0:01

I'm Bethany McClain, and this is making a killing

0:03

interviews, exploring the headlines

0:05

you thought you understood, and finding

0:08

the long term lessons we can all learn

0:10

from today's business stories. I'm

0:12

at Bethany mactwelve on Twitter. So

0:16

here's a really inconvenient truth. Oil

0:19

is still the lifeblood of industrialized nations.

0:22

From driving your car to heating

0:24

your home, to getting those Amazon

0:26

packages delivered to charging

0:29

all your devices, modern life

0:31

still depends on fossil fuels. One

0:34

of the funny things about energy markets is

0:36

how everyone who dares to make predictions

0:38

usually has one thing in common. They're

0:40

wrong. Most famously was two

0:42

thousand and five's Twilight in the Desert. It

0:45

was written by a really serious, smart analyst,

0:47

and he predicted rising oil prices

0:50

due to sharply declining Saudi production.

0:53

In the mid nineteen nineties, there were congressional

0:55

hearings featuring politicians and economists

0:58

who were hand ringing over pending shortages

1:01

of both oil and natural gas in the US.

1:03

Then came the shale revolution, better

1:05

known as fracking, and now everyone

1:08

thinks we have a plethora of both. The

1:10

Trump administration even calls them Freedom

1:12

molecules. In other words,

1:15

the conventional wisdom is often wrong.

1:17

So here's today's conventional wisdom about

1:19

oil prices. Global oil

1:22

supply is supposed to continue to rise rapidly,

1:25

thanks in part to substantial growth

1:27

coming from US frackers, so

1:29

prices are supposed to stay low. Likely

1:32

we won't ever have to worry about oil price

1:34

shocks again because the frackers

1:36

will keep prices low, and by the time

1:38

that runs out, renewables will for sure

1:40

if kicked in, the days of fear

1:42

and trembling about oil price shocks are

1:44

over. But are they really their

1:47

skepticism about what will happen if

1:49

investors stop funding the money losing shale

1:51

industry. Conversely, if

1:53

prices do stay really low or

1:55

the age of renewables does come quickly, that

1:58

poses some risks of its own. What

2:00

does that mean for Saudi Arabia, which

2:02

depends on oil revenues defund

2:05

its economy and keep its society

2:07

stable, and right now is trying

2:09

to take its massive state owned oil company,

2:11

Saudi Aramco public. It

2:13

was supposed to be the biggest IPO ever.

2:16

If there were easy answers, history shows

2:18

that'd likely be wrong. But I'm delighted

2:21

to talk through the topic with Liam Denning, who

2:23

is a well known Bloomberg opinion columnists covering

2:25

energy, mining and commodities. He

2:28

previously worked at The Wall Street Journal in the Financial

2:30

Times, and like me, he was once a

2:32

Goldman Sachs investment banker. So,

2:34

Liam, why would you look historically has

2:36

it been so difficult to predict the direction of energy

2:39

prices? Why are people mostly wrong? Partly

2:41

because, like any commodity, any

2:44

sort of disruption can cause prices

2:46

to fluctuate one way

2:48

or the other. I think it's also because energy,

2:51

because it's so central to

2:53

modern society, is a highly

2:56

politicized commodity. It's

2:59

often forgotten and we focus on companies

3:01

like Exomobile or Chevron

3:03

that they're actually a tiny part, a relatively

3:06

small part of the global oil business.

3:08

A lot of it is really still controlled

3:11

by state owned entities

3:13

like Saudi Aramco or state

3:17

like controlled entities like the

3:19

Russian oil companies. So it really sits

3:21

at the intersection of the economy

3:24

and politics in a way that is somewhat

3:26

unique in the business world. Would you say, I

3:28

would say so, yeah. I mean, I think anything

3:30

that touches upon what we

3:33

eat or how we heat ourselves or

3:35

get around is going to be ultimately

3:37

a political thing. So what's the

3:40

debate today? It seems like we've switched

3:42

from this idea of peak supply,

3:45

this idea made famous by Twilight in the

3:47

Desert, that we are going to run out of oil and natural

3:49

gas, to a different concept, and almost

3:51

the opposite concept, right, which is peak

3:53

demand. Yeah, we've we've

3:55

gone from an age of scarcity

3:58

to an age of abundance, or at least

4:00

that's what everybody thinks. That's what everybody

4:02

thinks, you know. And I think it's it's important to

4:05

distinguish really what abundance

4:08

means. I think it's fair to say,

4:11

in purely geological terms, we

4:13

will probably never run out of

4:16

oil and gas below the ground. I

4:18

think it's fairly well established that there

4:20

is just a hell of a lot there. What

4:22

it really boils down to is

4:24

the demand there for it, and also is

4:27

the capsule there to fund

4:29

it? And you know, and I think

4:31

shale has actually been a great example

4:33

of how that dynamic plays out. And

4:36

what do you mean, because investors

4:38

have been willing to fund the shale industry despite

4:40

the fact that it doesn't make money.

4:42

Yeah, I mean, what ails the US

4:45

oil and gas business is that technologically

4:48

it is brilliant. It has been able

4:50

to effectively pick itself

4:53

up from thirty years

4:55

of decline and turn itself

4:57

into the biggest force in the global energy

4:59

business in the space of a decade, mainly

5:01

for fracking, right and pas on that just from

5:04

just to tell people what it is and how why it's

5:06

changed things so dramatically. Yeah,

5:08

So essentially the US

5:10

oil business has gone from being a conventional

5:13

oil business, which was centered

5:16

mainly on some declining

5:18

onshore assets the Gulf of Mexico

5:20

which had kind of boomed in the late

5:23

seventies and into the eighties, and Alaska.

5:26

Those are all now either flat or declining.

5:28

Really, and what's happened is the

5:31

US independent oil and gas business

5:34

unlocked the code of fracking, which

5:36

is essentially, you drill

5:38

down into the source rock of

5:40

oil and gas and you pump

5:42

a bunch of fluids and propints

5:45

into it and break apart the rock and you release

5:47

a lot more oil and gas. And back to your point,

5:49

it's it's a pretty enormous technological

5:51

achievement, right. Whatever the questions about

5:54

the environment and other things, which we'll get

5:56

to But that's a pretty enormous technological achievement.

5:59

Yeah. I mean, the industry has been playing

6:01

around with fracking, you know, for at least

6:03

about forty or fifty years. It was only

6:06

really in the you

6:08

know, the first decade of this century that

6:10

companies like Mitchell Energy Chesapeake

6:12

Energy really began to get things

6:14

going. And it's only in the past decade that

6:16

it's really taken off with oil production. It

6:18

was previously a gas thing. So you're come back

6:21

to your point about how shale is emblematic

6:23

of the US of the industry overall.

6:26

Yeah, So the industry has been technologically

6:28

brilliant. Financially it's been a disaster.

6:31

You know. What's really happened is, you

6:34

know, in some ways, I see the frackers as being

6:36

a little like Tesla or

6:38

Uber or we Work. Even

6:41

what you've seen is the US engage

6:43

in a massive grab for market share in

6:45

the global oil and gas business, mostly

6:48

financed by third party

6:50

capital. So it's not necessarily

6:52

the venture capital that we've seen with companies

6:54

like we Work. It's very

6:56

accommodating high yield

6:59

debtmark and the equity market and

7:02

private equity and private equity as well and

7:05

what they've done is they've essentially allowed these

7:07

companies to outspend their cash flow

7:10

based on a story like all these companies

7:12

don't worry about the fact that we're outspending capital

7:14

now because we're growing into things

7:17

and the more market share we take eventually

7:19

will be fantastically profitable.

7:22

And I think what's happened, particularly over the last

7:24

year or so is that's kind of hit the wall.

7:26

Why did it hit the wall now when that dynamic

7:28

was always in place. In other words, it's not like

7:30

these companies once made money and then they stopped.

7:33

Why did investors start believing partly

7:35

it was an OPEC thing? You know, if you go back to Thanksgiving

7:38

twenty fourteen, that's that famous OPEC

7:40

meeting where OPEC decided to kill

7:43

you as shale, right, it wasn't going to cut

7:45

production, it was going to let prices

7:47

fall and the shale industry would

7:49

be devastated. What we've

7:52

seen is actually a

7:54

capital markets stepped in and twenty

7:56

sixteen, which was when oil briefly

7:58

dipped below thirty dollars a barrel,

8:01

is also, to my recollection,

8:03

the biggest year ever for

8:06

emp excy fundraising. If you can

8:08

imagine it actually happened just as oil

8:10

hit its lowest point, and it's because investors

8:13

were used to this cycle playing out where

8:16

all prices drop, stocks become cheap,

8:18

and then everyone gets ready for the next

8:20

up cycle. The next up cycle hasn't

8:23

happened. Uhha. So that's why now

8:25

you have this this brewing skepticism.

8:28

How does that play into the bigger

8:30

picture? Because the

8:32

markets are counting on continued growth from

8:34

US shale, right And I think it's

8:36

a fascinating thing because we tend to think of it through an

8:38

environmental lens, and we'll get to that,

8:41

but there's this this very economic

8:43

lens to think of it through, too, which is that these

8:46

companies don't make money and the market stops

8:48

funding them and their supply starts to go down.

8:50

What does that do to this dynamic

8:53

where everybody's predicting that oil prices will

8:55

stay low exactly? I mean, this is the big

8:57

debate now amongers

9:00

of supply and demand. It seems

9:03

the big agencies that we usually look to for

9:05

forecasts, so you know, OPEC, the

9:07

I, the EIA in the US

9:10

are all still reasonably convinced

9:12

that US shale supply will

9:15

prove resilient. Now there's

9:17

a little complication in twenty

9:19

twenty, and that we're also expecting a big

9:22

wave of NONWUS shale,

9:24

non OPEC production to come through in places

9:26

like Brazil Norway.

9:29

This is all stuff that got teed

9:31

up when all prices were at one hundred bucks

9:34

a barrel and is now starting to

9:36

come through because these conventional projects

9:38

take so long to debate, multiple years

9:40

to bring on stream. Yeah, so

9:42

twenty twenty is looking bad

9:45

anyway, no matter in terms of all prices,

9:47

no matter what happens with shale.

9:50

The big question is will

9:52

the capital spiggot being turned

9:54

off cause US shale

9:56

production to go from this one

9:59

million barrels a day extra every

10:01

year down to you know, five

10:03

hundred thousand barrels or even zero? And

10:05

what do you do You think that's likely and

10:08

what's what's the effect if that does happen? So

10:12

is it likely? It seems

10:14

to me almost certain that the

10:16

EMP business has to scale back,

10:18

and that's certainly the message that's

10:20

coming out from a lot of the companies. Only

10:23

this morning I was listening to the CONCO

10:26

kind of ten year plan, and most of that

10:28

plan boils down to things

10:30

look very uncertain. All you can do is try and keep

10:32

your costs down. So you

10:35

have to imagine that, given

10:37

that this is a business that's mostly

10:40

driven by its access to capital, that

10:42

it has to scale back in some way. Having

10:45

said that, I probably would

10:47

have said almost the same thing in twenty fifteen,

10:49

right, and somehow it

10:53

managed to prove us all wrong. So I

10:55

think that that factor has to be borne

10:57

in mind in terms of what it would do well.

11:00

For one thing, it would allow OPEC

11:03

to claw back a bit of the power

11:06

that it's lost over the past few years in

11:08

terms of trying to support all prices.

11:11

In an extreme scenario, if you had

11:13

us supply growth suddenly

11:17

flip and everyone couldn't count

11:19

on it, you have the potential

11:21

then for a pretty serious increase

11:24

in all prices. I think though,

11:26

that this cycle would be different

11:29

from the last cycle that we had if that

11:31

was to play out. In other words, prices wouldn't shoot

11:34

over one hundred dollars a barrel because there's

11:36

more flexibility in the system. It's

11:38

it's it's less where the price would

11:40

settle, it's more what the impact of

11:42

that would be. Because I think when

11:45

all prices last peaked

11:47

above a hundred bucks a barrel and then

11:49

collapse. I think we were all in the mindset

11:52

that all prices, you

11:54

know, were still stuck in the usual cycle,

11:56

that they would go above a hundred, come down,

11:58

go above a hundred, come down. I

12:00

think this time, if we were to see all prices

12:03

jump above a hundred bucks a barrel, given

12:06

what's happened in the last few years in terms

12:08

of two main things. One

12:11

is greater awareness of

12:13

what climate change is doing to us, and

12:15

secondly this changing relationship

12:18

between the US and the Middle East, I

12:21

think another superspike in all prices

12:24

is probably the worst thing that could happen to the old market.

12:26

We elaborate on that. Why Well,

12:29

if you go back to two

12:31

thousand and eight, which is the last time

12:33

I would say politically the US was

12:36

serious about dealing with climate change. You may

12:38

remember there was a carbon pricing bill

12:40

that died in the Senate, but there was

12:43

a bill right there, at least was a bill.

12:45

What was interesting about that time was that there was

12:47

an alignment between environmentalists

12:50

on one hand and you

12:52

know, the kind of security hawks

12:54

on the other. Because people were getting worried about

12:56

our dependence on this fractious

12:58

area called the Middle East for US supply.

13:01

What's different this time, I think is

13:04

if we were to get another one hundred dollars

13:06

a barrel superspike in all prices,

13:09

it would absolutely lend more credence

13:11

to the environmentalist movement, particularly

13:14

because in the intervening decade we've

13:16

seen the cost of alternative technologies drop

13:19

dramatically, so electric vehicles no

13:21

longer seem fantastical. Renewable

13:23

energy is pretty cheap now. But

13:26

I think we would also see that security

13:28

element come back, but with a crucial twist,

13:31

which is, these days the US does not

13:33

see itself as quite so

13:35

dependent on the Middle East in

13:38

certain respects. As we can see, particularly

13:40

with the current administration, it is pulling

13:42

back in all sorts of ways, in part

13:45

because of these freedom molecules, as the Trump

13:47

administration calls them, right, what did you call

13:49

them? Freedom frack? Freedom

13:51

fracking. Yes, that's

13:54

a path that administrations in the past have

13:56

not pursued, and that well they weren't able

13:58

to. But the Obama aministration pretty

14:01

explicitly did not want to use energy as

14:03

a geopolitical weapon. How big

14:05

a change is it in US policy to

14:07

have the Trump administration using

14:09

it so explicitly. Oh, that's enormous.

14:11

I mean, I think the standard US policy

14:15

on energy markets posts the seventy

14:17

three crisis was to essentially

14:19

use markets and diversification

14:22

and you know, protecting global trade

14:25

to manage its energy exposure,

14:28

almost like an investor diversifies their portfolio

14:30

to manage their risk. We've now seen

14:33

that flip and the US is actually saying

14:35

the speech. I think it was the speech

14:38

that Mike Pompeo gave it Serial Week

14:41

earlier this year, where you

14:43

know, he actually talked about values being

14:45

attached to US energy exports

14:48

and using those exports to export

14:51

American values. I mean, that's a that's

14:53

a huge change in the old market we've had it gone

14:55

back to a more mercantilis framework.

14:58

You had it in one of your pieces, and he' said we're

15:00

not just exporting American energy, We're

15:02

exporting our commercial value system to our

15:04

friends and to our partners. Our model matters

15:06

now, frankly more than ever in an era of great power,

15:09

rivalry and competition, and they're using

15:11

their energy to destroy ours. It was quite

15:14

a strongly worded speech. Yeah, not great

15:17

if you're in Europe, of its name. No, isn't

15:19

there a risk to that if fracking companies

15:22

do turn out to be well, I suppose

15:24

it's not clear what the fate of Tesla and Uber is,

15:26

but it's certainly clear what the fate of we Work is. If

15:28

the analogy does hold and fracking companies

15:31

turn out to be potentially like we Work

15:33

and they can never make money, isn't that a dangerous

15:35

game for the US to be playing? It is?

15:37

I mean, we have to consider how it

15:39

would play out. I mean, the thing is the

15:42

thing with the US fracking business is

15:44

we tend to think of it in all or nothing terms.

15:47

So if a bunch of frackers

15:49

can't make their debt payments they go bankrupt,

15:51

what does that mean? Really, it

15:54

doesn't necessarily mean production goes to zero.

15:56

The assets change hands. Whoever

15:58

ends up owning the assets wants those assets

16:01

to produce, and actually, once you take the

16:03

burden of debt off them, in

16:06

some ways, there are actually better position to keep producing.

16:09

It is dangerous in the sense that

16:11

the US is being overconfident.

16:14

Yeah, I think in its energy

16:17

independence or dominance dream

16:19

that it has now, the US is

16:21

not energy independent. Yes,

16:23

next year, technically it

16:25

will become a net oil

16:28

exporter for the first time in decades,

16:31

it will still be importing millions

16:33

of barrels of crude oil a day,

16:35

because that's just how the oil system works.

16:38

You know, there are different grades, there are different

16:40

prices on offer. There's a reason

16:42

we haven't embraced autarchy. It's

16:44

generally not good for the economy. And

16:47

isn't the concept of energy independence itself

16:49

somewhat flawed given that we

16:52

live in a global economy, and so even

16:54

if we were producing enough energy to

16:56

fund all our needs, we're not producing enough to

16:59

ask fund Asia's needs. So Asia's

17:01

dependent on the Middle East, We're dependent on Asia.

17:03

Isn't there something sort of flawed

17:06

at the heart of that notion in today's

17:08

very global economy? There is if

17:11

you believe in a very global economy. I

17:13

mean, I would say all the signals

17:15

coming out of the Trump administration

17:18

is that it doesn't believe in a global

17:20

economy. It believes in great

17:23

power rivalry and

17:25

trade barriers and reverting

17:28

back to a

17:30

trading system that sort of predates

17:33

the Bretton Woods arrangements

17:35

at the end of the Second World War. It made

17:37

sense in the past for the US to

17:39

guarantee Middle Eastern oil

17:42

supplies because it was dependent on it and its

17:44

allies that we're helping it face

17:46

off against the Soviet Union would dependent on

17:48

it. That world no longer holds, and

17:50

I think what we've seen with

17:54

Obama, to be honest with regards

17:56

to the Middle East, but we've seen it massively accelerate

17:59

under Trump. The US is just stepping back

18:01

from a lot of the arrangements that used to underwrite.

18:04

And as somebody who's covered the energy markets

18:07

now on the banking side and then as a journalist

18:09

for almost two decades, how big a change

18:11

is this. I mean, it's a completely

18:13

changed world. We have become used

18:16

to the idea that as volatile

18:19

as energy markets can

18:21

be, undergoding it all were some

18:23

constants. US security guarantees,

18:26

free trade, freedom of navigation.

18:29

Those are the things that enable us to

18:32

go from a ten million barrel a day

18:34

world to one hundred million barrel a day

18:36

world. I'm not sure we can

18:38

necessarily count on oil

18:41

demand continuing to grow in a world that's changed.

18:43

It's really interesting because it goes back

18:46

to your point about oil sitting at

18:48

this intersection of both

18:50

economic factors and political factors.

18:53

And if the economic factors were always volatile,

18:55

the political ones were in a sense more

18:57

constant, Right, they were more fixed,

18:59

And they're both completely wildly

19:02

unpredictable. Absolutely, And also

19:05

obviously the third element is we've

19:07

begun to price in the thing that's always been there

19:09

but which we always ignored, which is the

19:11

environmental cost. I wanted to go back

19:13

to something you'd said earlier, which is, which is

19:15

interesting in a tiny bit counterintuitive,

19:17

but not once, but that

19:20

higher oil prices actually can be really

19:22

good for the advent of renewables, right. And

19:24

so in some ways the fact that prices are

19:26

low as a result of fracking

19:28

has been a benefit to all of us, a benefit

19:31

to our pocketbooks, but it's also sort of thwarted

19:33

into him that would be to our long term benefit.

19:36

Right, Is that the right way of thinking about it? Yeah?

19:38

I think so. I mean I think particularly in terms

19:41

of gas, right, I mean, the

19:43

cheap gas that's come from the fracking revolution

19:46

obliterated the US coal industry.

19:48

Yeah, but it also presents a fairly formidable

19:51

challenge to renewables. And in some ways

19:53

we're reaching a point in certain markets where

19:55

renewables is if

19:58

that's a word true target these days

20:00

is less coal and it's more natural gas.

20:03

So do you believe, because there's such heated

20:05

debate about this, is natural gas a bridge

20:07

fuel to a cleaner future? I

20:09

mean, I think the problem with the whole bridge fuel thing

20:12

is it's a blanket term. It's

20:14

obviously a nice selling point that

20:16

Chesapeake among other companies used to push.

20:20

I think gas plays a useful

20:22

role in balancing renewables.

20:25

I think in certain markets. You know, if you look

20:27

at places like China or India, it

20:30

can play a much more aggressive role, partly

20:32

because you still have a lot of coal fired

20:35

power there. The downside for those countries,

20:37

I think China in particular is for them

20:40

they still look at they look at gas,

20:42

and yes it helps them on the coal side,

20:44

but they're still dependent on energy imports.

20:47

And this comes back to the geopolitical

20:49

aspect of all this is, you know, if you're

20:51

a planner in Beijing, yes,

20:54

on the one hand, you definitely want to clean up the air

20:56

in your major cities. What you

20:58

really don't want to do is repeat

21:01

what the US did in the twentieth century and

21:03

become dependent on places like the

21:05

Middle East or countries that might turn hostile

21:07

to you for your energy. And

21:09

so when people,

21:12

for example say, well, you

21:14

know, we can be bullish on fossil fuels because

21:16

China and India still need to industrialize

21:19

and get up to our consumption levels that we've

21:21

had in the West, I think it's a mistake

21:23

because there really is no guarantee

21:25

that they're going to repeat the model of development

21:27

that the West had in the twenty They're actually trying to learn

21:30

from the past instead of repeating the mistakes

21:32

of the past. That's really interesting.

21:34

When I was doing my book about energy,

21:37

I put a lot of work into trying to figure out

21:39

when the dawn of the age of renewables would

21:41

be and figured out at least that just like with

21:44

energy markets, no one really knows when

21:46

it will be. Is that still the case or do you feel

21:48

like now you have a sense of when we might

21:50

be able to see the end of the fossil fuel industry.

21:53

I mean, I think we're already at the dawn of it, definitely.

21:56

And the way I think about that is

21:58

looking at marginal change. So already

22:01

you see renewable power and

22:04

even things like electric vehicles are

22:06

still tiny parts of the overall

22:08

market. But when you look at their share

22:10

of the growth in the overall energy

22:13

or automobile market. They're already

22:15

at more than fifty percent in a lot of major

22:17

markets. So to my mind, when new

22:19

technologies begin to capture a bigger

22:22

share of growth, that's when they start

22:24

to attract more capital. It's almost like

22:26

a self fulfilling cycle.

22:28

I mean, I think there's a reason why

22:31

big incumbent car makers who

22:33

are selling eighty odd

22:36

million new internal combustion engine

22:38

cars a year globally are

22:40

putting the vast majority of their R and D spending

22:43

into electric vehicles, which maybe

22:46

a tiny part of their sales now, but they

22:48

clearly see as being the way things are

22:50

going. It's a very talent statistic, I

22:52

think. In terms of looking towards

22:55

peak demand. I try not to give

22:58

hard and fast date because

23:00

you'll be wrong on that, because I will

23:02

be wrong. But I think, you know, look back over the

23:04

past decade, you go back

23:06

to November two thousand and nine,

23:09

it'd be really hard to predict what

23:11

has happened. I mean, the energy business

23:14

has changed out of all recognition.

23:16

The idea that we would end the decade with

23:19

Saudi Aramco trying and failing

23:21

to sell itself to international

23:23

investors, to me, is just wild. It's

23:27

almost certain to me that when we get to November twenty

23:29

twenty nine, there will have been enormous

23:31

changes in the energy business, and given the

23:34

underlying dynamics, I would guess

23:36

those changes tend more towards the

23:38

peak demand end of things. Yeah,

23:40

it's shocking when you look back to the late two thousands,

23:42

right, and the hand ringing from Congress about

23:45

US shortages of oil and natural gas,

23:47

and now the US is the world's biggest producer of

23:49

crude oil, right. I mean, it's just it's

23:51

astonishing how different things are

23:53

from from where they were supposed to be.

23:55

Before we get to Saudi Aramco, I wanted to ask a

23:57

last question about renewables. Would you say

24:00

that if India and China do want to not

24:02

repeat the mistakes the US made as its

24:04

economy was industrializing, if

24:07

they could put their investment

24:09

instead in renewables, that they could

24:11

actually avoid our trajectory. Is

24:13

the technology there that that's doable? The

24:15

technology is there that they can certainly start

24:18

doing it now? I mean, if you

24:20

look at the price statistics

24:22

and the projections from Bloomberg's

24:25

own Bloomberg New Energy Finance. I

24:28

mean they foresee, essentially China

24:30

and India are the ballgame when it

24:32

comes to renewables because they still

24:34

have growing energy needs, they have enormous

24:37

pollution problems, and they have this added

24:39

geopolitical issue of

24:41

becoming dependent on places like the Middle East

24:44

when they don't necessarily have a

24:46

giant navy to help them with that. The

24:48

weird thing is China is in the uncomfortable position

24:50

right now of depending more

24:53

and more on Middle Eastern oil and

24:55

by definition, depending on the US Navy

24:58

to keep the sea lanes clear. That's

25:00

a really strange dynamic. That's certainly

25:02

not something they want to be dependent on for a long time. But

25:04

yet we have to do that, contrary

25:07

to some of the other moves

25:09

and the Trump administration. We almost have to do

25:11

that because we're dependent on imports from

25:13

China. Right. So it's not as if

25:15

we're doing that in an altruistic sense. We're doing

25:17

that because we need to economically

25:20

speaking. Oh yeah, and I mean it

25:22

was never altruistic. I mean, you

25:26

know, it had a strategic game and the

25:28

strategic games of change. Yes, certainly.

25:31

So let's let's go back to Saudi Aramco, because

25:33

that is completely fascinating, and

25:35

even in the last I think you wrote a piece, even in the last

25:37

four or five years, it's astonishing

25:39

how that's changed. And so maybe that's also

25:42

a way to help see how

25:45

the energy markets have changed so dramatically.

25:47

So tell us about Saudi Aramco

25:49

then and now and what happened

25:51

in the interim. So Saudi

25:54

Aramco is obviously it's the foundation of

25:56

the Saudi Arabian economy. More

25:59

importantly, it's the

26:01

vital part of the social contract between

26:03

the ruling family and this

26:06

young, fast growing population.

26:08

And if we go back

26:10

to twenty fourteen, which

26:13

is when all prices collapse,

26:15

I think at that time the view

26:17

was Sadi Aramco was still essentially

26:20

the top dog in OPEC, which was still seen

26:22

as the top dog in the all

26:24

market, and if things were

26:26

going to play out in the normal way, it was about to

26:28

go through a period of low revenues

26:31

and then the cycle would come back up and we'd

26:33

be back to what we were doing before. I think

26:36

a few things have changed.

26:38

One is OPEC has lost any

26:40

sort of control it had over the oil

26:42

market. I mean to me, even though

26:45

you know the lights havn't exactly been switched off

26:47

in the ballroom in Vienna. But to me, OPEC

26:50

is basically dead, and is that essentially

26:52

a function of US fracking. It's a

26:54

function of US fracking. I think

26:56

it's also a function of the fact that outside

26:59

of Saudi Arabia and a few of the

27:01

Gulf monarchies, let's face it, most

27:04

OPEC members it's not that they

27:06

struggle to you know, stay

27:08

within their quotas, it's that they

27:10

struggle to produce. They're royal.

27:12

I mean, you look at the tragic situation in

27:15

Venezuela. Yes, it's Saudi

27:17

Arabia and a lot of walking wounded countries

27:19

in OPEC. And I think the fact that they've had to

27:22

come up with this thing called plus where

27:24

they embrace Russian that's

27:28

that's right, that's including the other ten countries

27:30

that are helping them keep a lid on production.

27:33

Yea. The very fact that that exists now

27:36

tells you that OPEC as an entity is pretty

27:38

much dead. And that's another shocking

27:40

dynamic rate that you would have predicted a decade

27:42

ago. So back back to a Ramca, I think you

27:45

wrote a piece. It's still the most profitable

27:47

company in the world. Apparently from what we can see

27:49

into its numbers. Yes, but yet

27:51

it's not able to go public at nearly

27:54

the valuation that Mohammed

27:56

bin Salman had once predicted. He'd said two trillion

27:58

dollars and where are we now? So

28:00

the range they've got now is about one

28:02

point six to one point seven trillion, But

28:04

that is predicated on selling only

28:07

about one half percent the company into

28:10

the Saudi Arabian domestic

28:12

stock market, which has a free float which is

28:14

smaller than exomobiles market cap,

28:16

And so that basically means it doesn't then

28:19

the numbers aren't real. No, I mean I characterize

28:21

it as more of a sort of elaborate

28:24

form of taxation than a real IPO. Explain

28:27

that. Why an elaborate form of taxation. Well, essentially

28:29

you're going to sell it to a lot of domestic shareholders,

28:32

so you'll have the retail part of

28:34

that, and they're being lent money by

28:36

Saudi banks to help fight

28:38

to help fund their share purchases. And then you have

28:40

a lot of rich Saudi families

28:43

who you know, I think it's fairly

28:45

safe to say have been encouraged by

28:47

the regime to participate

28:49

at a certain price, But doesn't that in

28:51

some ways obviate the purpose of the IPO.

28:54

At least the purpose of the IPO of a Ramco

28:56

as I understood it was to provide

28:58

the funding to help transitions Audi Rabe's economy

29:01

away from dependence on oil because

29:03

right now, even at current oil prices, they can't

29:05

fund their social spending. Right NF

29:07

prices plumb, it further adoe to renewables.

29:10

What happens. But if you're effectively making

29:12

your own population by the shares,

29:14

isn't that why bother? Yes? Good

29:16

question. I think they

29:19

obviously felt like they needed to go

29:21

ahead with it. I think in a normal situation

29:23

the IPO would have been pulled. They've

29:26

sort of failed on every aspect

29:29

of what this was supposed to achieve. It was supposed

29:31

to mark the kind of

29:33

reform of the Saudi economy and

29:35

provide a lot of funding to help

29:38

with that. As it turns out, it's not going to help

29:41

beyond You know, twenty five billion is not to be sneezed

29:43

at, but it's definitely not what they were planning

29:45

on doing. There's no big kind of

29:48

global coming out party because it's

29:50

not being marketed outside the

29:52

country. And I think what this gets back

29:54

to is, on any given

29:56

measure, Aramco is fantastically

29:59

profitable. It's margins,

30:01

it's return on capital, everything

30:03

just blows away the rest of

30:05

the competition in the our business.

30:07

But the difference is if you look at a company

30:10

like you know, an XON or a BP or

30:12

something like that, their profits are smaller.

30:14

But on the other hand, they don't have to fund an entire

30:16

country with those profits. And that's

30:18

a Ramco's issue, and it's

30:20

the reason the valuation wouldn't

30:24

get to where they wanted it to be, because,

30:27

yes, the cash flows are enormous, but if you're

30:29

a fund manager sitting in London on New York,

30:32

you're going to put a pretty high discount rate

30:34

on that because you know that what you're buying isn't

30:36

just an our company. What you're also buying

30:39

is a stake in that thing known as the Saudi

30:41

Reform Project. I saw that line in one

30:43

of your pieces about how that was a Ramco's

30:45

purpose, right funding an entire country. It's it's

30:48

very, very different. Why has the

30:50

investment community's attitude toward a Ramco

30:52

change so dramatically in recent years

30:55

such that excitement about this mammoth

30:57

IPO of this profitable company became

31:00

skepticism. Is that partly what we've seen about

31:02

from the Saudi regime. Is it also

31:04

a commentary on the dawn of the age of renewables,

31:07

just as much as the auto manufacturers

31:10

moving to electric carses Or is

31:12

it both? I think it's all those things. I mean, I think

31:14

it's partly it was missold to

31:16

my mind that IPO should have happened

31:19

after a long period of reform.

31:21

It should have been the capstone of reform. It should

31:24

not not the the kind of teaser

31:27

for reform, because what you're essentially

31:29

asking people to do is to buy

31:32

a stake in the promise of reform.

31:35

It would have been a much easier sell if

31:38

the Saudi Arabian government could have

31:40

pointed to a bunch of

31:42

positive changes and then said, okay, now we're

31:44

going to sell you part of our oil company.

31:47

Their fixation right,

31:49

and that again, you know, just served to

31:51

emphasize exactly what you were buying

31:53

into. This obsession with the two trillion

31:56

dollar figure was clearly clearly

31:58

kind of spiked the ball in the process.

32:01

And then I think the growing awareness

32:03

that something will have to be done to

32:05

address climate change is

32:07

also weighing on people's minds. And you

32:09

know, if you're a fund manager, I

32:12

mean maybe in New York, I think, particularly

32:14

in a city like London, you're

32:16

going to have a tough job saying

32:19

to people I'm buying into

32:21

sixty odd years worth of

32:24

crude oil reserves at a time when

32:26

the scientists of the IPCC are

32:29

telling us that if we don't stop burning

32:31

this stuff within the next fifteen to twenty years,

32:33

we're dead. That's a real change, isn't

32:35

it. Because maybe I'm being too harsh,

32:38

but I would have said five years ago, even

32:40

three years ago, investors wouldn't have given a

32:42

dam and now they do. Is

32:45

that fair? That's certainly the impression

32:47

I have. I mean, it's been one of the biggest changes

32:49

in the past few years, is just how

32:52

much momentum the

32:54

movement to do something about climate change

32:57

has gained, and just also the attack

33:00

and politics of it. I mean, we talked earlier about

33:02

the carbon tax

33:05

bill in two thousand and nine. I mean,

33:07

to be, that's only ten years ago. That seems almost

33:09

quaint. Now. Yes, people still talk

33:11

about a carbon tax, and I think it remains

33:14

probably the most important tool that

33:17

we can use. But the argument has moved

33:19

way beyond that. You look at what was being talked

33:21

about by Democratic presidential

33:23

candidates, what's being talked about at

33:25

individual city levels,

33:27

and in some ways, you know, the industry

33:30

has only itself to blame

33:32

on this. It has spent a good thirty

33:35

years obfruskating the argument, blocking

33:37

action, and what that's done

33:39

is it's kind of like pulling back on an elastic

33:42

and when that elastic band snaps,

33:45

it's going to blow way past things

33:47

like carbon taxes and go direct for things

33:49

like gasoline car bands in major cities,

33:52

which we're already seeing talked about in Europe.

33:54

Obviously progress, But why is there this split

33:57

that you've mentioned and written about between the

33:59

big oil comes and the frackers about the

34:01

idea of a carbon tax. Oh? I think

34:03

it's about time horizons. Okay,

34:05

you know, so the fracas, especially

34:08

these days, I mean, they don't really look

34:10

beyond the next twelve months, right, because

34:13

what they want to do is make sure that they can balance

34:15

their spending. The larger

34:17

oil companies tend to have much

34:20

longer time horizons decades,

34:22

and they're starting to care that they and we are still

34:24

around in decades. Well, yeah,

34:26

they're starting. I mean what they're thinking about

34:29

is does this company have a viable

34:31

business model ten years from

34:33

now? You know, can we really

34:35

attract the attention

34:38

and capital we need from investors

34:40

in a world where demand

34:43

may not have plummeted, but demand has stopped

34:45

growing. That's just not something they've had to

34:47

deal with before. It's actually really interesting

34:49

because I mean, the world moves forward and fits and

34:51

starts forward and backwards. Right that even though

34:54

there has been this change on the part

34:56

of investors, you've had growing

34:58

up concurrently with that US frackers,

35:01

right, which only exists because investors

35:03

had until recently been very willing

35:05

to fund them, right. Yeah. And so you have, just

35:08

as the big oil majors are starting

35:10

to think more long term about these these consequences,

35:13

you have this other industry that has grown up in

35:15

parallel, right, that is sort of thwarting

35:17

all of that. And by the effect it's had on oil

35:19

prices, the way in which it's lower oil prices,

35:21

that has pushed back perhaps some of the work that

35:23

would have been done on renewables. Yeah, no,

35:26

I think you know, it's interesting to watch

35:28

the majors coming into shale.

35:31

They sort of ignored it. Yes, for a long time

35:34

time. It's a business model

35:36

that that isn't really suited to very

35:38

large companies, which

35:40

have tended to be more focused on pulling

35:42

off gigantic, multi year projects.

35:45

But now they're saying, well,

35:47

you know, we can actually go in and make

35:49

this work economically. And if you look

35:51

at Exxon and Chevron, they are

35:54

all in on shale and saying

35:56

that, unlike to date,

35:58

they will actually turn this into a profitable cash

36:01

generating business. I mean, the jury is out

36:05

on that for now. I think, you

36:07

know, one of the things that's happened with the fracas

36:10

in particular, is people

36:13

used to look past the bad capsule

36:15

management because they would say, well,

36:17

even if these guys are paying themselves too much,

36:20

and even if they tend to, you know,

36:22

go way way over

36:24

their heads when there's a boom, when the oil

36:26

price goes up, I'll make out like

36:28

a bandit. But what

36:31

I've noticed, particularly in the last eighteen months

36:33

or so, investors are no longer pricing

36:35

in that oil option. They are no

36:37

longer saying, well, bad as this company

36:39

is. When all goes back to eighty ninety

36:41

one hundred bucks I'll still make a profit.

36:44

They're just not banking on that anymore. That's

36:46

a really interesting change too. And perhaps you

36:48

could argue that big oil getting interested

36:51

in fracking might create

36:53

a longer term orientation around

36:55

it. Right, So perhaps you could argue even

36:57

if they can't, even if it turns out they can't make money

36:59

at it, the other that having them step in

37:01

and invest in it will actually be good

37:04

for the world. Is that to naive a point of view,

37:06

good for the world in the sense of keeping supply good,

37:08

good for the world in the sense of being a bit

37:11

more responsible, being a bit more long term

37:13

in their view of it, instead of being being

37:15

operating on a tomorrow or twelve month horizon

37:17

like the frackers do. Yeah. Possibly, I

37:19

mean, I think the bull argument for

37:21

the major's going into shale is

37:24

that it will extend the life of the resource.

37:26

Yea, that you may not get so

37:28

many years where production grows at a million

37:31

barrels a day, but you'll have a long period

37:33

where it grows at five or six hundred

37:35

thousand barrels a day because they'll dump

37:37

all the bad acorage, they'll focus on the good acorage,

37:39

and they'll approach it in a more methodical

37:42

manner. And yes, on the environmental

37:44

side, they will. They'll be better about

37:46

flaring, and they'll be more responsible

37:49

with their fluids because they care more about

37:51

their brand, etc. Etc. Are you surprised

37:54

when you look back that it was the Obama administration

37:56

that overturned the ban on exports and

37:59

is that thing that surprised

38:01

you and that you think matters or do you think it's

38:03

small enough that it's irrelevant.

38:06

I don't think it's irrelevant. It didn't

38:08

surprise me a huge amount. Obama

38:11

obviously, early in his administration there

38:14

was this push to do something on climate change,

38:17

once most of his political capsule

38:19

had been burned on healthcare reform,

38:22

that focus on climate change

38:24

and doing something about carbon emissions. Kind

38:26

of it didn't fall away because

38:28

obviously we still had action aimed

38:31

at cleaning up power plant emissions

38:33

and that sort of thing. But it was definitely

38:36

it was opportunity downgraded, and in

38:38

fact, overturning the

38:40

export ban was done in exchange

38:43

for some concessions from Republicans on other

38:45

environmental measures, and

38:47

I think it was it was a big deal because

38:49

it allowed the fracking

38:51

boom to continue. I mean, if you know if you

38:53

go back to before the export

38:55

ban, the differential between US OR prices

38:58

and international loop all prices

39:00

would had blown out to an

39:02

enormous extent, and you would have definitely seen

39:05

a lot of companies either go under or

39:08

have to scale back drilling because they just weren't getting

39:10

the prices they needed. It's just fascinating. It's

39:12

back to your point about how much politics matters

39:14

in this industry once again. Right to

39:17

believe that the export band over to the

39:19

overturning of the historic forty year export

39:21

band actually had something to do with healthcare re form,

39:24

right, I mean, that's that's politics and spades.

39:27

So I wanted to before we finished up. I wanted to

39:29

go back to Saudi Aramco because

39:31

it seems to me that it's it's easy

39:34

from a sort of naive, perhaps

39:36

naive perspective, to say,

39:39

oh, how great that they can't take a ramco

39:41

public. It's a commentary on the repressive

39:43

Saudi regime that needs to change.

39:46

But given how much the

39:48

regime has been dependent on oil

39:50

revenues and would be dependent on a ramco

39:52

to continue to essentially fund social stability,

39:55

is this something we should be celebrating or is this something

39:57

that's actually a little bit dangerous.

40:00

Oh, it's it's it's quite dangerous.

40:02

I mean, I think ever since

40:05

I think it was January twenty sixteen when

40:07

Prince Mohammad been Salmon gave that initial

40:09

interview where he laid out this vision. You

40:12

know, when you have a regime

40:14

that is quite ossified, that

40:17

depends on you know, a rentier economy,

40:21

has been quite repressive. The most dangerous

40:23

moments for those regimes is when

40:25

they embrace reform, because that's

40:28

when the cracks can begin to appear,

40:30

because everything has been kind of suppressed. That

40:34

you hold out this vision of what

40:36

can be and you start to tinker with

40:38

the machinery of the state, and at

40:40

quite a fundamental level, you know, listing

40:43

Saudi Aramco and potentially laying

40:46

out all its secrets to a global investor

40:48

audience, which didn't quite happen in the end,

40:50

but it was held out there. That's

40:52

a big move, and I think it spoke to the

40:56

pressures on the regime. I mean, I

40:58

think like the oil market since the Second

41:00

World War, in some respect, Saudi

41:02

Arabia is a product of this kind

41:05

of packs Americana oil dependent

41:07

global economy that we've had for the

41:10

past seventy years or so. And I think they saw

41:12

the writing on the wall in terms of all

41:14

prices not necessarily roaring

41:16

back in the way they used to the US,

41:19

not necessarily as interested in the Middle

41:21

East as it was, and so

41:23

they had to change. But the problem is when

41:26

you've been the sort of embodiment

41:29

of not changing so that long,

41:32

you then seek to change yourself. That's a very

41:34

dangerous moment. And then, particularly

41:36

as we've discussed the way in which it went, where

41:39

it's almost a version of the Emperor has no

41:41

clothes, right, Instead of having it be

41:43

the two trillion dollar deal of the century,

41:45

it's turned out to be quite a bit less

41:47

than that, right, Yeah, those are

41:49

all the risks you run. And you

41:52

know, Saudi Arabia, like you know, a

41:54

lot of it's it's peers in

41:56

the Middle East, you know, and has essentially

41:59

had this social contract, which is the

42:01

government will provide a lot of funding

42:03

for things and a lot of subsidies. You know, look at

42:05

the riots in Iran

42:08

over moving the gasoline price up from

42:10

a few cents to twenty

42:12

cents or whatever the price is. Yeah, those

42:15

things matter, and when you start to tinker

42:17

with them. It can unleash

42:19

you forces that you've kept down for a long time.

42:21

It's a really interesting way of thinking about

42:24

this and where we are now, because I think we

42:26

do tend to celebrate the advent of renewables

42:29

is entirely a good thing, and from some standpoints

42:31

it is. And you had a great quote from Thomas

42:34

Edison in one of your recent pieces.

42:36

But in some sense, as we so often do, we're also

42:39

not thinking through all of these broader ramifications.

42:41

Right, what does this US

42:44

led oil based world economy?

42:46

What does it mean when that starts to fall

42:48

apart? Yeah, well, I think with any

42:51

big change in the underlying geopolitical

42:53

architecture, there's going to be winners and losers. You know,

42:55

the oil age elevated

42:58

a place like Saudi Arabia from relative

43:00

obscurity to a you

43:02

know, not a superpower, but definitely a global

43:05

power. There's a reason it

43:07

has retained that spare capacity

43:10

to maintain its relevance, and it's kind

43:12

of hand on the tiller of the global economy.

43:14

Likewise, as the energy system

43:17

shifts to other technologies,

43:20

that's going to create relative winners and losers

43:23

as well. The US is in the fairly

43:25

enviable position of if

43:27

it uses the opportunity correctly of

43:31

you know, having the opportunity to be a winner.

43:34

In either case. It does have large

43:36

natural resources, but it also has

43:38

amazing technological capability deep

43:40

capsule markets. It can win in

43:42

either scenario, but that won't hold true for a

43:45

lot of other places. I think it's back to

43:47

your point about how things are changing

43:49

now in a way that is just the piece

43:52

of change is just is just dramatic. Thank

43:54

you so much for coming. Thank you. I

43:57

always love it when I think I'm thinking broadly

43:59

about a topic, but it turns out there

44:02

is so much more, and that I was actually

44:04

thinking quite narrowly, perhaps

44:06

because of my previous work on fracking. I'm

44:09

obsessed with the lack of profitability of these

44:11

companies, are they we works as leam

44:13

asked, and what that may mean for oil

44:15

prices. But really this is just part

44:17

of a much bigger issue. The entire

44:20

framing of our world as a US

44:22

led, oil driven global economy

44:25

is changing drastically, and that

44:27

has huge ramifications for economies

44:30

and for politics. All that we

44:32

know for sure is that in a decade we'll look

44:34

back and be shocked at what we didn't

44:36

see. Making

44:38

a Killing is a co production of Pushkin Industries

44:41

and Talk and Blade. It's produced

44:43

by Ruth Barnes and Laura Hyde. My

44:46

executive producers are Alison McClean

44:48

no relation in Making Casey. The

44:51

executive producer at Pushkin is Mia Loebell.

44:54

Engineering by Jason Rostkowski.

44:57

Our music is by Jed Flood. Special

44:59

thing to Jacob Weisberg at Pushkin

45:01

and everyone on the show. I'm Bethany

45:04

McClain. Thanks so much for listening. Find

45:06

me on Twitter at Bethany mac twelve

45:09

and let me know which episodes you've most enjoyed.