Odd Lots - What So Many People Get Wrong About The Energy Transition

Episode Date: July 28, 2022

With energy prices booming, heatwaves ravaging Europe, and Russia going to war against Ukraine, there's an increased focus on the so-called energy transition. Interest in decarbonization is surging. But there's still a lot of ambiguity about what that might look like. As we've learned lately, with booming demand for coal, and many premature obituaries having been written for oil, energy sources don't just disappear easily like how Palm Pilots died after the introduction of the iPhone. In fact, the consumer tech/disruption framework is completely the wrong way to think about it. On this episode of the podcast, we speak with Bob Brackett -- a senior research analyst at Bernstein -- on what so many people get wrong about the energy transition. And what it will look like instead. See omnystudio.com/listener for privacy information.

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And I'm Tracy Alloway. Tracy, you know, the high price of energy, obviously, has put a lot of increased interest, once again, on energy transition. Cleaner energy, cheaper energy. But the thing that strikes me about 2022 so far is the world is using more coal than ever. Right. I think if there's one thing we can internalize. from like the lessons of 2020 to 2020. It's that A, things we expected to happen have not happened.

And B, on that note, the energy transition is just a lot messier and a lot less linear than I think a lot of people expected. People expected like, you know, once EVs became widely available, someone somewhere would flip a switch. Everyone would shift their dependency away from gas into electricity. and the problem would kind of be solved and all these dirty energy industries like coal, like oil, would be resigned to the dustbin of history, I guess. Yeah. And I think the 2010s sort of lulled us into maybe this false sense of complacency about the future of fossil fuels or dirtier sources of energy.

And I think, you know, we had especially starting in 2014, this big drop in the price of oil combined with the boom in electric cars. And I think a lot of people sort of thought, like, okay, well, this is like, this is the final chapter of the oil era, the fossil fuels era. It's going to fade over time. You know, people are over a long time into oblivion, but sort of this linear down. And of course, now oil is exploding. And not only that, these other, you know, sort of coal has bounced back. And there's sort of this very intense impulse now to expand production, at least in the short to medium term of energy sources to bring prices down. Right. I think a couple years ago, no one would have expected governments, you know,

liberal governments from Europe to the U.S., the Biden administration, to basically say, like, we need more energy. We need more oil to be drilled. We need more energy coming from somewhere, preferably cleaner energy, but if we have to, we will also look at dirtier forms of energy as well. Like, that was totally unexpected. Right. And everyone long term is like, yeah, electrification of everything and hopefully more renewables, maybe even some nuclear and stuff like that. But in the short to medium term, suddenly there's just this big urge to get the price of energy down. So it raises the question, if we were like lulled into this false sense of complacency last decade, like, what are we getting

wrong in our thinking and what will the energy transition ultimately look like? Absolutely. All right. So I am very excited about this guest, someone who has been talking for many years, long before the 2021-22 cycle, who has been making this argument that people are wrong about how energy sources die or wrong about how commodities get replaced by something new. We are going to be speaking with Bob Brackett. He's a senior analyst covering natural resources at Bernstein, and he's been covering the resource space in various capacities for about 30 years.

So, Bob, thank you so much for coming on Adlaughts. Thank you so much, Joe. Thank you, Tracy, for having me. So how is that that, like, people have been, like, wanting to kill coal forever, it seems like. And, you know, there's been so little funding of coal. Like, all these banks got out of, like, financing coal. Everyone was like, this is over. I remember, you know, big thing.

And like last decade was like, what are we going to, you know, let's train all the coal workers to learn to code and things like that. And yet here in 2022, the world is using more coal than it ever has in history. Like, how did that happen? So it happened. It's sort of on the supply side and it happened on the demand side. And on the demand side that the reality is energy transitions just take time. If we think about coal, clearly on the demand side, there is just an inherent demand for the utility that coal provides.

Nobody actually wants to consume coal. No one wakes up and says, I wish I had some coal. People wake up and say, I want electricity, right? I want the things that a lifestyle that electricity engenders. And so if we can't provide that electricity from other means, because we can't ramp renewable spending capital fast enough. if we can't tackle issues around intermittency and security of supply, then you fall back on what's available and that's coal. And so that's the call on demand.

On the supply side, if you're a coal miner and you're building assets that last decades, you were terrified about what the future, what the last 10 years of that asset could look like. It could have no terminal value. So as a result, your burden, your risked return, your cost, your cost, cost, you're, you're, of capital, however you want to call it, you just end up being afraid to sanction long-term supply, and then you end up in this sort of perpetual tightness. Yeah, and Tracy, you know, I'm thinking about some of the conversations we've had with

Jeff Curry and, you know, the Voltrap, like this idea, it's like, okay, prices are high right now, but if everyone is like talking about some peak in a few years in consumption, like, why invest? How much does regulation play into a story like coal? one of the interesting things about coal is it's I don't think it's ever really been considered a good source of energy like it's always had certain connotations it's always been dirty to actually get out of the ground dirty to store in your house which I'm experiencing now because I just discovered we have a large pile of coal in the basement which is fun of course Tracy of course Tracy has a basement full of coal like that is a very Tracy thing anyway keep going all right and you know associations with child labor and things like that. It feels like coal has sort of been vilified for most of its history. So how does that play into its life cycle? Yeah, it's funny. And I forget the king of England who attempted to ban coal half a millennium ago and utterly failed. Cole has an externality. In the old days,

the externality around coal was the soot and the emissions and the socks and the Knox, and we've mostly as a planet cleaned that up. And today, the externality is carbon dioxide. It's kind of always had an externality. And despite that, it has always had a utility that's overcome that. So it is just an incredibly geologically unique store of energy. And it's just very hard to find a substitute. And the other aspect, even today, what we're seeing is politicians, regulators, they don't like coal for its externalities, but they also like cheap electricity for the voting population. And so we're even seeing in the U.S., we're seeing in Europe, we're seeing softening of taxes against hydrocarbons. And that's sort of short-termism.

I've got to keep the penalty of inflation against my voting population, even though in the long-term I really have to tackle this thing. The king, who tried to ban coal in 1285, King Edward I only know that because I read it in your note in 20s. You wrote it. So we wanted to talk to you because you wrote this amazing sort of this long piece at Bernstein in 2017, basically talk about what people get wrong about the energy transition. And what the theme seems to be that in our heads, you know, when we think about transition or we think about disruburn, We think the iPhone comes along and then like two years later, there's no Palm pilots or one year later.

There's no flip phones. Like something better comes along and then the old thing is over. And sort of the thrust of your note is that, no, like energy just doesn't work like that. And having this sort of like tech framework of disruption leads you to some bad paths when thinking about the future of commodities or the future of energy. Exactly. And the genesis of this book that I wrote was a fact. effectively a debate with the ever so popular tech analysts here at Bernstein, where the metaphors they were using for the energy transition were, you know, digital cameras displacing analog cameras and, you know, flat screens displacing CRTs and smartphones, displacing dumb phones. And my caution for that my rather lengthy caution was in in natural resources industries, in depletion based industries, where you need just a lot of capital. not only to grow, but just to stay flat, that that dynamic is different. And in those sorts of

environments where it's not a consumer electronic device, transitions can take decades and decades and decades. So that was ultimately the genesis of why I wrote the scribe. Well, could you go into that in a little bit more detail? Like, why is energy different from a consumer good? Why does the transition seem to be more complex and why does it definitely take longer? It comes to the supply side being afraid of the future. And the term I've coined for oil is this green wolf at the door, that if you're investing in hydrocarbons, you know, someday that green wolf at the door is going to come in. And you're just afraid to not earn a return on your capital, not strand your asset. My favorite analog, and I've got a couple, is the mercury.

industry. So the U.S. Geological Survey posts the annual volumes, price, and revenues for the mercury industry over the last hundred years. And it's sort of say, well, Mercury is terrible. Talk about a bad product. Think mad hatters. Think insanity. Think of all of the terrible things Mercury does. But the mercury industry has never had higher revenues. And the reason is, is there is sticky demand for mercury in a bunch of niche uses that are very hard to displace. And only a fool would open a mercury mine today, right? Just to think about what that would take. So the supply side that requires capital to keep going has said, I just can't deploy capital here. And the demand side says, well, but I really don't have a substitute yet. And so the mercury industry is going to end

someday in a time measured in decades, but it's going to go out at high prices and a lack of supply, not with the shelves full of products the way a consumer electronic device that's defunct would. So how should investors actually think about that? Because I feel like this is where things get really tricky, especially when it comes to oil. So everyone, I think, pretty much agrees that oil is going to go away someday. The question is just how long it's going to take and then whether or not there are these sort of big peaks and troughs in oil use in the meantime during the transition. And as we've seen in recent years, it just feels really difficult for investors and also the energy businesses themselves to get a handle on because how do you plan for the future if you're expected

not to have one? And the question is just how long it's going to take? the one misconception out there is this concept when the demand for a product starts to fall, the price for the product starts to fall. But ultimately, if you think back to your classic economics 101, the price of something is where marginal cost meets marginal supply. And if the marginal supply is running away from you, then there's no requirement that price fall. And so if you believe the mercury analogy that I shared with you,

if you believe the asbestos analogy, if you kind of believe coal, right? We're trying to get rid of coal and prices at all time high. And the answer is the oil and gas companies are afraid to deploy long cycle assets, right, 10, 20, 30 year types of project. They're generating record cash flows, certainly as we go into earnings in the next week or two. And the response for the typical USE&P that I follow is I'm just going to return that cash to shareholders. let them decide what to do with it. So I don't know when my industry is over. It's a twilight. But in the meantime, investors, you take the cash and you decide how to redeploy. And I will manage my best short-term, high-return investment as that happens. So obviously, we're going to have to do a Mercury episode

at some point in the future. But actually, I do have, I want to go back to Mercury real quickly. When you say Mercury will come to an end, is there a substitute? Like what that exists for Mercury? Is there a reason that at some point there won't be future mercury demand? So it gets to the end uses. So luckily, like mercury gets used in the mining sector, for example, certainly by artisanal miners. It can be displaced with cyanide, which, you know, there's a whole bag of worms there. There are medical uses as well. There are some industrial uses.

And, yeah, I mean, yeah, there have to be workarounds, but yes. And then at some point, like we see with other metals, we can get to a world where there's enough efficient recycling of mercury that demand can get met that way, but which is not quite there yet. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest. information and data to keep you informed. Yes, there are other products like this from a variety

of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes, so you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Let me ask you another question, and I guess it's about Cole and the failure of the sort of typical tech disruption frame. It seems to me that there is a way to view this as like coal is the disruptive technology.

I mean, again, all these things sort of break down because Cole's been around forever. But if you think like here's a really cheap form of energy, it's like really powerful form of energy. Like you get a lot of electricity out of it and it's cheap, then, you know, you could probably make the argument that, you know, if you're willing to tolerate the externalities, yes, it's worse for the air. Yes, it emits a lot of carbon that on a sort of like strictly like like for like basis that one might consider coal the disruptor of natural gas or the disruptor of oil. Should all the tech ETFs get into coal? Is that what you're saying? You can very quickly see how some of the tech thinking could like really break down or lead you astray. It's like, well, which one is the real disruptor here? If the planet had overinvested in LNG and other sources of natural gas. And if we were getting all of our energy from windmills, then I'm sure coal would be a massive disruptor to that. Yeah. So if we'd started in reverse and if everything was a wind turbine, we would have this. this issue of intermittency, the wind patterns change daily and seasonally and sometimes not at all. And if someone came and said, I've got this product, it's very dense, it has a lot of energy, and look, it can burn 24-7 and be a baseload of power. Yeah, it would be a remarkable disruption.

So I have maybe a strange question. You know, we're talking about disruption and new technologies and things coming in to replace other types of commodities. In history, has there been like a good example of a commodity just going completely away? Because it feels like even the really questionable stuff like Mercury still finds some sort of use. And even things that have been vilified, like coal, as we've been discussing, or like tobacco or instance, those are all, you know, they're still around. They're still big industries and they're still, in the case of tobacco, still quite profitable.

That is a strange question, and it's one that I went to answer. Oh, good. Okay, I'm not the only. Yeah. I looked at 84 different commodities and over the last 120 years, and said which one of them went away? A category of them that are deadly, on average, decline single digits a year. So even the deadliest, the cesiums of the world, the asbestos, the merchant, the merchant, Even those things tend to go away slowly. I didn't find a commodity that was radically displaced on any short-term time horizon. I believe the closest you could come was strontium, where the biggest source of demand for strontium was in CRTs, the old TVs we used to use.

And so when flat screens came in, strontium demand fell. But that was the exception, right? that was kind of the 1% club, the reality. And it goes back to Jevin's paradox, which was, again, a guy looking at coal at the end of the 1800s, generally just commodity demand rises. It's hard to find commodities that we use less of. Remind us what Jevin's paradoxes. So the Jevins paradox was that the more efficient you got that producing coal, the more you use. And it works for road systems.

It works for a number of things. But the classic example is, hey, I've got a four-lane highway. I'll make it an eight-lane highway. And then congestion will fall. Right. And then every time we build an eight-lane highway, congestion rises. And so it was kind of, yeah, as you try to improve the efficiency of something, you actually increase the consumption of it.

So going back to oil for a second, because as you've said, like, you actually do think there will be an end date for oil, or at least oil as a source of maybe fuel for automobile. Like, what does that look like? And what is, how are you thinking about the long-term time frame of when the oil age comes to an end and how is it replaced? And, you know, like, what do you tell people when they say, like, how long is the future of oil? How long do we have here? Part of it is just a mentality shift. So through most of my career looking at oil and gas investment, people believed in peak oil supply, right?

It was Hubbard's Peak. It was the association for the society of peak oil. It was twilight in the desert. And we all thought, in hindsight, incorrectly, that we would run out of supply. And in that world, you have sanction a project. And you say, maybe it's over budget. Maybe it's late. Maybe it's not quite up to stuff on deliverability.

But price will bail me out. And so as long as the mentality of scarcity existed in my sector, we as an industry kept growing oil and gas supply. And in the last five-ish years, that mentality has pivoted to this world of the end of oil demand. So we're going to run out of oil demand before supply. And that's where all the capital allocation mentality completely flips from sort of, I'll lean into it into fear. That's what's driving kind of what could be perpetual tightness. Now, in terms of when does the oil age end, the way we, the way we're going to. think about oil, we divide oil into six big buckets. In reality, oil into a refinery produces

dozens and hundreds of products. But we think about gasoline for passenger travel, diesel for, you know, think rail, trucks, trains, vessels, marine vessels, and then pet chems for plastics, jet fuel for air travel, and then into more obscure buckets. The obvious bucket that gets disrupted is gasoline. So EVs attack gasoline demand. To some degree, the hydrogen economy attacks diesel demand. But even under a range of reasonable assumptions, oil demand should rise into the 2030s. Perhaps it's 10% higher than it is today. And then it enters kind of this gradual plateau. We as a planet are still looking for ways to substitute jet fuel, air travel. Air travel grows with GDP. So if GDP, not this year, but if GDP grows 3% a year, then jet fuel demands growing 3% a year and compounds in the next 10, 20 years.

And how do we substitute air travel in any meaningful time frame? So the answer is think of a plateau. Think of the 2030s is where that plateau starts to be visible. And think of the supply side of the equation being much more afraid of that plateau than the demand side. This is a tough question, I think. But in your opinion, when it comes to encouraging that transition from gas and oil to a more electrified future, what's the best way or the most effective way of doing that? Is it something on the demand side? Is it trying to, you know, encourage a better or a larger supply side response?

Or is it, you know, government intervention coming in and subsidizing things like electives? electric cars? Like, what is most effective here? So the subsidies have been the path people have accepted. Norway is the perfect experiment for the energy transition for EVs. We have yet to see, for example, Norwegian oil demand roll over significantly. And so I think the answer is, and what Norway has done is through subsidies. And of course, it's a well-developed economy. It's a wealthy economy, and they can afford those sorts of tools that a broader adoption just can't afford. And so if you can't really tackle it on the demand side, you have to tackle it on the supply side. Now, selfishly, I would argue that the mining side, which I also cover, is the obvious bottleneck.

And so in theory, supporting mining in your home country, in your home region, or supporting mining in general, The industry, if you think about, I spend a lot of time thinking about shale, right? So shale was a massive disruptor to what I did for a living for a long period of time. And shale was a manufacturing process that we did 100,000 times and we drove the cost of it down massively, just through that classic learning curve. As we look at building EVs, we're going to go from a planet that sold 10,000 EVs and then 100,000 and now north of a million will get to 10 million someday. And those learning curves will just reduce the cost of all the manufacturing parts of the EV supply chain. But, you know,

mining, the extractive industries just follow a different drummer. And those get tougher over time. We drill the best wells first. We find the best copper mines first. We mine the best grades first. And so to me, encouraging the supply side, the metal side of the battery revolution would be something policymakers could do. And frankly, that's the toughest part because it's the one place where local ESG issues are fighting full force against global ESG issues. I'm really fascinated by this idea that there's a shift in mentality when everyone went from talking. about peak supply. And I think, you know, we all remember, I used to read the oil drum that blog years ago where everyone talked about like peak oil and we were going to run out of oil. Oh, wow. I remember that one. Yeah. That was a great resource. I'd love to have them back now

because the people on that site would be great contributors to sort of the current discussion. But I remember, you know, peak oil. There's like this huge thing. And now, as you mentioned, now it's all about the concerns over peak oil demand. And that's really changed the sort of mentality and calculus of the industry. Is there anything that could flip it back in terms of the industry really wanting to ramp up investment again? Or do you think this is going to be a long-term, I don't know if permanent, but a very long-term persisting thing where even with soaring prices, and actually oil has come down a bit lately, but even with highly elevated prices, that impulse to really expand production just isn't going to come back? It takes some fairly sci-fi scenarios

During the pandemic, we were spending as a planet, roughly $350 billion a year on upstream oil and gas. Pre-pandemic, it was half a trillion, 500 billion. And then back in the glory days of too much capex, it started to approach a trillion. So the idea that it ever gets back to those levels, it's just hard. We know the typical USE&P doesn't plan to grow more than 3, 5%. We know the typical European integrated energy company is ex-oil growth and is reallocating capital to the energy transition, the mobility solution, renewables, et cetera. And so you're kind of left with OPEC plus to not only increase their capital, but increase it enough to offset the falling capex in these other buckets. And for them to do that would be sort of to willingly flood the market that they control.

so that seems at first blush irrational. So, yeah, except for a world where a sequestration technology, direct air capture worked, and we could flip a switch for next to nothing and put all the CO2 that we needed away, then you'd say, well, we've solved the externality, now let's go produce more hydrocarbons. But that's decades, that's more than decades away. This is also an extreme question, but I feel like you, you, you, have these like deep thoughts on the industry so we can ask you these questions but is nationalization

a possibility here like we have seen some instances of that in or at least one instance of that in Europe and if you think of an industry that you know it's responding rationally to what the market is telling it but on the other hand you know this is a vital resource people need oil at reasonable prices in order to live their lives at least at the moment would something like that makes sense? I spent years as a management consultant serving a huge host of national oil companies. And there is a spectrum of extremely high quality national oil companies and extremely low quality ones. It's a bit of a philosophical view, right? Can the state be a better deliverer volumes than the private market? Clearly on the choice of utilities, most nations have

decided that utilities need to be heavily regulated, but still stay in private hands with a very strong government overprint. And that's more or less worked. Sometimes less so than others. But yeah, wholesale nationalization, by and large, has not succeeded for the typical oil company. And part of it is, if you think about an oil company, their core capabilities are taking risk, managing contractors, and allocating capital. And putting those three, especially risk taking into political hands, generally just the incentives just aren't a lot. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance podcast. It's about making you smarter every business day. We bring you complete coverage of the U.S. market open.

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On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. I want to ask about another niche commodity because you wrote about it and it seems instructive. The first chapter of your big paper is about rubber and how. we actually have a superior technology that exists today to rubber, and yet rubber hasn't gone away.

What's the story there? I found that really interesting. It goes back to the days where if you were caught smuggling rubber seeds or saplings out of Brazil, the penalty was the death penalty, right? This was a commodity that made parts of Brazil extremely wealthy. It was a commodity that during wartime was at such high demand that we launched effectively a Manhattan project to try to find synthetic alternatives. And so by and large, the old approach to rubber was a plantation. You grow rubber, plants, you harvest them, and you make natural rubber, and then synthetic rubber, petrochemical pathways were determined that could make synthetic rubber.

And they each have slightly different properties, and they exist, they coexist in kind of a 50-50 share, even today. And so rubber, if the analogy is electric vehicles, I think a lot of people that follow S-perbs and think about adoption, think about binary, 100% or 0%, you know, if EVs turn out to be like rubber, you get to a 50% penetration, there's lots of internal combustion engines, lots of EVs, and rubber tells you that that's a plausible path. Since we're throwing out random commodities, can I ask. Can we make a game show?

Now do fertilizer. Seriously, it's like commodities, commodities with Bob, commodities with bracket, where the audio just throw, let's do a live event with Bob, and the audience just gets to throw a commodity out. He can tell the history of it. It gets to throw commodities at me. Let's do it. Okay, we'll plan this.

I think it'll be a fun event. Nothing unsafe, though, like Mercury. That would be bad. Or cyanide. Okay. Random commodity. It's not really random. But can we talk about copper for a little bit? Because I think this is one instance where, again, the short term versus long term trajectory or the tension there comes into play. Because we've had people on the show, notably the analysts over at Goldman Sachs, talking about how they are extremely bullish on copper over the longer term. And I think most people would agree that if we are moving to a more electronic future, we will need a lot of copper in order to make. that possible. But on the other hand, if you look at a chart of the copper price right now, it's down a lot. It's down a lot. It's down a lot, yeah, a scientific term. It's down quite a lot.

So clearly, like, there's a mismatch there between the long run expectations and the short run expectations. So how are you thinking about copper? So the nickname that copper earns is Dr. Copper. Copper has a PhD in economics. And in the short run, we have tools where we, we from Bloomberg, pull every macro indicator you can think of and see what correlates best with copper. And copper can smell the economy better than just about any other commodity. And so in the short run, it's extremely rational what copper is doing. It's smelling some level of recession and it's responding. In the long run, it's phenomenal.

So in the short run, the good news is we know as far as copper can fall. So, for example, when copper mines get to zero EBITDA, when the cost of that worst ton of copper in the market equals the revenue of that ton of copper, those mines go to care and maintenance. And that's a great way to sort of prevent the free fall in all but the worst recessions. And so you know where your downside is on copper. On the upside, you know, the very simple way to think about it is the planet uses about 25 million tons. of copper a year of mine copper. Each EV we add is about 0.1 tons, 100 kilograms. So if we get to a world where every vehicle is an EV, that's 100 million rounding up vehicles a year. That's 10 million tons of copper. So we've got to not only keep the copper demand in the broader economy

at that 25 million, we've got to add 10. And in a world where we have, watched copper grades fall for a hundred years in a world where ESG issues around local communities saying, wait a minute, why do I have to bear the brunt of mining to help the EV market, some electric vehicle in the OECD, for example, right? There really is a strong mismatch between where that demand could be and that supply could be. So we similarly look at our very bullish, long-term copper. There's some people that look at the high price of oil right now, the high price of natural gas, and they say, like, good, this will accelerate the transition. This will encourage more market forces to, you know, invest in battery technology or people to buy EVs, etc. On the flip side,

though, the 2010s, particularly the second half of the 2010s, even after oil crashed, like, is essentially when the EV industry grew up or really started to be. become a thing. And obviously, Tesla had a phenomenal decade. It basically invented the modern industry, and now all these other car players are scrambling to catch up. The 2010s were also a really big decade for installed wind and solar capacity around the world. So even in a period of low commodity prices, it didn't seem to be an impediment towards a rapid expansion of renewables and alternatives. And so I guess my question is, do high prices actually, prove to be an accelerant of transition or new technologies, or is the price mechanism or the short-term

price mechanism kind of irrelevant for the longer-term transition? Yeah, so I think the jury's out, but I'll throw out a, so one thought is that what you mentioned is almost a second order thinking, which is, hey, the price of oil is high that will haste and substitution, let me invest in the substitutes. The first order thinking is the price of oil is high, let me invest in oil, right? That's kind of the simple. Yeah, or coal. So, you know, the other thing I'll throw into the mix is high, stable prices are much more likely to drive substitution than the incredibly volatile prices that we've seen. So to some degree, the fact that oil was negative two years ago was okay last year is great right now, doesn't provide a stable competitor against which to plan the energy.

transition. What about here, like, the role of government? So setting aside nationalization, are there other things governments could theoretically do to de-risk production? You know, you mentioned every resource player is worried that of the last 10 years of the life of this mine will actually be a zero because the transition is coming. Are there other things that policymakers could do to de-risk some of these decisions? What policymakers should do is reduce the demand for the things they want to get rid of and not subsidize that demand, even though in the short run that's quite painful. And it almost harkens back to Jimmy Carter, where President Carter told the nation wear a sweater, reduce speed limits to 55. So there's lots of things you can do to reduce demand.

We have not seen the political will to do that. And in fact, some of those efforts get blocked. Right. So instead of reducing speed limits this time around, we've reduced taxes on gas. right? Right. And so that's counterproductive if your goal is to reduce the price of something. You know, subsidizing the price of something doesn't reduce its demand. But telling Americans, for example, hey, COVID, during COVID, we were very effective at reducing oil demand. So we'd ask all of you to stay home for another year to reduce oil demand feels like a non-starter. I would be very in favor of that policy. I think we should all stay at home. at any mention of more reasons to work from home. I like coming into the office. I like recording in the same studio as you turn. Oh, thank you, Joe. Thank you.

Yeah, so certainly in the short run, markets will do what they're going to do. And a lot of what we've talked about is kind of that long run. But yeah, I think the answer is when we come out of this recession, we're going to go back to a world of lower rates. In the long run, our strategist has a chart showing interest rates for thousands of years. trend towards zero. So someday rates will fall again. And someday that will incentivize investment. But that investment, we need to spend a lot of money, not in the metaverse, but back in the physical world. And it's going to be rebuilding our energy systems, maybe building redundant energy systems, given how geopolitics has caught everybody up this year. And we've not only got to

underpin our old energy systems, the hydrocarbon-based ones. We've got to build electrical-based systems. And so there's just going to be a lot of activity in the physical world once we get out of the time we're in now. This metaverse thing is proving to be a real distraction. I mean, it's like we have a lot of work to do in the real world. Yeah, of like actual molecules instead of pixels. Like we got to get we got to get people focused on the real world again, don't I? I feel like that's what we've been doing for the past two years. I was last week in eastern Namibia at a site visit for an oil and gas explorer out there. And to see a local Namibian collecting seismic data dressed like Ironman with these nodes that he's pushing into the ground that are

GPS linked and he's collecting data. And you look and say, that is so much more sophisticated and interesting than the next app that gets me my burger. You know, and we, and we, talked about this. We did a recent episode with Peter Tertzakian about like this idea of like how much the sort of talent drain that the extractive industries have seen, especially over the last decade and for all kinds of reasons. Do people not appreciate like how much tech is involved with extraction these days and like is there a lot of exciting tech on the horizon even if it's just to get better like, you know, finding natural gas or finding other resources? Yeah, it's a completely missed story. And if you think about GPUs, before crypto needed GPUs for mining, the oil and gas industry was buying everyone they could for doing seismic processing and interpretation and 3D reservoir modeling.

And so it's an extremely data intensive industry, software intensive industry, tech intensive industry. The capital projects are bigger than anything we do short of mood launches. and it just sort of assumed to be part of the old economy. So, yeah, I'm a huge proselytizer for how cool oil and gas tech is. I was going to ask, this kind of raises the question of why venture capital doesn't get more involved in this space. Is it just it's easier to go into software with lower startup costs and less capital actually needed versus big, you know, projects in the real world? Yeah. Part of it might just be that sort of capital is the riskiest taking capital.

And so maybe they're looking at an oil and gas field once it's in development. It's reasonably well understood what the economics could be. And maybe venture capital is looking for things that could massively disrupt the future of the world. But not clear to me. Bob, this was such a trade. If only for the value, oh, sorry, I'm just going to say, yeah, for lateral thinking, I would encourage any investor to spend as much time thinking laterally as they can, even if it's an obscure part of the market. What do you mean by that when you say thinking laterally?

What does that mean? Just stepping out of your sector of the market and just looking across the market, looking across history, just saying, you know, what does this resemble? What does this feel like? What sort of interesting angles that other sectors have taken that, could be applicable here. Bob Brackett, this is a real treat, very interesting thinker on these questions and sort of like kind of mind expanding. So appreciate you so much for coming out on online.

My pleasure, Joe. My pleasure, Tracy. Thanks so much. Thanks so much, Bob. That was great. Yeah, that was like that. That was this idea that like commodities just don't get disrupted, that they live on forever. The fact that there's been a war on coal since the 1200s since the 13th century, It's like really useful stuff, I think, to appreciate when thinking about these problems. Totally. I love looking at historic parallels for these types of things. And the one thing that struck me, like, yes, absolutely.

Energy transitions or transitions away from commodities never seem to be linear and they never seem to happen completely going by history. But the other thing that I thought was really interesting that Bob pointed out was this idea that there is an assumption that as people start moving away from a commodity, the price will go down. But demand is only one half of the supply demand equation. And so if you have capacity cut at the same time, then prices can actually go up. Yeah, that's a really important idea. And again, I think we sort of got lulled into, you know, one is, again, we think in the frame of consumer tech and like a new, you know, flat screen TV has come along. And then whoever still holds the stock of, you know, normal TV is like sells them super cheap just to get rid of the inventory, right? And so that is the frame that we think demand for something goes down and then whoever has it just sells it for very little.

But in the case of CapEx heavy extractive industry is everyone can see those charts. I don't know whether it's going to be 2027, 2037, 2047 that like oil peaks. But everyone's looking at those charts and you could have a situation where because demand is going down, supply contracts even faster. Right. And the other thing that struck me, I really like the phrase Bob used was local. versus global ESG because this is something that, you know, we recorded an episode on this recently when it comes to Chile and deserts and things like that. But it does seem like there is a tension here, the sort of like everyone agrees that we need to get more metals out of the earth in order to electrify our future. But no one really wants to be the place that's actually doing the mining.

Yeah, it's a real big tension because as we know, like rich countries. more EVs, large corporate interests in decarbonization, and everyone has their, like, climate goals. They're like 20, 15 net zero or whatever, and every company wants to tout its green credentials. They're offsetting all their emissions or whatever. But on the other hand, these industries like copper, like lithium, et cetera, they damage the water supply. They may damage the air supply. These are like really dirty industries on a local basis. And this tension, I'm sure, is only going to increase. And the math, that Bob laid out about copper demand.

And like, this can be a huge burden. Yeah. And the other thing that strikes me is, like, it does really seem like there is a role for the government to play here in trying to smooth some of these cycles or offset some of these, like, longer term motivations and concerns, maybe not as extreme as outright nationalism, which I don't think would happen in the U.S. at least, but other ways, as he outlined. Yeah. And, of course, we, you know, we had that recent conversation with Skanda and Rory.

about, you know, could the SPR be used to smooth the booms and bust? And in theory, that's a model that could be applied to other commodities, et cetera, to create that guarantee of demand so that people aren't terrified by demand curves that, you know, eventually start turning down. But it's going to be really tricky. All those scary demand curves. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allo. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our producer, Carmen Rodriguez, at Carmen Armin, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.