Will Oil Hit $100/Bbl by Year End? | Top of Mind Series

Welcome back to another episode of the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. Today we're doing another Top of Mind. So these are short and to-the-point topics of discussion that we're reading, seeing, and things we're kind of having conversations about offline that we love to share with our listeners. And, you know, a topic that is just kind of front and center for a lot of reasons, especially it's something you know, the consumers are feeling when they're going to the gas station every couple of days, filling up their pump and seeing those prices tick up. And, you know, we've seen this happen, you know, last summer. And it's really a long-term thesis that we've been talking about a lot. So if you listen to the podcast, some of this won't be new, but it's interesting to kind of see what's happening in real time. So what's happening, Bob? We got oil prices are going up. We've been hearing about OPEC cutting production. Meanwhile, you know, we're saying we don't need to drill, we don't need more fossil fuels.

Like, what?

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Will prices hit $100 a barrel this year? Right. That's a question a lot of, a lot of people are asking. In fact, I was just on the phone with a Wall Street Journal reporter yesterday and he was asking that question. What was our forecast on energy prices? And And so it's very interesting. You know, there was a, there was a brand new article coming out by— from oilprice.com, and they point out that there's, there's supply, supply shortages everywhere. So let me see here. It says, it says what all the forecasters have in common is that all of them point out a discrepancy between the demand for oil, which has remained strong, and supply, which has become increasingly constrained, and at a time when governments in the West are making a huge effort to reduce that demand and supply as well. So this is something we pointed out well over a year ago that you're seeing, that we've seen for the last couple years. Um, demand has— demand has exceeded supply, and so we're seeing oil inventories dropping. I mean, right, right now, the oil inventories in Cushing, um, Texas— or sorry, in Cushing, Oklahoma— are hitting, I mean, the tank bottoms. They're just empty. And we continue to see draws. And we've been saying this all along, that, that basically you're seeing oil supplies because it's been underinvested. The investment globally in energy has dropped by almost 50% since the peak years in 2014. And so you see this supply curve that's just dropping like this. And as long as demand stays below it, you know, then it's, it's not going to be a problem. But it's pushing up against it right now, and that's the problem. And so we're seeing tightness in every area of, of this, of this, uh, of the energy patch. Um, the EIA just reported that oil production— the Energy Information Administration reported that oil production from the U.S. shale patch was set to decline in October from September after the September average also declined from August. So we're seeing, we're seeing declines. And so, so the big question is, well, aren't people going to pump more? Right. Aren't people going to, you know, prices go high? I mean, we're right now in the oil business and the, you know, and the profits are much sweeter. Right. So but what's happening is it takes a long time to develop an oil field. You can't just turn it on. And so, so that's the problem. It takes a long time to develop these things. Plus, as I was pointing out to the Wall Street Journal, um, journalist, um, you know, you've got, you've got in the past a lot of this stuff has been, you know, the drilling is very capital intensive and debt is much harder to find, um, equity is much harder to find for these things. A lot of investors have pulled back because of the political heat, right? And, um, you know, and I mean, it was, it was just in 2020, so 3 years ago, Biden was basically comparing oil pumpers to war profiteers and threatening punitive windfall taxes. And then California, they passed the windfall tax, right, for oil. So it's like you're evil if you're producing oil. Then he comes in 2 years later and he's— now then you're evil. He says the oil companies in his State of the Union talked about how oil companies were evil, that they were because they weren't pumping enough. Right, which is it, right?

Which is it?

And meanwhile, John Kerry is rebuking, you know, earlier this year, rebuking oil companies BP and Chevron for their investment in oil and gas, right, to go and develop oil and gas fields. And he's rebuking them for that. Well, which is it? Which do we want? I mean, really, the, the, the administration's oil policies are, are completely nonsensical. And, and self-defeating. I mean, so if you're an oil developer, what do you do? I mean, you know, what do you do? You know, meanwhile, there's still, you know, there's a lot of scars in the oil industry from the 2016 crash. I don't know if you guys remember, but, but in 2009, you know, we really— that was really the beginning of the shale revolution. And this, and this, you know, began to just take off like crazy, the shale revolution, and develop, develop, develop, develop. Borrow money, build out these oil fields, and then it kind of hit a bubble and then it crashed. And in 2016, it crashed. And partly the Saudis were trying to do this. They were there. They pumped like crazy to basically punish the shale patch for, you know, taking over their crown. And, and they worked. And so oil prices crashed to, you know, I believe is in the 20s somewhere, depending on which oil price metric you're watching. Well, bankruptcies galore all across the oil patch. Bankruptcies, you know, defaulted debt. And so people are now— the oil patch is like, we're not doing that again. We're not doing that. And then in 2020, you actually saw oil price go negative during COVID for, you know, a day. And there— so everybody's like, we don't know. You know, you add— you add the whole, you know, oil price volatility to the political nonsensicalness and, and, and, and the political demonization of, of, of oil producers. And, you know, everybody's just very cautious to do anything and ready, you know, happy to let some profits roll in without, without really expanding supply.

So to me, what's so fascinating about it is, I mean, it's really become— fossil fuels have become front and center political issue. And because of that, it's this hypocritical oscillation of whatever narrative is going to serve the current political agenda. Right. So it's, you know, when oil prices are lower, it's, oh, let's go beat up on the oil companies and serve, you know, the, you know, other programs. We want to go to support alternative energy sources and green energy, which, hey, we've said all the time that that's great. We should be doing that too. But then when, you know, it's pretty apparent that supply is limited and we're seeing oil rig counts go down, we're seeing production going down. And it's, to your point, it's inelastic. It's not something you just turn on all of a sudden. So now they flip the switch and say, oh, well, these companies are not doing their job and producing enough. Now the customers and consumers are suffering the pain of it. But it's so ideologically driven and zooming out to kind of the capital markets side of this, because there's been a lot of scars in the industry. But now the ESG narrative, which has really taken hold really the past, you know, 5 or so years where they're really having requirements as these big capital allocators, you know, the Blackstones of the world, they have to invest in ESG-driven initiatives as part of the mandates that are being put on them and just from the PR headlines and investing in the environmental, societal, governance standards that are very supportive of the green energy. And so it's left this huge gap. We've shown these charts before, you know, in different webinars we've done. But the, you know, not only is supply decreasing, but the private equity funding of new production, which has been the big driver of new production for the past decade plus, that almost evaporated. I mean, it's, it's not non-existent.

And, and the big guys, the, the majors, are not— you know, every time they try to drill, they're getting rebuked. And yeah, you know, so, so what, what do you do? You know, they're, they're trying to convert— I mean, they're, they're, you know, doing green energy stuff, but don't you want your oil companies trying to find oil? You know, um, so here, here's a quote from the chief executive of Aramco, which is the Saudi oil company, who has been a critic of, of the of the current energy transition as it's being conducted, said this. He said, "The current transition shortcomings are already causing mass confusion across industries that produce and/or rely on energy. Long-term planners and investors do not know which way to turn." So Nasser said at the World Petroleum Institute in Canada. Exxon CEO was more succinct. Quote, "If we don't maintain some level of investment in the industry, you end up running short of supply." which leads to high prices, end quote. And that's a scenario that's currently unfolding. So there's not sufficient investment. This article goes on to talk about and, you know, here's, here's what the chief chair of Canada's Suncor told Reuters. If you want to add 100,000 barrels a day of production, you're going to spend billions and billions of dollars in terms of any real meaningful investment in large projects. That's probably going to have to wait to have for more clarity from the government front. So, you know, so people are just like, do you want us to drill? Do you want us to not drill?

You know, and, and meanwhile, I mean, what's the incentive for these oil companies to go and spend all this CapEx if they're just going to get, you know, their wrists slapped? Meanwhile, they're making—

and again, get a windfall tax, you know.

And yeah, it's, it's, it's a good time to not do anything, right, as the prices are going up and they're in a good position. So what's what's the incentive for them?

Right.

And it's— and so it's just a fascinating time in history. We've been talking about it for a while. But, you know, it is an incredible time to be investing in this space because of all these dynamics going on. Right. Even if you don't believe—

investors have fled. And that's exactly the time, right, when there's blood in the streets, that's when you want to be buying. Right. And that's— there is, you know, so there's, you know, huge misunderstandings of the market, you know, You know, I'll tell you a funny story. I was just at a speaking at an investment conference last week and sharing some, you know, the economic insights. And, and one guy looked at me and I was talking about oil and gas. He looked at me confused and he said, well, what about, what about, you know, renewables? And, you know, aren't we, are we mostly all renewable now? And I said, absolutely not. And he's like, what? What do you mean? And I said, 17% of of, of, you know, of energy usage or energy source comes from renewables. 17. 17. I was like, what?

What? You know?

And he said, what about EVs? And I said, what about them? And I said, well, they're about 6% of vehicles sold in America last year. He said, okay, and but aren't they— they're 100% free, right? And I said, well, no. Where does an electric vehicle get its energy from? And he looked at me again, confused. He says, well, we plug it into the wall. And I said, well, and where does the electricity come from? The wall. And he said, well, from a plant. And I said, that's right. And how does the plant make electricity? Long silence. Long silence. I don't know. I mean, had no idea how a plant produces electricity. Well, it turns out it's mostly coal and secondarily natural gas, all fossil fuels. And he was like, why has no one told us this? I mean, there really is a massive misunderstanding about the energy transition and there's real confusion. I mean, you look at, you know, the Democrats now are reeling because, you know, they want high energy prices. Okay. The liberals want— the climate change folks want high energy prices. Why? Because it helps facilitate a transition, right? If oil is $200 a barrel, Well, that makes alternatives a whole lot more attainable. But on the other hand, it makes life a whole lot more miserable, right? So all of a sudden, if you're paying $10 a gallon at the pump, well, I mean, that really hurts people. And if you're, you know, can't heat your house, etc. So, so there's— they're really of two minds right now. And, you know, and it's— the policy shows that's just complete confusion. So, you know, but there's, there's no, there's no question we need fossil fuels. And interesting, you mentioned ESG. So I'm just reading this morning an article on the Goldman Sachs CEO is backing away from ESG. He basically said, you know, we need fossil fuels. You know, he said, here's, here's what he said. He said, this is Solomon, the CEO of Goldman Sachs, said, quote, traditional energy companies are hugely important to the global economy. And they're hugely important to Goldman Sachs. We're going to continue to finance traditional companies for a long time. We recognize there needs to be a transition over time, but that transition is going to take time, he added. So, I mean, so he's backing away from the ESG initiative and saying, you know, this, you know, the goals are aspirational and they're great, but the reality just isn't there yet. And that's really where we stand. I mean, who wants to burn fossil fuels forever, right? You know, we definitely need to quit, okay? But on the other hand, do we really want to go back to the Dark Ages, right? And that's what— so it seems a lot of the extremists are saying, you know, let's stop pumping, well, and let's all, you know, lock our cars up and ride horses. I, I don't know what, you know, you know, ground all the airplanes. And of course, I mean, it's just It's kind of nonsense, really. That's really what we need to do and, you know, turn off our factories and everyone would starve. I mean, you know, it's just— it's not real, right? And that's what these activists are, are trying to see happen. Yeah.

I mean, there's a whole other side of this too. It's probably beyond the time we have to dive into this episode. But if you look at what has been the primary driver of, you know, global human flourishing and advancement in technology and bringing about developed countries into being developed countries is cheap energy and access to cheap energy. It's the number one way of doing that. And fossil fuels, you know, oil is the most easiest to transport energy and the most energy-dense resource that we found today. There's nothing that can even get close to comparing with it. And it's just obviously we need to go after these bigger, longer-term goals, but we need to be realistic in the transition and not just you know, do this complete switch because it's not— it can't happen overnight. It's, you know, functionally cannot happen.

So, I mean, we've been trying to do this transition since the '70s, the oil embargo, the Arab oil embargo of the '70s. And, you know, so what do we have, 50 years now? And we've got 17% renewables. I mean, you know, we've got a long ways to go, you know. And I was thinking about this earlier. Okay. You think about a windmill, here's the ultimate, you know, taking wind and making beautiful, clean energy. But Okay, well, it made, you know, they had to— they did steel. Well, they had to get iron ore, and that iron ore mine runs 100% on diesel trucks and diesel cranes and diesel everything to load it. And then it's all transported by rail to the smelter, right? Which a diesel train. And the smelter is all run off coal and in smelting this ore to produce pig iron. And then it goes from there to a factory that produces steel. And again, that's all run by coal and oil. And then once the steel is made, well, then it's rolled, you know, and it's formed and forged and all that is coal. And then they— then it's put on trucks. This giant windmill was put on a truck and it's all diesel powered and it runs to its, to its location. It's going to be erected and then it's erected by a, by, you know, a diesel crane. And then it still takes something like 700 gallons of oil per year for lubrication. I was just researching this, you know, The windmills, you know, it's like as much as we try, right? And I'm not bagging on windmills. We need— I like windmills, but the truth is they need oil, a ton of fossil fuels to work. And that's as optimistic as it gets, right? I mean, I wish there was better answers. I'm an engineer, right? I'm an engineer and a scientist by training, and I wish there was better answers, but The answers are not quick and they're not, they're not easy. And I wish there were. So, yeah, we are, we are probably in for it, you know. So my conclusion to the Wall Street Journal guy was I don't think we're going to see oil prices sustain above $100. I think that's probably the cap for this year because the Saudis don't want to wake up the energy patch right in America.

Exactly.

So they're going to, they're going to keep it sleeping. And, and they're going to, you know, they would probably prompt more to keep prices below 100 to stop the oil patch from waking up is my, my best guess. But we're going to see continued high energy prices really from now until reinvestment begins. Seriously, reinvestment begins. So, yeah.

All right. Well, hopefully you got a few good nuggets out of this episode. We always appreciate you listening and writing to us. If you have other things that you're seeing, reading, and have questions on. Uh, be sure to subscribe if you are not already, leave a review if you can, help share the word, and tune in next time. Thanks so much.