WEBVTT - Jeff Currie on the 'Volatility Trap' Keeping Commodity Prices So High 0:00:10.920 --> 0:00:15.200 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.280 --> 0:00:19.520 I'm Joe Wisn't and I'm Tracy Alloway. Tracy, we got 0:00:19.560 --> 0:00:23.639 the latest inflation data this morning. We're recording this on 0:00:23.800 --> 0:00:26.479 April twelve, and it was interesting. I mean, it showed 0:00:26.520 --> 0:00:31.040 there's some easing perhaps in sort of core goods core 0:00:31.120 --> 0:00:35.040 inflation on that side, but the headline, which of course 0:00:35.080 --> 0:00:39.680 includes energy and food continuing to continuing to move higher 0:00:39.680 --> 0:00:42.600 at least as of March. Yeah, that's certainly right. And 0:00:42.840 --> 0:00:46.280 last month would have captured the worst of the energy spikes. 0:00:46.320 --> 0:00:48.520 So a lot of commodities prices have come down ever 0:00:48.640 --> 0:00:52.320 so slightly. But it does feel like there's just generally 0:00:52.360 --> 0:00:54.800 a lot of angst and concern about what's happening with 0:00:54.840 --> 0:00:57.160 commodity prices at the moment. And I have to say, 0:00:57.240 --> 0:00:59.680 I just realized the last time we spoke to our 0:00:59.680 --> 0:01:03.440 guests it was also cp I Day and we started 0:01:03.440 --> 0:01:06.440 out the discussion basically in exactly the same way. Okay, 0:01:06.480 --> 0:01:09.039 so in a year from now, some good news here, 0:01:09.120 --> 0:01:14.199 but OI. But yes, oil and other food related commodities, energy, 0:01:14.400 --> 0:01:17.160 natural gas is very expensive. There is, of course. I 0:01:17.200 --> 0:01:20.240 think two dimensions. One is like pure price, and then 0:01:20.280 --> 0:01:22.880 the other is availability. Ya as we've been talking about 0:01:23.319 --> 0:01:26.319 with some recent guests, including up here on Grand like 0:01:26.360 --> 0:01:29.319 those have become two separate things. Also, Salton Post are 0:01:29.400 --> 0:01:32.360 like there's this fracturing of global commodity supply chains. Were 0:01:32.760 --> 0:01:37.000 absolutely right, and even financial exposure to commodities, you might 0:01:37.040 --> 0:01:38.840 make a lot of money at the moment, but you're 0:01:38.880 --> 0:01:42.399 not necessarily guaranteed to take delivery. There seems to be 0:01:42.720 --> 0:01:47.160 a chasm opening up between financial commodities exposure versus the 0:01:47.160 --> 0:01:50.040 physical and we saw that very dramatically with Nicol and 0:01:50.120 --> 0:01:53.160 some of the dislocations there. Well, no more, no more intro. 0:01:53.280 --> 0:01:55.120 I want to get right into our guests because we've 0:01:55.160 --> 0:01:58.000 had him on twice before, and I would say, of 0:01:58.040 --> 0:02:01.240 all the people you talked to, he's probably called this 0:02:01.320 --> 0:02:05.160 commodity cycle. Maybe it's a supercycle as well or better 0:02:05.200 --> 0:02:08.720 than anyone we're going to be speaking with. Jeff Curry, 0:02:08.760 --> 0:02:11.920 he's a Goldman, he's the global head of Commodities Research. 0:02:12.080 --> 0:02:14.040 We had him last on in the middle of October 0:02:14.320 --> 0:02:16.320 and he said there was more pain ahead in this 0:02:16.360 --> 0:02:20.640 commodity supercycle, and that has proven clearly to be true. Jeff, 0:02:21.000 --> 0:02:24.200 thank you. So much for coming back on oddlines. Great, 0:02:24.200 --> 0:02:26.680 it's a pleasure to be here. Let's just didn't realize 0:02:26.680 --> 0:02:30.079 it was CPI weekly. Well, let's just start it off 0:02:30.160 --> 0:02:33.200 like really simple, Like is there you know, in in 0:02:33.240 --> 0:02:35.079 the middle of October you said there was still more 0:02:35.160 --> 0:02:38.840 pain ahead. That clearly proved to be true. Start really general, 0:02:39.400 --> 0:02:44.120 is there more pain ahead? It's a different kind of pain. 0:02:44.360 --> 0:02:48.079 We like to argue we're entering a volatility trap where 0:02:48.400 --> 0:02:54.440 higher of all discourages UM investment, which then reinforces higher ball. 0:02:55.080 --> 0:02:59.320 And to think about what ends a supercycle, there's only 0:02:59.360 --> 0:03:02.600 one thing that And in a supercycle investment you've got 0:03:02.600 --> 0:03:05.600 to grow supply and deep bottleneck the system so that 0:03:05.639 --> 0:03:09.080 you can accommodate more demand growth on a forward going basis. 0:03:09.160 --> 0:03:11.639 And that's how you ended the seventies, how you ended 0:03:11.639 --> 0:03:14.000 the two thousands, and that's how we're gonna end this one. 0:03:14.320 --> 0:03:17.960 But at this point right now, UM investment, whether it's 0:03:18.000 --> 0:03:22.320 investment and through capital markets, through banking, you know, in 0:03:22.360 --> 0:03:25.560 the commodity markets themselves, it's all declining right now in 0:03:25.560 --> 0:03:28.160 an environment in which it needs capital more than ever. 0:03:28.320 --> 0:03:30.840 So you know, it's I like to say, we're in 0:03:30.840 --> 0:03:33.280 the early inning. Still maybe it's the second or third 0:03:33.280 --> 0:03:36.960 inning of the supercycle. But we're just getting going now. Well, 0:03:37.080 --> 0:03:39.360 why don't we just jump into that point then, because 0:03:39.360 --> 0:03:41.320 this is something that has come up quite a lot 0:03:41.400 --> 0:03:45.880 on recent episodes, this capital investment point. What is it 0:03:45.920 --> 0:03:49.560 in your opinion that's holding back that investment and when 0:03:49.640 --> 0:03:53.920 would we perhaps expect that to change as higher prices 0:03:53.960 --> 0:03:59.360 start to incentivize more producers. Well, this one is a 0:03:59.360 --> 0:04:01.760 little bit ferent than the other cycles, But why don't 0:04:01.760 --> 0:04:05.240 we start with the other cycles and then talk about 0:04:05.240 --> 0:04:07.840 how this one is different. The way this one is 0:04:07.880 --> 0:04:12.440 different is through e s g. In banking regulation following 0:04:12.520 --> 0:04:15.400 the financial crisis in the way oh nine, So let's 0:04:15.400 --> 0:04:18.279 go back to the nineteen sixties. You had the nifty 0:04:18.360 --> 0:04:22.360 fifty that was your new economy booming along UM, absorbing 0:04:22.680 --> 0:04:25.200 much of the capital from the old economy and starving 0:04:25.240 --> 0:04:27.880 the old economy of the capital that needed to grow 0:04:27.920 --> 0:04:30.680 the supply base, which set you up for a very 0:04:30.720 --> 0:04:33.800 tight supply environment when you got the big uptick in 0:04:33.880 --> 0:04:37.080 demand off the Great Society UM in the late sixties. 0:04:37.120 --> 0:04:39.880 In the early seventies, similar dynamic that happened in the 0:04:39.920 --> 0:04:42.960 two thousands as well as today. You think about in 0:04:43.080 --> 0:04:47.159 the two thousand's you had the the dot com boom, 0:04:47.279 --> 0:04:50.679 and in the two thousand tents you had the bag boom, 0:04:50.720 --> 0:04:53.960 so it was a very similar dynamic um and you 0:04:54.040 --> 0:04:56.600 saw that. You know, basically it was this whole idea, 0:04:56.640 --> 0:04:59.880 the revenge of the old economy is investors preferred growth 0:05:00.160 --> 0:05:05.240 names like Netflix to old economy names like Exxon Um. 0:05:05.320 --> 0:05:10.839 That created the capital deficit that led you into this environment. Now, 0:05:10.880 --> 0:05:13.640 why is this one so much more extreme than ones 0:05:13.720 --> 0:05:16.160 that we've seen in the past, is when you have 0:05:16.240 --> 0:05:19.120 E s G policies overlaid on top of that. I'm 0:05:19.160 --> 0:05:22.000 not gonna be labored those points much further because we've 0:05:22.040 --> 0:05:24.400 talked about them in the past. But it's important to 0:05:24.440 --> 0:05:29.039 remember that E s G is not a substitute for 0:05:29.279 --> 0:05:34.000 a a carbon tax um. It's a blunt instrument that 0:05:34.120 --> 0:05:37.800 is reducing capital flows into a very critical sector. So 0:05:38.040 --> 0:05:40.440 if you had a carbon tax, you put the carbon 0:05:40.480 --> 0:05:43.880 price into that energy company model, look at its carbon 0:05:43.920 --> 0:05:46.040 emissions and think, hey, is this a good investment or 0:05:46.120 --> 0:05:50.000 that investment. What we're seeing is entire sectors being shunned, 0:05:50.400 --> 0:05:53.040 and that's made this one much tighter and it's not 0:05:53.120 --> 0:05:56.719 just the oil gas guys, it's the metals and mining 0:05:56.760 --> 0:06:00.800 as well as the agriculture sectors. But banking regulation, and 0:06:00.839 --> 0:06:03.400 that's the one that I've really began to focus on 0:06:03.800 --> 0:06:06.719 over the last let's say two to three months. And 0:06:06.760 --> 0:06:11.760 it really boils down to leverage ratios and those were 0:06:11.760 --> 0:06:14.880 put in place back in you know, Dodd Frank back 0:06:14.960 --> 0:06:17.480 after following oh eight o nine. And let's think about 0:06:17.520 --> 0:06:21.400 what that leverage ratio is. It's tier one capital on 0:06:21.520 --> 0:06:24.680 the top and the total assets of the bank on 0:06:24.800 --> 0:06:26.479 the bottom. If you think about what are two what 0:06:26.560 --> 0:06:29.560 is tier one capital? It's bonds? What are all the 0:06:29.640 --> 0:06:32.160 assets that go into the economy. All that lending is 0:06:32.200 --> 0:06:36.160 based off commodities, So it's things the real world. And 0:06:36.200 --> 0:06:38.640 so let me ask you if if you have and 0:06:38.880 --> 0:06:42.160 most policymakers are gonna tell you it's inflation proof because 0:06:42.240 --> 0:06:44.640 it's the price level times the bonds and then the 0:06:44.680 --> 0:06:47.200 price on the numerator, and then the price level times 0:06:47.480 --> 0:06:50.000 the overall assets on the denominators. So the price level 0:06:50.080 --> 0:06:53.359 drops out, it's you know, inflation proof. The reality it 0:06:53.520 --> 0:06:58.680 is not, and why because bond prices are negatively impacted 0:06:58.680 --> 0:07:01.839 by commodity prices. So essentially, what is that ratio. It 0:07:01.960 --> 0:07:05.520 is bonds on the top and commodities on the bottom. 0:07:05.800 --> 0:07:08.120 And what we're seeing is that these leverage ratios are 0:07:08.120 --> 0:07:10.720 starting to become really binding. You think about how much 0:07:10.760 --> 0:07:13.680 more capital of the market needs today than it did. 0:07:14.200 --> 0:07:17.520 Let's say, you know a year ago, we have oil 0:07:17.560 --> 0:07:19.480 prices are two x what they were a year ago. 0:07:19.520 --> 0:07:21.880 You're gonna need two times the amount of working capital 0:07:21.920 --> 0:07:24.800 out there. And it's in an environment you're are already 0:07:24.880 --> 0:07:27.440 bumping up against those constraints and banking. Do you think 0:07:27.480 --> 0:07:31.640 about banking. Banking's old economy too, it's you know, anything 0:07:31.680 --> 0:07:34.680 that is at you know, capital heavy. The world was 0:07:34.760 --> 0:07:38.800 focused on asset like, capital light, everything of that investing. 0:07:39.040 --> 0:07:42.120 But we've now focused on the need for having capital 0:07:42.160 --> 0:07:44.680 heavy investments, particularly in commodities at a time and it 0:07:44.760 --> 0:07:47.720 was already under invested and at a time that you 0:07:47.800 --> 0:07:49.560 have E. S G constraints. So I think you get 0:07:49.560 --> 0:07:52.800 the idea that the capital deficit in this market is 0:07:52.880 --> 0:07:56.480 extreme and now it's kicking off this volatility trap where 0:07:56.480 --> 0:08:00.800 the under investment um leads to decline in inventories to 0:08:00.920 --> 0:08:05.080 raise cash, liquidation of financial positions to raise cash. All 0:08:05.120 --> 0:08:08.880 of that accentuates the volatility and then scares off further investment. 0:08:08.920 --> 0:08:12.120 So you now are entering this volatility trap. You know 0:08:12.200 --> 0:08:14.600 that we've made the point I've testified in Congress on 0:08:14.640 --> 0:08:17.120 this point before, is the only way out of this 0:08:17.280 --> 0:08:20.560 is you need somebody to stop that vicious cycle and 0:08:20.640 --> 0:08:24.240 create some type of stability to I saying, I like 0:08:24.320 --> 0:08:31.360 to say, is spot prices, solve surpluses, long term contracts 0:08:31.400 --> 0:08:36.000 solved shortages. Can I just ask, because I know we'll 0:08:36.120 --> 0:08:38.920 have people who listen to this and they'll hear someone 0:08:39.080 --> 0:08:43.400 from Goldman Sachs, you know, a big bank cell side analysts. 0:08:43.520 --> 0:08:46.800 They'll go, oh wait, it's someone from Goldman complaining about 0:08:46.840 --> 0:08:52.120 bank leverage ratios and E s G and regulatory um 0:08:52.320 --> 0:08:56.120 capital requirements. Can you just can you flush that argument 0:08:56.120 --> 0:08:57.600 out a little bit? Or what would you say to 0:08:57.640 --> 0:09:01.400 the critics who are immediately going to well, this is 0:09:01.480 --> 0:09:04.160 just you know, a bank talking its own book. Obviously 0:09:04.200 --> 0:09:10.360 a bank would like to lend more to the energy sector. Well, um, 0:09:10.880 --> 0:09:14.480 one is that the banks, um, you know, all of them, 0:09:14.800 --> 0:09:17.520 are are very much behind the the the E S 0:09:17.559 --> 0:09:20.720 G push. And I want to emphasize I am very 0:09:20.920 --> 0:09:23.800 very much a pro climate change and really believe it's 0:09:23.800 --> 0:09:26.840 a problem that needs to be solved. What I'm arguing 0:09:26.880 --> 0:09:28.880 at E s G is probably not the best way 0:09:28.920 --> 0:09:31.280 to go at it, you know, as I really believe 0:09:31.320 --> 0:09:34.360 a carbon tax is the right way to approach this, 0:09:34.760 --> 0:09:37.080 you know, and most economists would agree with me on that. 0:09:37.480 --> 0:09:39.440 And the you know, the way I could think about 0:09:39.800 --> 0:09:43.400 e s G is an effective carbon tax on the 0:09:43.440 --> 0:09:46.160 consumers in places like the United States, in Europe, and 0:09:46.280 --> 0:09:49.800 preticularly high carbon tax in places like Europe where the 0:09:49.880 --> 0:09:53.240 tax revenues do not go to the local governments, is 0:09:53.280 --> 0:09:55.760 going to places like Russia. Um. You know, in fact, 0:09:55.800 --> 0:09:58.120 like to point out, you know, the quarter over quarter 0:09:58.280 --> 0:10:02.080 growth in oil revenue for Russia funded its sixty two 0:10:02.120 --> 0:10:05.440 billion dollar military budget last year. UM. So you know, 0:10:05.480 --> 0:10:07.920 the impacts of e s G in the fact that 0:10:07.960 --> 0:10:11.319 you're not collecting that tax revenue is significant, but more 0:10:11.360 --> 0:10:15.640 importantly creating big distortions and investment. So you know, I'm 0:10:15.679 --> 0:10:18.480 not you know, you know, I want to really emphasize 0:10:18.480 --> 0:10:21.120 I'm very much pro climate change. It's a problem we 0:10:21.160 --> 0:10:23.599 need to deal with decarbonization. It's just E s G 0:10:23.880 --> 0:10:27.480 is not affected tool and approaching this um, well, there's 0:10:27.520 --> 0:10:29.840 a more effective tool of doing it. In terms of 0:10:29.880 --> 0:10:34.360 the question about about bank bank regulation there, um, you know, 0:10:34.400 --> 0:10:36.240 at the point, I'm just going to point out that 0:10:36.559 --> 0:10:44.000 the energy companies and the and the the the trade 0:10:44.040 --> 0:10:47.520 houses in Europe, they went to the regulators asking for 0:10:47.679 --> 0:10:50.600 more funding. So clearly there's not enough funding. And whether 0:10:50.600 --> 0:10:53.959 if it's coming from the likes of banks, there's the 0:10:54.040 --> 0:10:56.679 point is that that you're bumping up at these constraints. 0:10:56.720 --> 0:11:00.160 The whole industry was focused on being capped at a 0:11:00.280 --> 0:11:02.520 light and it was all It goes back to this 0:11:02.520 --> 0:11:04.520 whole revenge of the old economy because banks are old 0:11:04.520 --> 0:11:08.040 economy to in fact, you look at banks price shares 0:11:08.120 --> 0:11:10.240 and you look at them to metals prices where you 0:11:10.320 --> 0:11:13.040 are in the capex cycle. They're very much correlated because 0:11:13.120 --> 0:11:16.800 ultimately the banks of the conduit of that capex cycle. 0:11:17.160 --> 0:11:20.200 So they're all really old economy and pretty much more 0:11:20.280 --> 0:11:23.480 broadly since oh eight oh nine, old economy was bad. 0:11:23.600 --> 0:11:25.840 If I could just show you pictures at the equity 0:11:25.840 --> 0:11:29.320 prices of anything that was capital light, it went straight up. 0:11:29.640 --> 0:11:32.400 Anything that was capital heavy, you know, like the big 0:11:32.400 --> 0:11:35.440 oil companies went down or sideways over the course of 0:11:35.480 --> 0:11:37.960 the last ten years. And it's not just you know, 0:11:38.000 --> 0:11:39.520 so I'm not gonna blame it all on E. S G. 0:11:39.600 --> 0:11:41.160 And let's be only be very careful here so it 0:11:41.200 --> 0:11:43.760 doesn't sound like I'm so anti EU s G. This 0:11:43.840 --> 0:11:47.640 industry had really bad returns, investors were not interested in it. 0:11:47.640 --> 0:11:49.160 And if we go back and we look at the 0:11:49.200 --> 0:11:53.440 previous supercycles, let's say the one in the in the 0:11:53.520 --> 0:11:56.199 two thousand's, prices started to move up in oh three 0:11:56.200 --> 0:11:59.080 and it wasn't until oh six that that capital came in. 0:11:59.160 --> 0:12:01.000 Why they want to see a track record of good 0:12:01.000 --> 0:12:03.839 returns that still holds today. So I'm not want to 0:12:03.880 --> 0:12:06.040 blame it all on E S G, all on banking 0:12:06.080 --> 0:12:08.600 regulations and say it's just a combination of many different 0:12:08.600 --> 0:12:11.600 factors that's created a huge capital deficit. And I want 0:12:11.640 --> 0:12:14.480 to point out it wasn't just all vulgar that solved 0:12:14.480 --> 0:12:17.360 the seventies. There was a huge amount of investment that 0:12:17.400 --> 0:12:21.760 went into North Sea Alaska, North Slope, Gulf of Mexico, 0:12:22.320 --> 0:12:26.040 Mexican production, Brazilian, Norwegian. I can keep going going down 0:12:26.120 --> 0:12:28.960 the list. That investment that came to fruition did a 0:12:29.000 --> 0:12:31.840 lot to ease the inflationary pressures if you went into 0:12:31.880 --> 0:12:33.920 the eighties, so you can just get you know, contribute 0:12:33.960 --> 0:12:36.360 all to the rate hikes by the Fed, because there 0:12:36.400 --> 0:12:38.640 was a lot of that investments. That investment is critical, 0:12:38.880 --> 0:12:40.839 and we're at a junction right now with eight and 0:12:40.840 --> 0:12:44.240 a half percent inflation, but we still haven't seen the 0:12:44.320 --> 0:12:47.960 underlying investment that was already there, let's say in the seventies, 0:12:47.960 --> 0:12:50.600 that is not here today. We need that investment because 0:12:50.640 --> 0:12:53.040 the only way out of this is investment in the 0:12:53.080 --> 0:12:56.720 appropriate ability to grow that supply. You know, you hear 0:12:56.800 --> 0:12:59.840 from say the CEOs of independent oil companies and they 0:13:00.000 --> 0:13:04.120 talk about the demand among investors for returning cash and 0:13:04.200 --> 0:13:08.319 that's totally understandable because after a decade of the industry 0:13:08.360 --> 0:13:11.280 having lost half a trillion or whatever the numbers are, 0:13:11.520 --> 0:13:15.400 you can understand investors who want to optimize for cash flow. 0:13:15.440 --> 0:13:18.000 And you can also understand, as you've been pointing out, 0:13:18.240 --> 0:13:21.360 the reluctance of banks to you know, bump up against 0:13:21.400 --> 0:13:24.920 their capital requirements by lending further. Why not the more 0:13:25.000 --> 0:13:28.160 opportunities on the private side, or why not you know, 0:13:28.200 --> 0:13:31.000 why haven't we seen you know, me and Tracy just 0:13:31.000 --> 0:13:35.160 start a private h private oil company, and forget about 0:13:35.160 --> 0:13:38.720 the public markets, forget about borrowing from banks, and uh, 0:13:38.760 --> 0:13:41.240 you know, borrow money in the bond market and return 0:13:41.280 --> 0:13:45.319 money to our investors privately without some of these outside 0:13:45.800 --> 0:13:50.600 financing considerations. Why why aren't more players taking advantage of 0:13:50.880 --> 0:13:53.320 seeming like you know, with oil, where it is roughly 0:13:53.320 --> 0:14:00.360 a hundred dollars opportunities around that scale, the alee of 0:14:00.440 --> 0:14:03.880 these industries are unlike anything else on the planet Earth. 0:14:04.000 --> 0:14:07.520 You take a Cashigan and and caspping its nickname was 0:14:07.600 --> 0:14:10.480 cash All Gone, why you know, was somewhere around a 0:14:10.559 --> 0:14:14.319 sixty billion dollar project. I mean the magnitude in the 0:14:14.360 --> 0:14:17.760 scale of these investments or unlike anything. And take a 0:14:17.800 --> 0:14:21.480 company like VP with that that horizon spill. It had 0:14:21.520 --> 0:14:24.240 to write over a check the fines for something like 0:14:24.280 --> 0:14:27.160 thirty eight billion dollars. Tell me another company on the 0:14:27.200 --> 0:14:29.440 planet Earth who could write over a check for thirty 0:14:29.440 --> 0:14:33.120 eight billion dollars. So the first and most important is 0:14:33.480 --> 0:14:36.480 the scale, and then the access issues really critical. I 0:14:36.520 --> 0:14:39.720 like to point out things like copper are very narrowly 0:14:39.840 --> 0:14:43.760 geographically distributed, so that you need to have the scale 0:14:43.800 --> 0:14:46.080 to be able to get into these places, and you 0:14:46.160 --> 0:14:48.120 have to have the ability to know how to the 0:14:48.200 --> 0:14:51.680 technological know how, the political know how um to go 0:14:51.920 --> 0:14:54.120 in there and do it. So I think that is 0:14:54.120 --> 0:14:56.400 one of the real key reasons here. But by the way, 0:14:56.400 --> 0:14:59.240 I want to point out, why are the oil stocks 0:14:59.240 --> 0:15:02.120 going up. It's because private investors are going around the 0:15:02.160 --> 0:15:06.800 institutional players and making these investments in these companies. So 0:15:07.040 --> 0:15:09.200 where it can go around it it is, which is 0:15:09.240 --> 0:15:12.400 why you know, ultimately, if you're going to solve climate change. 0:15:12.840 --> 0:15:16.560 You know, I don't want to you know, sound dismissing here, 0:15:16.600 --> 0:15:19.800 but when you know the Russian army is coming barreling down, 0:15:19.920 --> 0:15:22.400 you can't have Germany turning back on the coal plants. 0:15:22.600 --> 0:15:25.680 You know, Historically, when you deal with these problems, you 0:15:25.720 --> 0:15:28.640 have to have policy, create rules. These rules need to 0:15:28.680 --> 0:15:32.400 be enforced and that those rules that they're violated, there 0:15:32.440 --> 0:15:34.320 has to be punishments and there has to be a 0:15:34.360 --> 0:15:37.040 price associated with There's why you know, trying to go 0:15:37.120 --> 0:15:39.480 down this E. S G type path to deal with 0:15:39.520 --> 0:15:42.040 this is gonna miss a lot of these really critical points. 0:15:42.240 --> 0:15:44.560 They are going to be required to solve this problem. 0:15:44.640 --> 0:15:46.920 So point you know, looking at this on a you know, 0:15:46.960 --> 0:15:50.040 a longer term basis, we need to have policy put 0:15:50.080 --> 0:15:52.280 in place that is created a framework that's gonna be 0:15:52.280 --> 0:15:55.400 conducive to getting these capital flows coming to the right places, 0:15:55.520 --> 0:15:58.200 because even if the private investor probably has to do it, 0:15:58.240 --> 0:15:59.760 he still needs to do this in a way that 0:16:00.480 --> 0:16:03.240 environmentally friendly. And I think that you know, again, you 0:16:03.280 --> 0:16:06.000 need to have this scale the policies put in place 0:16:06.400 --> 0:16:09.600 in a such a framework that it's done and that 0:16:09.720 --> 0:16:13.440 it addresses the unique for investment in a very environmentally 0:16:13.480 --> 0:16:17.920 friendly way. So you're talking about this this volatility trap, 0:16:18.080 --> 0:16:21.560 and I think you briefly mentioned this earlier, but there 0:16:21.640 --> 0:16:24.240 has been talk of maybe there is a role for 0:16:24.280 --> 0:16:27.920 either governments or central banks to play in this space 0:16:28.040 --> 0:16:31.960 to make things smoother, maybe smooth out price volatility, or 0:16:32.120 --> 0:16:35.880 provide financing or funding for energy firms or energy traders 0:16:35.920 --> 0:16:38.760 that need it. First of all, is that required in 0:16:38.800 --> 0:16:41.960 your view? And secondly, what is the best way to 0:16:42.000 --> 0:16:45.000 try to smooth out volatility to give players in the 0:16:45.000 --> 0:16:49.000 commodity space confidence to actually invest and produce. Well, it 0:16:49.040 --> 0:16:52.280 goes back to that that saying I've made before. You know, 0:16:52.680 --> 0:16:58.960 spot prices, salt surpluses, long term contracts, solved shortages. Why 0:16:59.080 --> 0:17:01.960 is that the case is because if you can take 0:17:02.000 --> 0:17:04.679 out that volatility and lock in that return through a 0:17:04.720 --> 0:17:08.399 long term contract. That investor feels, you know that he 0:17:09.040 --> 0:17:11.399 is safe to be able to make that investment because 0:17:11.440 --> 0:17:13.840 there's a minimal rate of return because remember these things 0:17:13.840 --> 0:17:16.480 are these things are not like tech tech is you 0:17:16.520 --> 0:17:18.359 get you have a low chance of getting it, but 0:17:18.440 --> 0:17:20.879 you have get a big return that lasts over maybe 0:17:20.920 --> 0:17:22.800 twelve to eighteen months. You know, it's something like an 0:17:22.800 --> 0:17:27.520 iPhone is very short cycle and it's high returning. These 0:17:27.520 --> 0:17:32.400 are low returning, very long cycle type of investments. So 0:17:32.840 --> 0:17:36.879 locking in that rate to return throughout that volatility is 0:17:36.920 --> 0:17:39.679 really critical. And so when we think about you know, 0:17:39.720 --> 0:17:41.480 what you need to do to get that, you need 0:17:41.520 --> 0:17:44.320 to create an environment that's conducing to creating that type 0:17:44.320 --> 0:17:47.439 of long term contract structure. You know, actually, if you 0:17:47.480 --> 0:17:49.920 look at what happened in the seventies, that was when 0:17:49.920 --> 0:17:52.960 we created many of these long term contracts around l 0:17:53.080 --> 0:17:55.240 en G and gas and so forth. But there was 0:17:55.280 --> 0:17:58.440 also conglomerates that were put together to be able to 0:17:58.440 --> 0:18:02.640 to shield the upstream, downstream type of volatilities. There's lots 0:18:02.640 --> 0:18:04.919 of ways. And then we moved into two thousands to 0:18:05.000 --> 0:18:06.560 a market based and This will bring you to the 0:18:06.600 --> 0:18:10.359 Nickel story. Why was this Nickel story because the seventies 0:18:10.400 --> 0:18:13.280 we did this with like conglomerates in long term contracts. 0:18:13.440 --> 0:18:16.320 If somebody failed a long term contract, this thing would 0:18:16.320 --> 0:18:18.679 be resolved in a court of law. So then in 0:18:18.720 --> 0:18:21.920 the two thousands, the banks got in between these conglomerates. 0:18:22.000 --> 0:18:24.680 Let's say between like a a GM and an al 0:18:24.800 --> 0:18:28.919 COHA could squeeze in there, um provide lower cost of capital, 0:18:28.960 --> 0:18:31.680 and you had the financial market squeeze in there, and 0:18:31.720 --> 0:18:34.560 then create that new kind of long term contract that 0:18:34.680 --> 0:18:38.240 was financially based. Now, the problem with that is that 0:18:38.280 --> 0:18:40.440 when you go through periods like we are right now 0:18:41.000 --> 0:18:43.600 in that price of that long term contract goes up 0:18:43.640 --> 0:18:46.320 because it's traded on the market. You get a huge 0:18:46.760 --> 0:18:49.439 capital call and our margin call, which is what was 0:18:49.480 --> 0:18:52.320 happening with that case in Nickel. Then you need the 0:18:52.400 --> 0:18:55.440 cash to fund that that that margin call. You didn't 0:18:55.480 --> 0:18:58.119 have that back in the seventies, you have it today. 0:18:58.240 --> 0:19:00.359 So that's can we all The question is are we 0:19:00.440 --> 0:19:03.480 gonna gravitate something back closer to the seventies to deal 0:19:03.520 --> 0:19:05.800 with this problem, or we're gonna try to fix the 0:19:06.280 --> 0:19:08.880 structure that was created in the two thousands, which means 0:19:08.920 --> 0:19:11.359 you're gonna need different type of lending too, agreements and 0:19:11.680 --> 0:19:14.679 people have to be more comfortable in that risk and 0:19:14.720 --> 0:19:17.720 how much capital these sectors needs, you know, obviously, I 0:19:17.760 --> 0:19:19.800 think the easiest way to solve with this is create 0:19:19.840 --> 0:19:22.960 a regulatory framework, you know, Tracy, as you talk about 0:19:23.280 --> 0:19:25.760 that would be able to address these issues, take out 0:19:25.800 --> 0:19:29.359 that volatility, make banks, investors and so forth comfortable with 0:19:29.400 --> 0:19:31.840 that kind of risk. Otherwise we will go back to 0:19:31.920 --> 0:19:35.800 the period of the seventies, which is vertical integration conglomerates 0:19:35.840 --> 0:19:38.640 and these longer term contracts that end up in court 0:19:38.680 --> 0:19:42.760 of laws, not in in financial institutions. Is there more 0:19:42.960 --> 0:19:45.879 so one proposal that's floating out there would be to 0:19:45.960 --> 0:19:49.480 be more creative with this would be oil specific, of course, 0:19:49.600 --> 0:19:52.440 with the spr and so we know that the administration 0:19:52.880 --> 0:19:58.120 has authorized daily sale of oil included. Solve the long 0:19:58.240 --> 0:20:02.719 term contracts problem or the challenge by pairing that with 0:20:02.800 --> 0:20:05.879 more robust commitments to buy back at a certain price. 0:20:06.320 --> 0:20:08.520 We have seen this sort of flattened a little bit, 0:20:08.560 --> 0:20:13.040 but it's heavy backwardated oil futures curve, essentially putting a 0:20:13.160 --> 0:20:16.040 floor underneath the longer term prices, and could it use 0:20:16.320 --> 0:20:21.080 the SPR to sort of create more domestic supply in 0:20:21.080 --> 0:20:24.119 investment right now. I mean you can do that what 0:20:24.160 --> 0:20:27.360 you're describing at the farm subsidy programs that the US 0:20:27.520 --> 0:20:29.680 has with you know, it's farm Bill with the farmers 0:20:29.720 --> 0:20:32.399 in terms of giving that kind of basically buying the 0:20:32.400 --> 0:20:35.680 farmer put on soybees in case some bad weather shock 0:20:35.800 --> 0:20:38.600 or something like that occurs. You don't need the SPR 0:20:38.800 --> 0:20:41.560 to create that type that type of dynamic. But what 0:20:41.640 --> 0:20:44.800 you're talking about is a physical version of the you know, 0:20:44.840 --> 0:20:47.480 the farm bill really is one that the farm subsidies 0:20:47.480 --> 0:20:50.199 are ones that are more like a financial put, but 0:20:50.240 --> 0:20:53.120 what you're describing is more like an in kind physical put. 0:20:53.200 --> 0:20:55.480 Both our ways to think about solving it. But the 0:20:55.480 --> 0:20:58.600 one thing I will say about dealing with higher oil 0:20:58.720 --> 0:21:01.399 prices with an sp our release like what we're seeing 0:21:01.480 --> 0:21:05.200 right now, that's crowding out private investment, which doesn't help 0:21:05.280 --> 0:21:08.359 solve that longer term problem of getting investment into the 0:21:08.440 --> 0:21:11.040 right place. So these policies need to be thought through 0:21:11.080 --> 0:21:14.200 in such a way that they're conducive to creating decentis 0:21:14.240 --> 0:21:17.560 in place to make the longer term investments. I wondered 0:21:17.560 --> 0:21:20.480 if I can ask something I've been wondering about when 0:21:20.520 --> 0:21:22.600 it comes to the SPR release, and I'm sure a 0:21:22.640 --> 0:21:24.760 lot of people have been asking this as well. But 0:21:25.040 --> 0:21:27.600 you know, it's a pretty big release, and we saw 0:21:27.960 --> 0:21:31.159 a very immediate impact on prices, and I think Goldman 0:21:31.240 --> 0:21:34.959 also cut its price target on oil because of the release. 0:21:35.359 --> 0:21:38.000 What happens after this, like, how does that actually get 0:21:38.000 --> 0:21:40.520 topped up in the future, and how does the US 0:21:40.800 --> 0:21:44.199 source that oil? And at what pace would you expect 0:21:44.280 --> 0:21:48.840