WEBVTT - Hartree Partners Special Advisor Edward Morse Talks Oil & Gas Prices

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>Glad to welcome Ed Morris of Hartree Partners now on

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<v Speaker 2>set here at seven thirty one, lex Ed, great to

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<v Speaker 2>have you in the building today. How do you see

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<v Speaker 2>this war in Iran when you look at past incidents

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<v Speaker 2>of you know, war in the Gulf or the Arab

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<v Speaker 2>oil embargo. I mean, we've had a number of hot

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<v Speaker 2>points in the Middle East. Where does this rank?

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<v Speaker 1>So rank somewhere in between. Certainly, this is the third

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<v Speaker 1>Gulf war we've seen since nineteen ninety ninety one, straight

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<v Speaker 1>to hor moves. Wasn't closed in the first one or

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<v Speaker 1>the second one, and it wasn't even closed in the

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<v Speaker 1>events of the early period of time in the seventies

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<v Speaker 1>or even the Iranian Revolution. So this is pretty unique.

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<v Speaker 1>So I put it more serious than anything we've seen

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<v Speaker 1>since the early nineteen seventies.

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<v Speaker 3>Does that mean that, even let's say this somehow resolves

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<v Speaker 3>in a week time Trump or someone off, is it

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<v Speaker 3>serious enough that we're going to have a fundamental rethink

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<v Speaker 3>of the way energy flows and energy markets after this,

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<v Speaker 3>much like after the air of oil embargo when the

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<v Speaker 3>SBR came, like after COVID, after Ukraine when we rethoughted

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<v Speaker 3>just exactly how energy markets are structured.

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<v Speaker 1>So I think we should look and see what some

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<v Speaker 1>major countries are doing, and we're doing even beforehand. China

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<v Speaker 1>is energy dominant when you think of clean energy, and

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<v Speaker 1>they have certainly decided, as being very dependent on flows,

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<v Speaker 1>particularly from the Middle East, that they're going to double

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<v Speaker 1>down on the clean energy scenario. Europe is already talking

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<v Speaker 1>about going back to green energy targets. We'll see what

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<v Speaker 1>happens in the US, but certainly there's been a kind

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<v Speaker 1>of worldwide rethink about what to do in terms of dependence,

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<v Speaker 1>and that includes emerging markets as well. It includes India certainly,

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<v Speaker 1>as well as China and much of the Far East.

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<v Speaker 2>We were playing some sound from the US Energy Secretary

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<v Speaker 2>Chris Right on yesterday's Sunday Shows, and he was saying, look,

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<v Speaker 2>this is a fear premium, that it's going to last

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<v Speaker 2>a couple of weeks, but we're going to start getting

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<v Speaker 2>shifts through the streets of hormus soon. He seemed pretty sanguine.

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<v Speaker 2>Do you share his view that this could be relatively

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<v Speaker 2>short lived?

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<v Speaker 1>Well, I share his views that it could be relatively

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<v Speaker 1>shortly we lived, but I'd say I would turn his

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<v Speaker 1>remarks of a few weeks to a few months. And

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<v Speaker 1>that's certainly the case if we look at the nitty

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<v Speaker 1>gritty of the oil market and the gas market in particular.

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<v Speaker 1>So we shouldn't forget that gas prices of skyrocket around

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<v Speaker 1>the world because twenty percent of the world's available internationally

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<v Speaker 1>derived natural gas comes from the UAE a little bit

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<v Speaker 1>and Qatar an awful lot, and that's not going to

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<v Speaker 1>be turned on for at least a month.

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<v Speaker 2>And that's all priced in dollars, by the way, So

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<v Speaker 2>it hurts them even worse than it hurts us.

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<v Speaker 1>It absolutely is, yes, And on the dollar price, by

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<v Speaker 1>the way, given what you've just talked about, with the

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<v Speaker 1>increase in the value of the dollar globally, just adds

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<v Speaker 1>insult to injury. It just makes the inflation for the

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<v Speaker 1>rest of the world significantly higher than it otherwise might

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<v Speaker 1>have been. But even the oil, it's not come back

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<v Speaker 1>like overnight. They'll be testing, they'll see what happens, and

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<v Speaker 1>we still have a big risk. Latently in the western

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<v Speaker 1>side of the Arabian Peninsula, we have the Huthis and

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<v Speaker 1>they have not activated yet, and they are a proxy

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<v Speaker 1>still of Iran and we haven't seen a complete shutoff.

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<v Speaker 1>You know, we've seen a shutoff. If people are arguing,

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<v Speaker 1>is it ten million barrels a day or sixteen in

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<v Speaker 1>either case is pretty large, but it can go to

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<v Speaker 1>the full twenty coming out of the Middle East if

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<v Speaker 1>we have a closure on the other side of the

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<v Speaker 1>Arabian Peninsula.

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<v Speaker 3>And there just feels to be a disconnect. I'm listening

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<v Speaker 3>to you and other experts in this that are talking

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<v Speaker 3>about the potential for this to stretch on and have

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<v Speaker 3>very big implications. Then I look at what markets are doing.

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<v Speaker 3>I mean, the backwardation suggests that oil prices resume something

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<v Speaker 3>close to normal pretty relatively soon. Are we being sanguine

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<v Speaker 3>about the risk that this could stretch on and have

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<v Speaker 3>much higher oil prices to come?

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<v Speaker 1>I think we're being a little bit too sanguine. The

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<v Speaker 1>futures curve doesn't tell you very much. It tells you

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<v Speaker 1>that we've had a spike in the medium in the

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<v Speaker 1>inter it tells you that bagradation has increased, so there's

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<v Speaker 1>just not a lot of liquidity in the market, and

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<v Speaker 1>the fact that ten year prices have not changed very much.

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<v Speaker 1>It doesn't tell you what's really going to happen in

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<v Speaker 1>the next few years. So I wouldn't use that as

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<v Speaker 1>a predictor. I'd say that's a reflection of where macro

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<v Speaker 1>funds are placing their short term cash.

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<v Speaker 2>We have seen a big spike in prices at the pump,

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<v Speaker 2>and I thought it was interesting in reading your research

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<v Speaker 2>that the product prices rise faster than the underlying crude

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<v Speaker 2>for example, why is that and how do you expect

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<v Speaker 2>to see gas prices go because I mean, this chart

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<v Speaker 2>doesn't do justice to what we've seen on the price

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<v Speaker 2>at the pump. It's the highest in either Trump term.

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<v Speaker 1>Yeah, so I've seen prices coming from the lower three

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<v Speaker 1>dollars range to the mid three dollars range. There's been

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<v Speaker 1>a what fifteen sixteen percent increase in the price of gasoline.

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<v Speaker 1>If you look at crude oil, where was crude oil

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<v Speaker 1>trading two weeks go. Brent was trading at around seventy

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<v Speaker 1>it even fell below to sixty eight sixty nine and

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<v Speaker 1>it's now at one hundred and three. And WTI was

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<v Speaker 1>trading at sixty five, sixty four, sixty three and it's

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<v Speaker 1>now at one hundred and two, one hundred and three.

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<v Speaker 1>That's a double increase from what we've seen in gasoline.

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<v Speaker 1>So we've seen a very slow reaction, so to speak,

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<v Speaker 1>on the gasoline side. That's due to a whole bunch

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<v Speaker 1>of factors, including you deliver out of what you have

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<v Speaker 1>from storage in the light. But we're seeing a curtailment

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<v Speaker 1>on the product side. We've seen the big curtailment out

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<v Speaker 1>of the Middle East. The Middle East, while they're exporting

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<v Speaker 1>sixteen million barrels a day or so through the Strait

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<v Speaker 1>of Hormuz, two million of that is product, and we've

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<v Speaker 1>seen that product, which largely goes into Asia, having a

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<v Speaker 1>dramatic impact on jet fuel prices in Asia, on gasoline

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<v Speaker 1>prices in Asia, on diesel diesel diesel prices in Asia.

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<v Speaker 1>And that's much more than the fifteen percent increase seen

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<v Speaker 1>in the US. So the US is a lagrate and

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<v Speaker 1>if we see what's happening in the rest of the world,

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<v Speaker 1>it tells you that we're going to see four dollars

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<v Speaker 1>at the pump more more sooner than we.

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<v Speaker 2>Otherwise well ed, what does it mean that IMAX catches

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<v Speaker 2>up to Brent? I thought it was interesting the other

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<v Speaker 2>day I looked at a WTI quote and I thought

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<v Speaker 2>it was a mistake in the graphics that it was

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<v Speaker 2>actually Brent, because usually there's a five dollars gap between

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<v Speaker 2>the two. I'm you know, rounding, But now we're at

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<v Speaker 2>the same level.

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<v Speaker 1>Well, don't forget that there's more crude coming out of

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<v Speaker 1>the United States than there is at a northwest Europe,

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<v Speaker 1>and the US has available incremental crew that can be

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<v Speaker 1>bid up. We don't have restrictions on exports. So we're

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<v Speaker 1>seeing the demand for WTI related crewde skyrocketing in a

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<v Speaker 1>way that makes it get closer to where Brent has

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<v Speaker 1>been trading. We're seeing more ban in Dubai at a

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<v Speaker 1>ten dollars increment even above where Brent is trading. So

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<v Speaker 1>that tells you that the world pricing is sorting itself out.

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<v Speaker 3>So for one O two on bront right now and

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<v Speaker 3>not sort of this out saying that your calls about

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<v Speaker 3>a fifty percent chance likelihood that we see a rise

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<v Speaker 3>of fifty percent in prices, What does that scenario look like,

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<v Speaker 3>how do we get there and how long does that

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<v Speaker 3>price elevated price? Last?

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<v Speaker 1>Well, one scenario is one I just mentioned. The houthis

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<v Speaker 1>get to work and we see the western part of

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<v Speaker 1>the middle in the Arabian Peninsula also shut off. That's

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<v Speaker 1>twenty million a day. We're not going to see the

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<v Speaker 1>battlefield ending pretty soon. We're going to see at least

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<v Speaker 1>two good weeks. I suspect of continued bombing of energy

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<v Speaker 1>infrastructure in Iran and in the western part of the Gulf.

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<v Speaker 1>The Ranians are not slowing down as far as I

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<v Speaker 1>can tell. We're going to see inevitably, if there are

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<v Speaker 1>some ships trying to get through to the Strait of Hormoves,

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<v Speaker 1>we'll see those being attacked, and we'll see tankers being attacked.

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<v Speaker 1>We have to remember that Iran has just reaffirmed the

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<v Speaker 1>hardline approach by putting in place the son of the

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<v Speaker 1>form of Supreme Leader. And they had a big debate

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<v Speaker 1>about that. It was a week long debate which way

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<v Speaker 1>are they going to go? And they chose the hard

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<v Speaker 1>line way. So they're there for an existential threat and

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<v Speaker 1>they're going to fight for the existential survival of the regime.

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<v Speaker 2>I want to actually zero in on that because you

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<v Speaker 2>talked about that in your notes. We could have seen

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<v Speaker 2>Iran after the Ayahtola if he had been let to

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<v Speaker 2>die of natural causes. Right, go with a more I guess,

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<v Speaker 2>reformist supreme leader. But it seems as if this attack

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<v Speaker 2>by Israel and the US has at least, you know,

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<v Speaker 2>helped to push them towards a more hard line leader.

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<v Speaker 2>So I wonder what do you think were the justifications

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<v Speaker 2>for this war. We haven't heard much from the administration

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<v Speaker 2>in the way of an official, you know, line of

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<v Speaker 2>why we did this.

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<v Speaker 1>Well, that's the the interesting question of why did we

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<v Speaker 1>do this? And we did it for all of the

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<v Speaker 1>reasons I suspect that we've heard from the White House.

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<v Speaker 1>We've done it because that regime has been a threat

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<v Speaker 1>and it's been a threat to the economies of the

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<v Speaker 1>part of the world for a while. It's been a

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<v Speaker 1>threat to Saudi Arabia, it's been a threat to the UAE.

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<v Speaker 1>The bombings that came in when ABCAK was hit in

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<v Speaker 1>twenty nineteen was not an accident. It came from Iran.

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<v Speaker 1>The proxy attacks come from Iran. So there's been that

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<v Speaker 1>threat for a long time. Yes, there was regime change

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<v Speaker 1>in the minds of some people, including the President. He

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<v Speaker 1>said it too often for you to not believe their

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<v Speaker 1>regime change was certainly there.

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<v Speaker 2>In this case, it's pretty much worse than what we had.

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<v Speaker 1>Well original we expected, we expected, I suspect they expected.

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<v Speaker 1>I didn't expect it. They expected this to be over

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<v Speaker 1>in a couple of days, and that certainly didn't happen.

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<v Speaker 3>Well, so it's a president at the same time who's

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<v Speaker 3>been making this push for affordability at you advised presidents

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<v Speaker 3>before you'd advised government, you've advised governments. We have finance

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<v Speaker 3>leader ministers of the G seven meeting right now discussing

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<v Speaker 3>a possible release reserves of oil. The US is surely

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<v Speaker 3>trying to figure out how to stem some of the issues.

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<v Speaker 3>To what would you be advising governments at the moment

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<v Speaker 3>to try to mitigate some of the price rises.

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<v Speaker 1>Well, I think they're doing what they have to do.

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<v Speaker 1>The governments that have better control than the US government

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<v Speaker 1>does on local electricity prices, is, you know, is keeping

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<v Speaker 1>the weight of the increase in the hands of utilities,

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<v Speaker 1>many of which are public sector anyway, the US doesn't

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<v Speaker 1>have that privilege exactly. We have very independent regulatory agencies

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<v Speaker 1>for power generation, and power prices are certainly going to

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<v Speaker 1>go up. So the affordability issue can only be met

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<v Speaker 1>to a certain extent by the risk of releasing strategic stocks,

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<v Speaker 1>and we're seeing what's going to happen in the next hour.

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<v Speaker 1>I suspect on what the G seven are going to decide.

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<v Speaker 1>They're talking about big numbers, talking about three to four

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<v Speaker 1>hundred million barrels of a release, which is bigger than

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<v Speaker 1>the release after Russian invasion of Ukraine, which was a

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<v Speaker 1>very large release to say the lease, and that didn't

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<v Speaker 1>stop prices from going up because it takes a while

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<v Speaker 1>to redeploy oil when you have some of the you know,

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<v Speaker 1>the major oil pass sanctioned immediately after that Russian attack,

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<v Speaker 1>So it's going to be a while. I think it'll

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<v Speaker 1>be a good month or two before we see the

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<v Speaker 1>weight of strategic stocks coming in the market. The release

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<v Speaker 1>will obviously cause the market to fall, but how long

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<v Speaker 1>that will last is another matter.

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<v Speaker 3>And we should hear from them in about fifteen minutes

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<v Speaker 3>time after that readout ed. It's such an honor and

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<v Speaker 3>a joy to have you on. Ed Morris of Hard

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<v Speaker 3>Tree Partners