WEBVTT - Lead Analyst at Sankey Research Paul Sankey Talks Commodities

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<v Speaker 1>Bloomberg Audio Studios. Podcasts.

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<v Speaker 2>Radio. News. Let me explain Paul Sankey, folks. For years,

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<v Speaker 2>you'd get the Deutsche Bank research, and this is before

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<v Speaker 2>the Internet. It was chiseled into granite. It was chiseled.

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<v Speaker 2>Excuse me. Chiseled.

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<v Speaker 3>Let's go. Let's get into this right here.

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<v Speaker 1>Chiseled into granite.

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<v Speaker 3>Chiseled into granite. We used to get the paper research reports.

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<v Speaker 2>All right.

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<v Speaker 3>You know what? We're sitting here with Paul Sankey, lead

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<v Speaker 3>analyst at Sankey Research. He is the go-to voice on

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<v Speaker 3>global energy. Paul, I've been reading over the last 24,

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<v Speaker 3>48 hours that a lot of crude is getting through

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<v Speaker 3>the Strait of Hormuz, like a lot of crude. Why

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<v Speaker 3>is Brent still at $ 103? Why aren't we trading this

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<v Speaker 3>stuff at $ 80 a barrel?

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<v Speaker 1>Well, I think it's going to come down because, yes,

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<v Speaker 1>the numbers we're getting are actually 20 million barrels a

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<v Speaker 1>day right now, the very latest. So the U.S. has

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<v Speaker 1>absolutely thrown the military, the Air Force particularly, into, for example,

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<v Speaker 1>I was told they have eight F-15s constantly running up

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<v Speaker 1>and down the petrol line to protect the petrol line.

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<v Speaker 1>And the F-15s apparently are faster than the drones. So,

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<v Speaker 1>you know, it makes you wonder about Top Gun and stuff. But,

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<v Speaker 1>you know, what strikes me, obviously, is the enormous expense

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<v Speaker 1>of this effort. And it's clearly an all-in military effort

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<v Speaker 1>by the U.S. to get the oil flowing. And that's

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<v Speaker 1>exceeding I think the problem is, you know, what happens

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<v Speaker 1>once we get through the midterms, because it's clearly an

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<v Speaker 1>unsustainably expensive effort right now. And what you're seeing, I

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<v Speaker 1>was just looking at the charts, is actually year forward

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<v Speaker 1>crude is now moving up quite aggressively. So you're above

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<v Speaker 1>80 for one year delivery. So, you know, this time

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<v Speaker 1>next year, the price of oil has gone up quite

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<v Speaker 1>a lot.

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<v Speaker 3>Why is that?

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<v Speaker 1>Because I think everything you're looking at now is pointing

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<v Speaker 1>towards 2027 being a problem as well, you know, because

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<v Speaker 1>we've drawn down, we've run through the six or seven

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<v Speaker 1>buffers that we had in global oil, which would be

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<v Speaker 1>some of the less well-known ones were, for example, that

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<v Speaker 1>Saudi and UAE had major inventories in Asia already stored.

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<v Speaker 1>An obvious one is the Strategic Petroleum Reserve. Those are

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<v Speaker 1>getting tight. There is another release of the Strategic Petroleum

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<v Speaker 1>Reserve coming through, but you've gone from one and a

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<v Speaker 1>half million barrels a day of drawdown to more like

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<v Speaker 1>150,000 barrels a day there, and that simply can't go

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<v Speaker 1>on forever. So, This is a short-term sort of sugar

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<v Speaker 1>rush of crude that we're getting that is clearly, I

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<v Speaker 1>don't think the U.S. military effort can be sustained, quite frankly,

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<v Speaker 1>at this level of expense.

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<v Speaker 3>When you get the oil out, then what do we

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<v Speaker 3>do with it? We've got to refine it, right?

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<v Speaker 1>That's the second problem is that I keep saying you're

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<v Speaker 1>pushing on a string, and the fact of the matter

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<v Speaker 1>is the constraint is not crude. The constraint is diesel,

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<v Speaker 1>and we're getting almost no diesel out of the Straits

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<v Speaker 1>of Hormuz. The Kuwait refinery used to supply 60% of

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<v Speaker 1>Heathrow's jet fuel. You know, that's all now missing. And

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<v Speaker 1>you really have basically an energy crisis again in Europe

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<v Speaker 1>that we're hoping won't be as bad as it might

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<v Speaker 1>be because we're looking for a warm winter with El Nino.

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<v Speaker 1>But I think we're also looking at a very volatile winter.

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<v Speaker 1>As you know, we just had a nor'easter here in September.

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<v Speaker 1>That's very early. It's not unknown. But it looks like

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<v Speaker 1>we might have energy disruptions from... force majeure from God

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<v Speaker 1>himself or herself.

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<v Speaker 2>Paul Sankey with us, folks. Sankey Research, thrilled he could

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<v Speaker 2>be with us today. I should say in the plague

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<v Speaker 2>that I'm getting over, now I have two people on

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<v Speaker 2>the Bloomberg Money Team, Paul, with us out today. Yes,

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<v Speaker 2>I saw that. Folks, if you've got this flu thing

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<v Speaker 2>going around, this pneumonia thing, go to the doctor. Don't

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<v Speaker 2>be a hero. I can't say enough the care I've gotten.

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<v Speaker 2>We're working it in every day. Paul Sankey, I think

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<v Speaker 2>Paul's dead on here. And that the public is looking

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<v Speaker 2>at simplistic politicians and their rhetoric. If you were talking

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<v Speaker 2>to the politicians with their simplistic, you know, primetime news soundbites,

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<v Speaker 2>what would you say to them that they need to understand?

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<v Speaker 2>What's the come to Jesus moment the politicians need?

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<v Speaker 1>I think the free markets, you know, I think the

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<v Speaker 1>idea that we would ban diesel exports in order to

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<v Speaker 1>short-term bring the price down because the Russians banned diesel

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<v Speaker 1>exports and the Chinese banned diesel exports, you know, that's

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<v Speaker 1>one of the sort of comparisons that makes you realize

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<v Speaker 1>what a terrible idea it is. It's like, no, you know,

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<v Speaker 1>we got to this position of the world's biggest oil

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<v Speaker 1>and gas producer and exporter, an amazing position that's greatly

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<v Speaker 1>underestimated by almost everybody in terms of the benefits that

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<v Speaker 1>it's brought to the U.S., And then to turn around

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<v Speaker 1>and start mucking around with it at the margin in

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<v Speaker 1>a way that you get a six, whatever it would be,

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<v Speaker 1>a 90-day benefit of lower diesel prices. And you get

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<v Speaker 1>a 20-year discount for not being an investable place to

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<v Speaker 1>put money in refining.

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<v Speaker 2>So then how do you perceive, say, next summer, a

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<v Speaker 2>gallon of gas or a gallon of diesel or just

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<v Speaker 2>the price of Brent?

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<v Speaker 1>Well, one comparison that we're using regularly is if you're

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<v Speaker 1>at 650 diesel, you're at $ 250 a barrel. I think

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<v Speaker 1>that would help people realize what the issue is. You've

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<v Speaker 1>got $ 100 crude, you've got 250 diesel, and we use diesel.

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<v Speaker 1>Everything that is out there is that because of what's

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<v Speaker 1>happened in Hormuz and because it looks like it's structurally

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<v Speaker 1>going to be very risky, what's happening here as well

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<v Speaker 1>is the Iranians have no radar, so they're just randomly

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<v Speaker 1>throwing missiles hoping to hit a boat. It's a very

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<v Speaker 1>inefficient way to do it, thankfully. But it really tells

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<v Speaker 1>you they're not stopping. You know, we're going to have

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<v Speaker 1>to either continue massive military presence down there. You know,

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<v Speaker 1>that military presence right now is causing massive spikes in

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<v Speaker 1>tanker rates because the tankers, the state companies are using

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<v Speaker 1>the state ships to get through the strait because they're

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<v Speaker 1>prepared to risk. And then they're putting it on commercial

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<v Speaker 1>tankers outside the straits. That's adding $ 25 a barrel to

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<v Speaker 1>the price of crude to get from Saudi to China.

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<v Speaker 1>Last year, it was under $ 2 a barrel. So you

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<v Speaker 1>have a structural transport increase. This week, Tom, just on Monday,

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<v Speaker 1>I was at the Total Energies analyst meeting here at

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<v Speaker 1>Columbus Circle. And a couple of things they did. One

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<v Speaker 1>I thought was brilliant is that Total Energies voluntarily put

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<v Speaker 1>a cap on gasoline and diesel prices in France. So

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<v Speaker 1>the company actually did it themselves. And that would be

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<v Speaker 1>a suggestion to me for a Valero. Let's get 100,000,

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<v Speaker 1>200,000 barrels of price-tapped diesel to the farmers, and that

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<v Speaker 1>will probably satisfy the politicians a lot. But broadly speaking,

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<v Speaker 1>because of the enhanced risk, you actually need higher inventories, arguably,

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<v Speaker 1>than you were holding before the crisis. And inventories have

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<v Speaker 1>been radically drawing down. So a couple of important numbers

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<v Speaker 1>just to finish. You drew down 4 million barrels a

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<v Speaker 1>day of global inventory suddenly in September. So the drawdown

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<v Speaker 1>suddenly accelerated because we'd blown through the buffers that we

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<v Speaker 1>talked about. And then, of course, you lost the petrol line.

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<v Speaker 1>So the market got panicky. And that's why we're at 100%.

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<v Speaker 1>But at the same time, actually, the US military effort

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<v Speaker 1>was massively ramping up the crude, which takes 50 days

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<v Speaker 1>to reach its destination. So I think we're going to

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<v Speaker 1>come off these level of crude prices quite aggressively, assuming

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<v Speaker 1>they maintain the 20 million barrels a day of exports

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<v Speaker 1>that they're achieving right now, apparently. But you're going to

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<v Speaker 1>remain in a major issue for diesel because you're actually

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<v Speaker 1>doing nothing to address the diesel problem. The other thing

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<v Speaker 1>I'm watching, Tom, finally, is just whether or not Treasury rates,

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<v Speaker 1>interest rates disconnect from oil because, as you know, for

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<v Speaker 1>the past eight weeks, six weeks, we've had a one-on-one

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<v Speaker 1>oil moves a percent. Those guys, you know, you can

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<v Speaker 1>just check, overlay the charts. I've just seen this week

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<v Speaker 1>the beginning of oil trading off, but the interest rates

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<v Speaker 1>continuing to rise. And I think that's going to be

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<v Speaker 1>very scary for the market if that starts happening.

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<v Speaker 2>Get one more in here, Paul.

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<v Speaker 3>All right, here's the simplistic question of the day because

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<v Speaker 3>I'm sure 99% of our audience wants to just know this.

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<v Speaker 3>When do we get back to normal? Do we ever

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<v Speaker 3>get back to where we were January, December in terms

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<v Speaker 3>of global energy and all the way from your world

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<v Speaker 3>in the oil fields all the way down to my

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<v Speaker 3>pump on Route 36 in the Jersey Shore?

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<v Speaker 1>Look, I tell you this. My standard line is if

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<v Speaker 1>you're worried about World War III, you shouldn't be because

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<v Speaker 1>you're in it. And, you know, this is World War III,

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<v Speaker 1>and there's a number of higher levels than the usual

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<v Speaker 1>trench warfare in Ukraine. You have a situation here where

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<v Speaker 1>you have an AI world war. You have a finance

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<v Speaker 1>world war, you know, we call it OFACs against UCAVs,

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<v Speaker 1>which is the US sanctions against drones. And that's just,

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<v Speaker 1>you can split the world east-west basically with a second

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<v Speaker 1>front line through Tokyo and Korea and Taiwan and Australia.

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<v Speaker 1>How do we resolve this? I really would love to

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<v Speaker 1>see the Chinese get on the same page as us. But,

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<v Speaker 1>you know, I think Wall Street always supported Trump taking

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<v Speaker 1>on China. The execution at times has been suboptimal, we

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<v Speaker 1>can say. But I think the general idea was that

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<v Speaker 1>we have to make some sort of new industrial policy

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<v Speaker 1>in the US and reduce the power of China over time.

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<v Speaker 1>And that's hopefully something that can happen in the future.

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<v Speaker 1>But at the moment, it's pretty intractable. It's pretty difficult

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<v Speaker 1>to see how we normalize, certainly how we normalize ever

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<v Speaker 1>again the straightforward moves, because it's a structural damage that

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<v Speaker 1>we've Paul.

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<v Speaker 2>Thank you, thank you, thank you. Paul Sankey, folks, with

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<v Speaker 2>us here.