Texas Oil & Gas Fuels Economic Growth Amid Global Energy Challenges
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Dean what impact are geopolitical issues
having on the oil markets well there’s
clearly a premium when you’re looking
and you can say glass half full or glass
half empty in the way oil markets and
prices have been going but despite all
the geopolitical uncertainties
especially in the Middle East we still
have only 80 to 90 oil here
the main uncertainties and the things
that could affect prices cancern iRun
mainly so the scenarios around that if
that escalates that’s the fork in the
road that could affect global oil
markets in a substantive way but baring
that it is pretty remarkable that
despite all of the uncertainties from
Russia Ukraine what’s happening with
Hamas and Israel plus Iran peripherally
involved that we only have 89 dollar per
barrel oil here what does I wrong plays
such a large role in oil markets is the
amount of barrels they could put on the
market what caused them to be so
influential in the global market for
oil well if you think about the attack
on a refiner complex in Saudi Arabia it
was Iran backed
houthis from Yemen that sent missiles
that took almost five million barrels
per day of of export capacity by blowing
up these tanks in ABC Saudi Arabia the
straints of Hormuz going right by Iran
they threatened in the past to mine
those so if you actually got into a
wartime scenario it’s substantial and
it’s material because so much of the
carrier traffic goes right through there
so if if you cut off the ability to
trade through the straight support moves
that has a huge Global repercussion is
this ever going to change or just
because of the geolocation of Iran will
they continue to always play a large
strategic role in the global oil markets
well it really is that and it’s the fact
that the
regime is fundamentally misaligned with
Saudi Arabia with with Egypt and with
the West so as long as it’s viewed as a
pariah and there’s this even remote
threat and these are really low
probability scenarios because if it goes
down that road it would require greater
Global intervention to fix it but high
impact low probability kind of scenarios
are the things that people pay attention
to especially when trading and looking
at you know Financial Market activity to
go with it this it’s a pariah that you
you don’t want to kick it because the
bees might come out it’s just this weird
seems like it’s a very delicate just
because the disadvantages of starting a
conflict there that could have not just
on the oil markets but on on the global
economy because the global economy oil
demand is is set to achieve consecutive
records in 2024 and 2025 the US Energy
Information Administration expects
consecutive Global oil supply records of
a record of 102.4 million barrels per
day in 2024 and 104 2 million barrels
per day in
2025 what’s driving that growth and with
this Iran issue can the growth be met
well there are a couple of layers of the
onion here the growth is got two levels
that are record levels and it’s notable
that between their March and April
assessments of global oil markets that
they increase retroactively the
assessment from last year by 1% or
around a million barrels per day so this
is material and that says that 2023
three on average in their view is around
102 million barrels per day now up from
101 this year it raises it to
102.9 now so up from even what we had
last month which was 102.4 so adding a
half million barrels per day of demand
this year and then looking at next year
the exiting it was at like 103.7 or8
million barrels per day it’s now up to
104.2 as you just mentioned so these are
substantial upgrades retroactively
carries in and affects the activity this
and next year but largely if you look at
the transaction and the way they changed
their projections for this in next year
it’s largely advancing growth that was
expected to happen by 2025 into this
year so this is an interesting dichotomy
because we’re looking at the headlines
by the day and the concerns about
economic growth and will will there’ll
be uh monetary policy changes cuts and
interest rates that might help cushion
or stimulate activity along the way
this says that the they are expecting in
the base case more activity this year
than what they had previously expected
and that it’s consequently slower when
you’re getting into 2025 in their view
Cuts I’ll go on the record are not going
to happen the CPI report came in as
Bloomberg said hot hot hot it was hot
inflation
sticky what happens if we don’t get Cuts
this year we’re also running out of time
for the three projected Cuts maybe is
there one possibly on the table I I
think the fed’s going have a very hard
time of orchestrating a soft Landing
it’s the way things are looking well I
think your listeners will appreciate if
they’ve been following the Outlook in
our conversations over the last couple
of years I’ve consistently said I believ
that price inflation would remain sticky
and there are a lot of reasons for that
from energy transition to Commodities to
the emphasis on things that you know
with Workforce and supply chain
challenges at various points haven’t
been so easy to clear up and I think
there is a seasonal aspect to what’s
happening right now the latest report
for the US came in at 3.5%
year-over-year so it shows an escalation
for two consecutive months it’s not the
direction that the FED really wants
things to go it’s consistent by the way
with increased spending increased
industrial activity that we’ve continued
to see and it says the economy is strong
and it’s strong not just on us basis but
on a global basis has been upgraded by
the IMF as we were the international
monetary fund as we were talking about
in the last quarter or so so this is
It’s it’s a good news good news story
and a good problem to have in the sense
that global economic growth and US
economic growth are continuing I do
think because of the debt overhang both
at the household and corporate levels
and the New York Federal Reserve their
credit survey would say as a fourth
quarter that’s the latest now 17 a half
trillion dollars worth of debt held by
us households that’s a record high the
delinquencies from auto loans to
mortgages to credit cards that they
picked up but they’re not at
recessionary levels they’ve just picked
up and that despite the fact that the
delinquencies are up Auto repossessions
and you evictions from homes those
things are not up so people are have
they’re stressed and they’re managing
but it’s an issue and if you have to
spend more to pay for interest costs you
don’t have as much discretionary income
so at some point there has to be an
issue the where it’s downward pressure
on spending and discretionary income
corporately we’ve talked about 5 A5
trillion dollars worth of corporate debt
that must be refinanced this year at
rates that are roughly three times
higher than they were at the end of 2021
the international monetary fund the bank
for international Settlements a lot of
the official agencies have talked about
the downside to Global growth as a
result of Corporations hitting this wall
the bank for international settlements
has an interesting research piece out
showing that this basically could
consume for for especially small and
mediumsized Enterprises as much as one
quarter
that their profits after taxes so it is
a big deal and it is a serious headwind
to continued growth but we haven’t hit
the wall yet and you’re still seeing
economic activity go along at a pace and
price inflation consequently Rising
where the FED as you said doesn’t
necessarily have to cut a lot but we
need to see where they go because I
think that there’s a very narrow bridge
to walk to make sure that you can
continue to have strong growth going
forward and make sure it doesn’t drop
off so I sure they’re watching this I
know they’re watching this and this is
the kind of thing where they’ll figure
out what if any Cuts will be necessary
to make sure that they can sustain
growth and not have a spiral that comes
off of it narrow bridge it’s a tight
rope there’s no there’s no other way to
say it that the FED is walking a tight
RPP these corporations are going to have
to refinance their debt something’s
going to have to cut job loss they’re
going to cut jobs and consumers are
strapped with credit card debt they’re
strapped with Mortgage Debt they’re
strapped with loan debt some not very
good interest rates then just things
continue to deteriorate and I’ll use the
term do things break at that point and
then when things start to break does the
FED act or do they or the FED just say
we got to get to that that 2% Mark we’re
going to get to that 2% Mark things are
going to break we’re going to get there
well it’s pretty clear that they’ve
backed off of the 2% and they’re paying
you know putting more weight on labor
Market activity right now and the fact
that the labor market is still solid so
we added over 300,000 jobs last month
the unemployment rate sitting at 3.8% is
historically still low it’s it’s not
saying that they need to rescue the
labor market at this phase so that’s
really I think the calculus that the FED
is going by and we’ll see how markets
respond to that if the FED does not cut
interest rates this year how do the oil
markets
react well we’ll get into I I think the
relationship the inverse relationship
that’s historically gone between its
interest rates as they affect the
strength of the US dollar and then hence
an inverse relationship with prices and
you know your biggest effect on the US
dollar is really the term is hot money
chasing interest rates so if I increase
interest rates I I attract a lot of
money into US dollars from other
currencies the US dollar appreciates the
US dollar is still sitting you know
basically close to it alltime high it’s
not at the all-time high a little error
came out of it in the last quarter or so
but it’s not big movement like you’d
expect if they start the path of rate
Cuts you’d expect other currencies to
appreciate around the world you know
people to move out of US Dollars oil
becomes relatively more expensive excuse
me um more affordable in emerging
markets around the world in local
currency terms that stimulates demand
there’s also a commodity trading aspect
where you if I’m expecting interest rate
Cuts I might actually hedge that by
buying Commodities hence also
potentially supporting oil and other
commodity prices and notably here
despite good economic news overall we
have gold basically at an all-time high
you have crypto at an all-time high you
have a lot of things that are sometimes
bearish indicators that are at all-time
highs so it really is an interesting
dichotomy there’s a lot of things that
don’t make sense in this market there’s
really no way to describe it overall
what role does fed policy play in the
oil and natural gas markets you said
that they they ying and yang together
but but what role do they really truly
play together I mean monetary policy
isn’t meant to affect or manage
commodity and oil prices so much they
are designed to really manage price
inflation where you know oil is still a
big part of that and the affordability
of fuels especially for transportation
now for materials increasingly important
agriculture as well all of these things
kind of are tied together so that there
is a causality that goes through the
greater system as a result of that and
they have to keep keep you know mind on
where that is that’s not you we’re
talking about the interest rates the
other thing that’s quietly been
happening is you know during the crisis
time we’re talking about quantitative
easing expanding the balance sheet and
it’s just been the opposite where a lot
of liquidity has been taken out of the
market by the fed and other central
banks that’s the other thing that’s
quietly happening that’s part of why
longer term interest rates have been
picking up despite the fact that the
near-term interest rates of basically
the FED funds future is sitting at 5.3%
it hasn’t really budged much I think
people expected many more Cuts coming
into this year it’s clear that’s not
happening so as that happens it’s
interesting last week it’s the first
time since really February that we’ve
seen this premium for lower corporate
credit quality start to go up above 8%
if you were comparing fed funds Futures
to hot yield and that for our sector
matters because of corporate credit
quality across Independence generally
not always being investment grade so you
have to really pay attention to that and
a lot of smaller again companies that
have to borrow are paying higher rates
for it what impacted Global central
banks have on the oil market like the
ECB the the bank of Japan what impact do
they have on the oil markets when they
may decide to make a decision well think
of the central banks as trying to
coordinate so globally you know they’re
basically reactive to what the FED is
doing at this point they’re not really
moving ahead of the curve the issue has
been that the FED raised rates so
quickly and so much that a lot of
central banks around the world couldn’t
follow to the same extent hence that
opened a so-called carry trade where I
would borrow in Yen and
Euro translate the money into US dollars
invest in us treasuries and maybe have
maybe hedge my foreign exchange risk
maybe not but either way I’m earning a
real return by and this is part of why
the Dollar’s been so strong and it’s
part of why as the fed’s expected to cut
that the air would come back out of the
dollar there’s interesting times that
the the euro is expected to go to a
dollar 12 by the end of the year further
strengthening some estimates said to put
as high as as
A14 we export 60% of natural gas to
Europe what impact is that going to have
with a strengthening Euro declining
Dollar on the natural gas market from an
export perspective well keep in mind
that the gas these contracts are largely
traded in US Dollars like oil is so you
know if the dollar gets weaker you’re
now making natural gas even more
affordable given the fact that we’ve had
two consecutive relatively warm winners
though we’re sitting here with pretty
full storage in Europe and in the
US at least above the fiveyear norm the
the range that we would look at we’re
sitting here for the first quarter of
the year with the lowest inflation
adjusted natural gas prices ever for the
United States I mean this is
historically low so it actually should
be stimulated to demand and if monetary
policy follows you know that that’s
pressure to help keep it in check
natural gas demand is growing 24 and 25
is projected hit record demand where’s
that demand coming from is that coming
from data centers with the increase of
AI the gpus or or what is driving the
record demand for natural gas like there
are you know private projections that
would say oh I’m GNA see you huge
increases in data center driven demand
AI driven demand for electricity in the
United States in Europe and Western
economies especially and I think that’s
real I think that’s likely to stimulate
natural gas demand but on net the eia
the Energy Information Administration
and others Still project that advanced
economy natural gas demand is basically
flat in fact backing some out of the out
of power out of the power sector in the
United States Forest projections of the
next six seven years where you’ve got
substantial growth it’s especially Asia
Pacific and it’s not just India and
China by the way on the coiles of that
the rest of a Asia Pacific emerging
economies are really growing
resoundingly in their demand for natural
gas they need it both for power for
industry as a processed fuel they need
it during winter season for heating they
don’t have a lot of domestic supplies of
it so the the exports that are flowing
globally a lot of the growth in this
will continue to go not just to Europe
you know for security purposes but to
Asia Pacific the Middle East is also
growing substantially as is Latin
America so it truly is a global
phenomenon that’s driving natural gas
demand up the Asia one’s interesting is
that just is that going into factories
you mentioned the heating for the
households I don’t know how why that be
but there’s a big Factory growth there’s
a lot of factories popping up in Vietnam
there’s Apple’s now 10% of the iPhones 1
in 7 now are manufactured in India how
large is the demand for natural gas in
India
well I I don’t know the the quantum
exactly off the top of my head but it’s
been it has next to China in the region
the second highest growth and in terms
of substantive growth they’ve been a
major consumer of liquefied natural gas
cargo is coming in they’ve contracted
long term for a lot of supplies but
coming out of Australia and Papa New
Guinea it’s continued to be strong and
again without the domestic Supply as
much they really do need you know
reliant on the globalization gas markets
to bring that in but from Bangladesh to
Taiwan to Singapore you’ve got the more
developed economies but
from Bangladesh to Vietnam you’ve got a
lot of industrial economies that are
growing and in terms of the heating
demand just to reinforce that whether
it’s Japan or South Korea if you get in
Northern Asia a cold winter just like us
they bring in a lot more gas to feed
that so there there is especially in the
developed economy economies across the
region a heavy Reliance on natural gas
to feed it is that the seasonality is
that Texas natural gas I asked that
because Texas produced 27.8 billion
cubic feet per day of dry natural gas
last year is that is that where that gas
is going is it Texas gas going Asia
Pacific so out of that 27.8 you roughly
half is maybe consumed in the state
that’s between and we are the largest
industrial consumer of natural gas we’re
the largest residential and Commercial
consumer of natural gas in the us but we
only need about half of what we produce
now out of the amount you know the the
other half that’s going
externally roughly half of that going to
Mexico by pipe and then the other half’s
going by LG so you’re seeing and and
some of it’s greater than half that’s
going 60% is going by LG and out of that
70% of that’s recently been going to
Europe it used to be that most of that
would have gone to Asia so really is
Russia’s war in Ukraine for the last
couple of years it’s upended the
regional balance of it and over time
maybe that sorts itself out maybe not at
least as far as we see right now with
Russian supplies being off the global
market largely for gas with northstream
one and two pipelines having still been
out of service you’re really looking at
continued needs and a good demarcation
of that in the last week or two you’ve
seen the headlines out of Germany where
they’re you know returning and expanding
and re redoubling now on natural gas
plants now they’ve coupled this with a
commitment that by 20 or 30 or 40 you
that they want to in the longterm
transition this to hydrogen but make no
doubt about it the fact that a very
industrial German economy is not
competitive without having energy and
right now a reliable affordable source
of energy is really important natural
gas is the way they’re going natural gas
is Affordable hydrogen’s expensive in
California it’s over $200 if fill up
your hydrogen car I I don’t know what
that would be to heat your your house
obviously California has energy problem
there’s a regulation coming down now
where people going to be taxed for
collecting
solar where does this policy end where
it just because it seems to me that if
these policies are forcing consumers in
a recessionary environment with high
interest rates to pay more it’s only
going to accelerate a potential economic
downturn in the energy cost could be a
driver of that especially in California
yeah California this is interesting
because they have the highest rates in
the nation they’re about three times
higher than what Texas pays and it
hasn’t made Nationwide headlines but
over the last couple of years in
response to legislation there they’re
implementing income household income
based electricity charges so imagine you
spend 20 or $30,000 to get your
household off of the grid and largely
self-supply electricity for your needs
but you’re still connected to the grid
well if you’re a higher income household
you’re going to be asked with the
compounding of fees to pay upwards of
$200 a month right now this is happening
this has been implemented now there’s a
proposal from the Public Utilities
Commission in California to repeal it
but that hasn’t happened yet so far the
marching orders are by July that this
goes in everywhere so you are now as a
household literally submitting your IRS
tax return to your
utility and the these yeah $200 a month
for the Privileges of just being
connected without any of your usage
charges on top of it so this is quite
substantial it does affect affordability
even for
$180,000 per year and higher is their
higher income bracket which in parts of
California with the cost of living there
is still maybe middle class for for many
other parts of the country I want to
make sure I heard you right on this you
submit your tax return to utility is
that is that right yeah and over the
last year the CPU held proceedings
explicitly where the utilities the major
ones uh pg& San Diego Gas and Electric
Southern California Edison all three of
them petitioned to say I don’t want to
be the Arbiter trying to determine
somebody’s outcome please use a third
party service so then they hauled
Equifax in had them testify and do a
trial run and Equifax said well we can
only be about three4 accurate in
predicting a household’s income based on
all they we’re using uh
it they it’s called the work number but
basically everybody’s payrolls by
companies they track this and to the
extent that there is you know aboveboard
information that they can track from
corporations and tax returns and things
that are getting submitted only with
three quarter accuracy could they be
predicted so the cpuc mandated that the
utilities expand the reporting mechanism
they use for lower income programs and I
could send you a a link to pgn’s website
but the first thing on there is send us
your IRS 1040 and if that’s not
sufficient big letters it’s you we may
ask for
more it it’s really astounding both to
have the it’s there’s no other place
I’ve seen that’s implemented charges
based on electricity and let’s be really
clear the economic theory of what’s
efficient is you don’t charge anybody
more than the marginal cost to get them
onto the network because you want a
positive networ effect with all of this
and this is
substantial some of the articles about
it have talked about one in4 California
households being behind on their
electricity bills behind and basically
as systemwide cost the root problem here
is that the systemwide cost in
California has gone up the prices become
unaffordable and as a result they’re
leaning back on the only constituency
they’ve got that can afford it which are
higher income households and it’s just a
cautionary Tale I mean it’s as in urot
the electricity reliability Council of
Texas that covers over 90% of Texas
electricity we’ve implemented programs
that you know frankly from a wholesale
Market perspective alone cost almost 13
billion doar last year for the estimate
from the Independent Market monitor for
OT so billions right I mean these are
and there’s another ancillary service
called a performance credit mechanism
that they’re potentially putting in
place here this year or implementing
that’s another billion dollars plus and
they been headlines this week about
questioning whether it’s actually more
than a billion but use the ausome powers
Dr Evil you know it it’s not million I
mean it’s billions of dollars we’re
talking about this is big
money what what’s next and then I go to
what’s next but then the first I go to
I’m going to put on my economics at
cyber security Insurance that’s
expensive then you have to get dno
insurance you have to get liability
insurance and now what’s that’s going to
be the next tax that’s passed along
because you have cover the insurance
cost what happens when there’s a data
breach that’s going to open a a whole
can of worms and a lot of the companies
in the valley in San Francisco Northern
California very highly paid Executives
they’re mostly paid in stock based
compensation they’re not paid in cash so
now do you have to submit your your
stock based compensation as well as your
cash based compensation to pay this then
if you look at it from an energy
perspective why why would anybody want
to put solar why would anybody want to
try and do sustainability go go off the
grid and on the back side of that is
this going to be aack on the on the
individuals bought electric vehicle now
they’re going to have to pay even more
to charge it and does that lead to a
shift back to internal combustion
engines that use a little thing that
Californians consider dirty gas that’s a
derivative of oil is that where this is
going to
go well California’s mandates basically
phase out internal combustion engines
you know in in the next decade or so so
that’s going to be an interesting
challenge you raised an interesting
point in questioning whether you’ve got
any incentive to invest in household
efficiency in solar panels to get off
the grid if you’re still going to have
to pay for the grid connection that that
is interesting I think the idea of
raising these fixed charges is that they
might be able to lower the usage charges
so they’re not three times greater than
the rest of the country so maybe the
usage component becomes relatively more
affordable but net net the high higher
income householders basically been taxed
a lot there you already have the second
highest tax rate in the country you
might as well Pass New York and make it
the highest tax rate this is just
astronomical but you’ve got a great
governor governor Abbott they’re moving
to Texas Tesla moved to Texas and I saw
Governor Abbott put out a tweet number
one employer and Austin is Tesla over
22,000 individuals work for Tesla in
Austin you have Oracle move their their
headquarters there the one that I was
talking to an economist the other day in
California I said when do they wake up
and realize and he said they’re not and
I said okay let me ask you this scenario
what happens when Wells Fargo and Visa
decide to move to Dallas oh that’s going
to wake some that’s going to wake
somebody up bring all those jobs to
Texas it’s the Texas economic engine
that’s working Texas accounted for
42.7% of all us oil production in 2023
it’s highest level since 2020 you’re
creating jobs you’re creating oil and
not just not just jobs in Tech you’re
also creating jobs in the oil industry
you’re also one of the largest employers
in the trucking and Logistics Industries
do you see the trend of the Texas oil
demand continuing to
grow we don’t predict it with Precision
but yes because the peran Basin in
particular is your most prolific and
growing source of oil supply in the
United States it really is the hotb of
activity and Innovation for the industry
so it’s very likely that especially as
the Colorado of the world continue to
struggle with whether they even want a
fossil fuel energy industry there you’re
continuing to see Texas and I I was in
Houston yesterday listening to governor
abot and he was at the conference where
I was also participating and he
basically said you know we move at the
speed of business we respond to business
they are very proud of the policies put
in place to attract all the corporate
headquarters that you mentioned and it’s
growing and you’ve got roughly 1500
people a day moving to Texas so this is
a big deal because demographically
economically the stronger getting
stronger here and these policies really
do reward good policies and good
behavior it goes the economy
strengthened the Texas economy is
strengthening and it’s a diversified
economy so you’re producing 42.7% of all
us oil how much of that oil is exported
overseas okay so the short answer in
recent months and very close to the
average for last year is almost four
million barrels per day of just crude
oil but there’s almost that again of
different other products so refined
products and Natural Gas Liquids and
when you look at Global oil markets
which is really the lens through which
we’re trying to assess all of this the
totality of all the liquid supplies
matter whether they’re finished products
or not a barrel is a barrel and barrels
are relatively fungible so this makes
you you’re talking basically almost
eight million barrels per day going out
to Global markets Texas Imports about a
million barrels per day a little over of
crude and other liquids but they’re of
different qualities so for example you
might take heavier oil from Canada
process it you these quality differences
come into play but net it’s at least 7
million barrels per day when you account
for all the liquids is the United States
once again net exporting oil again to
the world we have been and it’s
interesting because it’s swung all over
the place about three weeks ago we had
net exports of 4.2 million barrels per
day of total petroleum and that was the
second highest weekly net export total
on record ever I mean it was amazing but
in today’s release coming out this
morning it’s only down to 800,000
barrels per day so you really do you’ve
got holiday seasonality you know with
Easter Passover you you’ve got a lot of
things that kind of vary as you’re
transitioning now toward summer driving
season with some of the products and the
way they shift so there there is a
seasonality to this you kind of smooth
it out and in general we’ve been going
you know net exports of a little over
two million barrels per day kind of
chugging on but we need to watch it
because if those things drop off
substantially then that could be a sign
of where Global markets are going and
the potential slowing and concerns if
they remain super hot it’s just the
opposite so again this volatility from
week to week is really interesting
that’s very interesting so low export
that’s going to mean a weak global
economy and a high export will mean a
strong global economy yeah High exports
are going to tell you that is a big
Global pool for energy especially oil
and as the economy goes so this is
bedrock right as the economy goes so so
goes your demand for both oil and
natural gas and total energy because you
don’t get any form of economic growth
without having energy in some way shape
or form to supply it it could be
electricity but for transportation for
materials it really is oil and gas that
are feeding it is is oil and gas the the
backbone of the global
economy absolutely so over 90% of your
energy for transportation stems directly
from oil in the power sector it might be
close to 30% right of you know that’s
natural gas on a global basis here in
Texas you know depending upon the time
we’re talking 40 and 50% is natural gas
so it really is critical both to the
state economy to the US economy it’s
huge pull for exports you know we’re
continuing to see not just because of
Russia’s Waring Ukraine but natural gas
exports have continued to grow the
export capacity of this you we’ve got
the debate uh federally about the pause
on potential prospective export
approvals which you know in our view is
really fundamentally bad Economic Policy
it’s it’s bad for investment and frankly
it’s bad for their own environmental
goals of trying to supplant coal and
lower emissions globally on all fronts
growing natural gas demand growing oil
demand it’s both good for the country
and for the world in terms of human and
econ IC development and making
environmental progress where we’re
producing it in the most environmentally
responsible ways here at home I’m going
to ask you the contrarian question
because I love to get your opinion on
this because certain individuals want to
remove all traces of oil if we removed
oil from the global
economy where are we do we even have a
global economy if oil was removed no you
really don’t and let’s be clear I mean
despite people trying to phase out and
incentivize the Alternatives at the end
of the day whether you look at Alex epy
in his book fossil future you could talk
about vaka schmeil in his book on how
the world really works there’s really
thoughtful analysis that takes apart
Transportation Systems agriculture you
know think of Agriculture where 20 to
30% of your food cost off the top is
just energy related and most of that is
oil and natural gas between
Transportation fertilizer feed heating
through the winter you know what keeps
your turkeys alive in Minnesota if you
you know horel being based there right
you’ve got a lot of things that really
say you need to have oil and gas and
from a productivity standpoint how it is
that the world feeds eight billion
people on the planet with the resources
that we’ve got has only been made
possible by productivity so if you peel
back the layers on and both of these
authors actually Epstein and SM both do
you talk about the productivity per
gallon of diesel for example in
transportation
for feed for
fertilizers all of the progress that
substantially made it so that we have
the global food system that we do you
without modern fertilizers that are
mainly nitrogen based natural gas-based
you know you wouldn’t have the
productivity that you do so the global
system the global economy and really
being able to feed the world depends on
having these resources yeah sm’s book
was great how the world really works
Bill Gates actually recommended on Gates
notes it was a really it was like
textbook you’re back in college The Way
It Was Written but it was really
informative it was a really balanced
approach to where we are from a global
economy and the role that energy plays
in the global economy the the economies
of the world are interconnected and you
want to use the term oil oil is the pre-
Broadband with it’s that it’s that
critical to the global economy here’s an
interesting thing to ask you to generate
$1,000 dollar of GDP in 2023 the United
States economy required about 13 gallons
of oil compared with 14 gallons in China
and 22 gall balance for emerging markets
how and
why well it’s interesting these are
calculations that I’ve done based on you
the official data sources but using when
you translate an economy into US dollars
you can either do it with or without
adjustments for for the purchasing power
of the of each currency and if we’re
just straight up using the actual
exchange rates this is what you get and
it’s interesting because there used to
be a much larger gap between the US and
Emerging Markets especially China and
The Narrative was that you China was
growing really fast and its oil
intensity was so high so therefore you
know you’d get this unsustainable amount
of oil demand and energy demand as they
grew but a decade later here we are
almost at parity in terms of the
relative and this isn’t technical
efficiency it’s economic efficiency
because it’s a combination of both the
technical basis by which the economy
translates this into value as well as
just the growth of the economy itself so
if you’re think of it as division energy
in the
numerator or and the economy in the
denominator the the economies continue
to grow you know five to six percent per
year in China you know on the lower end
this year as that grows though it’s
growing a lot faster than the energy
hence this oil intensity of the economy
and energy intensity of the economies
continued to come down the fact that
Emerging Markets I mean they’re they’re
higher but they’re not like twice as
high as they used to be this says that
the world is converging it’s what you’d
expect it says that the diffusion of
Technology works and that Energy
Efficiency is a real phenomenon that
makes as you continue to to grow the
economy relatively more efficient use of
it says that you know other things being
equal you’re getting human Economic
Development that’s sustained because of
it so you really do have to think of
that Nexus of making human and economic
development over time feasible as a
result of using energy in these ways
Energy Efficiency drives economies and
drives businesses look at this goes back
to the Jack Waltz days at GE look at all
the Energy Efficiency that they were
able to unlock and and their energy
business did really really well there
and China wants efficiencies that’s the
way you see the public statements from
president CH of China they’re trying to
unlock efficiencies in any which way
they can so they can sustain their
economy India is trying to do it our
economy trying to do it we’re all based
on efficiencies what is the largest
global growth market right now for oil
demand well I mean as individual
economies it probably is still China but
you know India and developing Asia are
right there with it and keep in mind
China despite all of the push toward
electrification Rare Earth minerals for
all of that it’s in all the above
strategy so they are still now the
largest importer of oil in the world 12
to 13 million barrels per day and
growing so it this just says as the
economy continues to grow globally this
is a global issue it it really is all
intertwined so we have to look at it in
a Global Perspective when we try to have
US policies that asymmetrically just say
okay we’re g to do this well we’re going
to do this but to what end and when
you’re talking about subsidies to
Kickstart things you have to think of
can you scale up the subsidy to a
societal level I mean that’s kind of
what we’re doing with the inflation
reduction act and keep in mind that in
the way that like even under the
inflation reduction Act of 2022 the
Congressional budget office only scores
these bills for 10 years and and these
credits extensively go in perpetuity so
that’s not paid for and that’s the kind
of thing that makes it vulnerable in the
longer term to really think about from
you at a time when we’re running a
primary government expenditure deficit
in the US of over 30% of GDP in terms of
affordability debt
sustainability not having your debt grow
faster than your economy these are all
the kind of macro things that have to
come home to Roose in the next decade or
so the United States that’s a problem
Jamie Diamond is annual shareholder
letter he he called it out Point Blank
it’s a problem that we have to address I
don’t see I’ll give you a nice I’ll be
nice next five years any sort of
balanced budget approach to to the
budget I don’t see it happening I had
dinner with a politician recently yeah
he was the former speaker of the United
States house I’ll I’ll leave it who he
was very nice interesting conversation
and I said to the former speaker I said
sir when is common sense going to take
place he stands up and he gives me a hug
he said that’s the kind of thinking we
need and he was telling me stories when
he was trying to balance the budget with
new and all these various different
stories and where they wanted Common
Sense get the noise the chatter the
media the politics out of it and just do
what’s right for the country put country
first but what if we don’t get there
what what’s going to happen is this does
the price of energy go up longterm is
the debt keeps increasing or any what
impact on the energy markets will this
have with an increasing debt load of the
United States so look it’s not the
mainstream view but there are some that
say regardless of who wins in November
in the US presidential election that
either party would expand spending in
ways that might be deemed irresponsibly
unsustainable and the financial Market
reaction to that and we’ve already seen
instances where US debt gets downgraded
yeah the financial Market reaction to
that could be extreme and that where you
get into a scenario that people are most
concerned about about being able to
sustain that but it is you know the
traditional phrases we’re still the
prettiest horce in the glue factory
right right now the US is continuing and
these things are good until they aren’t
good and that’s why politically it’s
been really the third rail to try to fix
it because you you unilaterally have to
go out and take entitlements or benefits
away from people spend less keep in mind
going back back to our early
conversation even about the job
situation a lot of the job growth this
year and you mentioned it you know tech
companies as they’re becoming more
accountable and needing to pay attention
to profits they are cutting back they’ve
reduced a lot of jobs this year larger
companies in general and a lot of the
job growth has come from some service
Industries and government so these
aren’t the high value ad jobs it’s been
a lot of government spending that’s
helped hold that together and in the
aggregate the macro picture looks okay
but the balance of How It’s Growing and
where it’s growing and how sustainable
that is and what that means as we get
into next year there are lots of things
to really contemplate and it’s
unfortunate layoffs are like going to
accelerate Apple laid off the project TI
and the car team recently there was an
analy report I believe was RBC or Wells
Fargo muner of the bank and said Tim
Cook found his discipline again more
layoffs to come at Apple as Apple tries
to to write the ship you start M those
are high-paying jobs and you look at the
ones at alphabet the left you look at
the ones at meta and we can we can go
down the line of tech companies are
high-paying jobs yeah we’re going to
have a very very big problem if the FED
can’t land this ship you mentioned 12 to
13 million barrels per day that China’s
importing oil where is that coming from
because I read a report today in
Bloomberg where somehow Russia’s cut off
from Swift but yet they’re still trading
oil at record numbers is that is Russ is
Russian oil making its way into China or
where are those 12 to 13 million barrels
a day coming from well I me your number
one source would be Saudi Arabia and
OPEC but Russia absolutely is supplying
and I think we’ve talked about the
statistic in the fast in the past where
Javier blast of Bloomberg has
highlighted that Malaysian exports of
crude oil to China are roughly three
times their productive capacity of crude
oil you you’ve got these basically at
Sea markets where things get loaded
offloaded Blended and Russia’s been
pretty masterful at continuing to find
that now there have been headlines in
recent weeks saying that some of the
secondary enforcement of international
Banking and other regulations has
started to bite Russia a little bit but
usually what that means is you just have
to go to different buyers that maybe
apply a slightly different discount a
Deeper Discount to continue to place
those barrels into you know second and
tertiary refiners in each each economy
but it’s happening and have no doubt in
E the Energy Information Administration
their projections of global oil this is
interesting because they had said that
there was would be very little if any
reduction of oil supply coming from
Russia this and next year in the March
Outlook they had actually scaled it back
to be a few hundred, barrels per day but
now as of the April Outlook they’re
basically back to steady as it goes for
Russia so this says that Russia is going
to continue to skirt those regulations
to the extent they do any reductions it
really is just to go along with Saudi
Arabia for OPEC plus Cuts you can’t stem
off the fuel we have the Mark Rich all
the the the stories the king of oil was
a really interesting book about what
they did with the ships the oil kept
moving out of Iran it kept moving the
oil’s always going to continue to flow
it’s always going to continue to be a
part of the global economy there’s
Broadband connectivity and there’s oil
both are critical components of the
global economy that lead to economic
growth Dean in your opinion what are the
key things to watch in the oil markets
over the next quarter well we’ve talked
about a lot of them we really do need to
read the T the economy again we’ve got a
weekly chartbook in addition to a
monthly energy economics Outlook and a
quarterly view with a more polished
Outlook across the economy oil and gas
markets and we look carefully at the
indicators in this weekly chart book and
they don’t show a huge drop off they
show continued growth actually through
the first quarter momentum going into
second quarter here and that suggests
that energy continues to grow in in
demand as the economy grows and right
now you know that again the base case is
we we’re chugging along here and we need
to continue to monitor for any turns in
that geopolitical uncertainties I think
everybody pays attention to it but they
haven’t meaningfully derailed things and
think about it in terms of the growth
Quantum I’ve given this comparison in
the past but the two to one thing of if
the economy grows you know roughly 3% on
a global basis divide by two and that
means you need a million and a half
barrels per day more oil this year than
last year now the econom is growing
closer to 2.7% so it’s a hair under that
but eia and IA the International Energy
agency the energy ex the Energy
Information Administration they both
have growth this year that’s you know
1.2 to 1.4 million barrels per day even
if you cut you know substantially off
Global growth you still need more oil as
long as the econom is growing and not in
some abject collapse as it was back in
in 2020 with the pandemic so this says
that other things being equal if the
economy is growing I’m going to need
more energy we continue to see that it
could be stronger or weaker on the
margin and that’ll affect the price
environment but from a demand
perspective there’s no question the need
is there growing economies need oil
we’ll summarize it that way and for your
turn Dean as we look to wrap up this
insightful conversation till next
quarter when we have you back on in June
what would you like our listeners and
viewers to take away with them today
well I hope these conversations are ful
in terms of educating on the things that
we really look at I hope it’s leading to
a dialogue about what the things there’s
there’s no free lunch so to speak so we
brought up the California electricity
issue when you see policies locally or
us-wide that basically seem to raise
costs and you wonder you wonder where
the money’s coming from well ultimately
there is a bill to pay for these things
and whether it’s a federal bill or a
state bill or a local Bill they’re
getting paid and they’re getting paid
sometimes through some really perverse
policies like we’re seeing with these
income based electricity charges in
California that’s a cautionary tale so
understanding where this can go and what
it really means to you as a consumer
understanding the the patterns that go
please uh refer to listeners to tea.org
TX oa.org our weekly monthly and corly
materials are available feel free to
reach out on LinkedIn I I love a
dialogue on these issues I enjoy having
you here every quarter understand the
energy markets is key to understanding
the global economy the future is bright
the future autonomous the future is a
strong and vibrant energy Market Dean
thank you so much for coming on the road
to autonomy autonomy economy today
thanks so much Grayson it’s always a
great conversation I really enjoy it see
you next quarter see you
bye if you’ve enjoyed listening please
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[Music]
Dean Foreman (https://www.linkedin.com/in/dean-foreman/) , Chief Economist, Texas Oil & Gas Association joined Grayson Brulte https://twitter.com/gbrulte on The Road to Autonomy podcast to discuss the pivotal role the oil and gas plays in the global economy.
With a backdrop of geopolitical uncertainty, Dean provides an in-depth analysis of how geopolitical factors like the Russia-Ukraine war and tensions with Iran impact oil markets. He examines the increasing demand for natural gas, particularly from Asia and Texas’ position as one of the leading producer and exporters of oil and gas.
During the conversation, Dean and Grayson explore the implications of rising interest rates and inflation on the energy sector and the broader economy, including California’s controversial electricity pricing based on household income.
Additionally, Grayson and Dean discuss the U.S.’s growing national debt and how it could potentially impact the energy markets as there is an interdependence between economic growth and energy demand.
This comprehensive conversation is a must-listen for anyone interested in understanding the intricate dynamics of the global energy landscape and it’s profound influence on economic development.
► Subscribe https://www.youtube.com/channel/UCQgokf2oSrwae4CPeUQBmYw?sub_confirmation=1
Recorded on Wednesday, April 10, 2024
Episode Chapters
0:11 The Impact of Geopolitics
4:41 Monetary Policy Impact on Oil & Natural Gas Markets
13:34 Growing Demand for Natural Gas
19:24 California Energy Policy
26:40 Oil & Gas Impact on the Global Economy
34:02 Impact of the Growing U.S. Debt on the Economy
41:34 China Oil Imports
43:48 Things to Watch in the Oil Markets
——–
About The Road to Autonomy
The Road to Autonomy® is a leading source of data, insight and commentary on autonomous vehicles/trucks and the emerging autonomy economy™. The company has two businesses: The Road to Autonomy Indices, with Standard and Poor’s Dow Jones Indices as the custom calculation agent; Media, which includes The Road to Autonomy and Autonomy Economy podcasts as well as This Week in The Autonomy Economy newsletter.
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