Speaker 1: Hello, and welcome to another episode of the Odd Locks podcast.
Speaker 1: I'm Joe and I'm Tracy Halloway. Tracy, you know, the
Speaker 1: high price of energy obviously has put a lot of
Speaker 1: increased interest once again on energy transition, cleaner energy, cheaper energy.
Speaker 1: But the thing that strikes me about two so far
Speaker 1: is the world is using more coal than ever right.
Speaker 1: I think if there's one thing we can internalize from
Speaker 1: the lessons of two, it's that a things we expected
Speaker 1: to happen have not happened. And be on that note,
Speaker 1: the energy transition is just a lot messier and a
Speaker 1: lot less linear than I think a lot of people expected.
Speaker 1: People expected, like you know, once evs became widely available,
Speaker 1: someone somewhere would flip a switch. Everyone would shift their
Speaker 1: dependency away from gas into electricity, and the problem would
Speaker 1: kind of be solved and all these dirty energy industries
Speaker 1: like coal, like oil would be resigned to the dustbin
Speaker 1: of history. I guess yeah, And I think the twenty
Speaker 1: tens sort of lulled us into maybe this false sense
Speaker 1: of complacency about the future of fossil fuels or dirty,
Speaker 1: dirtier sources of energy. And I think, you know, we
Speaker 1: we had the especially starting this big drop in the
Speaker 1: price of oil combined with the boom and electric cars,
Speaker 1: and I think a lot of people sort of thought like, okay, well,
Speaker 1: this is like this is the final chapter of the
Speaker 1: oil era, of the fossil fuels era. It's gonna fade
Speaker 1: over time, you know, people over a long time into oblivion, oblivion.
Speaker 1: But it's already of this linear down. And of course
Speaker 1: now oil is exploding, and not only that, these other
Speaker 1: you know, sort of coal has bounced back, and there's
Speaker 1: sort of this very intense impulse now to expand production,
Speaker 1: at least in the short to medium term, of energy
Speaker 1: sources to bring prices down. Right, I think a couple
Speaker 1: of years ago, no one would have expected governments, you know,
Speaker 1: liberal governments from Europe to the US the Biden administration
Speaker 1: to basically say like, we need more energy, we need
Speaker 1: more oil to be drilled, we need more energy coming
Speaker 1: from somewhere, preferably cleaner energy, but if we have to,
Speaker 1: we will also look at dirtier forms of energy as well.
Speaker 1: Like that was totally unexpected, right, And everyone long term
Speaker 1: is like, yeah, electrification of everything, and hopefully we're renewables,
Speaker 1: maybe even some nuclear and stuff like that. But in
Speaker 1: the short to medium term, suddenly there's just big, this
Speaker 1: big urge to get the price of energy down. So
Speaker 1: it raises the question if we were like lulled into
Speaker 1: this false sense of complacency last decade, like what are
Speaker 1: we getting wrong in our thinking? And what will of
Speaker 1: the energy transition ultimately look like? Absolutely all right, So
Speaker 1: I am very excited about this guest, someone who has
Speaker 1: been talking for many years, long before the two cycle,
Speaker 1: who has been making this argument that people are wrong
Speaker 1: about how energy sources die or wrong about how commodities
Speaker 1: get replaced by something new. We are going to be
Speaker 1: speaking with Bob Brackett. He's a senior analyst covering natural
Speaker 1: resources at Bernstein and he's been covering the resource space
Speaker 1: and various capacities for about thirty years. So, Bob, thank
Speaker 1: you so much for coming on odd lots, Thank you
Speaker 1: so much. Thank you Tracy for having me. So how
Speaker 1: is that that? Like there are people have been like
Speaker 1: wanting to kill cole forever, it seems like, and you know,
Speaker 1: there's been so little funding of coal, like all these
Speaker 1: banks got out of like financing call everyone's like this
Speaker 1: is over. I remember, you know, big thing, and like
Speaker 1: last decade was like what are we gonna you know,
Speaker 1: let's train all the coal workers to learn to code
Speaker 1: and things like that, and yet here in the world
Speaker 1: is using more cold than it ever has in history,
Speaker 1: Like how did that happen? So it happened. That's sort
Speaker 1: of on the supply side, and that happened on the
Speaker 1: demand side, and on the demand side that the reality
Speaker 1: is energy transitions just take time. If we think about coal, clearly,
Speaker 1: on the demand side, there is just an inherent demand
Speaker 1: for the utility that coal provides, or nobody actually wants
Speaker 1: to consume coal. No one wakes up and says I
Speaker 1: wish I had some coal people wake up and say
Speaker 1: I want to electricity, right, I want of the things
Speaker 1: that lifestyle that electricity and genders. And so if we
Speaker 1: can't provide that electricity from other means, because we can't
Speaker 1: ramp renewable spending capital fast enough, if we can't tackle
Speaker 1: issues around intermittency and security of supply, then you fall
Speaker 1: back on what's available, and that's coal, and that that's
Speaker 1: the call of demand. On the supply side. If you're
Speaker 1: a coal miner and you're building assets that last decades,
Speaker 1: you were terrified about what the future, what the last
Speaker 1: ten years of that asset could look like. They could
Speaker 1: have no terminal value. So as a result your your burden,
Speaker 1: your risk return, your cost of capital, however you want
Speaker 1: to call it, you just end up being afraid to
Speaker 1: sanction long term supply, and then you end up in
Speaker 1: this sort of perpetual tightness. And Tracy, you know, I'm
Speaker 1: thinking about some of the conversations we've had with Jeff Curry,
Speaker 1: and you know, this is the vault trap, like this idea,
Speaker 1: It's like, Okay, prices are high right now, but if
Speaker 1: everyone is like talking about some peak in a few
Speaker 1: years in consumption, like lie invest how much does regulation
Speaker 1: play into a story like coal? Because one of the
Speaker 1: interesting things about coal is it's I don't think it's
Speaker 1: ever really been considered a good source of energy, Like
Speaker 1: it's always had certain connotations. It's always been dirty to
Speaker 1: actually get out of the ground, dirty to store in
Speaker 1: your house, which I'm experiencing now because I just discovered
Speaker 1: we have a large pile of coal in the basement, um,
Speaker 1: which is fun. Of course Tracy, of course Tracy has
Speaker 1: a basement full of coal, like that is a very
Speaker 1: Tracy thing and keep going all right, and you know,
Speaker 1: associations with child labor and things like that. It feels
Speaker 1: like Cole has sort of been vilified for most of
Speaker 1: its history. So how does that play into its life cycle? Yeah,
Speaker 1: it's funny. And I forget the King of England who
Speaker 1: attempted to ban Cole uh half a millennium ago and
Speaker 1: utterly failed. Cole has an externality. In the old days,
Speaker 1: the externality around Cole was the was the soot and
Speaker 1: the emissions and the socks and the knox, and we
Speaker 1: mostly as a planet cleaned that up, and today the
Speaker 1: externality is carbon dioxide. It's kind of always had an externality,
Speaker 1: and despite that, it is always had a utility that's
Speaker 1: that's overcome that, and so it is just an incredibly
Speaker 1: geologically unique store of energy and it's just very hard
Speaker 1: to find a substitute. And the other aspect, even today,
Speaker 1: what we're seeing is politicians, regulators they don't like coal
Speaker 1: for its externalities, but they also like cheap electricity for
Speaker 1: the voting population. And so we're even seeing in the US,
Speaker 1: we're seeing in Europe, we're seeing softening of taxes against
Speaker 1: hydro carbon's and that's sort of short termism. I've got
Speaker 1: to keep the penalty of inflation against my my voting population,
Speaker 1: even though in the long term I really have to
Speaker 1: tackle this thing. The king who tried to ban cole
Speaker 1: in twelve eighty five, King Edward the First. I only
Speaker 1: know that because I read it in your note wrote
Speaker 1: so the whole you know, we wanted to talk to
Speaker 1: you because you wrote this amazing sort of this long
Speaker 1: piece at Bernstein in twenty seven and team basically talking
Speaker 1: about what people get wrong about the energy transition and
Speaker 1: what the theme seems to be that in our heads,
Speaker 1: you know, when we think about transition or we think
Speaker 1: about disruption, we think the iPhone comes along and then
Speaker 1: like two years later there's no palm pilots, or one
Speaker 1: year later there's no flip phones like it. Just something
Speaker 1: better comes along and then the old thing is over.
Speaker 1: And sort of the thrust of your note is that no,
Speaker 1: like energy just doesn't work like that, and having this
Speaker 1: sort of like tech framework of disruption leads you to
Speaker 1: some bad paths when thinking about the future of commodities,
Speaker 1: of the future of energy exactly. And the genesis of
Speaker 1: this book that I wrote was effectively a debate with
Speaker 1: the ever so popular tech analysts here at Bernstein, where
Speaker 1: the metaphors they were using for the energy transition were
Speaker 1: digital cameras displacing analog cameras, and flat screens displacing crt s,
Speaker 1: and smartphones displacing dumb phone. And my caution, for my
Speaker 1: rather lengthy caution, was in in natural resources industries, in
Speaker 1: depletion based industries where you need just a lot of
Speaker 1: capital not only to grow but just to stay flat,
Speaker 1: that that dynamic is different. And in those sorts of
Speaker 1: environments where it's not a consumer electronic device, transitions can
Speaker 1: take decades and decades and decades. So that was that
Speaker 1: was ultimately the genesis of why I wrote describe Well,
Speaker 1: could you go into that in a little bit more detail,
Speaker 1: like why is energy different from a consumer good? Why
Speaker 1: does the transition seem to be more complex, and why
Speaker 1: does it definitely take longer? It comes to the supply
Speaker 1: side being afraid of the future. And the term I've
Speaker 1: coined for oil is this green wolf at the door
Speaker 1: that if you're investing in hydrocarbons know someday that green
Speaker 1: wolf at the door is going to come in and
Speaker 1: you're just afraid to to not earn a return on
Speaker 1: your capital, not strand your asset. My favorite analog, and
Speaker 1: I've got a couple, is the mercury industry. So the
Speaker 1: US Geological Survey posts the annual volumes, price, and revenues
Speaker 1: for the mercury industry over the last hundred years and
Speaker 1: store to say, well, mercury is terrible. Talk about a
Speaker 1: bad product. I think, think mad hatters, think insanity, I
Speaker 1: think of all of the terrible things mercury does. But
Speaker 1: the mercury industry has never had higher revenues. And the
Speaker 1: reason is is there is sticky demand for mercury in
Speaker 1: a bunch of niche abuses that are very hard to displace,
Speaker 1: and only a full would open a mercury mind today
Speaker 1: right just to think about what that would take. So
Speaker 1: the supply side that requires capital to keep going has said,
Speaker 1: I just can't deploy capital here, and the demand side says, well,
Speaker 1: but I really don't have a substitute yet. And so
Speaker 1: the mercury in this is going to end someday in
Speaker 1: a time measured in decades, but it's going to go
Speaker 1: out at high prices and a lack of supply, not
Speaker 1: with the shelves full of products the way of consumer
Speaker 1: electronic device that's that's defunct would. So how should investors
Speaker 1: actually think about that? Because I feel like this is
Speaker 1: where things get really tricky, especially when it comes to oil.
Speaker 1: So everyone, I think pretty much agrees that oil is
Speaker 1: going to go away someday. The question is just how
Speaker 1: long it's going to take, and then whether or not
Speaker 1: there are these sort of big peaks and troughs in
Speaker 1: oil use in the meantime during the transition, And as
Speaker 1: we've seen in recent years, it just feels really difficult
Speaker 1: for investors and also the energy businesses themselves to get
Speaker 1: a handle on because how do you plan for the
Speaker 1: future if you're expected not to have one and the
Speaker 1: question is just how long it's going to take. The
Speaker 1: one misconception out there is this concept with the demand
Speaker 1: for a product starts to fall, the price for the
Speaker 1: product starts to fall. But you know, ultimately, if you
Speaker 1: think back to your classic economics one oh one, the
Speaker 1: price of something is where marginal cost meets marginal supply.
Speaker 1: And if the marginal supply is running away from you
Speaker 1: and there's no requirement that price fall. And so if
Speaker 1: you believe the Mercury analogy that I shared with you.
Speaker 1: If you believe the asbestos analogy, if you kind of
Speaker 1: believe call right we're trying to get rid of call
Speaker 1: and prices at all time high, then the answer is
Speaker 1: the oil and gas companies are afraid to deploy long
Speaker 1: cycle asset right ten twent thirty year types of projects.
Speaker 1: They're generating record cash flows, certainly as we go into
Speaker 1: earnings in the next week or two. And the response
Speaker 1: for the typical U, S, E. N P that I
Speaker 1: follow is I'm just gonna return that cash to shareholders
Speaker 1: and let them decide what to do with it. Right, So,
Speaker 1: I don't know when my industry is over. It's a twilight.
Speaker 1: But in the meantime, investors, you take the cash and
Speaker 1: you decide how to read a ploy, and I will
Speaker 1: manage my best short term high return investments as that happens.
Speaker 1: So obviously we're going to have to do a Mercury
Speaker 1: episode at some point in the future. But actually I
Speaker 1: do have. I want to go back to Mercury real quickly.
Speaker 1: When you say the Mercury will come to an end,
Speaker 1: is there a substitute like what that exists for Mercury?
Speaker 1: Like is there a reason that at some point there
Speaker 1: won't be a future mercury demand. So it gets to
Speaker 1: the end uses. So luckily, like mercury gets used in
Speaker 1: the mining sector for example, certainly by artisanal miners, it
Speaker 1: can be displaced with cyanide, which you know, there's a
Speaker 1: whole bag of works there. Um, the there are medical
Speaker 1: uses as well, there are some industrial uses, and yeah,
Speaker 1: I mean yeah, there have to be workarounds, but yes,
Speaker 1: and then at some point, like we see with other medals,
Speaker 1: we can get to a world where there's enough efficient
Speaker 1: recycling of mercury that the and can get a messed
Speaker 1: that way, but which is not quite there yet. Let
Speaker 1: me ask you another question, and I guess it's about
Speaker 1: coal and the failure of the sort of typical tech
Speaker 1: disruption frame. Seems to me that there is a way
Speaker 1: to view this is like coal is the disruptive technology.
Speaker 1: I mean, again, all these things sort of breakdown because
Speaker 1: cole has been around forever. But if you think, like
Speaker 1: here's a really cheap form of energy, it's like really
Speaker 1: powerful form of energy, like you get a lot of
Speaker 1: electricity out of it and it's cheap, then you know,
Speaker 1: you could probably make the argument that you know, if
Speaker 1: you're willing to tolerate the externalities. Yes, it's worse for
Speaker 1: the air. Yes, it emits a lot of carbon that
Speaker 1: on a sort of like strictly like like for like
Speaker 1: basis that one might consider coal the disruptor of natural
Speaker 1: a gas or the disruptor of oil. Should all the
Speaker 1: tech ETFs get into coal, is that's what you're saying.
Speaker 1: You can very quickly see how some of the like
Speaker 1: tech thinking could like really break down or lead you astray.
Speaker 1: It's like, well, which one is the real disruptor here?
Speaker 1: If the planet had over invested in l n G
Speaker 1: and other sources of natural gas, and if you're getting
Speaker 1: all of our energy from windmills, then I'm sure coal
Speaker 1: would be a massive disruptor to that. So if we
Speaker 1: started in the reverse and if everything was a wind turbine,
Speaker 1: we would have this issue of intermittency. The wind patterns
Speaker 1: changed daily and seasonally and sometimes not at all. And
Speaker 1: if someone came and said, I've got this product. It's
Speaker 1: very dense, it has a lot of energy, and look
Speaker 1: at it can burn twenty four seven and be a
Speaker 1: baseload of power, Yeah, it would be a remarkable disruption.
Speaker 1: So I have maybe a strange question. You know, we're
Speaker 1: talking about disruption and new technologies and things come in
Speaker 1: to replace other types of commodities in history, has there
Speaker 1: been like a good example of a commodity just going
Speaker 1: completely away? Because it feels like even the really questionable
Speaker 1: stuff like mercury still finds some sort of use, and
Speaker 1: even things that have been vilified, like coal as we've
Speaker 1: been discussing, or like tobacco or instance, those are all
Speaker 1: you know, they're still around. There's still big industries, and
Speaker 1: they're still in the case of tobacco, still quite profitable.
Speaker 1: That is a strange question, and it's one that I
Speaker 1: went to answer, and so I good, okay, not the
Speaker 1: only Yeah. I looked at eighty four different commodities and
Speaker 1: over the last hundred and twenty years, said which one
Speaker 1: of them went away? A category of them that are
Speaker 1: deadly on average declined single digits a year. So even
Speaker 1: the deadliest, the caesiums of the world, the asbestos, the mercury,
Speaker 1: even though things tend to go away slowly, I didn't
Speaker 1: find a commodity that was radically displaced on any short
Speaker 1: term time horizon. I believe the closest you could come
Speaker 1: with strontium, where the biggest source of demand for strontium
Speaker 1: was in in c rt s, the old TVs we
Speaker 1: used to use, and so when flat screens came in,
Speaker 1: strontium demand fell. But that was the exception for that's
Speaker 1: that was kind of the one percent club. The reality
Speaker 1: and it goes back to Jevan's paradox, which which was
Speaker 1: again a guy looking at cold at the end of
Speaker 1: the eight hundreds. Generally, just commodity demand rises. It's it's
Speaker 1: hard to find commodities that we use less of remind
Speaker 1: us what paradox is. So the Japan's paradox was that
Speaker 1: the more efficient you got that producing cold, the more
Speaker 1: you use. And it works for road systems, it works
Speaker 1: for a number of things. But the classic example is, hey,
Speaker 1: I've got a four lane highway, I'll make it an
Speaker 1: eight lane highway, and then congestion will fall, right, And
Speaker 1: then every time we build an eight lane highway, congestion rises.
Speaker 1: And so it was kind of as you try to
Speaker 1: improve the efficiency of something, you actually increase the consumption
Speaker 1: of it. So going back to oil for a second,
Speaker 1: because as you've said, like you actually do think there
Speaker 1: will be an end date for oil or at least
Speaker 1: oil as a source of maybe fuel for automobiles, Like
Speaker 1: what does that look like and what is how are
Speaker 1: you thinking about the long term time frame of when
Speaker 1: the oil age comes to an end and how is
Speaker 1: it replaced? And you know, like what what do you
Speaker 1: tell people when they say, like how long is the
Speaker 1: future of all? How long do we have here? Part
Speaker 1: of it is just a mentality shift. So through most
Speaker 1: of my career looking at oil and gas investment, people
Speaker 1: believed in peak oil supply, right, it was Harbard's peak,
Speaker 1: It was the association for the society peak oil. It
Speaker 1: was twilight in the desert, and we all fall in
Speaker 1: hindsight incorrectly that we would run out of supply. And
Speaker 1: in that world, give sanctional project and you say, maybe
Speaker 1: it's over budget, maybe it's late, maybe it's not quite
Speaker 1: up to stuff on deliverability, but price will bail me out.
Speaker 1: And so as long as the mentality of scarcity existed
Speaker 1: in my sector, we as an industry kept growing oil
Speaker 1: and gas supply. And in the last five ish years
Speaker 1: that mentality has pivoted to this world of the end
Speaker 1: of oil demand. So we're going to run out of
Speaker 1: oil demand before supply, and that's where all the capital
Speaker 1: allocation mentality completely flips from sort of i'll lean into
Speaker 1: it into fear. That's what's driving kind of what could
Speaker 1: be perpetual tightness now in terms of windes the oil
Speaker 1: age end. The way we think about oil, we we
Speaker 1: divide oil into six big buckets, and reality, oil into
Speaker 1: a refinery produces dozens and hundreds of products. We think
Speaker 1: about gasoline for passenger travel, diesel for think rail trucks, trains, vessels,
Speaker 1: marine vessels, and then pet cams for plastics, jet fuel
Speaker 1: for air travel, and then into more obscure buckets. The
Speaker 1: obvious bucket that gets disrupted is gasoline, right, So e
Speaker 1: v s attack gasoline demand to some degree, the hydrogen
Speaker 1: economy attacks diesel demand. But even under a range of
Speaker 1: reasonable assumptions, oil demands should rise into the twenty thirties,
Speaker 1: perhaps it's ten percent higher than it is today, and
Speaker 1: then it enters kind of this gradual plateau. We as
Speaker 1: a planet are still looking for ways to substitute jet
Speaker 1: fuel air travel. Air travel grows with GDP, So if
Speaker 1: GDP not this year, but if GDP grows three percent
Speaker 1: a year, then jet fuel demands growing three percent a
Speaker 1: year and compounds in the next ten twenty years, how
Speaker 1: do we substitute air travel in any meaningful time frame.
Speaker 1: So so the answer is, think of a plateau. Think
Speaker 1: of the thirties is where that plateau starts to be visible,
Speaker 1: and think of the supply side of the equation being
Speaker 1: much more afraid of that plateau than the demand side.
Speaker 1: This is a tough question, I think, but in your opinion,
Speaker 1: when it comes to encouraging that transition from gas and
Speaker 1: oil to a more electrified future, what's the best way
Speaker 1: or the most effective way of doing that. Is it
Speaker 1: something on the demand side. Is it trying to you know,
Speaker 1: encourage a better or a larger supply side response, or
Speaker 1: is it you know, government intervention coming in and subsidizing
Speaker 1: things like electric cars? Like what is most effective here?
Speaker 1: So the subsidies have been the past. People have accepted
Speaker 1: Norway is the perfect experiment meant for the energy transition
Speaker 1: for e vs, But we have yet to see, for example,
Speaker 1: Norwegian oil demand roll over significantly. And so I think
Speaker 1: the answer is, and what Norway has done is through subsidies.
Speaker 1: And of course it's a well developed economy, it's a
Speaker 1: wealthy economy, and they can afford those sorts of tools
Speaker 1: that a broader adoption just can't afford. And so if
Speaker 1: you can't really tackle it on the demand side, you
Speaker 1: have to tackle it on the supply side. Now, selfishly,
Speaker 1: I would argue that the mining side, which I also cover,
Speaker 1: is the obvious bottleneck. And so in theory, supporting mining
Speaker 1: in your home country, in your home region, we're supporting
Speaker 1: mining in general the industry. If you think about I
Speaker 1: spent a lot of time thinking about shale, right, So
Speaker 1: shale was a massive disruptor to to what I did
Speaker 1: for a living for a long period of time. And
Speaker 1: shale was a manufacturing process that we did a hundred
Speaker 1: thousand times, and we drove the cost of it down
Speaker 1: massively just through that classic learning curve. As we look
Speaker 1: at building e vs, we're going to go from a
Speaker 1: planet that's sold ten tho ev s and then a
Speaker 1: hundred thousand and now north of a million, will get
Speaker 1: to ten million someday, and those learning curves will just
Speaker 1: reduce the cost of all the manufacturing parts of the
Speaker 1: e V supply chain. But you know, mining the extractive
Speaker 1: industries just following a different drummer and those get tougher
Speaker 1: over time. We drill the best wells first, we find
Speaker 1: the best copper minds first, we mind the best grades first,
Speaker 1: and so to me, encouraging the supply side, the metal
Speaker 1: side of the battery revolution, would be something policymakers could do.
Speaker 1: And frankly, that's the toughest part because it's the one
Speaker 1: place where local s G issues are fighting full force
Speaker 1: against global E s G issues. I'm really fascinated by
Speaker 1: this idea that there's a shift in mentality when everyone
Speaker 1: went from talking about peak supply and I think, you know,
Speaker 1: we all remember I used to read the Oil Drum
Speaker 1: that blog years ago where everyone talked about like peak
Speaker 1: oil and we're going to run out of oil, and
Speaker 1: that was a great resource. I'd love to have them
Speaker 1: back now because the people on that site would be
Speaker 1: great contributors to sort of the current discussion. But I remember,
Speaker 1: you know, peak it was like this huge thing, and now,
Speaker 1: as you mentioned, now it's all about the concerns over
Speaker 1: peak oil demand, and that's really changed this sort of
Speaker 1: mentality and calculus of the industry. Is there anything that
Speaker 1: could flip it back in terms of the industry really
Speaker 1: wanting to ramp up investment again, or do you think
Speaker 1: this is going to be a long term I don't
Speaker 1: know if permanent, but a very long term persisting thing
Speaker 1: where even with soaring prices and actual oils come down
Speaker 1: a bit lately, but even with highly elevated prices, that
Speaker 1: impulse to really expand production just isn't going to come back.
Speaker 1: It takes some fairly sci fi scenarios. During the pandemic
Speaker 1: that we were spending as a plan at roughly three
Speaker 1: billion dollars a year on on upstream oil and gas.
Speaker 1: Pre pandemic, it was half a trillion, five billion, and
Speaker 1: then back in the glory days of too much capics,
Speaker 1: it started to approach a trillion. So the idea that
Speaker 1: it ever gets back to those levels it's just hard.
Speaker 1: We know the typical USC and P doesn't plan to
Speaker 1: grow more than three. We know the typical European integrated
Speaker 1: energy company is ex oil growth and is reallocating capital
Speaker 1: to the energy transition from mobility, solution, renewables, etcetera. And
Speaker 1: so you're kind of left with OPEC plus to not
Speaker 1: only increase their capital, but increase it enough to offset
Speaker 1: the following capex in these other buckets and for them
Speaker 1: to do that would be sort of willingly flood the
Speaker 1: market to take control. So that seems that first blush blush, irrational.
Speaker 1: So yeah, except for a world where a sequestration techn
Speaker 1: leques direct direct their capture worked, and we could flip
Speaker 1: a switch for next to nothing and put all the
Speaker 1: CEO two that we needed away, then you'd say, well,
Speaker 1: we solved the externality. Now let's go produce more hydrocarbons.
Speaker 1: But that's decades and that's more than decades away. This
Speaker 1: is also an extreme question, but it isn't. I feel
Speaker 1: like you you have these like deep thoughts on the industry,
Speaker 1: so we can ask you these questions. But is nationalization
Speaker 1: a possibility here? Like we have seen some instances of
Speaker 1: that in or at least one instance of that in Europe.
Speaker 1: And if you think of an industry that you know
Speaker 1: it's responding rationally to what the market is telling it.
Speaker 1: But the other hand, you know this is a vital resource.
Speaker 1: People need oil at reasonable prices in order to live
Speaker 1: their lives, at least at the moment. Would something like
Speaker 1: that makes sense. I spent years as a management consultant
Speaker 1: serving a huge host of national oil companies and there
Speaker 1: is a spectrum of extremely high quality national oil companies
Speaker 1: and extremely low quality ones. It's a bit of a
Speaker 1: philosophical view, right, can can the state be a better
Speaker 1: deliverer of volumes than the private market? Clearly on the
Speaker 1: choice of utilities, most nations have decided that utilities need
Speaker 1: to be heavily regulated but still stay in private hands
Speaker 1: with a very strong government overprint. And that's more or
Speaker 1: less worked, sometimes less so than others. But the wholesale
Speaker 1: nationalization by and large is not succeed e did for
Speaker 1: the typical oil company. And part of it is if
Speaker 1: you think about an oil company, that their core capabilities
Speaker 1: are taking risk, managing contractors, and allocating capital, and putting
Speaker 1: those three, especially risk taking into political hands generally just
Speaker 1: the the incentives to start alive. I want to ask
Speaker 1: about another niche commodity because you wrote about it and
Speaker 1: it seems instructive. The first chapter of your big paper
Speaker 1: is about rubber and how we actually have a superior
Speaker 1: technology that exists today to rubber, and yet rubber hasn't
Speaker 1: gone away. What's the story there? I found that really interesting.
Speaker 1: It goes back to the days where if you were
Speaker 1: smuggling rubber seeds or saplings out of Brazil. The penalty
Speaker 1: was the death penalty, right this This was a commodity
Speaker 1: that made parts of Zil extremely wealthy. It was a
Speaker 1: commodity that during wartime was it such high demand that
Speaker 1: we launched effectively in Manhattan project to try to find
Speaker 1: synthetic alternatives. And so, by and large, the old approach
Speaker 1: to rubber was a plantation. If you grow rubber plants,
Speaker 1: you harvest them and you make natural rubber, and then
Speaker 1: synthetic rubber. Petrochemical pathways were determined that could make synthetic rubber,
Speaker 1: and they each have slightly different properties and they exist,
Speaker 1: they coexist and kind of a share even today. And
Speaker 1: so rubber, if the analogy is electric vehicles, I think
Speaker 1: a lot of people that follow sperbs and think about adoption,
Speaker 1: think about buyin ay or zero percent. You know, if
Speaker 1: if e vs turn out to be like rubber, you
Speaker 1: get to a penetration. There's lots of internal combustion engines,
Speaker 1: lots of e vs, and rubber tells you that that's
Speaker 1: a plausible path. Since we're throwing out random commodities, can
Speaker 1: I ask, can we make a game show now to
Speaker 1: fertilize it like commodity. Commodities with Bob, commodities with bracket
Speaker 1: for the audience, just throw. Let's do a live event
Speaker 1: with Bob and the audio. I think commodity out and
Speaker 1: he can tell the history gets to throw commodities at me.
Speaker 1: Let's do it. Okay, we'll plan this. I think it'll
Speaker 1: be a fun event. Nothing unsafe though, like mercury, that
Speaker 1: would be bad. Okay, Uh, random commodity, it's not really random.
Speaker 1: But can we talk about copper for a little bit,
Speaker 1: because I think this is one instance where again the
Speaker 1: short term versus long term trajectory, or the tension there
Speaker 1: comes into play. Because we've had people on the show,
Speaker 1: notably the analysts over at Goldman Sacks, talking about how
Speaker 1: they are extreme dreamely bullish on copper over the longer term,
Speaker 1: and I think most people would agree that if we
Speaker 1: are moving to a more electronic future, we will need
Speaker 1: a lot of copper in order to make that possible.
Speaker 1: But on the other hand, if you look at a
Speaker 1: chart of the copper price right now, it's down a lot.
Speaker 1: It's down a lot. Yeah, scientific term, it's down quite
Speaker 1: a lot. So clearly like there's a mismatch there between
Speaker 1: the long run expectations and the short run expectations. So
Speaker 1: how are you thinking about copper? So the nickname that
Speaker 1: Copper earns is Dr Copper. Copper has a PhD in economics.
Speaker 1: And in the short run, we have tools where we
Speaker 1: from Bloomberg pulled every macro indicator you can think of
Speaker 1: and see what correlates best with copper, and copper can
Speaker 1: smell the economy better than just about any other commodity.
Speaker 1: And so in the short run it's extremely rational what
Speaker 1: copper is doing. It's smelling some level of recession and
Speaker 1: it's responding. In the long run, it's phenomenal. But so
Speaker 1: in the short run, the good news is we know
Speaker 1: as far as copper can fall. So, for example, when
Speaker 1: copper minds get to zero ev to when the cost
Speaker 1: of that worst ton of copper in the market equals
Speaker 1: the revenue of that ton of copper, those minds go
Speaker 1: to care and maintenance. And that's a great way to
Speaker 1: sort of prevent the free fall in all but the
Speaker 1: worst recessions. And so you know where your downside is
Speaker 1: on copper. On the upside, you know, the very simple
Speaker 1: way to think about it is the planet uses about
Speaker 1: twenty million tons of copper a year. Of mind copper,
Speaker 1: each e V we add is about point one tons
Speaker 1: hundred kilograms. So if we get to a world where
Speaker 1: every vehicle is an e V, that's a hundred million
Speaker 1: rounding up vehicles a year, that's ten million tons of copper.
Speaker 1: So we've got to not only keep the copper demand
Speaker 1: in the broader economy at that, we've got to add
Speaker 1: ten And in a world where we have watched copper
Speaker 1: grades fall for a hundred years, in a world where
Speaker 1: e s G issues around local community saying, wait a minute,
Speaker 1: why do I have to bear the brunt of mining
Speaker 1: to help the EV market some electric vehicle in the
Speaker 1: O E C D for example, right there really is
Speaker 1: a strong mismatch between where that demand could be in
Speaker 1: that supply. So we similarly look at are very bullish
Speaker 1: long term copper. There's some people that look at the
Speaker 1: high price of oil right now, the high price of
Speaker 1: natural gas, and they say, like, good, this will accelerate
Speaker 1: the transition, This will encourage more market forces to you know,
Speaker 1: invest in battery technology or people to buy e v s, etcetera.
Speaker 1: On the flip side, though, tens and particularly the second
Speaker 1: half of the times, even after oil crashed, like is
Speaker 1: essentially when the ev industry grew up or it really
Speaker 1: started to become a thing. And obviously Tesla had a
Speaker 1: phenomenal decade, basically invented the modern industry, and now all
Speaker 1: these other car players are scrambling to catch up. The
Speaker 1: twenty tens were also a really big decade for installed
Speaker 1: wind and solar capacity around the world. So even in
Speaker 1: a period of low commodity prices, it didn't seem to
Speaker 1: be an impediment towards a rapid expansion of renewables and alternatives.
Speaker 1: And so I guess my question is do high prices
Speaker 1: actually proved to be an accelerant of transition or new
Speaker 1: technologies or is the price mechanism or the short term
Speaker 1: price mechanism kind of irrelevant for the longer term transition.
Speaker 1: So I think the jury is out, but I'll throw
Speaker 1: out So one thought is what you mentioned is almost
Speaker 1: a second order thinking, which is, hey, the price of
Speaker 1: oil is high, that will hasten substitute shouldn't let me
Speaker 1: invest in the substitutes. The first order thinking is the
Speaker 1: price of oil is high, let me invest in oil,
Speaker 1: right that's kind of the simply yeah or coal or
Speaker 1: so um. You know. The other thing I'll throw into
Speaker 1: the mix is high stable prices are much more likely
Speaker 1: to drive substitution than the incredibly volatile prices that we've seen.
Speaker 1: So to some degree, the fact that oil was negative
Speaker 1: two years ago, was okay last year is great right now,
Speaker 1: doesn't provide a stable competitor against which to plan the
Speaker 1: energy transition. What about here, like the role of government,
Speaker 1: so sitting aside nationalization, Are there other things governments could
Speaker 1: theoretically do to de risk production? You know, you mentioned
Speaker 1: every resource player is worried that the last ten years
Speaker 1: of the life of this mind will actually be a
Speaker 1: zero because the transition is coming. Are there other things
Speaker 1: that policymakers could do too? Do you risk some of
Speaker 1: these decisions? What policy makers should do is reduced the
Speaker 1: demand for the things they want to get rid of
Speaker 1: and not subsidize that demand, even though in the short
Speaker 1: run that's quite painful, and it almost harkens back to
Speaker 1: Jimmy Carter where President Carter told the nation were a sweater,
Speaker 1: reduce speed limits to fifty. So there's lots of things
Speaker 1: you can do to reduce demand we have not seen
Speaker 1: the political will to do that, and in fact, some
Speaker 1: of those efforts get mocked. Right, So instead of reducing
Speaker 1: speed limits this time around, we've reduced taxes on gas right, right,
Speaker 1: And so that's counterproductive if your goal is to reduce
Speaker 1: the price of something. Subsidizing the price of something doesn't
Speaker 1: reduce its demand. But but telling Americans, for example, hey COVID.
Speaker 1: During COVID, we were very effective at reducing oil demand.
Speaker 1: So we'd ask all of you to stay home for
Speaker 1: another year to reduce oil demand feels like a nonstarter.
Speaker 1: I would be very favor of that policy at any
Speaker 1: mention of more reasons to work from home. I like
Speaker 1: commands to the office, but I like recording in the
Speaker 1: same studios. Thank you, thank you. Yeah. So, certainly, in
Speaker 1: in the short run, markets will do what they're going
Speaker 1: to do, and a lot of what we've talked about
Speaker 1: is kind of that long run. But yeah, I think
Speaker 1: the answer is when we come out of this recession,
Speaker 1: we're going to go back to a world of lower rates.
Speaker 1: Right in the long run, our our strategist has a
Speaker 1: chart showing interest rates for thousands of years. They all
Speaker 1: trend towards zero. So someday rates will fall again and
Speaker 1: someday that will incentivize investment. But that investment, right, we
Speaker 1: need to spend a lot of money, not in the metaverse,
Speaker 1: but back in the physical world, and it's going to
Speaker 1: be rebuilding our energy systems, maybe building redundant energy systems,
Speaker 1: given how geopolitics has has caught everybody up this year,
Speaker 1: and we've only got to underpin our old energy systems,
Speaker 1: the hydrocarbon based ones. We've got to build electrical based systems.
Speaker 1: And so there's just gonna be a lot of activity
Speaker 1: in the physical world once we get out of the
Speaker 1: time we're in now. This metaverse thing is proving to
Speaker 1: be a real distraction. I mean, it's like we have
Speaker 1: a lot of work to do in the in the
Speaker 1: real world. Yeah, of like actual molecules instead of pixels.
Speaker 1: Like we gotta get we gotta get people focused on
Speaker 1: the real world again, don't I I feel like that's
Speaker 1: what we've been doing for the past two years. I
Speaker 1: was last week in eastern Namibia at a site visit
Speaker 1: for an oil and gas explorer out there, and to
Speaker 1: see a local Namibian collecting seismic data dressed like Iron
Speaker 1: Man with these nodes that he's pushing into the ground
Speaker 1: that are GPS linked and he's collecting data truck and
Speaker 1: you look and say, that is so much more sophisticated
Speaker 1: and interesting than the next app that gets me my burger,
Speaker 1: you know. And we talked about this, We did a
Speaker 1: recent episode with Peter church Sack in about like this
Speaker 1: idea of like how much the sort of talent drain
Speaker 1: that the that the extract of industries have seen, especially
Speaker 1: over the last decade, and for all kinds of reasons
Speaker 1: do people not appreciate, like how much tech is involved
Speaker 1: with extraction these days? And like is there a lot
Speaker 1: of exciting tech on the horizon, even if it's just
Speaker 1: to get better like you know, finding natural gas or
Speaker 1: finding other resources. Yeah, it's a completely missed story. And
Speaker 1: if you think about g p US, before Crypto needed
Speaker 1: GPUs for minding the oil and gas industry was buying
Speaker 1: everyone they could for doing seismic processing and interpretation and
Speaker 1: three D reservoir modeling. And so it's an extremely data
Speaker 1: intensive industry, software intensive industry, tech intensive industry. The capital
Speaker 1: projects are bigger than anything we do short of mood launches,
Speaker 1: and it's just sort of assumed to be part of
Speaker 1: the old economy. So, yeah, I'm a huge proselytizer for
Speaker 1: for how cool oil and gas tech is. I was
Speaker 1: going to ask. This kind of raises the question of
Speaker 1: why venture capital doesn't get more involved in this space.
Speaker 1: Is it just it's easier to go into software with
Speaker 1: you know, lower startup costs and less capital actually needed
Speaker 1: versus big, you know projects in the real world. Yeah,
Speaker 1: part of it might just be that sort of capital
Speaker 1: is the riskiest taking capital, and so maybe they're looking
Speaker 1: an oil and gas field once it's in development. Yeah,
Speaker 1: it's reasonably well understood what the economics could be, and
Speaker 1: maybe venture capital is looking for things that could massively
Speaker 1: disrupt the future of the World's not clear to me.
Speaker 1: Well this was such only for the value Oh sorry,
Speaker 1: I'm just gonna say, yeah, for lateral thinking. I would
Speaker 1: encourage any investor to spend as much time thinking laterally
Speaker 1: as they can, even if it's an obscure think laterally,
Speaker 1: what does that man? Just you know, stepping out of
Speaker 1: your sector of the market and just looking across the market,
Speaker 1: looking across history, just saying you know, what does this resemble,
Speaker 1: what does this feel like? What sort of interesting angles
Speaker 1: that other sectors have taken that could be applicable here.
Speaker 1: Bob Brackett, this is a real treat, very interesting thinker
Speaker 1: on these questions and sort of like kind of mind expanding.
Speaker 1: So appreciate you so much for coming out online. My pleasure, Joe,
Speaker 1: my pleasure tracing so much. Thanks so much. That was great. Yeah,
Speaker 1: that was like, that was really good. Uh. That was
Speaker 1: this idea that like, commodities just don't get disrupt dude,
Speaker 1: that they live on forever. The fact that there's been
Speaker 1: a war on coal since the since the thirteenth century.
Speaker 1: It's like really useful stuff I think to appreciate when
Speaker 1: thinking about these problems totally. I love looking at historic
Speaker 1: parallels for these types of things. And the one thing
Speaker 1: that struck me like, yes, absolutely, energy transitions or transitions
Speaker 1: away from commodities never seemed to be linear and they
Speaker 1: never seem to happen completely going by history. But the
Speaker 1: other thing that I thought was really interesting that Bob
Speaker 1: pointed out was this idea that there is an assumption
Speaker 1: that as people start moving away from a commodity, the
Speaker 1: price will go down, but demand is only one half
Speaker 1: of these supply demand equation and so if you have
Speaker 1: capacity cut at the same time, then prices can actually
Speaker 1: go up. Yeah, that's a that's a really important idea.
Speaker 1: And again I think we sort of got lulled into,
Speaker 1: you know one is again we think in the frame
Speaker 1: of consumer tech and like a new you know, flat
Speaker 1: screen TVs come along, and then whoever still holds the
Speaker 1: stock of you know, normal TV, it's like sells them
Speaker 1: super cheap just to get rid of the inventory. Right.
Speaker 1: And so that is the frame that we think demand
Speaker 1: for something goes down and then whoever has it just
Speaker 1: sells it for very little. But in the case of
Speaker 1: Capex heavy extractive industry is everyone could see those charts.
Speaker 1: I don't know whether it's gonna be that like oil peaks,
Speaker 1: but everyone's looking at those charts, and you could have
Speaker 1: a situation where because demand is going down, supply contracts
Speaker 1: even faster. Right. And the other thing that struck me,
Speaker 1: I really like the phrase Bob used was a local
Speaker 1: E s T versus global E S G. Because this
Speaker 1: is something that you know, we recorded an episode on
Speaker 1: this recently when it comes to Chile and deserts and
Speaker 1: things like that. But it does seem like there is
Speaker 1: a tension here the sort of like everyone agrees that
Speaker 1: we need to get more metals out of the earth
Speaker 1: in order to electrify our future, but no one really
Speaker 1: wants to be the place that's actually doing the mining. Yeah,
Speaker 1: it's a real big tension because as we know, like
Speaker 1: rich countries more e vis large corporate interests in decarbonization,
Speaker 1: and everyone has their like climate goals they're zero or whatever,
Speaker 1: and every company wants to tout it green credentials, they're
Speaker 1: offsetting all their emissions or whatever. But on the other hand,
Speaker 1: these industries like copper, like lithium, etcetera. They damage the
Speaker 1: water supply, they may damage the air supply. Like these
Speaker 1: are like really dirty industries on a local basis. And
Speaker 1: this tension, I'm sure it's only going to increase. And
Speaker 1: the math that Bob laid out about copper demanded like
Speaker 1: this can be a huge burden. Yeah. And the other
Speaker 1: thing that strikes me is like it doesn't really seem
Speaker 1: like there is a role for the government to play
Speaker 1: here in trying to smooth some of these cycles or
Speaker 1: offset some of these like longer term motivations and concerns,
Speaker 1: maybe not as extreme as outright nationalism, which I don't
Speaker 1: think would happen in the US at least, but other ways,
Speaker 1: as he outlined, Yeah, and of course we you know,
Speaker 1: we had that recent conversation with Sconda and Rory about
Speaker 1: could the spr be used to smooth the booms and
Speaker 1: bus And in theory, that's a model that could be
Speaker 1: applied to other commodities, etcetera, to create that guarantee of
Speaker 1: demand so that people aren't terrified by demand curves that uh,
Speaker 1: you know, eventually start turning down. But it's gonna be
Speaker 1: really tricky, all those scary demand curves. All right, shall
Speaker 1: we leave it there. Let's leave it there. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway. And
Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at
Speaker 1: The Stalwart, follow our producer Carmen Rodriguez at Kerman Arman,
Speaker 1: and check out all of our podcasts Bloomberg under the
Speaker 1: handle at podcasts. Thanks for listening year to