WEBVTT - Chevron CEO Mike Wirth Talks Oil Prices, Hormuz, Venezuela

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Crude on track, at least for now, for its steepest

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<v Speaker 2>month of the client since twenty twenty. Optimism building for

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<v Speaker 2>a resumption of traffic through the straight upformers as anergy

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<v Speaker 2>producers are highlighting the risk of an extended closure. Chefron's

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<v Speaker 2>been warning quote we will start to see physical shortages.

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<v Speaker 2>The CEO, Mike Worth, I'm very pleased to say joins

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<v Speaker 2>Center Studio. Mike's going to see you. Good to see you, John,

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<v Speaker 2>Welcome back to the program Sir. I get this question

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<v Speaker 2>a lot. You're the expert. Help me answer it. Why

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<v Speaker 2>is crude at one hundred at ninety and not close

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<v Speaker 2>to the two hundred given this straight it's been shut

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<v Speaker 2>for three months.

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<v Speaker 1>You know, it's a little hard to explain.

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<v Speaker 3>We really are seeing markets, Titan inventories draw demand for

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<v Speaker 3>products around the world still very strong.

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<v Speaker 1>I think there's this belief.

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<v Speaker 3>And we you know, we're experiencing it again the last

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<v Speaker 3>few days that the end is near. The conflict is

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<v Speaker 3>nearly resolved, and flow through the straight will resume very quickly,

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<v Speaker 3>and that has kept the back end of the curve

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<v Speaker 3>lower than it might otherwise. Have been, and I think

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<v Speaker 3>the psychology the market has been this is closer to

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<v Speaker 3>the end rather than the beginning.

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<v Speaker 4>But what about the physical world? When will inventories be

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<v Speaker 4>at the very bottom?

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<v Speaker 1>Before long?

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<v Speaker 3>We are steadily drawing inventories down on products on crude

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<v Speaker 3>in locations around the world. I think June and July

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<v Speaker 3>are going to be critical months, and you can see

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<v Speaker 3>the trajectory of these inventories in the data.

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<v Speaker 1>And it's concerning do you.

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<v Speaker 4>See any physical shortages right now around the world.

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<v Speaker 3>We do see some in some Asian markets, and we've

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<v Speaker 3>seen some rationing. We've seen work weeks adjusted, other demand

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<v Speaker 3>measures imposed in some of the countries in Asia. Markets

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<v Speaker 3>are very efficient at moving products and barrels to where

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<v Speaker 3>they're needed, and we haven't reached a crisis point yet,

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<v Speaker 3>but the inertia in the system is very, very strong

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<v Speaker 3>and turning that is not easy.

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<v Speaker 4>One of the main sticking points the US has when

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<v Speaker 4>it comes to negotiating with Ron is this idea of

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<v Speaker 4>the tolling.

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<v Speaker 5>Would cheveryone consider paying a toll?

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<v Speaker 1>No, we wouldn't.

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<v Speaker 5>Do you know how people are paying a toll?

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<v Speaker 3>I've heard reports of people using cryptocurrency in various countries.

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<v Speaker 3>I think the Treasury has come out this week and

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<v Speaker 3>sanctioned the new authority that has been put in place

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<v Speaker 3>to oversee transit through the Strait. It went from a

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<v Speaker 3>toll to a navigation fee.

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<v Speaker 5>To something a navigation fee, a cop.

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<v Speaker 3>I don't know enough about any of these things to

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<v Speaker 3>say definitively, but look, freedom of navigation through international waterways

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<v Speaker 3>is a very well established principle, and anything like this

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<v Speaker 3>would begin to say that countries adjacent to an international

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<v Speaker 3>waterway can charge some sort of a transit fee. There

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<v Speaker 3>are many other places in the world where that principle

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<v Speaker 3>could be applied, not just to energy products, but to

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<v Speaker 3>all freight moving through the Straits of Malacca, the Bosphorus.

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<v Speaker 3>Pick your choke point, and so that's not a principle

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<v Speaker 3>I think that most countries in the world would find acceptable.

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<v Speaker 6>How far are we away from having pipelines that connect

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<v Speaker 6>some of these countries to the mainland and their production

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<v Speaker 6>without having to traverse the straight at all.

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<v Speaker 3>Well, there's a couple that exists now that you've talked

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<v Speaker 3>about in Saudi and the UAE. The UA sanctioned a

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<v Speaker 3>project last year which is about fifty percent complete to

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<v Speaker 3>get more of their production over to Fujira and outside

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<v Speaker 3>of the Strait.

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<v Speaker 1>So I think you would see more of that, Lisa.

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<v Speaker 3>The one opportunity there is countries like Iraq and Kuwait

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<v Speaker 3>that are deeper up in the Gulf don't have access

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<v Speaker 3>to those pipelines, and for them the route could be

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<v Speaker 3>through the North and ultimately then into the Mediterranean, maybe

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<v Speaker 3>through Turkey, where we see a pipeline comes out of

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<v Speaker 3>Caspian Sea over into the Mediterranean in Turkey. And so

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<v Speaker 3>I do think one of the responses to this will

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<v Speaker 3>be infrastructure investments that will allow these energy flows to

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<v Speaker 3>avoid the strade and horror moves. And that's underway now

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<v Speaker 3>and I think you'll see that in the years that follow.

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<v Speaker 6>We started the conversation talking about why oil prices aren't higher,

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<v Speaker 6>and you're saying that we're getting close to breaking the

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<v Speaker 6>bottoms of some of the inventory bins. And we were

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<v Speaker 6>speaking just a moment ago with Alex Saltman at Barclays

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<v Speaker 6>who said we actually could see a glut of oil

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<v Speaker 6>in six to twelve months time if there is a

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<v Speaker 6>resolution here, based on the production levels of so many

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<v Speaker 6>different oil companies and countries, what's your take on that.

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<v Speaker 6>Do you think that that's a feasible interpretation.

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<v Speaker 3>Well, history says that shortages tend to be followed by gluts,

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<v Speaker 3>and high prices send a signal and markets work, Consumers

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<v Speaker 3>consume less, producers produce more in response to a price signal,

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<v Speaker 3>and there's a time lag in the way both of

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<v Speaker 3>those manifest themselves in the market. And what has happened

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<v Speaker 3>historically is at the time that the new supplies reach

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<v Speaker 3>the market, demand may have turned down through conservation measures,

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<v Speaker 3>economic slowdown, maybe a recession, and you can see those

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<v Speaker 3>lines crossover and the price cycles down. It's why commodity

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<v Speaker 3>markets are cyclical, is they tend to overshoot. And history

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<v Speaker 3>says when we get into one of these situations that

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<v Speaker 3>is somewhere out in the future.

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<v Speaker 2>What signal do you take from the futures curve? I'd

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<v Speaker 2>lovely reaction to that, because so many people have pointed

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<v Speaker 2>to the back end of the futures curve as a

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<v Speaker 2>prediction of markets, of where they think CREUD will be.

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<v Speaker 2>How does an energy boss like yourself look at the

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<v Speaker 2>futures curve?

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<v Speaker 3>Not very frequently. It's not something we use for planning purposes.

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<v Speaker 3>We do a certain amount of hedging in our business

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<v Speaker 3>on commercial activity where you will use futures, but we

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<v Speaker 3>don't look at futures curve as a prediction of future price.

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<v Speaker 3>We do our own fundamental analysis on demand, supply, technology, policy,

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<v Speaker 3>economic growth and arrive at our own scenarios, and we

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<v Speaker 3>don't use a point fourcast or a curve. We use

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<v Speaker 3>a range of scenarios. Prices are hard to predict in

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<v Speaker 3>these markets, and so we don't anchor on a single price.

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<v Speaker 1>We use a range of prices.

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<v Speaker 6>What's fascinating is you were talking about how typically commodity

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<v Speaker 6>markets tend to overshoot and then you get the glut

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<v Speaker 6>just as demand falls off. Are we overshooting because what

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<v Speaker 6>I keep hearing is that we're not overshooting.

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<v Speaker 5>The actually oil prices and the.

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<v Speaker 6>Future's curve is remarkably low, and that people keep consuming.

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<v Speaker 6>And frankly, people like yourself are not investing in more

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<v Speaker 6>production right now. You're not increasing production traumatically to offset

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<v Speaker 6>some of what's going on. So is this time different

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<v Speaker 6>in terms of the commodity cycle.

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<v Speaker 3>Well, first of all, we are increasing production. Our production

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<v Speaker 3>growth seven to ten percent this year, which is a

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<v Speaker 3>lot in a world where demand is growing one percent

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<v Speaker 3>on average, and so there is investment in growth. Is

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<v Speaker 3>this time different? You know, people say that every time

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<v Speaker 3>and often find themselves regretting having said that this time

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<v Speaker 3>is this is the circumstances. Here are things we haven't

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<v Speaker 3>seen before. The twenty percent of the world's energy production

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<v Speaker 3>cut off for now nearly one hundred days. A billion

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<v Speaker 3>barrels that is not in the market that otherwise would

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<v Speaker 3>have been in the market is not something that we've

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<v Speaker 3>seen before. So that part of it is different. How

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<v Speaker 3>commodity markets respond have a pattern that has been proven

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<v Speaker 3>through different types of shocks to the system that is

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<v Speaker 3>remarkably repeatable. Maybe not perfectly predictable, but it is something

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<v Speaker 3>that you have to bear in mind when you're in

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<v Speaker 3>this business, as you allocate capital and as you plan

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<v Speaker 3>for your business.

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<v Speaker 1>Is these patterns exist for a reason when.

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<v Speaker 4>You allocate capital. I want to ask you about Venezuela.

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<v Speaker 4>When will you put fresh dollars into the country.

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<v Speaker 3>Yeah, we're currently operating under a system that's been approved

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<v Speaker 3>by the US treasure and the Venezuelan government to recover

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<v Speaker 3>debt that we're owed. We made some loans to their

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<v Speaker 3>state owned company many years ago and they weren't repaid,

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<v Speaker 3>and so we set up a mechanism to ensure repayment

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<v Speaker 3>oil flows to the US, which is important for us

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<v Speaker 3>for fine. We're working our way through that and we'll

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<v Speaker 3>recover the debt over the next year or so, the

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<v Speaker 3>final portion of it, and then we need a new

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<v Speaker 3>set of fiscal terms under which we would invest in

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<v Speaker 3>the country. Right now, the amount of tax and royalty

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<v Speaker 3>that's paid doesn't leave enough for an investor to get

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<v Speaker 3>a return on their investments.

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<v Speaker 1>The country has changed.

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<v Speaker 3>It's a hydrocarbon law has indicated a new range of

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<v Speaker 3>taxes and royalties that would be applied to the energy sector,

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<v Speaker 3>but they've not been specific about wearing the range those

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<v Speaker 3>would land.

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<v Speaker 1>So there are.

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<v Speaker 3>Negotiations underway, discussions Even this week, we had a team

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<v Speaker 3>in Venezuela that had some discussions on this issue. I

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<v Speaker 3>expect over the next short period of time we may

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<v Speaker 3>see some clarity from them on specific values on corporate

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<v Speaker 3>income tax, on a range of things on royalties and

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<v Speaker 3>how that might be applied. So there's progress being made

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<v Speaker 3>to clarify the things that would be needed in order

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<v Speaker 3>to make those investments, but we don't have enough clarity

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<v Speaker 3>right now, understand what the regime would look like, and

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<v Speaker 3>so it's unlikely we would put capital to work until

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<v Speaker 3>those things are clarified.

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<v Speaker 2>Inquiring minds want to know. I'm getting the feedback right now.

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<v Speaker 2>So December is trying to get eighty four. What is

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<v Speaker 2>the Microworth chef Ron price this year? What's the range

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<v Speaker 2>in your scenario?

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<v Speaker 3>Planet, Well, the range on the low end would probably

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<v Speaker 3>get to that number, and on the high end if

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<v Speaker 3>we were to see an extended constraint on transit out

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<v Speaker 3>of the straight and horror moves. The question is how

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<v Speaker 3>high is high?

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<v Speaker 2>You get to very high numbers, so your low is

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<v Speaker 2>actually where December is priced right now.

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<v Speaker 3>Assumptions right, we don't tip into a recession, we don't

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<v Speaker 3>have some other exogenous event. But yeah, it's going to

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<v Speaker 3>take months john two to clear ships out of the strait,

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<v Speaker 3>to make sure that the mines have been cleared, to

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<v Speaker 3>establish to get two thousand ships out, they don't all

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<v Speaker 3>go out at once. You need weeks and weeks. Somebody's

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<v Speaker 3>got to prioritize to bulk traders go out first, to

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<v Speaker 3>container ships go out first, to us, Allied ships go

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<v Speaker 3>out first or last. Arranged two thousand ships. Decisions unclear

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<v Speaker 3>at this point.

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<v Speaker 5>Wouldn't it be the fifth fleet.

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<v Speaker 3>It's unclear at this point. So there needs to be

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<v Speaker 3>assystem to prioritized traffic. Shipowners have to be convinced that

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<v Speaker 3>it's safe to transit through the strait. There need to

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<v Speaker 3>be some sort of security measures, and then that's just

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<v Speaker 3>to get ships out. You have to get ships in

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<v Speaker 3>as well. And the tanks inside the gulf are full.

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<v Speaker 3>That's why production is being slowed or stopped is because

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<v Speaker 3>there's no place to put it. The ships are full,

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<v Speaker 3>of the tanks are full, so you need new ships

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<v Speaker 3>to come back in. Shipowners have to be comfortable sending

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<v Speaker 3>ships back in after having ships trapped for months and

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<v Speaker 3>crews trapped for months. They may or may not be

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<v Speaker 3>willing to move all of their vessels back in. There's

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<v Speaker 3>other routes now that are trading US to Asia is

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<v Speaker 3>a very heavily traded route. There's a lot of ships

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<v Speaker 3>in that service, so it will take months and then

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<v Speaker 3>you then you start to clear out the inventories that

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<v Speaker 3>are in tanks, which allows fields to restart, damage to

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<v Speaker 3>be repaired.

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<v Speaker 1>This doesn't happen overnight and so this is going to

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<v Speaker 1>be with us for some time.

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<v Speaker 2>I got to ask you, do you just sit here

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<v Speaker 2>and say you first, how do you think about it?

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<v Speaker 1>Well, we'd like to get our ships out. It's not

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<v Speaker 1>a decision that ship.

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<v Speaker 3>We have six ships inside the straight right now with

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<v Speaker 3>our cargoes. All of them are chartered, so they're owned

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<v Speaker 3>by a third party, and we don't ultimately make the call.

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<v Speaker 3>The ship moowner decides whether or not he wants to

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<v Speaker 3>put his vessel and his crew through the strait, and

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<v Speaker 3>so that's a decision. We provide advice on input too,

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<v Speaker 3>but we can't make that decision. So it's a very

0:11:37.520 --> 0:11:40.080
<v Speaker 3>complex set of decisions that need to be made to

0:11:40.120 --> 0:11:43.040
<v Speaker 3>begin to get things moving again, and it will happen slowly.

0:11:43.080 --> 0:11:45.120
<v Speaker 3>I would expect there will be some stop and start

0:11:45.400 --> 0:11:48.960
<v Speaker 3>to it. There still has been kinetic activity this week,

0:11:49.000 --> 0:11:50.920
<v Speaker 3>someone which has been reported to the media, someone which

0:11:50.920 --> 0:11:55.240
<v Speaker 3>has not, and so we see risks very real still

0:11:55.240 --> 0:11:55.360
<v Speaker 3>in that.

0:11:55.880 --> 0:11:58.240
<v Speaker 2>Generally you can't say things that hasn't been reported. What's

0:11:58.280 --> 0:11:59.520
<v Speaker 2>not been reported? What are you hearing?

0:11:59.640 --> 0:12:02.120
<v Speaker 3>Well, there's there have been There have been vessels that

0:12:02.160 --> 0:12:05.040
<v Speaker 3>have been in transit that have suffered attacks.

0:12:05.600 --> 0:12:07.720
<v Speaker 2>That's more than what we've heard of in the press.

0:12:08.480 --> 0:12:11.200
<v Speaker 1>Yes, our reports would indicate that what do.

0:12:11.240 --> 0:12:13.120
<v Speaker 2>They suggest how frequent of those attacks been.

0:12:14.600 --> 0:12:19.320
<v Speaker 3>Maybe not every day, but there have been multiple incidents

0:12:19.400 --> 0:12:20.920
<v Speaker 3>that have occurred, Mike.

0:12:20.960 --> 0:12:23.640
<v Speaker 2>For the people of California, people waking up early this morning,

0:12:23.640 --> 0:12:25.840
<v Speaker 2>perhaps on the West coast and tuning into this program,

0:12:26.200 --> 0:12:28.520
<v Speaker 2>what's your message to them about why gas prices are

0:12:28.520 --> 0:12:31.200
<v Speaker 2>so much higher in their state compared to everybody else.

0:12:31.400 --> 0:12:38.400
<v Speaker 3>Well, this is politicians gas lighting about gas prices. The

0:12:38.440 --> 0:12:42.640
<v Speaker 3>fact is California's policies for two decades have been driving

0:12:42.880 --> 0:12:47.760
<v Speaker 3>prices higher. California has six refineries operating.

0:12:47.280 --> 0:12:49.720
<v Speaker 1>Today, a little bit more than a year ago. We

0:12:49.760 --> 0:12:50.480
<v Speaker 1>had nine.

0:12:52.480 --> 0:12:55.400
<v Speaker 3>Refining capacities, down seventeen percent in just the last year.

0:12:55.520 --> 0:12:59.080
<v Speaker 3>California has the highest taxes and fees in the nation.

0:12:59.640 --> 0:13:03.199
<v Speaker 3>Californ On imports sixty percent of its crude oil, twenty

0:13:03.240 --> 0:13:06.319
<v Speaker 3>five percent of its diesel, twenty percent of its gasoline,

0:13:06.960 --> 0:13:10.720
<v Speaker 3>similar amounts of jet fuel. And we're in a situation

0:13:10.760 --> 0:13:14.360
<v Speaker 3>where world energy markets are tight and so prices are

0:13:14.360 --> 0:13:17.720
<v Speaker 3>going up everywhere. California has long been the highest price

0:13:17.760 --> 0:13:21.480
<v Speaker 3>state in the country because the policies have constrained supply

0:13:21.760 --> 0:13:25.079
<v Speaker 3>and demand is continuing to be very robust in a

0:13:25.200 --> 0:13:29.320
<v Speaker 3>state where supply has been consciously constrained by policy.

0:13:29.520 --> 0:13:34.200
<v Speaker 4>But how do some gasoline companies stations like Costco keep

0:13:34.320 --> 0:13:37.320
<v Speaker 4>actually lower prices though he's.

0:13:37.160 --> 0:13:38.840
<v Speaker 1>Got a different business model. I think.

0:13:40.600 --> 0:13:44.240
<v Speaker 3>A hypermarketer like a Costco has things they use as

0:13:44.320 --> 0:13:47.080
<v Speaker 3>almost a loss leader to bring traffic in and can

0:13:47.360 --> 0:13:49.480
<v Speaker 3>operate on a very small margin because you go to

0:13:49.520 --> 0:13:52.320
<v Speaker 3>the big box and that's where the revenue is, and

0:13:52.360 --> 0:13:54.760
<v Speaker 3>the real P and L comes through the subscriptions and

0:13:54.800 --> 0:13:58.640
<v Speaker 3>the memberships. A small service station owner doesn't have the

0:13:58.679 --> 0:14:01.040
<v Speaker 3>benefit of that. They have to make a margin on

0:14:01.280 --> 0:14:05.520
<v Speaker 3>the fuel that they sell and maybe some ancillary goods.

0:14:05.520 --> 0:14:08.680
<v Speaker 3>So retailers all have different business models and you see

0:14:08.679 --> 0:14:11.680
<v Speaker 3>that in the marketplace, and they meet different customer needs,

0:14:11.679 --> 0:14:12.880
<v Speaker 3>so used to arrange of those prices.

0:14:12.880 --> 0:14:15.160
<v Speaker 4>I'm sure Chevron is going to be on the mind

0:14:15.200 --> 0:14:17.200
<v Speaker 4>of Gavin Newsom as he looks for twenty twenty eight

0:14:17.240 --> 0:14:20.600
<v Speaker 4>presidential run. But it's also been I mean, you've been

0:14:20.720 --> 0:14:23.320
<v Speaker 4>front and center when it comes to this administration as well.

0:14:23.400 --> 0:14:27.640
<v Speaker 4>Do you spend more time in Washington or the Permian lately?

0:14:27.720 --> 0:14:30.880
<v Speaker 1>Probably in Washington. I like being in the Permian.

0:14:31.440 --> 0:14:37.880
<v Speaker 3>But my job requires some interaction with elected officials in

0:14:38.120 --> 0:14:42.280
<v Speaker 3>the Senate and the House, the administration, and during a

0:14:42.280 --> 0:14:47.480
<v Speaker 3>time of extreme distress in energy markets, there's a lot

0:14:47.520 --> 0:14:49.240
<v Speaker 3>of dialogue that goes on in Washington, d C.

0:14:49.440 --> 0:14:51.600
<v Speaker 1>So hopefully I'll get to the Permian on the second

0:14:51.600 --> 0:14:52.320
<v Speaker 1>half of the year.

0:14:52.360 --> 0:14:55.080
<v Speaker 6>Yeah, which would require a gasoline price is going down,

0:14:55.120 --> 0:14:57.640
<v Speaker 6>and recently they've been remaining at this relatively high level,

0:14:57.720 --> 0:14:59.640
<v Speaker 6>though they have diff just a bit. You talk about

0:14:59.640 --> 0:15:01.240
<v Speaker 6>how he could to end up seeing shortages in the

0:15:01.280 --> 0:15:03.760
<v Speaker 6>next few weeks even in the United States. Looking right

0:15:03.800 --> 0:15:07.120
<v Speaker 6>now at distillate fuel inventories the lowest levels here since

0:15:07.120 --> 0:15:10.320
<v Speaker 6>two thousand and three, a pretty shocking number. How much

0:15:10.320 --> 0:15:13.200
<v Speaker 6>could you foresee gasoline prices in the United States rising

0:15:13.280 --> 0:15:17.200
<v Speaker 6>outside of California because of just simply shortages that you're

0:15:17.240 --> 0:15:18.200
<v Speaker 6>seeing on the ground.

0:15:18.720 --> 0:15:21.000
<v Speaker 3>Yeah, well, right now, the US has come to the

0:15:21.040 --> 0:15:23.720
<v Speaker 3>rescue of some of our allies around the world. We're

0:15:23.720 --> 0:15:28.320
<v Speaker 3>exporting crude at record levels. We're exporting products to Europe

0:15:28.320 --> 0:15:31.560
<v Speaker 3>in particular, and so what that means is products that

0:15:31.720 --> 0:15:34.760
<v Speaker 3>might otherwise be used in the US are being highly

0:15:34.880 --> 0:15:38.640
<v Speaker 3>valued elsewhere, and so we're seeing flows in that direction.

0:15:39.160 --> 0:15:40.880
<v Speaker 1>Inventories are low for.

0:15:40.880 --> 0:15:44.720
<v Speaker 3>Diesel for gasoline in the US, and we're moving into

0:15:44.760 --> 0:15:47.360
<v Speaker 3>a period of time which seasonally says demand is likely

0:15:47.400 --> 0:15:47.840
<v Speaker 3>to rise.

0:15:48.320 --> 0:15:50.320
<v Speaker 1>The refineries in the country are running.

0:15:50.040 --> 0:15:53.760
<v Speaker 3>As hard as they possibly can. They're all near maximum.

0:15:53.240 --> 0:15:55.280
<v Speaker 1>Utilization, and so the market is tight.

0:15:55.320 --> 0:15:58.280
<v Speaker 3>And this is the reason why I've talked about concerns

0:15:58.280 --> 0:16:01.640
<v Speaker 3>about upward pressure on prices, because you can get away

0:16:01.640 --> 0:16:06.120
<v Speaker 3>from the crude forward curve and get to diesel inventories,

0:16:06.160 --> 0:16:08.600
<v Speaker 3>gasoline inventories, and the prices of those products, which are

0:16:08.640 --> 0:16:11.320
<v Speaker 3>really the products that are consumed. And we're in a

0:16:11.320 --> 0:16:14.880
<v Speaker 3>period where inventories are tight, demand and remain strong, prices

0:16:14.920 --> 0:16:18.800
<v Speaker 3>are elevated, and there's risks they go higher and shortages

0:16:18.840 --> 0:16:22.760
<v Speaker 3>that have now only really appeared in Asia could begin

0:16:22.840 --> 0:16:24.680
<v Speaker 3>to show up in other parts of the world.

0:16:24.880 --> 0:16:26.640
<v Speaker 2>Mike, you one of the very best a clinic has

0:16:26.680 --> 0:16:29.120
<v Speaker 2>always We appreciate your time. Thank you, sir, Thank you.

0:16:29.240 --> 0:16:31.280
<v Speaker 2>My worth as a Chevron CEO