1 00:00:03,190 --> 00:00:05,300 Speaker 1: You're listening to a CNA podcast. 2 00:00:08,210 --> 00:00:12,039 Speaker 2: Hi, I'm Andrea Heng, and this is Money Talks Explains. Now, 3 00:00:12,060 --> 00:00:15,489 Speaker 2: Money Talks Explains is where we have a burning question, 4 00:00:15,699 --> 00:00:17,909 Speaker 2: and then we go find an expert to break it 5 00:00:17,909 --> 00:00:20,979 Speaker 2: all down for us. So one of the headlines that's 6 00:00:20,979 --> 00:00:24,340 Speaker 2: come out from the conflict between Iran and Israel or 7 00:00:24,340 --> 00:00:29,020 Speaker 2: any kind of geopolitical standoff really is how oil prices 8 00:00:29,020 --> 00:00:29,979 Speaker 2: are affected. 9 00:00:30,559 --> 00:00:34,659 Speaker 2: But have you ever wondered why? What is the correlation 10 00:00:34,659 --> 00:00:38,659 Speaker 2: between war and oil prices? Well, that's exactly what we 11 00:00:38,659 --> 00:00:41,619 Speaker 2: are getting Vanana Hari to do for us today. She's 12 00:00:41,619 --> 00:00:45,839 Speaker 2: founder and CEO of Vanda Insights, which monitors the global 13 00:00:45,840 --> 00:00:49,699 Speaker 2: energy markets, and she's going to help us connect the dots. Hi, 14 00:00:49,819 --> 00:00:50,500 Speaker 2: welcome to the show. 15 00:00:50,580 --> 00:00:52,930 Speaker 2: Oh, thank you, Andrea. My pleasure to be here. The 16 00:00:52,930 --> 00:00:55,650 Speaker 2: pleasure is all ours in hosting you. So set the 17 00:00:55,650 --> 00:00:58,889 Speaker 2: context for us here, Vanda. Oil is something that every 18 00:00:58,889 --> 00:01:02,529 Speaker 2: single person needs more than we know, actually, whether we 19 00:01:02,529 --> 00:01:05,529 Speaker 2: see it or we know it. Why is this so? OK, 20 00:01:05,730 --> 00:01:09,569 Speaker 2: great place to start. So oil is the lifeblood of 21 00:01:09,569 --> 00:01:10,529 Speaker 2: the global economy. 22 00:01:11,019 --> 00:01:16,080 Speaker 2: When we look at the world's primary energy mix, 82% 23 00:01:16,080 --> 00:01:20,220 Speaker 2: of it is what we call fossil fuels. The remaining 18% 24 00:01:20,220 --> 00:01:24,089 Speaker 2: or so is renewables and the more new energy stuff. 25 00:01:24,580 --> 00:01:28,819 Speaker 2: Now oil alone is the single biggest component of that 26 00:01:28,819 --> 00:01:31,899 Speaker 2: energy basket, 32%. 27 00:01:32,279 --> 00:01:35,370 Speaker 2: And it has reduced. The share has reduced a little 28 00:01:35,370 --> 00:01:39,690 Speaker 2: bit over the past 678 decades, but not by that much. OK. 29 00:01:39,849 --> 00:01:43,730 Speaker 2: And for the foreseeable future, the coming decades, it is 30 00:01:43,730 --> 00:01:48,589 Speaker 2: expected to remain the primary source or the biggest source 31 00:01:48,589 --> 00:01:51,690 Speaker 2: of energy in the world basket. So when we read 32 00:01:51,690 --> 00:01:54,290 Speaker 2: about the oil market, we often hear the names OPEC, 33 00:01:54,330 --> 00:01:58,599 Speaker 2: OPEC plus, OPEC spelled OPEC, which stands for the Organization 34 00:01:58,599 --> 00:01:59,209 Speaker 2: of Petroleum. 35 00:01:59,600 --> 00:02:03,401 Speaker 2: Exporting countries and they get mentioned a lot, right? So 36 00:02:03,401 --> 00:02:06,721 Speaker 2: who are the biggest suppliers and why are they so 37 00:02:06,721 --> 00:02:11,720 Speaker 2: influential to oil prices? So OPEC and which has in 38 00:02:11,720 --> 00:02:16,001 Speaker 2: recent years become OPEC plus because about 10 members that 39 00:02:16,001 --> 00:02:19,561 Speaker 2: were not traditionally a part of OPEC. Now OPEC has 40 00:02:19,561 --> 00:02:22,660 Speaker 2: been around for, I think, at least 6 decades now. 41 00:02:22,800 --> 00:02:25,921 Speaker 2: So they were joined by these 10 other countries, the 42 00:02:25,921 --> 00:02:26,269 Speaker 2: biggest 43 00:02:26,322 --> 00:02:30,391 Speaker 2: Of which is Russia. So they came to be known 44 00:02:30,391 --> 00:02:35,181 Speaker 2: as the non-OPEC collaborators of OPEC. Now, as a result 45 00:02:35,181 --> 00:02:38,530 Speaker 2: of this collaboration, now we have this group of countries, 46 00:02:38,632 --> 00:02:44,072 Speaker 2: which account for nearly 40% of global oil supply. So 47 00:02:44,072 --> 00:02:47,671 Speaker 2: that is a big deal. So whatever decisions they take 48 00:02:47,671 --> 00:02:52,280 Speaker 2: with regards to their production policy is obviously critical for 49 00:02:52,281 --> 00:02:53,272 Speaker 2: the supply demand. 50 00:02:53,352 --> 00:02:56,503 Speaker 2: Balance of the markets for sure. As with any other 51 00:02:56,502 --> 00:02:59,822 Speaker 2: trade in the world, how do the supply demand dynamics 52 00:02:59,822 --> 00:03:03,782 Speaker 2: of these specific players affect us small guys, the consumers 53 00:03:03,782 --> 00:03:05,782 Speaker 2: at the end of the day? So let's just go 54 00:03:05,782 --> 00:03:09,942 Speaker 2: back about 5 years to 2020, when COVID happened, and 55 00:03:09,942 --> 00:03:12,473 Speaker 2: we all know what life was like and how our 56 00:03:12,473 --> 00:03:17,763 Speaker 2: roads looked and transportation came virtually to a halt.Road transportation, 57 00:03:17,912 --> 00:03:20,302 Speaker 2: air transportation. Our lives didn't. 58 00:03:20,383 --> 00:03:24,253 Speaker 2: Stop. We were still getting air conditioning, cooling our houses, 59 00:03:24,413 --> 00:03:27,014 Speaker 2: warming our houses, electricity, and what have you, but we 60 00:03:27,014 --> 00:03:30,654 Speaker 2: did stop moving around, right? That led to a huge 61 00:03:30,654 --> 00:03:36,604 Speaker 2: collapse in global oil demand consumption, essentially, almost overnight. And 62 00:03:36,604 --> 00:03:40,093 Speaker 2: that's when this group stepped in and said that, OK, 63 00:03:40,253 --> 00:03:44,083 Speaker 2: this is not a good thing, short, medium to long term, 64 00:03:44,453 --> 00:03:47,283 Speaker 2: such shocks are not good for producers. 65 00:03:47,425 --> 00:03:50,324 Speaker 2: Because first of all, if you continue producing, prices will 66 00:03:50,324 --> 00:03:52,914 Speaker 2: continue going down, right? Because there's no demand for that. 67 00:03:53,404 --> 00:03:55,085 Speaker 2: You're going to run out of storage. Where are you 68 00:03:55,085 --> 00:03:57,565 Speaker 2: going to put that oil? And if you live with 69 00:03:57,565 --> 00:03:59,634 Speaker 2: this kind of a price shock for a long time, 70 00:03:59,804 --> 00:04:03,634 Speaker 2: what is it going to do to the future sustainability 71 00:04:03,634 --> 00:04:05,794 Speaker 2: of your company? That's true of any company because you 72 00:04:05,794 --> 00:04:08,955 Speaker 2: don't want to bleed money. No, and certainly not for 73 00:04:09,205 --> 00:04:13,365 Speaker 2: this kind of an unanticipated, unforeseen shock that all company 74 00:04:13,365 --> 00:04:14,324 Speaker 2: was prepared for, right? 75 00:04:14,610 --> 00:04:19,980 Speaker 2: So this group played a vital role in rebalancing. So 76 00:04:19,980 --> 00:04:23,368 Speaker 2: overnight they decided they're going to slash production. 77 00:04:23,760 --> 00:04:28,559 Speaker 2: By about 10 million barrels a day, which rebalanced the markets. 78 00:04:28,700 --> 00:04:32,519 Speaker 2: Prices gradually came up. Of course, the world gradually getting 79 00:04:32,519 --> 00:04:35,200 Speaker 2: back to normal was obviously on the demand side was 80 00:04:35,200 --> 00:04:40,040 Speaker 2: a big factor. But the immediate step that was needed 81 00:04:40,040 --> 00:04:43,678 Speaker 2: to save a lot of companies, oil producers essentially, from 82 00:04:43,678 --> 00:04:47,000 Speaker 2: going bankrupt and perhaps never resurfacing. 83 00:04:47,399 --> 00:04:49,959 Speaker 2: This group played a big role. Before that, they have 84 00:04:49,959 --> 00:04:52,510 Speaker 2: continued to play a role, and after that, they've continued 85 00:04:52,720 --> 00:04:55,799 Speaker 2: to play the sort of balancing role. There's a lot 86 00:04:55,799 --> 00:04:59,609 Speaker 2: of controversy around it. There are a lot of fingers 87 00:04:59,609 --> 00:05:05,640 Speaker 2: routinely pointed. It gets labeled a cartel. It gets pinpointed 88 00:05:05,640 --> 00:05:09,140 Speaker 2: as this is the group that is essentially trying to 89 00:05:09,140 --> 00:05:10,558 Speaker 2: keep oil prices high. 90 00:05:10,779 --> 00:05:16,320 Speaker 2: The very critical role they play in balancing supply with 91 00:05:16,320 --> 00:05:18,719 Speaker 2: global demand and which they are able to play, especially 92 00:05:18,720 --> 00:05:22,039 Speaker 2: now accounting for 40% of supply. Had it been a 93 00:05:22,040 --> 00:05:25,399 Speaker 2: smaller proportion, they may not have been as influential. So 94 00:05:25,399 --> 00:05:28,000 Speaker 2: it's a very critical role they are playing, which often 95 00:05:28,000 --> 00:05:31,359 Speaker 2: gets overlooked. Well, if they're trying to keep oil prices up, 96 00:05:31,480 --> 00:05:34,079 Speaker 2: why aren't we at $80 today instead of 60? 97 00:05:34,488 --> 00:05:36,559 Speaker 2: right? And on that note, I wanted to talk to 98 00:05:36,559 --> 00:05:38,950 Speaker 2: you about that, the prices that they are at now, 99 00:05:39,119 --> 00:05:42,839 Speaker 2: what's going on here? How is this group managing the 100 00:05:42,839 --> 00:05:46,600 Speaker 2: situation with the oil prices vis a vis supply and demand? 101 00:05:46,720 --> 00:05:49,519 Speaker 2: Sort of two themes here, right? What's happening in the 102 00:05:49,519 --> 00:05:52,369 Speaker 2: Middle East? Why is it always in the news? Why 103 00:05:52,369 --> 00:05:56,640 Speaker 2: is it the biggest shock to oil when something breaks 104 00:05:56,640 --> 00:05:57,558 Speaker 2: out over there? 105 00:05:57,839 --> 00:06:03,290 Speaker 2: And how able or not is OPEC or OPEC plus 106 00:06:03,290 --> 00:06:06,649 Speaker 2: able to manage a situation when there's a flashpoint in 107 00:06:06,649 --> 00:06:09,209 Speaker 2: the Middle East. So let's zoom out. So when you 108 00:06:09,209 --> 00:06:17,079 Speaker 2: look at the world's major oil producers, Saudi Arabia, Iran, Iraq, Kuwait, Oman, UAE, Qatar, 109 00:06:17,410 --> 00:06:20,489 Speaker 2: all of these are based in the Middle East. The 110 00:06:20,488 --> 00:06:23,690 Speaker 2: other sort of issue that keeps the markets on edge 111 00:06:23,690 --> 00:06:26,970 Speaker 2: with regards to the Middle East is there's definitely. 112 00:06:27,092 --> 00:06:32,083 Speaker 2: And potentially two crucial choke points through which most of 113 00:06:32,083 --> 00:06:34,673 Speaker 2: this all of the oil that I talked about a 114 00:06:34,673 --> 00:06:38,122 Speaker 2: moment ago flows through. Now what happens when we talk 115 00:06:38,122 --> 00:06:41,121 Speaker 2: about a choke point is essentially it's a very narrow waterways. 116 00:06:41,282 --> 00:06:44,803 Speaker 2: So should any kind of hostilities break out, any country 117 00:06:44,803 --> 00:06:48,041 Speaker 2: in this case, Iran, sitting very close to the Strait 118 00:06:48,041 --> 00:06:51,881 Speaker 2: of Hormuz, which accounts for about 20 million barrels per 119 00:06:51,882 --> 00:06:55,143 Speaker 2: day of about 50% of the world's oil supply size. 120 00:06:56,365 --> 00:06:59,825 Speaker 2: On the other side of the Arabian Peninsula you have 121 00:06:59,825 --> 00:07:03,145 Speaker 2: the Bab al-Mab Strait at the mouth of the Red Sea, 122 00:07:03,555 --> 00:07:06,835 Speaker 2: which is very close to Yemen and the Houthi rebels 123 00:07:06,835 --> 00:07:10,196 Speaker 2: of Yemen. The major oil producing countries for the most 124 00:07:10,196 --> 00:07:13,196 Speaker 2: part other than Iran, which has been under US sanctions 125 00:07:13,196 --> 00:07:16,355 Speaker 2: on and off and Western sanctions, and Iraq, which has 126 00:07:16,355 --> 00:07:19,835 Speaker 2: some other internal problems. So you have this region which 127 00:07:19,835 --> 00:07:25,545 Speaker 2: is the world's single biggest concentration of oil and gas production. 128 00:07:25,859 --> 00:07:32,179 Speaker 2: And is geopolitically unstable and has these flash points and 129 00:07:32,179 --> 00:07:37,220 Speaker 2: has this conflict between Israel and Iran, which has been 130 00:07:37,220 --> 00:07:39,690 Speaker 2: going on for decades and have you found a real 131 00:07:39,690 --> 00:07:42,679 Speaker 2: solution to that conflict? I don't think so. You talked 132 00:07:42,679 --> 00:07:46,140 Speaker 2: about how the Middle East concentration makes up about 40% 133 00:07:46,140 --> 00:07:49,420 Speaker 2: of global supply, about a quarter, about 25% plus is 134 00:07:49,420 --> 00:07:51,940 Speaker 2: about 40%, right? Who makes up the rest? 135 00:07:52,286 --> 00:07:55,055 Speaker 2: OK, if you look at the big producers and the 136 00:07:55,055 --> 00:08:02,165 Speaker 2: rest of the world, and thankfully relatively politically geopolitical stable places, OK. 137 00:08:02,536 --> 00:08:05,936 Speaker 2: So the US today is the single biggest producer in 138 00:08:05,936 --> 00:08:08,816 Speaker 2: the world. It's not Saudi Arabia, it's not Russia. So 139 00:08:08,816 --> 00:08:12,735 Speaker 2: today the US pumps about 13.5 million barrels per day 140 00:08:12,735 --> 00:08:17,575 Speaker 2: of oil. Canada is also a major producer. And then 141 00:08:17,575 --> 00:08:18,256 Speaker 2: you have a. 142 00:08:18,611 --> 00:08:23,932 Speaker 2: In South America, Venezuela, which is a member of OPEC plus, 143 00:08:23,971 --> 00:08:26,842 Speaker 2: but you have Brazil and Mexico, which are not members 144 00:08:26,842 --> 00:08:30,721 Speaker 2: but also major producers. What about China? What about in Asia? Yes, 145 00:08:30,891 --> 00:08:35,331 Speaker 2: Asia used to be a much bigger producer than it 146 00:08:35,331 --> 00:08:38,252 Speaker 2: is now. So the main producing regions, of course, Malaysia 147 00:08:38,252 --> 00:08:42,681 Speaker 2: and Indonesia, right? You mentioned China. It's interesting. So China produces, 148 00:08:42,692 --> 00:08:44,531 Speaker 2: give or take about 5 million barrels per day. 149 00:08:44,929 --> 00:08:47,859 Speaker 2: The reason it doesn't get talked about much is that 150 00:08:47,859 --> 00:08:51,570 Speaker 2: China consumes needs all of its oil production and more. 151 00:08:52,219 --> 00:08:55,169 Speaker 2: So China pumps about 5 million barrels per day. It 152 00:08:55,169 --> 00:08:58,539 Speaker 2: imports close to 11 million barrels. Oh, so not even 153 00:08:58,539 --> 00:09:02,380 Speaker 2: enough for domestic consumption, nowhere and that is pretty much 154 00:09:02,380 --> 00:09:07,179 Speaker 2: the story of Asia and Southeast Asia and Australia that 155 00:09:07,179 --> 00:09:10,460 Speaker 2: all of these are basins that have been producing oil 156 00:09:10,460 --> 00:09:13,580 Speaker 2: for a long time, for decades that haven't been any. 157 00:09:14,109 --> 00:09:18,859 Speaker 2: major new discoveries. So we are in this region sitting 158 00:09:18,859 --> 00:09:23,460 Speaker 2: on big basins which are mature, which are in perennial decline. 159 00:09:23,630 --> 00:09:28,189 Speaker 2: This region contributes to the biggest demand growth globally. So 160 00:09:28,190 --> 00:09:32,510 Speaker 2: it is a very interesting dynamics here, declining production, no 161 00:09:32,510 --> 00:09:37,348 Speaker 2: new discoveries, demand leaping ahead. So this region is actually 162 00:09:37,349 --> 00:09:41,830 Speaker 2: very import dependent, going to become increasingly more so. And 163 00:09:41,830 --> 00:09:42,510 Speaker 2: as a result, 164 00:09:42,609 --> 00:09:46,419 Speaker 2: Also very vulnerable to shocks in the Middle East. Yeah, 165 00:09:46,599 --> 00:09:51,719 Speaker 2: and that's also what contributes ultimately to how oil prices move. 166 00:09:51,880 --> 00:09:57,000 Speaker 2: So therein lies the question, why exactly are oil prices 167 00:09:57,000 --> 00:10:00,199 Speaker 2: so sensitive? I mean, since it's a necessity, why can't 168 00:10:00,200 --> 00:10:04,950 Speaker 2: it be fixed? A lot of commodities, very important commodities, 169 00:10:05,119 --> 00:10:08,840 Speaker 2: including coal and metals until very recently have traded on 170 00:10:08,840 --> 00:10:11,159 Speaker 2: a fixed price basis. So what we mean by that 171 00:10:11,159 --> 00:10:11,460 Speaker 2: is 172 00:10:11,760 --> 00:10:15,229 Speaker 2: The major producers, major consumers get together and say, OK, 173 00:10:15,270 --> 00:10:18,309 Speaker 2: for the next 1 year or 5 or 10 years even, 174 00:10:18,510 --> 00:10:20,950 Speaker 2: we're going to trade on the basis of this number. 175 00:10:21,030 --> 00:10:24,390 Speaker 2: Now what happens is if there is more demand and 176 00:10:24,390 --> 00:10:29,309 Speaker 2: less supply, which needs prices to go up to incentivize 177 00:10:29,309 --> 00:10:31,349 Speaker 2: more production, that wouldn't happen. 178 00:10:31,599 --> 00:10:35,469 Speaker 2: So essentially in a fixed price regime, the market is 179 00:10:35,469 --> 00:10:41,709 Speaker 2: highly inefficient in that any signals of oversupply, more supply, 180 00:10:41,719 --> 00:10:46,468 Speaker 2: and less demand, which should depress prices and prompt producers 181 00:10:46,469 --> 00:10:50,739 Speaker 2: to cut production to restore the balance, those signals are 182 00:10:50,739 --> 00:10:54,869 Speaker 2: absent in today's world, so it's actually interesting pros and 183 00:10:54,869 --> 00:10:58,669 Speaker 2: cons of having so-called spot prices or prices moving. 184 00:10:59,260 --> 00:11:03,020 Speaker 2: Forget day to day, minute to minute basis, right? Responding 185 00:11:03,020 --> 00:11:06,789 Speaker 2: to the demand supply balance. There are some cons, but 186 00:11:06,789 --> 00:11:11,299 Speaker 2: the biggest pro is this that it is an efficient, 187 00:11:11,590 --> 00:11:16,270 Speaker 2: effective channel to transmit signals to producers and consumers. So 188 00:11:16,270 --> 00:11:19,010 Speaker 2: not just producers, consumers as well. So prices were, let's 189 00:11:19,010 --> 00:11:21,630 Speaker 2: say crude was to jump into the 90s and 100s today. 190 00:11:22,299 --> 00:11:25,619 Speaker 2: Yes, producers will produce more, but it's limited how much 191 00:11:25,619 --> 00:11:28,500 Speaker 2: more they can quickly bring on in the current environment. 192 00:11:28,780 --> 00:11:30,179 Speaker 2: They will get the signal from the price, we will 193 00:11:30,179 --> 00:11:33,489 Speaker 2: be getting more price, so let's invest more, let's pump more. 194 00:11:33,580 --> 00:11:37,520 Speaker 2: But equally high prices also give a signal to the consumer, right? 195 00:11:37,739 --> 00:11:40,049 Speaker 2: So the consumer says, OK, where can I tighten my belt? 196 00:11:40,099 --> 00:11:42,179 Speaker 2: Where can I use, can I be more efficient? 197 00:11:42,455 --> 00:11:45,296 Speaker 2: With my use of oil, where can I save and 198 00:11:45,296 --> 00:11:50,255 Speaker 2: use less oil. So that's what happens with spot prices 199 00:11:50,255 --> 00:11:54,776 Speaker 2: or prices moving on a day to day basis and 200 00:11:54,776 --> 00:11:57,655 Speaker 2: start being fixed for long periods. So there's fixed prices 201 00:11:57,655 --> 00:12:00,335 Speaker 2: and there are spot prices and a good way to 202 00:12:00,335 --> 00:12:02,495 Speaker 2: understand spot prices is that 203 00:12:02,541 --> 00:12:06,891 Speaker 2: They're dynamic, right? They are responding. They're moving with signals 204 00:12:06,892 --> 00:12:10,322 Speaker 2: that the market is picking up on supply and demand. 205 00:12:10,372 --> 00:12:12,171 Speaker 2: We go back to what's happening in the Middle East 206 00:12:12,171 --> 00:12:14,851 Speaker 2: and how there's a conflict there, right? Now, when there's 207 00:12:14,851 --> 00:12:17,361 Speaker 2: a conflict, the first thing we tend to look at 208 00:12:17,361 --> 00:12:20,330 Speaker 2: is oil prices because that's almost always the first thing 209 00:12:20,331 --> 00:12:23,492 Speaker 2: to react apart from stock prices on Wall Street. Why 210 00:12:23,492 --> 00:12:26,572 Speaker 2: does this happen and when should we really worry about 211 00:12:26,572 --> 00:12:29,331 Speaker 2: oil price movements being too far up or down? 212 00:12:29,960 --> 00:12:33,309 Speaker 2: So I think taking Ukraine and the Gaza wars would 213 00:12:33,309 --> 00:12:36,059 Speaker 2: be a good example, sort of compare and contrast them. 214 00:12:36,429 --> 00:12:39,030 Speaker 2: So in the case of the Ukraine war, Ukraine is 215 00:12:39,030 --> 00:12:42,069 Speaker 2: not a producer, not a major consumer, but Russia is, right, 216 00:12:42,210 --> 00:12:46,030 Speaker 2: the 3rd largest oil producer, major exporter of crude and 217 00:12:46,030 --> 00:12:49,150 Speaker 2: refined products. Whenever a conflict breaks out, the first thing 218 00:12:49,150 --> 00:12:53,669 Speaker 2: the oil market looks at is, is this likely to 219 00:12:53,669 --> 00:12:57,669 Speaker 2: impact oil supply? Because if there is a chance, even 220 00:12:57,669 --> 00:12:59,739 Speaker 2: if it hasn't directly impacted, if there is a 221 00:12:59,820 --> 00:13:04,020 Speaker 2: Chance that it could interrupt or disrupt oil supplies, then 222 00:13:04,020 --> 00:13:07,020 Speaker 2: we're going to have some sort of a disruption shortage 223 00:13:07,020 --> 00:13:10,239 Speaker 2: all the way from some shortage to a major supply shock, 224 00:13:10,380 --> 00:13:12,260 Speaker 2: which means oil prices are going to go up when 225 00:13:12,260 --> 00:13:14,849 Speaker 2: that happens, typically that's a signal for producers and buyers. 226 00:13:14,900 --> 00:13:19,978 Speaker 2: The problem is that buyers and producers need time to 227 00:13:19,979 --> 00:13:23,000 Speaker 2: adjust to any price signals. 228 00:13:23,440 --> 00:13:26,109 Speaker 2: So the immediate response has to be what are we 229 00:13:26,109 --> 00:13:28,500 Speaker 2: going to do if you're going to lose 5-7% or 230 00:13:28,500 --> 00:13:31,750 Speaker 2: whatever of our supply overnight and then if we are 231 00:13:31,750 --> 00:13:35,869 Speaker 2: to live with higher prices, that is a huge blow 232 00:13:35,869 --> 00:13:40,229 Speaker 2: to the global economy because oil powers everything. Now of 233 00:13:40,229 --> 00:13:43,020 Speaker 2: course for the lay person you identify it as, oh, 234 00:13:43,030 --> 00:13:44,789 Speaker 2: what am I paying for my taxi fare because the 235 00:13:44,789 --> 00:13:47,789 Speaker 2: taxi is buying fuel, diesel or petrol or whatever or 236 00:13:47,789 --> 00:13:49,950 Speaker 2: I'm putting it into my car or what am I 237 00:13:49,950 --> 00:13:51,429 Speaker 2: paying for public transportation. 238 00:13:51,979 --> 00:13:56,369 Speaker 2: A more sort of unseen part of oil prices percolating 239 00:13:56,700 --> 00:14:01,339 Speaker 2: is all our goods are moving on public transportation, right? 240 00:14:01,469 --> 00:14:04,750 Speaker 2: So it could be cargo planes, it could be trains, buses, trucks, 241 00:14:04,820 --> 00:14:09,890 Speaker 2: and so on. So high oil prices percolate into every 242 00:14:10,419 --> 00:14:15,780 Speaker 2: part of the economy and cause inflation. That worries and 243 00:14:15,780 --> 00:14:18,059 Speaker 2: then in turn central banks as well. 244 00:14:18,659 --> 00:14:22,270 Speaker 2: Now, when inflation happens, typically the central banks tend to 245 00:14:22,270 --> 00:14:25,619 Speaker 2: raise interest rates. That means you and I have to 246 00:14:25,619 --> 00:14:29,169 Speaker 2: pay higher for our mortgages, for our car loans, or 247 00:14:29,460 --> 00:14:35,409 Speaker 2: corporates have higher borrowing costs. They tend to then hire less, 248 00:14:35,500 --> 00:14:40,130 Speaker 2: they tend to cut costs. So the corporate world suffers, 249 00:14:40,179 --> 00:14:41,580 Speaker 2: the individual suffers. 250 00:14:41,747 --> 00:14:45,986 Speaker 2: So high oil prices can be a major shock, which 251 00:14:45,986 --> 00:14:49,986 Speaker 2: is why the world is so sensitive to any signs 252 00:14:49,986 --> 00:14:54,617 Speaker 2: of disruption in oil supply. That is quite the domino 253 00:14:54,617 --> 00:15:00,057 Speaker 2: effect that I think many of us don't immediately think about. Now, 254 00:15:00,346 --> 00:15:03,896 Speaker 2: while governments, they are buyers of oil as well, big time, right? 255 00:15:04,466 --> 00:15:04,916 Speaker 2: What do 256 00:15:04,963 --> 00:15:08,164 Speaker 2: as consumers need to worry about when prices turn volatile. 257 00:15:08,223 --> 00:15:10,234 Speaker 2: Is this something that we really need to watch as 258 00:15:10,234 --> 00:15:15,193 Speaker 2: closely as governments do, for example. So governments and consumers 259 00:15:15,193 --> 00:15:20,184 Speaker 2: get affected slightly differently. Both have reasons to worry unless 260 00:15:20,434 --> 00:15:25,573 Speaker 2: you're the government of a major oil producing and exporting nation. 261 00:15:25,874 --> 00:15:28,164 Speaker 2: A big part of your budget comes from 262 00:15:28,210 --> 00:15:33,241 Speaker 2: Spending comes from oil revenues, you will probably be, OK, 263 00:15:33,281 --> 00:15:37,000 Speaker 2: I don't want to say happy because governments do get 264 00:15:37,000 --> 00:15:40,041 Speaker 2: worried if prices are too high for too long because 265 00:15:40,041 --> 00:15:43,861 Speaker 2: then that dampens demand and nobody wants to buy. There's 266 00:15:43,861 --> 00:15:47,841 Speaker 2: always a sweet spot where all consumers are happy and 267 00:15:47,841 --> 00:15:51,361 Speaker 2: producers are happy. But just going back to our original question, right? 268 00:15:51,640 --> 00:15:54,390 Speaker 2: So as a consumer, your costs are going to go 269 00:15:54,390 --> 00:15:56,789 Speaker 2: up unless it's a case like what happened over the 270 00:15:56,789 --> 00:16:00,190 Speaker 2: past couple of weeks. It was a spike in oil 271 00:16:00,190 --> 00:16:03,820 Speaker 2: prices and a quick dive, which didn't worry too many people. 272 00:16:03,909 --> 00:16:06,469 Speaker 2: But had it stayed that way or continued going higher, 273 00:16:06,630 --> 00:16:09,190 Speaker 2: God forbid, if there was an actual supply disruption. 274 00:16:09,489 --> 00:16:12,440 Speaker 2: Then the consumers would have been quite edgy. Then they 275 00:16:12,440 --> 00:16:16,320 Speaker 2: start saying, OK, now my fuel costs, my electricity costs 276 00:16:16,320 --> 00:16:19,799 Speaker 2: are probably going to go up. Where can I save? 277 00:16:20,400 --> 00:16:24,039 Speaker 2: So that is also a hit for economic growth because 278 00:16:24,039 --> 00:16:26,960 Speaker 2: if consumers are buying less of other products, whether it's 279 00:16:26,960 --> 00:16:31,820 Speaker 2: durable or perishables, that's not good for the economy. Governments worry, 280 00:16:32,159 --> 00:16:36,359 Speaker 2: especially in major oil importing countries, which is most of this. 281 00:16:36,450 --> 00:16:39,799 Speaker 2: Part of the world, Asia, because the consumers buying less 282 00:16:39,799 --> 00:16:43,320 Speaker 2: is going to be bad for the economy. So what 283 00:16:43,320 --> 00:16:46,210 Speaker 2: about if we are savvy investors and we happen to 284 00:16:46,210 --> 00:16:50,909 Speaker 2: have oil or we're thinking about having oil in our portfolio? 285 00:16:50,960 --> 00:16:54,559 Speaker 2: What would you advise there? So first and foremost, a 286 00:16:54,559 --> 00:16:56,919 Speaker 2: word of caution. The thing to keep in mind with 287 00:16:56,919 --> 00:17:00,400 Speaker 2: regard to oil, so you could be investing in a 288 00:17:00,400 --> 00:17:03,109 Speaker 2: lot of derivative products. So there's oil. 289 00:17:03,559 --> 00:17:06,800 Speaker 2: equities, oil and gas companies. But there's a lot of 290 00:17:07,229 --> 00:17:11,639 Speaker 2: products which I would say are highly sophisticated for your 291 00:17:11,640 --> 00:17:18,040 Speaker 2: average layperson investor. So you have options and futures that 292 00:17:18,040 --> 00:17:21,719 Speaker 2: you can trade in crude and some refined products. You 293 00:17:21,719 --> 00:17:26,520 Speaker 2: have what is called exchange traded funds and exchange traded notes, 294 00:17:26,660 --> 00:17:30,229 Speaker 2: ETNs which basically they don't buy or sell. 295 00:17:30,630 --> 00:17:33,410 Speaker 2: On your behalf, but they are tracking the oil price. 296 00:17:33,550 --> 00:17:37,310 Speaker 2: They're tracking what futures are doing, but quite often they 297 00:17:37,310 --> 00:17:40,109 Speaker 2: can throw a curveball at you as well, you know. 298 00:17:40,449 --> 00:17:43,900 Speaker 2: And especially in volatile times, what we've seen over the 299 00:17:43,900 --> 00:17:46,458 Speaker 2: past two weeks, you might just read maybe some social 300 00:17:46,459 --> 00:17:49,099 Speaker 2: media and people are saying, oh, crude is now going 301 00:17:49,099 --> 00:17:51,329 Speaker 2: to triple digits, and you say, oh this is buy 302 00:17:51,339 --> 00:17:53,150 Speaker 2: buy buy. Imagine if you were to buy it at 303 00:17:53,150 --> 00:17:58,929 Speaker 2: $78 of brand futures, you would today be sitting in deep, 304 00:17:59,150 --> 00:18:02,139 Speaker 2: deep in the red, OK, because simply because you followed 305 00:18:02,140 --> 00:18:05,020 Speaker 2: some voices that were saying that, oh, Iran is going 306 00:18:05,020 --> 00:18:07,260 Speaker 2: to close the Strait of Hormuz, and you didn't have 307 00:18:07,260 --> 00:18:10,219 Speaker 2: any independent reliable research. 308 00:18:10,365 --> 00:18:12,836 Speaker 2: You weren't unfortunately able to go to the people who 309 00:18:12,836 --> 00:18:15,115 Speaker 2: know and who know better than to say that the 310 00:18:15,115 --> 00:18:18,436 Speaker 2: strait will be closed. So there is a risk of 311 00:18:18,436 --> 00:18:23,556 Speaker 2: getting burned much more in oil. I would say investing 312 00:18:23,556 --> 00:18:27,955 Speaker 2: in a more passive in mutual funds that are exposed 313 00:18:27,955 --> 00:18:32,475 Speaker 2: to commodities are either mostly commodities or have some abortion 314 00:18:32,475 --> 00:18:35,795 Speaker 2: funds apportioned to commodities. I think that's generally a good idea. 315 00:18:35,936 --> 00:18:38,635 Speaker 2: I would suggest unless you have done a lot of 316 00:18:38,635 --> 00:18:40,156 Speaker 2: research yourself, don't jump into. 317 00:18:40,302 --> 00:18:42,812 Speaker 2: Being an active investor. I think those are very wise 318 00:18:42,811 --> 00:18:45,410 Speaker 2: words indeed. And there you have it. We've made the 319 00:18:45,411 --> 00:18:50,001 Speaker 2: connection between oil prices and what happens around the world. 320 00:18:50,251 --> 00:18:52,571 Speaker 2: Thank you for being our Money Talks explainervanda. Thank you 321 00:18:52,571 --> 00:18:56,092 Speaker 2: for having me. Do you have a finance thing that 322 00:18:56,092 --> 00:18:59,612 Speaker 2: you want explained? We are your people. Send us a 323 00:18:59,612 --> 00:19:02,251 Speaker 2: note and if you want some answers, send an email 324 00:19:02,251 --> 00:19:07,170 Speaker 2: to CNA podcasts at Mediacorp.com.sg. Thank you for listening to 325 00:19:07,171 --> 00:19:10,091 Speaker 2: Money Talks. This is Money Talks Explains. I'm Andrea Hing.