We Study Billionaires - The Investor’s Podcast Network - TIP429: What is happening with Oil? w/ Josh Young

Starting point is 00:00:00 You're listening to TIP. On today's show, we are doing a deep dive on oil with expert Josh Young of Bison interests. Bison returned 350% in 2021 compared to the S&P 500's 29%. And we cover a lot of reasons why they may just be getting started. Prior to Bison, Josh was the chairman of RMP Energy. In this episode, we discussed why oil has been the most hated commodity as of late, debunking myths about oil, why supply levels could lag demand for the, foreseeable future, the key drivers of oil spike in price, oil producers that Josh is invested in,

Starting point is 00:00:36 the Russia-Ukraine conflict and how it could potentially disrupt the supply, how Europe's decline of natural gas will affect the price of oil and a whole lot more. It is clear that Josh is an expert in this space and I really think you're going to love this one. So please enjoy this deep dive on oil with Josh Young. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerby, and today we have Josh Young. Welcome to the show, Josh. Thanks for having me. I really wanted to get you on the show, Josh, and you came highly recommended from multiple people,

Starting point is 00:01:30 mainly because you have been spot on with your predictions of the price of oil over the past year, especially, and meanwhile, the consensus narrative on oil has been repeatedly wrong. Now that oil is near $100 a barrel again, I'm sure a lot of people are out there thinking that we're nearing the market top, especially given where it's traded historically. But you're not one of those people, and we're going to talk a lot about your bullish views on oil going forward. But to set us up, I want to talk about why oil has been, quote unquote, the most hated commodity over the past few years. I think has happened is I think there's been a powerful narrative around electric vehicles in particular. And because of misconceptions around electric vehicles, people think that 100% of

Starting point is 00:02:14 vehicles should be electric vehicles and that anyone and everyone that's involved with anything as an alternative to electric vehicles is evil or wrong or greedy. And I think it really has to do with that and that sort of misconception and misunderstanding around the importance of oil and oil-related products for the economy outside of electric vehicles. Now, Forbes was just writing about this a little bit where, you know, when Donald Trump was in office, oil production reached a peak of around 12.7 million barrels per day. And now under the Biden administration, it's back down to kind of the same levels as Russia and Saudi Arabia, somewhere around 10 million barrels per day. Was this action taking place in expectation of, say,

Starting point is 00:02:58 build back better coming through and more, you know, sustainable energy initiatives, getting into place that just ultimately haven't yet? I think it's complicated. And so I think that there's been failed energy policies across both parties for a number of years now. And energy independence in the U.S. is a great goal because it helps us from a geopolitical risk perspective, as well as because we have a lot of environmental regulations that can allow for cleanly produced and generated energy across the energy spectrum, from anywhere

Starting point is 00:03:31 from coal on the kind of dirty end and kind of hated end to solar, wind, whatever, you kind of have this whole spectrum with significant regulations and oversight. And so I think there are certain policies that certain administrations have had that have hurt U.S. oil development, but the bigger thing there definitely has been the oil price cycle. And low oil prices, particularly during COVID, meant that there was going to be underinvestment for some amount of time, which would lead to higher price cycle. and less production, kind of regardless of what the policies would be. You know, one chart I noticed from your research shows global production and consumption

Starting point is 00:04:10 rising together in this highly correlated fashion, basically since 2010. 2020 hits and both declined dramatically from the pandemic, but similar to the stock market, they're beginning to kind of bounce back. However, the chart indicates that the supply will severely lag demand moving forward. And I thought this was kind of interesting because I was curious as to why the supply wouldn't bounce back just the same to where it was kind of in 2019 levels? Yeah, I think there's two different cycles that are happening simultaneously for oil. And I think that's where a lot of the headlines have been kind of in reporters covering the space,

Starting point is 00:04:46 have been confused along with a lot of the analysts that cover it. So there's a long cycle, which is that oil has been in a bare market since roughly 2012. And really, oil never achieved the high price that was seen in 2008. And so arguably, it's been in a prolonged bear market even since, let's say, 2008. Then there was a shorter cycle boom and bust in shale investment that was primarily spurred by private capital, by endowments and pensions and whatever allocating to private equity funds and equity in debt where they went and drilled shale, which is a particular kind of oil field that has a very high initial production rate and very high decline and has been

Starting point is 00:05:27 most economic here in the U.S., there was this mini cycle for oil shale here in the middle of this down cycle for oil. And so what you had happened was a lot of long cycle projects that take a while but aren't really low decline. They produce for a number of years without a lot of necessary reinvestment. And you had a prolonged and extended down cycle for conventional development for oil, partly because there was this shale boom and bust. And the boom and bust for shale has been heavily politicized. There's lots of people that are anti-fraking. They don't even understand what it is or what the real risks are. There's a lot of people that are anti-pipeline. And a lot of these things have gotten conflated. And I think when you remove the two and you understand kind of what's

Starting point is 00:06:13 happening, it becomes a lot clearer. And what we're seeing is the impact of a arguably more than a decade downturn in long cycle oil investment because we've been in this oil bear market. And that's kicking in at the same time as this bust and shale where there had been three or 500 billion a year. And I think in some years that had been spent and in many cases lost or much of the money was lost because of high declines of production at low prices. And so where you see those two meat, you end up with declining production or at least production that's not rising as much as you'd think because you have this mini boom and bust along with this longer cycle. And it's really, I think, messed up a lot of the investment incentives. And I think it's

Starting point is 00:07:00 made this bull market for oil that we're starting to see way more powerful as well as very misunderstood by many different sources. Well, on that note, maybe we just take a quick detour and debunk some of these things around fracking because I'm not highly educated at myself. And I could probably tell you that most people think fracking either creates dirty water because of the oil and the water or the methane that could potentially come out of the fracking is bad, even worse for the environment than the carbon, et cetera. But I know there's ways to burn off the methane now, even to say power Bitcoin, which I think you have some familiarity with. So, you know, what are some of these myths around fracking that we could debunk quickly?

Starting point is 00:07:39 Yeah. I mean, let's address the two that you mentioned. So the first one is that fracking pollutes groundwater. And it's hard to tell exactly where that started, but there was a famous movie, I think it was a decade ago called Gasland. And they showed, I think it was Matt Damon going and finding a tap water that was from a well in Pennsylvania. And they turned on the water on this one particular faucet and they lit it on fire. And this was a horrific misrepresentation of what's happening. This was not at all related to fracking. There was zero relation. What happens in, In some places where there's coal that's naturally occurring near the surface is there's a phenomenon called coal bed methane, where if you pull enough water out from an aquifer that is surrounded

Starting point is 00:08:27 essentially by coal, you end up depressuring the coal and you release natural gas from the coal. So they knew that, right? This was a total misrepresentation, but it looked really sexy and it fed into people's fears, was especially in New York City for their water system where they understand that there are some places historically where that water has come from that's been really bad, right? There's been all kinds of horrific industrial pollution and waste upstate New York. There were historically all kinds of cover-ups. And so there's a lot of sensitivity to this, but it's also not a new thing. Fracking has been going on for decades. And it's been going on near population centers and near aquifers for decades.

Starting point is 00:09:02 You know, you look at near Dallas and you look in West Texas. I mean, this has been going on for a very long time in different forms, but essentially the same thing. And you can study these things and observe kind of the communication between different rock layers. And I think it was just this like very easy kind of cheap hit. And unfortunately, as a society, we've been progressing from people that read, you know, books and long form essays to seeing short kind of YouTube or Instagram or whatever clips. And it's really hard to unsee the water being lit on fire, even though again, it's totally unrelated. And maybe with like what's happened with COVID and some other stuff, like there's more sensitivity to this where like you see these videos of people pass

Starting point is 00:09:46 vomiting blood and dying in China that were unrelated at all to COVID, but like they were hard to unsease. I think it's a similar sort of thing. So I think that's on the water pollution. And it's not that it's not affecting water at all. Any industrial process has externalities. So if you drill for oil or gas anywhere, you're using stuff. you're using equipment and supplying the equipment and running the equipment can cause small leaks. So you may have some engine oil that leaks. But it's very similar to operating a commercial truck and, you know, trucking, even like trucking organic produce causes some amount of water pollution or some amount of emissions. But they're not what they're being described or being attacked or characterized.

Starting point is 00:10:29 So there is a little bit of pollution, but there's almost no resemblance to the critiques or the concerns that people have. And just the degree of risk versus the degree of concern is totally misplaced and it's really oriented towards anti-energy independence. And in many cases, these groups have been funded by Russia. And I know that sounds really weird and timely now. But like, there's been a lot of evidence, especially in Canada where there were some lawsuits and some of the donors were forced to be disclosed. There was some foreign funding of some of these groups that were anti-fraking and anti-pipeline.

Starting point is 00:11:01 And, hey, if you're one of the world's largest oil exporters and you can spend a little bit of money and scare a lot of people and reduce some of your competition, especially in a commodity where it's hard to really affect the competitive dynamic. Why not? So I think that, you know, is a kind of timely reminder of kind of where some of the stuff comes from. And it's really unfortunate because if you take something that's really important and it has a positive contribution for human life on earth and is relatively clean. It's really unfortunate to have it get underinvested in and besmirched for, you know, to sell tickets to a movie or something like that. It seems a little odd for Russia to scare people out of buying what they're selling, though, right?

Starting point is 00:11:41 I mean, what? No, they're not scaring people out of buying natural gas. They're scaring them out of producing natural gas in the U.S. Got it. And you said relatively clean. So let's touch on the methane release. That's potentially, you know, a risk of fracking. Yeah.

Starting point is 00:11:56 So the methane release is not unique to fracking. Anytime you drill an oil or gas well, especially historically, you know, you used to see these like towers where, you know, when they hit oil, it meant they, like, the oil would shoot out of the top or similar for natural gas. That's not what happens anymore. And so everything is kind of controlled and contained in a system. And especially today, activity for drilling and completing oil and natural gas anywhere onshore U.S., onshore Canada, there's an attempt at capturing 100% of the methane from the well. And part of it is economic, because you can sell that right now for quite a bit of money. And whether you have to wait for a pipeline or something in order to test it or whether you have to or whether you can hook it right up, depending on where you're drilling, there's a huge economic incentive to not vent that natural gas. And so where there's been news recently around it, it's actually been interesting because I think people conflate it. Again, it's a similar sort of thing. There was a Bloomberg kind of hit piece and some oil and gas

Starting point is 00:12:57 analytics firms were involved with us too, which was kind of too bad because they knew better and they participated anyway, but they went around and took these pictures around very old wells that have nothing to do with fracking, nothing to do with shale. In some cases, they were natural gas wells from the 20s or 30s around Pennsylvania, West Virginia, and they took these pictures and they showed that these wells were leaking methane. But again, that's not related to fracking. Wells that are fracked in that area, that only started in Pennsylvania in the last, let's say, 20 years or so, people drilling for natural gas and fracking. So there's this misconception around gas being emitted. There is gas emitted from oil and gas fields all around the world, but actually proportionally

Starting point is 00:13:41 very little from fields where the wells are drilled and completed, which is usually fracked. And are we seeing realistic applications of this methane being captured and turned into something, another kind of power outlet like Bitcoin mining or something that actually then turns it clean in some way? So mostly no. Mostly if you don't have a pipeline near and you need to test a well, you hook it up to a incinerator or a combustor, which you don't allow the methane to get released into the environment.

Starting point is 00:14:14 Again, there are like very strict regulations around that in the U.S. and in Canada. It's like part of why it's so important to produce oil and natural gas here. where it's regulated, whereas if you drill in Venezuela or Russia or many other places, you're just venting whatever, wherever, way fewer, if any, consequences. So there's a lot of emphasis on either capturing it and using it right away or if it needs to be wasted to waste it in a way for a very limited time where it's combusted and where there's almost no methane in the emission. The emission might be CO2 and oxygen, but it's very unlikely to. to have any methane or almost any methane in it. So what I did was Bitcoin mining at well

Starting point is 00:15:00 sites at the company I was chairman of. And that was a little different. That was more driven by economics than it was by waste. We were wasting zero gas. There was no, we were fully hooked up. I think there was one test well that the company had done before I joined where there had been flaring. But again, that was incineration of gas. That wasn't just release of methane into the air. and it was only flared for, I think, it was five days or six days, something like that, a proportionally small amount of time with very little, or if any, methane actually released. What we were doing was we noticed that we were actually net of the processing and transport costs losing money on our natural gas because at the time, there were lots of pipeline bottlenecks

Starting point is 00:15:41 that were reducing the price that we were able to get for that gas. So what we did instead, at least with some of the gas, is we ran it through power generators that we had on site anyway for drilling operations and other stuff. And we used some of that power to power Bitcoin miners. So that was purely from my perspective and economic then. We weren't wasting the gas anyway. Like we were getting something from it. And so it was just a question of like, are we going to make 20 cents in MCF? Or are we going to make $5 or $15 or something in MCF? So for us, it was about that. It wasn't really, there was just no, we were not interested in flaring or, sorry, inventing methane because we wanted to sell it and make money.

Starting point is 00:16:23 And it was just for us a way to make more money rather than less money on our gas. Something you just touched on a little bit earlier there, it sounded like you were kind of hinting at this idea of maybe it's better or more responsible to produce it here in the U.S. where it's regulated, meaning like we should probably bolster up this production for the sake of the planet in some ways because it could take away supply from other countries who are less regulated theoretically. If I'm reading into that too wrong, let me know. But it was reminding me of this, you know, when your parents may have given you a beer in high school saying,

Starting point is 00:16:54 hey, we'd rather you drink it at home than go out in the world. I mean, it sounds like that's sort of the argument here. Like, let's do it here, but responsibly. And that's better for the planet. Is that your opinion? Yeah, I mean, like the beer, I think like it's probably pretty unhealthy to be drinking that in high school, kind of middle school, whatever we are at this. I think that's a healthy parenting approach.

Starting point is 00:17:12 But like, the thing itself is negative. I would argue that hydrocarbons are net, substantially positive. So I think it's more of making sure that you eat your healthy meal at home instead of eating in the cafeteria where you manned up with a meal that's a little less healthy. All right. So I'd love to talk a little bit about oil, the commodity. And let's start with some of the leading drivers for demand growth over the next decade. So the biggest driver of oil demand growth is very poor people becoming less poor. And so where you see, the biggest volume growth is in places like India and China, in particular India and then some

Starting point is 00:17:55 other countries kind of in that vicinity with that similar sort of GDP per capita. And what you see is there are certain kind of benchmarks and it's hard to know the exact number because in many places the local cost of living can be different for different things. But anywhere from $2,000 a day to $10,000 a day of per capita GDP, somewhere in that range, you start to hit a point where demand inflex up substantially. And so in many cases, it ends up being farmers getting to buy their first truck or car or scooter or moped with a big thing in the back to bring whatever their product is to market. And the amount of economic gains and life quality gains for them from that relatively

Starting point is 00:18:38 small purchase and that relatively small amount of gasoline or diesel is enormous. And it's one of the things where, and again, I'll just get out of soapbox for one more second, when people are anti-oil and gas use, especially when they try to push these regulations on less developed markets, it's really like almost colonial. It's almost like, oh, we're rich and we're a certain, you know, demographic and you're not wealthy and you're a different demographic and therefore you don't get enough hydrocarbons to power your scooter to drastically. improve your life, while your total consumption might be less than our refrigerator. And it's really like a, I think, humanitarian thing. And I think the story's just been told all wrong. And it's really about kind of this transition from dire poverty, you know, the slumdog millionaire sort of set up, some of these other things.

Starting point is 00:19:31 And it's like very hard actually to think about or access that level of poverty being in, I mean, I'm in Houston. Like, it's a great place. Even poor people in Houston have their conditioning and food stamps. and they have access to the things that they need. And there are billions of people in the world that do not have that access. And that's where the vast majority of demand growth is coming from for oil. And as the price of oil increases, won't that create like a gold rush of producers to enter the market

Starting point is 00:19:59 and with all these new rigs and eventually get enough supply so the price comes back down? Why would that not be the obvious case? Yeah. So that will eventually happen. But there's a little bit of a couple of things going on. that are going to make that hard. So one, we are at the tail end of the very long bear market for oil. We're just starting this bull market. Prices, like you mentioned in the last year, have rocketed higher, and they've finally gotten to a point where it's economic to start

Starting point is 00:20:26 investing in these long lead time projects. The problem with long lead time projects is that they're long lead. So in many cases, you have to spend 10 years bringing your discovery onto production and developing it more. And there's been too little activity in discovering oil fields. So you kind of need to start from the beginning. So in many cases, you may need to spend 15 years in between now and bringing oil on. And oil prices have almost, I think they've doubled in the last year. So, you know, where do they go in between now and that kind of five to 15 year from now window

Starting point is 00:20:59 for those long-dated projects? And then on the short-dated shale and other sort of conventional but short-cycle projects, were just at the tail end of this giant boom and bust in that area, too. And so there were many companies that misrepresented their economics and said, oh, we can break even at $30 oil or $40 oil or whatever their economics were. And many of those companies just reported their Q4, and they were profitable at $80 oil, but like barely profitable. So it turns out that those companies require much higher prices too for their activity

Starting point is 00:21:34 to be economic. and they're only going to rush and drill a lot more if their activities are highly economic. So that whole, the setup both for the short cycle and the long cycle, both of those are requiring much higher than historic prices in order to bring on new rigs. And then in the oil services industry, it's even worse, where there's been even less capital available for even longer. I think people forget about this. They just kind of assume, oh, hey, there'll be plenty of rigs.

Starting point is 00:22:02 And there were more rigs running 10 years ago. The problem is that that was 10 years ago, and many of those rigs have been cannibalized, they've been scrapped, and many of the people that worked on them are no longer in the business. In many cases, they're retired. And so getting the talented workforce along with capable additional rigs and frack stacks and other sort of equipment, I mean, it's a real problem. And we're not even at the point where it's economic for those oil services companies to start. They're starting to try to hire, but wages haven't gone up enough yet.

Starting point is 00:22:34 And they're not even starting to build new rigs. So if you think about that from a lead time perspective, that's a multi-year cycle on its own just for kind of the short-term stuff. So I think we're set up for this multi-year bull market where the first thing you need to see is oil services stocks go up five or 10x. That way they can have an investment boom. That way they can go build over the next few years, the equipment that's necessary to have a drilling boom to have drilling go way more than it needs over a multi-year period.

Starting point is 00:23:03 And then you can have a big crash. but that might be coinciding with when these long lead time projects come on. So it's really set up nicely, I think, for a very long, very strong bull market that's really going to incent a lot of investment. But like you're saying, like, why can't they do it? Well, there's just all these logistical and investment problems that are keeping it from happening. Wow, barely profitable at $80 a barrel. I find that very surprising.

Starting point is 00:23:28 And especially when you're considering, you know, the decrease in rigs, it's not so much that the rigs are just going out of business and being scrapped, they're getting more efficient, I think, you know, say over the last 10 years, or that would be the idea, right? Some innovation, they're more efficient and you would be able to run more profitably. So that kind of brings up for me, like what is the actual marginal cost to produce oil today? So there is a cost curve, right? So it's not like any one well. And I think that was the thing with Shale where you had these various large cap or mid-cap companies of their CEOs getting on TV saying, oh, we break even at 25 or 30. They were talking about their very best well when they were drilling

Starting point is 00:24:05 500 wells. And their 500th well was not economic at $150 oil. So, you know, there was a lot of this kind of snake oilish, like charlatany, hey, we're this, but we're really that. And, you know, the truth was somewhere in the middle. And so I think it depends. I think the incremental well is going to be a lot less profitable than the average well. And since it's a commodity, you really need that incremental well to be highly economic. So if there's 500 rigs operating right now in the U.S. for oil and gas drilling, to bring on that 5001st rig needs to go somewhere, needs to have a producer for whom the return is likely to be in excess of their cost of capital. And for producers right now, there's huge pressure on them to return capital and not drill. Again, we're at the tail end of this

Starting point is 00:24:54 disaster where every company lost a ton of money. And so that was active in the space. And so there's this very, very high bar for them to bring on that rig. They have to find the rig. And there are some rigs left. Then they have to find the people for that rig. They have to find the oil field tubulars and other equipment, which is sold out in many cases. And then they have to have the drilling inventory. They have to have like the rights to land that's economic enough to kind of to exceed the costs of all of those different things. So on the marginal well, I mean, there's a pretty good argument that you're just getting your kind of 10% return on a cost of capital adjusted basis when you factor all that in. So the rig count is rising because you are getting to that point, but you're not so far beyond the point that you have these companies going and ordering more rigs or getting longer contracts from any more.

Starting point is 00:25:45 And in general, I think there's kind of this trajectory of like a slow build. But it's definitely not boom time even with oil as we're talking around $96 WTI. 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.

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Starting point is 00:30:03 All right, back to the show. So you have these green energy ESG initiatives underway, COVID shutdowns, labor shortages, as you mentioned, a lot of people exiting the space. And it's leading to this gap between drilled, uncompleted wells and completed wells. And this might sound very technical to a lot of people listening, but I'm having fun nerding out on this stuff with you. And I feel like it's really setting up this bullish argument for this commodity here. So I want to kind of quickly walk us through what that means,

Starting point is 00:30:34 the difference between the uncompleted and the completed wells and why that is and the incentives driving these decisions from producers to kind of curb the investing in additional production. That's a great, really kind of important choke point for the industry. And I guess I'll just say it's similar to the rigs where when you had under investment, you didn't have, especially in the last couple of years, you didn't have companies building more rigs. And since they weren't building more rigs, there's a certain number of hours that a rig can work before you need to replace the engine, you need to replace various other components, you need to replace filters. And at some point, you just hit your useful life on a rig and you're done.

Starting point is 00:31:10 And so that's kind of an analogy to the process from a producer's perspective, going from undrilled land to a producing well. And one of the steps is after you drill the well, then bringing the right equipment on to frack the well and tie it into a pipe and bring it on production. And so as a part of this giant boom and bust and the short cycle shale stuff, there were a lot of wells that were drilled that weren't completed and brought on yet. I think some of it was a capital budgeting and timing thing. Some of it was some of these wells were not very good and they knew they weren't good. And so they didn't even bother fracking them or bringing them on. And what you're pointing out is white paper, you know, we talked about.

Starting point is 00:31:55 And there's various other sources that have been focusing on this because it is an issue where we noticed that the number of these wells that, were prepared to be fracked, but hadn't been fracked yet, was falling a lot. And what that told us and what it tells us in terms of why things are going to struggle to scale how you would expect in a boom, is that there's been essentially this underinvestment, essentially burning the furniture where the wells that were drilled already are being completed faster than new wells are being drilled. And that means that you need to drill a lot more wells in order to be able to complete the same number of wells that you've been completing. So if you think about it, step one, step two, oil, well, they did too many step ones to start. And now they're doing too many step two's and you need to

Starting point is 00:32:39 kind of coincide step one and step two in order to get to a completed well that's on production. So it's a sequencing issue, but it's also a budgeting issue. And we're seeing many producers now subsequent to that white paper. We're seeing them come out with guidance where they're raising their capital budgets anywhere from 20 to 25 percent without raising their production guidance at all. Some of that's cost inflation, but some of that's also replacing. They're recognizing they did not enough step one drilling wells. And so now they have to do more step one in order to catch up with the step two, which is completing wells.

Starting point is 00:33:14 So when the price goes up as it has, obviously that means there's a supply issue at hand, but the UAE is claiming that they are not currently undersupplied. but yet they continue to miss their quota. So what do you expect is happening here? And how does it play into this bigger bullish picture? So I can never tell if there's going to be like a bone saw getting sharpened for me in Saudi Arabia or UAE when I talk about this stuff. I used to worry about that, but then I've gotten a lot of positive feedback from various people in that part of the world who really like the work that Bison's been doing on this stuff. So I don't know.

Starting point is 00:33:48 So specifically, UAE has more production capacity. They're like one of the few countries in the world that could be producing more oil and they're choosing not to. And they started to choose not to at a time where there was oversupply and insufficient demand and they were helping support the price. And it was a great thing they did for the oil market. It helped reset things. And that reset's important because that helped getting U.S. producers and other producers to start drilling again. So it was very important and healthy for the oil market for them to do that. At this point, though, many of their competing oil producing countries in OPEC Plus are at,

Starting point is 00:34:22 out of capacity. A number of them have been missing their quotas every month. And the quota has been rising by 400,000 barrels a day every month. So if the quota was 10 million barrels a day, the next month it's 10 million 400,000 barrels a day. The next month is 10 million, 800,000 barrels a day. And I'm off by, I think it's like 30 million and not 10, but it's kind of that mechanism. And what's been happening is the quota will rise by 400,000 barrels a day, but only 300,000 will get produced incremental. And then the next month, 300,000. And it's been eight months and we're just seeing it's possible that this month there might be a slight excess. So it might be, you know, in the ninth month, or 10th month or whatever, this agreement that they'll have one month where they

Starting point is 00:35:02 beat. But these misses that have been compounding have gotten the quota to a point where I think they're producing about 2% less than the overall quota across OPEC Plus. And that tells you, despite the high oil price, that it's not even about their agreement because they're underproducing versus their agreement. And the price of oil keeps going up. So it's obviously not about them trying to make the price of oil supported or higher because it's going up anyway. So I think it tells you that there is a real issue that many of these countries don't have the spare capacity that they represent that they have. And what that means is it's not this dire thing today because the price of oil clears the supply and demand for the market in any given day. The problem is that as we continue to turn on

Starting point is 00:35:50 demand as travel recovers, as more people go back to their jobs, and as the third world, various several countries continue to grow and poor people continue to, you know, use more oil products. As we're seeing that happen, we're getting close to a point where we need that extra production that's promised from OPEC Plus, and there's a real risk that it won't be available at the time that we get it. Now, I was under the impression that to find more oil, let's just say here in the States, you'd have to go more and more offshore. So could that be one of the factors here why people aren't investing in new rigs because they just have to keep going more and more offshore?

Starting point is 00:36:31 And if so, what does that do to the cost? There's a different dynamic for offshore development versus onshore. But I think that does bring up, there is a issue from a regulatory perspective, which is that new drilling permits have been hard to get in certain places in the U.S. in Canada, as well as in certain places in Europe. other places in the world, actually. And so that's an issue because if you can't drill the wells that you want to drill to adequately supply the market, then you either have to drill wells you don't want to drill, which means that they are less economic, less productive, less energy

Starting point is 00:37:05 efficient, potentially more risky from an environmental perspective or operational perspective. And it means that the price of oil has to go higher in order to incentivize you to drill those less economic wells. So that's where there is some responsibility, the current presidential administration in the U.S., the day they came into office, they canceled the pipeline. So that was a signal. Don't drill behind that pipe because you're not going to get to sell your oil there or you're going to have to truck it or do something else that's ironically less environmentally friendly, but also you're going to make less money. So there was an economic signal from that policy. And then there's been this back and forth on federal drilling on federal lands where companies pay lots of money to the federal

Starting point is 00:37:46 government to be able to get the rights to drill on federal lands. And the Biden administration, right when they came into office, they put in an executive order to cancel drilling on federal lands, to not allow any new. And there's been court battles back and forth on that because that is unconstitutional. Among other things, there is a right as a company or as a kind of individual in the U.S. You have a right if you have property, whether it's fully private property or its least federal or state property. If you have a contract and you have a contractual right to do something, you can't cancel that right. And if you do as a government, you have to eminent domain it and pay a lot of money to the people that you're taking that from. And so anyway, it's unconstitutional.

Starting point is 00:38:27 It keeps getting thrown out in court and they keep canceling permits anyway. And there's a similar issue in a part of Canada right now as well. And so that definitely is causing higher prices. And again, it's not kind of a general thing. It's a very specific couple of policy issues that can be pointed to a particular executive order or two executive orders that are specifically driving prices higher. So not to get too political, but that particular thing, I mean, if you ban drilling in certain places that people want to drill, then you're going to have less drilling, which means less oil, which means prices go higher. That sounds pretty objective to me. So now I'm getting a better idea, a better picture of why that supply line is not popping back up to the 2019 levels as I was referring to earlier. So let's just say you're a retail investor like I am and you're liking this narrative on oil and you're thinking, okay, this could go much higher and you want to develop a position.

Starting point is 00:39:16 I would think a lot of retail investors would go towards, say, an ETF, USO or OIL or whatever, but these are essentially following oil futures, right? Not necessarily the commodity itself. And there might be some issues with that. What might be some of the reasons a retail investor maybe shouldn't go that route? Yeah, I think there's this kind of big debate right now in terms of do you want to own oil futures or do you want to own oil producers? And I'm definitely on the producer side.

Starting point is 00:39:42 It's less to do with the structure of the ETFs. I mean, every ETF, any investment product and anything in life is not inherently good. It always has the costs and benefits. And there are various kind of specific structural issues with a USO or a YL or whatever. But those fundamentally own oil futures, either shorter or long dated. And my preference is to own oil and gas producers, even with the regulatory issues that they're facing, there are some oil producers and gas producers that trade at very, very low cash flow multiples. And because it's been such a long downturn, there's very few people, I mean, to some extent

Starting point is 00:40:21 you asked initially, like, hey, how have you been getting this research so right? Like, how do you figure out all this stuff? The answer is it's a little like Forrest Gump where, you know, I went into shrimping and it was a really dumb idea in 2007 to start doing that professionally. And there was a giant storm. And there was the equivalent of that in oil and gas for seven years, it was horrible. And all the smart people early on went and did other stuff. And I guess I'm dumb and stubborn and just stuff through it.

Starting point is 00:40:49 And there's really no one left. I mean, there's very, very few investment firms focused on oil and gas. And then on the research side, there's been kind of an evisceration of that space as well. And then when you look at kind of who holds themselves out as an oil and gas expert on that kind of cell side or on that sort of like professional expert, like many of the best people at that too have kind of saw the writing on the wall and moved on. And so there's really not, there's not a lot left. And since there's not a lot left, there's a lot of opportunities that historically would have been picked up on or in other sectors would immediately be picked up on an arbitrage. And so there's these just great opportunities.

Starting point is 00:41:29 It's really a stock pickers market in oil and gas equities. And partly because of that, I think it's just so one-sided to go buy individual oil and gas stocks versus owning an ETF of oil and gas stocks or owning the futures. Why do you think we are seeing such a low multiple on cash flow for these producers, especially now you're seeing oil go up and they're just left for dead, they're abandoned? I mean, what's your sense on that? So we were up like mid-triple digits last year and we're getting zero institutional allocations. So we've literally like if when we started in 2015, if XOP is down 40 something percent and we're up, you know, almost 100 percent, like no one cares.

Starting point is 00:42:10 So from an institutional perspective. So the money is still getting drained out of oil and gas and the extreme divergence in between exposure to the sector where the stocks are going up because the cash flows are going up so much. But the underinvestment from institutional allocators who fund stock pickers and fund and, you know, ETFs and other. things that do help re-rate stocks. I mean, it's extreme. I've never seen, I guess the closest to this maybe is what they did with coal a few years ago, but it's extreme. The preference of the people managing pension funds and endowments to like look woke versus to earn the maximum return for their constituents is, I don't really understand that decision, but it's just not happening. And so since it's not happening, the funds are cut off. And there's some retail investment

Starting point is 00:42:59 in the space and high net worth in the space where people either view it as good or they understand that they want to make more money and they can do that by investing in something that's very unpopular. I think it's really like that starts with where the funds come from that are used to fund that sort of arbitrage. And partly that's why I'm focused on the smaller cap names because there are hedge funds that aren't really telling their clients, but they have huge oil and gas positions. But those guys need stocks that trade $100 million a day, $50 million a day.

Starting point is 00:43:29 for their various strategies. And so there's this whole universe of small cap and smid cap oil and gas stocks that are really kind of misunderstood. And there's really just no, there are very few professional efforts to identify and arbitrage those. And so that's what I'm doing. And it's just, I mean, there shouldn't be this sort of set of opportunities available at these sorts of divergent valuations. And it just doesn't happen that much in modern rights. Yeah, that was actually one of my questions. Why not a Chevron? Why not? not, you know, one of these bigger names. And you're leaning towards these small midcaps. Say, for example, Journey is one I've heard you talk about. There's a couple of others. Walk us through your favorite

Starting point is 00:44:08 producers and kind of what sets them apart other than just the market cap. So Journey, for example, I was just looking at a sell side report that includes them on a comp sheet. And they have their numbers wrong. And so there's not that many investment banks that cover Journey because it's a sub-200 million dollar market cap. And of the few that cover them, they just have the wrong numbers. They're not even bothering to update the numbers. So when you think about like a value investor checklist and you say, okay, well, is this stock covered by research analysts? It's almost better that they're covered but ignored with the wrong numbers than that they're not covered at all because it just increases the chance that people don't even bother to look at them. So Journey is a,

Starting point is 00:44:50 they're producing almost 10,000 barrels a day of oil and gas. And if you look at, there was a big transaction done today where PDC Energy bought a producer in Colorado, which is a very kind of regulatory intense area where valuations are ultra low. And if you use that valuation, journey for that acquisition and you say, hey, journey is at least as good as a Colorado oil producer where there's these heavy regulations and all these other problems, it would imply the stock to be worth about twice what is trading for today. And so that's like a starting point. Hey, what's the liquidation value? And not that anyone's going to go buy them today or tomorrow for that price, but using a comparable company, comparable asset,

Starting point is 00:45:31 which is, I think, inferior in many respects, the valuation implies a far higher price. So that's like a good starting point, I think, is looking for companies at a reasonably large discount to the theoretical liquidation value of their assets. But then there were other things. So the CEO of Journey was the founder of New Vista, which is a multi-billion dollar oil company, and he was a senior exec at Bonavista, which was, I think they started at four and it went to 100 at its peak. And I think it paid out like $40 a share of dividends over the 10 or 15 years he was there. And so the independently wealthy and heavily invested personally in Journey. So you have a great CEO

Starting point is 00:46:06 who's not well understood and not really well appreciated. You have a stock at a big discount to liquidation value. And then when you have good people in good situations, they end up doing creative things that add additional value. So in addition to just doing the base oil and gas business, They're in Alberta, which is a place where they've been shutting down coal power plants and not turning on enough natural gas and solar and other power generation. So power prices have been skyrocketing. So Journey installed some, I actually bugged them about this a few years ago and, you know, I'm now very happy they did it. But they installed some power gen and it's wildly economic. Like there's two year paybacks on the power gen that they've installed, which is not how it's supposed to work.

Starting point is 00:46:48 You install power generators that last for 20 years. It's supposed to be, I don't know, a five-year, seven-year, 10-year payback, something like that. That's kind of a normal utility sort of payout. And so they have this power gen business. They've been building up internally. And then they have other sort of infrastructure assets that I think are misunderstood and should be awarded an infrastructure multiple, not a two-time cash flow, upstream multiple. So with some of these undervalued, we'll call them stocks, do you have a guess for what price of oil is priced in to the stocks themselves to the equity prices? Yeah. So I think on average, I've seen some investment bank studies and it's like it's a complicated

Starting point is 00:47:27 question that requires triangulating to try to get to an estimate. The average oil and gas producer right now, the various research reports I've read, they indicate kind of in the 60 to 65 dollar price range. Some of them maybe 70 depending on the valuation. My estimate for journey is that they're pricing in roughly 55 to maybe $60 oil. And that's not giving them any credit for their power gen or other stuff, just purely focused on their oil and gas assets. And someone tweeted about this today. It's kind of interesting.

Starting point is 00:48:00 There is a more active Twitter community and retail investor community in oil and gas. I think they've started to pick up on just these absolutely ridiculous low hanged fruit opportunities. So it's one guy who's had like a 10 bagger in something else and a five bagger and something else. He's decided Journey is a good idea. And so he tweeted about it recently where he showed that in their reserve report, the reserve report showed that at, I think the number was around 65. At $65 oil, Journey's assets were worth three times what the stock was trading for based

Starting point is 00:48:29 on their reserve report. Wow. Very interesting. Okay. Curious, does any other name come to mind besides Journey, which, by the way, is ticker J-O-Y? Anything else coming to mind that you're following closely? Yeah. So Journey is just like not well known.

Starting point is 00:48:43 and it's a J-O-Y on the TSX exchange in Toronto. Another one that is hated, and it's just amazing how much people hated. And again, like with this very active online community of people following these things, right, no professional investors, but lots of retail investors. There are many people who have just been, were dedicated at least for a while to declaring that this one is going bankrupt. And they believe it so firmly that as the stock went from 70 cents to, I think it peaked recently at $15.

Starting point is 00:49:13 They continued to predict bankruptcy even after they paid off all their debt, built up all this cash. So this one's Sandridge Energy, the stock tickers SD. And Sandridge, I think, has around $6 a share of net cash. We're going to find out in the next week or so. I don't know, maybe it ends up being five, maybe it's seven. But kind of directionally, they've been building about a dollar a share of net cash every quarter.

Starting point is 00:49:38 And I think actually Q1 and Q4 were both. kind of $2 a share cash build quarters. It's controlled by Carl Icon. And I saw this a recent video or whatever on HBO, the icon documentary. And I had to like stop myself from throwing stuff on my TV screen because he talks about Cheryl to return and whatever and is grossly, grossly undercommunicating, I guess I'd say, about Sand Ridge. I mean, hopefully they return this cash and do something. But it's something where, you know, you can feel good, I think, in the long run investing in something that Icon's controlling, but you might get really frustrated for a while. And my thesis is pretty simple. If they're generating this much free cash and they build up all this cash, at some point, they either go

Starting point is 00:50:21 buy something, which they'll probably buy something good because Icon won't let them buy something not good, or they'll return it and they'll just surprise everyone. And one day, there'll be a $2 a share, a quarter dividend or something. And, you know, that'll annualize to like a 30% dividend or something. something along those lines, depending on exactly how much they are actually, it would be a lot more than that. But whatever it is, like, you could see them pretty easily pay a very large dividend, do a really big share buyback, or do an acquisition. And kind of from any of those perspectives, something generating this much free cash with this much cash on the balance sheet is just very obviously misunderstood, undervalued, and just easy to own. And, you know, there's less torque to upside for oil and natural gas because obviously with that much net cash on the balance sheet, a change of oil price or gas price isn't really going to change the cash flow versus the enterprise value that much just because you're just, you're not financially levered. But the flip side is you also have very little risk, at least relatively speaking, because you're sitting on this giant cash pile.

Starting point is 00:51:21 So, you know, stock can go down, but, you know, how far is it going to go versus this cash pile that's rapidly building? Fantastic. Yeah, I love that documentary, by the way. I recommend everyone go watch it. You know, one of the other interesting notes I picked up on your research is this interesting signal where COVID cases are rolling over as they've just done here in the U.S. And it appears to be this great buying opportunity for producer equities. Is this a hopefully soon to be outdated signal? Or what drew you to this signal in the first place, I guess would be my question. And are you still watching it? So several different analysts kind of all at once. in the last cycle of cases came out with this.

Starting point is 00:52:00 And they were smart and interesting. One's a by side guy. One's a newsletter guy. One I don't remember. And so it was a really, I hadn't really thought about it too much, but these cases were coming in waves. And there was just such a strong correlation between how oil prices and oil stocks were trading and the case count.

Starting point is 00:52:21 And if you could figure out where the peak case count and then the peak death count was, you could essentially time a move in oil and gas stocks. And again, I only caught this for this last cycle. I caught it as Delta was kind of phasing out. And so when I saw what happened with Omicron, it was very promising because oil didn't, it fell a lot, but only for a few days and then it kind of bottomed out really fast. And so you could tell both from how oil and gas stocks and the commodities were trading, as well as from kind of the trajectory of the cases and deaths. Fortunately, Omicron was way less severe and a lot of the kind of fear mongers and whatever kind of I think overstated it a lot. And so that did provide an opportunity because oil went down a little. But it was very clear for

Starting point is 00:53:06 this cycle kind of what was happening. And there was an opportunity to essentially front run that, which you saw oil markets do, where oil didn't come down nearly as much as it did for Delta and as it did for the prior waves. And it's been a lot stronger. I'm optimistic. I think, you know, there's a good chance that Omicron was one of the last severe waves. And there's been some discussion, so I think like Bill Gates was talking about this recently, where Omicron may actually reduce the requirement to have one set of boosters. Apparently, like, I don't understand this stuff, but there's something, there are two different kinds of virus things. Whatever the characteristics are of it, it does look promising. And so it looks promising that there may be

Starting point is 00:53:53 fewer or less severe COVID wave is going forward. So hopefully it doesn't tell us that we're supposed to be selling our oil and oil stocks right now because there might be another wave right now. Hopefully it's telling us that there was this peak. It's now waning and we may be set up for a very nice long period with few new COVID cases and a nice path forward for demand resumption. I guess the one other thing, I think part of why things didn't sell off as much, was even with Omercrown, demand was very strong for oil. And I think people are just getting sick to some extent of staying at home. And in the tradeoff of public health versus sacrificing various things in their lives,

Starting point is 00:54:38 I think we're at the point where unless there was a very severe strain that had a way higher mortality rate, I think we're just pretty likely to not be shutting stuff down going forward, at least nearly as much as we have for past waves. 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.

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Starting point is 00:58:06 be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. So one other major disruption to supply that could happen is occurring in Russia, which has been a massive headline as of late for obvious reasons, the war with Ukraine, et cetera. And Russia is a major player in oil and gas. Russia supplies 7% of U.S. oil at the moment, I believe in 40% of Europe's natural gas. So if you bear with me, I'd like to kind of veer into maybe a macro discussion for a brief second, because I'm trying to understand this war and what it's all about. And I'm kind of curious to know if you have any opinions on this. So let me lay this out for you. Basically, Russia and China both seem to be incentivized to

Starting point is 00:58:50 find alternatives to the petro dollar system due to the U.S.'s ability to sanction it. And so far, the U.S. hasn't sanctioned oil, but they have cut Russia off from the SWIFT system, right? Now, had Russia preemptively or voluntarily cut off their oil supply to Europe, the West would have likely considered that an act of war. But now, Russia could cut off oil as a means of negotiation and perhaps even hold it hostage until some kind of new monetary system is enacted, say like a ruble yuan gold-backed payment system, for example. Does any of this kind of geopolitical risk play into your bullish thesis? And could this be the reason why Russia is at war with Ukraine today?

Starting point is 00:59:33 These are great questions. You know, I think like the last one I'll punt on. I don't know why they're at war, I think generally it's a bad idea to invade your neighbor. And generally, it's just whatever you think you're going to accomplish, it's just, it just doesn't accomplish what you're hoping for and often as significant negative ramifications. So I don't know exactly why Russia is doing that. But in terms of the supply dynamic of Russian gas to Europe and then just Russian oil to the international markets, it's been surprising to me that Russia hadn't already figured out some other mechanism for getting paid than going through a U.S. and European banking system. The idea that Russia should deliver oil or natural gas via a pipe directly to

Starting point is 01:00:19 China and that that somehow needs to get processed in dollars through a U.S. or European bank, that just seems weird and wrong. And I think it's great from a U.S. perspective that we have the whole world dollarized, at least on certain transactions. But it just just isn't, that's not really intuitive to me. And I know that there are certain specifics around how the international banking system works that are reasons for that, but I could see that changing independent of the current conflict. And then in terms of Russian supply of gas to Europe, which has really been stressing European budgets and the European economy and is forced aluminum smelters and fertilizer plants and other stuff in Europe offline, I think there's been just a, you know,

Starting point is 01:01:05 gross miscalculation by Germany in particular about the need for natural gas. And I think they kind of let the utopians make the decisions. We needed to have the engineers and scientists make policy decisions. And so the biggest thing that Russia said was bothering them, if you rewind to September or October of last year, was that Europe wasn't willing to enter into a multi-year gas purchase contracts. And the biggest thing that was bothering Europe was that Russia wasn't willing to, to supply their gas at spot prices regardless of whatever that price ended up being. They really wanted short-term contracts, Russia wanted long-term contracts.

Starting point is 01:01:45 And so that was getting resolved through Russia delivering only their contracted amount of gas on those short-term contracts and none of the gas that Europe wanted on a spot basis and that caused European gas prices to go up a whole lot. But I don't know that that's really that related to the current conflict. That seems like a contract dispute that was going to get naturally resolved by sufficiently high prices on the spot market that European utilities and governments were about to go sign agreements that were longer dated, likely discounted, potentially not even dollarized, and also they were approving this Nord Stream pipeline that the U.S. had been opposed to.

Starting point is 01:02:24 So, I mean, things actually looked quite good for Russia economically. They were winning, and then they invaded Ukraine. So I don't, I mean, again, like, I think this is a close. classic example of honey attracts more flies than vinegar and Russia really seems to have messed up with this. I don't really understand the endgame, but what I just described, I think Europe really needs Russian gas and there's not really good alternatives, despite what you might see in the news, there's just, there's so much gas that they consume and building more solar panels in Germany where there's very low sun intensity and where solar panels don't do a lot, that doesn't really

Starting point is 01:02:59 help. And it's not good for the environment because you have to burn a lot of coal to make those solar panels and putting more wind also same sort of idea. You really need that gas. And so it's really just unfortunate. I think it's unfortunate for Western Europe and it's unfortunate for Russia. And obviously it's most unfortunate for Ukrainians, but it's not really that. It almost seems like a separate issue, almost unrelated. I'm just curious if you factored in the possibility of Russia cutting off oil to some of their neighbors in the near term and what that might do to the price of oil. So what I think Russia's done that's positive for the oil market is by not having a guaranteed steady supply of natural gas, the demand for oil product power generators, so diesel generators,

Starting point is 01:03:44 heating oil, heaters, other sorts of, you know, some gasoline power generators, the demand for these are off the charts. Generac has been sold out for a while. Other power generators are running really low. There's huge demand for oil-based. power generators. And that's happening in Europe. And to some extent, it's also the case in other places. I mean, in California, there's been strong demand for a while because of the blackouts that we saw that they saw there for a number of years. And that's starting to pop up in Asia as well. And so that's a direct consequence of uncertain supply of power. It's very rational if you're wealthy and you don't want to ever have your lights not turn on. You see this happening and you just go buy a

Starting point is 01:04:27 power generator, why not? And that once you have it, you start using it. And so the structural demand for oil from power generation has taken a 30-year step back, right? This is not what oil. Oil is a very valuable resource that should be used for its energy intensity and should be used for its ability to get turned into all kinds of fabulous chemicals that we use for our books and our pharmaceuticals and our clothes. I mean, it's a wonderful thing that shouldn't be burned for backup power. And so there is this extra demand that I think isn't going to go away. In terms of withholding oil, that seems pretty unlikely. That's where most of Russia's hard currency comes from.

Starting point is 01:05:08 And what is more likely, I think, is that they just switch who they're providing their oil to. And it looks like already a lot more Russian oil as sanctions are going on, Russia, is going to China and India, where they kind of don't care about the sanctions and they just need the oil. So I don't think they're actually going to do that much on the oil side. They're already kind of producing close to their maximum capacity. And this was something that was very contentious six months ago.

Starting point is 01:05:32 But as they just keep raising their quota and not producing that much more, I think it's less contentious and kind of more obvious. So I don't know, do they really cut back from already underproducing their OPEC quota or do they just kind of stay as is? And then one complication there that makes me think it's more likely they keep selling it is if they withheld some of their oil from the market, they could mess up this OPEC plus deal that they've arranged. And sure, that would send oil prices higher right now, but it would risk their ability to coordinate with OPEC in the future. So I don't think they could be really upset about this.

Starting point is 01:06:06 I could definitely see them cutting off gas. Ironically, they've been supplying more gas to Europe, not less since the Supreme thing started, but I don't think that they're likely to cut off their oil. Okay. Speaking of Europe there, how does Europe's decline in natural gas play a role in the price of oil in at least the near term? Yeah. So similar issue to Russia supplying less gas, Europe supplying less gas to themselves and there being less activity in Europe. It's a tremendous case of policy failure and I guess governance of company failure too, where there were earthquakes at Groningen, which was a big European gas field, and there have been other sort of fracking bans and other sort of activity bans at various

Starting point is 01:06:49 places in Europe where supply could be coming, an incremental supply could be coming from. And so the failure to develop their own resource for various reasons, much of which is political and kind of environmentally motivated, has made Europe more dependent on Russian natural gas. And now, ironically, is making them more dependent on burning coal and on burning oil for backup power jet. All right. My last question for you is an unfair one. But with oil around $100 a barrel right now, what's the bullish case if you had to throw out a number? because I'm hearing everything from 200 to even 500. I mean, people throwing out with crazy numbers. Do you have some kind of realistic expectation for the price from here? Yeah, I was actually quoted in the Wall Street Journal recently saying that oil could go crazy high.

Starting point is 01:07:34 So I don't know if I'm the right person to not have a crazy number. What I think happens in cyclical industries and with cyclical commodities is that in their up cycles, they end up exceeding their prior inflation-adjusted high price. And so let's say that that like 147 all-time high price for oil maybe was a little wrong. Let's say maybe it was like 130 and then it got pushed up through a margin call or a short squeeze or something. So if that's the wrong number, if it's 130, the right number for oil to go to to at least get to for this cyclical high would be an inflation adjusted. So if you go from 2008 to today, I don't know, maybe that gets you to 160, 170. So I think there's a pretty good argument that we exceed that.

Starting point is 01:08:18 I just don't know if we exceed that and go to 165 or we exceed that and we go to 300. And I think people react really negatively to these high price estimates, partly because they're non-consensus, although they are increasingly becoming heard and at least, you know, and out there. I think they respond negatively, but they then ignore other commodities that have already moved like this. You look at lithium prices that are up a lot. you look at even European natural gas prices, which are up about five times from where they were

Starting point is 01:08:51 this time last year. And if you ask someone at this time last year in Europe, hey, is it possible for European natural gas to get priced at $200 a barrel of oil equivalent? They would say no. And that certainty around the impossibility of a price going to a certain level increases the chance that it goes to that level. Think about the activity that that sort of potential price incentivizes. And when you look at the consensus that's built and kind of the continuity of views where the highest price you'll see is maybe Goldman with like a 115 for a quarter sort of call, somewhere along those lines, I think that's helping in terms of reducing activity because you don't get all your oil sold in one quarter on capital expenditures.

Starting point is 01:09:36 You get it sold over some amount of time. And so having a negative view on future prices for oil is reducing the level of activity. Whereas if you look at past up cycles for oil, you saw as prices increased, you saw positivity around sort of future price expectations. So I think that's part of where I come up with an all-time high inflation-adjusted number as a good starting point. But I think you also need better sentiment. And then you also need some serious oil field services investment. And we're not even starting there. We're not even close. And so if you have low valuations for producers and low valuations for services companies and pipelines still being blocked and drilling permits still not being allowed

Starting point is 01:10:22 or being canceled. I mean, that's a recipe for oil prices. That's the, you know, if that continues and hopefully it doesn't, that's a $500 sort of potential outcome. If you just keep having policies that try to force less oil and you need more of it, you end up with a much higher price. So I know a lot of people, you know, conflate things like oil with petroleum and this kind of interchangeable vernacular for novices like me especially, but I'm just curious if we saw crude go up to something like to that extreme, what would that ramification be, especially like say for those normal people at their gas pump? And what are they going to see like $20 gas prices at that point? Yeah. A large portion of the gas price that people see around the world is government taxes.

Starting point is 01:11:05 And so I think there's already pressure on taxes on gas. And I think that you'll see some rollbacks on those taxes, and I think you'll see rollbacks on diesel taxes for trucks as well. But when you think about the things that have moved in price over the last, let's say, 20 years, 10 years, if you're buying a house and you look at what a house cost in Houston or a house cost in Los Angeles or New York, you look at what it cost in 2008 versus what it costs today, and you look at what a gallon of gas cost in 2008 versus today. I mean, there is a lot of catching up to do for gas to catch up to housing prices, for example. Similar idea for lumber. Lumber is three times more expensive than gasoline relative to kind of that sort of same 12 year period. I don't know if it's exactly three times.

Starting point is 01:11:52 What kind of directionally there's been that sort of move? We're seeing that move in other commodities as well. We're seeing it in wages. Wages are starting to inflate and then various other sort of inflation measures. And so I don't know where the breaking point is going to be in terms of where people just stop buying gas if they think it's too expensive. But what we are seeing, is we're not close to that yet. And we're seeing consumption continue to increase in places like India and China where there is this marginal consumer that's starting to consume oil. And we're not seeing demand fall off that much in the U.S. or Europe so far, despite much higher gas prices and despite very heavy taxes. So that's part of where I see the potential for oil to go a lot higher

Starting point is 01:12:35 is because gasoline prices have lagged so much versus other inflationary items, there's just more room even if people are poorer, even if their budget didn't expand as much as, you know, the price for a house or whatever, there's still room on a relative basis in their budget to be able to spend a lot more on gasoline than they're currently spending. And then the marginal benefit, like people generally don't use gasoline unless they need it. And generally the marginal benefit of consuming gasoline dramatically exceeds the marginal cost of actually paying for it. And so that's where there's significant price, any elasticity of, demand where you just don't see demand fall off that much as prices go. Fantastic.

Starting point is 01:13:17 Perhaps another bullish argument then for things like electric vehicles. Ironically, it's all kind of feels like it kind of comes back together. Josh, this was so enlightening and really educational. For me personally, I really had a fun time researching this and talking to you. It's been a lot of fun. I'd love to do this again. Before I let you go, I'd like to give you an opportunity to handoff to our audience where they can learn more about you and advice and interests and any other research or resources you want

Starting point is 01:13:41 to share. Sure, absolutely. Thank you. This has been great. I appreciate the opportunity to talk to you. So people can find Bison White Papers at Bisoninterest.com. And then on Twitter, the Twitter handle is Bison Interests or they can find me on Twitter as well, Josh underscore Young underscore 1.

Starting point is 01:14:01 Fantastic. Well, thanks again, Josh. I'd love to do it again. Great. Thank you. All right, everybody. That's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast.

Starting point is 01:14:11 podcast app. And while you're out, you might as well leave us a review. Let us know what you think of the show. You can also reach out to me on Twitter at Trey Lockerby and be sure to check out all the resources we have for you at the investors podcast.com. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to The Investors Podcasts. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - TIP429: What is happening with Oil? w/ Josh Young

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