Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn't and I'm Tracy Alloway. Tracy, we got
Speaker 1: the latest inflation data this morning. We're recording this on
Speaker 1: April twelve, and it was interesting. I mean, it showed
Speaker 1: there's some easing perhaps in sort of core goods core
Speaker 1: inflation on that side, but the headline, which of course
Speaker 1: includes energy and food continuing to continuing to move higher
Speaker 1: at least as of March. Yeah, that's certainly right. And
Speaker 1: last month would have captured the worst of the energy spikes.
Speaker 1: So a lot of commodities prices have come down ever
Speaker 1: so slightly. But it does feel like there's just generally
Speaker 1: a lot of angst and concern about what's happening with
Speaker 1: commodity prices at the moment. And I have to say,
Speaker 1: I just realized the last time we spoke to our
Speaker 1: guests it was also cp I Day and we started
Speaker 1: out the discussion basically in exactly the same way. Okay,
Speaker 1: so in a year from now, some good news here,
Speaker 1: but OI. But yes, oil and other food related commodities, energy,
Speaker 1: natural gas is very expensive. There is, of course. I
Speaker 1: think two dimensions. One is like pure price, and then
Speaker 1: the other is availability. Ya as we've been talking about
Speaker 1: with some recent guests, including up here on Grand like
Speaker 1: those have become two separate things. Also, Salton Post are
Speaker 1: like there's this fracturing of global commodity supply chains. Were
Speaker 1: absolutely right, and even financial exposure to commodities, you might
Speaker 1: make a lot of money at the moment, but you're
Speaker 1: not necessarily guaranteed to take delivery. There seems to be
Speaker 1: a chasm opening up between financial commodities exposure versus the
Speaker 1: physical and we saw that very dramatically with Nicol and
Speaker 1: some of the dislocations there. Well, no more, no more intro.
Speaker 1: I want to get right into our guests because we've
Speaker 1: had him on twice before, and I would say, of
Speaker 1: all the people you talked to, he's probably called this
Speaker 1: commodity cycle. Maybe it's a supercycle as well or better
Speaker 1: than anyone we're going to be speaking with. Jeff Curry,
Speaker 1: he's a Goldman, he's the global head of Commodities Research.
Speaker 1: We had him last on in the middle of October
Speaker 1: and he said there was more pain ahead in this
Speaker 1: commodity supercycle, and that has proven clearly to be true. Jeff,
Speaker 1: thank you. So much for coming back on oddlines. Great,
Speaker 1: it's a pleasure to be here. Let's just didn't realize
Speaker 1: it was CPI weekly. Well, let's just start it off
Speaker 1: like really simple, Like is there you know, in in
Speaker 1: the middle of October you said there was still more
Speaker 1: pain ahead. That clearly proved to be true. Start really general,
Speaker 1: is there more pain ahead? It's a different kind of pain.
Speaker 1: We like to argue we're entering a volatility trap where
Speaker 1: higher of all discourages UM investment, which then reinforces higher ball.
Speaker 1: And to think about what ends a supercycle, there's only
Speaker 1: one thing that And in a supercycle investment you've got
Speaker 1: to grow supply and deep bottleneck the system so that
Speaker 1: you can accommodate more demand growth on a forward going basis.
Speaker 1: And that's how you ended the seventies, how you ended
Speaker 1: the two thousands, and that's how we're gonna end this one.
Speaker 1: But at this point right now, UM investment, whether it's
Speaker 1: investment and through capital markets, through banking, you know, in
Speaker 1: the commodity markets themselves, it's all declining right now in
Speaker 1: an environment in which it needs capital more than ever.
Speaker 1: So you know, it's I like to say, we're in
Speaker 1: the early inning. Still maybe it's the second or third
Speaker 1: inning of the supercycle. But we're just getting going now. Well,
Speaker 1: why don't we just jump into that point then, because
Speaker 1: this is something that has come up quite a lot
Speaker 1: on recent episodes, this capital investment point. What is it
Speaker 1: in your opinion that's holding back that investment and when
Speaker 1: would we perhaps expect that to change as higher prices
Speaker 1: start to incentivize more producers. Well, this one is a
Speaker 1: little bit ferent than the other cycles, But why don't
Speaker 1: we start with the other cycles and then talk about
Speaker 1: how this one is different. The way this one is
Speaker 1: different is through e s g. In banking regulation following
Speaker 1: the financial crisis in the way oh nine, So let's
Speaker 1: go back to the nineteen sixties. You had the nifty
Speaker 1: fifty that was your new economy booming along UM, absorbing
Speaker 1: much of the capital from the old economy and starving
Speaker 1: the old economy of the capital that needed to grow
Speaker 1: the supply base, which set you up for a very
Speaker 1: tight supply environment when you got the big uptick in
Speaker 1: demand off the Great Society UM in the late sixties.
Speaker 1: In the early seventies, similar dynamic that happened in the
Speaker 1: two thousands as well as today. You think about in
Speaker 1: the two thousand's you had the the dot com boom,
Speaker 1: and in the two thousand tents you had the bag boom,
Speaker 1: so it was a very similar dynamic um and you
Speaker 1: saw that. You know, basically it was this whole idea,
Speaker 1: the revenge of the old economy is investors preferred growth
Speaker 1: names like Netflix to old economy names like Exxon Um.
Speaker 1: That created the capital deficit that led you into this environment. Now,
Speaker 1: why is this one so much more extreme than ones
Speaker 1: that we've seen in the past, is when you have
Speaker 1: E s G policies overlaid on top of that. I'm
Speaker 1: not gonna be labored those points much further because we've
Speaker 1: talked about them in the past. But it's important to
Speaker 1: remember that E s G is not a substitute for
Speaker 1: a a carbon tax um. It's a blunt instrument that
Speaker 1: is reducing capital flows into a very critical sector. So
Speaker 1: if you had a carbon tax, you put the carbon
Speaker 1: price into that energy company model, look at its carbon
Speaker 1: emissions and think, hey, is this a good investment or
Speaker 1: that investment. What we're seeing is entire sectors being shunned,
Speaker 1: and that's made this one much tighter and it's not
Speaker 1: just the oil gas guys, it's the metals and mining
Speaker 1: as well as the agriculture sectors. But banking regulation, and
Speaker 1: that's the one that I've really began to focus on
Speaker 1: over the last let's say two to three months. And
Speaker 1: it really boils down to leverage ratios and those were
Speaker 1: put in place back in you know, Dodd Frank back
Speaker 1: after following oh eight o nine. And let's think about
Speaker 1: what that leverage ratio is. It's tier one capital on
Speaker 1: the top and the total assets of the bank on
Speaker 1: the bottom. If you think about what are two what
Speaker 1: is tier one capital? It's bonds? What are all the
Speaker 1: assets that go into the economy. All that lending is
Speaker 1: based off commodities, So it's things the real world. And
Speaker 1: so let me ask you if if you have and
Speaker 1: most policymakers are gonna tell you it's inflation proof because
Speaker 1: it's the price level times the bonds and then the
Speaker 1: price on the numerator, and then the price level times
Speaker 1: the overall assets on the denominators. So the price level
Speaker 1: drops out, it's you know, inflation proof. The reality it
Speaker 1: is not, and why because bond prices are negatively impacted
Speaker 1: by commodity prices. So essentially, what is that ratio. It
Speaker 1: is bonds on the top and commodities on the bottom.
Speaker 1: And what we're seeing is that these leverage ratios are
Speaker 1: starting to become really binding. You think about how much
Speaker 1: more capital of the market needs today than it did.
Speaker 1: Let's say, you know a year ago, we have oil
Speaker 1: prices are two x what they were a year ago.
Speaker 1: You're gonna need two times the amount of working capital
Speaker 1: out there. And it's in an environment you're are already
Speaker 1: bumping up against those constraints and banking. Do you think
Speaker 1: about banking. Banking's old economy too, it's you know, anything
Speaker 1: that is at you know, capital heavy. The world was
Speaker 1: focused on asset like, capital light, everything of that investing.
Speaker 1: But we've now focused on the need for having capital
Speaker 1: heavy investments, particularly in commodities at a time and it
Speaker 1: was already under invested and at a time that you
Speaker 1: have E. S G constraints. So I think you get
Speaker 1: the idea that the capital deficit in this market is
Speaker 1: extreme and now it's kicking off this volatility trap where
Speaker 1: the under investment um leads to decline in inventories to
Speaker 1: raise cash, liquidation of financial positions to raise cash. All
Speaker 1: of that accentuates the volatility and then scares off further investment.
Speaker 1: So you now are entering this volatility trap. You know
Speaker 1: that we've made the point I've testified in Congress on
Speaker 1: this point before, is the only way out of this
Speaker 1: is you need somebody to stop that vicious cycle and
Speaker 1: create some type of stability to I saying, I like
Speaker 1: to say, is spot prices, solve surpluses, long term contracts
Speaker 1: solved shortages. Can I just ask, because I know we'll
Speaker 1: have people who listen to this and they'll hear someone
Speaker 1: from Goldman Sachs, you know, a big bank cell side analysts.
Speaker 1: They'll go, oh wait, it's someone from Goldman complaining about
Speaker 1: bank leverage ratios and E s G and regulatory um
Speaker 1: capital requirements. Can you just can you flush that argument
Speaker 1: out a little bit? Or what would you say to
Speaker 1: the critics who are immediately going to well, this is
Speaker 1: just you know, a bank talking its own book. Obviously
Speaker 1: a bank would like to lend more to the energy sector. Well, um,
Speaker 1: one is that the banks, um, you know, all of them,
Speaker 1: are are very much behind the the the E S
Speaker 1: G push. And I want to emphasize I am very
Speaker 1: very much a pro climate change and really believe it's
Speaker 1: a problem that needs to be solved. What I'm arguing
Speaker 1: at E s G is probably not the best way
Speaker 1: to go at it, you know, as I really believe
Speaker 1: a carbon tax is the right way to approach this,
Speaker 1: you know, and most economists would agree with me on that.
Speaker 1: And the you know, the way I could think about
Speaker 1: e s G is an effective carbon tax on the
Speaker 1: consumers in places like the United States, in Europe, and
Speaker 1: preticularly high carbon tax in places like Europe where the
Speaker 1: tax revenues do not go to the local governments, is
Speaker 1: going to places like Russia. Um. You know, in fact,
Speaker 1: like to point out, you know, the quarter over quarter
Speaker 1: growth in oil revenue for Russia funded its sixty two
Speaker 1: billion dollar military budget last year. UM. So you know,
Speaker 1: the impacts of e s G in the fact that
Speaker 1: you're not collecting that tax revenue is significant, but more
Speaker 1: importantly creating big distortions and investment. So you know, I'm
Speaker 1: not you know, you know, I want to really emphasize
Speaker 1: I'm very much pro climate change. It's a problem we
Speaker 1: need to deal with decarbonization. It's just E s G
Speaker 1: is not affected tool and approaching this um, well, there's
Speaker 1: a more effective tool of doing it. In terms of
Speaker 1: the question about about bank bank regulation there, um, you know,
Speaker 1: at the point, I'm just going to point out that
Speaker 1: the energy companies and the and the the the trade
Speaker 1: houses in Europe, they went to the regulators asking for
Speaker 1: more funding. So clearly there's not enough funding. And whether
Speaker 1: if it's coming from the likes of banks, there's the
Speaker 1: point is that that you're bumping up at these constraints.
Speaker 1: The whole industry was focused on being capped at a
Speaker 1: light and it was all It goes back to this
Speaker 1: whole revenge of the old economy because banks are old
Speaker 1: economy to in fact, you look at banks price shares
Speaker 1: and you look at them to metals prices where you
Speaker 1: are in the capex cycle. They're very much correlated because
Speaker 1: ultimately the banks of the conduit of that capex cycle.
Speaker 1: So they're all really old economy and pretty much more
Speaker 1: broadly since oh eight oh nine, old economy was bad.
Speaker 1: If I could just show you pictures at the equity
Speaker 1: prices of anything that was capital light, it went straight up.
Speaker 1: Anything that was capital heavy, you know, like the big
Speaker 1: oil companies went down or sideways over the course of
Speaker 1: the last ten years. And it's not just you know,
Speaker 1: so I'm not gonna blame it all on E. S G.
Speaker 1: And let's be only be very careful here so it
Speaker 1: doesn't sound like I'm so anti EU s G. This
Speaker 1: industry had really bad returns, investors were not interested in it.
Speaker 1: And if we go back and we look at the
Speaker 1: previous supercycles, let's say the one in the in the
Speaker 1: two thousand's, prices started to move up in oh three
Speaker 1: and it wasn't until oh six that that capital came in.
Speaker 1: Why they want to see a track record of good
Speaker 1: returns that still holds today. So I'm not want to
Speaker 1: blame it all on E S G, all on banking
Speaker 1: regulations and say it's just a combination of many different
Speaker 1: factors that's created a huge capital deficit. And I want
Speaker 1: to point out it wasn't just all vulgar that solved
Speaker 1: the seventies. There was a huge amount of investment that
Speaker 1: went into North Sea Alaska, North Slope, Gulf of Mexico,
Speaker 1: Mexican production, Brazilian, Norwegian. I can keep going going down
Speaker 1: the list. That investment that came to fruition did a
Speaker 1: lot to ease the inflationary pressures if you went into
Speaker 1: the eighties, so you can just get you know, contribute
Speaker 1: all to the rate hikes by the Fed, because there
Speaker 1: was a lot of that investments. That investment is critical,
Speaker 1: and we're at a junction right now with eight and
Speaker 1: a half percent inflation, but we still haven't seen the
Speaker 1: underlying investment that was already there, let's say in the seventies,
Speaker 1: that is not here today. We need that investment because
Speaker 1: the only way out of this is investment in the
Speaker 1: appropriate ability to grow that supply. You know, you hear
Speaker 1: from say the CEOs of independent oil companies and they
Speaker 1: talk about the demand among investors for returning cash and
Speaker 1: that's totally understandable because after a decade of the industry
Speaker 1: having lost half a trillion or whatever the numbers are,
Speaker 1: you can understand investors who want to optimize for cash flow.
Speaker 1: And you can also understand, as you've been pointing out,
Speaker 1: the reluctance of banks to you know, bump up against
Speaker 1: their capital requirements by lending further. Why not the more
Speaker 1: opportunities on the private side, or why not you know,
Speaker 1: why haven't we seen you know, me and Tracy just
Speaker 1: start a private h private oil company, and forget about
Speaker 1: the public markets, forget about borrowing from banks, and uh,
Speaker 1: you know, borrow money in the bond market and return
Speaker 1: money to our investors privately without some of these outside
Speaker 1: financing considerations. Why why aren't more players taking advantage of
Speaker 1: seeming like you know, with oil, where it is roughly
Speaker 1: a hundred dollars opportunities around that scale, the alee of
Speaker 1: these industries are unlike anything else on the planet Earth.
Speaker 1: You take a Cashigan and and caspping its nickname was
Speaker 1: cash All Gone, why you know, was somewhere around a
Speaker 1: sixty billion dollar project. I mean the magnitude in the
Speaker 1: scale of these investments or unlike anything. And take a
Speaker 1: company like VP with that that horizon spill. It had
Speaker 1: to write over a check the fines for something like
Speaker 1: thirty eight billion dollars. Tell me another company on the
Speaker 1: planet Earth who could write over a check for thirty
Speaker 1: eight billion dollars. So the first and most important is
Speaker 1: the scale, and then the access issues really critical. I
Speaker 1: like to point out things like copper are very narrowly
Speaker 1: geographically distributed, so that you need to have the scale
Speaker 1: to be able to get into these places, and you
Speaker 1: have to have the ability to know how to the
Speaker 1: technological know how, the political know how um to go
Speaker 1: in there and do it. So I think that is
Speaker 1: one of the real key reasons here. But by the way,
Speaker 1: I want to point out, why are the oil stocks
Speaker 1: going up. It's because private investors are going around the
Speaker 1: institutional players and making these investments in these companies. So
Speaker 1: where it can go around it it is, which is
Speaker 1: why you know, ultimately, if you're going to solve climate change.
Speaker 1: You know, I don't want to you know, sound dismissing here,
Speaker 1: but when you know the Russian army is coming barreling down,
Speaker 1: you can't have Germany turning back on the coal plants.
Speaker 1: You know, Historically, when you deal with these problems, you
Speaker 1: have to have policy, create rules. These rules need to
Speaker 1: be enforced and that those rules that they're violated, there
Speaker 1: has to be punishments and there has to be a
Speaker 1: price associated with There's why you know, trying to go
Speaker 1: down this E. S G type path to deal with
Speaker 1: this is gonna miss a lot of these really critical points.
Speaker 1: They are going to be required to solve this problem.
Speaker 1: So point you know, looking at this on a you know,
Speaker 1: a longer term basis, we need to have policy put
Speaker 1: in place that is created a framework that's gonna be
Speaker 1: conducive to getting these capital flows coming to the right places,
Speaker 1: because even if the private investor probably has to do it,
Speaker 1: he still needs to do this in a way that
Speaker 1: environmentally friendly. And I think that you know, again, you
Speaker 1: need to have this scale the policies put in place
Speaker 1: in a such a framework that it's done and that
Speaker 1: it addresses the unique for investment in a very environmentally
Speaker 1: friendly way. So you're talking about this this volatility trap,
Speaker 1: and I think you briefly mentioned this earlier, but there
Speaker 1: has been talk of maybe there is a role for
Speaker 1: either governments or central banks to play in this space
Speaker 1: to make things smoother, maybe smooth out price volatility, or
Speaker 1: provide financing or funding for energy firms or energy traders
Speaker 1: that need it. First of all, is that required in
Speaker 1: your view? And secondly, what is the best way to
Speaker 1: try to smooth out volatility to give players in the
Speaker 1: commodity space confidence to actually invest and produce. Well, it
Speaker 1: goes back to that that saying I've made before. You know,
Speaker 1: spot prices, salt surpluses, long term contracts, solved shortages. Why
Speaker 1: is that the case is because if you can take
Speaker 1: out that volatility and lock in that return through a
Speaker 1: long term contract. That investor feels, you know that he
Speaker 1: is safe to be able to make that investment because
Speaker 1: there's a minimal rate of return because remember these things
Speaker 1: are these things are not like tech tech is you
Speaker 1: get you have a low chance of getting it, but
Speaker 1: you have get a big return that lasts over maybe
Speaker 1: twelve to eighteen months. You know, it's something like an
Speaker 1: iPhone is very short cycle and it's high returning. These
Speaker 1: are low returning, very long cycle type of investments. So
Speaker 1: locking in that rate to return throughout that volatility is
Speaker 1: really critical. And so when we think about you know,
Speaker 1: what you need to do to get that, you need
Speaker 1: to create an environment that's conducing to creating that type
Speaker 1: of long term contract structure. You know, actually, if you
Speaker 1: look at what happened in the seventies, that was when
Speaker 1: we created many of these long term contracts around l
Speaker 1: en G and gas and so forth. But there was
Speaker 1: also conglomerates that were put together to be able to
Speaker 1: to shield the upstream, downstream type of volatilities. There's lots
Speaker 1: of ways. And then we moved into two thousands to
Speaker 1: a market based and This will bring you to the
Speaker 1: Nickel story. Why was this Nickel story because the seventies
Speaker 1: we did this with like conglomerates in long term contracts.
Speaker 1: If somebody failed a long term contract, this thing would
Speaker 1: be resolved in a court of law. So then in
Speaker 1: the two thousands, the banks got in between these conglomerates.
Speaker 1: Let's say between like a a GM and an al
Speaker 1: COHA could squeeze in there, um provide lower cost of capital,
Speaker 1: and you had the financial market squeeze in there, and
Speaker 1: then create that new kind of long term contract that
Speaker 1: was financially based. Now, the problem with that is that
Speaker 1: when you go through periods like we are right now
Speaker 1: in that price of that long term contract goes up
Speaker 1: because it's traded on the market. You get a huge
Speaker 1: capital call and our margin call, which is what was
Speaker 1: happening with that case in Nickel. Then you need the
Speaker 1: cash to fund that that that margin call. You didn't
Speaker 1: have that back in the seventies, you have it today.
Speaker 1: So that's can we all The question is are we
Speaker 1: gonna gravitate something back closer to the seventies to deal
Speaker 1: with this problem, or we're gonna try to fix the
Speaker 1: structure that was created in the two thousands, which means
Speaker 1: you're gonna need different type of lending too, agreements and
Speaker 1: people have to be more comfortable in that risk and
Speaker 1: how much capital these sectors needs, you know, obviously, I
Speaker 1: think the easiest way to solve with this is create
Speaker 1: a regulatory framework, you know, Tracy, as you talk about
Speaker 1: that would be able to address these issues, take out
Speaker 1: that volatility, make banks, investors and so forth comfortable with
Speaker 1: that kind of risk. Otherwise we will go back to
Speaker 1: the period of the seventies, which is vertical integration conglomerates
Speaker 1: and these longer term contracts that end up in court
Speaker 1: of laws, not in in financial institutions. Is there more
Speaker 1: so one proposal that's floating out there would be to
Speaker 1: be more creative with this would be oil specific, of course,
Speaker 1: with the spr and so we know that the administration
Speaker 1: has authorized daily sale of oil included. Solve the long
Speaker 1: term contracts problem or the challenge by pairing that with
Speaker 1: more robust commitments to buy back at a certain price.
Speaker 1: We have seen this sort of flattened a little bit,
Speaker 1: but it's heavy backwardated oil futures curve, essentially putting a
Speaker 1: floor underneath the longer term prices, and could it use
Speaker 1: the SPR to sort of create more domestic supply in
Speaker 1: investment right now. I mean you can do that what
Speaker 1: you're describing at the farm subsidy programs that the US
Speaker 1: has with you know, it's farm Bill with the farmers
Speaker 1: in terms of giving that kind of basically buying the
Speaker 1: farmer put on soybees in case some bad weather shock
Speaker 1: or something like that occurs. You don't need the SPR
Speaker 1: to create that type that type of dynamic. But what
Speaker 1: you're talking about is a physical version of the you know,
Speaker 1: the farm bill really is one that the farm subsidies
Speaker 1: are ones that are more like a financial put, but
Speaker 1: what you're describing is more like an in kind physical put.
Speaker 1: Both our ways to think about solving it. But the
Speaker 1: one thing I will say about dealing with higher oil
Speaker 1: prices with an sp our release like what we're seeing
Speaker 1: right now, that's crowding out private investment, which doesn't help
Speaker 1: solve that longer term problem of getting investment into the
Speaker 1: right place. So these policies need to be thought through
Speaker 1: in such a way that they're conducive to creating decentis
Speaker 1: in place to make the longer term investments. I wondered
Speaker 1: if I can ask something I've been wondering about when
Speaker 1: it comes to the SPR release, and I'm sure a
Speaker 1: lot of people have been asking this as well. But
Speaker 1: you know, it's a pretty big release, and we saw
Speaker 1: a very immediate impact on prices, and I think Goldman
Speaker 1: also cut its price target on oil because of the release.
Speaker 1: What happens after this, like, how does that actually get
Speaker 1: topped up in the future, and how does the US
Speaker 1: source that oil? And at what pace would you expect
Speaker 1: it to replenish that stockpile. I mean, the details on
Speaker 1: the replenishment rates are not that clear at this point,
Speaker 1: but you know it would be at least a year
Speaker 1: or two before you expect them to come back and by,
Speaker 1: And I think the plan right now is that they
Speaker 1: would go back and by. Let's talk about the impact
Speaker 1: that it has had on prices. There's two factors that
Speaker 1: have created the recent downdraft in oil prices and commodities.
Speaker 1: More broadly, is the SPR announcement, which was a you know,
Speaker 1: a million barrel per day throwing the Europeans. It gets
Speaker 1: up to around one point two million barrels per day
Speaker 1: release for about six months, and then you know, it's
Speaker 1: meant to be a bridge the gap until you get
Speaker 1: the investment that brings on new supply that can be
Speaker 1: used to refill the the SPR. So you can see
Speaker 1: it's a temporary patch. And then you have the COVID
Speaker 1: situation in China, which is another two million barrel per
Speaker 1: day to man H so you've had a big hit
Speaker 1: to the situation more near term. Now, I want to
Speaker 1: emphasize that that you know, these are all transient events,
Speaker 1: a loss in demand. Once you normalize China, you get
Speaker 1: the problems come back back again. Once you have to
Speaker 1: buy back those barrels of oil that go into the SPR,
Speaker 1: the problems come back again, you know. So we're in
Speaker 1: a down draft right now, which is part of this
Speaker 1: whole idea of higher volatility. But it doesn't mean that
Speaker 1: any of this is signaling into the longer term problem
Speaker 1: you like to point out. Let's see right now is
Speaker 1: a temporal solution into a structural problem that needs to
Speaker 1: be readdressing. I wanted to pivot. Actually, you know, so
Speaker 1: much of our conversations and I think like over the
Speaker 1: last several years, most commodity conversations, including this one and
Speaker 1: stuff farther there's obviously a high emphasis on oil, but
Speaker 1: natural gas is also really at the forefront of mine.
Speaker 1: We see prices they were already surging in Europe even
Speaker 1: prior to the invasion. Obviously the politics of Germany and
Speaker 1: other countries cutting such a big check to Russia every
Speaker 1: month is incredibly uncomfortable. And we've seen prices rising here
Speaker 1: in the US. I think it's like a multi decade
Speaker 1: high at the Henry Hub prices for natural gas. What
Speaker 1: is the where is the how much further? Let's start
Speaker 1: just simply does that? Do prices there have a lot
Speaker 1: further to run? Uh? In the US and Europe. In
Speaker 1: the US, yes, in Europe you're at the demand rationing phase.
Speaker 1: You're gonna have periods, We're gonna have more severe shortage,
Speaker 1: you need more upper price bikes, and maybe you have
Speaker 1: periods that less tightness. But you're at that. You're at
Speaker 1: that you can think about a commodity cycle that's going
Speaker 1: you know, from you draw your inventories down in the
Speaker 1: price begin to trend up. Once you've exhaust your inventories
Speaker 1: and have to go into demand rationing phase because you
Speaker 1: don't have enough supply. Um, that's when you know you
Speaker 1: get the high volatility. Europe is at that phase right
Speaker 1: right now. The US, on the other hand, is not one.
Speaker 1: It has the shale production that can be brought online,
Speaker 1: you can't continuously export it because there's constraints around l
Speaker 1: en G liquid liquid faction capacity in the US, which
Speaker 1: means the US is is much more immune to this
Speaker 1: than the rest of the world. I'd like to say
Speaker 1: it's East of Rocky US California has that has a
Speaker 1: problem similar to the rest of the world. But East
Speaker 1: Rockies US is is a relatively well supplied market, but
Speaker 1: it won't be forever, particularly as you continue to build
Speaker 1: more llergy terminals, and the policy more recently in response
Speaker 1: to the situation in Russia Ukraine is you know, to
Speaker 1: build more llergy terminals to supply Europe, which will ultimately
Speaker 1: exhaust that cushion and then push you up into a
Speaker 1: much more higher ball regime. But I don't think we're
Speaker 1: going to get there any time in the next year.
Speaker 1: So this is something that's curious about, is expanding llenergy
Speaker 1: export capacity, Like how should we think about it from
Speaker 1: the perspective of US national interests, because it does seem
Speaker 1: like a more globalized llergy market would cause prices to
Speaker 1: go up. On the other hand, we would have more
Speaker 1: export revenue. So how should we think about like from
Speaker 1: the policymakers, is an unellied good to continue to build
Speaker 1: out llergy export terminals and so forth. You know, if
Speaker 1: you do it with all the permitting suwhere around four years,
Speaker 1: you take out the hermitting, you can get it down
Speaker 1: to twenty three months, you do you know, a Defense
Speaker 1: Act Production Act type, maybe you can squeeze it down
Speaker 1: to you know, twelve to eighteen months. I don't know
Speaker 1: what you could do get it down to, but you
Speaker 1: get the idea. It's a pretty long drawn out process
Speaker 1: to create one of these liquid faction terminals, and you know,
Speaker 1: that's definitely one of the goals in terms of dealing
Speaker 1: with this geopolitical situation. But I want to emphasize the following.
Speaker 1: You know, I've talked to many German industrials that made
Speaker 1: this point. The German industrial manufacturing base can't operate off
Speaker 1: leg Move the BMW plant to the US and build
Speaker 1: the BMW's on top of the gas plant and then
Speaker 1: export the BMW's or build the BMW's and Qatar don't
Speaker 1: move the gas to you know, move the gas to
Speaker 1: heat people. But you can't run a an industrial base
Speaker 1: off of, you know, liquefied gas. You know, I've never
Speaker 1: been a fan of that. You know, think about what
Speaker 1: this thing. It's a three hundred million dollar floating third,
Speaker 1: a mess that is frozen, and you pump a bunch
Speaker 1: of of gas into it and you move it around
Speaker 1: the world. It's a lot easier to move manufactured goods
Speaker 1: on bolt ship containers and it is in lergy tankers.
Speaker 1: So I'm not a fan of using lergy to run
Speaker 1: a manufacturing economy, but it does work for heating and
Speaker 1: things like that. But you know, the question is, um,
Speaker 1: you know, is this the most viable solution to this?
Speaker 1: Thinking about it on a longer term basis, it's probably not.
Speaker 1: So this actually leads into my next question quite well,
Speaker 1: which is how should we think about the fungibility of
Speaker 1: commodities in this situation, Because it seems like one thing
Speaker 1: we are learning over the past couple of years is
Speaker 1: that if there's a crunch on coal in China, it's
Speaker 1: not that easy to source alternates. If Russian gas is
Speaker 1: suddenly taken out of Europe, it's difficult to source replacement supplies.
Speaker 1: As well. So how are you thinking about that and
Speaker 1: how does that inform your overall supercycle commodity East thesis.
Speaker 1: It's it's critical here. And you know, as I like
Speaker 1: to say, there's BTU conversions across all these commodities. We
Speaker 1: saw it in the seventies, we saw it in the
Speaker 1: in the two thousand's, and we're beginning to see it
Speaker 1: happening again. I mean that if you think about commodities
Speaker 1: and you you rank order them. We chose all these
Speaker 1: commodities to do what they do for us by their
Speaker 1: cost basis, and you know, I actually I've come to
Speaker 1: the point there's there's four things we use use commodities for.
Speaker 1: Obviously transportation, and we figured out oil is the best
Speaker 1: to the lowest cost way to create that transportation. You
Speaker 1: can do it with electricity, um, you know with us
Speaker 1: a nuclear, but it's a it's got a different cost basis,
Speaker 1: and actually it's higher. If you just look at the
Speaker 1: density of oil and you put it into the car,
Speaker 1: it's pretty much the it's the lowest cost way to
Speaker 1: do that. In fact, Ford and Edison had this debate
Speaker 1: well over a hundred years ago about which one was better,
Speaker 1: and we determined at that point in time that the
Speaker 1: the oil was. Then the other one is we need
Speaker 1: to build things, and you know copper is best for
Speaker 1: things like plumbing, electricity, conducting, conducting electricity, UM. And then
Speaker 1: you have we got to feed ourselves, and we figured
Speaker 1: out using corn, wheat, soybean, which are your workhorse grains
Speaker 1: to do it. We're the cheapest to do that. And
Speaker 1: then you have to cool yourself, heat yourself, which then
Speaker 1: you know you look at natural gas and nuclear and
Speaker 1: those other types of com mine. So we chose all
Speaker 1: these things for that reason. But let me point this out,
Speaker 1: and this is fairly obvious. We could do all of
Speaker 1: that with corn. We can drive our cars on corn.
Speaker 1: We all know that. You know, you can make plastics
Speaker 1: out of corn, you can build your house out of corn.
Speaker 1: You obviously can feed yourself with corn, and you can
Speaker 1: use corn to generate electricity, heating, cooling and all those things.
Speaker 1: So we would only need one commodity to do that,
Speaker 1: which is corn. But we don't do it because it's
Speaker 1: too expensive. And so what you're asking now is, okay,
Speaker 1: we look at some of these other commodities like oil
Speaker 1: and gas. They have these admissions that we don't like,
Speaker 1: Let's figure out how to replace them and the best
Speaker 1: way to do it. I'm gonna go back to my
Speaker 1: carbon price, carbon price. Put the carbon price out there,
Speaker 1: this is how much it's gonna cost, and do it.
Speaker 1: Then let's sit and let's figure out is nuclear the
Speaker 1: best way to do it? Is hydrogen the best way
Speaker 1: to do it? Um that would be the appropriate way
Speaker 1: to do is create a market based solution to find
Speaker 1: the answer to this. Let me, you know, I want
Speaker 1: to go back and talk about, you know, the seventies
Speaker 1: because it was very similar to today about the war
Speaker 1: on acid rain and how we solve the war on
Speaker 1: acid right. In fact, the same three big themes we
Speaker 1: talked about the supercycle, about redistribution of policies, environmental policies,
Speaker 1: and deglobalization. They're all the same ones you had. Reistribution
Speaker 1: was the Great Society of the War on poverty, the
Speaker 1: environmental was the was the war on acid rains. And
Speaker 1: let's talk about how that war on acid rain was
Speaker 1: solved in the seventies. Is there was the Soviets and
Speaker 1: the Americans wrapped up in a nuclear treaty that was enforceable.
Speaker 1: The rules around desilpization, and in doing that, they had
Speaker 1: an enforceable rules that then was imposed on NATO countries
Speaker 1: and Warsaw Pact countries, which is, you know why they
Speaker 1: were able to enforce them, but you got a functioning
Speaker 1: sulfur market at it. Once you have the soul functioning
Speaker 1: soulfer market, you were able to, let you know, venture
Speaker 1: capitalists come in there and create the solutions to it.
Speaker 1: By way, ended up solving the soulfur problem was much
Speaker 1: cheaper than what we had ever envisioned. We're now focused
Speaker 1: with a very similar part. By the way, the other
Speaker 1: lesson to learn from the Acid Raine. When did the
Speaker 1: Americans get serious about dealing with the the acid rain?
Speaker 1: When places like Lake Erie were on fire. They had
Speaker 1: to see it, and once they saw it, they passed
Speaker 1: the other thing to do. It was Nixon who passed
Speaker 1: the Clean Air Act, and you know, a pact hat to.
Speaker 1: Somebody pointed this out to me that you know, conservation
Speaker 1: conservatives and conservations historically had gone hand in hand. But
Speaker 1: I think the key point here it was a sulfur
Speaker 1: market with a price signal, and it was enforceable policy
Speaker 1: that led to that solution, and we need something similar
Speaker 1: to that around carbon to deal with this current problem
Speaker 1: that we're dealing with, call it the war on climate change.
Speaker 1: So just to put all together, you know E. S. G.
Speaker 1: And your view discourages investment. What we need is a
Speaker 1: price on carbon, some sort of tax. But then that
Speaker 1: would in theory create the encouragement of investment because okay,
Speaker 1: you know the rules, you know the cost that any
Speaker 1: given entity is going to bear, and then the challenge
Speaker 1: is out there to to do better, to find a
Speaker 1: way to make it problems. And then you you would
Speaker 1: look at some oil companies and you would put their
Speaker 1: total emissions and you know what that number is. You
Speaker 1: put a cost on it, and then the equity analyst
Speaker 1: may go, hey, this is a good company. This is
Speaker 1: a bad company, And I did it was like looking
Speaker 1: at the economics that they're imposing on society, and then
Speaker 1: we wouldn't have this blanket under investment that's creating many
Speaker 1: of the problems we're witnessing today. Can I ask you know,
Speaker 1: how do you see like these various shortages and tightness
Speaker 1: is in markets affecting all the other ones? Because it's interesting,
Speaker 1: you know, one of the reasons cited for the slow
Speaker 1: ramp up of US production is shortages in metal pipes
Speaker 1: and shortage well, shortages in labor as well, and other
Speaker 1: commodities sand as well that are needed to expand domestic production.
Speaker 1: How much is essentially the shortage and the tightness of
Speaker 1: every commodity at the same time contributing to slowness in
Speaker 1: the ramp up of of of new production and new investment.
Speaker 1: The revenge of the old economy. Like my point, banks
Speaker 1: are old economy too. It's why they're not providing the capital.
Speaker 1: They don't have the capacity to it. We didn't invest
Speaker 1: in everything you just mentioned. Plus you know old economy banking.
Speaker 1: I can just give you a list of all the
Speaker 1: things that were under invested, you know, warehouses in the
Speaker 1: US ports facilities, you know, the trucking chassis. The list
Speaker 1: goes on and on, and then all of a sudden
Speaker 1: we gotta pull in demand that stressed the system, and
Speaker 1: then we find out where all these shortages are. Um.
Speaker 1: You know that part of the reason why you know,
Speaker 1: you go back to you know, the seventies and the
Speaker 1: two thousand's what made it very similar was you had
Speaker 1: that same dynamic of that you know, revenge of the
Speaker 1: old time. I mean the new economy, the nifty fifty
Speaker 1: sucked all the capital way it was, the dot com
Speaker 1: bom did it again in the two thousands, and the
Speaker 1: things again this time. That's why you have this. You know,
Speaker 1: it's a very broad space. But once you broad based
Speaker 1: shortage that you get this persistency in transitory shocks, meaning
Speaker 1: that one shock in one market then leads to another
Speaker 1: shock in another market, which then makes it feel like,
Speaker 1: you know, the transitory becomes much more persistent. That's what
Speaker 1: we've seeing. But the core reason is the everything you
Speaker 1: just listed were poor returning industries also were very much
Speaker 1: impacted by m de carbonization, which as a result we
Speaker 1: under new lesson. Can I ask another question on a
Speaker 1: topic that has been coming up quite a lot recently,
Speaker 1: which is this idea of the demise of the dollar
Speaker 1: or the long term decline of the dollar, And maybe
Speaker 1: that starts with certain commodities producers asking to be paid
Speaker 1: in something other than US currency. So we've seen Russia
Speaker 1: talk about getting net gas payments and rubles, for instance,
Speaker 1: and they've long been rumors and speculation about China taking
Speaker 1: un payments and things like that. How do you see
Speaker 1: that playing out? In the commodity space. I wanted to make.
Speaker 1: To make a one of these reserve currencies work, you
Speaker 1: need to have a current account deficit in a very
Speaker 1: large bond mark, of which China does not have. But
Speaker 1: I think, you know, let's go to another point about
Speaker 1: you know all this, you know talking about the demise
Speaker 1: of the of the dollar is you know that everybody's
Speaker 1: focused on the demand of the dollar. Let's talk about
Speaker 1: the supply of the dollars. And you look at the
Speaker 1: commodity bullmark, it's in the seventies nearther in the two thousand's.
Speaker 1: What was associated with both of those was a savings glut.
Speaker 1: And the reason why everybody thinks that that higher commodity
Speaker 1: prices and oil prices is bad to the the economy
Speaker 1: is because when could you think about if you just
Speaker 1: took a close economy raised oil prices. Let's say the US.
Speaker 1: Let's take the US and produced enough oil, you raised
Speaker 1: the oil price. All it is is a transfer from
Speaker 1: Chicago to to Houston. It should have no impact on
Speaker 1: the broader US environment. Maybe then they'll spend, you know,
Speaker 1: through the wage increases in Houston. May take time. I
Speaker 1: don't want to get it you get the exercise I
Speaker 1: went through, if everybody had the same consumption and savings
Speaker 1: and have no impact. The reason why the seventies and
Speaker 1: the two thousands had such an impact and we saw
Speaker 1: it was that savings glut. You had a transfer from
Speaker 1: groups in the U s that would consume something, you know,
Speaker 1: like two groups that were consuming somewhere around fifty to
Speaker 1: six and then so that you created that savings glut.
Speaker 1: You know what, this time around, they're going to spend it.
Speaker 1: You're not gonna get that savings glut off the higher
Speaker 1: commodity prices, which is going to reduce the availability of
Speaker 1: dollars on the global market. In fact, the reason why
Speaker 1: you had that sharp oil dollar correlation in the seventies
Speaker 1: as well as in the two thousand's is let's think
Speaker 1: about this, and this was you know, you know, Ben
Speaker 1: Berniki was the one who coined the terms, you know,
Speaker 1: savings glut is as oil prices went up, the dollars
Speaker 1: would go to Saudi Arabia, Saudio Atavia take those access
Speaker 1: dollars and then by US treasuries. In fact, when they
Speaker 1: were hiking rates between Juno BO four in Juno BO six,
Speaker 1: the front of that curve was going up in the
Speaker 1: back end was going down because you had such higher
Speaker 1: commanding prices going in and buying US treasuries on the
Speaker 1: back end. That was the recycling. You know why they
Speaker 1: had to do that. They didn't have anything else to
Speaker 1: do with those dollars. I remember one time I was
Speaker 1: in in China in oh five, I was talking to save.
Speaker 1: They were spending a hundred billion dollars. They needed to
Speaker 1: place a hundred billion dollars per month. That's a huge
Speaker 1: amount of amoe of the key reasons you couldn't spend
Speaker 1: a hundred billion dollars inside China in two thousand five.
Speaker 1: Guess what today you could. You could easily same thing
Speaker 1: with Saudi Arabia. And so you have these entities that
Speaker 1: are developing in places like Saudi Arabia take p I F.
Speaker 1: The only market that had enough liquidity to absorb that
Speaker 1: kind of potential investment were U s treasuries, which is
Speaker 1: why we saw that savings glut and saw the capital
Speaker 1: move into places like um you know, US treasuries. And
Speaker 1: you can think about that period between June of BO
Speaker 1: four and June a BOE six, when the FED was
Speaker 1: high team rates, the back end was coming down. Why
Speaker 1: was the back end coming down. It's because you had
Speaker 1: all of that capital going into the emerging market that
Speaker 1: was being recycled back into US treasuries. Hence the term
Speaker 1: the savings gluts. Now, the difference between today in the
Speaker 1: two thousands of the nineteen seventies is you can place
Speaker 1: a hundred billion dollars into some place like China immediately.
Speaker 1: You can place a hundred billion dollars into some place
Speaker 1: like Saudi Arabia immediately. So if you could think about
Speaker 1: if we had a savings glut in the nineteen seventies
Speaker 1: and in the in the two thousands, today what we're
Speaker 1: seeing ourselves up for is the spending spree. And I
Speaker 1: even say team up. You look at a an entity
Speaker 1: like p I up in Saudia Arabia. It was the
Speaker 1: intention of that investment vehicle is to go out and
Speaker 1: invest in Saudi Arabia. Um there's similar entiticent places like
Speaker 1: agu Dhabi. They're going to invest in power, gas, but
Speaker 1: just the ex transportation, healthcare, all these things in their
Speaker 1: own economy. And this is part of this whole idea
Speaker 1: of the globalization, is that you're going to get a
Speaker 1: lot of this investment locally, So if the savings glut
Speaker 1: was able to um you know, create a slow down
Speaker 1: and growth from higher oil prices, as spending spree is
Speaker 1: going to do the exact opposite, and if anything, it's
Speaker 1: going to reduce the available supply of dollars being recycled
Speaker 1: back into the US, run up funding costs in places
Speaker 1: like the US, but also create more commodity inflation out
Speaker 1: of spending in places like Saudi Arabia with a NEOM
Speaker 1: city or in China like one Belt, one Road. Can
Speaker 1: I just ask where is the production response from OPEC,
Speaker 1: because again, you know, traditionally in a situation like this,
Speaker 1: you would expect OPEC to start ramping up production, but
Speaker 1: it hasn't really happened, or at least not to the
Speaker 1: scale that people have anticipated. And one of the things
Speaker 1: that comes up is that some of the smaller OPEC
Speaker 1: members actually have trouble increasing production. They have under investment
Speaker 1: in their own oil sectors, and so they can't you know,
Speaker 1: immediately press a button and satisfy the world's energy needs.
Speaker 1: You gotta ask yourself, who's going to put money into
Speaker 1: a billion dollar deep water offshore project going to be
Speaker 1: producing oil twenty years from now. Answer is not very
Speaker 1: many people. Hence why you don't you don't have capital
Speaker 1: going to places like now Gerry and Angola, and why
Speaker 1: production is starting to decline. I wanna you know, speaking
Speaker 1: of oil, obviously, the surgeon gasoline prices has talked people
Speaker 1: about upping e V production, and so you know that
Speaker 1: does seem to be happening. Demand for electric vehicles seems
Speaker 1: to be growing pretty rapidly in the U S and elsewhere.
Speaker 1: I guess they have two questions like when, in your view,
Speaker 1: do we see the peak of petroleum demand as a
Speaker 1: result of this shift? But then related to that, what
Speaker 1: kind of deficit do you think we're facing for the
Speaker 1: other commodities that go into evs, such as all the
Speaker 1: different metals and chemicals that go into batteries. How are
Speaker 1: you thinking about that? Yeah, you can think about the
Speaker 1: hydrocarbon commodities like oil and gas and coal. They face
Speaker 1: under investment and supply constraints that that that you're referring to,
Speaker 1: while most of the other non energy and metal commodities
Speaker 1: can copper and aluminum in particular, are going to see
Speaker 1: significant increases in the demand. In fact, I would argue
Speaker 1: copper is likely to be the tightest commodity will have
Speaker 1: ever seen. You. It's much tighter than what oil was
Speaker 1: during the two thousand Let me remind you oil went
Speaker 1: up seven x in the two thousand's. You know, our
Speaker 1: forecast is fifteen thousand a time on copper. But no
Speaker 1: matter what technology you use, you're gonna be using electric electricity,
Speaker 1: And the only thing that can conduct electricity, given the
Speaker 1: rules around the periodic table and the rules of chemistry,
Speaker 1: is copper at the rate we need to conduct it,
Speaker 1: which means that the demand for copper is going to
Speaker 1: be there. So, you know, I think the upside around
Speaker 1: our fifteen thousand target, which by the way, if you
Speaker 1: started this cycle at five thousand dollar copper fifteen is
Speaker 1: a three x if oil was seven x over that
Speaker 1: time period. The upside potential and copper, I think it's significant.
Speaker 1: But I think there's the big disconnect here that I
Speaker 1: think is why people are going, you know, how is
Speaker 1: this happening? Get we just invest in in green um
Speaker 1: e v S more to solve this problem. Is the
Speaker 1: scale of evs. There's maybe ten million of them on
Speaker 1: the road today. Uh, there's one point to five billion
Speaker 1: internal combustion engine cars on the road today. You're gonna
Speaker 1: have to grow those eases very rapid rate to overtake
Speaker 1: the combustion engines to get to that point. You're asking,
Speaker 1: when is the you know, peak oil demand and you know,
Speaker 1: I'll take our base case, which has been generated off
Speaker 1: of our base case is generated off of uh, you know,
Speaker 1: announcements and investments and everything, would say that, you know,
Speaker 1: we start to slow demand growth. And this was pre
Speaker 1: rushing Ukraine and invasion. You start to slow demand growth
Speaker 1: somewhere around six you hit a peak in the early
Speaker 1: twenty thirties, and then you begin to roll over. That's
Speaker 1: probably optimistic thinking you're probably gonna overshoot to the upside
Speaker 1: near term. Let's not forget there's also the constraint about
Speaker 1: the damage we're doing to the environment. Eventually, there's going
Speaker 1: to be a point. Remember the seventies, I said it
Speaker 1: was we started dealing with the war on acid rain
Speaker 1: when people started to see you know, fires in on
Speaker 1: Lake Erie. Um, are we going to see a similar
Speaker 1: dynamic where people start to see enough of the damage
Speaker 1: is being done by carbon emissions, they go, hey, not enough,
Speaker 1: and we're gonna do an about phase and start to
Speaker 1: deal with this thing in a much more efficient way.
Speaker 1: They try to get results more likely just watching things. Historically,
Speaker 1: you don't deal with the problem until it's knocking on
Speaker 1: your back door. We think about what we learned from COVID.
Speaker 1: If that's the case, oil demand probably goes well about
Speaker 1: those projections near term. Then we hit a wall and
Speaker 1: they go, hey, time to deal with this, and then
Speaker 1: it starts to drop. Precipitously, we showed dear in COVID
Speaker 1: that you know, ingenuity was able to come up with
Speaker 1: the vaccine in six months. Now, if you have to
Speaker 1: remove this stuff from the sky and figure out how
Speaker 1: to you know, store it and do you know, removal
Speaker 1: or capture or something like this to do it on
Speaker 1: that very rapid basis, that could potentially be a solution here.
Speaker 1: But I think the key point here if you need investment, technology, people,
Speaker 1: everything directed solving this problem. Like I said, don't ever
Speaker 1: bet against an engineer. You give them enough time and money,
Speaker 1: they will solve the problem. The problem with the organization,
Speaker 1: we just haven't given them enough time and money to
Speaker 1: solve the problem. So, if you're an investor and you're
Speaker 1: bullish on the commodity cycle, How do you actually go
Speaker 1: out and play that at the moment, because you know,
Speaker 1: I feel like we talked conceptually about, for instance, the
Speaker 1: copper price going up, but as we've seen over the
Speaker 1: past six weeks or so, there can be a difference
Speaker 1: between financial exposure to commodities and the physical So how
Speaker 1: do you, you know, just bought a wheat et f
Speaker 1: for instance, you might have experienced problems in the past
Speaker 1: couple of weeks or so, So how would you recommend
Speaker 1: people actually get commodities exposure at the moment? By the way,
Speaker 1: you know, the thing that I've really learned in the
Speaker 1: last six months is nobody has to buy a financial problem,
Speaker 1: but somebody has to buy a commodity. Somebody has to
Speaker 1: buy oil, and somebody has to buy We say, commodities
Speaker 1: have a captive consumer and a captive producer who can
Speaker 1: do nothing about their position in the very near term.
Speaker 1: In contrast, is you know, nobody has to buy an
Speaker 1: oil equity. We now learned that oil prices you can
Speaker 1: keep going up, the fundamentals of the company can get
Speaker 1: better and better, but nobody has to buy it. And
Speaker 1: that's why you have that huge disconnect between commodity prices
Speaker 1: and the commodity related financial instruments. So to answer that question,
Speaker 1: what do you want to own? You want to get
Speaker 1: as close as to that person who actually has to
Speaker 1: buy this thing as possible. And these things like the
Speaker 1: b Commune, the Bloomberg Commodity Index that rolling front month,
Speaker 1: and I'm not pitching Bloomberg here. The b comm Index
Speaker 1: is an excellent product that does this. It's rolling the
Speaker 1: front month of these commodities. It gets you right up
Speaker 1: as close as you can to that consumer who actually
Speaker 1: has to buy this commodity, because that's where the returns
Speaker 1: are going to be generated. And given this pullback that
Speaker 1: we've see more recently, you know, with oil down below
Speaker 1: a hundred dollars apparel yesterday, you're you're in an envirn
Speaker 1: in which that entry point, i'd argue is is relatively good.
Speaker 1: Particularly you're going to have volatility going forward because a
Speaker 1: new thing too, that rolling front month strategy. It's just
Speaker 1: another way to say your long commodity ball. And if
Speaker 1: you believe our view that commodity ball is going to
Speaker 1: be rising over time, being along that kind of product,
Speaker 1: you're going to be your best bet here. So you know,
Speaker 1: I don't know you if you don't even really have
Speaker 1: to think about trying to too which sector to own,
Speaker 1: just go out the overall d common that gives you
Speaker 1: a nice waiting across energy, metals, agriculture, and the rest
Speaker 1: of the commodity complex. If you want to be more
Speaker 1: weighted towards energy, um the old Goldman Fact Comodity Index
Speaker 1: which is now the B S and P one um,
Speaker 1: the G S c I is more energy weighted. The
Speaker 1: b COM is a more uh you know, broad based
Speaker 1: weighted commodity index, and then you can pick the sub industries.
Speaker 1: But I know the thing that you're that you're capturing
Speaker 1: here is you're as close to that consumer who have
Speaker 1: to buy it as possible. I will just want to
Speaker 1: ask a quick question about copper again, real quickly, and
Speaker 1: you talked about dollars a ton of plausible where I
Speaker 1: think roughly we also said the tightness that we're seeing
Speaker 1: in copper rivals or perhaps exceeds even what we sell
Speaker 1: with oil in the sort of earlier two thousands during
Speaker 1: that cycle, what are the numbers like how much what's
Speaker 1: the potential deficit we're looking at given word demand is
Speaker 1: going and how much new production needs to come online,
Speaker 1: like quantify the tightness beyond just the sort of word
Speaker 1: the dollar worth the press. Okay, good question. So if
Speaker 1: you go back to two thousand to two thousand and three,
Speaker 1: when we first started getting really bullish on oil, and
Speaker 1: you looked out, you would say peak oil, you know,
Speaker 1: somewhere around on oh five oh six it will by
Speaker 1: the way it rolled over on conventional oil late oh
Speaker 1: four UM. And then demand with China was going um,
Speaker 1: you know, you would get a deficit of somewhere around
Speaker 1: five of the market. The numbers were coming up with
Speaker 1: copper or like pent of the market three times is
Speaker 1: tighter than what you would have seen oil the two thousand's.
Speaker 1: And you know, part of the you know this point
Speaker 1: right now, oil is not our copper is not responding
Speaker 1: this because you have the inventories are going down. But
Speaker 1: investor interest is very concerned about China. So you know
Speaker 1: the site the fact that pundamentals are getting tighter and tighter.
Speaker 1: You don't have investors and consumers worried about copper because
Speaker 1: they're focused on the China property market. But this is
Speaker 1: the main gear which you see the passing as the
Speaker 1: baton from Chinese property market to the green cafex story
Speaker 1: and by three it's a green cafe X becomes the
Speaker 1: dominant force there. You talked about we need to create
Speaker 1: sort of a regulatory structure that encourages long term investment,
Speaker 1: and that's really the only thing that's going to solve this.
Speaker 1: So the White House calls you up and says, Jeff,
Speaker 1: we need to craft a plan and anything you say
Speaker 1: will get implemented. What are the basic ideas of what
Speaker 1: the ideal policy response, at least just let's just say
Speaker 1: in the US, what would what is the ideal policy
Speaker 1: response look like to to induce that increase in the investment?
Speaker 1: What are the components of it? First, first and foremost,
Speaker 1: you need a policy around how we're going to do decarbonization. Um.
Speaker 1: Whether it's right now there's a focus on the demand side,
Speaker 1: but it's a very asymmetric response in term, there's no
Speaker 1: policy around how you're gonna wind down the supply side. UM.
Speaker 1: So first and foremost is create a policy framework around
Speaker 1: how we're going to actually decarbonize, and then create it
Speaker 1: in such a way that it can be rolled out
Speaker 1: in US, Europe and Chronic because that's two thirds of
Speaker 1: the world emissions right there. The second thing is then
Speaker 1: create once you have the rules in place that are
Speaker 1: enforceable by punishment, and that's the key. They got to
Speaker 1: be punished. We saw with Volkswagon with the catalytic converters
Speaker 1: UM they got punished for cheating. If you cheat on this,
Speaker 1: you've got to get punished. Once you have that, then
Speaker 1: you can now create the cap and trade Marvel attacks
Speaker 1: carbon price and once you have that carbon price but
Speaker 1: in place, this solving a lot of these problems and
Speaker 1: getting the investment to flow becomes much more easy. The
Speaker 1: other thing that that you know advocate is creating. You know,
Speaker 1: Tracy came up with a few ideas or something around
Speaker 1: the str or whatever it might be, to create that
Speaker 1: idea of a long term contract to take out the
Speaker 1: volatility that investors would potentially be focused on. So, I mean,
Speaker 1: those are the two ways. I think first and foremost
Speaker 1: is we need a policy around decarbonization. And if you
Speaker 1: go back to the seventies example, that didn't happen until
Speaker 1: you saw a lake erie on fire, I don't know
Speaker 1: what's going to take um in the two thousand and
Speaker 1: twenties to get that. That's first and foremost, we need
Speaker 1: that policy around decarbonization and a carbon price. Well, Jeff,
Speaker 1: always fantastic to talk to you, this question how we're
Speaker 1: going to finance and crease that abstraction of udities, musique
Speaker 1: question and fantastic perspective. So thank you for coming back
Speaker 1: on a great Thanks for having me. Thanks, thanks, Yeah,
Speaker 1: that was really good, Trazy. I obviously I love talking
Speaker 1: to Jeff. I mean, that really does seem to be
Speaker 1: the fundamental challenge that we face right now. It really
Speaker 1: does seem to be on the investment side. However you
Speaker 1: want to slice it, like what do you want to
Speaker 1: talk about moving away from fossil fuels and the copper deficit?
Speaker 1: What you're talking about just what do we need to
Speaker 1: bring balance to the oil market right now? Solving this
Speaker 1: sort of like long term it's kind of like a
Speaker 1: game theory problem. How do people to commit to investment
Speaker 1: seems like a huge is the huge challenge at the moment.
Speaker 1: It is weird to think. I mean, if you think
Speaker 1: about what human beings need on a day to day basis,
Speaker 1: it's basically food and energy. And you could argue that
Speaker 1: the entire role of the state is basically to ensure
Speaker 1: those two things, um maybe as well as social order
Speaker 1: security and things like that, but clearly too vital things.
Speaker 1: And yet it seems like structurally there have been years
Speaker 1: and years of under investment now. And this is something
Speaker 1: that's come up both from from Jeff as we just heard,
Speaker 1: but also Salton Posar's idea that a you have previous
Speaker 1: under investment, but now you have the cycle of volatility,
Speaker 1: increased transport costs, things like that. That just means you
Speaker 1: need even more capital to support commodities trading and production.
Speaker 1: I love Jeff that the volatility trapp Yeah, that's a
Speaker 1: really good one, and I think you know, it speaks
Speaker 1: to obviously, look, the job I guess of the capitalists
Speaker 1: of capitalists is to take risks and including price volatility.
Speaker 1: But if you have this sort of like volatility that
Speaker 1: feeds volatility overall, you can create this situation which you
Speaker 1: have this dearth of investment. And it's interesting too because
Speaker 1: so Jeff talked about obviously bank capital requirements and the
Speaker 1: discouragement air and then the E. S G overlay on
Speaker 1: top of that, and then also this extraordinary tech boom
Speaker 1: that we saw, and so the rise of like the
Speaker 1: Netflix is in our life and the rise of the
Speaker 1: iPhone and the rise of Facebook and social media. You
Speaker 1: just like, in an environment like that, you could just
Speaker 1: see like who wants to invest in digging up you know, fossils,
Speaker 1: you know, dead animals that turn into liquid out of
Speaker 1: the ground. It's just in in that in that period
Speaker 1: you can just see why there had been such a
Speaker 1: dearth of interest in this, right. Well, this is also
Speaker 1: just I guess the sort of headspace that a lot
Speaker 1: of investors tend to be in, which is you're always
Speaker 1: looking for the next big thing, and oil has never
Speaker 1: been or you know, for a very very long time,
Speaker 1: it has not been considered the next big thing, and
Speaker 1: so it just doesn't have a good story behind it. Well,
Speaker 1: and I think there's another thing. You know, we talked
Speaker 1: about normalization all the time, right and so normalization I
Speaker 1: think of the very sort of crude senses all the
Speaker 1: restrictions from COVID slowly getting lifted and we go back
Speaker 1: to services. But I think that, like implied, is just
Speaker 1: the idea that like, yeah, and then oil prices are
Speaker 1: going to go back down, and then everyone's going to
Speaker 1: invest in tech and web three, in crypto, etcetera. But
Speaker 1: I feel like as long as we have that mentality,
Speaker 1: or as long as everyone sort of has this feeling like, well, yeah,
Speaker 1: we're having this like temporary surge because it's weird, like
Speaker 1: you're not going to actually get there. It's almost like
Speaker 1: in order to get you know, in order to get
Speaker 1: prices down, people have to believe the prices will never
Speaker 1: come down, which is very tricky from a narrative perspective.
Speaker 1: I mean, I think like if you you know, you
Speaker 1: think like back to two thousand and four, two thousand
Speaker 1: and five, we thought that the prices were that that
Speaker 1: was the exact opposite. I think people thought there's this
Speaker 1: big oil boom that's happening, China's usually got an infinite
Speaker 1: amount of oil, will never catch up, and that then
Speaker 1: you would get the investment. We have the peak oil
Speaker 1: narratives exactly right. And so now it's like, well we
Speaker 1: are still in the opposite where these sort of conditions
Speaker 1: it seemed temporary and we're going to move to e
Speaker 1: VS and we're going to normalize and everything we'll bring
Speaker 1: back into balance. And that's not a sort of it's
Speaker 1: not a great headspace for actually bringing stuff into balance.
Speaker 1: We need to think of a good story for like wheat, right,
Speaker 1: what is But you know, in all seriousness though, like
Speaker 1: the copper thing, I think is really interesting and I
Speaker 1: hadn't thought about that that people may be associated copper
Speaker 1: as largely a Chinese construction Chinese real estate story. But
Speaker 1: if we're going to electrify everything in the world, that
Speaker 1: creates a lot of copper demand and so then it's
Speaker 1: just a matter of like, well, what's the psycho for
Speaker 1: building that out? Well, this is another thing that we
Speaker 1: are discovering on these episodes, which is that you actually
Speaker 1: need a lot of these old economy metals or dirty
Speaker 1: fuels or whatever in order to get off the other
Speaker 1: dirty fuels. Yeah, exactly, yeah, exactly. Alright, shall we leave
Speaker 1: it there, Let's leave it there. Okay. This has been
Speaker 1: another episode of the ad Thoughts podcast. I'm Tracy Allowaite.
Speaker 1: You can follow me onto at Tracy Alloway and I'm
Speaker 1: Joe Why Isn't All? You can follow me on Twitter
Speaker 1: at The Stalwart. Follow our producer Carmen Rodriguez on Twitter
Speaker 1: at Carmen Arman. Follow the Bloomberg head of podcast, Francesca
Speaker 1: Levi at Francesco Today, and check out all of our
Speaker 1: Podcasts at Bloomberg under the handle at podcasts. Thanks for listening. Hey,
Speaker 1: there are odd Lots listeners. We are very happy to
Speaker 1: let you know that we've been nominated for a Webby Award. Yeah.
Speaker 1: I'm not you know, Tracy, I'm not normally like a
Speaker 1: big awards person, but now that we're nominated for one,
Speaker 1: I'm really excited. You really wanted Yeah, I kind of
Speaker 1: really want to win. Okay, Well, on that note, we
Speaker 1: would very much appreciate if you can take two minutes
Speaker 1: of your time and head over to vote dot Webby
Speaker 1: Awards dot com and vote for us. You'll find us
Speaker 1: nominated in the Business podcast category. And be sure to
Speaker 1: check out Odd Lots on the I Heart radio app
Speaker 1: wherever you listen to Things to To