Speaker 1: Hello, and welcome to another episode of the Odd Logs Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, remember a couple of years ago, you know, when
Speaker 1: like oil prices started booming and there was this big
Speaker 1: story that like production wasn't coming back. Then all these
Speaker 1: oil companies had found discipline, they were all focusing on profits,
Speaker 1: et cetera, not just volume, and that the expectation would
Speaker 1: be that production would be depressed for a long time.
Speaker 2: Wait, I don't think it wasn't that production was ever
Speaker 2: coming back. It was that production would slow substantially. And
Speaker 2: the idea was that this is one part of the
Speaker 2: oil boom story of the sort of mid twenty tens
Speaker 2: that always fascinated me was it was actually a capital
Speaker 2: market story. So it was all these investors who just
Speaker 2: poured money into shale oil basically and thought they were
Speaker 2: going to make millions and millions. Shale completely over expanded.
Speaker 2: It became very very difficult for them to actually pump
Speaker 2: at a profit, and so they all started collapsing. They
Speaker 2: all started pulling back. All the investors got burned and
Speaker 2: they were like, we're never going to touch this industry
Speaker 2: with a ten foot pole ever again, and then lo
Speaker 2: and behold. In sort of the early twenty twenties, shale
Speaker 2: starts to become profitable again. It starts to expand. It
Speaker 2: says it's expanding at a more disciplined pace than previously.
Speaker 2: But I have questions about that. But yeah, it's all changed,
Speaker 2: it's all turned around.
Speaker 1: Yeah, I'm glad. You know, you brought up that capital
Speaker 1: markets aspect that did seem to be you know, this
Speaker 1: idea of depressed production seemed to be all part and
Speaker 1: parcel of that that suddenly financial conditions were tightening, that
Speaker 1: the market was placing this premium in this new nonser
Speaker 1: world of you know, cash flow today, et cetera. And
Speaker 1: so like, I'm slowly confused, like what exactly happened with
Speaker 1: bad story? You know, there's lots of things. As production
Speaker 1: has come back, it seems like investors are still into
Speaker 1: the space. Prices have come down. Then there's all kinds
Speaker 1: of obviously geopolitical stuff going on. It seems like it's
Speaker 1: a time to sort of take stock of what's going
Speaker 1: on in the energy world.
Speaker 2: Yeah, well, US oil production in particular, right, I mean,
Speaker 2: I think that's an all time high. I actually if
Speaker 2: you look at domestic production in the US, I think
Speaker 2: it's something like thirteen million barrels of crude per day
Speaker 2: and twenty million including you know, energy and things like that,
Speaker 2: So an all time high. And it means that US
Speaker 2: oil basically accounts for one of every eight barrels of
Speaker 2: global outputs. So pretty big stuff there.
Speaker 1: Yeah, pretty extraordinary. So what happened to all the narratives?
Speaker 1: Is production coming back? Why I have prices falling? I'm
Speaker 1: very pleased to bring in the person we always love
Speaker 1: to turn to when it comes to oil and energy.
Speaker 1: We're going to be speaking to our colleague, Javier Blast,
Speaker 1: Bloomberg opinion columnists on oil and energy. Have you thank
Speaker 1: you so much for coming back on outlaws.
Speaker 3: Thank you for having me again?
Speaker 1: Have you? What is the deal with that? So like
Speaker 1: we're back at records again in the US production.
Speaker 4: We add two record levels and it's just an incredible number.
Speaker 4: As Tracey said, if you look just at what we
Speaker 4: say is crude oil, it's more than thirteen million borrows
Speaker 4: a day. But if you add on top of that
Speaker 4: number other things that they go into the oil liquids
Speaker 4: streams or like condensates and NGLs or natural gas liquids,
Speaker 4: a bit of ethanol, et.
Speaker 3: Cetera, et cetera.
Speaker 4: We are well above twenty million borrows a day of
Speaker 4: oil production. That compares to one hundred million worldwide. So
Speaker 4: you put everything together, the US is producing one in
Speaker 4: five barrels of oil consumed. That is just an incredibly
Speaker 4: high number, and it doesn't seem to be about to stop.
Speaker 4: Probably it's gonna low down a bit in twenty twenty four,
Speaker 4: but he's going to continue to go up.
Speaker 2: Okay, where is all that new oil actually coming from?
Speaker 2: Because it's been a while since I've brought up the
Speaker 2: rig count chart, But if you look at the rig
Speaker 2: count chart, I mean, this is such a fun one
Speaker 2: because you can see the big humps of the early
Speaker 2: twenty tens and then the big slide into twenty fifteen,
Speaker 2: and now it seems kind of flat. So there's been
Speaker 2: some increase between twenty twenty and twenty twenty two. The
Speaker 2: number of new rigs being drilled has gone up, but
Speaker 2: it's not like it's not like we're seeing a boom
Speaker 2: in new gas rigs and new explorations. So where is
Speaker 2: all this oil coming from?
Speaker 4: Well, it's coming from the very same places that it
Speaker 4: was coming about ten years ago. But it's coming in
Speaker 4: some way, for lack of a better war better. So
Speaker 4: it's coming from Texas, it's coming from New Mexico, and
Speaker 4: it's coming up bit from North Dakota, Oklahoma, et cetera. Exitise,
Speaker 4: it's coming from the shale regions of the United States.
Speaker 4: But we were to say where in just one single
Speaker 4: or two or in this case three single words, is
Speaker 4: Texas and New Mexico. That's where the new oil is coming.
Speaker 4: And you're right, Tracy, the recount is not significantly up. Actually,
Speaker 4: if you look at from a long perspective, it's lower
Speaker 4: than it was during the previous booms of shale. But
Speaker 4: it's just that the oil companies in Texas and New
Speaker 4: Mexico have got very good at distracting more oil from
Speaker 4: those ricks from those wells that they are drilling, and
Speaker 4: they're also doing much longer well s.
Speaker 3: If you think about.
Speaker 4: How an oil shale well looks like, it first goes
Speaker 4: down vertically and then it just turns around ninety degrees
Speaker 4: and it goes horizontal for a while. At the beginning,
Speaker 4: those horizontal wells were relatively short. Perhaps you know, a
Speaker 4: quarter of a mile half a mile at most. Now
Speaker 4: they're going as much as three miles Antonia, and that
Speaker 4: they can get a lot more oil that they were
Speaker 4: able to do a few years back.
Speaker 3: So it's important.
Speaker 1: We're going to talk a lot about the capital market.
Speaker 1: It's an investor aspect, but it's impart just like ongoing
Speaker 1: technological improvements as well. What else is happening on this
Speaker 1: sort of Oh?
Speaker 2: So can I read? Sorry, I never get a chance
Speaker 2: to do this. Can I read one of my all
Speaker 2: time favorite leads from a story that is all about
Speaker 2: technological improvements? Oil drilling? Okay, okay, Javier, Joe, you guys
Speaker 2: are ready, I'm gonna read it.
Speaker 3: Okay.
Speaker 2: This is a story from twenty sixteen. Last spring, stat
Speaker 2: Oil announced it had used the same oil well design
Speaker 2: and components to drill three reservoirs for the price of one.
Speaker 2: While the specs for Norwegian sea drilling might provoke reactions
Speaker 2: akin to the oil field's name, the snore, such standardized
Speaker 2: pipes and casings could hold the key to a pervasive
Speaker 2: mystery about today's energy market. Why is everyone still drilling
Speaker 2: when prices are in the man snort? Get it?
Speaker 3: Oh that's good.
Speaker 2: Maybe you have to read it.
Speaker 1: So that really held up well. So what changes twenty
Speaker 1: sixteen have.
Speaker 4: You Well, technologically wise, we can read longer, particularly the laterals.
Speaker 4: We can pump fracking fluids at the higher pressure, and
Speaker 4: companies are also very good at doing this super quick
Speaker 4: and previously a well could have taken thirty days.
Speaker 3: Now it takes ten.
Speaker 4: They just companies and the crews have got very good
Speaker 4: at doing it, and that means that they can do
Speaker 4: it cheaply. And that's the funny part of the whole
Speaker 4: boom of twenty twenty three and twenty twenty four, a
Speaker 4: difference of the previous ones. Companies are making money and
Speaker 4: investors are making money, so everyone is loving it. This
Speaker 4: is the first time, and this is what really terrorized
Speaker 4: or PEG. This is the first time that shale oil
Speaker 4: is growing and making money at the same time, and
Speaker 4: that's a big problem in you are Saudi Arabia.
Speaker 2: I definitely want to get to the possible response from Peck.
Speaker 2: But just in terms of technology, I mean one of
Speaker 2: the things and the reason I brought up that story,
Speaker 2: it was the idea of standardization. So before you used
Speaker 2: to have all these bespoke custom fittings for oil rigs
Speaker 2: or platforms or whatever. But then I think there was
Speaker 2: actually like an industry wide effort or attempt to start
Speaker 2: standardizing some of these things so you didn't have to
Speaker 2: order a bespoke component for every single oil project that
Speaker 2: you were doing, and that seems to have helped make
Speaker 2: things go faster to Havier's point, and also brought down costs.
Speaker 2: How much of a big deal is that in the industry.
Speaker 4: It is a big deal. I mean it has happened
Speaker 4: everywhere in the oil industry. Let me give you my
Speaker 4: favorite anecdote of a standards asia, please in the oil industry.
Speaker 4: So you are working on a Norsea oil platform. This
Speaker 4: is offshore outside Norway and and the United Kingdom. You
Speaker 4: need to paint a lot of the staff yello kind
Speaker 4: of you know, yellow, danger, very busy ball et cetera,
Speaker 4: et cetera, very stormy areas of the wall the Norsea folk.
Speaker 3: You get the kind.
Speaker 4: It's not the kind of place that you really want
Speaker 4: to spend an evening in winter there. So every company
Speaker 4: have their own shade of yello. They were nineteen different
Speaker 4: kinds of yello to paint things in the Norsea. Each
Speaker 4: company have their own shade with their own specification.
Speaker 3: And it was just ridiculous.
Speaker 4: So at one point a few engineers in the industry
Speaker 4: got together and said, well, this is a bit ridiculous.
Speaker 3: I mean, can we're not just doing like a Yello norsea.
Speaker 4: And so they got together and everyone decided this is
Speaker 4: the shade of Jello that we're going to use. And
Speaker 4: now everyone is painting everything that they need to paint
Speaker 4: in Yello with the same shade. That at a much
Speaker 4: bigger scale has happened across the oil industry. Everything has
Speaker 4: got a standard, and companies within themselves they like to
Speaker 4: do everything best spoke. They really in some ways gold
Speaker 4: plated a lot of projects, so each well was a
Speaker 4: bit different to the other one. Now companies are designing
Speaker 4: one single design and when they I've really thought, okay,
Speaker 4: this is it. This really works very well. Now copy
Speaker 4: and paste for the next twenty five fifty one hundred wells.
Speaker 4: And that has cut costs significantly.
Speaker 1: I love the fact that like just something as simple
Speaker 1: as the color.
Speaker 2: Painting of I'm imagining a room full of oil executives
Speaker 2: looking at different swatches of yellow and being like, no,
Speaker 2: that one's too orange. Can we get something a little
Speaker 2: bit more buttermilk.
Speaker 4: Maybe I will love to be the competition lawyer who
Speaker 4: has to stop it on the meeting to make sure
Speaker 4: that no one is saying anything inappropriate that the Department
Speaker 4: of Justice could get us, like there was a conspiracy
Speaker 4: for the yellow color.
Speaker 1: Yeah, I'll looking at the different panton of shades, but
Speaker 1: gotta do so in a legal way. All right, Let's
Speaker 1: talk about the capital markets aspect, because you know, it
Speaker 1: did seem like the way people thought about it was
Speaker 1: that the industry face had to face a choice. Would
Speaker 1: it be pursuing volume or would it be pursuing profitability?
Speaker 1: And as you just said, like there seems to be
Speaker 1: this very weird situation in which volume is ramping and
Speaker 1: productivity is sustained. How is that happening? And how sustainable
Speaker 1: is that?
Speaker 4: Well to the question of how long how sustainable? I'm
Speaker 4: gonna be honest. I either know. I thought that production
Speaker 4: growth will have a slow down in twenty twenty three,
Speaker 4: and it never happened.
Speaker 3: It did the opposite. They accelerated.
Speaker 4: You look to every oil executive, if you look at
Speaker 4: the forecasters of the industry, everyone is saying it's gonna
Speaker 4: sloan in twenty twenty four. But also they said the
Speaker 4: same for twenty twenty three and they were wrong, So
Speaker 4: we'll see what happens really. But yes, I mean the
Speaker 4: industry went into this new era thinking about profitability, So
Speaker 4: everyone cut kapex, everyone tried to get more efficient, and
Speaker 4: everyone thought that production growth was going to slow down
Speaker 4: because the focus was profitability. The fact that they were
Speaker 4: able to grow quite strongly came a bit of a
Speaker 4: surprise to the industry and then everyone kind of, you know,
Speaker 4: celebrated it. But here there is a very important question.
Speaker 4: If OPEK have not cut production to make room for
Speaker 4: all these new shale oil from the United States, prices
Speaker 4: will have come down, and then the industry will have
Speaker 4: faced the same kind of dilemma of the past. You
Speaker 4: are producing too much, then the prices come down, your
Speaker 4: profitability comes down, and then you have a problem. So
Speaker 4: a lot of these that we are putting based on efficiency,
Speaker 4: it's true. But if not for OPEC cutting production and
Speaker 4: keeping prices about seventy dollars a barrel, then shale companies
Speaker 4: will be in trouble.
Speaker 2: One thing I'm really curious about is who is actually
Speaker 2: funding production now. Versus say in the early twenty tens.
Speaker 1: And just to add on to that a little bit,
Speaker 1: is there any difference between private, publicly traded domestic US players.
Speaker 4: Okay, so let's go from parts on Tracy's question, who
Speaker 4: is founding this well? Back ten years ago, five years ago,
Speaker 4: it was Waller Street. It was a mix of equity
Speaker 4: and credit markets which were founding or all of these
Speaker 4: growth through different instruments. I mean, sometimes it was just
Speaker 4: issue of fresh equity. Sometimes it was bond high till bonds,
Speaker 4: research lending, where a bank is lending to an oil
Speaker 4: company based on the research underground, more or less like
Speaker 4: a mortgage rather than a house. You mortgage the oil
Speaker 4: research that they are underground, and a lot of that
Speaker 4: is still there, but a lot of the money now
Speaker 4: needed for the expansion and to finance in all these
Speaker 4: new growth is coming from cash flow. Generation is the
Speaker 4: internal cash flow of these companies. They generate enough cash
Speaker 4: to pay for all the new drilling that they are doing,
Speaker 4: to pay for all the capital investment that they need
Speaker 4: to do alongside new pipelines, et cetera, and to pay
Speaker 4: the shareholders. These companies now for the very first time,
Speaker 4: are paying dividends and that's that sounds like well companies,
Speaker 4: publicly listed companies would be paying dividends, that that's like normal.
Speaker 4: Well that was not the case a few years back,
Speaker 4: but now they're generat enough cash to do all of
Speaker 4: them both. And in terms of there is there a difference. Yes,
Speaker 4: publicly listed companies have been a bit more caustios. They
Speaker 4: have been trying to They have the shareholders, they have
Speaker 4: wall strips on top of them, and they have to
Speaker 4: really try to focus as much as possible on paying
Speaker 4: dividends and buying back shares privately on they don't have
Speaker 4: that pressure, that super strong pressure, so they have done
Speaker 4: a bit more of growing, and there is a suspicion
Speaker 4: in the industry. A lot of that growth was to
Speaker 4: try to maximize the amount of production that you are
Speaker 4: doing so you can sell yourself to a big player,
Speaker 4: say Exomobile or Chevron, and perhaps that's not as sustainable
Speaker 4: as it looks like.
Speaker 1: Talk more about OPEK, because you mentioned that US shell
Speaker 1: has benefited from OPEC cutting production. You know, I remember,
Speaker 1: I guess it was twenty fifty fifteen, I think when
Speaker 1: OPEK did that huge increase in production to try to
Speaker 1: kneecap us shell. Why are they sort of I guess
Speaker 1: in alignment these days where OPEC's impulse to maintain production
Speaker 1: is good for Opek, but also I guess clearly as
Speaker 1: you say, benefiting US production.
Speaker 4: Well, Opek is trying to keep oil prices as closed
Speaker 4: as he can to one hundred dollars. It's not as
Speaker 4: successful as they will hope. Prices have been between seventy
Speaker 4: and eighty despite a lot of geopolitical tension that you
Speaker 4: wually mind will have pushed prices even higher. I think
Speaker 4: that the key question here is that OPEK is convenced
Speaker 4: that this is a bit of a bleep that at
Speaker 4: some point the growth in US production slows down, the
Speaker 4: demand remains there, the annual demand growth remains there, and
Speaker 4: then they have room to expand their production to bring
Speaker 4: some of the production that they have taken off the market.
Speaker 3: Now so they were able to bring it back and.
Speaker 4: I was, to be honest, the same kind of bed
Speaker 4: that Opek made in twenty eleven twenty twelve. You know,
Speaker 4: this is a blip. Usl growth is going to slow
Speaker 4: down at some point and after a few years, by
Speaker 4: twenty and fifteen, twenty sixteen, they cannot discovered Actually, no,
Speaker 4: this is not working. At seventy five eighty one hundred
Speaker 4: dollars oil. These guys can grow and they can grow forever.
Speaker 4: We need to change the strategy. And that's when OPEK
Speaker 4: decided to float the market kill prices. The price of
Speaker 4: West Texas and a brand crew the two global benchmark
Speaker 4: collapsed to thirty dollars a barrel, and that's what really
Speaker 4: brought down shale growth for a few years. The jury
Speaker 4: is out whether they're making the same mistake or not,
Speaker 4: and I think that we are going to see it
Speaker 4: by the middle of this year, at most Q three
Speaker 4: of this year. We are going to see whether ushale
Speaker 4: really is slowing down or not, and whether demand is
Speaker 4: either sustaining the growth or where you need to see
Speaker 4: a slowdown in demand because you know, electric vehicles and
Speaker 4: more energy efficiency, et cetera, et cetera. So this is
Speaker 4: this is a very important year for OPEK because if
Speaker 4: it doesn't really go as plan, OPEK really needs to
Speaker 4: change the strategy completely.
Speaker 2: What can it do in that scenario.
Speaker 3: Well, they can only do two things.
Speaker 4: One is to accept that you know, the one current
Speaker 4: prices of seventy five dollars, plus they need to cut
Speaker 4: even more production, giving shale more share of the market,
Speaker 4: or they accept that they need to bring prices down
Speaker 4: because shale can grow at seventy five dollars and perhaps
Speaker 4: cannot grow at say fifty or forty and then OPEK
Speaker 4: and that's how the Arabbia puts a lot more production
Speaker 4: into the market and triggers a crash.
Speaker 3: But that means lower prices for OPEK.
Speaker 2: Yeah, and it didn't really work the last time because
Speaker 2: it just incentivized everyone to cut costs and streamline and
Speaker 2: become more efficient.
Speaker 4: Indeed, you're absolutely right, and on both options means lower revenue,
Speaker 4: either because you are producing less or because you are
Speaker 4: accepting lower oil prices.
Speaker 3: But if the strategy of OPEK.
Speaker 4: Doesn't work, and I am not really one hundred percent
Speaker 4: sure that OPEK really has a much of a strategy
Speaker 4: of the next six months, I think that they are
Speaker 4: holding the line for the next six months and then
Speaker 4: they will.
Speaker 3: See what they do.
Speaker 4: But if they are wrong, it means a period of
Speaker 4: lower revenues for open countries and that will be very painful.
Speaker 4: Just in mind, lower revenues when you have experience a
Speaker 4: significant increase in inflation. That means that the purchasing power
Speaker 4: of your barrel goes even lower. That's very painful for
Speaker 4: Saudi Arabia.
Speaker 2: This is a slightly off topic question, but shale producers
Speaker 2: in the US cannot join OPEK right because we do
Speaker 2: not like price fixing cartels.
Speaker 3: I think that the Department of Justice may have one
Speaker 3: or two.
Speaker 2: Yeah, it might have something to say, yeah, you know.
Speaker 4: Like no, I mean, it's not a completely you know,
Speaker 4: it's not a crazy question.
Speaker 3: Tracy Texas.
Speaker 2: I know it's come up every once in a while.
Speaker 4: The State of Texas sent observice to OPEK meetings in
Speaker 4: the eighties. They never joined, but actually they sent up
Speaker 4: service and the state of Alaska so send observers to
Speaker 4: the OPEC meetings. I mean they will be you know,
Speaker 4: an American gentleman sit down during the OPEC meeting as
Speaker 4: an observer.
Speaker 3: I mean, I think at.
Speaker 4: Some point cool heads and so legal advice decided that
Speaker 4: I was not very cool.
Speaker 1: It's funny the things that like one remembers from like
Speaker 1: the sort of fever swamp days of spring twenty twenty
Speaker 1: during the peak of the pandemic. But I just remember
Speaker 1: there was like some like railroad commissioner in Texas, and
Speaker 1: of course the Railroad commission in Texas is the oil regulator.
Speaker 3: There was some oil.
Speaker 1: There was some railroad commissioner who was like trying to
Speaker 1: like do diplomacy with Opek in the middle of it.
Speaker 1: I can't remember his name, but he was like some
Speaker 1: guy on Twitter. Do you guys remember that?
Speaker 3: Yes, there was someone. I cannot remember one hundred percent,
Speaker 3: but I will come back.
Speaker 2: It was.
Speaker 1: Yeah, there was some random guys.
Speaker 3: Let's not forget that.
Speaker 4: When Opek and an Opek plush with this this alliance
Speaker 4: between Opek and and other oil producers including Russia, they
Speaker 4: were negotiating how to respond to the pandemic and just
Speaker 4: basically trying to agree how to split a ten million
Speaker 4: bottles that they cut. Ten percent of global oil production
Speaker 4: was taken out of the market by Opek and his allies.
Speaker 4: A lot of the negotiations Donald Trump. That the point
Speaker 4: President Donald Trump was heavily involved. I mean, the whole
Speaker 4: final deal was effectively cook on a three way phone
Speaker 4: conversation between President Donald Trump, President bladymir Putting, which was
Speaker 4: still you know, negotiating these things with the White House
Speaker 4: face to face effectively and King salmon or Saudi Arabia,
Speaker 4: So the US in some ways it was not part
Speaker 4: of the cartel or anything like that, but it was
Speaker 4: participating in the conversations.
Speaker 3: And Trump got actually acquired.
Speaker 4: A sweet deal because he got the saudiast and the
Speaker 4: Russians to agree to cut production. Why the US industry
Speaker 4: got absolutely nothing.
Speaker 1: I think his name. He even wrote a Bloomberg opinion
Speaker 1: column in March March twenty, twenty twenty. Ryan Sitton was
Speaker 1: his name. The railroad commissioner who called on OPEK to
Speaker 1: coordinate with the US in constraining supply. I want to
Speaker 1: pivot for a second and talk about the Red Sea,
Speaker 1: and we talked about it a couple of weeks ago
Speaker 1: with the context of container freight. What is the rising
Speaker 1: tensions there? We recently saw the US strike at uti Asset.
Speaker 1: What is the rising tension there mean from an oil perspective.
Speaker 3: Well, it's more or less a binary situation.
Speaker 4: As long as the straight Hormos, which is the big
Speaker 4: outlet from the Persian Gulf for countries like Kubey or
Speaker 4: Saudi Arabia into the open markets, as long as that
Speaker 4: remains open. What's happening on the Red Sea is of
Speaker 4: less importance. Yes, it's gonna mean an increasing cause because
Speaker 4: a lot of the oil tankers and also the lng CA,
Speaker 4: this is liquefied natural gas carriers, they're gonna have to
Speaker 4: divert about the Red Sea and go around Africa. That
Speaker 4: ads from the person Gulf into Europe. That ads probably
Speaker 4: a good ten to fifteen days extra. So you know,
Speaker 4: it's not as small and it could really increase the
Speaker 4: cost of shipping, but it's not the end of the world.
Speaker 4: And that's what the oil market is taking it quite relaxed.
Speaker 4: I mean, prices has barely increased over the last few days.
Speaker 3: But then you could think.
Speaker 4: Well, okay, so that is basically on a scale of
Speaker 4: one to ten, probably that's a two, maybe a three.
Speaker 4: What is the other scenario? Where the other scenario is
Speaker 4: the you know, open five with Iran, not with his proxies,
Speaker 4: the hoodies in Germen, but actually with Iran and the
Speaker 4: straight of hormones from somehow gets in trouble. Shipping is
Speaker 4: more difficult through it probably is not completely close, but
Speaker 4: things get really bad, and that on a scale of
Speaker 4: one to ten, that's probably twenty five. And that's the problem.
Speaker 4: That's what I say, it's a bit of a binary
Speaker 4: situation at the moment. Are we well so so far
Speaker 4: not so bad.
Speaker 2: Could it mean that more LNG gets exported from the
Speaker 2: US to Europe. That seems to be the obvious solution, right.
Speaker 4: Yeah, The obvious solution is that all the Atlantic LENG
Speaker 4: goes into euro So that's the US, but also in
Speaker 4: Nigeria trily that that's gonna go as much as possible
Speaker 4: to Europe, and then all the non Atlantic basin LENG.
Speaker 3: Goes to Asia.
Speaker 4: So Gutar will try to radio rect as much of
Speaker 4: the LEG that they can into into Asia. I could
Speaker 4: provide some training opportunities for LNG exporters in the United States.
Speaker 4: And let's not forget that means also more Russian leg
Speaker 4: is gonna remain in Europe rather than going into Asia
Speaker 4: because Europe continues buying LERG from Russia. I mean, we
Speaker 4: stop buying Russian gas through pipeline, but LEG is free
Speaker 4: for all.
Speaker 1: Real quickly, just going back to the Opek conversation, I
Speaker 1: just remembered one of the other things that we talked
Speaker 1: about a lot, I think in like twenty twenty two
Speaker 1: was just that, you know, setting aside what was going
Speaker 1: on with US show production, that there were various structural
Speaker 1: impediments to OPEC supply or non OPEC supply or OPEC
Speaker 1: plus supply, that a number of countries have let their
Speaker 1: own infrastructure slowly get into disarray with the low prices
Speaker 1: of twenty tens, that that was constraining the ability to expand.
Speaker 1: What is happening with sort of non US OPEK related capacity.
Speaker 3: Well, it's true in part.
Speaker 4: I mean you look at so of particularly the African
Speaker 4: producers of OPEK, the likes of Nigeria, Well, they have
Speaker 4: been in travel and they have been striving to meet
Speaker 4: their own production on targis. Recently, Angola left OPEK because
Speaker 4: he was not happy with the fact that OPEK was
Speaker 4: pointing to Angola, you cannot produce as much as we
Speaker 4: even allowed you to produce, so we are going to
Speaker 4: bring your deduction level officially to what you are able
Speaker 4: to do.
Speaker 2: Well.
Speaker 4: Then Golen didn't take that very well and then decided that, well,
Speaker 4: we don't want to be part of this club anymore.
Speaker 4: Then we have two other countries that they have been
Speaker 4: producing far less than in the past, but due to sanctions.
Speaker 4: That's Venezuela and Iran. The sanctions are still there, but
Speaker 4: the US is enforcing them. Well, the US is not
Speaker 4: really enforcing them anymore. It's particularly in the case of Iran,
Speaker 4: has turned a blind eye because you know, the priorities
Speaker 4: get oil prices under control. So Iranian and Venezuelan production
Speaker 4: has increased significantly last year, to the point in twenty
Speaker 4: twenty three the biggest source of extra oil into the
Speaker 4: market was the usail industry. The US was the kind
Speaker 4: of the big number into the oil market put in
Speaker 4: extra oil. The second source of extra oil in twenty
Speaker 4: twenty three compared to twenty twenty two was Iranian oil production.
Speaker 4: And that's just incredible to me that Iran added so
Speaker 4: much oil into the market to the tune of half
Speaker 4: a million borrowers a day. So the story of Opek
Speaker 4: is struggling is not as true as it was three four,
Speaker 4: five years ago. And then you have the UAE, which
Speaker 4: is adding a lot of production and not happy that
Speaker 4: it cannot produce more. And we are beginning to see
Speaker 4: also the saudiast starting to try to increase the production capacity.
Speaker 4: Some of that will come on a stream next year,
Speaker 4: and then in twenty twenty six and twenty twenty seven.
Speaker 4: So the story within OPEK is starting to change from
Speaker 4: one of struggling to keep production to one where Ian
Speaker 4: and Venezuela are adding a lot of barrowls. But also
Speaker 4: we have this new production capacity expansion plants of the
Speaker 4: UIE and Saudi Arabia really about to hit the market potentially,
Speaker 4: because we don't know if they will translate that capacity
Speaker 4: into actual production or not.
Speaker 3: That's a political that's a political decision.
Speaker 2: Yeah, Saudi Arabia needs to pump more in order to
Speaker 2: afford Rinaldo's contract, I guess. But you know, hearing you
Speaker 2: weigh all this out Avier, it sounds almost as if
Speaker 2: we're wi like a slow motion reconfiguration of the world's
Speaker 2: energy sources or energy trade, one where the US is
Speaker 2: far more prominent, Iran is more prominent than it used
Speaker 2: to be. Is that a fair way of putting it? Like?
Speaker 2: Is this a reordering of the system in some respects?
Speaker 4: I think that you are putting it absolutely right. I mean,
Speaker 4: the fact that the US is exporting so much oil,
Speaker 4: and when you can crude and refined products many weeks,
Speaker 4: the US on a growth basis, is sporting more than
Speaker 4: ten million borrows a day, obviously, at the same time,
Speaker 4: it's imported in a bit so on a net basis
Speaker 4: about two million.
Speaker 3: Borrows a day.
Speaker 4: But the fact that the US has oil to export
Speaker 4: on a net basis that, you know, more than it
Speaker 4: consumes and it can esport it. It's just mind blowing,
Speaker 4: and particularly for you know, I have been writing about
Speaker 4: this industry for twenty five years. If even ten years
Speaker 4: ago you have told me that the US was going
Speaker 4: to be exporting the amount of crude that is doing today,
Speaker 4: I would have said absolutely not that you know, no way,
Speaker 4: I mean, no way, this is happening. And you know,
Speaker 4: the fact that Iran and Sancians is back producing qualottle
Speaker 4: oil is also quite surprising. And the fact that Saudi
Speaker 4: Arabia has accepted again to cut unilaterally his production without
Speaker 4: the help of other production countries, something that if promise,
Speaker 4: will never do again, that is also very surprising.
Speaker 2: Yeah, where does the Biden administration set in all of this?
Speaker 2: And we've sort of touched on it in a few
Speaker 2: episodes at this point, but Biden came on on a
Speaker 2: very oil unfriendly campaign, basically talking about transitioning to green energy,
Speaker 2: and yet here we are a few years later, and
Speaker 2: US domestic production is a record. Iran is pumping again,
Speaker 2: which is a whole other political situation. But you talk
Speaker 2: to people in the industry, how are they feeling about
Speaker 2: the Biden administration at the moment.
Speaker 4: Well, I think that the Biden administrations say it has
Speaker 4: a narrative in public, very climate change, green transition, and
Speaker 4: in practice what you see has been they have not
Speaker 4: really done much to limit the US industry ability to expand. Yes,
Speaker 4: people in the oil industry will say, oh my god,
Speaker 4: you know, we have all these problems with the White House,
Speaker 4: and you know they are really anti oil and anti
Speaker 4: fossil fuels and so on. But you really sit down
Speaker 4: with them and told privately and relaxed, they will admit, Look,
Speaker 4: they leave us alone. We can produce as much as
Speaker 4: we can. Their focus is on keeping energy prices down,
Speaker 4: and we are all happy. Can we get more things
Speaker 4: from them?
Speaker 3: Yeah?
Speaker 4: Probably without Republican administration we will get it more. But
Speaker 4: to be honest, we are getting more than enough, and
Speaker 4: actually we do not really produce too much oil. The
Speaker 4: same price is crashing, so yeah, I mean, I think
Speaker 4: that everyone in the industry privately at least, is pretty
Speaker 4: happy with the Biden administration in public, of course, the
Speaker 4: lobbies and so on, they have to say, oh my gosh,
Speaker 4: President Biden, an energy crisis in America.
Speaker 3: That's just completely utter nonsense.
Speaker 1: Let's pivot real quickly. You have a new big piece out,
Speaker 1: I know, not all related, but about the changes happening
Speaker 1: in European energy market. What's the story about.
Speaker 3: Well, it's it's particularly about how we trade electricity.
Speaker 4: And you think about a few years back, and by
Speaker 4: that I mean five six years ago. A lot of
Speaker 4: the electricity market in Europe was controlled by the typical
Speaker 4: names that we all knew, the utilities that have been
Speaker 4: privatized but used to be stay owned companies, big names
Speaker 4: like you know e theF Electricity of the France, r WUE,
Speaker 4: et cetera, et cetera. And the market was quite sedated.
Speaker 4: Prices were not really moving much, there was no much volatility.
Speaker 4: There were very few of the independent trade that's really
Speaker 4: making money trading electricity.
Speaker 3: And a few years back.
Speaker 4: In the middle of nowhere in them market, in a
Speaker 4: town called Archhus, big big university town in rural Denmark,
Speaker 4: a group of companies kind of started to plot how
Speaker 4: we can make out of money out of this market,
Speaker 4: and they were really driven by two things that were
Speaker 4: happening in Europe. Was the liberalization of the market. It
Speaker 4: was a lot more of crossborder electricity trading in Europe,
Speaker 4: and there was also a lot more volatility in the
Speaker 4: supply of electricity in Europe because win and solar you
Speaker 4: cannot predate how much win and solar power you're gonna
Speaker 4: get more than five days, perhaps ten days. But you know,
Speaker 4: meteorologies have a limit of you know, how strongly the
Speaker 4: wind is gonna blow, or whether it's gonna be you know,
Speaker 4: cloud covered in one area of the continent or not
Speaker 4: for solar, et cetera, et cetera. So that variability created
Speaker 4: a lot of price polatility, particularly in the very short
Speaker 4: of the short market. I mean, electricity used to be
Speaker 4: traded one year in advance, one month in advance. And
Speaker 4: this company is kind of specialized in trading in the
Speaker 4: next thirty minutes of the electricity market. But it's gonna
Speaker 4: be you know, what is mid morning, what is going
Speaker 4: to be the demand for electricity by lunchtime. That's what
Speaker 4: they specialized. But it was you know, the five or
Speaker 4: six top of these companies were making perhaps one hundred
Speaker 4: million dollars combined, so not a lot, and you know
Speaker 4: they were in the rather of the industry, but not that.
Speaker 4: In twenty twenty two they made five billion dollars. Their
Speaker 4: return on equity on many names of the industry went
Speaker 4: well above one hundred percent, in some cases well about
Speaker 4: two hundred and fifty percent.
Speaker 3: So let me put it this way.
Speaker 4: The companies that were making a couple of million dollars
Speaker 4: were making ten twenty five thirty million. The guys who
Speaker 4: were making twenty five thirty million before were making a
Speaker 4: couple of one hundred million dollars, and the guys who
Speaker 4: were making one hundred all the way, they just went
Speaker 4: to a billion. It was just one of the biggest
Speaker 4: booms in commodity trading profitability I have ever seen. And
Speaker 4: that the piece is about these names with outside the industry. Basically,
Speaker 4: no one really knows about how much of.
Speaker 2: A parallel is there with the sort of old school
Speaker 2: commodities traders like a Glencore or a traffic Era. To
Speaker 2: the point where as we saw after the pandemic, you
Speaker 2: had sort of systemic issues among those commodities traders that
Speaker 2: became a headache or problem for everyone in Europe at
Speaker 2: one point in time. Could something like that happen with
Speaker 2: this new breed of electricity traders.
Speaker 4: The results are different, but there are very significant races
Speaker 4: with this new breed of electricity traders. A lot of
Speaker 4: what they are doing is computer driven. Some of the
Speaker 4: desks where this happening they are called automated electricity trading desk.
Speaker 4: I mean everything is done by the computers. I have
Speaker 4: been on their trading floors and in some cases eighty
Speaker 4: percent of the volume is run by computers, with the
Speaker 4: traders and the meteorologies just sitting in front of the
Speaker 4: computers making sure that everything is fine, but just the
Speaker 4: computers deciding what to buy and sell. To the point
Speaker 4: that the kind of the umbrella of the regulators in
Speaker 4: UD that look at the electricity market reported that in
Speaker 4: twenty twenty two they monitor four point four billion transactions
Speaker 4: in the electricity market in Europe. That's one hundred and
Speaker 4: forty transactions every second.
Speaker 3: For the whole year.
Speaker 4: And how you monitor that that, I don't think that
Speaker 4: the regulators really have the capacity. And then that a
Speaker 4: significant chunk of the market now is traded by firms
Speaker 4: that they have relatively small capital bases that they are
Speaker 4: all trading from the same place in the middle of
Speaker 4: nowhere in then market, using the same banks and the
Speaker 4: same brokers. Well, it's when you know, the words systemic
Speaker 4: risks kind of come to mind. And I'm not saying
Speaker 4: that there is a problem, but I am concerned that
Speaker 4: regulators and policymakers in Europe don't really know much about them.
Speaker 4: And I was recently, as I was reporting for this column,
Speaker 4: I was talking to one of the top people in
Speaker 4: the European Commission that looks at, you know, these kind
Speaker 4: of situations, and I said, well, what do you know
Speaker 4: about XY said the names of these companies And this
Speaker 4: person told me so honestly, haveavier. I know that they
Speaker 4: exist and that's about it. I have never met then
Speaker 4: I don't really know much about them. When I said, oh,
Speaker 4: do you know that you know, this company made a
Speaker 4: billion dollars, you know, in twenty twenty two, and the
Speaker 4: person was utterly surprised by the level of profitability. And
Speaker 4: the fact is kind of the I think that a
Speaker 4: lot of European policymakers they don't know what they don't.
Speaker 1: Know high policymakers all around the world that could be
Speaker 1: said Javier Blas, thank you so much for coming back
Speaker 1: on outlauds, and I guess describing across many different realms
Speaker 1: the massive changes that are happening in the energy world
Speaker 1: is great to have you back my pressure.
Speaker 3: Thank you.
Speaker 2: I think that was fun.
Speaker 3: Thank you.
Speaker 1: Just real quickly, Tracy, we should do more on electricity trading.
Speaker 1: I've had some requests, and I have to say, like,
Speaker 1: I still don't totally understand like the basics of electricity
Speaker 1: trading in the sense that when I think about trading shops,
Speaker 1: whether it's commodities or even just the traditional financial instruments,
Speaker 1: you know, I think about like entities that are able
Speaker 1: to wear house or absorb some sort of risk in
Speaker 1: exchange for but you can't wear house electricity because it's.
Speaker 2: I suddenly have this vision of like these electricity traders
Speaker 2: on a trading for with tool belts filled with batteries,
Speaker 2: and they're like, I'm buying electricity and then someone comes
Speaker 2: and like charge their battery and then they like hold
Speaker 2: on to it and sell it two days later. But
Speaker 2: that's not how it works.
Speaker 3: I don't think so.
Speaker 1: But for real, like there's not much electricity storage or
Speaker 1: it's pretty small, so like I want to do more.
Speaker 2: It does seem Yeah, it does seem like it's a
Speaker 2: unique commodity in the sense that, like the timeframe is
Speaker 2: so short and you don't have a good line of
Speaker 2: sight into electricity availability, you know, beyond a few days,
Speaker 2: because you don't know what the wind's going to be like,
Speaker 2: or what how strong the sunlight's going to be and
Speaker 2: things like that. So it is really interesting from that perspective.
Speaker 1: Yeah, we should do more just on like the basics
Speaker 1: of what electricity traders do and where they they're sort
Speaker 1: of how they harvest profits. But on the oil question,
Speaker 1: I mean, it's pretty wild that, at least for the
Speaker 1: moment and who knows how long it lasts, the US
Speaker 1: industry hasn't had to choose between volume and profitability. Yeah,
Speaker 1: it's like why not both?
Speaker 2: Yeah, And I think that story about technology, I mean,
Speaker 2: shale was always a technology story and a capital market
Speaker 2: story and investors getting excited about the new technology that
Speaker 2: made all this possible. But it feels like people think
Speaker 2: about technology and they think some like really cool new
Speaker 2: way of drilling, And Okay, yes, the horizontal drills are
Speaker 2: getting more horizontal and more powerful, but horizontal at horizontal aert.
Speaker 2: That's right, But we can also talk about like just
Speaker 2: really small incremental changes, like standardizing the type of bolts
Speaker 2: that you're using in her rig, standardizing the color yellow
Speaker 2: on your north Sea platforms. That was pretty fun.
Speaker 1: I love that example. But no, it's like you just
Speaker 1: don't know where you are in the tech cycle and
Speaker 1: the fact while you were talking, I looked up your
Speaker 1: old article from twenty fifteen that you mentioned and seem
Speaker 1: to have nailed it perfectly. We should do more on standardization.
Speaker 1: Standardization bodies are really interesting organizations too.
Speaker 3: Yeah.
Speaker 2: Standardization is kind of like what drives the world and
Speaker 2: also causes problems a lot. It's really interesting. Yes, let's
Speaker 2: do a standardization series. I really want to speak to
Speaker 2: the guys that make the cure, the barcodes, the bar
Speaker 2: Code Association, what are they up to.
Speaker 1: I love the idea of a standardization series.
Speaker 2: Yeah, all right, Okay, well this is one of those
Speaker 2: episodes where we've kind of come away with five other
Speaker 2: things to discuss. Shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 4: Okay.
Speaker 2: This has been another episode of the ad Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe, why isn't though?
Speaker 1: You can follow me at the Star, Follow Javier Bloss
Speaker 1: at Javier Bloss, Follow our producers Carmen Rodriguez at Carmen Arman,
Speaker 1: Dashel Bennett at Dashbot and kel Brooks at Kelbrooks. Thank
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