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