Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. America's war with Iran
Speaker 1: is now in its fifth month, with only a few
Speaker 1: brief weeks of peace in between. That means the largest
Speaker 1: oil and gas supply shock to the world continues to deepen.
Speaker 1: Early on in the war, as you heard on this
Speaker 1: podcast and so many other places, analysts were worried about
Speaker 1: the oil price shooting up to two hundred dollars a barrel,
Speaker 1: causing a global recession and stoking panic in the markets.
Speaker 1: That didn't happen. The oil price didn't even reach one
Speaker 1: hundred and thirty dollars a barrel. This is zero. I'm
Speaker 1: Akshadharati this week, Where did the panic go? And what
Speaker 1: happens next? Joining me to discuss the impacts of the
Speaker 1: Iran war on global energy markets is Javier Plus, a
Speaker 1: Bloomberg opinion columnist covering energy and commodities. He's also a
Speaker 1: co author of the book The World for Sale, Money, Power,
Speaker 1: and the Traders who barter the Earth's resources Have Welcome
Speaker 1: to Zero. Thank you for having me, So let's go
Speaker 1: back in time. On March fifth, barely a week into
Speaker 1: the war, you wrote a column title, this Isn't an
Speaker 1: energy crisis, at least not yet. Now, fine, mons On,
Speaker 1: you were right. We haven't quite seen an energy crisis
Speaker 1: of the scale in oil markets as we have seen
Speaker 1: in the past. But for the wrong reasons.
Speaker 2: Oh absolutely, for the wrong resource. I'm very happy to
Speaker 2: admit that I was right for the wrong resource, which
Speaker 2: effectively means I was wrong. So in some ways I
Speaker 2: got very lucky that these didn't turn out as a
Speaker 2: full energy crisis. There were some elements on that column
Speaker 2: that I think I was on the money at the world.
Speaker 2: All that elements I wasn't. I think that the biggest
Speaker 2: one that I miss is I thought that the White
Speaker 2: House was conscious that this needed to be a quick conflict,
Speaker 2: that they were going to go in and out rather quickly.
Speaker 2: That has proven completely a mistake. What I think I
Speaker 2: got more right was that this was a crisis, that
Speaker 2: there was a big deal for the oil market. There
Speaker 2: was a significant deal for the LNG market, but doesn't
Speaker 2: mean the gas market. The gas market is a much
Speaker 2: larger piece that the LNG market. And I said that
Speaker 2: there was a risk of analyzing the crisis of this
Speaker 2: shock if the global economy was still in nineteen seventy
Speaker 2: three seventy four when the first oil crisis hit. And
Speaker 2: I think that the global economy is very different for
Speaker 2: a number of reasons, and we can go into them.
Speaker 2: What surprised me, and I think that we had Bloomberg
Speaker 2: opinion work quite quickly to recognize of the importance of it,
Speaker 2: was the role of China in this crisis. China pre
Speaker 2: war on the sea worn market. This is the rue
Speaker 2: oil that this boat by Danker was buying anywhere from
Speaker 2: ten to twelve million barros a day depending on the month.
Speaker 2: I would say on average eleven million barrows a day
Speaker 2: in June, China boat less than six million bars a
Speaker 2: days and more than a fifty percent reduction in total
Speaker 2: oil imports from kind of pre war levels or forty
Speaker 2: forty to fifty percent drop. And that really changed the
Speaker 2: market completely because China acted as a balancing mechanism. I
Speaker 2: call it the invisible hand of the oil market. It
Speaker 2: was very visible and very directed by Beijing. The price
Speaker 2: have gone uppen, and certainly it is a bit painful,
Speaker 2: but it has not been a complete flown, blown up
Speaker 2: crisis that people will complain and and looking at the
Speaker 2: global economy, nothing suggests we I mean inflation is contained,
Speaker 2: is under three percent. Interest rates have not really gone
Speaker 2: up meaningfully. Yes we are. We look at the bond
Speaker 2: market that you know, the highest number of yeares, but
Speaker 2: there are many other reasons for that. The stock market
Speaker 2: keeps going up, Unemployment remains low. Nothing really says crisis,
Speaker 2: and certainly nothing similar to the crisis of nineteen seventy three,
Speaker 2: seventy four or any other oil crisis that we have
Speaker 2: had seence. But yeah, I was right, but only for
Speaker 2: the worn reasons.
Speaker 1: Let's go through the numbers here, because you know, two
Speaker 1: hundred dollars a barrel was floated. Now we're recording this
Speaker 1: on August third, and the price of oil is below
Speaker 1: eighty five dollars a barrel, and you know, Iran and
Speaker 1: the US are apparently talking again. But it did not
Speaker 1: even go beyond one hundred and thirty dollars at its
Speaker 1: very peak.
Speaker 2: In the war.
Speaker 1: You talked about how China was about five million barrels
Speaker 1: a day of sort of buffer provided taking, essentially not
Speaker 1: taking that supply and allowing the rest of the world
Speaker 1: to not panic as much. Another five to seven million
Speaker 1: barrels a day came from oil rerouting that happened where
Speaker 1: Saudi's got about five million barrels a day going outside
Speaker 1: hormones into the Red Sea, and same thing the UA
Speaker 1: about two million barrels a day. That takes you about
Speaker 1: twelve million barrels a day. There was the release of
Speaker 1: the Strategic Petroleum Reserve, which goes between two and three
Speaker 1: million barrels a day. That still leaves two or three
Speaker 1: million barrels a day those.
Speaker 2: Comms commercial inventories. We have been draining commercial inventories the
Speaker 2: market also at the beginning of the war. Now clearly
Speaker 2: we know that it was over supply, so supply was
Speaker 2: running above demand and the rest of the world has
Speaker 2: not kept juice. A steady oil production in the Americas
Speaker 2: is booming the United States. When you count every barrel
Speaker 2: in the US, and I like to count not usee
Speaker 2: the crude, but also condensates and natural gas liquids because
Speaker 2: we count them from the demand side. When we talk
Speaker 2: about one hundred million bars a day of demand, we
Speaker 2: mean all total oil liquids. You count every barrel in
Speaker 2: the US. The US is producing a million barrels a
Speaker 2: day more than a year ago. You look at production
Speaker 2: of Brazil is app twenty percent year on year. Venezuela
Speaker 2: is doing more, Argentina is doing a bit more, Colombia
Speaker 2: is doing a bit more. And you know they are incremental.
Speaker 2: I mean, so a lot of these countries are doing
Speaker 2: fifty thousand baros a day more, which is almost a
Speaker 2: statistical noise. But you put all of that statistical noise together.
Speaker 2: You know, the Americas from the north of Alaska all
Speaker 2: the way to Tierra del Fuego in Argentina probably is
Speaker 2: producing about two million bars a day more than a
Speaker 2: year ago. That's making a difference. I give you an
Speaker 2: example a country that has been suffering for a long
Speaker 2: civil war and a lot of unstability. Livia. Livia production
Speaker 2: last month. Probably the data is a bit fuzzy, but
Speaker 2: Livia most likely produced the most oil last month since
Speaker 2: the very early days of the revolution in twenty eleven
Speaker 2: twenty twelve. A lot of that has helped on the market.
Speaker 1: But the big story is the China story, is the
Speaker 1: five million barrels a day story. What do we know
Speaker 1: and what do we not know about how China pulled
Speaker 1: us off?
Speaker 2: I think that we know very little. So what we
Speaker 2: know is that China has reduced its purchases of seaborne
Speaker 2: crude significantly. That's what we know that China pre war
Speaker 2: was buying somewhere around eleven million dollars a day, and
Speaker 2: that in June it bote less than six. That has
Speaker 2: increased a bit to probably six and a half in July,
Speaker 2: but we are still massively down. This is the less
Speaker 2: purchases by China in at least ten years. How China
Speaker 2: has done it, that's when it became conjecture at best,
Speaker 2: and I'm not going to claim to know how China
Speaker 2: has done it. One of the problems is that China
Speaker 2: does not provide data on his inventories. It does not
Speaker 2: provide even an estimate of his demand for oil. Many
Speaker 2: other countries provide estimates every month in Europe, every week
Speaker 2: in the United States. China simply does not publish any information.
Speaker 2: So everyone is trying to guess what is happening, and
Speaker 2: we can see things. I mean, clearly, demand has come down.
Speaker 2: Clearly the Chinese economy is not enjoying the best of
Speaker 2: the days. But to justify a drop of forty percent
Speaker 2: inputs of oil, I don't think so. Probably China is
Speaker 2: releasing sant oil from strategic inventories or commercial inventories. It
Speaker 2: seems that son oil has been released, but not a
Speaker 2: significant lot. There are a number of elements. Probably China
Speaker 2: have a lot of stock piles of refined products and
Speaker 2: they've been running that down. They probably have a lot
Speaker 2: of stockpile on plastics or plastic commodities they may have
Speaker 2: been running down. China is unique in the rest of
Speaker 2: the world that has a big chemical industry that you
Speaker 2: coal rather an oil or gas as a fed stock.
Speaker 2: Probably they're running that harder. But is that much capacity
Speaker 2: to completely explain everything. I think they may explain a
Speaker 2: portion of it, but not the whole thing. So those
Speaker 2: are elements that may play role, but we don't really know.
Speaker 1: In one of your columns, you estimated back of the
Speaker 1: envelope that if China did drain some of its reserves,
Speaker 1: it's about one hundred million barrels, So you know, that's
Speaker 1: less than a million barrels a day in the last
Speaker 1: five months. Some analysts like Rory Johnston talks about four
Speaker 1: hundred million barrels that China may have contributed, including commercial inventories, and.
Speaker 2: I like the range is huge. The range is huge,
Speaker 2: and one of the problems is. I'm not going to dispute.
Speaker 2: I have told to Rory about that. You know, he
Speaker 2: probably is right. We simply don't know, and we are
Speaker 2: relying on on a lot of these estimates are based
Speaker 2: on satellite data that rely on or measuring the shadow
Speaker 2: of tanks, etcetera, etcetera. So you know, the margin of
Speaker 2: error is significant. It's also clear that the Chinese economy
Speaker 2: is very different than the Chinese economy of ten years ago.
Speaker 2: There are a significant number of evs and significant number
Speaker 2: of electric tracks, et cetera, et cetera, gas tracks, so
Speaker 2: all of that may have played a role. But the
Speaker 2: that the energy transition has helped China. But if China
Speaker 2: was able to reduce demands so much because they can't
Speaker 2: run on ebs, what it was not doing it in
Speaker 2: January rather than now. So I think that has also
Speaker 2: played a role.
Speaker 1: Staying with conjecture, why do you think China did it?
Speaker 2: I think that China has done it, first of all,
Speaker 2: because it has no interest whatsoever on very high prices.
Speaker 2: At the end of the day, China is the world's
Speaker 2: largest oil important so it's going to be affected. I
Speaker 2: don't think that China has an interest on an economic
Speaker 2: crisis in the Southeast Asia where it depends a lot
Speaker 2: on the well being of those countries for his own
Speaker 2: well being. I mean, I don't think that this is
Speaker 2: China being particularly generous, is helping others to help itself
Speaker 2: just generally. I think that China wants a healthy global economy.
Speaker 2: But then a lot of this happened at the same
Speaker 2: time that China and the United States were having a
Speaker 2: strategic dialogue. So is there anything under the table that
Speaker 2: the Why has said, you help me here, I will
Speaker 2: go easier on trade on Taiwan? We simply don't know.
Speaker 2: I mean, to pretend that the oil import level of
Speaker 2: China has not been part of the Washington Beijing conversation,
Speaker 2: I think it will be naive. But is that the key?
Speaker 2: Simply we don't know.
Speaker 1: It is very interesting. I mean, this White House has
Speaker 1: not been as leaky as the first Trump White House,
Speaker 1: but we do get pretty good reporting coming out of
Speaker 1: the White House. So the fact that we've not heard
Speaker 1: anything on oil price conversations with China is interesting. But
Speaker 1: there is an aspect of this which to me is
Speaker 1: still confusing, which is that if we are running down
Speaker 1: reserves and in places like the US, for example, reserves
Speaker 1: are not their lowest level since the early eighties. Yes,
Speaker 1: the panic hasn't shown up yet, but how long do
Speaker 1: you think this war can continue before that panic does happen?
Speaker 2: Well, very much the and so for how long China
Speaker 2: can sustain this very low level of demand into the
Speaker 2: international market. It also very much depends of and that
Speaker 2: is also a big question of what we are not
Speaker 2: a two hundred and we are at below eighty five today,
Speaker 2: and it is that the straight of hormones is close,
Speaker 2: but an awful amount of oil is leaking every day
Speaker 2: through the Strada hormos what we call the dark shuttles.
Speaker 2: These are oil tankers that they go dark. By that
Speaker 2: we mean that they are not advertising where they are located.
Speaker 2: By international agreement, every big oil tanker has to have
Speaker 2: effectively a GPS broadcast into the wall. Here I am,
Speaker 2: and this is my position, this is my speed, and
Speaker 2: this is my draft and my name.
Speaker 1: Don't come and crash into me.
Speaker 2: Please don't crash with me. Please. I carry two million
Speaker 2: bowels of oil, So that would be a very bad idea.
Speaker 2: Those those transponders that they are called the I system
Speaker 2: can be disconnected and they have disconnected. So tankers go
Speaker 2: dark and they shuttle between the terminals inside the Persian
Speaker 2: Golf and the Gulf of Man where they run the
Speaker 2: boot with another oil tanker. They get alongside, and we
Speaker 2: call that a ship to ship transfer, and they move
Speaker 2: the oil from one to the other, and then one
Speaker 2: tanker goes back to the Persian Golf to pick up
Speaker 2: another cargo, very dangerous. Some sailors have died because of
Speaker 2: that attacks and the other tanker goes into the high
Speaker 2: seas to the destination we reckon that anywhere from three
Speaker 2: to five million barrows a day of crude keeps flowing
Speaker 2: on these dark transits, and that has been important. So
Speaker 2: if the dark transits continue, if China keeps a lead
Speaker 2: on his purchases, we can carry on for a while
Speaker 2: before we exhaust our researchs. And have a column recently
Speaker 2: mentioning that there is no doubt that the reserves are down,
Speaker 2: both strategic and commercial, but they are not completely out.
Speaker 2: Strategic reserves. China has at least a billion barrels. The
Speaker 2: International Energy Agency member countries have probably a billion barrels
Speaker 2: left on the reserve. Japan and South Korea are sitting
Speaker 2: on a significant amount of crude oil the US is low.
Speaker 2: But in some ways there is a lot of emphasis
Speaker 2: on the fact that the Strategic Petroleum Reserve of the
Speaker 2: US is at his lowest since nineteen eighty three. But
Speaker 2: we knew this the day that the SPR release was announced,
Speaker 2: because we can do the match. We knew what starting
Speaker 2: point the reserve was, and the US promised to release
Speaker 2: one hundred and seventy two million barrels, so we knew
Speaker 2: that by the end of that period we were going
Speaker 2: to be this low. That's no commun as a surprise.
Speaker 2: A lot of people are making what I would call
Speaker 2: exaggerated claims about what comes next, But I also think
Speaker 2: that I would emphasize the SPR was designed to be
Speaker 2: used in a moment.
Speaker 1: Of crisis exactly, and it's been used, and.
Speaker 2: It's been used. We may have our own political views
Speaker 2: about whether these wars should have been started or not,
Speaker 2: but we are in the situation that we are, and
Speaker 2: the war is ongoing, and there is a supply shock,
Speaker 2: and the playbook to react to our supply shock is
Speaker 2: to use the SPR.
Speaker 1: You know, you talked about the fact that maybe Iran
Speaker 1: overplaced its hand by trying to keep the Street closed
Speaker 1: for a longer time. But if it does that, you
Speaker 1: know there are the reason which the oil can get out.
Speaker 1: More pipelines are already being announced. We did see though,
Speaker 1: after the twenty twenty two energy crisis, which you know
Speaker 1: in your own words was a full blown energy crisis
Speaker 1: because the price of oil, gas, coal and electricity all
Speaker 1: went up simultaneously.
Speaker 2: Sorry I'm interrupting that, but we in some ways we
Speaker 2: have forgotten how bad it was. I mean, around this
Speaker 2: time in twenty twenty two, the price of electricity on
Speaker 2: the spot market in Europe was close to one thousand
Speaker 2: euros per mecab at hours around one hundred today. Twenty
Speaker 2: twenty two, particularly on the electricity market, was so extreme,
Speaker 2: so painful, that only effectively European governments bailing out businesses
Speaker 2: and families. We went through it, and then I will
Speaker 2: say we got quite lucky. But yes, I agree with you.
Speaker 2: Twenty twenty two was very different.
Speaker 1: And we saw a reaction from importing nations. At the time,
Speaker 1: I mean, Europe was the worst it and so Europe's
Speaker 1: reaction mattered a lot. From twenty twenty two. It did
Speaker 1: all the things right, It doubled down on renewables. It
Speaker 1: tried to electrify as much as possible. It got energy
Speaker 1: from wherever it could get lerng, it tried to get
Speaker 1: its cold supply chain sorted out. It did lots and
Speaker 1: lots of things. But Europe has money and they could
Speaker 1: react in a way that allowed them to address these
Speaker 1: critical supply shocks this time around. A lot of developing
Speaker 1: countries have been hit by that supply shock. And what
Speaker 1: have we seen in the last five months. We've seen
Speaker 1: record in imports of solar panels and electric cars and batteries,
Speaker 1: all coming from China. So maybe China didn't plan for this,
Speaker 1: but China is certainly benefiting from developing countries choosing to
Speaker 1: get more and more of these clean energy resources. Do
Speaker 1: you think countries become especially important countries become wary of
Speaker 1: this reliance that they have on fossil fuels as a
Speaker 1: result of these two crises that have happened in this decade,
Speaker 1: and try and find faster ways to transition.
Speaker 2: I think that what we are going to see is
Speaker 2: that countries are going to get wary of importing energy. Certainly,
Speaker 2: fossil fuel energy in many places is important, So I
Speaker 2: think that some fossil fuels are going to suffer. I
Speaker 2: really struggle to see a number of countries trust in
Speaker 2: the LERG market going forward, because they have been hit
Speaker 2: twice in four and a half years, and I think
Speaker 2: that they will say, well, that was more than enough.
Speaker 2: But just generally, I think that there's going to be
Speaker 2: a tendency to try to be as self reliant as
Speaker 2: possible on energy that could mean, and obviously that self
Speaker 2: reliance is very different on fossil fuels, which is a flow.
Speaker 2: You need to buy those molecules time after time after
Speaker 2: time that relying on say solar panels, which you may
Speaker 2: need to impose from China, but you buy them once
Speaker 2: and they run for the next twenty years or twenty
Speaker 2: five years. The same thing with probably batteries, wind power,
Speaker 2: et cetera, et cetera, so many countries. I'm not saying that,
Speaker 2: you know, perhaps relying only on a source of solar
Speaker 2: panels like China, that also brings some challenges. But green
Speaker 2: energy is very different to fossil fuels in the sense
Speaker 2: that one is a flow and the other one is
Speaker 2: a stock. So I think that's important. What I think
Speaker 2: we're going to see is trying to what I have
Speaker 2: called and other people have been calling the rise of
Speaker 2: domestic energy. So if a country has access to domestic energy,
Speaker 2: they're going to try to maximize that energy. That the
Speaker 2: solution is going to be different for different countries. So
Speaker 2: for some countries it's going to be they have solar,
Speaker 2: let's try to do as many solar panels. Yes, we
Speaker 2: need to import them from China, but then once we
Speaker 2: have imported, they produce electricity for twenty years, so that's good.
Speaker 2: It maybe call a maybe domestic oil and gas production.
Speaker 2: I mean has one other aspect that we have not
Speaker 2: mentioned on China. Chinese gas production is an all time
Speaker 2: high oil production that deep about ten years ago has
Speaker 2: returned and China is producing about five to six hundred
Speaker 2: thousand dollars a day more than it was used producing
Speaker 2: a number of years ago, and that about six years ago,
Speaker 2: so that's also important. So I do think that we
Speaker 2: are going to see a movement to support sources of
Speaker 2: energy that one can produce either at home or perhaps
Speaker 2: regionally in countries that you have close political and economic relationships.
Speaker 2: But generally I think that the one that loses power
Speaker 2: here it's going to be oil and internationally trade gas
Speaker 2: by dunker After.
Speaker 1: The break, how will the strait of horror moves closure
Speaker 1: affect global food prices. If you're enjoying this episode of Zero,
Speaker 1: please take a moment to rate and review the show
Speaker 1: on whichever platform you're listening on. Recently, listener MPL twelve
Speaker 1: nine wrote the interview with Gerald Butts of Eurasia Group
Speaker 1: was a cracking episode of a consistently excellent show. Thanks
Speaker 1: MPL twelve nine. You have seen many energy crises in
Speaker 1: your time covering energy energy crises. Some of them can
Speaker 1: have many long term impacts, but one other aspect of
Speaker 1: the energy markets is the forecasting, and the forecasting can
Speaker 1: be fun but also can come to bite you. So
Speaker 1: I was writing a story about the fact that this
Speaker 1: year will reach three terror Warts of Soul, and no
Speaker 1: one really noticed because you know, it's another terror award.
Speaker 1: We just had another Terrra award two years ago, so okay.
Speaker 1: But when the first Terrawart was installed in twenty twenty two,
Speaker 1: we had a BLOUE mcginney I put out in an analysis
Speaker 1: and at that time they were expecting solar to reach
Speaker 1: nine terror awarts after twenty fifty. Today they're expecting that
Speaker 1: to reach in twenty thirty six. So clearly solar has
Speaker 1: been like a very surprise story, even for the most
Speaker 1: bullish people. But from your perspective, beyond solar, what has
Speaker 1: surprised you about the energy transition?
Speaker 2: I mean, the one that you know that I have
Speaker 2: been writing in Qualott is the resilience of coal. Call
Speaker 2: is the source of energy that refuses to go away.
Speaker 2: The fact that probably in twenty twenty six we are
Speaker 2: going to see record the amount for call. Yes, for sure,
Speaker 2: as a share of global energy that shared is going down.
Speaker 2: But what we care for the planet is the amount
Speaker 2: of tones that we are consuming and therefore burning, and
Speaker 2: the amount of CO two that we are releasing. That
Speaker 2: keeps surprising me because for the last ten years we
Speaker 2: have been talking about when coal is gonna pick, and
Speaker 2: every year keeps going up. And I was just looking
Speaker 2: and you know, this is a snapshot, and I think
Speaker 2: that you know, I'm very happy to raise my hand
Speaker 2: and say that I have been the first one who
Speaker 2: has underestimated solar. I mean, solar has been and it
Speaker 2: is the fastest growing source of electricity worldwide and is
Speaker 2: doing rather well. But if you look for example, as
Speaker 2: at of the analysis of the International Agency did on
Speaker 2: electricity markets two years ago, and it was just looking
Speaker 2: at what at the end of twenty twenty four, what
Speaker 2: the world looks like in twenty twenty six. They underestimated
Speaker 2: the amount of coal and overestimated renewables. In part that's
Speaker 2: because we have had a bad period of wind generation.
Speaker 2: We have had low win speeds in a number of
Speaker 2: markets and that has had an impact. But that is
Speaker 2: interesting and obviously coal will not be doing as well
Speaker 2: as he's doing this year. Have the work have not
Speaker 2: not not started? To me? That is one area that
Speaker 2: is surprising. The other area is how well a number
Speaker 2: of developing countries are adapting to solar. Pakistan has been
Speaker 2: a poster poster child of that. Therefore, and in some
Speaker 2: ways because solar in some markets in Europe, degrees are
Speaker 2: struggling to adapt with that. We don't have enough battery,
Speaker 2: the connections are not good enough. Voltage control can be
Speaker 2: a challenge with some you know of the earlier technologies
Speaker 2: with solar, and and obviously solar rams up very very
Speaker 2: quickly in the morning and then you know pigs and
Speaker 2: then you know there has a big cleaflike drop in
Speaker 2: the evening at times when also the demand is going up.
Speaker 2: So it's very difficult to accommodate that from a great
Speaker 2: perspective when you have a nice young white or a
Speaker 2: big real young greed like in the US. But in
Speaker 2: some developing countries it's just basically families putting a few
Speaker 2: solar panels in the roof and when they have power,
Speaker 2: they have power. When there is no power in the
Speaker 2: evening where they don't have power, but it's working, it
Speaker 2: provides enough energy through a number of hours. And there
Speaker 2: are a number of developing countries saying, well, yes, I
Speaker 2: mean solar has difficulties, particularly we don't have enough batteries,
Speaker 2: but it does seventy five percent of what we need.
Speaker 2: We don't need ninety nine point ninety ninety nine perfection.
Speaker 2: Seventy five percent is good for us. And that has
Speaker 2: been also a very interesting kind of lesson that at
Speaker 2: times we do not need to engineer or price for perfection.
Speaker 2: That they are a number of developing countries that that's
Speaker 2: seventy five percent is good for them. Yeah.
Speaker 1: And the other thing I think, you know, maybe five
Speaker 1: or ten years from now, the thing we'll talk about
Speaker 1: where maybe our forecasts were less optimistic than they could
Speaker 1: have been. Is batteries. So if you take there's a
Speaker 1: lovely chart of all technologies that once they reach ten
Speaker 1: terrawot hours of production, and how quickly did they get
Speaker 1: to five hundred tarot hours? And so nuclear, gas, oil
Speaker 1: like they all like follow pretty similar trajectory. And then
Speaker 1: wind also actually follows a very similar trajectory. But then
Speaker 1: solar breaks out and really speeds up much faster than
Speaker 1: anything else. And now we're already seeing early signs of
Speaker 1: batteries being even faster. Because batteries are not producing energy,
Speaker 1: they can absorb any form of electricity from the grid,
Speaker 1: and so that allows them to be just much more
Speaker 1: flexible in doing what we do.
Speaker 2: The batteries will change, and they are changing already degrees.
Speaker 2: But I mean just generally technology. I mean, it is
Speaker 2: an important lesson that energy is about engineering and every
Speaker 2: time we develop, I mean in so many ways. And
Speaker 2: this is also why they shock twenty six is different
Speaker 2: to previous shocks in oil. We have shades, which you know,
Speaker 2: I mean you have told me when I started covering
Speaker 2: the market twenty five plus years ago that the second
Speaker 2: largest provider supplier of oil to Japan in any given
Speaker 2: month was going to be the United States. And I
Speaker 2: would have said that you have completely lost it, because
Speaker 2: at that point twenty five years ago that sounded completely impossible.
Speaker 2: I mean, the US was the largest oil important, his
Speaker 2: production was declining, and however, in June, Japan imported a
Speaker 2: third of his oil from the United States. And that
Speaker 2: is all into the engineering progress that it has been
Speaker 2: made to develop shale. So can we have another crisis
Speaker 2: ten fifteen years ago that it will be very different
Speaker 2: because we have electri five even faster than we thought.
Speaker 2: Batteries are playing a huge role just because engineers have
Speaker 2: achieved new breakthroughs. I think that that's absolutely possible. And
Speaker 2: one thing that I have learned the hard way, and
Speaker 2: I have got many times rang is do not bet
Speaker 2: against an engineering You provide enough time and enough money
Speaker 2: to solve a problem, because they will solve it. And
Speaker 2: every energy crisis or energy shock creates a problem and
Speaker 2: an incentive for engineers to find effective, cheap ways to
Speaker 2: solve that problem.
Speaker 1: Now, you also think a lot about geopolitics because energy
Speaker 1: and geopolitics are so interlinked. All the time we've seen
Speaker 1: in China with this ability to be flexible on its
Speaker 1: oil imports, as you put it, a new oil price
Speaker 1: weapon from China. But China also has all these electricity
Speaker 1: technologies that it's developing for itself and of course for exporting.
Speaker 1: What do you make of the conversation around the fact
Speaker 1: that the US, with its ability to extract oil and
Speaker 1: gas as efficiently and at the scale that it does,
Speaker 1: is more and more a petro state, not in the
Speaker 1: classic sense of an economic petro state, but as a
Speaker 1: power and China, with its ability to be a flexible
Speaker 1: consumer of energy because of its electricity and an exporter
Speaker 1: of electricity technology, is an electro state. Do you think
Speaker 1: this is a new dimension to geopolitics or it's just
Speaker 1: you know, overblown.
Speaker 2: No, I think that we have a new dimension of politics.
Speaker 2: I mean, the fact that the US is producing more
Speaker 2: than twenty million hours a day of oil has changed
Speaker 2: completely the equation of the oil market. The fact that
Speaker 2: China seems to be but we don't really understand the mechanics,
Speaker 2: but seems to be able to swen his oil demand
Speaker 2: has created what I have called a swing consumer, similar
Speaker 2: to the way that we used to call Saudi Arabia
Speaker 2: the swing producer. Because his ability to respond to our
Speaker 2: crisis increasing production. I really like it. A comment by
Speaker 2: Jason Bordov at A Columbia A guess of you on
Speaker 2: previous podcasts. He used to work at the White House
Speaker 2: and there the Obama administration, and Jason said that, and
Speaker 2: probably he knows that first hand because he was in government,
Speaker 2: that the first goal by a US president when there
Speaker 2: was an oil problem was to Saudi Arabia to react.
Speaker 2: And so maybe in the future the first goal is
Speaker 2: to Beijing to ask them to reduce imports so they
Speaker 2: can balance the market. It's very interesting. It will be
Speaker 2: interesting what happened with politics in the US. We have
Speaker 2: a new administration coming in about three years will be
Speaker 2: more friendly to reality, which is that you know, solar
Speaker 2: and guin are developing the batteries because you look at
Speaker 2: you look at Texas. Texas is a superpower on oil
Speaker 2: and guys, but it's also becoming a real player in
Speaker 2: solar and particularly in battery and flexibility on the greed.
Speaker 2: So that's where I am still a bit of an
Speaker 2: optimist about the US because the engineering capability of that
Speaker 2: country and the capitalist system. At the end of the day,
Speaker 2: the batteries in the US are being deployed because they
Speaker 2: make commercial sense. There is no much of subsidies here
Speaker 2: is just the power of row money and money is
Speaker 2: speaking and it says to invest us that this is
Speaker 2: a technology that you are going to make money. The
Speaker 2: investment is going to continue, and the engineering effort is
Speaker 2: going to continue, no matter what the White House is saying.
Speaker 2: But my only query with electro state on China is,
Speaker 2: and I know that you're not making that argument, but
Speaker 2: for some people, electro state means clean, and China still
Speaker 2: produce half of his electricity from coal consumes you put,
Speaker 2: I think that the wall is about one hundred and
Speaker 2: ninety four countries, and China consumes as much coal as
Speaker 2: one hundred and ninety three of those countries together. So yes,
Speaker 2: it is an electro state. The amount of electrification of
Speaker 2: his energy system is amazing, but a lot of that
Speaker 2: the electricity is coming from the own source.
Speaker 1: You're getting these very interesting examples coming up, and the
Speaker 1: energy transition is just a fun bit to follow. But
Speaker 1: you also cover other commodities, and while you're here, I
Speaker 1: feel like I need to ask you about, you know, fertilizer,
Speaker 1: which is also a commodity that used to come out
Speaker 1: of the state of hormones in significant quantities go to
Speaker 1: developing countries. Was something that developing countries were really freaked
Speaker 1: out about, especially growing into the growing season in the summer.
Speaker 1: Now you look at wheat market, or rice market, or
Speaker 1: soft commodity markets and a similar story is playing out.
Speaker 1: It's not panic.
Speaker 2: Why well, first of all, because there is a lot
Speaker 2: of domestic production. The global international market place a significant
Speaker 2: but not majoritary role on the fertilizer market. Prices went
Speaker 2: to a point where every fertilizer plan outside the strait
Speaker 2: of hormos went into max production, and that really have
Speaker 2: a big, big impact. We have some surpluses. China produce
Speaker 2: about eighty percent of his nitrogen fertilizer from corn rather
Speaker 2: than from natural gas, so China was insulated and thankfully
Speaker 2: the starting point from a number of crops like wheat, corn, soybean,
Speaker 2: rice was of several years of surpluses inventories. Global stocks
Speaker 2: of those communities were high, and therefore there was not
Speaker 2: an impact as we will have expected. The other reason
Speaker 2: is that a lot of people were trying to draw
Speaker 2: a parallel line in between the twenty twenty two invasion
Speaker 2: of Ukraine by Russia. And now the war between the
Speaker 2: US and Israel and Iran in twenty twenty six. Forgetting that.
Speaker 2: The big impact of twenty twenty two was the fact
Speaker 2: that the two countries at war, the country that was
Speaker 2: launching the world and the country was invaded. Those are
Speaker 2: two what we call bread basket countries. They are huge
Speaker 2: producers of agri cultural commodity. Is the case of the
Speaker 2: Middle East, there is no production of agricultural commodity is Indeed,
Speaker 2: one of the jokes of the commodity market is that
Speaker 2: Middle East countries produce hydro carbons to import carbohydrates. So
Speaker 2: that the world has not had an impact of reducing
Speaker 2: the supply of wheat of cone to the market. We're
Speaker 2: not out of the boots because we have an anno.
Speaker 2: And whether the impact is uneven and some countries receive
Speaker 2: more rains and perhaps they can have more production, others
Speaker 2: are going to have a deficit. And not every al
Speaker 2: Ninia phenomenon have played exactly the same way, but an
Speaker 2: al Nino weather phenomenon alongside climate change, and you know
Speaker 2: it is very hot this year, particularly in northwest Europe,
Speaker 2: that can be difficult and we can lose crops, and
Speaker 2: I have seen crops can get lost very quickly. We
Speaker 2: can lose twenty five percent of production in a matter
Speaker 2: of a few weeks. So far, so good. We have
Speaker 2: not had any significant losses. Most of the harvest in
Speaker 2: Europe is already done. A lot of the harvest in
Speaker 2: the United States and Canada has been done. Same thing
Speaker 2: in Russia. But you know, this is perhaps a compounding impact.
Speaker 2: We have high fertilizer prices, we have high diesel prices,
Speaker 2: and we have unstable weather that they could have an impact.
Speaker 2: So in the case of food, I will say, perhaps
Speaker 2: the war is not the most important thing, but I
Speaker 2: will keep a watch on a Nino and what is
Speaker 2: going to be the situation in early twenty twenty seven.
Speaker 2: An area on food commodities that we are having a
Speaker 2: huge impact is going to be in an aquaculture. And
Speaker 2: an interesting fact, the world consumes today more fish and
Speaker 2: seafood from aquaculture that from the high seas for wild catches.
Speaker 2: For aquaculture, fish meal is scret and that's effectively a
Speaker 2: small fishes like anchovies that we capture dry mail and
Speaker 2: produce the fed stock to do salmon, shrims, et cetera,
Speaker 2: et cetera. The price of fish meal has gone absolutely
Speaker 2: through the roof. There is a huge job in anchovy
Speaker 2: captures in Peru, which I call the Saudi Arabia of anchovies,
Speaker 2: and that is going to have an impact. So you
Speaker 2: fancy salmon of s rims. I have bad news because
Speaker 2: in six to nine months from now, we're going to
Speaker 2: see an impact. Also, you take Omega three dieted supplement
Speaker 2: as I do, because I'm reaching the age where I
Speaker 2: need every supplement. Uh, then you are going to find
Speaker 2: that the price of YOUU Omega three is going to
Speaker 2: go up quite a lot.
Speaker 1: And on the theme of sort of choke points that
Speaker 1: are not war related but are showing up, you wrote
Speaker 1: about the state of the River Rhine, which you know
Speaker 1: acts as a conveyor belt for so many commodities chemicals, oil,
Speaker 1: steel and of course to take coal into power plants
Speaker 1: in Germany. You know, companies like BASF are hugely affected
Speaker 1: when the Rhine is affected, and currently rhine is at
Speaker 1: a record low. There was a recent study from the
Speaker 1: researchers at the World Where the Attribution Group that concluded
Speaker 1: that the severity of the drought in the region was
Speaker 1: worsened by climate change. Do you think you know we're
Speaker 1: in this era where ESG is not the hot topic.
Speaker 1: You know, net zero is a political football. But do
Speaker 1: you think from a pure capitalism commercial point of view
Speaker 1: that corporations need to think are they underestimating the risks
Speaker 1: of climate change to their supply chain.
Speaker 2: I think that in the case of the Rhine, you
Speaker 2: see a huge attempt to adapt. We have a big
Speaker 2: drought in twenty eighteen and sceince. Then a new generation
Speaker 2: of barges have been developed for the Rhine where they
Speaker 2: can go even at the very low levels of water,
Speaker 2: but there are limits. I mean, like you may see
Speaker 2: that they just go down to effectively zero on the
Speaker 2: on the n aviation channel. So that doesn't matter how
Speaker 2: much advertation you do, you're not going to be able
Speaker 2: to transport anything. I do think that companies are spending
Speaker 2: a lot more time to prepare for this, but ultimately,
Speaker 2: you know, some of the companies that they are preparing
Speaker 2: for for for this situation, they may be contributing to
Speaker 2: the situation because there are huge consumers of natural gas
Speaker 2: for chemical production. Not that we have many other alternatives
Speaker 2: to to guys. I mean, the other alternatives for petro
Speaker 2: chemicals will be called the only kind of climate change
Speaker 2: more friendly at it you will be to try to
Speaker 2: reduce your consumption of plastics. I do see quite a
Speaker 2: lot of work now on resilience of supply chains just
Speaker 2: generally across the board, not just because climate change, but
Speaker 2: I think that that's one big reason, but just generally
Speaker 2: a lot of companies. You know, we were lucky least
Speaker 2: my generation. We kind of became into adulthood. The iron
Speaker 2: world has fallen, the number of conflicts was coming down.
Speaker 2: There was a time I ran the Africa there is
Speaker 2: for a short period at the Financial Times, and one
Speaker 2: of my surprises just looking at the Africa continent was
Speaker 2: how peaceful was about ten years ago when I was
Speaker 2: doing that job than fifteen years ago compared to what
Speaker 2: it was in the eighties. We really benefited from a
Speaker 2: bit of a used to be called the past Americana,
Speaker 2: and that really meant that supply changes were a lot easier.
Speaker 2: You could buy from point A to point B a
Speaker 2: transport without worry about civil water a coudeta, or whether
Speaker 2: there's going to be enough water on the river. Today,
Speaker 2: a lot of those assumptions from climate change to global
Speaker 2: geopolitics have changed and we are more in a fragmented world,
Speaker 2: more volatile, perhaps more dangerous, certainly hotter, drier, and everyone
Speaker 2: is having to adapt to that.
Speaker 1: I'm just going to make a note of this because
Speaker 1: this happened this morning. The Romanian Army carried out a
Speaker 1: control explosion to divert water to ensure that they could
Speaker 1: cool the nuclear power plant. So you know, it's also
Speaker 1: affecting the clean sources of power, the stable sources of
Speaker 1: power that we have considered to be you know, absolutely
Speaker 1: necessary for the transition.
Speaker 2: It's having I mean, like the droughts on the Rhine
Speaker 2: and the Danube are having a huge impact across supply
Speaker 2: chains and energy supplies. And what worries me is that
Speaker 2: as we are recording this at the beginning of Augos,
Speaker 2: typically both rivers and just generally every river in northwest
Speaker 2: Europe sees the low point of the year around the
Speaker 2: end of September the beginning of October, just before the
Speaker 2: autumn rains start. The whole melting of the snow has ended.
Speaker 2: We have had the whole summer period of limited rain.
Speaker 2: If we follow the pattern, we're going to see even
Speaker 2: lower and lower levels on every river for the next
Speaker 2: eight to ten weeks, so we do really need urgently rain.
Speaker 1: Given all this, and given the politics of climate change,
Speaker 1: do you see that you know, the awareness of climate
Speaker 1: change is now much more in people's consciousness. This is
Speaker 1: true even in the US, not just in Europe, but
Speaker 1: also in developing countries. Do you think at some point
Speaker 1: the politics comes together to try and maybe not in
Speaker 1: at zero by twenty fifty, but support climate action in
Speaker 1: a way that starts to really address the problem.
Speaker 2: I think that the awareness on climate change is widespread.
Speaker 2: I think that other than some pockets on some corners
Speaker 2: of the political discourse, the science of climate change is
Speaker 2: very well understood. But I also think that what is
Speaker 2: very well understood is that the course of adaptation, the
Speaker 2: cause of action, is expensive and it entails certain sacrifices.
Speaker 2: I cannot have a sense, talking to many politicians, even
Speaker 2: on the left in Europe, that our countries are not
Speaker 2: prepared to do what it will take for climate change
Speaker 2: if not everyone is responding at the same time. Was
Speaker 2: earlier this year talking to a senior European politicians on
Speaker 2: the left of the argument saying, I am absolutely pro
Speaker 2: climate change action, but if that's going to cost my
Speaker 2: heavy industry and jobs, and I'm just shifting emissions to
Speaker 2: another country. I just need to stop there. And I
Speaker 2: think that there is also alongside more acceptance of the
Speaker 2: consequences of climate change we all have seen how hot
Speaker 2: got this summer, and more acceptance of the science. But
Speaker 2: I think it's just universal or in a few kind
Speaker 2: of dark corners of the political discourse. I think that
Speaker 2: there is also a widespreyers acknowledgement that it comes with course,
Speaker 2: and that those costs will be significant, and I don't
Speaker 2: think that we as a society are yet prepared for
Speaker 2: comparison of those course.
Speaker 1: Thank you, Javier, thank you for having me, and thank
Speaker 1: you for listening to Zero. Now for the sound of
Speaker 1: the week. That is the sound of an oil tanker
Speaker 1: blowing its foghorn off the coast of San Francisco. If
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Speaker 1: This episode was produced by Oscar boyd Our. Theme music
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Speaker 1: Laura Milan, Summer Maxwell and Alessa McDonald, I am Akshadarati
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