We Study Billionaires - The Investor’s Podcast Network - TIP 044 : Oil 101 - w/ Morgan Downey (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 44 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm going. I'm your host for The Investors podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And this is an episode I've been really waiting to do because ever since October, the oil industry has been acting a little funky. And I remember Stig and I distinctly talking about this on one of our earliest podcasts where we were talking about the oil industry and how I had read some article about the supply and demand on oil being all out of whack. and so I got a little scared and a little spooked, and I sold out of most of my oil positions back in October and into November. And it ended up being a very good choice. I'd like to say it was all skill, but it really wasn't.

Starting point is 00:01:13 There's obviously a lot of luck that was involved in my decision to move out of a lot of those picks. But ever since that point in time, I've wanted to learn more and more about oil. and Stig and I obviously have a lot of contrasting points of view on oil. And we talk about that on our show from time to time. Last week when we had our mastermind group, we were talking about some of our opposing positions. So what we did is we went out and we found the best author on all of Amazon who wrote a book. And the name of the book is Oil 101. And his name is Morgan Downey.

Starting point is 00:01:46 His book, Oil 101, explains the nuts and bolts of the oil business from its composition on the molecular level to the analysis. to the analysis of the market players, from refining economics to trading. I mean, it just goes on and on. And I mean, this book is so comprehensive. And the thing that I like about it most, Morgan, is the fact that it's written in simple and plain English for anybody to understand, which is a true accomplishment in any type of economics book. So we are so thrilled to have you on this show. Thanks, guys. I'm excited here to be on also.

Starting point is 00:02:15 I'm big fans. Well, so this is going to be a lot of fun. And before we get into the questions, which Stig and I, are obviously going to be probably prepping so that they're in our favor so we can win our argument, our ongoing argument between the two of us. But we want to learn a little bit more about you. I mean, this book is so comprehensive. I know whenever I arrived at my house and I was flipping through it, I was like, this is

Starting point is 00:02:39 unbelievable. Like it took this whole understanding of oil to a whole new level. And I see stick shaking his head because I know he totally agrees with me. But how did you, what motivated you to write this big comprehensive book on oil? So it was actually kind of interesting. I wrote the book, I wish someone else had written. I was kind of in a similar situation to you guys. I originally, I started out as an oil trader many, many years ago.

Starting point is 00:03:09 And as a commodity trader, primarily oil. I read everything I could get my hands on in terms of oil markets, the engineering, the whole process of exploration, production, whatnot. And there was very, very little that was well-ridden, first of all. A lot of it was kind of, they were usually tech for highly technical pieces that were written for a pipeline welder in Alaska operating in cold environments. So you had very highly specific technical tests, but you had nothing that explained why the hell do oil prices move from $20 to $150 and then back down to $40.

Starting point is 00:03:45 And it was not only, was there nothing out there that kind of explained the underlying fundamentals of the oil industry, you had back in 2004, 2005, when I started putting this book together, you had a huge move in oil prices. And the kind of the common media reaction at the time and the kind of man on the street reaction was that it was all speculators and there were kind of, it was a whole bunch of kind of bogey men, you know, people were just grasping for straws. And one of the reasons was that there was nothing out there that kind of explained, you know, here's how the price of oil is set at your local gas station or petrol station here outside the US. And I kind of, it frustrated me when particularly, you know, people would

Starting point is 00:04:27 blame speculators or just random events rather than, you know, looking at it from a fundamental basis. We had a supply crisis and no one was actually talking about the supply crisis that we, we had, were in. And it was kind of a movement. It was a whole movement called a peak oil movement that kind of started then. And so there was kind of a demand for information and information in a simple, straightforward fashion. And I kind of wrote that book, I wish someone else had written. And I can attest to that.

Starting point is 00:04:57 And, you know, having seen it, the thing that I really liked is you started really big picture and it's really well organized where it's not like this scatterbrain of different oil facts and lists of assumptions here and there. It is really well organized and thought out the way that you. structured the book. And huge kudos to you. I know anybody out there who would read your book, they're going to see that immediately how well structured it is and how it's a big top level picture, but then yet it digs down into the finer elements. If you really want to go that deep, it's all there. And that's what I really liked is how it was organized. But we're going to

Starting point is 00:05:31 go ahead and stick's going to go ahead and ask the first question here. And before he asked it, I'm just curious, were you talking about when there was an under supply? You were talking about like the 2006 to 2007 time frame? Yeah, yeah. Just 2005. 2006 when, you know, the prior 25 years, we had $15 oil to $20 oil for such a long period of time. And then within a year, we went from 20 to almost 150. Yeah. And so that was kind of the impetus was that defining moment. Yep.

Starting point is 00:05:59 Okay, Steve, go ahead. Yeah. So, Morgan, there is just this thing that just keeps posthumee, and that is that you see that the oil consumption has just still the increase. And you show that in your book, you know, it's just basically, increase from the very day that it was invented. And even since you wrote this book also keeps on steady increasing. Now at the same time, you hear politicians talk about moving away from fossil fuel and

Starting point is 00:06:28 you also see like massive investing in renewable energy. So the logic question for me to ask would be 50 years from now, do we as a world, globally, do we consume more oil than today? I'd be slightly shocked if we will be consuming a similar amount of oil as today, mainly because there's a supply side issue. But there's, so it's not going to be because people are demanding less oil. And oil, as you mentioned, the oil industry started in 1859. So it's actually kind of a relatively new industry.

Starting point is 00:07:04 You know, your kind of great grandparents were there at the beginning of this industry. Since 1859, oil demand, so consumption of oil, has only fallen three times. So it's grown every year throughout World War I, World War II, every year steadily. And the three periods where it fell were 1973, and it only fell for that one year, just that single year of 1973. In other words, there was no growth in consumption. Then the early 1980s, you had 1981, 82, 83. You had a fall off in consumption. And the only ever time oil demand fell was 2009 because you had a spike in prices and the credit crisis and all that kind of stuff.

Starting point is 00:07:46 But just that single year, every other year in the 155, 156 years of the oil industry, the consumption has gone up. And you mentioned renewables. And the kind of the underlying thing about oil is that oil is primarily a transportation fuel. And unfortunately for renewables, but fortunately for the oil. industry, there's almost no alternative at the moment. I mean, you do have electric cars and electric aircraft, you know, that small plane flying around the world, just trying to set a record at the moment, the electric solar-powered plane. So you do have electric cars, but they are a tiny, tiny fraction of the transportation world. So to put the kind of renewables in transportation

Starting point is 00:08:29 in perspective, this year, there should be roughly 16 million cars sold in the US, just the US alone. Obviously, there's huge numbers internationally in China and Europe and whatnot, but 16 million in the US. The number of electric cars to be sold this year in the US is just around 20,000. So, you know, and obviously Tesla and all these guys get a lot of hype and buzz, which they rightly should. You know, there's good to have some innovation, to have innovation. But the scale of renewables in the transportation field is it's not even, you know, it's not on the radar. It's just a fancy rich man's kind of toy right now in terms of new renewables. So what you're saying is that there's a potential for the demand to decrease in a long 50-year period, but you just don't see that happening in the short amount.

Starting point is 00:09:14 No, I don't see it happening. I mean, oil is a, as I mentioned in the book, is essential to the modern way of life. And, you know, people say, oh, well, you know, modern kids these days are using, you know, Skype more so you don't have to fly or using or chatting online so you don't actually have to physically visit someone or you're. ordering something off Amazon so you don't actually have to drive to the store. But all, even with all of that, oil demand is still growing pretty strongly. And so it's one of those things that people have to get to and from the office, have to get to and from work and school. And, you know, people have said, oh, well, suburbia is ending. Even if suburbia ends, you know, you've got a huge amount of things need to be transported around the world every day.

Starting point is 00:10:00 And the only fuel that is used to in transport is pretty much oil. No shipping, airlines, trains, cars, trucks, everything uses oil. And there's no real competition for that at the moment. And should there be competition? Yeah, I think it would be a great thing if battery technology evolves. And we can kind of ramp up solar and wind, you know, renewable energy. But the big challenge is that the scale of oil consumption is so huge. that it's kind of baked into our modern society.

Starting point is 00:10:34 And, you know, it's not a, there's no real alternative out there at the moment. So, Morgan, I think you have a really good point because, you know, when I'm talking about, like, will the oil demand increase? You know, one thing is to talk about demand of oil. We might also just talking about general energy consumption. And I think that everybody agrees on that the energy consumption will increase in the world. I don't think you can find anyone that will tell you otherwise. But the debate right now is how this demand should be, should be met. Is it with renewables or is it with oil, a third kind of thing?

Starting point is 00:11:07 And I think what a lot of people forget is that you can't just replace oil. And I also think that's what you're saying, that oil has some properties. For instance, when it comes to distribution and storage, that you can't do with windmills. You can't do that with solar. It just doesn't work like technologically. Yeah, yeah. And one of the interesting things that people talk when people talk about, oh, energy, renewable energy, Oil is kind of its own bucket.

Starting point is 00:11:30 Whereas if you look at electricity, almost zero oil is used to produce electricity, just because oil is so expensive and it's so energy dense and is so valuable in its use as a transport fuel, you can jam a huge amount of energy into a car tank or an airline's wings or a train. Whereas if you look at electricity, electricity production almost all around the world is roughly coal, not gas and nuclear, and in a small amount of hydro and wind and other kind of renewables. So there's the world of electricity, which is kind of one part of the energy world, and it's all those kind of coal, lack gas and nuclear. And then you've got the world of oil. And the two are not really, they're not fungible.

Starting point is 00:12:10 People are trying to solve the renewable world is trying to solve the electricity issue. But in terms of there being an alternative to oil, there's nothing really out there at any kind of scale at the moment. And even if you do get a ramp up in solar and wind and renewable, generation, power generation, that's primarily for use in the electrical grid. If you need power a car, you're going to have battery technology is going to have to improve hugely and dramatically to try and offset oil. And one of the interesting things you mentioned was that 50 years from now, there'll still be a demand for transportation. People still will need to get from A to B and get move goods from A to B. But I think that a major challenge is going to be on the supply side.

Starting point is 00:12:51 And we've only now started, it's, you know, that big shock in 2005 when oil went from 2050 to 150, That was not speculators. That was purely because conventional, easy, onshore oil has begun, production has begun to decline. And there was this whole movement called the peak oil movement a few years ago. Everyone was kind of saying oil production is going to decline forever type thing. And conventional oil production has actually peaked and is declining. That's onshore. We just drill straight down and it's cheap oil.

Starting point is 00:13:22 It's like $15 to $25 per barrel. And we've shifted up to a newer source because we have run out, our are running out of that easy, cheap, onshore oil. We've now had to move up the cost curve. And if you know, economics, you know this. You move up to more and more expensive cost curves when you burn through your low-cost supplies. And so we've moved up to deep offshore. An offshore oil is a $50 per barrel business. That's where it kind of starts.

Starting point is 00:13:47 And yet, is there more oil at that price? Yes. But it was much more expensive. You want to repair an oil rig. You need a wrench 50 miles out of water. You kind of have to, that wrench becomes a $1,000 wrench because you've got a helicopter the thing out and back. So offshore oil production is very expensive.

Starting point is 00:14:04 And then we've kind of offshore oil production has not grown to meet this, the continued growth in demand. And so we've shifted to an even higher cost supply, which is all this fracking. And fracking is actually a natural gas technology. It was primarily way back. It's kind of an old technology. It's, you know, obviously controversial somewhat in the US. because people are concerned about what the, you know, oil leach into into groundwater and the chemicals use in fracking fluids.

Starting point is 00:14:33 But it's a very, it's a very good technology to use for gnat gas. And it was developed from the gnat gas industry for where you drill down and you turn the pipe, the drilling pipe sideways. You drill sideways and then you later on you frack the rock with water. But it only really started to take off in 2009 because oil had reached the price where, This new source of supply, it's a very expensive thing to frack for oil. And oil fracking costs $70 to $90, depending on where the fracking is occurring. And so we've moved from conventional onshore, which peaked and began to decline in 2005. And globally, not just in the U.S. or other countries globally, we moved to deep offshore,

Starting point is 00:15:17 which is kind of, you know, the U.S. Gulf Coast, obviously the North Sea and all that kind of stuff. It's that's around $50 oil, but that's not enough supply there. So then we were moving higher to fracking supply. And fracking is a $70 to $90 per barrel cost in terms of the supply cost. And the problem with fracking is that you look out to 2020, 2021, U.S. fracking oil supply is also going to begin to decline. So all this, because there's only certain parts of the U.S. that can be fracked for oil.

Starting point is 00:15:46 There's North Dakota, West Texas, some parts of Pennsylvania and New York. And so it's great that. there's an additional few million barrels per day produced by the US at the moment. But have you noticed that no other country in the world is fracking for oil or none of the scale in the US? And so it's kind of there's a limited and it's a very high cost new source of supply. And so now we're moving on to what's the next high cost source of oil. And what is next, there's two big areas. One is Arctic oil, which is where you drill way up in the Arctic, in polar regions,

Starting point is 00:16:18 where it becomes a much more technically expensive thing because You've got freezing conditions, obviously, and ice flows and all that kind of stuff. But that oil is, anyone's guess, is between $125 and $150 per barrel, but you can produce it. It's there. You can see it. You can do seismic analysis. And then what you've got is you've got the next highest cost of oil is what's called ultra-deep offshore oil. And this is in places like Brazil.

Starting point is 00:16:43 And, you know, Brazil made a whole bunch of noise like the Brazilian government about five or six years ago. And they said they had discovered this huge oil field. was called the two-p field back then. And it is an enormous oil field. And the challenge with this oil is that it's, and Brazil made it said, we're going to save the world. We're going to produce all this oil. The problem, what it is is that it cost $200 per barrel to produce that oil. And by the way, the technology to produce it hasn't been created yet because you're drilling off the continental shelves.

Starting point is 00:17:11 You're drilling way down through the water, you know, miles deep. Then you're drilling into the rock. And so it becomes very expensive. And the first barrel of oil that's meant to be produced from this oil, this should be, in the early 2020s. And the run, it's roughly around 200 plus dollars per barrel. And so we're moving up along through these different supply curves. And so, you know, everyone kind of, you know, knocked all these kind of peak oilers.

Starting point is 00:17:35 And there was a certain kind of element of survivalism type thing. And, you know, it was almost got wrapped up into this, uh, it almost evangelical type movement. And so that was kind of what knocked it, I think, sideways. But the big challenge is is that we're, um, you know, oil is not a renewable resource. we are burning through our supplies at obviously in every rapid rate. And we've burned through all the really cheap stuff. Now we're going to much more higher cost. And, you know, if you price oil, it's pure economics.

Starting point is 00:18:04 If you price a barrel of oil high enough, you can get oil out of a lot of different things. You can make oil liquid gasoline out of coal. You can actually, you know, it's a hydrocarbon. You have to do some, you know, a lot of expensive things to that hydrocarbon to get an oil out of coal or to make or gasoline out of coal. but at $500 per barrel, all their things being equal, you can actually create gasoline out of any other hydrocarbon. And so you've got a situation where the demand side, demand is going to continue to grow because there's no real alternative at the moment. Electric cars are still a tiny, tiny, tiny fraction of the world. There's no, the demand will continue to grow.

Starting point is 00:18:40 The biggest challenge is on the supply side. And, you know, for all those people that kind of knocked all those peak oilers, they were all kind of right. Conventional oil production has peaked and begun to decline in. 2005, that was what caused that big rally in prices. We kind of hit a supply window. And so our supply ceiling, and we had to force the market up to pay for the newer, higher price oil, which was, you know, off deep offshore and then fracking oil. So right now, so it's really interesting that you say those things because you're talking

Starting point is 00:19:11 about how expensive the oil could get here in the future. And the question that I've got, so in January of 2015, in our show, obviously, you're obviously likes to study these different billionaires. So that's where this question is going. So we had this billionaire over in Saudi Arabia. His name is Prince Bintala al-Walid. Prince Al-Wilid, Prince Al-Wil. He's a famous guy in the finance world.

Starting point is 00:19:35 I'm going to go with your pronunciation of that. He said that he will not see or that the world will never see another $100 barrel of oil again. And I found this article, this was in the USA Today that they wrote this. In fact, we'll put the link to the article on the show notes so people can see this, but it was in the USA Today, and I found this to be totally mind-blowing that somebody could come out with his credentials and his background and being so intimately familiar with oil over in Saudi Arabia that he would say something like this. So I'm really curious to hear your opinions on why do you think he has this long-term opinion of oil remaining below $100? So it's kind of interesting. you know, it's kind of like if you're a kid of a rich family, everyone thinks that your opinions are much more weightier and deserve kind of a credibility, whereas they may not be, that may not be the case.

Starting point is 00:20:31 And so everyone thinks that everyone in Saudi Arabia knows everything about oil. It's kind of like saying everyone in Idaho knows everything about potatoes or things like that. You know, obviously he's a billionaire and he made a lot of his money, not in oil. He made it in other areas in finance and a whole bunch of other things. But the, obviously, Saudi Arabia is a very unusual country. It's entirely dependent on oil. There's no other industry there. There's no tourism or, I mean, there's a tiny amount of tourism,

Starting point is 00:20:57 but there's no kind of at-scale type industry. And Saudi Arabia is obviously the leader of OPEC. They're kind of the de facto leader of OPEC. And OPEC's, their only ambition in the world is to have higher oil prices. And so they try and, you know, reduce supply occasionally to try and prop up prices. So the challenge I have with, with, a statement that we'll never see a $100 oil again is that, okay, so where is this additional, you know, I kind of, you know, a guy that looks at numbers and physical supply and demand,

Starting point is 00:21:26 where is the, so you're going to have demand is continued to increase. Every year it grows by one to one to one half million barrels per day. We're up to the mid 90 million barrels per day of consumption right now. Um, where's all this additional supply going to come from? And, you know, to say that we'll never see a hundred dollar oil, that means you're basically by default saying, we're going to find cheap onshore oil. But where is that cheap onshore oil? I don't know where that is. I mean, there's some cheap onshore oil,

Starting point is 00:21:53 but not enough to meet demand growing up one and a half million bars per day. You're saying that also that fracking is going to go international, that you'll have fracking in Saudi Arabia, in Europe, in Russia. That hasn't happened yet. And there's a whole variety of reasons why fracking is kind of uniquely a U.S. thing at the moment. But basically you're making an assumption that you're going to see all these sources of supply that are going to come out of the next five to ten years that are going to be under $100 per barrel.

Starting point is 00:22:23 I don't know where those sources exist. So on the supply side, he's definitely wrong. There are no huge sources of oil that are coming in online under $50, $75 a barrel. There's just not that. Then maybe he's saying that demand is going to collapse, that oil, people are going to become much more efficient. And there's a famous thing in, you know, obviously oil grows pretty much with population. So it can be relatively steadily as grown over the last

Starting point is 00:22:51 155 years. And so, you know, maybe people are saying, you know, what is they, I'm trying to reverse his logic here or try to go through his logic, maybe saying, okay, people are just going to become much more efficient with their use of oil. And so there's an interesting thing in oil markets where it's kind of a, that's something that also occurs in other markets where every time efficiency increases, people, you burn more of that underlying commodity. So, If you look at cars in the US, you know, it used to be 15 years ago, cars would get 15 miles per gallon or 10 miles per gallon. We're now up to you can get a car today, just a regular Ford or whatever, they can get 40 miles per gallon. You know, it drives and looks like a regular car.

Starting point is 00:23:29 It's using some hybrid technology, some regenerative braking. The engines are much more efficient. They're smaller engines, but they're turbocharged. So you can actually get more efficiency out that way. So you've got a trend where miles per gallon of the average. cars on this road in the US and globally is increasing pretty at a decent rapid rate. But the interesting thing is that what do people do when they get a more efficient car? They buy a larger car.

Starting point is 00:23:56 And so if you look at SUVs around the world, the SUV sales are actually quite healthy. And so people, even though the underlying consumption device airlines, you know, use more efficient jet engines, ships use more efficient marine engines, cars get more miles per gallon. And all that the average consumer does is they fly more because airline tickets become cheaper. They ship more stuff, buy stuff because Amazon can ship it cheaper. You know, all those things, everyone thinks that Amazon, the world or the future and Google buying stuff off the internet involves no oil consumption. It involves almost the exact same oil consumption as if you drove to the store because Amazon now have to ship this single box to you.

Starting point is 00:24:39 you know, it has to go through a whole network of planes, boats and trucks to get to you. All that requires diesel, usually, for commercial transportation. And so there's no efficiency out there that's not being offset by higher consumption at the moment. So I just don't, I don't think that he can, what are the underlying facts that he would say that oil can never go above 100? There's no supplies, huge sources of supply coming out under $100 per barrel. And if are people going to become more efficient, engines are becoming more efficient, but people are then using that efficiency to consume more oil. So, you know, by shipping more products, by flying more on airlines, by buying larger cars

Starting point is 00:25:27 or just turning on the air conditioning in a car, you know, or turning, adding additional devices. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now.

Starting point is 00:26:23 You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having. dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Oslof Freedomforum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place

Starting point is 00:27:08 where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the Netsuite AI connector, you can use the AI of your choice

Starting point is 00:27:55 to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash study. The guide is free to you at netsuite.com slash study.

Starting point is 00:28:21 NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place,

Starting point is 00:28:56 from inventory to payments to analytics. So you're not joking. a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions, and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com, slash WSB. Go to Shopify.com slash

Starting point is 00:29:33 WSB. That's Shopify. com slash WSB. All right. Back to the show. And I will say this. In the article, it did not list anything

Starting point is 00:29:45 that he said quantifiably why he felt that way. It was just like, hey, I feel it's never going to be higher than $100. And that was pretty much like the essence of the article.

Starting point is 00:29:54 Yeah. Yeah. And it's kind of, it's one of those things that I'm very much because I'm coming from the trading world. I'm a very much of look at supply, look at demand, and it's in adding the numbers up type game,

Starting point is 00:30:05 and that you can actually, oil demand is actually relatively easy to model mathematically because it's the law of huge numbers. You've got, you know, six billion people, and people can't, when you get up to those scale of numbers, people behave very predictably. Yeah. And so you've got, and when you boil it down to, you know, people drive to and from work every day, two and from school. And at scale, it's very easy to model consumption.

Starting point is 00:30:29 And the supply side is kind of the more difficult thing to model for oil markets because you do get these lumpy and also technological ships. Like fracking only really took off in the US in 2009 because it required oil to be at $100 to start that whole to kick off that industry. And so the supply side, you've got a lot more dynamic things going on. And there's also there is a definite progression of technology on the supply side. But it's much more difficult to predict the supply side. side than it is the consumption side. And so I'm, I just think, I think he's probably saying it obviously for a, for, you know, maybe it's things that the world's going to become more efficient.

Starting point is 00:31:10 But history has shown that has not ever been the case with the will. And you don't know whatever his political intentions might have been for saying that over in Saudi Arabia. Maybe he's got some other intention tied to that comment or whatever. Yeah. I mean, to the thing about the Saudis that I don't want to kind of necessarily pick on the Saudis, But, you know, their entire economy is 100% dependent on oil. Of the 94 or 95 million barrels per day of supply in the world, just over 10 million of that, it comes from Saudi Arabia.

Starting point is 00:31:42 And so they, you know, it's something where politically, obviously oil is a very strategic commodity just because everything, some of jets, the military machinery all operate in oil. I would almost argue that every war since the, since 19, 1900 has been won and last. And a lot of the strategic decisions were based on oil, you know, Japan going down to try and get to Indonesian oil. That was their reason to push down and try and knock the US out of the Germans going into Eastern Europe, you know, to get to the oil fields in Russia. That was that, you know, to their detriment, you know, they burn, waste a lot of energy and obviously people going east during that thing to get to oil.

Starting point is 00:32:27 Also, oil is a very strategic thing. And so people are cautious about what they say. And obviously, when your only business is oil, then you're even more kind of cautious and kind of an interesting perspective. Yeah. So, Morgan, I can't help to think about this from the perspective of the stock investor. Because it seems to me, yeah. And the reason why Preston is laughing is that I always, you know, when I have a guest, I always say,

Starting point is 00:32:55 Well, so if I'm a stock investor, dot, dot, dot. So that's why he's laughing. So, Morgan, looking from the perspective of the stock investor, you know, when we think about the oil industry, the typical thing about companies like Chevron, Exxon, Shell, and so on, like these big, versatile integrated companies that might be quite vulnerable to the oil price, because they have a given cost structure, as you said, depending on how they explore that oil and then the revenue is basically the oil price. Now, I'm kind of thinking, I'm not sure I want to be in that industry, but I might want

Starting point is 00:33:33 to be in the all service industry because that is supplying equipment to that industry. Would you agree that that industry is less vulnerable to the fluctuating oil price? Unfortunately, I think it's even more vulnerable. And one of the reasons for that is that if you look at, obviously, fracking over the past few years, Slumberjay, Halliburton, they, if you're doing a frack job as in Exxon don't do the fracking of the well themselves, they hire Baker Hughes, Slumbergey or Halliburton to do that fracking for them. And a lot of those companies have gotten hit and the power hurt, their stock prices, those oil services companies have got hurt because they've lost a lot of that fracking

Starting point is 00:34:14 business when oil moved down to the 40s and 50s over the past few months at the end of last year. And so I would almost argue that oil service firms, like those Hullabert and Slumberger-Hughes, they're almost more levered version of exposure to oil prices. And companies like BP and Shell and Exxon, they're much more closely tied to the price of oil, you know, to flat price oil movements. And so I would almost argue the opposite, that it's the oil majors are much more closely correlated to the price of oil. And it's not, you know, that's not a bad thing. That's almost, that's a good thing that they're correlated price of oil.

Starting point is 00:34:56 You know, one of the biggest things in the oil market in the past few years has been all these ETFs for oil services funds and ETFs for trying to track the underlying price of oil. There's a big famous one called USO. And the problem with all the, some of these ETS is that they use futures contracts, oil futures contracts. And it doesn't really work that well, at least in my opinion, and if you look at, look at the performance of those ETS. It doesn't really work that well when you have an ETF based on oil futures because oil futures themselves are kind of, there's a whole bunch of transaction costs involved with them and whatnot. But if you want the most pure play for, you know, on the oil industry is obviously just one of those majors, the Exxons and they're still, they're very well-run companies.

Starting point is 00:35:40 And they are correlated with the price of oil. So you have to be willing to roll with some fluctuations and oil price correlations. but I would say that they're almost a less leveraged version play in oil than the oil services companies. The oil services companies, they get hit when oil prices fall. Everyone starts cutting oil services almost. It's a more exaggerated or more levered version of the oil majors. So I got a question for you, Morgan. I think a lot of people listen into this podcast are very curious to get the inside scoop of what you think has really happened over the last six months.

Starting point is 00:36:18 and yeah, I'm just, we had a guest on the show and he made the comment that the U.S. it was payback to Russia. I think you talked to anybody in the industry. They're all saying that I see you smirking. So you've heard this story too. So I really want to hear your opinion and whether that story holds any truth and just kind of your whole take on it. Okay. So the oil industry has always got all these conspiracies surrounding it.

Starting point is 00:36:42 There's, you know, it was the whole thing in the 1980s where people think that the Soviet Union was ultimately collapsed. by the US, Ronald Reagan telling the Saudis to pump as much oil as possible, and let's get these, let's crush the Soviet Union. So there's always kind of these kind of underlying conspiracy theories. But at the end of the day, it actually is just pure economics. There's nothing really, you know, politics does play a certain, is a certain part of story, but it's purely economics. And so what happened was up until August of 2014, up until August of last year,

Starting point is 00:37:16 For the prior five years since 2009, oil had been at a, and I'm talking about oil as WTI crude oil, which is the U.S. kind of benchmark. The WTI crude oil had been around $100 a barrel, give or take $10. And for five years, that is an incredibly stable oil market for five years. And there was a whole bunch of dynamics underneath that they, behind the scenes kind of in the oil market. The stability of oil at $100 enabled the fractures. enable the fracking industry to flourish. It basically said, you know, you can get your oil. Yeah, it costs $80 per barrel or $70 per barrel.

Starting point is 00:37:52 But look, oil is $100 and it's been stable there at $100 for, so it encouraged all this new supply, which the oil, it's just pure economics. The oil market needed to encourage that high cost oil to come out of the ground. And so you had that kind of creation of that whole new industry, the fracking industry. And so up until August 2009 and then what happened in August 2009? You had a few major things happened. One is you had the, there was a Libya, that's a decent size of oil producer.

Starting point is 00:38:24 Those guys had gone through a whole bunch of turmoil with their oil industry. But during the months of August, September, October of last year, their oil production doubled within a few weeks or a few months. And so, and they're not a huge producer, but everything in the oil market kind of moves at the margin. They went from just over a million barrels per day to over two million browse per day. So that was that. That was kind of a first thing that kicked off everything. Then you had... Because they're all trying to keep market...

Starting point is 00:38:52 Morgan, so what you're describing here is that basically one person starts producing more. Everyone wants to basically keep their market share, so then they start producing more and it gets competitive. Is that what you're saying? Is that what you're saying? No, no. No. So no, actually, that used to be the case many, many years ago. and the huge of oil is in the first chapter of all 101. But these days, everyone produces flat out, including Libya. And usually the reason they wouldn't produce flat out is because of a war. And that was a good situation in Libya.

Starting point is 00:39:24 And a whole bunch of other countries were just because of Iran, it's because of sanctions. They're producing about a million, million half bars per day less than they would like to. They would actually like to, but they can't buy the proper pipes, the pumps. They do the seismic tests that they need to do because they're operating under sanctions. The only country out there that actually deliberately withholds oil from the market is Saudi Arabia. And so they do it under the auspices of OPEC so they can point a finger to someone else. But it's pretty much Saudi Arabia is the only country.

Starting point is 00:39:55 Every other country and every other company in the world produces as much as they can if they can make a dollar out of it. So if they make it get out of the ground at 80, sell it for 81 at markets, then they'll do that. There's simple economics. So, Olivia oil production went up by over a million broads per day back in August last year. And it kind of came out of nowhere. I'm surprised, you know, there's a lull in the fighting and some stability there. And so oil production can recover that hadn't been expected. The second thing was that you had the dollar started to rally.

Starting point is 00:40:28 And oil is kind of a currency. So it's kind of a, you know, when I talk to, you know, fellow oil traders, whatnot, we don't talk about kind of the top line stuff in the old market. We always look under the hood. And so oil is a currency. And so the dollar started to strengthen all these, everything against the dollar, including like the euro, the, you know, all other currencies, including commodities, started to sell off. So you had a sell off in the dollar, I say stronger dollar, weaker oil prices. So you had Libya recovering, kind of unexpectedly out of nowhere. You had the dollar starting to strengthen. If you look at a chart of the dollar index, the tickers DXY, you can kind of see that.

Starting point is 00:41:08 It started off in August. And then the third thing, which was kind of one of the more critical things was that there's two big organizations that do oil demand forecasts. One is the EIA and the other one's the IEA. And when they do their big demand forecast, they use IMF and World Bank economic growth forecasts. And so if you look at starting in August of last year, people started to ratchet down global demand economic growth for 2016. And so that whole kind of, because of mainly a lot of it was due to China. But then it's kind of the class of all the brick countries, Brazil, Russia, India, China. People, you know, had to expect them to grow at 8%.

Starting point is 00:41:49 Now they're only going to grow at 6% per year. So they're still growing, but just not as rapidly. And all of those, that confidence of Libya, the dollar starting to tick higher and global economic growth forecasts, being all being reduced, and being reduced by decent, big piece, big amounts, that kind of pushed oil down to, say, $80, $75 from $100. So it'd been five years stuck at 100.

Starting point is 00:42:12 Now we're down to 75. And so then OPEC met at the, it was in November of last year. And one of the most unusual OPEC meetings ever in that they all met. And everyone always listens to what the Saudis say. There's a Saudi oil minister. His name is Al Naimi, he's famous in the oil world. And he usually, everyone hangs on, he's like the Janet Yellen. Everyone hangs on every single word.

Starting point is 00:42:36 And how, you know, his facial expression and all that kind of stuff. Because Saudi Arabia is the only country that deliberately tries to manipulate prices. You know, they withhold oil that they could otherwise produce. And so usually oil drops $25 a barrel. You expect OPEC and the Saudis to say, we are going to support, we're going to cut our production by, you know, because Libya has increased by a million and demand has, was expected to grow next year by two million per bars per day. Now it's only going to grow by one and a half million. So, someone has to take one and a half million bars per day of supply out of the market to balance

Starting point is 00:43:10 it and stops the prices falling. So that's kind of the underlying logic of going into that OPEC meeting in November. And Al-Naimi said nothing. And OPEC said nothing. And it was kind of crickets. You could hear the chirping of the crickets in Vienna where OPEC is based. And one of the most interesting things is that the Russian oil minister, sorry, the CEO of one of the Russian oil companies went to this meeting as well. And Russia is not part of OPEC. They're a similar size oil producer as Saudi Arabia and the US, but they're not part of OPEC. And so, but one of the heads, and supposedly he's Putin's number two guy, the OPEC meeting,

Starting point is 00:43:48 just to kind of listen in and participate. And he came out of one of these meetings and he said, you would expect them to say something supportive of oil prices. we were looking to help OPEC cut supply. Instead, what he said was, we, Russia, we're not going to cut supply. In fact, we can't because we kind of need the money. And technically it's difficult during the winter. It was a nonsense type statement.

Starting point is 00:44:11 But if you're in that position, you should never say that publicly. Never say, we're going to continue to produce and we're not going to support OPEC. So basically, you had a confluence of Libya, the dollar strong stronger, slow down in economic growth, still growth. slowdown economic growth all in August. Then in November, you had an OPEC meeting that were OPEC itself and none of the ministers, particularly Saudi oil ministers said nothing. Russia said negative things, you know, to try, you almost force the oil market to fall even further. And so we drifted down to the low 40s. And then you started to hear all these kind of things about Saudis were saying, well, why aren't you cutting? What's what's the logic here? And basically kind of came out in the whole series of articles. and whatnot over, you know, it's kind of almost like craminalogy back in the Soviet Union days. People look at OPECology and see you kind of read these articles. You look for certain kind of phrases or keywords. And it basically came out that the Saudis in particular, they were looking at the growth of

Starting point is 00:45:12 US and Canadian oil production over the past few years. And since 1973, the Saudis have controlled the price of oil, or at least have tried to. They've sometimes lost control of it. And they do that by withholding production. And the only way you can do that is that you've actually got to be the margin. You've got to be the only guy out there with that excess supply. And so what they've tried to do is they basically are trying to wipe out the U.S. fracking industry. All these guys that are $75 per barrel, $80 per barrel, they're trying to wipe them out

Starting point is 00:45:42 and remove them as a source of supply, such that Saudi Arabia is the marginal oil producer. And so does that make sense for them to do that or economically or whatnot? There's a whole debate around that. But basically they've said, and they've said it much more clearly since November of last year, that basically I've said we're going to cut, we're not going to cut oil production in order to support prices. So it was a very, that whole confluence of things was very unusual. You know, what happened since then is that demand growth wasn't as bad as people as had expected it to be. So oil prices kind of hit the 40s.

Starting point is 00:46:19 You had a collapse in US fracking. So, you know, all that new sources of supply, U.S. oil supply had been growing at almost two million bars, an additional two million bars per day. And to put in perspective, you know, the world is, is, grows, consumption grows around two, one and a half to two million bars per day. But the growth in U.S. supply stalled completely. But why it stopped. If you look at the numbers come out every Friday called the Baker Cues drilling rig numbers, reutilization has kind of has been collapsing. So the growth in US supplies stalled, you had demand was not as bad as it had it been expected to be. So this is the demand from last August.

Starting point is 00:47:01 People were expecting a huge drop off in oil demand. It hasn't been as bad as expected. Then Libya, after a little law where it's, there was a stable situation, they actually kept gotten even worse again. So now all that Libyan oil that was hitting the market is no longer hit the market. And so we recovered back up to 60 or 50. So I love your comment about oil being like a currency. And when you say that and we look at the current condition in the world right now with China, really their market, their equity market has fallen apart.

Starting point is 00:47:32 I think you have a lot of people really run into the U.S. with looking at the dollars being one of the strongest currencies of all these Fiat currencies, which are all just miserably terrible. But you see a lot of people run in the U.S. You have the Fed talking seriously about potentially raising rates before the start of 2016. And you made the comment that oil typically moves in the opposite direction of the strength of the dollar. So I'm real curious, do you see oil prices kind of staying where they're at based on those circumstances and trading it as if it's a currency? So you've got just looking at it kind of is a currency in that in some parts of the world, oil is used as a barter.

Starting point is 00:48:15 People sell, you know, give oil to get goods. And so it actually is kind of a currency in itself. But the one thing, unlike a like you mentioned, a fiat currency, where you can just print, you know, double the currency in circulation, you cannot do that with oil. It's limited supply. And also, there's not that much in storage, you know, of, you know, say the world consumes 90, 95 million barrels of oil per day. And it's a just in time, real time operation because oil companies at Exxon and BP and Shell. they don't like to sit there with tanks, huge, huge tanks full of oil because that is cost money to buy that oil and store it and it doesn't sit well for too long in tanks. It degrades relatively quickly. And so the, basically, it is a currency. And if the dollar, the dollar has been strengthening a lot over the past six months a year. And if the dollar does continue to strengthen, then oil will likely sell off in dollar term. So it is, it does definitely trade as a currency.

Starting point is 00:49:19 And I remember back a few years ago, there was this big push to trade oil in euros and trade oil in yen and all this kind of stuff. Trade oil and rubles are Chinese yuan. And the problem with that is that no one tells the oil market trade oil in dollars. Like the US government doesn't say, hey, you must trade oil in dollars. There's no edict around. The reason oil is traded in dollars is that it's the most liquid currency. And if markets try and literally. Yeah, yes. And people try and find, you know, efficiency in, if it were cheaper trade oil and euros in terms of the bid ass spread. Every time you have to buy and sell euros, it's a tiny fraction at scale more expensive to do that than it is to buy and sell dollars. And so the reason the oil market trades in dollars is because it is the most liquid actively traded currency. It's not because anyone tells anyone. And if, you know, it's, it's, but it does trade as, you know, if you have, if there.

Starting point is 00:50:14 All things being equal, it's just classic economics. If the dollar is stronger against the euro and other currencies, then the oil should sell off also in dollar terms. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

Starting point is 00:50:37 VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with VANTA.

Starting point is 00:51:07 That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone.

Starting point is 00:51:55 Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account. is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional

Starting point is 00:52:46 investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, It's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objective,

Starting point is 00:53:34 risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So I have this question because you said before that the work consumption right now was approximately 95.

Starting point is 00:53:55 Yeah. 95 million barrels per day. Yes, 95 million barrels per day. Yeah. And I just read in a blog post area. other day that I think since 2009 where your book was from, the US production has increased by 3.2. And from that 3.2, 2 billion of that barrels per day, that was from shale oil. Now, so that was actually, that was actually something that was really interesting for me,

Starting point is 00:54:20 especially when I read your book, because in your book, you present shale oil and you also introduce the concept energy return of investment. Yeah. So, yeah. Perhaps you can first explain the concept. energy return investment and then your opinion on share law yeah sure um and so um the the energy return investment is that to get a um a unit of energy out of uh a usable unit of energy out of the ground and you have to spend energy to get that so if you the easiest way to think about it is that if you're um to drill a well you've got to power that diesel generator to drill that well and so um you've got to burn energy to get to

Starting point is 00:55:03 to get to the energy to get and so over time and like drilling on dry land is has got a high return energy return on investment because um you don't have to helicopter things out you don't have to build an offshore oil rig you don't have to build any of these kind of deep underwater pipes you just can build a simple rig on dry land using very little energy and yet the return is huge you get a lot of energy out of the ground from oil so um basically over time going deep offshore and then with fracking, the amount of energy required to be spent to get energy out of the ground has been increasing. So the energy return on investment has been decreasing. So in other words, it's becoming much more energy intensive to produce, to get usable energy out

Starting point is 00:55:50 of the ground. So it kind of sounds like a strange kind of strange thing, but it's basically at its core, the cost of supply on energy has been increasing over time and will continue to to increase. So that's kind of one concept. It's called energy return investment. But the other thing is that on shale oil. And so in writing that the book, I kind of slightly regret using the phrase shale because there's what I should have actually referred to.

Starting point is 00:56:20 Fracking is actually what's called tight oil, the tight oil industry because basically the oil is locked in very tight little pores and you've got to blast through those pores to link them all using water pressure. And so it's, uh, all this fracking oil is coming from what's called tight oil, uh, reserves. Um, a lot of that tight oil is in a type of rock called shale. And so that that's kind of fracking the fracking industry. Separately, there's a type of rock called shale, which is immature oil. And it's, you know, it's, uh, basically oil that if you leave it cook for another several million years, it will eventually turn into liquid oil, but it's basically called shale. And so that technology is very expensive. To actually make oil out of that immature

Starting point is 00:57:08 rock, you have to, just like you can make oil out of any hydrocarbon, it takes a huge amount of energy to make oil from shale. But to frack, do tight oil fracking, which sometimes involves fracking shale rock, as then you blasts through the shale rock. And so that's what's the confusing part of, which I probably will have to clarify on an extradition of fracking tight oil, which can be oil locked in shale rock. And then there's another process of making oil, actually cooking oil out of shale rock, making turning physically transforming rock called shale into oil. And so there's a kind of a, one of the things actually, the challenges writing oil 101 was that kind of nailing down common terminologies because, you know, one of my pet peeves is when people say,

Starting point is 00:57:55 say gas. And it's, I hate that phrase, just gas because in my mind, I'm thinking, oh, you mean natural gas or, oh, no, if you mean gasoline, or do you mean aviation gasoline or motor gasoline? And so I usually like to use one phrase and use it very precisely. So there's motor gasoline. There's petrol is kind of a slang for motor gasoline or gas in the US is slang for motor gasoline. But it's one of the challenges with writing oil 101 was finding that kind of common terminology of which one of which I probably didn't explain as well as I should have was that fracking and tight oil as a distinct process from making oil out of shale which is we take a rock and kind of cook that rock into by adding hydrogen and whatnot also make it turn it into a

Starting point is 00:58:44 usable product like gasoline or jet fuel absolutely fascinating I'm so impressed I'm serious I know whenever I saw your book I was like this guy knows what he's talking about about and as everyone in our audience can tell this is incredible. Yeah, and I almost think that I'm unfair to you, Morgan, because I pick, and they're going to be completely honest, three lines from page 27 in your book, and then you can just, you know, keep on talking about how you can refine. I'm just completely floored about the knowledge you have about your own material. Well, actually, it was kind of an interesting thing in that the researching, because I knew

Starting point is 00:59:22 a lot about the old industry originally, I had done a lot of background reading and I had exposure. I know a lot of people and I actually worked in the oil industry. So there was that. But the actual writing of oil 101, I think the end book was something like 380 pages. And I don't consider myself to be a natural writer. And so I had a whole bunch of people help me with editing and all this kind of stuff.

Starting point is 00:59:43 But the original version, I remember I printed it out one day and it was something like 1,800 pages. And I kind of looked at it on my desk, went, hmm. And it took me about three years to edit it down. And a lot of that was due for readability. And so I would hand it to, I would hand it to someone had no idea about anything about the old industry. So I would hand it to my mother and say, here, read this. And tell me, is it entertaining first?

Starting point is 01:00:07 And so I try to put in, what do I call them, like knowledge bombs, like put in little things in every page that people will go, ah, I didn't realize that. And make them kind of like interesting. So she said, because there's nothing worse than reading kind of an engineering text of, okay, here's a chemical process. You got to say something interesting about, you know, one of the kind of little things like, you know, why is the acronym for oil in the oil market is BBL, but there's only one B in barrel. Where does the other B come from? And so it goes back to the standard oil and John D. Rockford's blue barrel. The original barrels that were standardized in the oil industry with 42 gallons for barrel or blue barrels.

Starting point is 01:00:45 And that's why everyone in the oil market today calls a barrel acronym BBL. And it comes from that little things. So I've got a question for you. And I was watching Stig. He was placing a trade while we were talking there. I can see he's buying more oil companies right now. The question I got goes to, there's a lot of these TV commentators on TV talking about the price of oil. And I think the most prominent one that everyone knows is Boone Pickens, billionaire Boone Pickens.

Starting point is 01:01:16 He's from Texas. He's on TV all the time. And I'm real curious because I know recently he's been. been saying that oil is going to be, within a year, oil will be like $80. He's making these predictions and stuff, which Stig and I usually shy away from any kind of predictions. But I'm real curious for you, Morgan, I mean, you're so intimately familiar with this stuff.

Starting point is 01:01:37 Who's the person that you really pay attention to? I know for like investing, we watch the Fed like a hawk. They have a huge influence on the impact of where the markets move and things like that. But who's one of those key people that you follow for the oil industry that people could maybe latch on to, if this person says something, it's usually a pretty valuable piece of information. Well, there's obviously, I listen to myself first. I would imagine so.

Starting point is 01:02:06 But I do that. It's one of those interesting, and I know Teebun Pickens, he's a famous guy. When I hear of Tiboon, I always remember that guy in the Simpsons, you know, the cowboy in the Simpsons. I actually think that it's based on him because Stephen Pickens was a big buyout guy. Before he was famous as he is for a hedge fund, he was famous in the 1980s. Maybe it is him. No, I think it is.

Starting point is 01:02:32 He actually, it's interesting. I could have actually written it into Oil 101, but one of the seven sisters they were called. There were these big bunch of companies that controlled oil from the 1930s to up until OPEC in 1970. And one of those big companies is called Gulf Petroleum. And if you look at it, it was, and if you look right now, there's a few in the northeast of the US petrol gas stations or gasoline stations that sell Gulf Petroleum. But Teaboon Pickens was the guy that actually did a buyout of golf petroleum. So he's actually a famous guy. He, you know, in the oil industry for not just his statements, but for the history of the industry.

Starting point is 01:03:11 Do I listen to him in terms of oil price predictions? I think he's a very colorful character. And a lot of what people say on TV and whatnot is a very extreme thing to try and get a reaction or get a buzz. It's kind of almost like writing a headline. You need to say something sensational. So who do I listen to? Obviously, anything that comes out of Al Naimi, who's a Saudi oil minister, that is like you kind of, you have to listen to. Where is he going?

Starting point is 01:03:42 So is he in China? Is he in Russia? Who's he meeting in China? what is he said in China? So Saudi oil minister Al-Naiimi is one of the critical people that, anytime he says anything or just where he is. Is he on Twitter? I say that jokingly, but somewhat serious.

Starting point is 01:04:00 No, actually, you know what? I don't think so. Maybe someone should create a Twitter account for him, a fake Al-Naiimi. Yeah. So let's get on it right now. That's not a bad idea. I know I'd follow it.

Starting point is 01:04:12 Oh, yeah. And so he's obviously a critical guy. In terms of kind of analysts and people kind of in the published research and whatnot, there's a kind of a whole ecosystem of these individuals. You know, gosh, one of the, and usually the kind of the interesting thing is that a lot of these people can have a bias. So Al Naimi is obviously a Saudi old minister. He has got a bias toward higher prices all the time. So you have to read, look with that lens, look at what he says with that lens of, of course, this guy wants

Starting point is 01:04:45 higher prices. So, you know, bear that mind when he says anything. So a lot of, if you look at some people that work at, uh, but do research at banks, a lot of there's good research produced by Citibank. I mean, it's kind of, you know, a lame thing to say and I kind of, you know, banks kind of a, um, but it's, they, they produce some really good research. They've got a really good research team there. Um, there. Um, do you have any like online resources that we could put into our show notes or like a link that you could provide to us for that? I can indeed. Yeah. Okay. That'll be great. So if, if, if you're listening to this and you want to see what Morgan provides Stig and I.

Starting point is 01:05:18 We'll have that in the show notes, and you can go to that and click on those links, and then you can use those from now into perpetuity as you continue to research your oil. And number one will be the fake Al-Nami. Exactly, exactly. Okay, so Morgan, the final question that we have, that's about books. So do you have any books that have dramatically shaped your life? a book that has really had an impact on you and why has the book had an impact on you? Interesting.

Starting point is 01:05:52 One of the books that kind of got me interested in financial markets was Liars Poker, Michael Lewis. Yeah. Great book, great book, well-written, very entertaining. He's a great, right? I love everything he writes. We're big fans of Michael Lewis. Yeah. And I like the way he kind of uses, he makes everything very accessible, like things like Moneyball

Starting point is 01:06:12 in those other books are also, I like his kind of approach to looking at an issue or a story, but looking at it from a different angle. But that was his first book, I believe it was his first book called Lyers Poker, written about the trading floor at Salmon Brothers back in the day. And that kind of got me, that was the book that inspired me to get, or one of the books that inspired me to get into financial markets. It made something, it just made it, made it alive, turned that whole kind of space into, made it very interesting and compelling.

Starting point is 01:06:43 And obviously, parts of it, I'm sure we're exaggerated and whatnot, but it just, you know, that book was one of the formative things that made me kind of want to get into the world of finance. Yeah.

Starting point is 01:06:54 We're, yeah, we're huge fans of his. And yeah, you're right. That was his first book. That's what gave him his big name. And we,

Starting point is 01:06:59 Stig and I did an episode where we talked about his most recent book, the high frequency trading book that he recently did. Yeah. Yeah, the Flash boys. Yeah, that's a great.

Starting point is 01:07:09 That's a great book also. So, yeah, I mean, he just, he writes well. He writes very entertainingly. And, you know, again, he's kind of an interesting author. And I also think he's kind of a little bit of a bias. Oh, yeah, oh, yeah. Like, he kind of has his love-hate relationship with Wall Street. Yeah.

Starting point is 01:07:25 He kind of hates Wall Street, but he loves to write about Wall Street. And, you know, but he writes really well. And, yeah, but that Flash Boys is also a great book. Well, fantastic. So for our audience, so Morgan Downey, is his name. He wrote the book, Oil 101. You should have no problems finding it on Amazon. If you go on the Amazon, just type in Oil 101. It'll be the first thing that pops up. We highly recommend that if you're interested in the oil industry, this is the go-to book. This is better than any book

Starting point is 01:07:54 out there that I've ever seen on oil. So, and it's by a landslide. It's not even a comparison. So Morgan, thank you so much for coming on the show and sharing your time and your expertise. I know our audience is going to take away a whole lot from this interview. So thank you so much. Thanks, guys. And if you need to follow me on Twitter, I haven't created the fake Al Naimi yet, but you can follow me at Commodity MD. Awesome. Okay, I didn't realize that you were on Twitter. So Commodity MD, no need to really follow anybody else. The guy to follow is Morgan. I promise you, you will not be disappointed. I know I will definitely add you shortly after we're done with this. Thanks, guys. All right, so this is the point in the show where we take a question from our audience. And this question comes from Dan Taggart. Hi, President Stig. My name is Dan, and I'm from Minneapolis, Minnesota. I want to first say thanks for a great show. You guys are a wonderful resource and have had a lot of fun listening and learning from your podcast every week. My question is regarding inverse ETFs. A while back at the end of one of your episodes, you had discussed various financial instruments that an investor might want to think about holding during times of low return and overvaluation. I'm generally a long only investor, but I am wondering what you're

Starting point is 01:09:08 thoughts are regarding inverse ETFs. Are these good investment vehicles to keep your money in as a hedge against an overheated market? Thanks. All right, Dan. So this is a fantastic question. I think it really applies to the current market conditions here in the middle of 2015 and the summer of 2015. Because the market is very high. A lot of people would say that it's extremely overpriced. I mean, there's some people that might not agree with that. But I think that the general consensus is that a lot of people think that the market's overvalued. And I think whenever you look at a distribution, you're seeing it two standard deviations away from where it normally is at.

Starting point is 01:09:46 So with those conditions, what you're asking is short selling the market, but doing it through an ETF or doing it through an index, I want to talk real briefly about if you're the type of person that wants to do a short sell, I think there's a lot of risk in short selling. And I think there's particularly a lot of risk in short selling an individual stock pick. Number one, the reason why I feel that way is because of buyouts. So let's say that, you know, and right now in 2015, the perfect company that I would say is just doomed for failure that is going to go into bankruptcy is Sears. Whenever I look at their income statement, their balance sheet, it is just disgusting. It is really, really bad.

Starting point is 01:10:28 So if I was ever going to short sell a company, that would be something that maybe I'd be in a and in short selling because it's just, it looks so bad, it looks like it's destined for bankruptcy. But here's the concern is let's say that there's another business that comes along that has a much larger market cap and has a lot of resources on their balance sheet in order to buy out Sears. If I have that short position and I think that it's going to go down because it looks so bad, I'm going to get taken to the cleaners as this new company comes along and there's talk on the street and in the newspaper of them being bought out. You're going to see the market price surge.

Starting point is 01:11:01 I'm going to get called. I'm probably going to lose a lot of money. That's not anything that I feel like I can predict or control, and that is very bad. So that's why I have never short-sold an individual stock in my entire life, and I don't ever intend on doing it, is primarily because of that specific risk. The other risk that I just gently discussed was that you would get called. So you'd have to buy this stock on margin, which is a loan or borrowed money. and if it moves against you and you get called, you have to come up with the resources in order to meet that call.

Starting point is 01:11:36 I don't ever want to be in that position. That sounds like a very stressful position. So that's me. Other people are comfortable with being in that position. But what you're talking about is not short selling an individual stock pick and having to worry about a call. What you're talking about is investing into an ETF, which moves in the exact opposite direction of the market. So if the market goes up 1%, let's just say the S&P 500, let's say the S&P 500 goes up 1%. Your short ETF or bare ETF, which they're commonly referred to, would move in the exact

Starting point is 01:12:09 opposite direction by the same magnitude. I'm not necessarily saying that a short ETF is really all that bad of a thing to be in right now based on these current market conditions. And I think a lot of value investors out there might really kind of say, Preston, what in the world are you talking about? You sound like a crazy person right now, but I mean, that's, that's really where I see this because I feel like the market has been so heavily manipulated by the Fed. I'm really curious. I want to stop talking because I think I've probably made a bunch of value investors very mad. They're probably throwing things at their radio or their phone or

Starting point is 01:12:45 smartphone or whatever right now. But I want to hear what Stig has to say about short selling, or primarily about an ETF, a short ETF. Yeah. So, Dan, I think I'm in the same boat as you. Like you, I'm primarily buying a whole kind of guy. And I just think for me, I don't know if it's only because I don't like the stress. I definitely don't like to be stressed. Or it's also because I don't just feel comfortable about it. Because I don't think I would buy into shorting in ETF4 and inverse SMP5.

Starting point is 01:13:24 100 index and that is not me saying this is a bad idea. I just think that this is not the approach I have to my portfolio. So a lot of people would be asking me, so if you think that the market is high, why don't you sell all your stocks? I would never say to people they should just sell off all their stocks. I will not say to people either that they should go short. They're 5100. It really depends on what they're comfortable with.

Starting point is 01:13:52 What I'm comfortable with is to buy companies when I think they're cheap and just hold them for a long time. Not necessarily sell them if they're high price because sometimes stock might get high priced. Now if Preston is comfortable with that or if you're comfortable with that or any other, I think that's probably right for you. And yes, my opinion right now is that the market is overvalued. I am just not comfortable enough to make the investment also because it would be, it is my opinion some sort of a short run bets.

Starting point is 01:14:24 And that's just not an approach. It's not a bad approach, just not my approach. And here's what's crazy is I agree with everything that Stig just said. I do. I completely agree with what you just said. And I think that if you're a conservative investor and you're trying to ultimately protect your principle, I think that that's how you've got to look at it. And you've got to also look at the fundamental nature of the market, no matter how you shake

Starting point is 01:14:47 it, is that you are buying a business. I don't care what anybody says. you are buying a business when you buy a share of stock. So let me, I guess, try to defend, which I probably will have a very hard time doing, my earlier comment. So I guess I look at the market right now, and you look at the Dow Jones, and it's at 18,000. And so if you're buying into an S&P 500 short, how high do you realistically think that the market can go? And if we're basing that off of the history of the last hundred years, which that's no judgment of what's actually going to happen in the future, but let's just say that you were going to do that.

Starting point is 01:15:28 I guess you'd have to use the valuations in the year 2000 as basically the highest that it could go, which was what a P.E. of like 75 or somewhere around in that range, somewhere very high. So if that's truly the case, then the market could go a whole lot higher. So, you know, maybe it could go up over 20,000, maybe it could go up to 22,000, something like that. I don't know. I have no idea where it's how high it's going to go or how, or when the potential crash could occur. If it'll even be a crash or it'll be like this slow, you know, slope down. I don't know. I have no idea if that's going to happen.

Starting point is 01:16:04 But I guess if I'm going to try to defend this idea of a short position, I think that it would be hard for the market to go much higher than 20,000 or 22,000. And if that's the case, the market, if it moved up that high, if it moved to 20,000, that's 10% higher than where it's at right now. And I think when a lot of people hear 20,000, they think that's really high. That's significantly higher than where we're at, especially because we've had a severe resistance level here at around 18,300 on the Dow. So if you're looking at it from a short position and you think maybe the market could contract 30 or 40%, And you think that maybe the top level the market would be around 20,000. That means that your downside would be 10% in a short position.

Starting point is 01:16:48 And your upside could potentially be 40% or 50%, which is a lopsided downside versus upside position to be in. That's probably why I maybe see it as being something that somebody could do if you were comfortable with that. And I guess I could understand your mindset a little bit. But I am not promoting that position to anybody. to do that. But I guess I can say I could understand why you would do that. So that's as gently as I can try to back up my position as a strong, hardcore value investor. I'd really totally agree with everything Warren Buffett. And Warren Buffett would probably smack me in the face for saying something like that. But I just want to put it out there. I mean, I guess I want to voice my own

Starting point is 01:17:33 opinions in addition to what all these other billionaires that are proven successes are doing. But That's all we got, guys. So that was a really fun question to answer. And we wanted to play that one because that's a really hard one. And it's something that I know I've been personally thinking a lot about. And I'm really happy to hear Stig's opinion. So, Dan, thank you so much for submitting your question. We're going to send you a free sign copy of the Warren Buffett accounting book.

Starting point is 01:17:54 And in that book, you'll see Warren Buffett does not recommend that approach. But, hey, it was really funny answering your question. And thank you so much for submitting it. If somebody else out there wants to get your question played on the show, go to asktheinvestors.com. You can record your question there. We really appreciate these questions that everyone submits us. It's so much fun to respond to this and just get all the different email questions that we get and being able to correspond with our audience. We also want to definitely thank Morgan for coming on the show.

Starting point is 01:18:21 I think you guys saw how knowledgeable he is about oil. It was just totally fascinating to have this interview with Morgan. So thank you so much. And that's all we have for you guys this week. So we'll see you next week. Thanks for listening to The Investors podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.

Starting point is 01:18:40 TheInvesterspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.w.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

Starting point is 01:19:09 Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP 044 : Oil 101 - w/ Morgan Downey (Investing Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.