Breaking Down the Brewing Energy Crisis and Opportunities feat. Bob Fraser and Ben Fraser

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and and interview successful investors. Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. And today we are going to dive some more into economics, everyone's favorite topic, right? So, you know, if you listened to last week's episode, Bob Fraser kind of dove into just at a high level what's causing high gas prices, right? And some of the economics and things going on in the market right now. And part of the whole goal of this podcast is finding and identifying trends that are going on in the market at a macro level and really trying to uncover opportunities for investors. And so one of the things we're seeing right now is obviously high inflation, right? We're seeing this high inflationary environment. We haven't seen this in a long time. One of the biggest contributors to that is high oil prices. And so it's caused us to really take a deeper look at what's going on in the market. Is there some deeper things going on, some bigger trends at play that can create opportunities for investors? And so we're going to kind of do a 2.0 today on the oil and gas market, just the energy market in general. And Bob Fraser's got some great research that he's put together. So again, if you are listening to this, you'd be able to get a lot of it from the audio, but we definitely recommend if you can watch this on YouTube, we are going to be sharing some slides and going through a few charts. So those that are listening, maybe we'll go back and watch it later on. But Bob, do you want to jump in and share some of the things that you've been reading about and seeing?

Yeah, let's do it. So I'm going to share a couple slides here. For us, and we're going to take a, take a look at kind of the energy dynamics, as Ben said. And, um, uh, it's pretty amazing. As we've been, been researching this, uh, we're, we're seeing a global mega shift happening in the energy market, and it, it predated, uh, the war with, uh, with the Russia-Ukraine war, but it's going to— it's also been exacerbated by that. So we're going to look at some of the dynamics and really evaluate, you know, energy as an investment opportunity here. And our conclusion, just to jump ahead, is that we're going to see high, high energy prices for the foreseeable future. And let's look at some of the dynamics here. So on this chart, this is a chart of global oil and gas investment. So this is the billions of dollars that are being put into energy projects globally. This is across the globe. And you notice it increasing from 2010 to 2014 and, you know, to a trillion, over trillion dollars per year in 2014. And then suddenly 2015 took a massive dive and it's kept dropping until 2020, you know, down 55%. I mean, that's, that is incredible.

Huge.

Now this matters because If you're not putting money into an oil field, if you got, you know, a million acres, it's gonna take billions of dollars and many years to develop that. So if you do not do that, you will have, you know, 5, 10 years from then, you will have shortfalls. You do not have enough capacity because you haven't developed enough capacity, right? So, so this really matters. So here, so what happened in 2014? Well, there became this dominant narrative that was really a brand new narrative that fossil fuels had reached peak demand. And, and, and as surprising as that may sound, it's not that unreasonable. Okay. Because fossil fuels, you know, conservation has been working, low population growth and low economic growth throughout the kind of Obama era, you know, reduced demand. And so you saw demand really flattening. And then of course it's wishful thinking too, you know, the greens, you know, really, really, and all of us are green, you know, to some degree really would like it to be so, so this narrative that fossil fuels have reached peak demand. So what happened is all the large energy companies, one, began to divert investment to green energy projects and, you know, sustainable renewable type projects. Stopped investing in big other projects. So if you believe that the demand for your product is going to go down, are you going to invest in a $50 billion development plan, right? To build that product. So that's what happens. Does that make sense? And so people started disinvesting because of this narrative simultaneously at the same time. The environmentalists and ESG initiatives began focusing on, on not just reducing fossil fuel consumption, right? Which is great. Let's not consume as many fossil fuels, but also on fossil fuel supply and investment. Let's reduce the availability of fossil fuels. Let's restrict availability by, by one, financing. So John Kerry has been on a mission to stop large banks from financing fossil fuel investment projects. There's been a lot of notorious kind of pulling of auctions of public lands and licensing and all this other stuff. And so the idea is, hey, we don't— this is dirty, we don't like fossil fuels, so let's not allow it to be developed, which, you know, we could come to regret that. I mean, you know, this is— it remains to be seen, but you reduce supply, you're going to get one thing and that's high prices. And maybe that's the objective. Because high prices for oil will increase demand for other, you know, solar and renewable, you know, makes other things more attractive financially. So could be that's the aim. But whatever, whatever the case is, simultaneously, we've just seen this dramatic reduction in supply and ability to produce fossil fuels. So long-term investments have declined down 55% from 2014 as a result global energy production today is severely supply constrained with a prospect of no rapid increases. You simply can't turn the spigot on. Now, you know, the narrative goes, or a common narrative goes, that Saudi Arabia does have the ability to turn the spigot up or down. But that is, that is actually hotly contested because Saudi Arabia definitely overstates their reserves and they overstate their capacity.

Right.

So, so, so That's debatable whether they can or they can't, but every time, you know, then they've said we're going to turn up supplies, they rarely have and they really haven't been able to. So, so what's happening is we have this, this, this scenario where, where production today is severely constrained because of basically 6 years of, 7 years of under— of disinvestment in energy production. And, and we in this kind of wrongheaded belief and it just stopped. It's overly optimistic belief that we're weaning ourselves off fossil fuels.

Right.

You know, meanwhile, now comes— so this, this, you know, we have this super slow economic growth period during the Obama administration, you know, very slow recovery, if you remember, slow demand. And now all of a sudden hit, hit the stimulus and the booming resurging kind of economy and demand, creating demand against hitting up against basically pretty massively supply-constrained market. And that's what happened. Now throw in the Russia-Ukraine war, right?

Okay.

So that's the scenario we get. So, so we've been alerted and started doing some research and believe that energy represents a very, very good investment opportunity at this point in our, in our history. So let's, let's hit another slide here. So for the last 2 years now, so kind of that's the big picture, kind of zeroing in the last 2 years. What we've seen is that oil production has not kept pace with post-COVID demand. So we show basically here since mid-2020, you see a, a stock draw, meaning, meaning energy inventories are being drawn down and it's consistently being drawn down. It's not being replenished. So you're creating just shortages, right? There's inventory draw, inventory draw, inventory draw. What happens after 6 quarters of inventory draws? You know, well, you run out of inventory, you know? And so what's happening is global inventory supplies today are at a record low. And again, now throw the Russian war and the Ukraine and the subsequent embargo has created a global energy supply shock. Now a lot of people are hoping for quick resolution. I believe even if there is a quick resolution, you're not going to see a reversion to the pre-war scenario because of basically de-Russification of energy, right? People, no one is going to want Russian energy, certainly not the Europeans who are the most threatened. I mean, you look at the NATO countries, Poland has been invaded by Russia, I don't know how many times. You know, they know where their threat is coming from and the last thing they want to do is have their oil be at risk. And so Europe is going to dramatically want to get free of Russian energy and, you know, they have very limited ability to do so as we'll see. So huge, huge shortfalls in inventory. So this is from Goldman Sachs, who's one of the best research firms, a big, big Wall Street bank, Goldman Sachs Investment Research. And here's, here's their little chart here shows this kind of blown up. This is global inventories included product on the water, storage containers, and their sum is this little red bar here. And you can see inventories have just been, been going negative really since since, you know, April of 2020.

Negative inventory just means that they're drawing on the reserves. Is that—

That's the word. Drawing on inventory, right? Negative inventory builds. Got it. So here's some of the quotes. Quote, oil inventories are at record lows and will take oil price above $140 a barrel to rebuild. Wow. I mean, and today, just for context, oil is at $98. So it's a 40% increase in oil. And so that's one pretty shocking— here's another quote. Supply remains inelastic to higher prices. Okay, so Ben, you know what that means? What does that mean? Right, right.

So the higher prices will not result in an increased supply. So, right.

So even when, even if prices hit $130, $135 a barrel, there's no additional supply, right? Why not? Because there just is no additional supply. There's no spigots to turn on. So, so when it says it's inelastic to demand, that's what it means. There is no additional supply to turn on. And if the world decides we need more oil and, you know, Kerry gets off his, his mission, And people decide to start reinvesting, it still takes many years to develop the capacity. Right, right. And America is one of the few places that has lots of additional capacity. A lot of places do not. So, so, so what happens is what they're basically saying is that $140 a barrel is where you'll start to see demand destruction. What that means is that prices at the pump get so high, people will stop driving. Right. And so it destroys demand because of the high prices. Now, maybe this is what people want on the environmental side, but it is, it's pretty devastating economically, you know, to our industry. So, you know, there's pluses and minuses here.

All right.

Third quote, the negative global growth impulse remains insufficient to rebalance inventories at current prices. And here's, here's what that means. Even an economic slowdown. So the big question is, well, certainly recession is coming, or if recession is coming, won't that decrease demand enough to bring prices down? And Goldman's answer is no, it will not. Negative growth impulse is not sufficient to rebalance inventories at current prices. It simply is not enough.

And I, I think it's an important, important point to kind of zone in on a little bit because I've heard that argument many times from different people talking about, hey, if we're in a recession, that's going to decrease demand, right, for oil. And that will soften the prices a little bit. But to Goldman's point, and what I'm picking up from that is because we're so backlogged in our inventories and we've exhausted a lot of the reserves, not only just to kind of get back to, or to meet demand, but also to get back to where we have to get for the reserves, it's going to take some time to rebuild those even if demand is reduced. And so the impact of constrained supply is going to be a greater force than potential demand destruction. Is that an accurate assessment?

That's it. And you also have to consider that demand is global. So the fact that even if America has a recession, well, America is not the world's largest energy consumer, right? Um, so what about China as their, their economy is rebounding? And, uh, you know, India and other places.

So, right, which interesting that at the end of the day, China is not having the same inflationary environment that we're having in the US, right? So it's, it's a different economic, um, kind of environment right now there, right?

Okay. And the fourth quote, this is again a stunner: the market will not build sufficient spare capacity by the end of 2023, extending the bull market into 2024 plus. So basically they're, they're, they're saying this inventory shortfall is so severe, we're seeing 2024 plus. And, and our prediction at Aspen is that it's beyond that. I mean, you know, they're being conservative, right? So we've got a pretty big bull market. You know, and Aspen, what we want to do is be, we want to be ahead of the game, right? And so yeah, you know, maybe you're, you know, filling your tank and someone was telling me, I think they, you know, put $200 in their fuel tank the other day, you know, and it's extremely painful. Where you go, what you want to do as an investor is get on the other side of that. Be the guy that's supplying the gas to the tank, right? That's exactly what we want to be doing. So inflation is hurting. Well, let's be on the side that's, that's not being hurt by inflation and is benefiting from inflation. So we want to, for every problem and pain, there is a way to turn that into a win. And you know, we are not, you know, we just, we just, we can only play the cards we've been dealt, right? We can't create new cards. So we're playing the cards we've been dealt and that's what we're doing here. All right. Next, next slide. So this is, this is also from Goldman. This is super interesting here. You see basically 20 years of data, over 20, and energy prices are in extreme backwardation. And this is a very rare phenomenon and it's in extreme right now, meaning oil price delivered today is priced much higher than oil prices being delivered a year from now. Okay. That's called backwardation. So normally oil prices go up over time to reflect storage costs. The fact that I could buy today, put it in a tank, deliver it in a year, and I pay my storage costs and it should be a break-even. That's theoretical. So being in backwardation is one extremely rare, and it represents, or it basically is an indication of the extreme tightness in the oil market right now, that there is simply not enough oil to be delivered to people who want it now, and they don't want it a year from now. They need it today. So, so you can see here right now the months, the delivery months are roughly 30% higher for Brent, meaning people are paying a 30% premium to get oil today from what, what they could, they would pay if they could wait a year to, to get it. And this is a, right, a 13-month time spread. So this is if they waited a year, they could save 30%, but they can't wait a year. So again, what does that tell you? Extreme tightness in the oil markets.

Hmm.

So what does this mean? So extreme tightness in the oil markets, historically such supply shortages have led to large increases in the price of oil. Makes sense, right? Yep. So here it goes back to 1990s. What is this? 1998. Yeah. So what they're showing here in the red, so this light blue line is this backwardation. Okay. It's when the 3, the front month to 3-year forward time spread. So this is when the time spreads, the backwardation gets high. Look what happens to the oil price. So here's the oil price. So when the backwardation— this little line here, when it's above zero, it means it's in backwardation. And look what happens to the o-oil price. So look at what happens to the oil price all through here. Look what happens all through here. Massive increase on the oil price right here goes into backwardation again. Massive oil price spike here goes into backwardation again. Massive oil price spike here. Backwardation again. Massive oil price spike. And right here as well. So any, anytime you see this tightness, it's historically meant oil price dynamics, oil price hikes going up. So, so it makes sense, right? Yep. So that's pre-war right now. Now look at adding the Russia-Ukraine war outcomes, and this is, this is really really troubling. And this slide is from Peter Zeehan and from a presentation he did. So he's got a brand new book out, which I'm looking forward to reading. And what this is, it shows basically the current oil flow. So each line represents a, you know, oil flows. And so you see a lot of Saudi Arabia, primarily Saudi Arabia's oil is going mostly to Asia. You see oil flows coming from the United States. People may not realize it, but the United States is actually an oil exporter since the '90s and the largest producers of oil, the largest in the world. And because of the Shell Revolution. So this is flows today. Some of our oil goes to Europe, some goes to Asia. Some goes to Canada, Saudi Arabian oil going to Europe primarily, or going to Asia primarily, some to Europe. And then we have a fair amount of production coming out of Africa, Nigeria, and some of the oil-rich areas of West Africa going to Asia and to Europe. Okay. And primarily Europe. Europe does not have an energy source in Europe except for this this North Sea field up here, you know, between the, you know, the UK and Norway here. They don't have energy in Europe. And so their primary energy supply has been coming from Russia. Okay. Of course. Well, if this gets cut off and if this becomes a, you know, they can't import, you're having a severe energy crisis in Europe. Severe. And it's already— there's dire warnings coming out as the The Nord Stream gas project has been cut off, that German industry is going to not— there's just no play, no way to replace this. And so natural gas especially has the disadvantage of being hyperlocal, right? So oil you can put in a, in a one of, you know, thousands of tankers and ship anywhere you want in the world. Gas is not— it's gas. It's big, it's voluminous, it's difficult to— you can't really ship it. Gas goes in pipelines, right? Which means you've got to build a point-to-point pipe and there's not a ton of those, or you need to compress it and freeze it, right? Cool it until it becomes liquid. That's called LNG or liquid natural gas. And then you put it in tankers and you can ship it. But LNG, there's very few tankers and there's very few terminals, LNG terminals, both for creating LNG, loading it, and for shipping it and offloading it. It's just the infrastructure just isn't there. And the US is one of the world's largest gas producers, right? Because it's a byproduct of the shale. But it's— and that's why our gas prices are— natural gas prices are so low relative to Asia and Europe. I mean, we're I think running around $5 per thousand cubic feet right now. In Europe and Asia, it's 5 times that much because they just don't have a lot of gas flows.

So we're already seeing, I mean, Russian oil trading at a pretty steep discount because of the geopolitical issues going on. But what you're saying in addition to that is production coming out of Russia is going to be severely constrained as well.

Right. So, so while production coming out of Russia, while So Germany decides— Germany, what if they shut off the oil flows? And what if Germany refuses to buy Russian oil? Okay, so Russian oil, if you look at this chart here, there's this little X here. Russian oil flows primarily to Europe.

Mm-hmm.

And then a small amount here goes to China, a very small amount. But you can't simply reverse these flows, right? Right. There's a whole infrastructure here that's, that goes from Siberia westward. You can't simply say, oh yeah, we're going to go, we're going to start shipping from the tundra millions of barrels per day across 5,000 miles of Siberia to the, to the east coast of Russia. Okay. You can't do that. Right. So, so there's those flows don't reverse easily. And so there's simply not a lot of places for Russian oil to go in the absence of this. So what, what's going to have to happen is basically to, to divert, avert this energy crisis. Uh, flows are going to have to be diverted from Africa and the Middle East to Asia. These, these kind of flows and flows from the U.S. have to be increased. Um, so, and all that, by the way, takes flows away from Asia. Flows away from Asia. So somewhere there's simply going to be a kind of an industrial potentially fallout recession, industrial production hits in Europe and/or in Asia depending on how this energy crisis resolves. So we have a pretty severe crisis and we don't know how it's going to play out. So war ends, I guarantee you Russian oil is still going to be a taboo.

Yep.

And, you know, people are going to want to— Europe is going to want to de-risk themselves by setting them free of Russian oil, even, even before it ends. If war doesn't end, this is going to continue to be, you know, oil energy is going to be weaponized as an economic weapon, and you're going to see massive— either way, you're going to see this kind of map wanting to be redrawn, increasing flows from the United States and increasing flows and diverting flows from Africa and Saudi Arabia into Europe, which today go primarily to Asia. So you're, you know, somebody is going to have a shortfall, you know, and here's the next slide. And this is Peter Zeihan's, you know, thought about how the energy map is being redone, redrawn 2025. So 3 years from now, um, basically sees all flows being diverted, African flows being diverted basically to Europe, um, and sees Saudi Arabian flows being diverted to Europe and Asia suffering primarily, um, from the lack of, lack of energy. Um, he also shows the, the U.S. being being stopped, being exports being stopped. And so in the case of high oil prices, right, will, will the president, who has by executive authority has the ability to bar exports. So it used to be illegal to, for the, for any U.S. producer to export oil, used to be illegal, and it was simply made illegal. I, I can't remember, I believe that's a few years back in the Trump administration. But literally by executive order, they could turn that off. So if energy prices are high in the United States, will, will the United States turn off energy flows, exports, to keep— and that would depress US energy prices at the expense of world oil prices, and really at the expense of the world economy, right? Um, because if those flows stop, you know, it just creates even more shortage, right? Throughout, throughout, throughout the rest of the world in Asia, you know, Asia and, and Europe. So we are at, you know, this is honestly the worst time for, you know, this 10-year period where this disinvestment was really the worst thing that could possibly happen. Right. So there's going to be, need to be a massive reinvestment. In oil and gas. And while we wish the Green Revolution was here fully, it simply isn't and it's simply not ready. And to try and just, you know, if we're weaning the world off oil tomorrow, you know, you're going back to, you know, the Dark Ages here. So, yeah, so a little bit troubling and you know, again, one of the things you can be sure everybody's going to need is energy. And so it's, it's a potentially, it's just a great investment. I believe that prices are going to remain high and, and that it's, that it's a good investment. And of course, you know, even Buffett has now been investing in, in, in energy for, so he's got a lot of forward thinking. So here's our, here's our kind of summary of what we believe. Where we believe we're at here. We expect energy prices to remain elevated well into 2024 and beyond. So I don't see this being resolved really in, in, inside of 5 or 6 years because of this, of the systemic shortages that have been built into the system. Energy prices will not revert to normal even if the war ends due to the de-Russification of energy demand and energy policy. Europe is going to want to free themselves from a Russian gun to their head. I could pull oil anytime I want and destroy you. Who wants that? So they're going to want to get rid of it. Energy disinvestment combined with ESG and the global environmental movement's focus on supply reduction instead of just demand reduction ensures energy prices will remain high. So, you know, basically it's really this, this, you know, energy, this environmentalism, while it's, you know, you know, maybe morally nice and wonderful, it's impractical as it stands. And we've got to— we need to have a more balanced policy that balances long-term goals with short-term goals. Right. And here's the final— the final thought is that energy is the mother of all commodities. And what I mean by that is all other commodities require it. Okay? For example, wheat, you know, is you, you need, you need diesel fuel, lots and lots of diesel fuel to run your farm equipment to produce that. You need, you know, for steel or mining or anything else, you need massive amounts of fossil fuels. So energy is the mother of all commodities. So if energy prices remain stubbornly high, it ensures inflation is going to remain stubbornly high. And so I believe we, we're going to continue to see an inflationary impulse in the next, in the next decade because primarily of energy prices, if not any other reasons, just because of energy. Prices alone because it is the ultimate commodity. So bottom line is I believe energy is a great investment this time and represents a good opportunity for investors to get in. And we're going to be evaluating some opportunities and ways to play this trend that are very attractive.

Yeah, well, this is very, very interesting. I mean, it's interesting to me to see the trends that seem pretty obvious when you kind of put it together like this, but it's not being talked about, right? No one's really, you know, sounding the alarm like, hey, we're at a— we're kind of at a pretty big crossroads of a potentially big crisis of energy that we are— is going to have an impact everywhere. I mean, we're already seeing it in inflation, right? It's been the biggest contributor to inflation. And everyone's surprised that inflation keeps remaining high. And it's, you know, right. This is one of, one of the, the big reasons.

You know, we, we live in the information age and, but it, it's not really the information age. It's the noise age. And just the amount of noise and just printed word and opinion and, and it's not information. It's not truly digested well-thought-out information. And so that's why, you know, our, our focus is getting data and analyzing data to, to get the storylines. And, and I like to look at big data, right? I like to look at long data because those trends, right? The, the little waves come and go. The tides, you, you can make a lot of, lot of predictions that work on tides coming. I want to know what the tides are doing. So this, this is a tide and, and there's actually other trends that, that we, we could, we could talk into in future podcasts too. And one is food prices. And, and, and so one of the other dynamics here is that Russia is the world's, one of the world's largest exporters of a number of, of not only wheat and grains, but also of a lot of, a lot of, uh, metals and, and fertilizer. So they're the largest exporter of fertilizer in the world. Well, you think fertilizer doesn't matter, but fertilizer matters a great deal. Without fertilizer, your crop harvest will drop 50 to 80% depending on your region. And they're, they're the largest producer and they're really, there's no replacement. I, I think they, they produce, you know, close to 40% of all global fertilizer. So you just removing this is enormous. Wow. Adding in that they also are a large producer of lithium and nickel and chromium and a lot of the metals used in steel and in renewables. So renewable energy. So we've got a pretty major, major, you know, shift in global economics that we are at the very beginning of right now. And it is, it's geopolitical as so much, so much of the, you know, world is. Um, and so much of economics is.

Yeah.

Um, so we're gonna see, so we need to talk about that in, in future, future podcasts, but we're about to see, you know, uh, some real transitions and hopefully this will be resolved, you know, without a lot of crisis or that. But we, we could see global food crisis. In addition to an energy crisis. And, you know, we need to, we need to really, you know, get a handle on the Russia situation there. You know, they are the, you know, just a massive, massive exporter of raw materials. So, well, yeah, interesting times.

Very interesting. Well, we appreciate you all tuning into this episode, and we actually have these slides up on the website. So if you go to thebillionairepodcast.com, you can download these slides and, and follow along on the charts. And again, we always appreciate your feedback and reviews on the platforms you listen to this podcast on, and we can continue to grow the audience and share this information with more people. So stay tuned for future episodes.

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