Odd Lots - US Oil Is Booming and It's Upending Global Markets

Episode Date: January 18, 2024

In the early 2010s, US shale players were producing oil like crazy, with no concerns about profitability. Then the legs were kicked out from the industry, causing a massive bust and massive oversupply. In 2021 and 2022, it looked like a very different story. Oil prices were surging and it seemed as though US players had found religion, learning how to maintain production discipline and improve profitability. But now we're in a new era that nobody saw coming: US oil production is booming. In in fact, it's at a record high. What's more, industry participants are actually making money at the same time. So how did they do it? And how did the prognosticators get things wrong? On this episode of the podcast, we speak with Bloomberg Opinion columnist and commodity specialist Javier Blas. We discuss the state of US supply and what it means for OPEC. We also talk about the rising tension in the Red Sea, as well as his reporting on the rise of electronic electricity trading in the European market.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, remember a couple years ago, you know, when like oil prices started booming and there was this big story that like production wasn't coming back, that all these oil companies had found discipline. They were all focusing on products. profits, et cetera, not just volume, and that the expectation would be that production would be depressed for a long time. Wait, I don't think it wasn't that production was ever coming back. It was that production would slow substantially. And the idea was that this is one part of the oil boom story of the sort of mid-2010s that

always fascinated me was it was actually a capital market story. So it was all these investors who just poured money into shale oil. basically, and thought they were going to make millions and millions. Shale completely over-expanded. It became very, very difficult for them to actually pump at a profit. And so they all started collapsing. They all started pulling back. All the investors got burned. And they were like, we're never going to touch this industry with a 10-foot pole ever again. And then, lo and behold, in sort of the early 2020s, Shale starts to become profitable again. It starts to expand. It says it's expanding at a more disciplined pace than previously. But I have questions about that. But yeah,

it's all changed. It's all turned around. Yeah, I'm glad you brought up that capital markets aspect. And that did seem to be, you know, this idea of depressed production seemed to be all part and parcel of that, that suddenly financial conditions were tightening that the market was placing this premium in this new non-ZERP world of, you know, cash flow today, et cetera. And so like I'm still like confused. like what exactly happened with that story? You know, there's lots of things as production has come back. It seems like investors are still into the space. Prices have come down. Then there's all kinds obviously geopolitical stuff going on. It seems like it's a time to sort of take stock of what's going on in the energy world. Yeah. Well, U.S. oil production in particular, right? I mean, I think that's an all-time high.

Actually, if you look at domestic production in the U.S., I think it's something like 13 million barrels of crude per day and 20 million, including, you know, LNG and things like that. So an all-time high. And it means that U.S. oil basically accounts for one of every eight barrels of global output. So pretty big stuff there. Yeah, pretty extraordinary. So what happened to all the narratives? Is production coming back? Why have prices fallen? I'm very pleased to bring in the person we always love to turn to when it comes to oil and energy. We're going to be speaking to our colleague, Javier Blas, Bloomberg opinion columnist on oil and energy. Javier, thank you so much for coming back on odd lots. Thank you for having me again. Javier, what is the deal with that?

So, like, we're back at records again in the U.S. production? We add to record levels, and it's just an incredible number. As Tracy said, you look just at what we say is crude oil. It's more than 13 million barrels a day. But if you add to a record, you add to the record. on top of that number. Other things that they go into the oil liquids stream, so like condensates, and NGLs or natural gas liquids, a bit of ethanol, etc., etc. We are well above 20 million barrels a day of oil production. That compares to a hundred million worldwide. So you put everything together. The US is producing one in five barrels of oil consumed. That is just an incredibly high number. And it doesn't seem to be about to stop. Probably it's going to slow down a bit in

2024, but it's going to continue to go up. Okay. Where is all that new oil actually coming from? Because it's been a while since I've brought up the rig count chart. But if you look at the rig count chart, I mean, this is such a fun one because you can see the big humps of the early 2010s and then the big slide into 2015. And now it seems kind of flat. So there's been some increase between 2020 and 2022. The number of new rigs being drilled has gone up. But it's not like, it's not like we're seeing a boom in new gas rigs and new exploration. So where is all this oil coming from? Well, it's coming from the very same places that it was coming about 10 years ago, but it's coming in some way, for lack of a better war, better.

So it's coming from Texas. It's coming from New Mexico, and it's coming a bit from North Dakota, Oklahoma, etc., etc. It's coming from the shale regions of the United States. But if we were to say, where in just one single or two, or at this case, three single words, is Texas and New Mexico. That's where the new oil is coming. And you're right, Tracy. The recount is not significantly up. actually, you look at from a long perspective, it's lower than it was during the previous booms of shale.

But it's just that the oil companies in Texas and New Mexico have got very good at extracting more oil from those bricks, from those wells that they are drilling. And they are also doing much longer wells. If you think about how an oil shale well looks like, it first goes down vertically and then it just turns around 90 degrees. and it goes horizontal for a while. At the beginning, those horizontal wells were relatively short, perhaps a quarter of a mile, half a mile at most. Now they're going as much as three miles horizontally, and that they can get a lot more oil that they were able to do a few years back.

So it's important, and we're going to talk a lot about the capital markets and investor aspect, but it's important just like ongoing technological improvements as well. What else is happening on the sort of... Oh, oh, can I read... Sorry, I never get a chance to do this. Can I read one of my all-time favorite leads from a story that is all about technological improvements in oil drilling? Okay, okay, Havier, Joe, you guys are ready?

I'm going to read it. Okay. This is a story from 2016. Last spring, stat oil announced it had used the same oil well design and components to drill three reservoirs for the price of one. While the specs for Norwegian sea drilling might provoke reactions akin to the oil field's name, the snore. Such standardized pipes and casings could hold the key to a pervasive mystery about today's energy market. Why is everyone still drilling when prices are in the basement?

Snor, get it? Oh, that's good. Maybe you have to read it. So that really held up well. So what's changed since 2016, Javier? Well, technologically wise, we can drill longer, particularly. particularly the laterals, we can pump fracking fluids at a higher pressure. And companies are also very good at doing this super quick.

Previously, a well could have taken 30 days, now it takes 10. They just companies and the crews have got very good at doing it. And that means that they can do it cheaply. And that's the funny part of the whole boom of 2023 and 2024. A difference of the previous ones, companies are making money and investors are making money. So everyone is loving it. This is the first time, and this is what really terrorized OPEC.

This is the first time that shale oil is growing and making money at the same time. And that's a big problem in your Saudi Arabia. Definitely want to get to the possible response from OPEC. But just in terms of technology, I mean, one of the things, and the reason I brought up that story, it was the idea of standardization. So before, you used to have all these bespoke custom fittings for oil, rigs or platforms or whatever. But then I think there was actually like an industry-wide effort or attempt to start standardizing some of these things. So you didn't have to order a bespoke component

for every single oil project that you were doing. And that seems to have helped make things go faster to Javier's point and also brought down costs. How much of a big deal is that in the industry? It is a big deal. I mean, it has happened everywhere in the oil industry. Let me give you my favorite anecdote of a standardization in the oil industry. So you are working on a North Sea oil platform. This is offshore outside Norway and the United Kingdom. You need to paint a lot of the stuff yellow, kind of, you know, yellow danger, very visible, et cetera, et cetera, very stormy areas of the wall, the North Sea, fog. You get the kind of, it's not the kind of place that you really want to spend an evening in winter there. So every company have their own shade of yellow.

There were 19 different kinds of yellow to paint things in the North Sea. Each company has their own shade with their own specification, and it was just ridiculous. So at one point, a few engineers in the industry got together and said, well, this is a bit ridiculous. I mean, can we not just doing like a yellow North Sea? And so they go together and everyone decided, this is the shade of yellow that we're going to use. And now everyone is painting everything that they need to paint in yellow with the same shade. That at a much bigger scale has happened across the oil industry. Everything has got a standard.

And companies within themselves, they like to do everything best spoke. They really, in some ways, gold-plated a lot of projects. So each well was a bit different to the other one. Now companies are designing one single design, and when they have really thought, okay, this is it, this really works very well. Now, copy and paste for the next 25, 50, 100 wells. And that has cut costs significantly.

I love the fact that just as something as simple as the color painting on the other. I'm imagining a room full of oil executives looking at different swatches of yellow and being like, no, that one's too orange. Can we get something a little bit more buttermilk, maybe? I would love to be the competition lawyer who has to stop it on the meeting to make sure that no one is saying anything inappropriate that the Department of Justice could get us like, there was a conspiracy for the yellow color. Yeah, I'll look at the different pantone shades, but got to do so in a legal way. All right, let's talk about the capital markets aspect because, you know, it did seem like the way people thought about it was that the industry had to face a choice.

Would it be pursuing volume or would it be pursuing profitability? And as you've just said, like, there seems to be this very weird situation in which volume is ramping and productivity is sustained. How is that happening and how sustainable is that? Well, to the question of how long and how sustainable, I'm going to be honest, I don't know. I thought that production growth will have a slowdown in 2023 and it never happened. It did the opposite. They accelerated.

If you look to every oil executive, if you look at the forecasters of the industry, everyone is saying it's going to slow in 2024. But also they said the same for 2023 and they were wrong. So we'll see what happens really. But yes, I mean, the industry went into this news. era thinking about profitability. So everyone cut capex, everyone tried to get more efficient, and everyone thought that production growth was going to slow down because the focus was profitability. The fact that they were able to grow quite strongly came a bit of a surprise to the industry and then everyone kind of, you know, celebrated it. But here there is a very

important question, if OPEC had not cut production to make room for all these new shale oil from the United States, prices will have come down and then the industry will have faced the same kind of dilemma of the past. You are producing too much, then the prices come down, your profitability comes down, and then you have a problem. So a lot of these that we are putting based on efficiency is true, but if not for OPEC cutting production and keeping prices about $70 a barrel, then shale companies will be in trouble. I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from

Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. One thing I'm really curious about is who is actually funding production now versus, say, in the early 2010s.

And just to add on to that a little bit, is there any difference between private and publicly traded domestic U.S. players? Okay, so let's go from part. So on Tracy's question, who is founding this? Well, back 10 years ago, five years ago, it was Wall Street. It was a mix of equity and credit markets which were founding all of these growth through. different instruments. I mean, sometimes it was just issuing of fresh equity. Sometimes it was bonds, high-gill bonds, reserves lending, where a bank is lending to an oil company based on the reserves underground, more or less like a mortgage, rather than a house. You mortgage the

oil reserves that they are underground. And a lot of that is still there, but a lot of the money now needed for the expansion and to financing all this new growth is coming from cash flow generation is their internal cash flow of these companies. They generate enough cash to pay for all the new drilling that they are doing, to pay for all the capital investment that they need to do alongside new pipelines, et cetera, et cetera, and to pay their shareholders. These companies now, for the very first time, are paying dividends. And that sounds like, well, companies, publicly listed companies should be paying dividends. That's like normal. Well, that was not the case a few years. years back, but now they generate enough cash to do all of the both. And in terms of, is there

a difference? Yes, publicly listed companies have been a bit more cautious. They have been trying to, they have the shareholders, they have Wall Street on top of them, and they have to really try to focus as much as possible on paying dividends and buying back shares. Probably on, they don't have that pressure or that super strong pressure. So they have done a bit more of growing. And there is a suspicion in the industry that a lot of that growth was to try to maximize the amount of production that you are doing so you can sell yourself to a big player, say Exomobil or Chevron, and perhaps that's not as sustainable as it looks like. Talk more about OPEC because you mentioned that U.S. shale has benefited from OPEC cutting production. You know, I remember, I guess it was 2015,

I think, when OPEG did that huge increase in production to try to kneecap U.S. shale. Why are they sort of, I guess, in alignment these days where OPEC's impulse to maintain production is good for OPEC, but also, I guess, clearly, as you say, benefiting U.S. production. Well, OPEC is trying to keep oil prices as close as it can to $100. It's not as successful as they will hope. Prices have been between 70 and 80, despite a lot of geopolitical tension that you believe mine will have pushed prices even higher. I think that the key question here is that OPEC is convened.

that this is a bit of a blip. That at some point the growth in US production slows down, the demand remains there, the annual demand growth remains there, and then they have room to expand their production, to bring some of the production that they have taken off the market now. They will able to bring it back. And that was, to be honest, the same kind of bet that OPEC made in 2011, 2012. You know, this is a blip.

U.S. shell growth is going to slow down at some point. And after a few years by 2015, 2016, they kind of discovered actually, you know, this is not working. At 75, 80, $100 oil, these guys can grow and they can grow forever. We need to change the strategy. And that's when OPEC decided to flood the market, kill prices, the price of West Texas and a brand crude, the two global benchmark collapsed to $30 a barrel. And that's what really brought down shale growth for a few years. the jury is out whether they are making the same mistake or not.

And I think that we are going to see it by the middle of this year at most Q3 of this year. We are going to see whether USA really is slowing down or not, and whether demand is either sustaining the growth or we are beginning to see a slowdown in demand because, you know, all electric vehicles and more energy efficiency, etc., etc. So this is a very important year for OPEC, because if it doesn't really go as planned, OPEC really needs to change the strategy completely. What can it do in that scenario?

Well, they can only do two things. One is to accept that, you know, the one current prices of $75 plus, they need to cut even more production, giving Shale more share of the market. Or they accept that they need to bring prices down because shale can grow at $75, and perhaps cannot grow at, say, 50 or 40, and then OPEC, and that's how the Arabia, puts a lot more production into the market and triggers a crash. But that means lower prices for OPEC. Yeah, and it didn't really work the last time because it just incentivized everyone to cut costs

and streamline and become more efficient. Indeed, you are absolutely right. And both options means lower revenue, either because you are producing less or because you are accepting lower oil prices. But if the strategy of OPEC doesn't work, and I am not really 100% sure that OPEC, OPEC really has much of a strategy of the next six months. I think that they are holding the line for the next six months, and then they will see what they do.

But if they are wrong, it means a period of low revenues for OPEC countries, and that will be very painful. Just in mind, lower revenues when you have experienced a significant increase in inflation, that means that the purchasing power of your barrel goes even lower. That's very painful for Saudi Arabia. This is a slightly off-topic question, but shale producers in the U.S. cannot join OPEC, right? Because we do not like price-fixing cartels. I think that the Department of Justice may have one or two.

Yeah, it might have something to say. Yeah, you know, like, no. I mean, it's not a completely, you know, it's not a crazy question, Tracy. Texas, at one point... I know it's come up every once in a while. The state of Texas sent observers to OPEC meetings in the 80s. They never joined, but actually they sent observers. And the state of Alaska also sent observers to the OPEC meetings.

I mean, they will be, you know, an American gentleman sit down during the OPEC meeting as an observer. I mean, I think at some point, cool heads and some legal advice decided that I was not very cool. It's funny, the things that, like, one remembers from, like, the sort of fever-swamp days of spring 2020 during the peak of the pandemic. But I just remember there was like some like railroad commissioner in Texas. And of course the railroad commission in Texas is the oil regulator. There was some oil. There was some railroad commissioner who was like trying to like do diplomacy with OPEC in the

middle of, I can't remember his name. But it was like some guy on Twitter. Do you guys remember that? Yes. There was someone. I cannot remember 100%. But I will come back on the name. Yeah, there was some random guy, some random regulator in Texas like trying to like.

Let's not forget that when OPEC and OPEC plus, which is this alliance between OPEC and other oil producers, including Russia, they were negotiating how to respond to the pandemic and just basically trying to agree how to split at 10 million barrels that they cut, 10% of global oil production was taken out of the market by OPEC and his allies. A lot of the negotiations, Donald Trump, at that point president, Donald Trump, was heavily involved. I mean, the whole final deal was effectively. cook on a three-way phone conversation between President Donald Trump, President Vladimir Putin, which wasn't still negotiating these things with the White House face-to-face effectively, and King Salman of Saudi Arabia.

So the U.S. in some ways, it was not part of the cartel or anything like that, but it was participating in the conversations. And Trump got actually quite a sweet deal because he got the Saudis and the Russians to agree to cut production while the U.S. industry cut absolutely nothing. I think his name, he even wrote a Bloomberg opinion column in March 20th, 2020, Ryan Sitton, was his name, the railroad commissioner who called on OPEC to coordinate with the U.S. in constraining supply. I want to pivot for a second and talk about the Red Sea. And we talked about it a couple weeks ago at the context of container freight. What does the rising tensions there? We recently saw the U.S. strike at Houthi assets. What is the rising tension? their mean from an oil perspective?

Well, it's more or less a binary situation. As long as the Strait of Hormuz, which is the big outlet from the Persian Gulf for countries like Kuwait or Saudi Arabia into the open markets, as long as that remains open, what's happening on the Red Sea is of less importance.

Yes, it's going to mean an increasing cost because a lot of the oil tankers and also the LNG carriers, this is a liquefied natural gas, They are going to have to divert, avoid the Red Sea and go around Africa. That adds from the Persian Gulf into Europe, that add probably a good 10 to 15 days extra. So, you know, it's not a small and it could really increase the cost of shipping. But it's not the end of the wall.

And that's what the oil market is taking it quite relaxed. I mean, prices has barely increased over the last few days. But then you could think, well, okay, so that is basically, On a scale of 1 to 10, probably that's a 2, maybe a 3. What is the other scenario? The other scenario is the open fight with Iran, not with his proxies, the Houthis in Yemen, but actually with Iran. And the Strait of Hormuz from somehow gets in trouble.

Shipping is more difficult through it. Probably is not completely close, but things get really bad. And that on a scale of 1 to 10, that's probably 25. And that's the problem. That's what I say. It's a bit of a binary situation. At the moment are we in La De, well, so far, not so bad. Could it mean that more LNG gets exported from the U.S. to Europe?

That seems to be the obvious solution, right? Yeah, the obvious solution is that all the Atlantic LNG goes into Europe. So that's the U.S. but also is Nigeria, Trinidad. That's going to go as much as possible to Europe. And then all the non-Atlantic base in LNG goes to Asia. So Qatar will try to redirect as much of the LNG that they can into Asia. I could provide some trading opportunities for LNG sports in the United States. And let's not forget, that means also more Russian LNG is going to remain in Europe rather than going into Asia.

Because Europe continues buying LNG from Russia. I mean, we stopped buying Russian gas through pipeline. But LNG is free for all. April 29th and 30th, Bloomberg House arrives in Miami at the Formula One Grand Prix. Set against one of the world's most electrifying sporting events, Bloomberg House brings business investment and culture together powered by Bloomberg journalism real-time data and forward-looking conversations from on-stage discussions to exclusive networking with global leaders this is where ideas connect Bloomberg House Miami presenting sponsor Coriant supporting sponsor Octa

learn more at Bloomberg Live.com slash Bloomberg House Miami real quickly just going back to the OPEC conversation I just remembered one of the other things that we talked about a lot I think in like 2021, 2022, was just that, you know, setting aside what was going on with U.S. shale production, that there were various structural impediments to OPEC supply or non-OPEC supply or OPEC plus supply, that a number of countries had let their own infrastructure slowly get into disarray with the low prices of 2010s, that that was constraining the ability to expand. What is happening with sort of non-U.S. OPEC-related capacity? Well, it's true in part. I mean, you look at some of particularly the African producers

of OPEC, the likes of Nigeria, while they have been in trouble and they have been struggling to meet their own production targets. Recently, Angola left OPEC because he was not happy with the fact that OPEC was pointing to Angola. You cannot produce as much as we even

allowed you to produce. So we are going to bring your production level officially to what you are able to do. Well, the Angolanans didn't take that very well and then decided that, well, we don't want to be part of this club anymore. Then we have two other countries that they have been producing far less than

in the past, but due to sanctions. That's Venezuela and Iran. The sanctions are still there, but the U.S. is enforcing them, well, the U.S. is not really enforcing them anymore. It's particularly in the case of Iran has turned a blind eye because, you know, the priorities get oil prices under control. So Iranian and Venezuelan production has increased significantly last year. To the point, in 2023, the biggest source of extra oil into the market was the U.S. shale industry. The U.S. was the kind of the big number into the oil market, put in extra oil. The second source of extra oil in 2023 compared to 2022 was Iranian oil production. And that's just incredible to me that Iran added so much oil into the market, to the tune of our half a

million barrels a day. So the story of OPEC struggling is not as true as it was three, four, five years ago. And then you have the UIE, which is adding a lot of production and not happy that it cannot produce more. And we are beginning to see also the Saudis starting to try to increase their production capacity. Some of that will come on a stream next year and then in 2026 and 27. So the story within OPEC is starting to change

from one of struggling to keep production to one where Iran and Venezuela are adding a lot of barrels, but also we have this new production capacity expansion plans of the UAE and Saudi Arabia really about to hit the market. potentially because we don't know if they will translate that capacity into actual production or not as a political, that's a political decision. Yeah, Saudi Arabia needs to pump more in order to afford Rinaldo's contract, I guess. But, you know, hearing you lay all this out, Javier, it sounds almost as if we're watching like a slow motion reconfiguration of the world's energy sources or energy trade, one where the U.S. is far more prominent.

Iran is more prominent than it used to be. Is that a fair way of putting it? Like, is this a reordering of the system in some respects? I think that you are putting it absolutely right. I mean, the fact that the U.S. is sporting so much oil and when you count crude and refined products, many weeks, the U.S. on a gross basis, is sporting more than 10 million barrels a day. Obviously, at the same time, it's importing a bit. So on a net base is about two million barrels a day. But the fact that the U.S. has oil to export on a net base, it's important. that, you know, more than he consumes and it can export it, it's just mind-blowing. And particularly for, you know, I have been writing about this industry for 25 years. If even 10 years ago you have told me that the US was going to be exporting the amount of crude that is doing today, I will have said absolutely not. And, you know, no way.

I mean, no way this is happening. And, you know, the fact that Iran under Sanchez is back producing quite a lot of oil is also quite surprising. And the fact that Saudi Arabia has accepted again to cut unilaterally his production without the help of other production countries, something that he promised will never do again, that is also very surprising. Yeah. Where does the Biden administration sit in all of this?

And we've sort of touched on it in a few episodes at this point. But Biden came on on a very oil unfriendly campaign, basically talking about transitioning to green energy. And yet, here we are a few years later, and U.S. domestic production is a record. Iran is pumping again, which is a whole other political situation. But you talk to people in the industry. How are they feeling about the Biden administration at the moment? Well, I think that the Biden administration say it has a narrative in public, just very climate change, green transition. And in practice, what you see has been, they have not really done much. to limit the U.S. industry ability to expand. Yes, people in the oil industry will say, oh, my God, you know, we have all these problems with the White House, and, you know, they are really anti-oil and anti-fossil fuels and so on. But you really sit down with

them and told privately and relax. They will admit, look, they leave us alone. We can produce as much as we can. Their focus is on keeping energy prices down, and we are all happy. can we get more things from them? Yeah, probably with a Republican administration, we will get in more. But to be honest, we are getting more than enough. And actually, we should not really produce too much oil that same price is crashing.

So, yeah, I mean, I think that everyone in the industry, probably at least, is pretty happy with the Biden administration. In public, of course, the lobbies and so on, they have to say, oh, my gosh, President Biden is threatening an energy crisis in America. That's just completely utter nonsense. Let's pivot real quickly. You have a new big piece out. I know not oil related, but about the changes happening in European energy markets. What's the story about? Well, it's particularly about

how we trade electricity. And you think about a few years back, and by that I mean five, six years ago, a lot of the electricity market in Europe was controlled by the typical names that we all knew, the utilities that have been privatized, but used to be state-owned companies, big names like, you know, EDF, electricity in France, RWE, etc., etc. And the market was quite sedated. Prices were not really moving much. There was no much volatility. There were very few of the independent trade that's really making money trading electricity. And a few years back, in the middle of nowhere in Denmark, in a town called Arhus, it was a big, big university town in rural Denmark.

A group of companies kind of started to plot how we can make out of money out of this market. And they were really driven by two things that they were happening in Europe. It was the liberalization of the markets. It was a lot more of cross-border electricity trading in Europe. And there was also a lot more volatility in the supply of electricity in Europe, because wind and solar. You cannot predict how much wind and solar power you're going to get more than five days, perhaps 10 days. But, you know, meteorologists have a limit of, you know, how strongly the wind is going to blow or whether it's going to be, you know, cloud covered in one area of the continent

or not for solar, et cetera, et cetera. So that variability created a lot of price volatility, particularly in the very short of the short term market. I mean, electricity used to be traded one year in advance, one month in advance. And these companies kind of specialize in trading in the next 30 minutes of the electricity market. What is going to be, you know, at mid-morning, what is going to be the demand for electricity by lunchtime? That's what they specialize. But it was, you know, the five or six top of these companies

were making perhaps $100 million combined. So not a lot. And, you know, they were in the radar of the industry, but not that. In 2022, they made $5 billion. Wow. The return on equity on many names of the industry went well above 100%. In some cases, well about

250%. So let me put it this way. The companies that were making a couple of million dollars were making then 25, 30 million. The guys who were making 25, 30 million before were making a couple of hundred million dollars. And the guys who

were making a hundred, all the way they just went to a billion. It was just one of the biggest booms in commodity trading profitability. I have ever seen. And the piece is about these names which outside the industry, basically no one really knows about. Wait, how much of a parallel is there with the sort of old school commodities traders like a Glencore or a trafficura to the point where, as we saw after the pandemic,

you had sort of systemic issues among those commodities traders that became a headache or a problem for everyone in Europe at one point in time? Could something like that happen with this new breed of electricity trader? The risks are different, but they are very significant risk with this new breed of electricity traders. A lot of what they are doing is computer-driven. Some of the desks where this is happening, they are called automated electricity trading desk. I mean, everything is done by the computers. I have been on their trading floors, and in some cases, 80% of the volume is run by computers. With the traders and the meteorologists just sitting in front of the computers, making sure that

everything is fine, but just the computer. deciding where to buy and sell. To the point that the kind of the umbrella of the regulators in Europe that look at the electricity market reported that in 2022, they monitor 4.4 billion transactions in the electricity market in Europe. That's 140 transactions every second for the whole year. And how you monitor that? I don't think that the regulators really have the capacity.

And then that a significant chunk of the market now is traded by firms that they have relatively small capital basis, that they are all trading from the same place in the middle of nowhere in Denmark, using the same banks and the same brokers. Well, it's when, you know, the worst systemic race kind of come to mind. And I'm not saying that there is a problem, but I am concerned that regulators and policymakers in Europe, don't really know much about them. And I was recently, as I was reporting for this column, I was talking to one of the top people in the European Commission that looks at, you know, these kind of situations.

And I said, well, what do you know about X, Y said, the names of these companies? And this person told me, honestly, Javier, I know that they exist. And that's about it. I have never met them. I don't really know much about them. When I said, oh, do you know that, you know,

this company made a billion dollars, you know, in 2022? And the person was utterly superfluous. price about the level of profitability. And the fact is kind of the, I think that a lot of European policymakers, they don't know what they don't know. Hi, policy makers all around the world. That could be said. Javier Blas, thank you so much for coming back on odd lots and I guess describing across many different realms the massive changes that are happening in the energy world. Great to have you back. My pleasure. Thank you.

Thanks, Javier. That was fun. Thank you. Real quickly, Tracy, we should. do more on electricity trading. I've had some requests, and I have to say, like, I still don't totally understand, like, the basics of electricity trading in the sense that when I think about trading shops, whether it's commodities or even just the traditional financial instruments, you know, I think about, like, entities that are able to warehouse or absorb some sort of risk in exchange for, but you can't warehouse electricity because it's... I suddenly have this vision of, like, these electricity traders on a trading floor with tool

belts filled with batteries and they're like, I'm buying electricity and then someone comes and charge their battery and then they like hold on to it and sell it two days later. That's not how it works. I don't think so. But for real, like there's not much electricity storage or it's pretty small. So like I want to do more. It does seem. It does seem like it's a unique commodity in the sense that like the time frame is so short. And you don't have a good line of sight into electricity availability, you know, beyond a few days because you don't know what the going to be like or how strong the sunlight is going to be and things like that. So it is really interesting from that perspective. Yeah, we should do more just on like the basics of what electricity

traders do and where they, that's sort of how they harvest profits. But on the oil question, I mean, it's pretty wild that at least for the moment, and who knows how long it lasts, that U.S. industry hasn't had to choose between volume and profitability. It's like, why not both? Yeah. And I think that story about technology. I mean, shale was always a, technology story and a capital market story and investors getting excited about the new technology that made all this possible. But it feels like people think about technology and they think some like really cool new way of drilling. And okay, yes, the horizontal drills are getting more horizontal and more powerful. But horizontal or horizontal. That's right. But we can also talk

about like just really small incremental changes like standardizing the types of bolts. that you're using in a rig, standardizing the color yellow on your North Sea platforms. That was pretty funny. I love that example. But no, it's like you just don't know where you are in the tech cycle. And the fact, while you were talking, I looked up your old article from 2015 that you mentioned and seemed to have nailed it perfectly. We should do more on standardization.

Standardization bodies are really interesting organizations, too. Yeah, standardization is kind of like what drives the world and also causes problems a lot. It's really interesting. Yes, let's do a standardization series. I really want to speak to the guys that make the QR codes, the barcode association. What are they up to? I love the idea of a standardization series. Yeah, all right.

Okay, well, this is one of those episodes where we've come away with five other things to discuss. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wisento.

You can follow me at the stalwart. follow Javier Blas at Javier Blas. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kel Brooks at Kel Brooks. Thank you to our producer, Moses Andam. For more Odd Lots content,

go to Bloomberg.com slash oddlots, where we have a transcript, blog, and a weekly newsletter, and chat with fellow listeners 24-7 in the Discord. Discord.org.g. slash oddlots. One of my favorite places to hang out. An excellent place to learn about energy.

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