subsidies. You know, look at
the riots in Iran over moving the gasoline price up
from a few cents to twenty cents or whatever the
price is. Yeah, those things matter, and when you start
(42:16):
to tinker with them. It can unleash you forces that
you've kept down for a long time. It's a really
interesting way of thinking about this and where we are now,
because I think we do tend to celebrate the advent
of renewables is entirely a good thing, and from some
standpoints it is. And you had a great quote from
Thomas Edison in one of your recent pieces. But in
(42:37):
some sense, as we so often do, we're also not
thinking through all of these broader ramifications. Right, what does
this US led oil based world economy? What does it
mean when that starts to fall apart? Yeah, well, I
think with any big change in the underlying geopolitical architecture,
there's going to be winners and losers. You know, the
oil age elevated a place like Saudi Arabia from relative
(43:00):
obscurity to a you know, not a superpower, but definitely
a global power. There's a reason it has retained that
spare capacity to maintain its relevance, and it's kind of
hand on the tiller of the global economy. Likewise, as
the energy system shifts to other technologies, that's going to
(43:20):
create relative winners and losers as well. The US is
in the fairly enviable position of if it uses the
opportunity correctly of you know, having the opportunity to be
a winner. In either case. It does have large natural resources,
but it also has amazing technological capability deep capsule markets.
(43:42):
It can win in either scenario, but that won't hold
true for a lot of other places. I think it's
back to your point about how things are changing now
in a way that is just the piece of change
is just is just dramatic. Thank you so much for coming.
Thank you. I always love it when I think I'm
thinking broadly about a topic, but it turns out there
is so much more, and that I was actually thinking
(44:04):
quite narrowly, perhaps because of my previous work on fracking.
I'm obsessed with the lack of profitability of these companies,
are they we works as leam asked, and what that
may mean for oil prices. But really this is just
part of a much bigger issue. The entire framing of
our world as a US led, oil driven global economy
(44:25):
is changing drastically, and that has huge ramifications for economies
and for politics. All that we know for sure is
that in a decade we'll look back and be shocked
at what we didn't see. Making a Killing is a
co production of Pushkin Industries and Talk and Blade. It's
produced by Ruth Barnes and Laura Hyde. My executive producers
(44:47):
are Alison McClean no relation in Making Casey. The executive
producer at Pushkin is Mia Loebell. Engineering by Jason Rostkowski.
Our music is by Jed Flood. Special thing to Jacob
Weisberg at Pushkin and everyone on the show. I'm Bethany McClain.
Thanks so much for listening. Find me on Twitter at
(45:07):
Bethany mac twelve and let me know which episodes you've
most enjoyed.
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Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.