Are We Ready for Energy Shockwaves From the Strait of Hormuz? with Rory Johnston | TGS 218

Thus far in the war, we're at more than half a billion barrels of oil that should have been produced this year based on all of our normal expectations going into the war, but now haven't

been. If you can't fill in supply, you

been. If you can't fill in supply, you draw down too many inventories. Prices

need to rise to destroy demand on the other side. So this would be a massive

other side. So this would be a massive downshifting of the entire global economy forced by supply restraint. This

is not just a consumer kind of recessionary depressionary crisis. This

is also a government fiscal crisis because the government at this current stage is naturally going to try and shoulder a lot of that pricing pain itself. It's going to be a catastrophe.

itself. It's going to be a catastrophe.

I think that like very simple, it will be devastating.

Today, I'm joined by oil market researcher Rory Johnston to discuss the large-scale implications of the straight of Hormuz closure for the long-term and

near-term stability of global oil supply and the subsequent ripple effects on our industrial and geopolitical and financial systems. Rory Johnson is the

founder of Commodity Context, also a lecturer at the University of Toronto's Monk School of Global Affairs and Public Policy, as well as the host of the Oil

Groundup podcast. Additionally, Rory is

Groundup podcast. Additionally, Rory is a fellow with both the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Minds. Prior to

founding Commodity Context, Rory led commodity economics research at Scotia Bank, where he set the bank's energy and metals price forecast, advised the bank's executives and clients, and sat

on the bank's senior credit committee for commodity exposed sectors. This was

a whirlwind conversation on the implications to the oil markets for the straight of Hormuz situation. We talked

about the impacts on California, the impacts on North America, the impacts on less developed countries and the best case, worst case, base case scenario of

the uh unfolding situation in Iran uh in the straight of Hormuz. I actually

learned a lot on this episode and it reminded me of way back in the day uh diving deep into the oil market uh particulars. I think you'll enjoy this

particulars. I think you'll enjoy this episode. Please welcome Rory Johnston.

episode. Please welcome Rory Johnston.

Rory Johnston, welcome to the program.

Thanks for having me, Nate.

So, um, your recent interviews have been typically focused on the near-term financial and investment aspects of the oil situation, particularly now today,

which is uh, Thursday, April 23rd at 11:05 Central time in the straight of Hormuz. Um,

Hormuz. Um, no, actually it's central time. the

straight of hormuz was part of my question. Uh so today I'm I'm hoping

question. Uh so today I'm I'm hoping that we can redirect your experience to maybe a wider broader uh vantage and

maybe we'll start with some fundamental misconceptions about how oil flows in the present global economy and why these disruptions in the straight of Hormuz uh

because of the USIsrael Iran situation have ripple effects across everything.

So to help viewers understand the scale of this story that's been unfolding since the end of February, can you tell us about what actually flows through the straight of Hermuz and what fraction of

the global energy system depends on those flows?

I think it's always good in these conversations to start with what I will call the barrel counting of it all. It's

kind of you know exactly what we're talking about in a supply demand sense.

So for viewers or listeners not familiar with the oil market generally we typically refer and talk about it in terms of flow rate. So right now supply and demand or I guess immediately prior

to the war supply and demand in the global oil market was around 105 million barrels a day. Uh but given for easy math let's just say 100 thou 100 million

barrels a day of supply and demand in the market. Of that roughly 20% 20

the market. Of that roughly 20% 20 million barrels a day flowed through the straight of Hormuz of that was roughly 15 million barrels a day of crude oil

specifically and another 5 million barrels of refined products and natural gas liquids. So mostly middle

gas liquids. So mostly middle distillates like diesel and jet fuel uh that went largely went to East Africa and up into Europe and then natural gas liquids like gas condensate, natural gas

liquids like propane and and and butane etc. that largely went into petem feed or petrochemical feeds in Asia. So

that's the kind of that's the chunk 20% roughly the of the world supplies travels through this very critical maritime choke point. I've been using

references to uh Frank Herbert's Dune and the Spice because it's not so dissimilar.

No, I mean the the spice, the barrels must flow. And if you go back and read

must flow. And if you go back and read Dune in particular, it's pretty clear that Frank Herbert was talking about oil and this particular patch of geography across the world. Like this is a story.

This is a narrative that we've been watching for a very very long time. And

honestly, if you had asked me three months ago, Rory, will the straight of hormones be closed this year? I would

have said absolutely not. I have been in this market now for going on 12, 14 years as an analyst. Ever since I got into this, the perennial kind of every

year, every month, you would hear someone talking about how Iran was about to close the straight of Hormuz. It was

the boogeyman scenario forever and it never happened. Even during the Iran

never happened. Even during the Iran Iraq war in the 1980s, uh, when you had way more fire across and and attacks on shipping in the straight, you never saw

shipping through the straight stop. So,

it was always this kind of bizarre kind of thought experiment that we never thought we would see realized.

And how does this compare to previous uh crises um in the in the ' 70s or regarding Iran in this situation? So the

the overall supply loss to date is the largest supply shock in the history of the oil market. Though we have not yet felt the full weight of that pricing impact as I'm sure we will discuss.

Before getting into the kind of comparisons to historical, it's important to talk about the offsets and the kind of ways that we have reduced it from that full 1/5 20 million barrels.

In total, the actual supply hit to the market is somewhere right now around 13 million barrels a day. And that factors for a couple successful rrooings away from transits that normally occur

through the Gulf. The most notable of which is Saudi Arabia's east west pipeline that travels from the Gulf side of Saudi Arabia all the way west to the Red Sea uh to terminate at the industrial port of Yamu. And that

pipeline is about a capacity of 7 million barrels a day and you had 2 to 2 and a half traveling on it before. So

you know you've got 4 and a half to 5 million barrels a day of switching capacity in the Gulf. So that's been that's been the biggest offset that brought us from like 20 to 15. Then you

also have some you know uh a little bit of rrooting capacity in the UAE out to the the port of Fuera on the Omani coast as well as you've also had Iranian oil

bizarrely continuing to flow through the majority of this crisis thus far immediately prior to the blockade being imposed. All that together, you know,

imposed. All that together, you know, you're left with about 13 million barrels a day of production in the Gulf region that can't get out. And when oil can't get out, when it can't when it doesn't have egress, as we talk about

it, that can't go anywhere, you can't just spill it onto the desert. You have

to shut in the wells. So, this is essentially this is the real supply loss that we're dealing with is that 13 million barrels a day that accumulates that accumulates every day. And thus far

in the war, we're at more than half a billion barrels of oil that should have been produced this year based on all of our normal expectations going into the war that now haven't been.

So that could be offset by three possibilities. One, production

possibilities. One, production elsewhere. Y

elsewhere. Y two, um draw down of stocks and storage like emergency reserves or other or three uh using less.

That's correct. So I mean if we and let's go through those cuz I think all of them are going to happen to a certain extent. Um and let's for the purposes of

extent. Um and let's for the purposes of this discussion assume that Hormuz remains closed indefinitely. What would

it mean to replace those barrels? How

would the market solve that kind of imbalance? So as you know the first and

imbalance? So as you know the first and most obvious way would be someone else producing more. Um where would that come

producing more. Um where would that come from? Most notably, I think people talk

from? Most notably, I think people talk of and think about the fast cycle response rate of the US shale patch or light tight oil, which is the fastest

response rate uh between investment and production in the oil industry.

Typically, we talk about response rates in the oil industry upwards of like 5 to 10 years. US shale is more like months

10 years. US shale is more like months and that's you know still slow in the in the scheme of this conflict but very very fast in oil market terms. But the hole in supply is just way way way too

big. Um, at the peak of US production

big. Um, at the peak of US production growth in 2018, we saw US production grow by 2 million barrels a day year-over-year, which was the fastest that any country in the history of the

oil market had grown supply. That alone

would take half a you know uh, you know, six plus years to fill in uh, the supply hole. So that's that's not an option. We

hole. So that's that's not an option. We

can't we can't have an imbalance for you know half dozen years. On top of that, you've also got like the main areas of nonopc supply growth generally right now are entirely concentrated in the

Americas in the United States, Canada, Guyana, Brazil, and Argentina. All of

those producers will produce some this year, but overall we're probably talking, let's say, 1.5 million barrels a day of expected growth this year against a 13 million barrel a day hole

in the market. So supply is there, but it's not going to be fast enough even with higher prices. The next I think chunk is stocks. Now the important thing

so I always think of the oil market as like the world's largest stock and flow model. And what we mean by stocks are

model. And what we mean by stocks are basically any barrel that has been produced out of a wellhead but has not yet been consumed by an end consumer.

But that flattens a lot of stuff in that stock pile. That's oil and water. You

stock pile. That's oil and water. You

know any tankers on the ocean that are between point A and point B count as a stock. um pip you know oil barrels that

stock. um pip you know oil barrels that are in inventory or sorry in transit on a pipeline similar it's it's you know flowing but it hasn't been consumed and has been produced so it's a stock all of

this kind of stacked together you have roughly 8 billion barrels of stocks in the global system that we generally know about but of that only about 3 billion

or so are actual commercial stocks in advanced OECD nations that we track and even then that includes things like pipelines and everything else. So it's

really the functional usable the workable inventory is probably more like 1 one and a half billion barrels. And

point number three and point number three and I should also say of that stock aspect you know strategic inventory is strategic reserves are also part of this that um

when you have know the the IEA through this crisis announced its largest coordinated strategic stock draw in history of 400 million barrels uh out of

the 32 IEA member states. In the way I view the oil market, I view SPRs or strategic petroleum reserves as stocks but not as proper inventory because the

decision to build an SPR or draw down an SPR is a discretionary policy choice by politicians by policy makers rather than

by you know the market per se. Whereas

commercial stocks I I treat essentially as the cumulative residual of this market. If it's over supplied, they need

market. If it's over supplied, they need to catch that and that needs to rise. If

it's under supplied, they need to catch that. It needs to fall. And the final

that. It needs to fall. And the final piece of this is after everything is said and done, and again, we can't draw down inventories to zero. If oil and water went to zero, there would be no global oil market left. That's just as

simple as that. So, the final step is if you can't fill in supply, you draw down too many inventories, prices need to rise to destroy demand on the other side. And that is I think you know just

side. And that is I think you know just for even general scenario here again we're assuming Hormuz remains closed indefinitely let's say you need to destroy 10 million barrels a day of

demand that was roughly the average demand loss through 2020 through co over the annual average um but we would need to achieve that demand loss not through

kind of you know heavy-handed top- down government policies about no flights or lockdowns or whatever. But we would need to do it entirely through the kind of more brutal logic of market pricing to

say you push prices so high that people will consume less and that's the only way this pro this market will solve if it's not given other options or or some combination. There may be

some of that rationing stuff. So I'm um I haven't had an oily person on the podcast in quite a while and I had like 20 questions for you and now I have 40.

So uh please please forgive me. So we

talk about roughly 20 uh million barrels a day uh and that the world uses 105 uh roughly.

Yep.

But there are a lot of countries in the world if we if we look at all the millions of barrels that we burn a lot of those are burned internally in Russia and the United States and Saudi Arabia

and other places for their own industries and and people. So what's

purchasable in the global market is only 50 55 million of that total. So in some ways that 20 million is a much larger percentage of the oil available for

markets to purchase.

Yeah, absolutely. And I think you know the vast majority of those barrels from the Middle East are historically sold into Asia. Um and that is where you've

into Asia. Um and that is where you've seen the kind of epicenter of this demand loss. And the other thing I

demand loss. And the other thing I should just note here is when we talk about demand destruction, I think it's important to kind of specify what we mean because I think it means different things to different people. I think when

I think about it in general terms like in in a normal recession with high oil prices um like in 2022 for instance um what we would have talked about would be there are you know the two main types of

demand destruction. So uh price elastic

demand destruction. So uh price elastic demand destruction. So pump price is too

demand destruction. So pump price is too high. So I decide to take a bus or over

high. So I decide to take a bus or over a long enough timeline I decide to purchase an EV to kind of remove that from my bicycle.

Right. Exactly. Or a bicycle. And then

the other option would be income elastic demand destruction. So high oil prices

demand destruction. So high oil prices stress the global economy. Uh you the firm you work for goes bankrupt and you don't have a job to drive to. So you

that you know there's a loss there as well. Um but on top of this we also have

well. Um but on top of this we also have this third kind in this crisis which I think is unique which is just given how large the shortfall in supply has been

and how slow these barrels typically move around the world. We've had this floor drop out of supply in Asia and you've had a lot of demand destruction

per se of like unfulfillable demand, but those individuals would pay more if they could get a barrel. But it takes time.

And one of the weird things with this crisis so far is that it's it's moving at the speed of tweet, whereas oil tankers take a month and a half to transit around the world.

Yeah. So, we have a molecule shortage.

Uh but there's also um a trust and time and complexity aspects to all of this.

And there's in in many ways I mean I'm hoping that this uh crisis resolves quickly though on April 23rd. I

just don't see how they're so far apart and I fear that between now and the time this episode airs there will be new bombs and who knows what. But even if it

were to end now, um because of the time lag, there's a pig in the python sort of thing that in many ways our culture has

metaphorically hit an iceberg and the band is still playing on the top uh you know deck. Y

know deck. Y and it seems like Asia will be hit first and there's rationing and Bangladesh and Thailand are closing schools to conserve

electricity and you know Philippines declared a national emergency and things like that. the US which is largely

like that. the US which is largely energy independent that we can talk about a lot of that also has to do with uh imports of of gross oil that we

combine with our light tight oil to make products but we don't see it quite as much other than WTI prices are around 100. Um, but why don't you explain the

100. Um, but why don't you explain the the time the the the the fuse here that's going on? Like the ships have finally arrived most destinations from

pre prewar and now they're not arriving or they're arriving uh less frequently.

So unpack that for me. The difference

between Asia, Europe, the US, Africa, etc. Yeah. So the important thing to remember

Yeah. So the important thing to remember here is that these ships like these tankers take a long time to travel around the world. They do not move especially fast in the scheme of things.

How how long do they take?

It depends on the region you're going, right? It takes longer to go. of a

right? It takes longer to go. of a

tanker that left Hormuz immed like the day before the war started. It would

take roughly 3 weeks for that ship to land in East Africa, 4 weeks to land in East Asia, um and again I should say probably two two to three weeks to land

in India, 5 weeks to land in Europe, and then 6 weeks, 7 weeks to land in the United States and Australia. So to this point we I've been describing this as essentially an air pocket that normally

this system normally this trade on on the water operates like a floating pipeline and I keep this when we talk about the market in millions of barrels a day it's because the system must flow

on a daily basis. Refineries have to keep running on a daily basis. They're

like giant you know flowing chemistry sets. Um any interruption kind of makes

sets. Um any interruption kind of makes that untenable. So, this is why it takes

that untenable. So, this is why it takes time to get to where it's going. And now

that those final tankers have landed and there's nothing behind them but air, now we move to that stage of okay, now we're starting to draw down stocks

and we're using the uh emergency by the way strategic petroleum reserve to trick us into feeling that there is no real crisis. H how how far draw down is the

crisis. H how how far draw down is the the US reserve? Do you know?

Yeah. So prior to the crisis it was just over 400 million barrels out of out of full would be what 8 89 give or take.

Okay. So it was already below half.

Yeah. So it got drawn down by the by administration and prior to this the largest SPR release in history uh following Russia's invasion of Ukraine.

At that stage it was about a 180 million barrel uh 80 180 million barrel total release.

Um and that was the big one at the time.

And the politics of this in the United States in particular are very, you know, sideways because and I think part of the reason and one of the interesting things that we've seen with the USS SPR release under Trump is that they've actually had

trouble getting the barrels out the door as quickly as you'd want in a crisis.

And that's because they've structured them as these so-called exchanges. And

one of the authorities at the SPR is to either do an emergency release like just, you know, dump them onto the spot market like what Biden did in 2022. Um,

but this time because Trump spent so long through the past couple years lambasting the B administration on drawing down those SPR releases or those SPR reserves, um, they've structured it

as an exchange. But the challenge is is that it puts more logistical and kind of risk on the count on the counterparty, the person that would be taking that barrel because they need to basically

contract for a redely, a return of barrels and kind with inkind interest.

So it's actually slowed the pace of releases out. But overall in the, you

releases out. But overall in the, you know, when we're talking about 400 million barrel release, um the IEA member states are, you know, they estimate that the total either

explicitly government controlled stocks or commercially held but governmentmandated stocks for these purchases for these purposes were roughly around 1.2 billion barrels. So

this release 1/3 of total IEA reserves and the US is now down to how much? 800

million would be full and we're down to roughly how much?

So we were at about 400 million, you know, 420 million prior to this and we're probably down, let's say, uh, by the end of this release cycle, just over half of that. So just over a quarter of

the total reserve.

So we're down to a 200 out of 800. And

and I want to get back to Hormuz itself, but um can you just briefly because you're one of the few people that would actually know the answer to this probably we can't draw that two that

that 800 million to 400 to 200 all the way to zero because there's some minimum threshold that needs to stay in there.

Uh am I right about that?

There could be some at the very very very bottom. But most of this is

very bottom. But most of this is basically uh managed by kind of you know pushing brine into the system to basically push the oil up. Um but one of the criticisms that has historically

been leveled about these releases and was heavily criticized the B administration for this large release was that these they claimed that these releases damage the reservoirs but

in actuality it's actually the funny opposite that these these these reservoirs these caverns which are essentially dissolved salt caverns were

specifically designed for big chunky releases all at one time. And what's

actually damaged them is that prior to the B administration's release or this release, most of the releases were small and kind of back and forthy. You know,

there was a hurricane, so we'll release 40 million barrels or whatever. It's

those small releases that were actually more damaging to the reserves than the large ones were.

So, just to put in context, the strategic petroleum reserve has roughly 200 million barrels now. The United

States uses two 20 million barrels a day. So without any other sources, and

day. So without any other sources, and we do have other sources, that's 10 days of our production. I mean, our our consumption uh and this isn't an emergency. I would hope that those would

emergency. I would hope that those would be truly used for an emergency. But I

digress. How are those ships that are now we are six or seven weeks past uh the the start of the closure what's happening uh with the loss of barrels uh

and how does that translate to actual energy shortages in China um Asia Africa etc. Part of our challenge is that we don't have complete total visibility on the

entire global stock system. So it means that we can only kind of look at what we can see and it just for let's talk about the kind of technology of it for a second because it's actually quite interesting. Um, a lot of these

interesting. Um, a lot of these estimates are of, let's say, stock changes are derived by satellite imagery because for those that aren't aware, crude oil storage tanks typically have

floating roofs. And this is to basically

floating roofs. And this is to basically make it so that you if you had a a fixed roof tank and these petrochemicals are volatile elements, they would build up gases in that empty space, which is bad

and explosive. So you have a floating

and explosive. So you have a floating roof, so it kind of goes up and down with with the level of crude in the tank. And by using SAR satellite

tank. And by using SAR satellite technology or even just optical, you can measure the angle or size of the shadow cast along the top of the roof and

estimate based based on that how full it is. So that is how we get these high

is. So that is how we get these high frequency estimates of crude oil inventory in the global system.

I didn't know that.

It's very very cool. The challenge is is that we can't do the same for refined products cuz refined products like gasoline can't have a floating tank. So

we have to wait on government you know statistical estimates. uh survey

statistical estimates. uh survey estimates typically for knowing how much is there. So we know how much crude and

is there. So we know how much crude and product is on water by tracking tankers.

We know generally how much crude is in global visible commercial above ground storage tanks. We can't see underground

storage tanks. We can't see underground storage like the SPR anything else. But

this is essentially what we can see. And

what we do know is that through the first call it two weeks of April, the global system between visible crude

inventories and um tankers on water drew down at a pace of roughly 10 million barrels a day for the first twoish weeks. If that that's roughly what we

weeks. If that that's roughly what we would expect to see in a release or or or in a in a supply shortfall of this magnitude. Again, presumably there are

magnitude. Again, presumably there are also product draws elsewhere that we can't see or can't confirm yet.

Typically in the oil market, I like normally my life is following like monthly data releases and kind of making charts and most of the data we use is lagged by 2 months. Unfortunately, a

two-month lag is before the war and quite nonrelevant to us anymore.

So, we really don't know. So, that's the challenge.

So, many people are likening this uh horm situation to similar events in the 70s and 80s. And how accurate do you think those comparisons are and where does the story uh diverge from from the

past?

Yeah. So I think that in terms of the realized loss of supply today, it's larger than anything we saw in the 70s

uh in the 80s u through either the kind of 73 oil embargo or the 79 Iranian revolution.

And and here we are with stock markets at all-time highs.

And here we are with stock markets at all-time highs. So let's unpack that

all-time highs. So let's unpack that because I think that I think there's two things that are important to kind of note. First is that relative to the

note. First is that relative to the 1970s, the world is much much much more energy efficient and much less oil inensive today as it was then. So as a

general thing, you know, each loss, you know, a, you know, pump prices going up is, you know, erodess disposable household income less today than it did back in the 70s just in terms of the

portion of the budget that goes to those products. So I think there's on one

products. So I think there's on one level, we're less dependent today. On

the flip side, you can almost say each barrel of oil today supports more economic activity than they did back then. So it's it depends on which way

then. So it's it depends on which way you're looking at it. Um, but I think the other thing, so the I published a report this morning called uh the sanguin straight stoppage uh talking and

trying to steal man why the oil market has so far reacted relatively optimistically to the largest supply shock in history.

Well, I mean I mean it's still doubled.

The price has doubled in in a couple months. So it hasn't gone up to $200,

months. So it hasn't gone up to $200, but it's still quite a quite a shock.

Yes, I think it's the financial markets that are that are missing some aspects of this. The oil market is different, but

this. The oil market is different, but please tell me your conclusions.

Going into this war, or at least immediately prior, we started the year around $70 on a barrel of Brent. Today,

we are sitting at on my screen as I'm looking $103.50.

That is high, but it is not as high as we would have expected it to be after 2 months of the largest supply shortage in history. and and WTI was in the 50s

history. and and WTI was in the 50s before this and I don't know where that is this morning 90.

Yeah. I think and I I and and probably just just shy of just shy of Brent right now. Two main things drove this in my

now. Two main things drove this in my opinion. So the first thing and I always

opinion. So the first thing and I always stress this and I think in some ways my own disbelief in the pricing violated my own cardinal rule of the oil market which is that oil markets and commodity

markets are not actually that good at being forward-looking. When we look at

being forward-looking. When we look at things like the equity market, we look at broader markets, we always talk about them as being forward-looking. Uh it

doesn't matter what's happening now, it's what's going to happen. Oil markets

and commodity markets where have where they have physical spot market clearance dynamics um require the curve which so we're talking about the futures curve to incentivize

a a closure of whatever gap exists in this in the spot market. So if there's an over supply uh basically you bid down

or you discount spot deliverable or ASAP deliverable barrels relative to the future which in an extreme example 6 years ago oil went to negative $30 a barrel for a

brief period which makes no long-term sense. no long-term sense. But, and

sense. no long-term sense. But, and

again, like no one could look at that and say, "Well, well, that's weird." You

know, uh, but what it's essentially doing is when there's an over supply in the market, um, you need someone else to take it and store it for you. And

storage costs money. It costs the tank, uh, you know, rental rate, it costs the financing rate, insurance, all that stuff. And the so the deeper the

stuff. And the so the deeper the contango, we call it this this discount on spot barrels, so you have an upward sloping futures curve from present to future. People typically think that's a

future. People typically think that's a bullish view because the market's saying prices are going to rise. I think it's actually the opposite interpretation.

It's saying right now prices are really really weak and overs supplied. So we

need to figure out a way for the market to pay for that storage. So, if you were a holder of inventory um or you you had empty tank space and you were in the

bottom of 2020, you could buy a barrel in the spot market, you could sell the same barrel a year later or 6 months later and as long as your storage cost

was less than that spread, you could print money risk-free functionally. And

that's how the market clears this over supply. In undersupplied markets in what

supply. In undersupplied markets in what we call backwardation where the curve is downward sloping so you have a premium on spot deliverable barrels the mechanism is the same but I think it's

slightly less counterintuitive because it's not like you're paying for not storage. What you're really doing is

storage. What you're really doing is you're creating an economic opportunity cost for anyone that holds storage not to release the barrel into the market.

Because in the same way, if you had a barrel and you didn't need to consume it this month, you could sell that barrel to the market today, buy the same barrel back in a month or two and basically

rent the barrel to the market and that earns you uh kind of returns. But I

think that is that that's the way this market clears. That's the way the market

market clears. That's the way the market has to clear.

So relative to before the crisis, um you said Brent went from 70 to 103 and WTI went from the upper 50s to around the same. How much is like a year out or 18

same. How much is like a year out or 18 months out? How much has that gone up

months out? How much has that gone up oil prices?

I'm actually just going to I'm going to pull you up Z7 which is December December uh 2027 because I think that's a nice a nice round number. So that went

from at the at the end of February was around $65 a barrel. The curve I should note at the beginning of this crisis the curve was very flat. Um we were actually transitioning between an undersupplied

market of backwardation to an overs supplied market. But to your question,

supplied market. But to your question, so we've seen a $10 a barrel increase in December 2027 deliverable Brent crude from 65 to around $75 a barrel.

Okay, here's here's where I want to go next on this. Um, let's put a pin in that because I want to come back to that. So in terms of infrastructure

that. So in terms of infrastructure damage in the region around Iran uh UAE, Kuwait um all all that area what sort of

damage has already happened and what are the biggest risks to future infrastructure and production if this conflict continues?

So let's split it in two. So I think let's talk about what we already what's already happened. I think thus far to

already happened. I think thus far to our knowledge there has not been extensive damage to upstream oil and gas infrastructure. So the wellheads but I

infrastructure. So the wellheads but I should say with a massive caveat here that many of the Gulf monarchies we're talking about some of the most kind of heavy-handed states in the world um they

have kept the knowledge and information about the extent of damage to industry infrastructure very very tight to the chest. We'll have to split that question

chest. We'll have to split that question in two. There hasn't been damage to the

in two. There hasn't been damage to the well heads, but if they're shut in, there might be damage to future production, especially in the older, not super high-tech uh wells and fields.

Yes.

Yeah. So, one, the reason that people don't like shutting in production is because particularly these conventional wells, which most of what we're talking about, the vast majority of what we're talking about in the Middle East is, you

know, the the oil comes up via natural pressure in the reservoir. Um, if you start closing that down willy-nilly, there's a chance that you could spoil

that pressure. Um, but there's also, you

that pressure. Um, but there's also, you know, potential that you can actually get more pressure out the other side.

So, there's there is both sides. I think

if you were in more areas of the world, I think this would be a bigger concern.

But given that these wells in the Middle East are the ones that are have historically been the most reactive to say OPEC policy, if we're going to have anyone shut in production, it should be the Saudis and the Emiratis because they

have a track record of being able to turn this stuff back on.

But what about the Iraqis and the Iranians?

Iraq and Iran and even to a degree Kuwait are a bigger open question. Iran

to our knowledge has not had has not been forced into extensive production shutdowns yet. Uh one of the weird

shutdowns yet. Uh one of the weird things of the crisis thus far is even though the straight has remained closed, Iran has continued to export oil through the entire crisis up until very recently the imposition of the blockade. But that

is that's weird. What we have seen confirmed damage is to what we call downstream infrastructure. So

downstream infrastructure. So refineries, petrochemical facilities, etc. That is, I think, the biggest open question that I have. And I think that

we're only really going to know is when we when we get new empty tankers into the Gulf, when this thing finally ends and let's say Kuwait, uh, which is a large historic export of refined

products, we need to be able to see, are they loading crude or are they loading diesel and that I think is going to be the only moment that we're really sure of the extent of the downstream damage

to the to the assets. And we've largely been speaking about oil, but there's a lot of natural gas that comes through the straight as well. And I know there's

been some uh um damage to some LG export facilities in Qatar and and elsewhere.

Do do you have any color on that?

Yeah. So my my only caveat here is that while I have have historically covered natural gas, it is not my main thing. So

I know just enough to be dangerous. But

to this point, the only notable upstream damage we've seen to infrastructure in the region has been in cutter. And this

was about the third week of the war uh when Israel attack attacked um Iran's south pars gas field uh which Iran shares with cutter. When Israel attacked

and Iran counteratt attacked, the damage done was much more extensive. And what

we've seen confirmed by the cutter energy CEO uh to Reuters said that it reduced cutter's LNG export capacity by 17% for

up to 5 years. And I think that is when we talk about the risk here. When we

talk about the risk that fighting could reignite in the worst case scenario, the big big risk to the market is that we see that 13 million barrels a day of production. Right now we're talking

production. Right now we're talking about that recovering in weeks to months.

Well, it could be it could be 20 million because both ends of the pipeline in Saudi Arabia could be under fire easily as well.

Absolutely. And and I think most notably we know that you know the the Saudi eastwest pipeline terminates in the Red Sea and those ships all go through the Bab Elmand Strait which has to pass

through the Houthies which are a longtime ally of Thrron. So this is something that we still have a lot of things on our scorecard of ways that

Iran could still escalate the crisis that it hasn't yet taken. If Frank

Herbert could see this now, there are so many reasons to immediately stop this crisis and yet yep I mean it's well we don't have to get

into I mean there there are religious forces uh on all sides that are pushing for something but it's from a understanding the underpinnings of civilization standpoint and a risk

averse standpoint this needs to stop like right now. Um,

so with your caveat that you're no longer a natural gas specialist, but let let me ask you this. If you look at the forward strip for 2027

natural gas, the United States prices haven't budged. They're like $3 uh per

haven't budged. They're like $3 uh per MCF per million. Keep your feet. And in

Europe, it's in the mid20s, like 21 $22.

So it's like 7 to n times more expensive in Europe. Y

in Europe. Y so in this unless this situation resolves this is hella big economic wallup to the European countries

European and Asian essentially anyone that depends on LG imports and again my caveat that I'm not a gas guy anymore but I know just enough to kind of explain this part I think one of the

weird things about natural gas is that LG like the liquefaction process depending on where you're looking at it could be viewed as as kind of upstream

of the LG sector or midstream or even downstream for the natural gas sector itself. Let's say in North America where

itself. Let's say in North America where LG is a relatively new entrant to the system. So the main thing that's

system. So the main thing that's important for US natural gas is the balance of supply and demand in continental North America where LG

exports effectively are a demand sync uh from that equation. But we just have so much gas in North America that even that, you know, we can't push out LG fast enough to close that. So you're

going to have this massive gap and we have seen this between North American prices, gas prices and Asian prices and European prices which in the context of the current moment particularly in the

current moment of let's say you know massive scale AI investments and all this stuff about power has become a very uh kind of particular advantage for

North American industry in this crisis today. almost makes you think it's uh um

today. almost makes you think it's uh um purposeful to win the AI race. Chuckle.

Chuckle. Yeah. I think the I hear this a lot. Um and it's all I should say

lot. Um and it's all I should say nothing's impossible, but I would say that my prior on this is that President Donald Trump never meant to get into this war in this kind of state. I

agree with that.

Um I think a lot of people there's a propensity to say it's all about AI.

It's all about strangling China. It's

all about flexing US energy dominance on Europe or whatever. It's all about humans and energy and optimal foraging and delusion and war and it's just a

modern manifestation.

Yeah. Hubris. I forgot that one. And

risk. I mean I mean Donald Trump thought this would be Venezuela 2.0, right?

Yes. So this is the this is the downside of a real success like Venezuela success. Um because then you get

success. Um because then you get emboldened. Hey, let's do this in the

emboldened. Hey, let's do this in the Middle East and now look at what's happening. So um getting back uh what

happening. So um getting back uh what what do you think the worst case, best case and most likely scenarios that you anticipate for how the straight of Hormuz situation resolves with all the

caveats on politics that we don't really have an idea what's going to happen and if we do see the best case emerge like a total end of sessation of violence and a

and a ceasefire starts before your interview is aired, how long would it take for the circulation of oil and gas to get back to some sort of normal normal situation if that's even possible

and then I have a followup to that.

Yeah. So, let's let's look at the absolute best case scenario. So, the

latest we've heard is that President Donald Trump believes the ceasefire lasts to Sunday. Again, we're we're we're uh we're recording this on Thursday. So, that's the latest is that

Thursday. So, that's the latest is that it goes until Sunday and that he's very confident like he always is that we will have a deal signed by Sunday night. So,

in the most optimistic world, we sign a deal Sunday and by come Monday or Tuesday, the straight is completely reopened and we start getting tankers out and tankers in and everything else.

Okay. I I think that's implausible, but I hope that's the case. And if that happens, what do you think?

Yeah. So, I would agree that it's implausible. Um, but let's kind of go

implausible. Um, but let's kind of go through what it would look like because again, this is the best case scenario.

In that case, we would it would take, you know, we still have almost a thousand ships that have been trapped in the Gulf now for upwards of 2 months.

We're talking about 20,000 seaf farers that did not plan to be stuck in the Gulf. This is a humanitarian crisis on

Gulf. This is a humanitarian crisis on top of everything else.

What are those people doing? Like just

playing sitting there on their phones and do they get to go into Dubai and have a shore leave or what?

Well, so that's actually been it's been a major kind of humanitarian crisis because the many of the Gulf States has have refused these crews.

Oh my god, those people. So these these people are stuck in no man's land and international water and for many of them they I mean you don't have food stores

or fresh water stores for that long. So

people they were they were have been so to the credit of these of these Gulf states they have not let them land per se but they have been sending crews and

ships out to resupply these vessels. So

that in itself is one of those um second, third, nth order effects of this that is inflationary because this is a good portion of of the uh labor pool for

that industry and they're going to go home and be like, I ain't going through that again.

Yeah. I I mean definitely not going to the Gulf again. Um, so I think that if if that so let's say upwards of a thousand ships that need to clear out uh prior to this in the best case scenario

we had kind of 130 to 150 ships.

Wait wait wait a minute a thousand ships and only 20,000 people there's only 20 people on each of these ships.

Yeah. A lot of a lot of them have fairly small crews. Um cuz I mean in in the

small crews. Um cuz I mean in in the scheme of things, it doesn't take that much to captain and direct these massive ships, but again it needs enough people

and that's so they basically all live in those kind of you know most of the ship is just holding oil as an example. The

people are all in that little little command pot up top. So it's going to probably take a month or two for those ships to get out even after this is all done. It's going to take a while to clear those ships out again

where they've all been trapped and stuck. Then there's also the question

stuck. Then there's also the question because we don't just need to get those ships out, we need to get new ships in.

Uh so there's two issues with that. You

noted one, which is who wants to sail back into who wants to sail back into the Gulf? Probably not the people that

the Gulf? Probably not the people that have been stuck there for 2 months. So

that's going to be a a behavioral inhibiting factor. Also, um there has

inhibiting factor. Also, um there has been a large exodus of tankers from the region. For a while they were all

region. For a while they were all waiting on the we'll call it the good side of Hormuz uh the world's side of Hormuz waiting for the street to reopen waiting to go and refill. But tanker

rates the kind of you know the the price charged by these by these tankers are very very high given there's a bunch of them trapped in Hormuz and they're like well we should do something with the time. So many of them have diverted away

time. So many of them have diverted away from Hormuz. most of them have diverted

from Hormuz. most of them have diverted to the US Gulf Coast, whereas the main location of available swing supply in the world now is North America. Back to

this question of kind of North American energy dominance. I'm up in Canada, so

energy dominance. I'm up in Canada, so some of those barrels are Canadian, I should note.

But even there, and I I there's questions embedded in questions here, and I I still want to get to your best case, but even there, we are not a net exporter of oil. Yes,

we are a next net net exporter of oil product but our refinery inputs are like 30 or 40% international I mean other oil that we add our domestics of supply and

then we have a net gain. So net net we're exporting product but we're not independent on that front. So there's a little bit of a miscommunication I think in the news on that.

Yeah. So what we talk about with the United States is it's a net petroleum exporter and some of those are refined products but the vast majority of the difference between you know crude production proper which is around 13

million barrels a day for the United States.

Y but then on top of that it has 7 to 8 million barrels a day of natural gas liquid supply.

We're an exporter of baggies.

Exactly. I mean a lot of this is petrochemical feed for for China in particular and this is essentially it is it's a liquid so it's counted in that 105 million barrels a day market but it

is not crude oil specifically and is generally extracted from what we call heavier streams of natural gas where it has these molecules in it cuz natural gas itself is methane and the the you

know you add kind of carbon molecules to that and then you get you know you know C2 you've got ethane C3 propane up you O to uh butane then pentaines and all of

these are considered natural gas liquids. Some of them are more useful as

liquids. Some of them are more useful as oil than others like pentains for instance is is often referred to as natural gasoline. But ethane is so close

natural gasoline. But ethane is so close to natural gas it's either used as petrochemical feed or we even if you know ethane prices are cheap we we see what was called ethane rejection and

they basically keep it in the natural gas stream. It just increases the heat

gas stream. It just increases the heat content slightly of natural gas. But

this is this kind of, you know, the the line between hydrocarbons is very very blurry because they're all functionally the same thing just manifesting in different forms ever, you know, straight

from natural gas all the way to coal.

I I want to get back to the best case, worst case. Um but just on this point um

worst case. Um but just on this point um is there a risk if the situation continues that the US will be out of

certain uh refined products this summer for example and sub sub question to that is California different than the rest of the US?

So let's start with the California question because I think California is the most directly exposed to Gulf flows given it's in the Pacific basin and there aren't really any pipelines that connect it with the rest of the United

States. It's kind of an island from the

States. It's kind of an island from the perspective of oil trade. Prior to this crisis, it was even more of an island because you couldn't reliably ship uh products, say they were exported from

the US Gulf Coast, the West Coast, because of this nasty thing called the Jones Act, uh which prevented tankers uh b the only tankers that could service trade between US ports needed to be

built in United States, owned by US companies and crewed by Americans, which is a ve is a vanishingly small portion of the global tanker fleet and basically nothing, you know, uh economical. But

one of the things that the White House has done through this crisis, it has temporarily waved the Jones Act, which is a big deal. And one of the things this does allow would be to allow for

say some product from the Gulf Coast to transit through the Panama Canal and up into Pad 5 or you know uh the west coast of of the United States. Um, so I do

think that in general, while you do get some, well, the United States does get some oil from the Middle East, of the roughly, let's say, 6ish million barrels a day of of crude oil imports that the

that the US imports, um, versus that kind of 13 that it produces, 2/3 of that comes from Canada. So, I'm up in Toronto, so I spent a lot of my time on Canada US oil trade. And one of the

unique energy security elements of that relationship for the United States is that the vast majority of those oil exports from Canada to the United States

go on fixed pipelines. Um that terminate largely in the Midwest of the United States through the Chicago area. Um some

of it does go down as far as the Gulf Coast, but generally most of that is captive from the perspective of the current market. So those barrels can't

current market. So those barrels can't be as easily incentivized away. So when

we're talking about the impact of this shortage on North America, it really comes down to a question of trade exposure. So you're going to see

exposure. So you're going to see basically global prices at the west coast and the east coast of the United States barring any you know potential trade tom foolery from the Trump

administration because they could for instance ban the export or put a quote on the export of refined products which could muck this up a little bit. But in

general, I would say that and my expectation is over a long enough period of time, if those trade linkages can all work, most advanced economies in the

world likely will not see kind of structural shortages that because you have a higher propensity to pay a lower price sensitivity in these regions relative to poorer areas of the global

south, which if this if this system if this crisis was allowed to play out for a long time, um you would see all of those global south barrels pulled into the global north. So global north would

see very high prices, but the global south would see functionally outright physical shortages.

Hasn't that story repeated over time?

Let's spend a minute on that. Um you and I both are are basic I mean there is a best case that by the time this interview airs there's a ceasefire and it continues and we begin to have fingers crossed.

Yeah, fingers crossed.

The most likely case is that this continues. Um and I don't want to talk

continues. Um and I don't want to talk about the worst case but we should maybe mention it uh a little bit but tell me about the um the less developed countries and the different price

sensitivity and the fact that they will be priced out of barrels especially those countries that a meaningful percentage of their GDP is energy

imports. What what does that look like

imports. What what does that look like and maybe name some specific countries?

Yeah, I mean it's going to be a catastrophe. I think that like very

catastrophe. I think that like very simple it will be devastating. Uh when

we see when we think about how trade fulfills demand and balances kind of national national levels essentially what we you think about oil is always

priced on the margin. So what you and so what you need is you need the marginal demand from say a country like you know uh Thailand or Pakistan. They need a

high enough price to incentivize a tanker somewhere in the world to travel there instead of somewhere else. So as

soon as a barrel is on water, it's going to go where the highest price signal is.

Right now, those are still largely coming from Asia because that's where the the shortages have physically hit.

But we know that these countries do not have the pricing power to compete with Europeans or North Americans or or or or people in Japan or Korea or wherever.

And part of that is because they can't print their own currency in a in a problem uh they have to use hard currencies to buy the stuff.

Part partly that but I also just think like the average I mean even if you have wealthy like very wealthy people in these countries which all these countries do have wealthy people um they're not consuming the marginal

barrel at the gas station. So even if they can afford it because that average marginal demand isn't there they just won't have anything at the gas station.

And we've already started seeing this like there's a particularly infamous example now going back to 2021 2022 when natural gas prices were blowing up globally uh even before Russia's

invasion of Ukraine. Um but there was a there were a couple instances where uh tanker LG tankers that had been going had been scheduled and committed to going to Pakistan basically broke those

term contracts uh paid a penalty and then sailed to Europe. And the

difference between the prices in Pakistan and Europe were so large that they could easily kind of justify the breakage fee as part of it. It's just

kind of this like the the brutal logic of a kind of a freely traded capitalist global system.

Could you unpack with a few sentences of what you mean by the word devastating?

Yes. I think that let's look at let's look at India and Pakistan as an example. When we talk about petroleum

example. When we talk about petroleum demand here in North America, we're typically talking about gasoline, we're talking about jet fuel, we're talking about being mobility, uh things that

help make our lives easier. But if we can't drive for the day or the week or whatever, there are alternatives. It's

harder, but we will figure out a way to get by. In India, as an example, between

get by. In India, as an example, between uh a fifth and a quarter of total petroleum demand in India comes in the form of LPG. So liqufied petroleum gas,

largely propane and is used for home cooking fuel. Uh, and I think that

cooking fuel. Uh, and I think that that's the big difference here is there's a difference between not being able to drive your car and not being able to cook food. So when we talk about the consequences there, the alternative

is wood burning in your house, burning animal dung. Yeah. And I think that that

animal dung. Yeah. And I think that that is there is a like a, you know, a hierarchy of need here. And much of the global south uses petroleum for much more kind

of life necessary processes rather than conveniencebased ones. And I think that

conveniencebased ones. And I think that will be the difference is I mean in some ways thank goodness this is happening during the summer because if it was happening in the winter you would have an even worse situation because you

would then have a more demand on heating fuels. Um so hopefully this is just a

fuels. Um so hopefully this is just a summer thing and it doesn't extend through the winter because I think it's even worse again. Well, the other thing, and again, um, we're going to run out of time before I run out of questions, but

I am hopeful, and I've actually framed it in a few of my monologues recently, that this is a dress rehearsal, and we treat it as such. Um, because one of the core themes of my work is that our

culture is energy blind. We don't

realize how powerful this stuff is in supporting our our current lifestyles.

And I think we take it for granted. And

this may be like one of those times where we start to appreciate what energy does for us a little bit more and maybe make different decisions about the future. If if it's possible, we could

future. If if it's possible, we could have a cultural learning moment these days.

Yeah. And actually just just quickly on that because I think in some ways people think about this crisis we're currently facing in the same kind of that it rhymes with 2022 because that was the

last energy crisis everyone has in their minds. And I think it's really important

minds. And I think it's really important to note the very very big differences between those crises because I think people are flattening them as the same thing. And I was having a conversation

thing. And I was having a conversation the other day where someone was like, well in 2022 everyone was all worried and oil prices ended the year lower so like they'll probably just do the same

again. For perspective here um in 2022

again. For perspective here um in 2022 the peak of concern was when Russia published its oil market report. It's

kind of the most watched industry kind of fundamentals outlook um in April and they warned that we could lose 3 million barrels a day of Russian production from the global system.

We are already at more than fourfold that consequence. And I should note we

that consequence. And I should note we never actually realized that level of Russian supply loss. We only maxed out at maybe a million barrels a day for two months before it recovered.

So maybe the the market's reaction to this is similar to Trump's reaction to Venezuela uh um project. I I think hugely hugely so it's very informed by that. So anyone that's like not a deep

that. So anyone that's like not a deep barrel counter is like ah well these things rhyme they'll turn out the same and you know there's a chance they still could but for very different reasons.

There's also a geopolitical aspect to this that um my work uh likens humanity to a metabolic superorganism with energy

as kind of the the veins and the arteries um the hemoglobin that goes through our veins and arteries. And I I think now that this has happened, even

if a ceasefire happens, we have this this fracturing of the superorganism now between east and west and energy

security and um access to molecules and and um uh materials and and commodities and resources.

The game theory has shifted now forever.

and and so I think part of the the future strips in oil and gas and everything now there's a um who's partnered with who and who has contracts

and military and and I think it's it's changed our world forever. Uh and and how do you think how what do you think about that? Yeah, and I actually think

about that? Yeah, and I actually think this is a great moment to get back to our kind of optimistic scenario because in the in the most optimistic scenario, this ends, right? Already we've had

almost 600 million barrels of unproduced oil in the system accounting for that lagged return. Even the best case

lagged return. Even the best case scenario, if Hormuz reopened May 1st, uh we're looking at upwards of a billion barrels of oil not produced this year.

That's the best case scenario at this stage. We're talking 10 days of global

stage. We're talking 10 days of global consumption equivalent. Um so I think

consumption equivalent. Um so I think that's a lot of oil and again relative to say maybe like three billion barrels of OECD commercial stocks that's a huge chunk of it and a mass even larger chunk

of working uh inventory space.

But in this scenario I think what we see coming out of this is like fundamentally like I I obviously think this is a bullish development for the near-term oil market. But I would say one thing

oil market. But I would say one thing I'm absolutely sure of is that relative to if you had asked me this question on February 1st to today, my view on future

demand growth for petroleum products particularly in Asia is much weaker today than it would have been 3 months ago because they are going to push hugely aggressively as pos as fast they

possibly can both to diversify their sources of supply away from the Middle East to reduce their overall dependence on petroleum ium imports following the kind of example of China where you've

seen the strongest push for electrification of transport not for environmental reasons but for energy security reasons and I think you're going to see a lot of people follow suit on that

and you're also going to see a huge buildout of strategic petroleum reserves the world over if anything they had been falling out of favor it was 50 years ago the the oil crisis of the 70s were so

long ago we have shale now who needs to worry about energy security and I I think for people paying paying attention. They're going to try to build

attention. They're going to try to build up their own energy security, whether solar panels or tanks with uh you know, diesel or what. I mean, people are going to take this into their own hands at a

local uh community level. I suspect.

Absolutely. And I think I mean, there's there's so many things this is going to this is going to spur. I think you're going to spur additional uh kind of national oil interest uh national oil

company interest from Asia in North America or America's supply sources.

Anything to diversify away from the from from the Middle East.

Just as a one-s sentence uh statement uh net net this is good for Canada.

Netn net this is good for Canada. Yes, I

think that net net particularly given the fact that the main political project of industry in Canada right now is to increase West Coast uh kind of non you know capacity that doesn't go through the United States that goes straight to

the west coast. Right now we only have the Trans Mountain pipeline system. Uh

but they're looking to build another big pipe to the west coast specifically for this purpose to satisfy Asia and to kind of reduce the US monopsin on Canadian crude.

What's a monopsiny again?

A monopony is the opposite of monopoly.

So a monopoly is a concentrated concentrated seller. A monopsiny is

concentrated seller. A monopsiny is market power in a concentrated buyer. In

this case, the United States.

The last time I saw that word, believe it or not, was in a Scrabble game like 10 years ago. Um so net net with a big asterisk though net net positive with a

big asterisk which is that um our administration doesn't uh try to consume Canada to merge all our refiners and different sorts of oil product.

Yes I would say I say for my own national in my own national view on this I in some ways not the worst thing that the White House is distracted right now uh you know from Greenland from wherever else and I think after this the view was

that they're going to roll over on Cuba next. So we're going to see what

next. So we're going to see what happens.

But it is an energy, you know, energy is a wealth of nations. Um ultimately

things are decisions and grand trends in the next 20 years are going to circle around energy.

Absolutely.

Um so let let me um just put you on the spot. What about the worst case?

Well, we've done best case scenario.

We're going to do, you know, worst case right now. And then

I do want to also mention what I think is most likely to happen at this crisis.

Um so the worst case scenario is that ceasefire talks fail. Uh we've se we've already seen uh the United States like this morning Trump was talking about

shooting and killing any Iranian boats trying to lay mines. There have been reports that Iran is trying to lay additional mines through the straight of Hormuz to facilitate more control.

Anytime you have people again even during this is during a ceasefire and they're still shooting at each other. um

that can spiral if we see the ceasefire collapse, if we see a return to outright hostility. Uh we've seen reports, I want

hostility. Uh we've seen reports, I want to say a week or two ago from the New York Times that was that was indicating that Iran may have upwards of half of its reserve stockpiles of drones and

missiles still remaining in the country and operational. Um they can do more

and operational. Um they can do more damage. And what we have seen thus far

damage. And what we have seen thus far is that most of the attacks have focused I think arguably in a way on kind of more terrorism in like the truest sense like they've been attacking civilian

infrastructure in in the Emirates.

They've been trying to seow fear but they have been pretty restrained thus far on hitting upstream oil and gas infrastructure because they know that is the kind their ultimate trump card here.

Uh we saw an attack from it's still never been 100% confirmed but everyone knows it's Iran uh in 2019 on the Saudi oil stabilization facility of at Abcake

which is the world's single largest oil processing facility. If they were to

processing facility. If they were to knock Abcake out of commission that's like like that's like 9 million plus barrels a day of capacity off the market

like in a snap. um they can do damage to these upstream facilities. And if this goes from a situation where it is a weeks to months recovery to a months to years recovery for this much supply,

then we end up in that scenario where like $200 plus crude is one guaranteed.

And we would need to basically destroy widespread um widespread uh demand across the board which means recession in the global north and potentially depressionary conditions in the global south

and potentially depressionary conditions in the global north because of how much financialized our system is. Uh it's a little bit of a of a musical chair

situation. Okay, keep keep going there.

situation. Okay, keep keep going there.

Okay, so like this keeps going, right?

Because it's not just it's not just the oil and gas. You've got fertilizers.

You've got helium for chip manufacturing. You all of this stuff.

manufacturing. You all of this stuff.

It's like thei like the Middle East is critically important for global feed stocks across the board. So this would be a massive downshifting of the entire global economy forced by supply

restraint. Most of the time we've been

restraint. Most of the time we've been talking about global crisis, they have been demand crisis, which is why like in in CO for instance, um the the reason we

were able to get through so much of it relatively so uneconomically damaged was because of massive government fiscal interventions to maintain demand support in the global

economy. In this, you can't do that

economy. In this, you can't do that because there just simply isn't enough supply. Um so doing that would not only

supply. Um so doing that would not only not help it could make the situation worse by further spiraling kind of supporting demand and further spiraling

prices higher and again then basically becomes a fiscal uh kind of zero sum game between nations who can kind of outstimulate their consumers more which I think for a lot of the global south in

particular you see typically much heavier government subsidies of petrol prices diesel prices LPG prices etc if that's allowed to continue in in this situation. This is not just a consumer

situation. This is not just a consumer kind of recessionary depressionary crisis. This is also a government fiscal

crisis. This is also a government fiscal crisis because the government at this current stage is naturally going to try and shoulder a lot of that pricing pain itself which leads to uh treasury funding

crisis and credit crisis and currency crisis and the great simplification in my opinion which is why this is uh this is such a watershed moment for our culture.

Yeah. And to be honest, I mean, I'm I'm no expert. Um, but you mentioned the

no expert. Um, but you mentioned the ability of Iran and all their underground uh their their stored missiles and such. Personally, I think that's what this is all about is to

eliminate that threat. And this enriched uranium is is kind of a uh a red herring. Um, I think that this is to

herring. Um, I think that this is to control the spice and if KSA and Israel and the US and some combination have

control over this region, that's one thing. If it's every man, every country

thing. If it's every man, every country in the Middle East for itself, that's chaos on the global market. So

there there I mean the global economy.

Yeah. I just it's refreshing and also frustrating uh for me to talk with someone um as irrudite and scholarly and barrel

maths savvy as you. The frustrating is the average financial pundit doesn't see the second and third order effects of

this. Either that or there's some other

this. Either that or there's some other tailwind that it doesn't matter what happens here that AI is going to change all our lives and and be massive productivity and it doesn't matter what

happens. But you and I both know that we

happens. But you and I both know that we need molecules and materials underpinning all the AI and and everything. So, uh, this is just a

everything. So, uh, this is just a bizarre moment in in history because I've been studying this and the risks and net energy and, uh, the relationship between energy and technology and energy

and money and energy and the environment for over 20 years. And it's just like, oh my god, look what's happening.

No, it's it's truly truly crazy. And

again, I I can't believe that we're two months into a closure. And I can't believe that despite two months into a closure, oh, we the oil prices are ticking higher again through our conversation. So they're up around $105

conversation. So they're up around $105 a barrel today uh on Brent. So slightly

slightly more concerned uh relative to you know the hour ago that we started talking but still not still not nearly concerned. But before we go on I do want

concerned. But before we go on I do want to just quickly touch on what I think what my base case is because I think that please do I think that it's my view from the beginning of this has been that there

are three participants primarily in this war. the United States, Iran, and

war. the United States, Iran, and Israel.

Yep.

Of those three participants, only one, the United States, and really just one person, Trump himself, is influencable by external market pressure. Israel is

not going to budge because what of the AS&P is doing. Iran's not going to budge. It's only Trump.

budge. It's only Trump.

Yeah.

So, I think that the way I see this ending, my base case is that Iran at this stage has no real incentive to bow out now. it the long right now for

out now. it the long right now for instance in a ceasefire let's say the ceasefire is working perfectly it's not but let's say it is in that situation Iran continues to build leverage the longer the straight's closed because

we're losing that 13 million barrels every day it remains closed if in a world you were to say Iran how about you keep building that leverage but we stop bombing you like wow that sounds

fantastic I love that plan so now for this full month we're basically going to be a situation where Iran is not being bombed but it continues contin to build leverage.

But why would they trust us?

Well, I think this is the thing, right?

Is I think they frankly they don't trust uh the United States in particular. I

mean, you Trump bombed them two or three times through active negotiations. So

that's not exactly goodwill building, but I do think that they also do not want this to last forever. Uh they also have an interest in like making money. Yeah. Yeah. And

making money. Yeah. Yeah. And

continuing. So, I think I think that they will eventually reopen the straight, but under some kind of go forward IRGC control, whatever that might look like. But I think

importantly, they are not going to reopen the trade or I think it's very unlikely. This is naturally when they're

unlikely. This is naturally when they're going to agree to something between this being filmed and us releasing. Um, but I do not believe that they will they will readily agree to the current proposals from the White House to reopen the

strait that would still require, for instance, them to give up the highly enriched uranium or domestic enrichment or missiles or whatever else. I think

that Trump is going to have to make some painful concessions to Tyrron to get the straight reopened, but I don't think that Trump is going to do that until the market presses him to do this. So this

will go into this paradox of right now the market sells off every Trump every time Trump says it's almost over, we're about to leave. But then that removes the pressure on him to do so. So now we just keep chasing our tails.

Do other countries have any uh influence like Europe leaders calling Trump and say dude or Xi Jinping. I mean I I China

has a huge petroleum reserve but they're also a big energy I mean uh oil importer and over time this is going to crimp all

their industrial capacity etc. Do does the international community have influence on my president?

I would say yes and no. Um yes let's start with no first. I do not think that Trump is a particularly multilateral president. I think that's just a

president. I think that's just a charitable way of putting the kind of unilateralism we've seen out of the White House thus far, particularly in his second term. Um, but what we have

seen is his address to Congress, uh, I can't remember how long ago that was, a couple weeks ago, and he basically said more or less, we don't get oil from the straight. Countries that get oil from

straight. Countries that get oil from the straight in Europe and Asia, figure this out yourselves. That was

increasingly my base case view of this unilateral taco and him basically leaving kind of the bag of crap for everyone else to kind of clean up on the

other side. But I will say that after he

other side. But I will say that after he said that very clearly, oil companies, Asian allies basically jumped down his

throat. And you have to his credit you

throat. And you have to his credit you have seen him back off that figure it out yourself framing. And that I think now this is how we got to the blockade which is before it was like we're just

going to let this figure itself out and we're going to leave. But now they're like no no we actually really need to reopen the straight and like okay how do we do that? Let's blockade it so that Iran feels more pressure which is kind of working but not really.

We just met so you don't know um all my my views and and logic and stuff. I'm

pretty apolitical. Um, and uh, I care deeply about the environment uh, and other species, but I'm a systems thinker and I look at how all this fits together. I learned the hard way in the

together. I learned the hard way in the Ukraine Russia situation that there's two wars. There's the kinetic war and

two wars. There's the kinetic war and then there's the propaganda war and a lot of people had really uh, divorced uh, stories from what was really happening. And I think that may be

happening. And I think that may be happening again. But I think however

happening again. But I think however this ends, unless it's the fingers crossed um smarter heads prevail uh in the next week, there is a

bifurcation now in international trust and cooperation and letters of credit and long-term contracts and they're

going to pile up between commodities and energy. And I think that is the the the

energy. And I think that is the the the geopolitical second third order effects of this are something that no one is really

long-term prognosticating because I think it's very difficult but but something big just happened. Uh what are your thoughts on that?

I agree and I think to to refer to our our national leaders um again I'm in I'm in Canada so there was a a Mark Carney speech to Davos about this same thing.

Basically, there's been a rupture in the global international system that used to at least pretend to work one way on a certain set of kind of transparent

rules-based global government, global governance. Um, that has entirely fallen

governance. Um, that has entirely fallen away. I think one of the weird things

away. I think one of the weird things about this is obviously the United States and the president is at the center of that I mean has been definitively the center of that post

postwar kind of global international system defined by open open seas free trade all these things that the US political system has prioritized kind of

as its bedrock central tenants on both sides of the aisle for decades and decades and decades and now we have all of a sudden a president who not just

doesn't care but actively hates many of those tenets of global governance. Um

but this is not and I think as as you are now clearly indicating being an American yourself these are not commonly these are not universally held hatred of the prior system of whatever else. So I

think one of the things that's going to be confusing for the global system over the next decade or two is that we it's a decation is that the United States and Washington is going to be very very hot and cold

back and forth between election cycles.

Let me ask you a personal question uh Rory. So my uh we just met recently um

Rory. So my uh we just met recently um but you've been on our guest list for for quite a while. My staff has uh had their eye on you. Um during your

professional career uh I understand you've also analyzed a variety of other commodities beyond oil. I'm just curious why you decided to switch to

predominantly focus on oil and how you currently situate oil in relation to all the other commodities.

Yeah. So the so prior to this I led commodity economics research at Scotia Bank here in Toronto where I covered roughly two dozen commodities between oil and gas, base metals like copper and

nickel, ferrris metals like steel, um agriculture, paper products, kind of everything under the sun. Um the reason I decided to go with oil is first oil was always my kind of first love of the

commodity space. It's what brought me in

commodity space. It's what brought me in the commodity space. I like any other young oil wannabe oil anal Dan Jurgens's the prize back when I was in undergrad.

I'm like wow Winston Churchill switching over the Royal Navy from Welsh coal to Persian oil. Oh this is so interesting.

Persian oil. Oh this is so interesting.

And I got really hooked on this side of it. So a bit of it was a prior but I

it. So a bit of it was a prior but I think very frankly one oil dwarfs in terms of market size every other commodity market in total easily. uh oil

is just that big a market in terms of market size and from my own view it's got the best data and I think this is because of the 1970s and because of the IEA and all these agencies that came out

of it you know metals data mining data is tragically terrible um I like base metals they're really interesting they're going to be you know obviously monumentally important copper in

particular for global energy transition but the data is really really bad uh and that is frustrating particularly as someone that wants to have charts that I can comment on. A lot of copper stuff

like is like annual and it's like well this is not really a business out of this in the same way.

I mean well the other reason is oil is the master resource as as Jurgen would have said uh or would still say and I say uh well other than oxygen and water

but um that's free most in most places most of the time. Um so but most of the world and this conversation has been focused on the direct effects of the

amount of oil available for purchase but um complexity is is one of the I call it one of the four horsemen of the 2020s.

If we look a layer deeper there are all sorts of other production cascades at risk here due to the closure already to this point let alone a further uh constriction. Are

there any hidden supply chain risks from the conflict that you are uh specifically keeping an eye on? And

I think the two ones that are below the oil and gas surface that everyone's talking about is fertilizer supply and helium. Um now in both of those cases,

helium. Um now in both of those cases, both of those are generally derivative derivatives of the gas sector in particular. Um so I think if this

particular. Um so I think if this persists and I think even if it doesn't persist, we're going to see a diversification of that production elsewhere. or for instance to places

elsewhere. or for instance to places like North America that have lots of cheap functionally captive natural gas in the system. So I think that is one thing that we could expect to come out of this. The other thing I should note

of this. The other thing I should note and this something we hadn't mentioned yet another I had mentioned kind of the guaranteed energy security policy changes in Asia more SPRs you transition

etc. In the Gulf this is in some ways the countries that have been most existentially threatened by this crisis are the Gulf economies themselves where you we're going to see doubledigit GDP contractions. you know, these are their

contractions. you know, these are their largest industries by far that have essentially just been turned off. Every

one of those countries is going to follow Saudi Arabia's lead and build pipelines that divert around the the straight of Hormuz. So, this is if you think about Iran, this is a a wasting

strategic asset for Iran that the longer they use it, the more they use it, the weaker it's going to become because it incentivizes diversification and kind of rerooting around it.

That's a good point. in the same way actually you know very relevantly of US economic warfare as well the the weaponization of the dollar and the international trading system is itself a

wasting asset because the more you use it against Russia and Iran and you know let's say China you know the more you diver the more you force diversification away from that system

away from swift and and all that yeah exactly so I think that in some ways I think the the thing this is going to do is this is going to put everyone on notice at you know like economically

it's never going to make sense to build pipelines to the Red Sea or the Med from these countries versus using the Gulf because even with a disruption you know we're talk you're talking about like massively expensive you know even if

Iran charged $2 million toll which is what it's been discussing at one point that's only a dollar a barrel for a VLCC tanker that's like pocket change in the global economy and if we were if oil was

only up a dollar I would not be talking to you right now right that's like that's not what we're talking about but in You're never going to build a pipeline for less than a dollar a flowing barrel. That's just pipelines

flowing barrel. That's just pipelines are way more expensive. But

fundamentally, it comes down to self-determination and kind of security for these countries.

I want to be uh respectful of your time, but I do have some some closing questions that I ask all my my guests.

Uh but before I ask that, um how does understanding all this uh or does understanding all this affect the way that you use and think about energy in your own life? And do you have any

recommendations for our viewers on how they might pivot their lifestyle or decisions or consumptions ahead of the the coming months?

It's interesting. I think, you know, I always joke that I we we recently had our third child a couple years ago and we were we need to upgrade the family car to something slightly bigger and we

switched from a diesel station wagon to a gasoline SUV. And I always joke that it was the best physical commodity trade I ever made because I we traded in at the end of 2021 and ever since then

diesel margins have been like double what we've seen in gasoline. So the

whole world I would say right now diesel and jet fuel these middle distillates are continually the most expensive scarcest molecule within the barrel.

Yeah. So diesel right now is like 200 or no jet fuel is like $210 a barrel. Yeah.

And oil is only a hundred.

Yeah. So you so when we talk about a crack spread and we haven't even really talked about refined products uh the crack spread is essentially a a a simple refining margin because obviously basically a crack spread is the difference between let's say the price

of jet fuel and the price of a barrel of oil that would be used to make it but as we've been discussing uh you can't turn a barrel of oil into a barrel of jet fuel. It has to be fractionated across a

fuel. It has to be fractionated across a whole number of like you know a dozen plus different different primary uh products. Um so I think that's the other

products. Um so I think that's the other aspect is that you know your your refining margin your profitability at the end of the day is a weighted average blend of all of those crack spreads but

right now middle distates diesel gas oil which is more commonly used in Europe and Asia um and jet fuel um are your kind of richest products in that right now with gasoline kind of tailing

behind. So if you have a capacity to

behind. So if you have a capacity to shift towards away from the middle the middle distillates in your lives I think that is a good long-term hedge or or shift away from all distillates

or switch away from all distillates also an option.

So do you um you mentioned that you have have kids um we have some young viewers uh in their late teens and 20s. uh do

you have specific recommendations for young humans who become aware of our economic energy environmental constraints uh that are present in the global economy?

So I've got two um so the first I will say specifically to energy and I think I a lot of my success to date has been due to the fact that there has not I have not had that much competition. People in

my graduating class out of grad school were not champing at the bit to talk about oil. They were looking at ESG.

about oil. They were looking at ESG.

They were looking at electrification.

They were looking at all the things all these things the future is predicated on. But that left a big gulf for

on. But that left a big gulf for traditional still dominant energy system. So I would say that if you are

system. So I would say that if you are interested in the future of energy transition spend as much time understanding legacy energy systems because they are the fulcrum around which everything else is going to bend.

So I think understanding what we mean by barrels and BTUs and everything else heat units. I think this is important to

heat units. I think this is important to base understand the way the global system is going to work.

Yeah, I happen to fully agree with that because a lot of the younger people just say, "Oh, fossil fuels have emissions so bad." Yes, that's true. But look at all

bad." Yes, that's true. But look at all the benefits that we take for granted and are starting to be shown to our face uh in in current and coming months. So,

I agree with that 100%. And I think the other thing I will

100%. And I think the other thing I will say is I think slightly less about energy and more about life. I also teach a course at the University of Toronto's Monk School of Global Affairs where I am I'm an alumni myself and I always give

my students kind of this piece of advice which is they're all talking about like future careers and like what should I do? Um they're always thinking about

do? Um they're always thinking about firms and titles. They're thinking about Xbank and being a analyst or managing director or a trader or whatever

cuz because they care about status.

Yes. and I think and status and income which I think makes sense as a young person particularly going into a life where you're like I just want to be able to afford an apartment or god forbid a house in these markets particularly in

Toronto. Um, so I understand that. But

Toronto. Um, so I understand that. But

the the thing I always stress is like don't People are like, "What should I do?" Like don't ask where you want to

do?" Like don't ask where you want to work or what you want to do per se, like what job. What do you want your

what job. What do you want your dayto-day grind to look like? Do you

want to be writing? Do you want to be reading? Do you want to be on podcast?

reading? Do you want to be on podcast?

Do you want to be talking to media? Do

you want to be doing emails and making decisions to allocate capital? Like,

it's that daily grind that is going to define your life, not your title. And I

think that it's really really important to just remember like what do you actually enjoy doing? I really like reading, researching, writing my thoughts, and talking to people about it. I have my dream job right now. I

it. I have my dream job right now. I

want other people to kind of think in the same way.

That's well said. Um, of course, I've I've changed that daily routine like three or four times, but th this this

job feels natural to me. Um, so I I resonate with what you you said. Um,

here are a couple, especially since you don't know these are coming. These might

be awkward questions. What do you care most about in the world, Rory?

What do I care most about the world? I

think my my family outside of family and outside of like my immediate loved ones, I think I I care about kindness. I think that I think the thing

kindness. I think that I think the thing I dislike most about the shift in our politics has been the kind of loss of that basic civility. No matter what

policy position you're recommending or or or advocating for, just be nicer to each other. I think we're all kind of

each other. I think we're all kind of trying to deal with this and I just think kindness is deeply underrated in our global system.

Now I know why my staff had you on the list. Um, if you could wave a magic wand

list. Um, if you could wave a magic wand and there was no personal recourse to your decision, what is one thing you

would do to improve the future? Oo,

remove all emissions from fossil fuels.

Okay, that's a magic wand.

That's a magic. You gave me magic. If we

could just have oil, gas, and coal without emissions or downsides, that sounds fantastic.

Um this has been very informative and um you're you're a great guest and I I know you're working uh on a Substack and you have your oil uh um newsletter. What's

the name of the newsletter?

So the newsletter and my main business is called Commodity Context. So you can find that at commoditycontext.com. It's

on Substack. And then I also host the oil groundup podcast where I talk about all this wonky stuff with other oil and gas analysts. uh all oil all the day.

gas analysts. uh all oil all the day.

I'm hoping in the same way that your purchase of your car uh with respect to diesel wasn't a castanza sort of move and that we have jinxed the ceasefire uh in the next week that this comes out.

But fingers crossed for a good outcome and um thank you for your time today and for your work to be continued. Rory,

thank you so much for having me, Nate.

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