We Study Billionaires - The Investor’s Podcast Network - TIP572: Finding Value in the Oil Market w/ Josh Young

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back oil expert Josh Young to give us an update on the oil market. Josh is the chief investment officer and founder of Bison Interest, which focuses on investing strictly in oil and gas equities. During this chat, we cover the highlights of the oil and gas market in 2023, how Buffett has shifted his investments in oil, why OPEC is sounding the alarm bells on an oil shortage, the impact of the China reopening on oil demand, Josh's thoughts on the U.S. dumping their SPR reserve while China is building theirs, how a rollover and shale production may impact oil prices,

Starting point is 00:00:40 Josh's approach to market timing in the oil market, Josh's view on how his bullish oil thesis may be wrong, and so much more. We always enjoy bringing Josh on the show to keep us in the loop of what's happening in the oil market, so with that, here is my chat 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 today, Clay Fink, and the audience is in great company today because we bring back Josh Young. Josh, such a pleasure having you back.

Starting point is 00:01:28 Thanks for coming on. Thanks for having me on, Clay. Well, today we're going to be covering your business. favorite topic, which is oil and the energy space, last time you joined us to chat about why Buffett was betting big on oil. And we also chatted about things like the Russia-Ukraine situation and everything that was happening there. And it's been a bumpy ride in oil. I believe last time the price of oil was around $90 a barrel. And today, as we're recording, we're around $80 or so. So I'd love for you to just hit on some of the highlights on what's sort of happened in the oil market and what's

Starting point is 00:02:01 progress since our last chat. Yeah, it's been really interesting and very bumpy, and things went down a lot in between that 90 and today's 82 or so dollars a barrel WTI. So the biggest couple of things in the oil market had been, one, that Russia actually was adequately supplying the market. Their production and their exports actually didn't fall, how consensus expected. And my view was that their exports would have fallen by about a million barrels a day from February of last year to around this time and they did not fall. They've only come down recently because of OPEC cuts. And then the other big sort of negative factor in the oil market has been China's reopening where from a logistical perspective, logistics demand, so gasoline and, you know, also

Starting point is 00:02:49 jet fuel have actually been pretty strong from a demand perspective, but petrochemicals and to a lesser extent, diesel demand has been pretty weak. And so the combination of essentially weaker, chemical demand in China, along with stronger exports from Russia. And then a bunch of sort of secondary factors in both directions. So Iran and Venezuela have been shipping more oil and various oil products, particularly Iran dumped a bunch of their floating storage in the last year or so. And then various countries either having way worse economies than one would have expected, like Europe, Germany's economy has been going through a degree of de-industrialization. While on the other hand, India has been growing actually faster than expected and certain

Starting point is 00:03:31 and other emerging markets are doing quite well. So I think that's sort of the summary. It's sort of been more negative than positive for the oil market in the last year with those couple of big surprises hurting the market in the short term. But subsequently, there's been multiple OPEC supply cuts. And as OPEC has sort of pulled back on their supplies, that's brought the market back into a deficit. And we're seeing oil prices starting to rise again as instead of Russian production coming offline. We're seeing Russian and Saudi and various other OPEC plus countries with their production coming off. So that's sort of the high level of what's happened in the oil market in the last year or so. In our audience, absolutely loved your update on what Buffett was up to

Starting point is 00:04:15 last year. He purchased substantial stakes in Occidental and Chevron. I looked up the recent quarter here in Berkshire steak and Chevron now sits at $21 billion in Occidental is around $13 billion. And a couple other headlines I caught was that Berkshire has agreed to spend $3.3 billion to boost its stake in a liquefied natural gas export terminal. That's in Maryland. And then they were also making a push for a bill that would see Texas spend at least $10 billion on natural gas-fired power plants to back up its grid. So, you know, with his large stakes in the Occidental and Chevron, he's still certainly still seeing value in the energy sector. And the energy sector is actually one of the cheapest sectors right now. it's the cheapest in the S&P 500 on a P.E. multiple basis. So I'd love to get your comments on

Starting point is 00:05:04 what we've seen from Buffett recently, if how much he's been adding to his positions and maybe any other comments related to those other headlines. Yeah, sure. So as I recall, I think Buffett actually has been selling some of his Chevron while adding to his position in Oxy and just Chevron has performed better as a stock than Occidental Petroleum. So my understanding of the investment thesis of Berkshire's investment in Occidental was that it was sort of a higher cost, higher leverage producer relative to the other large oil and gas publicly traded producers in the U.S. And so it was sort of a bet on higher oil prices for longer. And then the bet on Chevron was more related to refining as well as just being sort of the leader where it's one of the highest

Starting point is 00:05:49 quality companies in the business on the large cap side. And so it's sort of interesting seeing and Chevron has significant exposure to refining and downstream, whereas Oxy, while they do have a chemicals business and they do have some renewables, they're predominantly an oil producer. And so it is interesting to see Buffett selling some of his Chevron, even though dollars-wise he has more, buying more Oxy and then sort of positioning with just those two stocks, essentially in the oil and gas space for Berkshire's portfolio.

Starting point is 00:06:18 So all of that is pretty interesting. My interpretation is that Buffett seems to be quite bullish on the price of oil and on the value of oil producing assets. And then it's maybe less bullish on refining, where selling down his stake in Chevron, I guess, because of their large refining aspect, also as well as their sort of more demanding valuation, it's been a great bet for Berkshire and it's performed really well. And the downside of the stock that's performed well is sometimes it trades into territory where it's no longer a value purchase and where it might be at a valuation where it merits

Starting point is 00:06:50 selling for Berkshire's portfolio. And again, I think we've seen some of that. The other headlines are interesting. I think people forget that Berkshire is sort of a holding company, so they have the investments that Buffett makes with the cast and the float from the insurance that his insurance subsidiary is underwrite. And then he has all these different specific businesses that Berkshire owns outright. And so the investments in Oxy and Chevron are investments that Buffett seems to be directing personally, essentially himself. Whereas the Berkshire Hathaway Energy subsidiary, which is managed by others and Buffett technically oversees it, it's a subsidiary of Berkshire Hathaway. But a lot of those sorts of decisions, frankly, they feel they seem like they're big and the billions of dollars are just sort of normal course of business for Berkshire Hathaway Energy, which is it operates, I believe, regulated and unregulated infrastructure assets in the energy space, running all the way from coal to renewables. And so investment in natural gas exports, attempting to get.

Starting point is 00:07:51 essentially taxpayer funding for natural gas power plants. I mean, that's just sort of the normal course of business for Berkshire Hathaway Energy. And I would think that's actually sort of not, it's noteworthy that people don't really understand just how much, for example, coal power generation Berkshire operates and how much infrastructure they own sort of across the space and how much coal they're transporting at Burlington, which is a subsidiary of theirs, I guess technically not in Berkshire Hathaway Energy, but that similar idea. And so it just sort of fits in their normal course of business, it's sort of similar to if C's Candy launched some other sort of candy line. And again, different because it's more capital intensive, but similar in terms

Starting point is 00:08:30 of you have to wonder exactly how much Warren Buffett personally is associated with those sorts of decisions versus the Occidental Petroleum where he's going, or I guess he's having Oxy CEO fly up to Omaha, but he's meeting with her directly and making that sort of investment decision personally. Since we mentioned natural gas, I find it interesting to think about how stable oil prices have been, at least relative to some of these other commodities. When I look at natural gas, that was close to $10 in 2022 and now is around $2.60. So I'm curious if you have any thoughts on the volatility and natural gas and maybe how that

Starting point is 00:09:10 relates to oil and even Buffett's businesses as well. Yeah. I don't think many people really understand. what's going on in natural gas. Even some of the best natural gas traders ever have sort of bowed out of the market because they think it's too hard and too complicated. There are a few folks who have done well sort of betting on the direction for natural gas, but it's very hard. It's just so many different factors coming into play along with the sort of incredible productivity, almost miracle of shale gas in the U.S. And then the associated gas that comes with shale oil

Starting point is 00:09:43 activity. So there's many different cross-currents. It's sort of its own whole topic. I'm moderately bullish on gas. And with oil, I think the forward curve, it's in backwardation, which is if you sell a contract, if you want to sell your oil, sorry, via a futures contract a year out, you might sell it for five or $10 a barrel less than the current price for the spot oil if you were selling it today versus selling it via that contract for a year out. If you're selling natural gas in a spot contract today versus a contract a year out, you actually could get almost twice the price a year out as you can today. I think the winter 24 is over $4 in MCF, whereas the current price like you were saying is just over $2. So there's the forward curvers in Contango, and I think it actually

Starting point is 00:10:30 the forward curve is never right, but it's, I think, pretty close. I think probably $4 over the next couple of years as more export terminals come online is probably sort of the right number, depending on industrial activity in the U.S., depending on power burn and what the winter and summers are like in the next couple of years, as well as you really have to wonder what the impact is going to be of this drop of about 120 rigs from the peak rate of drilling both for oil and natural gas in the U.S., which I think peaked in Q4 of last year. You had mentioned that some of the big drivers of oil prices were the production within OPEC, what's happening with the relations with Russia and then the China reopening. And I think about the

Starting point is 00:11:14 OPEC, their production cuts, and they've kind of been sounding the alarm bells on, you know, just this underinvestment in oil. And I think about, you know, maybe what their incentives sort of are and what their motives are. What do you make of OPEC kind of sounding the alarm bells on this underinvestment and the production cuts as well? Yeah. So we put out a thesis a couple of years ago that we thought that OPEC had way less spare production capacity than they were claiming. And at the time, it was very contentious. And we were sort of making jokes about there being a bone saw sharpened for me since Saudi Arabia because their history with a reporter who had reported negative things about their regime.

Starting point is 00:11:56 And it turned out within a month of our publication of our white paper, I think it was the number two executive at Aramco came out and publicly talked about how there was less air capacity than people thought. And he wasn't directing it specifically to Saudi Arabia. It was more of a general comment. And subsequently, everyone from MBS to ABS, the Prince of Saudi Arabia to the Mark, to the head energy minister to various folks who are senior at Aramco, have all commented on massive underinvestment in oil in particular and being worried about their being undersupply. So, I mean, I think just the simplest explanation for that is that they're worried about their ability to adequately supply the market. And if you're a producer that house, you know, maybe they have

Starting point is 00:12:40 decades of reserves, but they're higher cost and they have less of it than they're expecting, I think they see a risk that oil prices go so high when there's a market under supply and they're just not able to manage it that actually destroys long-term demand. And oil they produce, let's say, 20 years from now will get, will not have a market or will have a much lower price. And then I think they're also worried that if there's a huge spike in price, again, from an inadequately supplied market, that it would encourage substantial additional capital investments that could actually bring on much more supply over the long term. So I think when they say they want more supply, I think they want, let's say, a couple million barrels a day more supply, maybe an extra 30% more activity than you're seeing globally. I don't think they want double or triple the activity levels that you're seeing. And again, you can't really know for sure, but I think it helps to sort of think about that

Starting point is 00:13:33 and what it means for a producer of something that's in a cartel that's limiting the supply of it to go tell everyone that they need to invest more. The one other interesting note, this is not our firsthand analysis. This is secondhand from having published our own sort of math on the productive capacity of these different countries. After we published that and after we sort of disseminated it, we had this great benefit. And it's a reason why we disseminate our research through white papers and other sorts of mediums, including podcast interviews and TV interviews.

Starting point is 00:14:02 One of the nice benefits is that people reach out to us who have personal experience in these various fields or who are manufacturing supplies, chemicals, or equipment or various other things to service these fields or who have worked on them in the past. And the feedback that we got was actually we were understating the problem with the productive capacity of fields in Saudi Arabia. and Kuwait and various other countries. And so, again, we haven't verified this fully, but the one supporting factor is that there is a huge amount of offshore activity

Starting point is 00:14:37 using very expensive, very sort of advanced rigs by Saudi Arabia as well as by Ramco, as well as by other sort of Gulf countries and other countries, where you would think that they would have adequate or more than adequate available supplies to bring on at very low cost onshore. So it's no longer the sort of Beverly Hillbillies shoe to the ground and oil comes out sort of idea or analog. It's totally the other end of the spectrum. I think when you see Saudi Arabia going and spending hundreds of thousands of dollars a day

Starting point is 00:15:07 per offshore rig and bringing, what is it? They have 50 or something running right now 55. I mean, that should tell you that there's a real issue onshore and that they're concerned. It's sort of their actions. As Buffett would say, you want to look at it, ignore what people say and look at what they do. and what they're doing is investing very heavily in their productive capacity. So again, that would be sort of confirming that. And again, it's sort of, it's very important, I think, to try to stay away from tinfoil

Starting point is 00:15:33 hat sort of twilight in the desert sort of theories. And again, like, was Matt Simmons right and early or just totally wrong or wrong because he was 20 years early? Unclear. But I think it's really helpful to sort of stay oriented on specific facts. And then a simple analysis that is logical and then go get as much. feedback as you can on that sort of thing and not make it too complicated. Is that sort of how we've approached it? And again, I think there are real capacity of limitations. And the simplest explanation

Starting point is 00:16:02 is probably correct here, which is just that there is limited spare capacity in OPEC. And it's costing them more than they expected to add capacity. And so they're telling other people to do it to avoid some of those longer term problems that I was mentioning. It's very interesting. I'm also really curious about the China reopening and how you sort of view this and how it plays into the market. But today we see global oil demand at around 101 million barrels per day. So, you know, when China goes off the zero COVID policy and they want to reopen their economy, you know, I think that's just huge demand coming on the market in terms of, you know, China being one of the largest economies in the world. So could you talk more about this and how this plays into your oil thesis?

Starting point is 00:16:46 Yeah, so China, I mean, I'm generally very opposed to mercantilist economies and centrally controlled economies like China's. And they have predictable long-term structural issues. So when you look at Japan, there was a period of significant growth in the Japanese economy and then it sort of hit a wall in the early 90s and basically Japan stalled out for a long period of time. So the China bears point to that. They point to demographic issues and say, hey, this is the problem. And I don't just agree that there will be problems in China, and China is definitely experiencing economic problems, but it's also very different in that there's this giant population that has very little energy consumption on a per person, sort of the per capita energy consumption is still very, very low.

Starting point is 00:17:30 And there's still even with negative demographics and even with all kinds of other problems, there's still enough room there for there to be significant additional growth before having this sort of Japan problem. And so it's sort of one of these things where I'm very sympathetic to the China bear case. It's just, I think it's been too early for a long time and it's still too early. So that caveat out of the way, I think China actually played this reopening trade sort of extremely well. And where the U.S. was running fiscal and monetary, essentially stimulus, concurrent with

Starting point is 00:18:04 a reopening, which was sort of a natural stimulus, and where we were essentially bribing businesses and giving government funds to businesses as well as direct payments to individuals, as well as suppressed interest rates. While the reopening was happening in the U.S., China did it different. They haven't done the same sorts of stimulus that we did. They did some of it for certain periods of time, but their reopening, they focused almost entirely on the sort of services side. They allowed the services side to sort of boom.

Starting point is 00:18:33 They sustained their real estate market enough that it didn't totally inflow. I mean, you had issues at Evergrand, and you had a couple of other real estate developers that had issues, but they kept it from totally exploding. but they, or imploding, in your perspective, but they sort of put it in stasis to some extent. They let their economy run hot on the services side. And now that that services boom is starting to slow, they're in the process of working on stimulus. And so two other thoughts on that. One, their stimulus is shifting now that they've built out plenty of real estate developments.

Starting point is 00:19:05 I mean, there's really not that much of a need for new housing in China at this point, given how much they've built versus their demographic trends. but they're shifting more towards sort of consumption-oriented stimulus, which is very positive. And then a non-China observation that's very important for Chinese oil demand, which is that we're starting to see green shoots in freight demand and freight activity in the U.S. And that consumption of diesel and that those extra trucks and extra real cars are bringing, in many cases, goods that are manufactured in China. And so there's a little bit of a lag effect, but I think that the strength of the U.S.

Starting point is 00:19:41 the sort of surprising strength of the U.S. economy and this resurgence in freight demand green shoots across trucking and rail, as we see inventory restocking. I think it could end up being another sort of similar effect for China. And when you think about what's suffered in China in terms of diesel demand at Petchem, if you see this pickup in factory activity and other sorts of parts of the industrial economy in China from demand in the U.S. and elsewhere, I mean, you could see a major economic research in China for a period of time. And again, I'm not saying this will last forever, but there's room for another, I don't know, somewhere between 2 and 4 million barrels a day of incremental oil demand in China above where we see them consuming today, whether it's 16 million

Starting point is 00:20:29 barrels a day or 17 and a half, depending on sort of who you're asking, whether it's Jody or I can't remember the EIA, IEEA, everyone sort of has this sort of bracket of just under 16 million barrels a day on one side in May to 17 and a half or so. And then just one last thought on China. So when you think about that consumption, when you think about sort of the trajectory of that consumption, you want to think about their purchases recently of oil to fill up their own restrictions of petroleum reserves and their own commercial inventories. And so the bare thesis on oil this year had been, all their inventories are full and they keep buying anyway. What happens when they sell or dump those inventories or refine that oil and then export it? And there's two things. One, they've been building more and more of this storage, right? And they're not building it for fun and they're probably not building it just to arbitrage of the price of oil.

Starting point is 00:21:22 They're building it because I think they see what I see and what others see, which is this likely scenario where they end up using millions of barrels a day more oil. And I think they see what OPEC sees, which is they don't know where it's going to come from. So if they don't know where it's come from and they know that they're going to need it and they need to simulate their manufacturing anyway, they might as well go build a bunch of steel drums and put concrete under them and fill them up with oil and refined products. And so I think that's noeworthy. I think the big thing the China bears get wrong is that there's somehow going to be oil coming out of China. The oil goes to China. It's getting used in China and they're not just sort of speculating on the price.

Starting point is 00:21:59 They're strategically purchasing it for future consumption. And again, I just think there's so much noise in there. There's so many sort of specific statistics that can look really alarming or really promising. And there's just a reality, which is these guys, they're centrally managing their and essentially planning their economy. And they expect to use more oil and therefore they're buying it and storing it. And their storage levels are actually pretty stable. And they're sort of in the mid-60s or so percent capacity utilization of their storage between technically SPR and commercial inventory. So again, there's lots of noise.

Starting point is 00:22:30 But when you look at the specifics and you think about what it means for a country like China to be going and buying more oil and putting it in storage, they're buying it to store it to use it. And it's likely not for more. It's likely not for these other sorts of far-fetched as possible. But the simplest explanation is just they're buying it to use it. They see the potential for millions of barrels a day of demand ramp up. They don't know where they're going to get it from. And so they want to make sure that they have an adequate supply to be able to have some buffer in case prices. spike due to some either supply disruption or uninterested demand.

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Starting point is 00:27:21 been building theirs up. How do the reserve levels compare between the two countries? Yeah, the US SPR is down. It looks like 50% or so from its recent high. And that's really interesting because there are limitations in terms of how much more you can pull out before you cause structural damage to these caverns. It's not like a steel drum where you can pull it all the way down and fill it all the way up. There's some structural limitations to how much you can pull out and maintain the integrity of it. But if you look at the trajectory, I mean, China's been building more of these things and filling them.

Starting point is 00:27:52 Again, it's not a calamity. It's not, they're not sold to the brim. They have plenty of additional room, but they keep building them and selling them about 60-something percent. And then their use of oil has been growing. So their days of storage in terms of the amount divided by the amount they're using per day has actually not increased by much. The U.S., the day storage has collapsed as we've dumped our SPR. And then, frankly, our commercial inventories are starting to fall too.

Starting point is 00:28:18 And when you net out the structural amount, so similar to the SPR, you need a structure. certain amount of oil in pipes for the pipelines to actually function. You need a certain amount of oil in silos and various other spots just for the normal flows for exports and imports and refiners processing stuff. You need just sort of working capital. When you net out the working capital of U.S. commercial inventories, we're actually at very low levels. And I think people just haven't done the math on that. There's an extra roughly 100 million barrels or so that's sort of It's counted as inventory, but it's just sort of structural. It just needs to be there.

Starting point is 00:28:53 And so we're pretty low on commercial inventories, too, in addition to scarily low on the SPR. One note on that, it's okay that we have less in the SPR because we do produce more oil domestically, but it still was nice to have. And if you look at why we built the SPR, there are strategic reasons to have it, even if we are a large oil producer at this point. And so it's sort of a, there's a lot of political arguments on both sides. of that, but we are in a less secure energy position today than we were a year and a half ago when we had twice as much oil or so in the SPR.

Starting point is 00:29:27 Luke Gromond on our show, he was on with Preston Pish. He was kind of sounding the alarm bells on, shale rolling over here in the U.S. My poll this Wall Street Journal article that was recently published, it explained that the U.S. shale production is dropping at its fastest pace since the COVID-19 pandemic. I saw that the number of rigs drilling for oil has dropped from, 800 to 670 with private drilling accounting for nearly 70% of that decrease. And we've seen US drilling rise and fall in these different waves over the past 20 or so years. So I'm curious what your take is on how previous declines in the shale production in the U.S., how that sort of

Starting point is 00:30:07 factors into the oil price and what history is sort of telling us on this front. I think I have a view, but I have it loosely helped because there's a history of people being totally embarrassed by bad calls on shale production, growth and declines in both directions. And so my current view, and this may change because, again, it's a very complicated subject. Each of those rigs are drilling specific locations and specific spots. They can get shifted to more productive locations or less productive. They can get shifted to locations that can produce more oil or more natural gas or more natural gas liquids or some combination of those.

Starting point is 00:30:43 So it is a dynamic problem. but high level shale productivity on the oil side has been falling over the last few years. It may have peaked around 2018. So that's the productivity per rig and essentially per thousand feet of lateral length in the horizontal of these shale wells. And it's been falling since then. And so as you have declining productivity per well and per thousand feet, And as you sort of, you hit the upper limits on rig productivity in terms of just how many feet you can drill per day with your rig.

Starting point is 00:31:19 And again, there are some extraordinary people and technologies for that. But we are sort of, it does look like peeking out on drilling productivity. And again, watch me totally be wrong on that at some point in the future with some new technology or drilling technique or what have you. But I think they're right. I think there's a real risk of production declining. And we also, we put out a bison white paper on this issue of drilled uncompleted wells. we called it the Duck Dilemma. And that sort of played out where we saw many more rigs getting added relative to frack

Starting point is 00:31:48 stacks, pressure pumping equipment getting added. And so we needed more of those rigs just to make up for the underinvestment and under the there was disproportionately too little drilling activity versus pressure pumping activity. So that sort of balanced itself out. And what we're seeing now is with there being a smaller inventory of drilled uncompleted wells relative to the rate of drilling wells, there isn't that sort of flex to bring on additional production very quickly to the extent that we see in oil price spike. So there is a little bit of a buildup and drill-line completed wells on the gas side, which makes sense given the shape of the gas

Starting point is 00:32:25 forward curve and the fact that you can sell gas right now, if you want for 18 months from now, way higher than the current price. So that's all rational. With the backwardation along with just sort of this increase in drilling rate activity and decrease in pressure pumping, we saw the drill of completed wells sort of go away, which means that whatever the error rate is going to be in terms of does shale surprise to the upside or the downside on the oil side, it's more likely to surprise on the downside. And then it's much less likely to correct as prickly as it did in this sort of post-COVID recovery where you saw production rebound by, I'm know, close to two million barrels a day over a couple of year period just because you had all these drilled uncompleted balls that you could bring back on or they would go incomplete without having to go drill new wells. to fully replace them. So sort of long answer short, probably we're going to have less production than people are still forecasting, and we may actually see U.S. oil production decline if we don't see a big step up in rigs as well as pressure pumping units.

Starting point is 00:33:26 Since we talked about Occidental and Chevron, I'm curious what you've seen from some of the super majors in terms of production and just some of the big names in the U.S. It's an interesting question because the industry generally has been underinvesting relative to its cash flows versus how it's invested in the past. So historically, the industry would invest about 100% of its cash flow, some of the shield producers prior to the, I mean, even after the 2014 crash running into, let's say, 2018, they would invest 100% or more of their cash flow. And right now they're all producing a fraction of that. And Buffett has cited that as one of the reasons he's a big buyer of Oxy as well as Chevron and why he's bullish on oil, that underinvestment of cash flow. Yeah, when you look at companies like Chevron, I mean, they're doing a big acquisition,

Starting point is 00:34:14 which is brilliant because they bought a company at the low end of the valuation spectrum, but that was still big enough to be material to them. And they bought it for about half of their current valuation. And so I think they should go buy more companies. And I think Chevron has done a really good job from a value perspective in terms of not paying too much when they've done acquisitions. And for example, when they were in a bidding war with Occidental over Anadarko, they actually let Oxy win. And they won by getting a, I think it was a billion dollar break fee or something like that. And they didn't overpay. And Oxy paid a lot more than

Starting point is 00:34:49 Chevron was going to pay for Anadarko. And Chevron moved on and they bought other companies for lower evaluations. So I think Chevron is sort of proven that they're good at that. And I think they should do more of it. And they seem likely to in terms of when you look at their capital programs versus their cash flows. Exxon has a sort of worst track record, particularly with onshore shale. Their XTO acquisition was abysmal. They had to write down almost 100% of the purchase price over time. I think they should still probably buy stuff. They're just, you know, I think they should, they probably need to be more cautious. And I think the market might might also be more hesitant in terms of seeing them buy assets just because of their history that was a little more mixed on the

Starting point is 00:35:28 capital allocation side. The other interesting thing, for both of those companies is that their well productivity. So when you look at their land, their land in the Permian in West Texas and Southeast New Mexico is top decile. But their well productivity is average. And so they think that they're good at it, which is so odd, right? You hear their comments, you talk to services providers and hear what Exxon and Chevron tell the services providers about how good they are.

Starting point is 00:35:52 And it looks like they just conch themselves versus their own wells, which is again, it's a very, very dangerous thing. You want to just, you don't want to be envious of others, but in an industrial process, you want to not just consider how you're doing it, but especially for drilling wells where it's pretty similar. You want to compare to other companies too. And so it's been this thing where Exxon, in particular, was spending a ton of money and trying to grow their production very, very rapidly, very aggressively, and they were not doing a very good job in terms of growing it relative to how much they were spending. They have pulled back a lot and their wells are less bad,

Starting point is 00:36:24 but they're still not impressive at all, in my opinion, relative to just the resource maps. When you look at how companies are doing on the edges of their core positions in southeast New Mexico, I mean, it's just not comparable. There are way better wells drilled by other operators like EOG immediately adjacent to them. So they are investing. They are growing a little. They're growing their gas and NGL production more than they're growing their oil. and they're frankly sort of wasting, from my perspective, some of the best rock that's out there.

Starting point is 00:36:57 I mean, it's bullish for oil, but it's sort of one of these very odd things and you hear them talk. And again, like, I'm a fan of their especially Chevron's MNA strategy. I think some of their offshore stuff, especially Exxon's activities in Guyana, very promising, very high return. But they just, there was this theory that the oil majors and super majors were going to be the best at shale because they could allocate the most resources and so on. it turns out you need to be sort of more entrepreneurial and have the executive team be sort of closer to the ground and more directly involved because of the complexity of the processes as well as the number of decisions that need to be made and the amount of authority that needs to be delegated that seems to not be consistent with the cultures that were built around these sort of very large

Starting point is 00:37:40 projects with limited numbers of very expensive wells like the activities in Guyana that Exxon's doing. I wanted to briefly zoom out and look at the bigger picture. One of the most interesting charts that I've seen recently is the long-term trend of energy consumption. Ever since around 1950, global energy consumption has just exploded and gone parabolic. And coal and oil and natural gas has fueled the majority of that growth in consumption. Do you envision the demand for oil to just continuously grow over time or remain stagnant? I know we don't expect oil demand and gas demand to just increase into perpetuity. So where do you see this energy dynamic sort of shifting and playing out how it plays out

Starting point is 00:38:27 in the long run? So probably, hopefully, we'll use more energy every year going forward like we have in the past. And that growth of energy consumption broadly has been associated with dramatic improvements in lifespan as well as quality of life across humanity. So hopefully in places where people use very little energy, they'll be able to use more and they'll be able to benefit from basic sanitation, basic things like air conditioning and refrigeration. I mean, these are things that dramatically improve people's lives, but they require energy. So I hope that that increases.

Starting point is 00:39:03 I'm concerned about policies that make energy much more expensive. And I'm worried that in this sort of tradeoff of climate risk and other risks from using certain funds, fossil fuels versus the risk of undersupplying cheap energy or making energy more scarce to the poorest people who could benefit from things like air conditioning and refrigeration and better transportation for themselves or their crops or whatever other sort of basic needs that they have that can be filled by energy. I worry that our current sort of policy course is to sort of affect the trajectory of consumption of energy on this chart. And so I think it's less of a, you know, the people say like all of the above and there are energy return on investment issues with some of these

Starting point is 00:39:50 sources versus others. But I think just holistically policies that promote the production of energy as well as the distribution of it broadly are very pro-humanity and the opposite is sort of anti. And then just the people that are anti-certain energy sources, you'll find them on their private jets to conferences where they talk about it. So it's a very sort of weird colonial like there's all kinds of open questions, I think, about what those people actually want. And again, getting back to Buffett, I think you just look at what people do and ignore what they say and you sort of know what they actually want. And I don't know why this conversation doesn't always start and where it's not covered in the news, like what these people actually do who are trying to restrict

Starting point is 00:40:32 energy consumption. But again, I hope that we continue on that trajectory. It's most likely that we continue on this growth of energy consumption, this dramatic growth of energy consumption trajectory. but I also worry that we're ruled by people who consume enormous amounts of energy themselves, but are promoting increased restrictions and scarcity of energy for others. To my knowledge, you're solar and wind energy skeptic, I might describe it as. So where do you see things sort of transitioning in terms of energy production? I'm sure this is something you've talked about before. My problem with solar and wind are that the technology,

Starting point is 00:41:11 Technologies don't seem to be sort of fully perfected from an R&D perspective. And so what you have is huge amounts of subsidies on imperfect technologies that are ruled out in a way where you end up consuming polluting fossil fuels in some cases much more polluting, right? You end up burning more coal or engaging in strip mining in various parts of the world using child labor, some combination of things that are very non-humanistic, along with things that are very polluting to end up with something that doesn't even work that well. And so it's not that I have a problem with solar. I would love for there to be really highly

Starting point is 00:41:52 efficient, highly effective solar and for it to be rolled out broadly, similar to wind. The problem is that it just doesn't work as well as advertised. And it somehow became a political thing where observing that or sharing, hey, this wind turbine blew up and it's on fire. Or, hey, here's what happened to all these wind turbine blades after they were, they last for 20 years or 10 years and they get disassembled and here's where they go or this is what happened to this solar field after it was ran through its useful life. Somehow that became a political thing instead of just being able to say, hey, this is a downside of this technology. So my hope is that the technologies get improved dramatically through research and development and that there would be more funding

Starting point is 00:42:33 oriented towards those improvements rather than to subsidizing the implementation of these imperfect technologies and increasingly less favorable locations. So the other problem is you see these pictures of solar panels covered by snow in Alberta. And so what are you actually trying to accomplish by burning coal to melt silicon to build your solar panels in China, in some cases using weager slave labor essentially to then ship it, again, using oil to the West Coast to then put it on a truck and drive it or put on a train. And you, again, use diesel to bring it over to install it to have it not run for 80% of the time because you get snowed and then you don't have a lot of sun anyway.

Starting point is 00:43:17 And so, again, it's less about the thing, right? The thing is great and hopefully it gets a lot better. And then the actual implementation, the idea versus the implementation, and the problem I have is on the implementation side. And I think when you compare it to oil or natural gas, you have huge taxes and regulatory burdens on the implementation of a natural gas solution to something. And you have huge subsidies and stimulus is essentially to encourage the consumption and use of the solar solutions.

Starting point is 00:43:44 And so it should be a really easy economic solution when it's not. I think that tells you that there is something wrong. So again, nothing against it specifically more of a problem of the actual economics, which tell you the effectiveness of the current general. generations of these things. I know you're not one to really try and time the market. You post a lot of stuff related to Buffett and not trying to time the market or forecast when a recession is going to happen. And I would mention that you were taking advantage of very attractive prices when oil dropped in recent months and has since rebounded back above the $80 mark. I'm curious with that,

Starting point is 00:44:22 If you expect oil to perform, you know, similar to previous recessions where it sort of has a little bit of a free fall before the economy recovers, or do you see the current dynamic much differently given, you know, all the underinvestment that's been occurring? We're in such an interesting time that it's really hard to answer that because I don't know that anyone really knows if our economy is booming or if we're in a recession right now. And it's like a very, a very strange time. We sort of know what happened a few years ago, but we don't really know what's happening right now. People are asking me that about oil. And I would say, hey, more broadly, we just don't know, right? There's a lot of complexity.

Starting point is 00:45:00 And there's increasingly inaccuracies in government reported data along with increasing inaccuracies in company reported data. So it's just really hard to say what it looks like right now. And again, it's very loosely held. It was just sort of like what the data seems to be showing. and credible analysis seems to be indicating. We had a downturn last year. The stock market sort of bottomed in, what was it, November or so last year, we've had a stock market recovery. We're seeing freight green shoots. We're seeing inventory restocking. This sort of looks like a recovery post-recession.

Starting point is 00:45:35 And we also saw oil prices fall essentially 50% from their high to their low, which is what you would see in a recession. And we're seeing a rebound after that, which is again what you would see. And so the question of, hey, what are your recession fears? It's like, okay, well, you know, I wasn't managing money through the 70s, but I was in the 2000s, and I got to see how scary and awful it felt in 2009 to be buying stocks, particularly where I run gas stocks. And everyone just thought the world was ending. I remember I attended an event where the chief investment officer for the Disney family office was presenting and discussing. And I asked him, hey, like, you actually seem pretty bullish on stocks, what's going on?

Starting point is 00:46:13 And he pointed to the inventory restocking and said, hey, I can't predict the future, but I know what's happening right now. And valuations, in his words, were very cheap. And there was this increase in economic activity. And so, again, I don't know for sure. And there's really wide bands on the accuracy of data that we're seeing. But right now, it actually looks like we may be in a recovery from what may have been a recession last year.

Starting point is 00:46:35 And I don't really know. I just know sort of where oil consumption is. I can actually see oil inventories a lot better than I can see some of these other sort of broader economic questions. So when I think about the risk of a recession, I look at the trajectory of consumption. I look at the things that could affect that. And again, most of the trajectories of most of those factors are actually positive, not negative. And the sentiment got really bad for oil in particular earlier this year as it was getting great for tech stocks, as it getting great for various other actually quite economically sensitive businesses. And your idea is that tech does well in a low

Starting point is 00:47:10 growth environment, but it does very poorly in a negative growth environment. And so for those stops to be running, I mean, they were indicating there was something, right? Either was a speculative mania or it was that the economy was recovering or both. And so, again, really hard to say. And one of those things where I'm sure some of my econ professors, if they see this, I took classes with a year to Chicago, not going to be thrilled to hear me say this, but I just don't know. I don't think people know. But, and like you said, value-wise, there were extraordinary bargains on these stocks still. I mean, we got to buy them for even cheaper a couple months ago, but high level, the S&P energy was like 4% of the S&P on a market cap basis, but 10% on an earnings basis.

Starting point is 00:47:52 So that was clearly unsustainable. We're up to, I think, 4.5% right now, but that's still way too low. And historically, if you just bought things on that basis, that's sort of one of the bus set approaches. You just, you end up over time converging. Maybe earnings come down a little and the market caps go up or earnings go up and your market cap. goes up more, but either way, that tends to be a really good trade historically has tended to be. And then on the specifics, I mean, some of the companies, because there's so few people looking at it, there's still a little index participation, and then there's just such negativity associated with the space. There are mispricings that are just astonishing. And it's three years into recovery for

Starting point is 00:48:32 these stocks. You'd think there'd be smart institutional money going for it. And, you know, sub-10, sub-20 million a day trading volume stocks. I mean, there are just gross mispricings in both directions and we're finding great opportunities. 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. 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

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Starting point is 00:51:58 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. It's funny because as you're an investor in the markets for a number of years and you look at the big picture and you look at sort of what's happening, things always feel really uncertain.

Starting point is 00:52:20 And a lot of people kind of see that as a bad thing. Like, are we going to enter a recession? are things going to turn down. But when you're looking for bargains, you want uncertainty. You want other people to be sort of worried and scared. And then, you know, obviously, you obviously should use caution with investing. But when everyone else is really uncertain about things like oil prices, then someone like you looks at the fundamentals and you're sort of able to take advantage of opportunities, other people are, you know, sort of too scared to dive into. And it also reminds me of the Peter Lynch quote that I believe you're also a big fan of. It's where investors, you know,

Starting point is 00:52:55 they lose more money trying to anticipate recessions than in the recessions themselves. One more point, you mentioned that, you know, investors don't know if the economy's ripping or if we're in a recession or not. And price discovery is one of the great signals within the markets. It was interesting to me how you've talked about how the oil price can actually sort of be an indicator for the economy. Oftentimes, people talk about things like the yield curve inversion to judge where we're at in the cycle. So I'd love for you to talk more about oil prices and what oil prices signal for where we may be at within the economic cycle. That's a really good question. One thing I will add, I think up there with Buffett and Peter Lynch, who both have great

Starting point is 00:53:39 investment track records as well as great quotes, my friend Morgan Housel has this great quote about downturns. And he says that every past downturn looks like an opportunity and every Every future one looks like a risk. So I think it's important to be the frame things the right way. And when everyone is scared, I like to joke, I hide under my desk and click buy. And so it's just you've got to be able to just invert it, right? The more confident I steal in something, the more scared I am and the less likely I am to really go buy more of it or buy it.

Starting point is 00:54:11 And the less confident, but it's really scary, but the math just checks out and I can't kill the idea. and I can't I can't not buy it in size. I mean, those are the things that I've done the best in by far. And so it's really, it's not about comfort. It's not about feel good. It's not about sleep at night, all those stuff. I mean, we saw in Canada recently there was a midstream stock that fell.

Starting point is 00:54:35 They were doing a spinout, which looked promising. I didn't get involved in it at all. But they were doing a spinout and their stock fell, I think, 15 or 20 percent on the announcement of a spinout, which historically would have actually been an indicator of promising return. And, you know, Greenblatt has written extensively about how spinouts sort of unlock value and there's extra returns potentially from buying them both before the spinout and after, depending on which one you buy, the bigger, the Remain Co or the Spin Out Co. And it was just so interesting to see how quickly price can drive narrative and sort of set

Starting point is 00:55:07 this like selling loop. And then that can reset and you can see a buying loop. So it's very, very difficult. That's relevant for the question, which is, what does the price of oil mean? for the economy. And I sort of think not much because when I look at the participation in the futures markets right now for oil, it's very low. When I look at the physical markets, there's very little risk taking by physical market participants. And there's very little incentive for folks to buy oil to store it given the shape of the forward curve, it being in

Starting point is 00:55:35 backwardation. And so when I look across that, I'm not seeing a lot of activity that would suggest that there's a strong price setting in the physical market. It looks like it's more being set on the future side. And the bulk of that activity seems to be via CTAs and hedge funds that are basically just trading momentum and sentiment. And so you have this just sort of game of telephone where it's sell, sell, sell, sell, sell, sell, and then someone mishears sell is buy, and buy, bye, buy, buy, buy, buy. So I actually don't think there's very much information right now in the price of oil, especially relative to where there might have been more information in the price in the past. So not saying much, I mean, over $80 a barrel, having said all that,

Starting point is 00:56:16 We're not in a recession, but we may be in a inflationary recession and inflationary recessions cause, they say, monetary illusions. You sort of have weird things happen when you're in periods of inflation that are higher than recent past periods. And so sort of a little bit of the mess, but just generally, I don't think there's that much information in the price at the moment relative to the broader economy. When looking at some of the opportunities you've been diving into, you and Trey talked about this quite a bit in your last discussion when talking about Buffett's picks.

Starting point is 00:56:50 And you highlighted how, you know, Buffett's managing large tranches of capital. And he's sort of forced into these super majors, even though they're trading at higher multiples than some of the small caps. Can you talk about what investors should keep in mind when they're thinking about small caps versus the super majors? Because, you know, I think about how smaller companies are probably more susceptible to price swings. They probably need to be a little bit more conservative in some way. So can you talk about that? Yeah, I had to eat crow on that a little bit because the supermajor stocks have done a lot better in the last year than the small caps. Why is that?

Starting point is 00:57:26 I mean, it's not valuation because the supermajor's went from expensive when we talked a year ago to more expensive now. And you see that shift where Buffett has been actually selling Chevron, it looks like. So I think that's not an accident. I think that's, again, valuation driven. I don't know for sure, but I don't remember that he's talked about that specifically, but you just see it. So I don't know. It could be that there's been fund flows towards large cap stocks generally in the U.S. And so as you have S&P 500 index fund flows, you end up with sort of structural buying

Starting point is 00:57:58 of some of these stocks, particularly the largest ones. And so Exxon and Chevron may ironically be getting bid up partly because Apple and Amazon and Google or in Microsoft are all doing really well and you're sort of their all-time highs are at their all-time highs. And so, you know, it could just be that where there's sort of these incremental purchases. It could be from share buybacks. And it could also be that there are folks who are more interested in making the oil macro bet through equities rather than through buying oil.

Starting point is 00:58:29 And if they end up buying XLE, which is that S&P 500 index fund focused on or ETF focused on the energy sector, 50% of that is Exxon and Chevron. So folks that are looking for that sort of broader diversified exposure through an ETF end up owning just a whole bunch of most of the Exxon and Sheffon. So those are some possible theories. I mean, we're just, we're in a market where I think we're at near record levels of concentration in a very small number of stocks. And in the largest stocks, sort of like the nifty 50 or, you know, like the Cisco's and a few

Starting point is 00:59:01 other stocks in the 90s. And in those time periods, you saw large companies that weren't even in that sort of set of most favorite companies. You saw their shares trade up a lot. So that's my guess. I don't think it's related to fundamentals. The fundamentals of those businesses versus small or mid-cap oiling now stocks have not really, there's been some benefit to refining, but refining margins are starting to fall again.

Starting point is 00:59:23 I don't know that there's really big differentiation. I think the one comment on risk, and again, none of this is a recommendation, people should do their own diligence and consult their own financial advisors. But there are companies that are small that are very low fundamental risk. and fundamental risk measured as solvency questions and viability questions. I mean, there's companies that I've talked about before that have hundreds of millions of dollars of net cash on their balance sheet and no debt and positive free cash flow. And so it's like, okay, how do you kill a company that you could, right?

Starting point is 00:59:58 But it would be really, really hard. And I don't know that being smaller, but having half or a third of your market cap in net cash really makes you more risky. Technically, it's more risky from a share price, volatility, measurement perspective, but it's not from a fundamental perspective. So I think there's some complexity there. And then I think I just worry that people end up missing, even though small cap stocks have done poorly,

Starting point is 01:00:23 I guess one change in the last year, we're allowed to talk about our returns. Again, it's not a solicitation, but I think it's illustrative for the difference in between small and large caps. So XLE, we launched in May of 2015, XLE, I think is up maybe 10% or something. since then. And the small cap, oil and gas stock index, the S&P 600 energy, is down. Last I checked, about 65% or so. And the ETF is down about recm. And we're up like 115% net of all fees

Starting point is 01:00:51 and expenses and whatever. And so there's room to do really well in small caps because there's so big differences in valuations. There's really wide valuation dispersion. And there's just less room, I think, to earn differentiated returns on the large cap side because everyone knows about Exxon and Chevron and Shell and BP. I mean, there's just a limited set of these very large companies and very little differentiation possible, I think, in the research and tons of cell-side notes on these companies. And there's just less of information asymmetry available. So I think even seeing outperformance by large caps over a period of time, even if it was over

Starting point is 01:01:30 a long period of time, that doesn't necessarily mean that there are large opportunities in small caps or microcaps or mid-caps to materially out. perform even when that sector is out of favor. And then when it goes back into favor, if it goes back into favor, there's room for even more exceptional returns in that sort of strategy. Are there big differences in the break-even price between the larger supermajors and the small caps? Or how do you think about that aspect? Yeah, sometimes, but there's also big differences in break-evens among small caps between one small cap to another. And so there's supposed to be, I wrote some articles during COVID about how COVID sort of challenged the super major business model.

Starting point is 01:02:16 The Rockefeller sort of came up with this model where through integration, it made the super major model that that design of business sort of bulletproof because they were supposed to, when oil prices went down, they were supposed to make more on refining. When refining was doing that along with oil, they would make more on chemicals, they would make money on transportation. and these companies have sort of shifted away from that to some extent. And so while there's some brilliance to the model that Rockefeller created, it's not as bulletproof today and there's not as much stability as there was for standard oil. I mean, he also had the benefit of running a monopoly. But even the monopoly constituents when they got broken up still did extraordinarily well

Starting point is 01:02:59 for a long period of time. So I know that's sort of a tangent, but I think it's important in thinking about it, It's not obvious that mega cap company in the oil and gas space will necessarily have lower break-evens than a small cap or microcap company. It all depends on the specifics of the assets, the specifics of the business strategy. And then the other aspect is what will the incremental returns on invested capital look like and what are the opportunities within those companies to earn those high returns? Because the way you make money as a company over time and the way stocks outperform over time

Starting point is 01:03:34 is through displaying high return on equity, return on invested capital. You really want those measures to be very high. And there's a lot of research showing over the long run. That's sort of the biggest single factor. And so, you know, these companies have big benches, right? Exxon has Guyana. They have this great land in West Texas and Southeast New Mexico, similar for Chevron, with some great offshore opportunities as well as some of the best land in Southeast

Starting point is 01:03:59 New Mexico. But if they're not effectively addressing them and if they're not sort of, sort of rebuilding that inventory, you can have small companies that actually earn far in excess return on equity over time. And those companies, again, statistically should do better because they have that better return opportunity. And then they're also smaller so they can be more nimble, more flexible. And it's a reason I think why in past cycles, small caps have actually traded at pretty large premiums from a valuation perspective from cash flow and so on to larger companies. And so I think there is a reasonable case that we'll see that reversion from a big discount for small caps to a premium.

Starting point is 01:04:37 And a big part of that, I think, is just this opportunity to find, to be more nimble and be able to find mispriced opportunities that an Exxon or Chevron just can't address because they're too big and it just takes too much change to refocus their capital. I'm really glad you mentioned the return on capital and the importance of that. And oil is just a really, really tough business. A lot of stocks just don't go anywhere because stocks might do well over one or two years as the oil price goes up. But over a long enough time frame, the return on equity, return on capital for a lot of those businesses is a very high, which is why probably a lot of investors just don't park their money into the oil sector. So, Josh, part of being a great investor, you're a big believer in Buffett's idea of value investing, investing with the margin of safety, investing in companies with strong return on. capital, part of being a great investor is understanding what can go wrong. So I'd love for you to talk more about if there's a feasible scenario in your thesis on oil, a scenario where the thesis

Starting point is 01:05:41 doesn't pan out, say, over a five-year time frame. What does that look like? I think the biggest risk to my thesis, which is finding small cap companies that are materially undervalued and owning them for the repricing close to fair value. The biggest risk there is that there is some giant discovery of new oil that oversupplies the market, whether it's through a big discovering, you'd have to discover a lot. You'd have to find a really big field that could come on really fast, and the history is not very promising for that. The last truly big fields were some of these shield fields, which from discovery to ramp up

Starting point is 01:06:17 were a decade plus. So, you know, you'd need something much faster than that. Maybe you would have to be a discovery in an existing field such that there's enough infrastructure in place to be able to adequately supply the market. Or you'd need an absolutely devastating economic downturn that would have to be global and would have to look like some of the stuff that we saw in the 30s with countries essentially going off the grid by going communist or a sort of similar type. You're just absolutely torching their industrial bases and torching their consumption of basic

Starting point is 01:06:49 materials, including energy. And so that's a, and it's not a, there's a, there's a non-zero probability of that. And it has happened in the past, which means the history doesn't repeat what it rhymes. And we are in a unstable, uncertain time. So that is a risk. I don't think it's very likely, but between those two, I think those would be sort of the biggest risks that I could see that are non-zero and would have sort of the biggest, and I guess the last one would be another sort of pandemic, so another either terrible COVID wave or some other sort of thing that would necessitate sort of lockdowns that might be more permanent than what we saw in this last wave. And that doesn't seem as likely to me because it seems like there's just sort of general public resistance to that. And I think if the

Starting point is 01:07:35 government said tomorrow, everyone needs to lock down, I think you might actually see significant civil disobedience and maybe just that not stick. I mean, we're even seeing that in China at some point where the Chinese people were just saying there were actual protests and in some cases riots. And that's very unusual for China at that scale that they saw it. So not likely. But again, any of those three things are left-tail risks. Nothing is certain.

Starting point is 01:07:59 There's always risk in any sort of investment. And the lessons from the Buffets and Peter Lynch's of the world are that you want to do what you can to minimize your risk, but you have to take risk in order to earn above market or even a market return. And if you don't take that risk, then you won't earn a great return. I had one more question for you, Josh. One thing that's been on my mind is the impact of higher interest rates on this industry. We've seen, you know, the U.S. selling off their SPR and it's put downward pressure on oil.

Starting point is 01:08:31 And higher interest rates, of course, make it more expensive for these companies to go out and invest in new production, assuming they're taking on debt. Has higher interest rates played as big of a role as investors sort of in, anticipated or what are you seeing on this front? So high level, it was a giant mistake for the Federal Reserve to raise interest rates in the way they did. And it was a similarly terrible decision by the ACB and other global banks to do the same thing. And so the reason I say that is that higher interest rates have suppressed capital investment.

Starting point is 01:09:05 And we had a supply problem from sort of pandemic after effects and underinvestment. And the solution from a central bank perspective has been to kill demand. And as we saw with that chart that you showed for energy, there's a natural tendency for demand for energy to increase. And so the solution from a humanitarian perspective is to supply more energy, not to kill demand for it because killing demand for energy is very bad. It kills people. It ruins their lives.

Starting point is 01:09:35 It's really bad. And so we're seeing that, right? Rig counts are down a lot since interest rates have risen. and again, partly that's commodity price driven, but it's also capital availability driven, which is a direct interest rates or a direct proxy for capital availability. We've seen inventory de-stocking. So while you've seen inventories increase in China, which appear to be strategic and economic, we're seeing oil inventories falling in the U.S., falling sort of globally X-China. And that sort of de-stocking, along with lower capital expenditures, they increase the fragility of

Starting point is 01:10:10 sort of the energy supply chain. So we have less investment to bring on new supply than we had prior to some of these large interest rate increases and especially relative to where we are at from a commodity price perspective. And then we also have a destocking of inventories. And I thought one of the lessons from COVID was that you wanted to have not just in time inventory, you wanted to hold some extra in case of some sort of disruption. And it appears that I was mistaken and businesses right now that have desocked were correct, clearly, because nothing has gone wrong since COVID with inventories. But, you know, when the next thing happens, then we'll find out that inventories were important again. So, so yes, I think there have been significant effects from it.

Starting point is 01:10:51 And it's one of those weird things where I think in the end I make more money from this terrible policy error. I made more money from the policy error of low interest rates. And I think value stocks and small cap stocks will do very well in the context of a higher rate environment with lower capital investment. But it's really unfortunate to sort of see, I'd rather make a little less money and make it through stock selection and finding great opportunities than having some sort of like terrible policy failure macro tailwind. We have it, which I guess is good for oil and gas investments, but I think we should have more investment and interest rates being higher are really constraining that. And frankly, even on the solar and wind side, alternatives outside of stimulus and subsidies,

Starting point is 01:11:33 higher rates are dramatically reducing investment in those categories as well. And again, I'm not a huge fan of those in their sort of current context, but I do think that we need more energy and it is unfortunate to see demand for alternatives get hurt by higher rates. And again, there are subsidies and stimuluses and so on for the purchase and manufacture and installation of those, but higher rates sort of counteract that to some extent and And they cut down dramatically on projects that aren't beneficiaries of stimulus. Josh, thank you. Thank you so much for coming back on the show.

Starting point is 01:12:11 I always enjoy getting your insights and it's great to finally have the chance to meet you. Before we close it out, I want to give you a chance to give the handoff for our audience, how they could get in touch with you and any other resources you like to share here. Sure. Yeah, thank you. I really appreciate it. It's awesome to be able to be on your guys show. So people can find me at bisoninterest.com.

Starting point is 01:12:32 We have a email list where we share various things we find interesting on a sort of monthly or so basis. And then you can also find me on Twitter. The bison Twitter is at bison interest. You can find my Twitter where I share too many random investment and energy investment thoughts, energy industry thoughts at Josh underscore young underscore one. And always happy to hear from people and get feedback. And really, it's an honor to be on this.

Starting point is 01:12:58 So thank you very much, Claire. You bet. Thanks again, Josh. 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 theinvestorspodcast.com. This show is for entertainment purposes only.

Starting point is 01:13:20 Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be ground. before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP572: Finding Value in the Oil Market w/ Josh Young

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