What's Causing High Gas Prices? | Top of Mind Series

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. Thanks for listening. And today's episode is going to be in our Top of Mind series. So this is a series that we try to put out a few times a month. These are shorter podcasts that are kind of little nuggets that we are wanted to share with our listeners things that we're reading, things that we're noticing, trends that we're seeing in the market. And one of the, you know, things that is on top of mind of most people right now is gas prices, right? If you filled up your tank or your truck recently, you are feeling the pain. And what we wanted to do today, we read a lot just in the energy sector right now. And wanted to just discuss some of the things that we're seeing and what is causing, you know, this huge spike in energy pricing. So Bob, what is going on?

Yeah, so this is such an interesting time. I've been reading a ton of articles and a ton of research on oil and gas. And I mean, we're seeing prices right now around $120 a barrel. And what's happening, of course, the big story is is the invasion of Ukraine and what's happened. So most of Europe is dependent on Russia for their natural gas supply and their, their oil supply. And so now Europe is appalled. And, you know, all of Eastern Europe was invaded by Russia. So they're terrified of Russia. So they're wanting to distance themselves from Russia. And now Russia has shown itself to be a bad actor there. So, so they're driving hard for energy independence from Russia. And right now, Russian oil is trading about a $30 discount, $30 a barrel discount from, from, from other oil. And so what's happened is kind of the end of the global free trade in oil. So now all the oil map, the oil trade map is being completely rewritten. And so now oil is being rerouted all, all across the, the, the country. So, so we're seeing going to— we're seeing demand for non-Russian oil increasing and demand for Russian oil decreasing. And, and all, you know, uh, so, so, so we're seeing this as really a, a structural change in the oil market. So I, I've been one that has not been very bullish on oil prices over the long haul because of technology. Technology is simply unlocking more and more barrels. But that takes time, right? That takes a lot of time. And so there, so what happens, there's a shock to the market. And at the same time, at the same time, we're not seeing the US producers and the, and the, the, you know, other producers increasing dramatically. So, so the last time oil, oil spiked up like this, you know, a few years back, we saw US oil producers ramp up production dramatically. They, they simply opened the spigot and started massively producing oil and driving oil prices down. And we're not seeing that now. And we're not seeing that now. And, you know, and what's happened is, is a lot of the oil companies got, got, got smacked down. And when oil went down, And also we're seeing this ESG initiative, it's environmental, social, and governance kind of ratings that are happening. But there's a huge push in the ESG movement or environmental movement to limit fossil fuel production. And the idea is that if you limit production, somehow you'll limit consumption. And it's flawed, obviously. You know, if they want to, if you want to slow, if you want to slow consumption, Well then slow consumption, but simply limiting production is only going to create shortages that drive up oil price, which yes, will, you know, I mean, it'll, there'll be demand destruction as prices hit the moon. But that's a, that's a flawed idea. So this, there's this whole idea to, to stop production, you know, and you saw it with the, you know, the recent administration, you know, not approving oil exploration in different areas, shutting down pipelines, this kind of thing. You've also seen it in John Kerry, who's the environmental representative for the current administration, is literally going around to the banks and telling all the major banks to not fund the fossil fuel production, as well as a lot of the big majors. They're investing very heavily in renewables, which is admirable, right? We definitely want more renewables. But, but they're, they're defunding production and exploration and development of fossil fuels. And they're not recognizing that you can't just turn off fossil fuels today as much as you want to. You can't without creating disruption. So, so what's happened is we've seen capacity reduction in oil refineries. Okay. Happened through COVID as, as well as nuclear power plants have been decommissioned. And oil production has simply not been invested in. And so all because of this, in that backdrop comes the Ukrainian crisis and this desire to get away from all this kind of supply squeeze. You cut kind of the systemic, uh, you know, lack of investment in the future fossil fuels production meeting a supply shock coming out of Russia. And it's not going away anytime soon. It, it takes a while to ramp up production. So the administration is kind of of two minds, right? We hate fossil fuels. Let's not, let's not do any more fossil fuels. And then holy crap, fossil fuels are exploding in, in, in price. Let's get more fossil fuels, but not from America. Let's go to Saudi Arabia and Venezuela, you know, these police states, you know, with, with horrible human rights and let's ask them to ramp up production. So it's kind of ridiculous what's happening, but, but Bottom line is it looks like we are going to be having structural, uh, uh, high prices in oil for the time being until investment is ramped up and until the administration gets a little more friendly to production, allowing the banks to finance production and getting these, you know, all these big companies that are been on this ESG craze to actually, you know, invest, you know, a, a sufficient funds in development of fossil fuels. So, and what people may not realize is that America is actually the world's largest oil producer. We have taken over the title. And so we've thought for years the marginal production increases. If you want more production, you go to Saudi Arabia and say, hey, up your production. But, but truly America is actually the number one producer. And by the way, it doesn't require shipment. It's not subject to piracy and, you know, available tankers, et cetera. It's here. So we really need to ramp up production in the US. And it's also clear it's making a huge opportunity for small US producers who are not playing this ESG game and who are happy to invest in production. So very interesting what's happening.

Yeah, I mean, it seems like it's been a very short-sighted approach to our reliance on oil for energy and the hatred for the fossil fuels, you know. And that's a whole other topic, but the transition is, it's going to take time. There's still some inherent disadvantages to renewables that we haven't solved yet. It's this very short-sighted approach. And to your point, they've kind of put themselves in a big pickle. Meanwhile, we have some other major supply challenges abroad, you know, and it seems to me that we're also seeing some structural changes in regards to Russian oil, right? Because whether the war in Ukraine ends here soon or not, I think the stigma with Russian oil will remain and European countries will not want to do that. So there's going to be some changes that are going to change the power centers of oil production. How do you think that also plays into the kind of supply side of this conversation as well?

It definitely does. It's going to create a surplus of Russian oil and gas and a deficit of non-Russian oil and gas because no one wants Russian oil and gas. I mean, Right now, most of it's going to India and China who are stepping up, and Asia who are stepping up, you know, hungry for cheap and taking advantage of the cheap oil and don't care about, you know, the invasion of Ukraine. But yeah, it's definitely structural changes happening in the oil industry. Here's another nuance. So everybody thinks about oil, but one of the key fossil fuels is natural gas. And this is gas coming out of oil wells, but but it doesn't, you don't stick it into a barrel, right? So, so all natural gas has to be run through pipelines. So there has to be an infrastructure that's literally point to point. So natural gas ends up being local, right? All natural gas consumption is local. It's not really shipped. So in order to ship it, what they have to do is they basically compress it and freeze it till it becomes a liquid, and it's called LNG, liquid natural gas. And then they put it on specialized tankers that keep it keep it cool and basically ship it overseas. But it's a very expensive process and it's a, it's a difficult process. And, and what people may not realize is that America is kind of the Saudi Arabia of natural gas. I mean, we have tons and tons of natural gas, and so the prices are super high. Traditionally been about $2 per 1,000 cubic feet, $2 per 1,000 cubic feet of natural gas, where in, in, in Europe, it's been 5, 7 times higher. And in Japan and other places that don't have natural gas, so there's a huge disparity. And so the LNG guys are basically taking this natural gas, compressing it, shipping it, and making the spread. But natural gas now has spiked up. It's gone up 4 times in value, in price. So it's becoming not an afterthought for, for local oil producers, but actually a real revenue source. So we're going to see LNG becoming more and more of a factor. And, you know, but yeah, we just saw LNG prices crash recently, and that's because one of the big LNG factories had an explosion and it shut down for 90 days. You know, again, it's like, could it get any worse? You know? And, you know, but there's not a lot of these LNG terminals that have the infrastructure, you know, produce LNG from natural gas. So huge structural changes happening in the oil industry.

Yeah, we just saw too, Goldman Sachs just released their projections on oil prices, you know, price per barrel to peak at potentially as high as $160 price per barrel over the summer because of demand. So it's, it's unprecedented. It's not something we've seen in a long time.

It's unprecedented. And the Green Revolution, as admirable as it is, is part of the problem. And so they're shuttering, right? You know, they're literally predicting power brownouts this summer if we have a hot summer. And meanwhile, they're shuttering nuclear power plants and turning all— it's just, it's like we're not meeting the energy needs and they're not replacing the energy fast enough with green energy. This kind of religious desire to create renewables is, is, it's too much. It's like, let's do it. Everyone agrees that we've got to get away from fossil fuels, right? Who wants to just do more fossil fuels forever, but we have to be smart and only limit fossil fuel production insofar as renewables are coming on board. And that hasn't been happening. So we're going to have huge shortages in power and in natural gas and in gasoline refinery. I mean, really the entire energy stack of electricity production to oil to diesel and gasoline refining. All this capacity has been hampered by the desire to get away from fossil fuels. And again, they're confusing fossil fuel demand with fossil fuel supply, and reducing supply does not reduce demand, except if you create a ton of pain, right? So it's just a little misguided. And unfortunately, the poorest Americans are going to feel, feel the greatest pain as they are now. You know, when it costs you $100 to fill your tank, I mean, wow. You know, one of the other things that, that this is gonna massively affect is inflation because kind of the mother of all commodities is energy. Energy is the main thing that drives crop production, right? Is drives, you know, manufacturing. So if energy goes up in price and if it stays high, it's gonna drive high prices in everything. And so we are going to see persistent inflation as long as oil prices remain elevated. So all in all, it's kind of a perfect storm. And you know, this whole world was set up with this, you know, these structural kind of weaknesses or supply concerns. And then now you add this Ukrainian shock and all of a sudden exposes the structural problem. Yeah.

Fascinating. There's, there's a lot going on and this is something that we're, we're paying attention to and potentially even seeing some opportunities as investors. So thanks for joining on this little episode. We're definitely going to be diving more into it in a greater way in the future episodes and appreciate you listening.