Comments
Transcript
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wjDont give up your petrol cars yet. I was looking at a Volvo t8 hybrid BUT: I asked the dealer when to replace batteries? Volvo only gives warranty on batteries for 100 000 km. Then I asked him since we “try” to live in a recycling world. Once I've changed the batteries do you have a plan to recycle them? Can I see your plan? He looked at me in shock and didn’t have an answer. It is now 4 months and still didn’t call me back. Just to add some more green news to EVS> On a German grid it was calculated that an electric car had to go 100 000 KM before it could be considered C02 efficient! (This is due to the terrible C02 inefficient batteries). Make your own conclusion but I have decided on a Porsche Cayenne > its more green!
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MKNice charts however Tracy struggled to get her points across clearly. The 3 way conversation seems less effective - works better if there are opposing views.
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HOI am soooooooo tired of listening to kvetching about Fed and CB policy, especially the kind that has been consistently and fundamentally wrong about asset prices. It is all noise and no signal, ever. This view predicts doom on both sides of rate cycles, which may improve their odds of being right at some point, but so far has just been wrong. The GFC was a huge deal, but looking for it - rather than normal cycles in anything - around every corner is capital destructive.
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dpMost of those companies will be out of business and leave behind polluted water tables for the locals to deal with. The Fed and the banksters truly are the enemy of the people
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JSFirstly: As someone who lives in Texas and works heavily with energy companies, I was disappointed in the lack of specificity in some of the respondents' answers to basic questions about the industry in this discussion. Secondly: Yes, many people are expecting lower energy prices in 2020 and layoffs, but the ~$200B of expansionary capex in refining and ethylene plants is a major driver of capex growth going forward. You cannot simply look at the upstream segment while ignoring the midstream and downstream segments when attempting to analyze the health of the industry as a whole. Thirdly: There was very little discussion emerging technologies in the oil patch, specifically carbon sequestration and carbon dioxide flooding, to enhance oil recovery and elongate the well life cycle. All in all, this was not my favorite real vision piece.
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CLThis was kind of hard to follow and whatnot. I mean, the content worth taking in is not nuanced and whatnot.
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BCAnswer to the question of when was the last refinery built in the USA..... 1976
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JAXLE current;y has a P/E ratio around 7. Question is, is the ugliness priced in? At these prices, I am a buyer. If it goes lower, I’ll be buying more.
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UJThere is a technology for us to use but when will they release it.... the big question is for the investor is the timeline we already started the transition, which way they choose for energy is an open question. https://www.youtube.com/watch?v=KsPLmb6gAdw&t=2639s
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FDI liked this exchange, glad to see the concept back on RV. I didn't get the impression Ed was out of place, he moderated the conversation very well. Keep up the good work RV team.
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AHSo what does this mean for MLPs?
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AKGreat breakdown, long term oil just seems like a rough play with electricity based vehicles and machinery on the ramp up. This in combo with low short term profitability makes you wonder who will actually buy oils stocks and based on what narrative.
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ECA lot of excellent RV regulars. IMHO Danielle DiMartino Booth runs away with the 2019 RV MVP with this one. She fires out very important information like a rapid fire fully automatic rifle. Loved getting Tracy's insights & Ed was solid. Got a ton out of this, thanks to all involved.
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DCA welcome return for The Exchange.
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DHI agree with Gary G. This should a forum for these experts to speak without interruption. It is one thing if a legit SITG expert is engaging them in a two-way discussion. He inserts his own opinion into discussions as if they are uncontested facts. It is passive-aggressive to the audience and annoying. Also dropping in comments designed to show his knowledge instead of letting the experts speak. Let these people discuss the market without interrupting them with your agenda based and discussion derailing "comments." His questions spend more time saying stuff than asking.
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GFSome oil minister of one of the OPEC countries is reported to have said, "The stone age didn't end because we ran out of stones, and the oil age won't end because we run out of oil." What I have understood from this interview (and other sources) is that the shale revolution has put an effective cap on the future price of oil. Shale oil may be uneconomic at $40-60, but if it starts to get close to $100, shale oil will start coming on line again, and production can be ramped up rapidly. The technology has been developed - and continues to develop - and there are a LOT of shale oil deposits around the world, not just in the US, although ours are massive. Social and political pressure are also pushing away from more oil use, so I think the quote at the beginning is true. Oil demand will not drop suddenly, but will probably peak over the next decade or less, and we will not again see sustained prices over $100 or so (in today's dollars). The Oil Age will taper off with recoverable oil still in the ground. This is certainly not what I believed or expected ten years ago, or even five, but that now appears to be the way we are heading.
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ASI got an impression that it was disjointed and incoherent..
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JBPension funds also subsidized the shale oil bubble. Other than EOG Resources, none of the other publicly traded US shale oil producers have consistently generated free cash flow despite having enormous amounts of capital available for over 7 years and many producers drastically cutting their costs in the last 7-10 years. I remember when the Saudis and OPEC were highly confident in 2013 that refusing to cut production and allowing oil prices to go well below $65/barrel would bankrupt all of the US shale oil producers. We may still get a lot of bankruptcies in the coming years, but many of these companies have endured for years longer than expected.
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BGEd is great. Makes a topic that I have little interest in, interesting.
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ACHmmmm. Potentially a great exchange, but I was left a little frustrated. How much to build a new refinery? "Billions". What does that mean? 2 or 12 or 20? A simple question to an industry specialist.... also, if price changes fundamentals, what happens to shale oil companies when/if the price heads back to $100? I suspect it won't change much, as they were not profitable in 2013, but costs (personal and materials) were higher then also. So maybe,...
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WBGreat guests and great Exchange..
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RMExcellent discussion Ed - and you are right this will play out in a major way in 2020. Please make sure this topic is one of the "thematic "weeks"" special you all are starting to run! Have a super holiday and really look forward to staying with you all next year!
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RANice to see “The Exchange” format back. Always liked the flow that develops.
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BAA lot of good information but a bit disjointed compared to most RV vids. A summary/ recap would help at the end of the video. What I took away was: 1) easy money made the 'Age of Abundance' through shale oil investment and innovation. 2) cheap oil from 2015 to now hasn't reduced production or helped shale company margins. Balance sheets are in a precarious place with credit ratings showing the stress. 3) lack of cap ex, some bankruptcies, and some consolidation will eventually reduce oil production and result in a more sustainable oil price (higher). 4) rationalisation in the industry is costing jobs and will kill a major contributor to the US growth cycle 5) energy sector should bottom in 2020/2021 but the US economy may be slowing more dramatically than currently anticipated so US 10yr yields may fall (prices rise)
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dbStocks have already started to move up but still deep value in international conventional producers with exposure to Brent.
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SPBest work on shale from an industry perspective. I’ll def be eyeing the “adults in the room” making acquisitions between 2020 and 2021.
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SvExcellent panel. Thank you.
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WManother perfect discussion among three really bright people. excellent...thank you
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CBNew ESG focus and mandates will make it more difficult for E&P related names to roll their debt. Players still willing to re-finance these entities will extract a higher price.
DANIELLE DIMARTINO BOOTH: When you put WTI, West Texas Intermediate crude oil on a chart, and you pit that against the Fed's balance sheet, they literally track one another up to this day.
I think that that connection starts to come undone in the coming years. I don't think that that's probably well appreciate it right now.
TRACY SHUCHART: We've been in a $50 to $60 range for this entire year. These guys are really making money at those prices even if you're still not making money. Eventually, this money is going to dry up, and it's already starting to dry up.
ED HARRISON: Hi, I'm Ed Harrison for Real Vision. We're going to have a discussion today about monetary policy and energy markets and the intersection between those two and we have two experts here with me to talk about that. We have Danielle DiMartino Booth, who is our monetary expert. We also have Tracy Shuchart, who is our oil expert. I got that one right in terms of the name.
Now, let us start off going back to the great financial crisis. I'm going to let you guys lead the discussion, but I want to start out there because I think that's where a lot of this stuff happened where this intersection came to play, because we had the Fed going to zero rates in 2008. It was off to the races after that in the energy sector here in the United States. Danielle, talk to me about the chart that you were just talking to me about offline.
DANIELLE DIMARTINO BOOTH: It's interesting. Sometimes, you sense that there are relationships and sometimes, you see that there are relationships. When you put WTI, West Texas Intermediate crude oil on a chart and you pit that against the Fed's balance sheet, they literally track one another up to this day. It's just fascinating to me that we wouldn't have made the leaps and bounds we have, we wouldn't have had a revolutionary shale revolution had it not been for all of the easy money flowing that started in December 2008 when the Fed lowered interest rates to the zero bound, and started its quantitative easing policy and growing its balance sheet that in turn, ended up funding all manner of investment in this burgeoning industry that Tracy can speak to much better than I can, given shale got it foundings in 2008. Tracy, you tell me, I think it was that easy money that really, really got things going.
TRACY SHUCHART: Yeah, absolutely. Shale revolution, the gas revolution actually started in 2005. They didn't really take off until after the Great Financial Crisis and we had all this easy money, and they were just throwing money at the shale industry. At that time, we had seen oil prices go from $33 all the way up to $115. That's really when, in 2010, that's really when all the money started funneling to shale and the shale revolution, revival revolution I should say, really began in 2011. That's really when we started to see production and whatnot increase.
ED HARRISON: When I think about that, what you're saying is I think about in terms of the reach for you, because when you had zero rates, and the Fed come in there with QE, basically people were like, we need some yield, we can get it in the shale patch.
TRACY SHUCHART: Yeah, absolutely. That's when we saw a bunch of high yield bond issuance. When I come online, if you look at-- I think we have a chart. If you look, you can literally see it explode. Then as recently after 2016, that's gone downhill, but you can really see exactly when that happened when you look at it on a chart.
DANIELLE DIMARTINO BOOTH: Yeah, had it not been I think for easy money policy, you would certainly not have seen the level of high yield bond issuance. In addition to that, and this is present to this day, you wouldn't have seen private equity absolutely swarm this sector, which was a good thing. You know me, Ed, it's very unusual for me to say that there was a silver lining to easy monetary policy, but I think that-- let me put it this way, I think OPEC would characterize it much differently.
It certainly wasn't a silver lining for OPEC, but it has really accelerated what's happened in the oil patch to an extent that I don't think anybody can quantify had it not been for the Fed launching its unconventional monetary policy. I'd love to hear Tracy take us through the OPEC backfire, because I think that that's really a fascinating aspect of this whole evolution.
ED HARRISON: Actually, let me go back a little bit further because I want to know that period from 2008 to 2014 when the Saudis and OPEC were like, let's go hog wild here, and crush these shale guys. What happened in that period? What were the market dynamics that led up to OPEC getting in there and trying to really lower the boom?
DANIELLE DIMARTINO BOOTH: Tracy, help us out here. Before we jump into answering that question, tell us where US oil production was on a global level before all this got started.
TRACY SHUCHART: Globally, we were far behind actually back in the '70s. We were producing a lot of oil and then that came down, it was the conventional oil and our oil production was flat for a lot of years there.
ED HARRISON: Yeah. When you say flat, what about demand versus supply? What was the differential between those two?
TRACY SHUCHART: We were importing, you have to remember at that time, we were not exporting oil until 2015. We were strictly an importer and using what we produce. That dynamic completely changed the industry within itself when we became an exporter.
DANIELLE DIMARTINO BOOTH: Going back, I think that we have to remember how very dependent we were on OPEC, and on importing oil and how the refinery capacity that we have to this day that was built out was built on the premise that we would remain an importer. I think back before this whole easy monetary policy imposed itself and created the show revolution, I think we were not even 5% of global oil production.
TRACY SHUCHART: Not even, not even. Really, that's when we started. The oil crisis in the '70s is exactly why we started in SBR, too. We were never really expecting an explosion to what we have to say at all.
ED HARRISON: The way I remember it is people were talking about peak oil, because remember when you were talking about that hundred and some dollars, 115 bucks, people are talking peak oil, but that peak conventional oil, people weren't really thinking about shale production.
DANIELLE DIMARTINO BOOTH: They were thinking about offshore drilling. One of the best ways that I ever had shale explained to me in layman's terms was think about what an offshore rig is, you're going straight down and pulling oil out of one spot, whereas with shale, you think of it as being a stack of pancakes and in each pancake, you go horizontally and pull from it. It literally exponentially, the technology itself increased the capacity of any given find.
I think that's what people really do need to understand about the process of fracking itself is how much it changed how we extract oil and really, how it made obsolete the whole notion of peak oil. There's been other technology, you're going to correct me if I'm wrong, that has shown that the shale actually reproduces itself, it revitalizes itself in time.
TRACY SHUCHART: Well, and on top of that, it's cheaper and it's faster to earn. Sorry, it's not cheaper, it's faster to extract when you talk about these mega projects, these offshore oil drills, you're talking four to seven years just to be able to get some oil out of the ground. With shale, you can do that much, much more quickly.
ED HARRISON: Yeah. As you were saying that, the first thing that came to mind-- there are two things that came to mind. One is technology. People talk about technology, and when you think about all the technology stocks and so forth, that's what draws people to shale. The second thing that I thought about--
DANIELLE DIMARTINO BOOTH: It was disruptive before Uber.
ED HARRISON: Right. The interesting bit though is if you think about it from an Austrian School perspective, Austrian School of Economics, where the long lead times that you have for things to come around, when you have prices really low, the price of money is really low, suddenly, people are like, wait a minute, these whiz bang technology things, they're an amazing thing. That's essentially what was going on in the oil space.
DANIELLE DIMARTINO BOOTH: It was and Tracy probably remembers that November OPEC meeting in Vienna better than I do. What I found fascinating in doing research for the report we're going to put up is that in 2014, as OPEC was considering their next move, because oil prices have gone from 107 to that November meeting, they were around $70. It was a dramatic decline in a very short space of time. At the time, the United States was just producing 5% of global oil production. I think OPEC was of the mind, you know what, they're so small, this is such small potatoes that we can shut them down, and they opted at that meeting to do what, Tracy?
TRACY SHUCHART: To do nothing. They opted to not cut and that subsequently, we obviously saw the price of oil go from $75 to February of 2016, we were at $26.
DANIELLE DIMARTINO BOOTH: That was a huge gambit that did not pay off. I think it also completely changed the dynamic of OPEC holding the keys to and being the arbiter of where global oil prices are.
TRACY SHUCHART: Absolutely.
ED HARRISON: Let me interject something here because I think there's a certain tension between the concept that this technology will save us and the potential that maybe actually it's not enough because when we talk about 5%, and maybe even 10% when we, Americans are guzzling gas like crazy. Tracy, help me out, is it likely over the longer term that we actually are going to be oil-- are we going to be independent?
TRACY SHUCHART: I think it is a tremendous feat that the United States has now-- we've reached this milestone October-November where we are exporting more than we are importing. However, when you logistically look at this, United States consumes 20.5 million barrels a day. A day and we produce 12.8, and that's including the lower 48 in Alaska. We have a differential there that has to be made up somewhere. Also, not to be a downer, but if you look at our just crude oil, we actually still are importing more than we are exporting. If you look at crude oil plus products, then we've hit that mark. We're at a deficit of between October and November, a deficit of about 62,000. It's exciting, but.
DANIELLE DIMARTINO BOOTH: Yep. In fact, Tracy was the first one to come out on Twitter when somebody put out this explosive, look, the United States is energy independent. She's like, wah, wah, actually.
ED HARRISON: Actually, I want to go a little bit more into the energy independence for a second here because I was talking-- I think I was telling you this. I was talking to a guy who's an expert in foreign policy, Alan Tonelson. He's an America firster, and he was talking about energy independence. It was almost like it was an assumption that we're going to become energy independent. In the back of my mind, I was thinking to myself, is that really true? Can America become energy independent? What are the obstacles to that independence? What's going on there? What do you think?
TRACY SHUCHART: The fact that we have global oil flows, this enables traders and users, refiners, petrochemical companies, to source the oil that they need from all over the globe. Another reason that we are not necessarily energy independent, because we have a global marketplace. It's on a global forum. To bring that-- we can't bring it all in house and it would be detrimental to the industry and into all of these companies to not be a part of this global flow.
ED HARRISON: Global supply chain, if you will.
TRACY SHUCHART: You would have to completely change every supply chain just to become energy independent.
DANIELLE DIMARTINO BOOTH: I think it comes down to the refineries we've built, how much does it cost to build a refinery? Billions of dollars.
ED HARRISON: Who's going to want a refinery in their backyard? When was the last time a refinery was built in the United States?
TRACY SHUCHART: Years ago. The thing is these refineries are already tools to refine a mix of light and heavy crude. Because we were refining what we had what we've produced and we were importing all this heavy crude from the Middle East, from Canada, from Mexico. Changing your lens and whatnot, and retooling your refineries is also another huge, costly expense. They're just not, especially now that nobody wants to pour money into that at this point.
DANIELLE DIMARTINO BOOTH: Yeah, I think the Accounting 101 tells us that the depreciation schedules for refineries stretch past a decade in time. You're talking about a massive investment here in infrastructure when it's hard to see what's going to happen the next year, when you've got central banks all around the world effectively discouraging capital investment. I think that goes across all industries at this point.
ED HARRISON: When you say discourage capital investment, immediately, it made me think back to Tracy's, what she had to say earlier about capital investment when I was talking to her in the green room, that essentially the scenario that you are talking about playing out is anti-CapEx for the oil patch going forward as well. Is that right?
TRACY SHUCHART: Well, it is that's what we're really seeing after the 2016 crash, we've really never recovered as far as CapEx is concerned. We have seen oil production increase, but we haven't seen capital expenditure increase. All you've been hearing from these companies the last couple years is they want to be conservative, they want free cash flow, investors want to see dividends, they don't want to see spending right now, investors do not want to see spending. If you look at the oil industry, it's gone from 20% of S&P 500 to 4.5% in weighting. This is an industry right now that people aren't really interested in so companies are doing whatever they can to gain investor confidence and tried to see money pulled back into this industry.
ED HARRISON: I got the impression though that somehow, that 2015-2016 wasn't a wipeout, but it sounds almost like they're just rolling over the debt and they're like hey, make sure that you meet our requirements.
DANIELLE DIMARTINO BOOTH: Look, there was a lot of excitement in 2015 and 2016, and this is where private equity reenters the picture. There's been a tremendous amount of fundraising. Right now, we're sitting on $2.47 trillion worth of dry powder on deployed capital worldwide, and that situation has been really increasing and intensity and existed-- that dynamic existed in 2016. Private equity that's been starved for truly distressed investments, because that's what they're supposed to do, they're the barbarians at the gate. They're supposed to be the ones who go in and poach things at fire sale prices.