Arjun Murti has been tracking global energy markets for three decades, including a stint as co-director of Americas equity research at Goldman Sachs. In this episode, Murti, who writes the Super-Spiked column on Substack, talks about rising global energy demand, the reasons for declining investment in the oil sector, “peak China,” gasoline as an “absolute miracle,” the exploitation of Africa’s mineral wealth, and why “oil demand will be the last thing to go away.” (Recorded July 3, 2023.)
Robert Bryce 0:04
Hi, everyone. Welcome to the power hungry Podcast. I’m Robert rice. On this podcast we talk about energy, power, innovation and politics. And I’m pleased to welcome Arjun Murthy. He is a partner at Barrington and publisher and publisher of super spiked on substack. Arjun Welcome to the power hungry podcast.
Arjun Murti 0:21
Robert, it’s a pleasure to be here. Thank you for having me.
Robert Bryce 0:24
Now, I’ve warned you I told you I don’t want every guest. But I want you that the guests on this podcast introduce themselves. You had a long career including investment banking at Goldman Sachs. But I’m not going to talk about that you are Imagine you’ve arrived somewhere you don’t know anyone you have about a minute to tell the people at this dinner party who you are, please tell us who you are.
Arjun Murti 0:44
Robert, I’ve spent just over 30 years identify as an equity research analyst. That was my career at Goldman Sachs, where I spent the bulk of my time I started on a small boutique investment bank in Denver. I was on the buy side of JP Morgan but 15 years at Goldman looked at really the sector from the lens of covering the major oils independent producers refiners, I did my time looking at clean energy, not sure how to clean it was it, I guess, produced energy 20 years ago, ran the research department did a bunch of different things as a partner at Goldman, and burnt out on the director of research jobs. I love being an analyst hated being part of management. My wife convinced me to retire, I got to catch my kids in middle school in high school. They’re now off to college. And during that time, I joined the board of ConocoPhillips. I’m a senior advisor at Warburg Pincus, and I’m affiliated with both Columbia center on global energy policy as well as clear path. So some public policy perspective from those two organizations, COVID hits, we have all this sort of insanity around energy transition, it motivated me to start a substack in November 2021, which in turn motivated me to, as I say, unretire and join verodin, which is energy strategy investing and we say something else, but I’ll just say shorthand and energy consultancy, focused on hopefully getting this energy transition to be less than saying that I think it’s currently on track to be
Robert Bryce 2:07
well, good. So I want to talk about that insanity, because there’s plenty of it. And on my substack, I just published a piece called the energy transition isn’t. But before we go on, I’ve had your colleague Brett Brown, Paul, from Barrington on the podcast, and we have a mutual friend there, of course, Maynard Holt, and Michael Bradley and some other folks who it’s your very interesting group, based in Houston Barrington is veriton.com. Is that right? That’s right on the internet. Right. And then Arjun writes, super spiked on substack. So those are the places you can find him. Okay, so let’s jump right into it. Because I’m looking at this article that was in the Wall Street Journal on Friday. The headline is oil sector models a slippery future. energy executives offer very different opinions on how much of the fuel the world will need by 2050. Last week in various predicted $100 oil. Today, John Kemp on Reuters said portfolio investors are exceptionally bearish about crude. Okay, what the hell? Does anyone really this is my first question, does anyone really understand what’s going on in the oil market? Because we have two very different calls very sophisticated analysts, one saying Look out below the other saying $100 oil by q4, what the hell what is what’s going on?
Arjun Murti 3:30
Well, all that, in part is driven by what is this insanity of energy transition. So there’s certainly a bunch of folks who think for whatever reason, crude oil demand and the crude oil markets are going to go away in some timeframe. And I think you have any other view than that, then there’s at least a hope and future for this business. You know, I start by my focus tends to be on the longer term cycles. That was what I tried to focus on a golden years ago. And what I do in my substack, which is these energy cycles, to simplify, especially for crude oil, and natural gas, 10, to 15 years up 10 to 15 years down. And of course, we’re just coming off one of those 15 year down cycles from Oh, six to 2020, which helped people think you don’t need crude oil, it can go away. And we’re now on the other side of it, where I my language I use is super vol, as opposed to supercycle and we can get into that. But I do think we’re on track for a pretty volatile period. But through those ups and downs, I think profitability is going to be better for traditional energy companies, at least for a period of time here. And actually think demand is still headed up for the foreseeable future. And I think we could have some debate on when it may end, but it’s hard to pick the date when we have peak demand when there’s still so many billions of people lacking with all that we take for granted and as a given here in the US or for those that matter those folks in Europe.
Robert Bryce 4:43
Yeah. Well, let’s talk about that. Because that’s the part that I’ve been looking at. I imagine I’m somewhat like you and we would just now have introduced ourselves. I haven’t talked with you before, but the statistical review of world energy just came out oil demand last year went up 3.1% globally, and when up about if memory serves in the US, it didn’t go up that high, but natural gas consumption in the US went up more than 5% in one year. That is a huge jump for a market as big as the US. But globally, demand last year. Well, let me see what were the numbers that Oh, nevermind. But the US demand was 20 point 5 million barrels a day in April. And then this is the other indicator. buches just opened the world’s largest gas station in Tennessee 120 fuel pumps, thinking, why do people think we’re not going to need oil? I that’s the part that I look at these numbers, I look at the statistical review of world energy, I look at the fact we have wet in the US 280 million motor vehicles, nearly all of them run on oil. Why do people why are people thinking we don’t need it anymore? That’s the part that I don’t understand where it from? Where does this come?
Arjun Murti 5:52
I mean, all energy. And I know, you know, this, Robert is critically needed. So I tend to be agnostic, I don’t believe in picking sides. I think it’s a question of what is available, what is affordable, what is reliable, what is secure? And then ideally, can you meet those objectives with hopefully as small of a climate and environmental footprint as possible. But make no mistake, it has to be available. First and foremost, we all know you can’t go five seconds without energy and you don’t actually care what you pay for it. That’s a secondary objective. You don’t care what country or region it comes for. You don’t care whether it’s a, you know, you frankly, don’t care whether it’s an Ice Vehicle, or an Eevee, or any other form of energy, you want to use energy is critical to everything we do. And I feel like that’s often forgotten. In this energy transition discussion, which is focused on one singular objective of net zero co2, and we can debate the legitimacy of that objective, the timeframes, there’s lots you can debate about it. To me, it starts with asking the wrong question in which is the world needs energy, and what is available and what is affordable. And that is why we use crude oil. So yes, I listen. I have driven a Tesla for seven years, I actually love driving that car. I’m also a retired Goldman partner, I have the house where you have the charger at home that everyone has this sort of very fortunate situation. So the idea that this is going to be the be all end all answer for all, it’s what I pushed back on. And when you go through the math of all the people around the world, the amount of oil they’re using, you know, we use 1415 barrels per person, the lucky 1 billion of us who live in the US, Europe, Canada, Japan, or Australia, the other 7 billion people using like three barrels per capitalist that numbers aren’t a close call. And so how do you solve their knees? How do we stop being so ego maniacal about it and believing that our perspectives or really the European perspective on how to solve energy is the answer? How are you going to solve the energy needs for the other 7 billion people on earth? And the idea that they’re all gonna be plugging in their Tesla’s in their home garages is simply a fantasy. And so it is basic economic growth, it is basic population growth that I think drives the demand for oil. And I think that continues for the foreseeable future, at least into the 2030s. But probably longer than that.
Robert Bryce 7:59
Right? Well, so does that. So that’s the narrative. This is the, you know, I have a lot of people on the podcast, I travel a lot. I’m very fortunate in my life. And I talked to a lot of people about well, if I gave you $10,000, where would you put your money? Right? And I get varying answers. Of course, you know, some guys are into crypto, some are to gold, some of the CDs, I don’t trust anybody. I’m going to put it in the bank and our net, right. But the when you look at the investment landscape, and there’s something I’ve talked about my brother who’s a CPA, he’s an investor. And you know, my friend, Art Smith, who used to run John us, Harold, you know, we’re looking at the pricing on oil and gas stocks relative to particularly technology stocks. I mean, it’s unbelievable how, on a relative basis, they’re cheap. And you know, I’m not the guy. I’m not former Goldman, I, you know, you know more about this as your world, not mine. But is that narrative of oh, we won’t need oil is that the reason why we’re seeing these hydrocarbon stocks selling at such a discount relative to other stocks in the marketplace?
Arjun Murti 9:01
I think there are two narratives out there. One is the idea that crude oil and for that matter, natural gas are going to go away. At some point, some people think it’s as soon as this decade, and by going to a mean, peaking and starting kind of a permanent decline. If we consider that as quote going away. I think the other element is in 2022, profits went from losing billions of dollars at the height of COVID and 2020 to 25 30% Return on capital for the sector, which is a terrific number, the long term average is 10%. They are in 30%. So people say, hey, peak profitability in 2022. And I have some concern, even if I’m not a climate at log, I don’t know what I believe or not believe this is a market out there. Maybe it might go away. But if I have peak profitability, and there was this war thing, and who knows whether that disruption can last or not, I think this idea that the business is going away, and it won’t be profitable because it wasn’t for the previous 15 years, explains the discounted valuation and that is the opportunity. If you think the business is not going away, which I don’t and if you think it least for the top quartile is the company’s better profitability has a fighting chance, especially in a world where everyone’s saying don’t spend money, you know, public investors or traditional, they’re saying don’t spend money because you guys wasted a bunch last decade, the climate folks are saying don’t waste don’t spend any money because we think you guys should go away on, you know, ethical grounds or whatever their arguments are, for all those reasons, you’re getting the real lack of CapEx increases, and that supports ongoing profitability. And so that I think, is the opportunity in this sector, the idea that profitability in the business can last longer than just the next few years.
Robert Bryce 10:34
Well, and that’s the part that to me is interesting is that, you know, Exxon Mobil what the PE is seven and something like that. And the dividend is three and a half or pioneer natural resources. I’ve interviewed the the CEO, who’s just now leaving I’m sorry, name is. Yeah, Scott Sheffield, I had him on the podcast talking about this very thing. And he said, Well, we’re returning cash to shareholders, that we’re being very disciplined in how we allocate capital. So I guess the one of the things when you’re saying this, that pops into my head is, well, you have a natural decline rate in the oil and gas business, what 6% A year 7%? A year. That’s natural, right? Kind of globally, right. So if investment stays flat on capital investment stays flat, you don’t increase it, then that six or 7% decline rate, after a few years, you’re gonna have 20 25% less production than you did three years earlier. If there’s less supply them prices should go up, right? I mean, am I missing something here? I’m not an economist. But that seems fairly obvious to me.
Arjun Murti 11:38
I mean, this, to me is always the protection for those of for those folks out there who do not have some detail supply demand model and are concerned that demand might go away. Again, I’m talking about non ideologues, here, just regular portfolio managers, it is much easier to stop capex, and then you get the six or seven or even 8%, declines that you were referencing, versus killing, demand and displacing or removing or changing your ice vehicles, your internal combustion engine vehicles to electric vehicles or something else. And so even if you’re pessimistic on demand, it is much more likely that capex will stop first, because people are moving away from the sector, which we’re starting to see. And that supply will be insufficient relative to whatever demand is, nevermind this scenario, where I think demand does continue to grow 1%, maybe a little over 1% per year, based on population growth, the world’s poor becoming less poor, the world’s less poor becoming middle class and so forth. That trend, which is a good trend, the world is better than it was 50 years ago, 100 years ago, because people are less poor, and they’re less poor, because they’re able to use modern energy. And the idea that you’d want to stop that the idea that somehow bad are evil. People, I think, really need to rethink why we use energy and the inherent needs of it, because that that will be the driver for this case, crude oil, which is what we’re talking about.
Robert Bryce 12:53
Yeah. So we’ll just to build on that. So you said assuming just 1% growth, and I don’t know, I’ve been looking at the statistical review as I nerd out on it. I mean, I really,
Arjun Murti 13:04
I love this degree publication. I love it.
Robert Bryce 13:07
But so assuming even 1% growth, but we have 3% in 2022, but assume 1%. And you combine that with a natural decline rate of six or seven or 8%. So let’s call it 7%. And that 1%, so you’re talking about an 8% delta between what you need to produce and just to keep up with demand, right? So that should assume that capex, that is capital expenditures, building drilling new wells, all the other things you have to do to deliver the hydrocarbon molecule, those should be increasing at a commensurate rate. I mean, am I understanding this correctly?
Arjun Murti 13:41
Well, so these capital cycles are long. And so this capital cycles tend to be 10 to 15 years in nature. So from 2002 to 2014, we had a major boom in oil markets, we had major growth and CAPEX, it tripled, quadruple whatever it was that people were trying to do deep water and Arctic. And in those days, people thought Russia and oil sands and all these and what it turned out to be was oil shale in the US, which even in the 2000s no one was really going after then suddenly, shale gas was, you know, became commercialized, the people said, Well, if you can just shale gas, let’s do shale oil, so that that really didn’t start till the 2000 and 10s. It wasn’t and we’d spent a whole bunch of money trying to find a bunch of other stuff, which we didn’t do now. We’ve been living off that bounty for the last now. 15 years 1213, almost 15 years, where we invested a lot in shale we’re continuing to grow production. We’ve seen two of the biggest plays the Bakken and the eagle furred one in North Dakota. One in Texas shows signs of maturing where that production is flat or slightly down the Permian Basin, which you referenced Scott Sheffield, a pioneer that been a leader in that play that is still growing and what we haven’t seen yet or what will be the issue is when that play matures, when we’re not able to continue to go to Permian. Suddenly, it’s not going to be a question of growing capex one or two hours or 8%. Even to meet the demand. It will be a doubling or tripling of CapEx, but we’re in Not trying that yet. No one explores for oil anymore. We’re not, you know, signing new production sharing contracts in new countries. We’re not doing any of the lead that and remember it took 10 years to get shale going after a major boom. And there was no climate ideology back then there was not a net zero objective. You know, there was all
Speaker 1 15:17
No, no, no, no way. No ESG,
Arjun Murti 15:20
none of that kind of stuff. And it still took a decade to figure out, hey, shales, what works not deepwater oils, and it’d be at some production on those other areas. And so, you know, we are, I think set up for a pretty big pinch point, I will still use the phrasing, though of super vol, rather than supercycle for the very reason, if you do not have inventories, if you do not have OPEC spare capacity, and you do not have sufficient supply growth, you do not get to have demand growth, it means you’ll have regular price spikes. But the flip side of price spikes is corrections and economic slowdown. And I think we’ve just gone through one of those periods. We went to 120, last May or June, we’ve had now four quarters of declining oil prices. Now, maybe the economy is going to hang in there or not. But this type of very volatile environment. I would say that’s the kind of environment I would expect in a world where companies are not allowed to spend money either because investors say you wasted money, or because climate in ESG reasons say we don’t believe you should spend money, whatever the reasons are, it’s going to lead to these continuous pinch points, I think on the global economy.
Robert Bryce 16:24
So when you say Super Ball, you’re that short for volatile or volatility, right? Sure. Yeah, that’s so right. Well, you have to have a name right? You have to name it right, you have to do I
Arjun Murti 16:33
still got an analyst at heart, right? So you got to brand these things a little bit. But I don’t like to supercycle language, because I think it implies this smoothness to the upcycle that I don’t think will be there, when you’re allowed to invest a lot of CapEx because either investors let you or there’s not these climate concerns, well, then you have a chance for some supply growth to come on. We had a booming Chinese economy, then they joined the WTO, all the jobs that went over there and so forth. But it came with a lot of economic growth. We don’t have those conditions. We were kind of at peak China in terms of industrialization and population growth. And we’ve not yet replaced it with the future of India or the future of Africa. And I think those countries and economies will develop very differently than China. But for all those reasons. It’s not that sort of, hey, price can go up and demand still goes up like we had in the 2000s I again, I sincerely believe in the superball environment.
Robert Bryce 17:24
I liked that idea. Or that or that that phrase that is the peak China I’ve had. Peter Zion has been on the podcast as well. And a
Arjun Murti 17:31
big fan of his work. He’s great. Yeah. Yeah.
Robert Bryce 17:34
I mean, a remarkable intellect. I mean, I don’t know if you’ve seen his book. I think he dictated the whole thing. And I asked him Did you just dictate the whole thing? Because it reads like he just did his
Arjun Murti 17:43
2014 book called The latest that Russia would try and go after Ukraine is 2022. I mean, he basically had it nailed to the year, seven years earlier. It was remarkable. So
Robert Bryce 17:55
but he talks about demographics in China. And I think that’s a really interesting story I originally wrote on my sub stack about Vietnam, right? That’s the growth story of Vietnam, a lot of companies moving from China to Vietnam. But you so peak, China, what do you mean, when you say peak China,
Arjun Murti 18:11
it looks like they’ve had peak population, you know. So it’s a little bit of the Peter Zion perspective, which is, you know, demographics are destiny. And that’s not 100% True. But in this case, China looks like it’s going to have a declining population. And so it means a lot of different things, the sort of mass industrialization that done which used a lot of energy, and it used a lot of oil, the oil intensity of being an exporter of steel, cement, and, and all those kinds of things is much more energy intensive than if you’re a service economy. And so I don’t think India will follow China’s China’s path, they’ll have some steel plant growth and refinery growth, but not to the it’ll be much more of a consumer economy, it will be much more of a service economy. And so I would not expect the types of energy intensity out of a place like India is just one example, versus a country like China, but they’ve had sort of peak industrialization, nevermind the world saying, Hey, I think we became too dependent on this one country that maybe doesn’t fully share our values and our perspectives, then there’s some good to come out of China’s growth. Generally, it’s been a low inflation environment. But there’s been some obvious geopolitical challenges that have been arisen and has been the gutting of you will know of our manufacturing base and our industrial base, from the US to China. And I think some of those trends are starting to reverse, but China itself, the one child policy, a clear example, where, you know, maybe not every government perspective is a good one, one child was their answer to their, you know, to their challenging economic situation from 30 years ago. They then just finally figured out a capitalism might be the better answer, but that’s coming home to bite. And when you have a declining population, I think it’s going to be a big, big challenge for China going forward. So
Robert Bryce 19:43
Well, I’m just looking at the at the statistical review numbers and the demand in China oil demand went down 4% last year, and that’s from a base of what 14 million a day so that’s 600,000 barrels a day. That’s a big decline. In the US demand went up 350,000 barrels, something like got almost 2% But meanwhile percentage basis India goes up 8% Vietnam is up 9% relatively small basis Bangladesh up 19%. So speaks to that overall discussion about you know, what is happening in these developing countries where there is so much what do you call that latent demand or developing demand? How do you how do you turn that what, but people living in energy poverty, going up the energy energy ladder, what do you how do you describe
Arjun Murti 20:30
human progress, right, and we should all want it to happen and recognize that that is our number one objective as society is to improve living standards for everyone in the world. I will say China’s demand last year was down most likely due to their extreme version of COVID lock downs. And I think that is starting to reverse this year. So I think the their demand will be back up again this year and will recover those COVID losses. But the strength of those other economies that you highlighted is absolutely those countries starting to come up that economic S curve, if you will, and reducing the poverty, which is has to be our number one objective.
Robert Bryce 21:02
Right. And Africa overall, oil demand up 5%. And here’s a country, you know, 1.4 billion, I mean, the potential demand growth there is just staggeringly large. But I just want to review so you’re a Tesla driver, but you’re an oil analyst,
Arjun Murti 21:17
as well. So this is part of it, I don’t believe
Robert Bryce 21:21
to be driving an F 250 or something like so big monster VA cushy,
Arjun Murti 21:26
you know, I don’t like that energy’s become ideological, I don’t believe that, you know, oil and gas should be Republican and solar and wind should be Democrat. It’s, it’s frankly, honestly ridiculous. I think there’s reasons to use all this stuff. You know, as an example, if you’re China, and you currently import 12 million barrels a day of oil. My argument is they’d rather have coal fired EVs, then OPEC and Russia fired ice vehicles as one example. And that’s, to me the, I think oftentimes Tesla and EVs are accused of being green vehicles, I don’t drive it because it’s green. I drive it because I like one pedal driving, I don’t like going to a gas station. And I live in a state in New Jersey, where we still have people filling up the gas for you. I was visiting my parents in Massachusetts, you have to fill up the gas yourself who likes to do this? It’s disgusting, right? So charging at home, infinitely better now. I drive a total of one and a half to three miles a day. So for me having electric vehicles not a problem, no, Tesla gets a lot longer range than that. But you know, the idea that EVs are the be all the end all and should be 100% of our mix. That to me is equally absurd. So let’s take out the ideology of this. It clearly, there’s some people like myself, who liked the technology of the Eevee, who liked the one pedal driving who prefer charging at home and other people who’d rather drive the big pickup truck. Now, I think that Ford Lightning has been very popular, but I’m sure there are people who drive hundreds of miles a day where it’s not practical to do that. And so whatever one’s view, that is the idea that poor people in Bangladesh, or Vietnam or India are going to be driving Tesla’s or whatever their Eevee equivalents are that they can afford is simply preposterous on any sort of reasonable timeframe. And so I do think we need I’m going to call it all of the above. But I also don’t think the answer is fossil fuels only. I think there’s plenty of reasons to use distributed solar. In some cases, I think nuclear needs to be part of our solution here. I think there is inefficiency and waste that can be improved upon. So I would like to see the energy compensation move from Republicans. So therefore, if they’re like oil and gas and hate and hate solar, or vice versa, I would like to get out of that sort of polarization that we see. It’s absurd.
Robert Bryce 23:33
Sure. Well, total agreement on that. I don’t know. I don’t identify with either party. But yes, the the ideological boundary setting between the parties on hydrocarbons versus wind and solar is deeply unfortunate. But I mean, it’s also I mean, I look at it follow the money. You know, what? One guest on the podcast talked about nuclear. And he said the problem with nuclear is there’s not enough grift. That was his line. Right? Where his wind and solar, you got these tax credits. Yeah, I mean, there is a lot of money that splashes around there, which is not the case with nuclear. But I digress. Is it? So let’s back to the oil thing. So you spent a lot of typesetting this. Is it true that the more oil we find the more oil we find?
Arjun Murti 24:18
I mean, the world is not on track to run out of oil anytime soon, right? And so we probably will stop using it as a world before we’ve run out of it. You know, on the other hand, there’s still lots of opportunity all over the world. So no one was expecting shale oil to be the big thing that actually resulted. It’s been 77 0% of the global worldwide supply growth over the last 10 to 15 years. That should scare the heck out of people in a world where we’ve become very dependent and unfortunately, it’s a good reason to be dependent on thank God for the state of Texas. I don’t live in Texas, but they’ve allowed and they have sets of rules and regulations that allow that oil to get developed. And same thing with North Dakota, but the world’s become very dependent on Frank The two US states, really one, it’s mostly just the Permian Basin at this point in time. And sorry, some of that’s in New Mexico as well. We do need to start finding oil and other parts, we need to bring back Canada’s oil since I think what we should worry about most as a nation and I speak as an American, we’re recording this just before the Fourth of July, is this idea that somehow ESG and climate folks are trying to limit investment in US and Canadian companies. So if you take it from the environmentalist perspective, let’s just say they hate oil and gas, for whatever reason, that’s fine. Shouldn’t you stop there trying to limit supply from countries like those in the Middle East Iran is an example of Russia and example, and allow the US and Canada to be those last barrels produced I think last barrel is going to be 100 years from now. But even if it’s sooner as some people project, I, this idea that you’d want to disadvantage US and Canadian companies, it’s probably the part I most pushback on in terms of ESG and climate movement.
Robert Bryce 25:59
Fair enough. But well, I’ll ask it again. And I gave him a long answer. But is it mean, we have used a lot of oil over the last century since 1859? We’re using a lot of oil now. And yet the reserves keep growing. So is it that we’re the technology seems to be in the big picture, you back up? And you think, well, this is what we seen. It’s the race between technology and depletion, and so far, technology seems to keep winning. So is it true that the more I mean, it’s true, the more oil we find the more oil we find?
Arjun Murti 26:31
Yeah, I mean, the shorter answer is yes, technology is winning, and it’s on track to continue to win. We’re using a fraction of the world’s will, you know, original oil in place would be the phrasing. There’s still plentiful oil here in the United States and the Gulf of Mexico and Alaska, and Canada’s oil sands. I’m in the Middle East. And you think, as so many countries are dominated by state owned companies, where you don’t have as we do here in the US, hundreds, if not 1000s, of companies like shale was developed by independent producers, not by the big oil. In most of the countries, if they have one company, or maybe a couple of companies, and they’re very impacted by their government. You’re not really even trying Venezuela as an example. They’ve obviously got challenges from a governmental perspective. But they’ve got some phenomenal, heavy oil in Canada that just cold flows, meaning you don’t have to heat it up like you do in the oils that Venezuela, you said Israel, excuse me, Venezuela, Brazil has got a lot of water, like there’s still a lot of oil to go after in all parts of the world that I don’t think the issue for why we should move off oil should be because of a lack of supply, that that is not a reason to move off of oil.
Robert Bryce 27:35
Well. So let’s build on that if you don’t mind, because that’s one of the things that can be as I you know, studied the industry for a while and written about it. That hasn’t that always been the problem, though, in the industry is too much oil, not too little. I mean, that was the birth of the railroad commission. Right? And it and the 1930s. After that Conley, hot oil act empowers the Texas Railroad Commission to limit supply, and that for the next 40 years, the railroad commission effectively determined price and therefore supply and therefore price 1973 comes around and OPEC What did they do? Exactly? Copy the Railroad Commission model of limiting supply? So is it the question it has that is the world oil market as the problem of too much supply been the problem or too little supply?
Arjun Murti 28:23
The world has never been short oil, even if at times it is thought that it was run out of oil. So it’s called Peak supply argument, oh, oil supply is going to peak in some year. And then it’s going to hit decline that’s often been used to make kind of a permanently bullish argument on oil that, hey, there’s no other way to drive your car. It’s just the demand is only gonna go up. But somehow supply is going to be limited. And that part is never come true. So when we talk about problems, I’ll say, this industry over 100 years, and my data goes back 50 years, there’s another sub stack, the crude Chronicles, which is taken industry profitability back to 1910. To started the industry, we have some data, the industry started Acosta capital as it should. So it’s earned enough to allow supply and demand to be balanced. So in terms of is it a problem to have too much supply? I’ll say that’s what’s enabled this industry to grow. It’s been the most certain growth you can have out there. It’s like, iPhone stopped growing. I think with iPhone six, most technologies get completely displaced within some period of time. This is an amazing industry. 450 years, demand has grown out. It’s only been one or 2% In recent years, but it has grown steadily since we started using it and that demand growth is unmet by supply growth. And there is no end in sight to that. We will go through temporary periods like I think we’ll go through this decade, where perhaps the Permian Basin and shale matures and we need to go find the next thing or hope some countries like Venezuela or Brazil reopen up or what have you, but the world is not on track to run out of oil anytime soon. But is it a problem? No. It’s what’s allowed economic growth to happen to allow people to come out of poverty. It’s been a great thing and industries earned a cost of capital return which makes sense it’s a commodity business, you compete away excess returns positive or negative. It’s done that And over its entire history of 150 years.
Robert Bryce 30:03
Right? Well, so But isn’t that the bet, then? Because the way you’re talking, I’m assuming you’re long oil, right, that you think that this is going to be? I don’t know, you know, you don’t have to give me your personal portfolio outlook, but you’re on the board of ConocoPhillips. So you believe that, that, you know, this, this need for oil is going to continue. But isn’t it the race between technological advancement and the and the decline curve? And so far, the technology advancement has kept the price on an inflation adjusted basis really the same now? for, what, 50 years? or more? So? Why would if that’s the case, if technology keeps crashing, the the what would be the potentially higher price? Why go long?
Arjun Murti 30:50
It’s a great question, let me do my best to try and answer this, which is the two ways you make money in the energy sector. One is making that price bet that at least for the next year, or five years, or 10 years supply is not going to keep pace with demand and oil prices are going up. That’s one way to make money. But it’s how people perceive that’s the only way to make money. That’s not true. The profitability of companies is not one to one with the oil price there periods of time it goes together, and there periods of time at D links for the industry, and so forth. But there’s also within that your top quartile your top two quartile companies, they’ve shown that they can earn, and they’ve done this historically, competitive returns on capital, irrespective of oil prices, I’ll give you the example of Exxon and shell going back to 1910, from 1910 to 2010. These were the largest, most dominant, more profitable companies in the beginning of the industry in 1910. And they remained as such by 2010. And that is not simply because they wrote up and down the cycles, they invested at the low end of the cost curve. The cost curves, sometimes it’s deeper, sometimes it’s shallower, when you invest in the low end of the cost curve, you have a chance to generate better than that cost of capital return sustainably. And my focus and my preference is on those sorts of veteran class companies that can generate through cycle profitability. through the ups and downs out some people say that I don’t want to do that, I just want to make the bullish call. And when it’s time to be bearish, I want to get out that is a perfectly alternate way to invest in the oil sector. And for those folks, I will say I think we’re closer to the beginning of this cycle than to the end of this cycle. But a final point, when you look at the last supercycle from 2002 to 2014, profits only went up for the first half of it. And then companies started over investing so that even though the oil price continued to go up and stayed high, profits started going down to these profitability cycles, which I spend a lot of time on. They are not one to one with the oil price cycle. I can never convince people that people always think if you like oil, it’s because you’re you know, there’s not enough supply relative demand. Again, that can be a way to make money. It’s not the only way. And frankly, it’s not the preferred way you’d rather invest, in my opinion, maybe it’s a personal judgment in these best in class companies that can generate double digit meetings returns through the cycle.
Robert Bryce 32:58
So okay, well then give me some names. And who do you like,
Arjun Murti 33:01
I don’t do individual stock recommendations. What I will say is that historically, it has been the domain of the super majors that have generated those better profitability. So it’s been the likes of Chevron and Exxon, and before they merged mobile and these types of companies, there’s only a handful of them. And in Europe, some of those companies are trying to be energy transition leaders, and maybe they’re backing away from that. Maybe they’re not. But I think people have called the question, the European focus of trying to do different things that you don’t know anything about. I think Exxon and Chevron, at least as best as we can tell, are more sticking to their knitting. So I’d say they’ve certainly got a decent chance to be amongst the profitability leaders. I can’t comment on Conoco Phillips. But obviously, I would expect any company I’m involved with to hopefully do its best. And then I think the question is Who amongst the rest the independent produce in the refiners, there will be companies who I think we’ll be able to continue to invest at the lower end of the cost curve. And that’s those would be the types of names that I think have a fighting chance, but it will also change. Right now it’s been the Permian leaders, maybe the Permian will mature, it will be some different areas. I think that’s what energy and I was trying to spend their time looking at.
Robert Bryce 34:04
Right? Well, so about the Permian. Isn’t it remarkable that here is this. This province, it’s, I would say, I would argue as the most drilled province in the world that more oil and gas wells are probably been drilled within 50 miles of downtown Midland, Texas than anywhere on the planet. And it’s still the hottest play in the world. I mean, how, how remarkable is that?
Arjun Murti 34:26
It is absolutely amazing. And it actually gets to your earlier question, which is there been many times throughout the last 100 plus years where the Permian looked like it was kind of done. And in that plate, it probably was done. So there been a whole bunch of conventional or enhanced oil recovery plays that have sort of come and gone and the shale will come and go, and I think we don’t know what’s next. I I had last summer the opportunity to go to the petroleum Museum in Midland, Texas, and they’ve got a great display that kind of goes through the end of the oil age predicted many times over the last 100 years. Every 20 years ago. People think right into the oil age. And we’re going through that again right now. And it’s always been disproven, it’s been true. People have thought about that at the Permian as well, which is this is going to go away and think about the rest of the world where we don’t have hundreds and 1000s of companies trying to prosecute what’s next, their entire countries that have had a fraction of the drilling we’ve had, who have not gone through these technology revolutions. The Middle East is a great example. South America is another example where there is a lot of oil and a lot of oil opportunity, they may never get developed, because of the governments in those countries. But that’s very different than saying there isn’t the opportunity in the first place.
Robert Bryce 35:33
Right? Yeah. So I want to read what you wrote about this was on your substack and it’s Arjun murthy.substack.com. You wrote the key drivers, and when I’m just reviewing some of the things that we’ve been discussing here, but I want to just read it, so that people are listening will have your view here. You wrote the key drivers of our view that oil demand is unlikely to peak this decade are one massive overestimation by most major forecasters have improved fuel economy gains, which have historically disappointed government driven headline mandates by 70 to 95%. He said, excluding Europe and Japan, which have done better second, challenges with raw materials, infrastructure and affordability of EVs. We expect considerable growth and Evie sales, just not the hockey stick to near 100% global uptake within the 2030s. And then finally, number three, massive unmet energy needs of the other 7 billion which we discussed earlier, that do not live in Western Europe, US, Canada, Japan. So this, I mean, that’s kind of if I was gonna boil down I mean, you’ve written and I think you’ve written that several different ways on your substack not a criticism, but just that that’s your theme that we’re not done with this commodity. And is it? Can we talk about the molecule itself? Because that’s one of the other things that I think people don’t understand is that I’ve my line is, if oil didn’t exist, we’d have to invent it, right, that this just near miraculous substance is, have you thought about that, or I mean, just because I mean, we talked about the policy, we talked about the implications, but the thickness of the gasoline, the thickness of the diesel fuel, it’s just incredible. And yet we, you know, people poopoo it, and oh, we won’t need that anymore, I mean, and then they fly on a 737. And don’t think about what an incredible machine it is, because the fuel that goes into the wind tanks,
Arjun Murti 37:21
we’re very, it’s a great line. By the way, we’re very fortunate, it wasn’t edited, or we would not have had the type of population growth and economic growth and poverty reduction. I mean, the real explosion in sort of the betterment of human life that we’ve had over the last during this age of oil in this age of fossil fuels has been a great thing, which doesn’t mean we don’t have environmental challenges, clean air, clean water are all things by the way, we can meet better when a country is richer than when it rather when it’s poor. We have cleaner air in the United States than we do in other parts of the world. And we use the most oil at anybody, and it’s not a close call, and perhaps isn’t objective as well to decarbonize and we can debate that a little bit over the timeframes. But yeah, gasoline is an absolute miracle. Diesel fuel is an absolute miracle. And I think people do take it for granted. And it’s hard to explain why they do. I think you articulated why I think oil demand will continue to grow. The biggest thing people get wrong, is actually those fuel economy gains, they assume, essentially a tripling or quadrupling a fuel economy gains that there’s no evidence we’re on track for essentially, cars do have higher fuel economy standards. But cars become bigger and heavier each year, which kind of offsets you know, whatever, however much better. The most recent BMW X five is versus 120 years ago, you know, and so it’s this fuel economy games that has most people causing oil demand to roll over this decade. And they’re just not on track. It’s not a close call. And I think the the hockey stick forecast some of the idea that the world will be 100% Evie sales by earlier middle of next decade. You can just go to the list of copper and all the different raw materials technologies, nevermind availability, or electric good stability and these other reasons for why I think that’s going to be a big challenge.
Robert Bryce 38:56
Well, let’s follow on that. Because that’s one of the other parts of this, that seems to be a major disconnect. Right between, you know, what I, what I talked about is the physical world, right? There’s, there’s the policy world and it’s easy to make policy, but delivering molecules and electrons and doing it reliable. That’s really hard. Right? So what about the mining? Daniel Yergin has written about this, I had Simon meesho. On the podcast, he talked about copper demand. Have you done calculations or went? Well, I’ll ask it this way. Talk about the material intensity of EVs and compare them to ice engines. And what is that? What does that portend? What does that material intensity? How do you how do you describe that as a limiter? In terms of the growth of EVs?
Arjun Murti 39:40
Well, if you really went to 100% EVs by 2035 or 2040 years, some years, you’d need something like a five fold increase in copper supply and demand to meet that it’s just one example. And I’m not a mining analyst that this does rely on the reports of others like Dan Yergin, you mentioned my colleagues, former colleagues, I should say Goldman Sachs and a whole bunch of different banks have done good work on this. And the thing to remember is these copper companies and these mining companies, they’re facing the same pressures oil companies are facing, which is, hey, we’re coming off a decade we’re profitability is poor. We all remember the past capex cycles where you built too many compromises and the demand thought we thought was going to be good. And then, and you know what, maybe it was good. But you still over invested right, China did grow a lot. But even with that growth, you over invested in copper supply, and so forth. So they’re under the same pressures. And of course, this, you’re not allowed to drill in the United States or Canada, we want to make sure you only exploit and pollute other countries, like in Africa, and so forth. I mean, it’s an insane mindset. But that still exists. But even with that, these companies, these copper companies, these mining companies, they face a lot of the same pressure, oil and gas companies do. So the idea that we’re on track for the type of copper supply, growth, aluminum growth, all the different metals, we’re far from it, and we’re, that was something something would have to change along the lines, where suddenly there was a major capex boom in these other areas that we’ve at least not started yet.
Robert Bryce 41:01
Yeah, well, I like your parallel there, because I maybe it occurred to me before, but you put it in an interesting way that they’re these these miners are facing the same challenges as the oil and gas producers are in somewhat different process, right drilling versus, you know, pulling the ore out of the ground and then refining it. But the the basic rock or geology in some ways is very similar in that we have high graded the best prospects first, right? We drilled the best oil wells, because we drilled the best prospects the same as in the mining and me shows point that the word quality is declining, well, you have less or quality or lower or quality, you have to mine more stuff, you have to move more stuff. And then that’s more energy intensive. So is that is that a long term? Ask again, you know, $10,000, you had it? Would you put it into copper mining? Or is that again, an issue of which companies are going to be the ones that are the most efficient? Because that’s your point on the oil and gas sector? Right? That? Yeah, the price may be higher, but it doesn’t mean every company is going to make better profits, because they might not be as well run, they might not have their geology of what their prospects are, isn’t as good. How do you think about that hardrock mining in general base metals, etc. When you think about the energy transition?
Arjun Murti 42:15
It’s a great question, it generally follows many of the same parallels that the oil industry does, which is yes, the best deposits or the you know, best or quality or so forth had been mine. But through new technology, and through to through resource development, you can start increasingly going after harder and harder stuff to do. And I think you have the same similar issues, but you do have far fewer companies. So we’re in the oil and gas business, there are lots and lots of choices and who to invest in, you can get a real spectrum of companies, you have consolidated these metals and mining industries to fewer players, certainly relative to the oil and gas industry, you know, and so the amount of pressure you have to put on companies to not invest, it’s actually far fewer of them. So for people who are against development of the general concept, there’s frankly, far fewer of these companies you have to go after and say don’t invest, don’t invest here where again, I use the example of shale oil, it was not ExxonMobil. As much as I admire Exxon and Chevron, it was not those two companies that pioneered no pun intended shale development. It was companies like pioneer or back end X to energy, or Aubrey Bill Kenyon, Chesapeake Energy that pioneered and really developed shale. And so we don’t have that same kind of effect in mining where there are smaller and different companies going after this stuff. But yes, you have the same issues where you’re either trying to play the copper cycle, that’s one way to do it, or you’re trying to invest in these best in class companies that you think will do well, through the ups and downs, there’s just far less choice in the mining sector, which is a challenge to getting this stuff developed.
Robert Bryce 43:38
Well, so how do you how do people even understand that then? Because as you say, there are one the copper deposits and the countries that have significant copper deposits, relatively few, a lot of those are state owned or state controlled? Or, you know, the state plays a much bigger role than oil and gas does here in the US who is there any way to look at those companies from any any way to rationalize them? I’m thinking about this, again, it from a, you know, a retail investor, someone that’s looking at this and saying, Oh, well, if that’s the way forward? I mean, how does you just look to the Goldman Sachs analysts for their recommendations? How do you even begin to think about that kind of you know, it? Or is that just a fool’s errand to think you can make a smart investment and those kinds of companies?
Arjun Murti 44:20
I mean, the challenge with especially something like copper is you’re trading in oil, where people say, well, Saudi Arabia’s an important producer, or Iran or Russia is, but hey, between the US and Canada, we consume about a quarter of the world’s oil demand. And we also supply about a quarter of the world’s oil demand. It’s about matches. And we’re very fortunate, you know, so we can say, Well, if there’s a disruption in Saudi or Russia that would cause gasoline prices by guests in places like copper, it’s Chile, it’s a handful of countries and if they decide to have a change in government, and they decide they no longer want these mines to produce on your whatever the old terms were, that’s it’s a much bigger challenge and these other countries now, could you go through a copper expiration cycle and decide that hey, in the US, yes, maybe there is some copper mines still develop or other parts of the world, I’m sure but we, we have not started that any more than we started it in oil. So you, you do have to go find this stuff. And people actually have to be excited about the idea that the cycles are long for copper as well. So you go through 10 to 15 years where you’re over supplied and people say, Oh, we got enough of it. Yeah, well, that’s true if demand wasn’t going to grow. And if we weren’t going to try and go to 100%, Evie sales. But if you want to do that, then you need to have a copper expiration cycle, you got to have a copper capex cycle investing, I don’t want these companies investing five to seven years based on some government mandated ECL assumption that I think is going to get revised down at some point it becomes a real catch 22 It’s got all the same kind of positive and negative challenges that the oil and gas industry does is actually more concentrated. I’m not sure why that’s a good thing. So
Robert Bryce 45:48
well, as you say that what, I’ll bring it back to you. So you have the you have the geological risks, right with the mind itself. You have the technology risk on being able to refine lower costs, or the lower grade, or, or what have you. But then you also have well, and then of course, capital risk, because it’s such a long cycle. But then you have political risk, because you’re in Peru, or you’re in Chile. And as you say, oh, there’s a new government. And by the way, they don’t like you Yankee go home. I mean, those are a lot of risks to contend with on what you know your point about the long development cycle. But let me leave that alone for a minute. Let’s talk about light oil and crude crude oil, because I’ve written me see what is that 16 years ago? No, 15 years ago, I wrote a book on energy independence, the myth of energy independence, gusher of lies, the myth of energy independence of the real fuels of the future, whether that’s different, but what is the name of the book anyway? I wrote it a long time ago that the myth of energy independence, we’ve heard this line about, oh, we’re suddenly independent in oil is Am I right? To say, Well, no, we’re producing like sweet oil. We’re exporting like sweeter importing heavy sour. Can you talk about the mismatch between us refiners and the crude that we’re producing?
Arjun Murti 47:03
You know, it’s funny when I was talking just a few minutes ago, but the US having sort of 25% of demand and 25% of supply, I was trying to use resist using the term or energy independent because I don’t believe we are, for more or less the reasons you just articulated. We are balanced numerically. But that’s a very different than saying, obviously, we had reduced dependence on the rest of the world by virtue of our shale boom, we definitely have less exposure than if you’re against a China and you’re importing 12 million barrels a day of oil. But there is this issue where and this is why when I look at the balances, I prefer looking at US and Canada together because Canada generally produces a heavier oil, we generally at least in the Shale World producing lighter oil. And of course, our refineries for a while used to, you know, consume light oil. Then when our production matured, and we were importing Venezuelan and Mexican barrels, we revered our refining system, this is the 90s now to produce to run more heavier oils. And of course, then shale oil is developed. And so like, it’s actually an amazing thing that a refineries have over time been as flexible, but they are that’s a credit to our country. It’s a credit to our refining companies. But yes, it is more complex than than simply saying liquids production is x and therefore, in our demand is y and therefore they’re imbalanced, you clearly have to do it actually much more detailed and simply even light medium or heavy crudes, it actually matters by product, how much gasoline diesel jet fuel and so forth you’re producing it is actually an energy is an amazing thing. We all take it so for granted, and I know you know this from the power space, it’s true in the oil space as well. It is not anywhere near as simple as people make it out to be, which is why I think people are so off base and the entities will just change the oil to EVs. And, you know, we’ll just go mind some copper somewhere and we’ll be fine. And like, it’s the whole thing is ridiculous. It doesn’t mean you shouldn’t try and develop new technologies or care about environment or in this stuff. But there is a simplicity which people make these energy transition statements, which are just totally not on track to come true. But now we’re on the verge of blackouts, which is a subject I think you’ll know more about we could be on the shortage of ultimately being having insufficient gasoline in some markets if the refining capacity didn’t keep pace like their real issues with kind of the ignorance that I think our country and most citizens have towards energy. Well,
Robert Bryce 49:14
I agree but but it’s not as not as pleasing to the ear to say well we’re energy balanced to numerically
Arjun Murti 49:27
This is why I wouldn’t be a good politician I’m not you know, this I can do super if I can get the like Wall Street kind of headlines, but I’m not good with this sort of political type. You know, soundbite
Robert Bryce 49:36
energy independence sounds a little more pleasing to the ear than we are. Our oil market is balanced numerically.
Arjun Murti 49:45
And we’re less dependent on the rest of the world. But that’s not as exciting the same energy independence. So
Robert Bryce 49:50
Right. But But what am I right in terms of we’re exporting our because of what you talked about our refineries and I think that the term of art is the Nelson complexity index, right? We have very sophisticated refineries and they’ve invested exorbitant amounts of money to be able to import heavy sour crude at a discount to West Texas Intermediate right and refined that into diesel gasoline etc. But is it true that we’re exporting the is it the bulk your or do you know these numbers? The majority of our light sweet we’re exporting and then we’re importing heavy sour and you know what the percentage there is?
Arjun Murti 50:28
Yeah, I don’t have that the tip by my fingertips. But you’re absolutely right that it is a net export number that, you know, again, the 23 and the 23 in the US and Canada, technically balanced out, but there’s a whole bunch of exports with a whole bunch of imports in its place. And yes, it’s generally we are exporting like crude oil. And we’re importing medium and heavy, sour crude oils from the rest of the world to which is how we’re fine, which is why we’re politicians can do real damage is suddenly decided they want to ban some amount of exports, or maybe it’s gasoline exports, they want to ban. And I think you really have to that is where I worry that you have spikes and gasoline. And it’s too much to ask for good energy policy, but let’s at least not have detrimental energy policy, that would be really bad stuff, right, which would be some of these protectionist, let’s ban exports of this and that type of thing that you often hear floated out there, you know,
Robert Bryce 51:17
yeah. What’s your take on the inflation Reduction Act?
Arjun Murti 51:22
Well, you know, I think they’re huge questions on whether giving a whole bunch of money to venture capital and PE firms and their CEOs is going to result in a scale up with new technology. So I’ll say, it’s probably better than an equivalent tax regime. And then I think we are about carrots not sticks as a country as a general commentary. I think for sure, there’ll be some very successful companies that are able to utilize these tax credits, and corporate giveaways to make a whole bunch of money. I think it’s a whole nother thing to say, and we don’t know whether those new technologies will scale up x the subsidy. And that I think we definitely do not know and hydrogen is a great example. And I worry about this less for the United States than they do for Europe, Europe is presuming that hydrogen will be there at scale to displace a whole bunch of natural gas consumption, which I think is highly untested and uncertain, I think this is going to be true for a lot of these Ira type objectives. So I, I actually would say that, it has been exciting to see a whole lot of new capital formation and companies formed, and they are for sure benefiting from the subsidies given out. And I think you can make a lot of money in this space as that PV or venture capital person, or as the executives of these companies, whether it’s going to be good for society or not, or more specifically, whether it’s going to result in the ramp up of scalable new technologies that are would work kind of extra subsidy, or at least without most of the subsidy, that is a huge question that we will not know for at least a decade, if not two decades. It’ll make some people rich, right. So great.
Robert Bryce 52:50
Well, okay, well, I won’t necessarily agree with that last part. But but let’s talk about that. To me, it seems like the this overall subsidy regime, well, you get x if you just build solar and wind and there’s no sensibility about whether that area that you’re building that solar and wind, whether they even need it, because it’s like, well, you get a tax credit, no matter where you build it from a grid standpoint, that’s not a good policy. We need to we need a more strategic approach. Well, we don’t need more solar in wherever this one region is, why are we building solar there? Because we got a tax credit. So it seems to me a very blunt instrument in terms of approaching what is a very sophisticated complex network of networks, which is the electric grid, you just say, Oh, here’s a bunch of money, just go build some stuff, regardless of where you put it. I mean, that’s how I see it. But But does that ring true to you?
Arjun Murti 53:46
No, I think you’re absolutely right. I do think it’s an area you’re more of an expert in. But the idea that we’re only going to have a singular objective, which is co2 net zero by some year. And we’re only we’re only going to start, you know, you know, without taking a holistic view of reliability. As you just point out, are we making the transmission line infrastructure needs the last mile infrastructure needs? Are we doing any of this other stuff, but really, the reliability being a key thing we know in the coming years with continued energy demand growth, we are going to face some challenges with grid line reliability. And I hope that will wake up the broader population to kind of the ideology that has led us down led us astray, which again, is not saying we should have zero solar wind. I’m not saying that either. I think in some places, it probably does make sense. But you can’t just add it to the grid ad infinitum without caring about or at least addressing transmission lines, reliability and so forth. It has to be part of a total package. And again, I know you’re very you’re better versed than I am on on it. I think this is going to come home to roost sooner rather than later. Maybe that will wake people up that you do need firm dispatchable supply or some other solution to ensure we have our 24/7 grid availability which I think there is some risk we won’t
Robert Bryce 54:55
right. So hydrogen I take the H stands for All right. So that’s, that’s my degree on
Arjun Murti 55:03
that. Yes. Okay. So we’ll see. I mean, we’ll see, but I guess it’s.
Robert Bryce 55:08
So give me your read on hydrogen.
Arjun Murti 55:10
I mean, I have no issues with people studying it, I would my issue with hydrogen is the presumption that it will be there at scale, sort of ex subsidy in some reasonable timeframe. And again, I think it’s a much bigger risk for Europe. So they of course, became way too dependent on Russian gas, the Russian gas went away, they disincentivize domestic gas production for whatever reason, they are trying to so to varying degrees, importing LNG, but even there, they don’t really want to they don’t want to sign the long term contracts. They keep saying, Well, no, it’s still they call it fossil gas, right, the most obnoxious term in the world, it’s been called natural gas forever. But of course, the European they’re climate ideologues, they gotta call it fossil gas now fine. But it says they don’t want fossil gas by Sun year, the presumption that hydrogen will be there at scale. And let’s just say you can force through subsidies that it will be there. Let’s just say you have unlimited government resources, somehow, I think the idea that your industry is going to be cost competitive at those types of electricity prices. In the event, it does not scale again, it might, but I don’t understand how we can treat it with such certainty that it will. And that I think, is where I’m not sure how, as a citizen, you’d want to be dependent on governments that have that sort of certainty in their planning for what is still an unproven technology from again, the ability to scale at cost if the scale of costs either. It’s easy to say these words quickly, scale at cost. Like those are hard things to do. You can’t just say quickly, you actually do have to do these things. And to say that society is going to be dependent on this stuff. That’s a huge, huge problem. It’s a huge problem. How is Europe not signing long term LNG contracts? It’s insane.
Robert Bryce 56:45
Well, okay, so let’s continue on the Europe and Saturday for just a minute. We’ll just talk more broadly, and not specifically Germany, of course, leading the insanity. But you made a key point and my brother, well, I am who I’m very proud. He’s done well, in the insurance business works for Arthur J. Gallagher, says nothing happens in industry and society without insurance. But you made the point recently in your substack, Arjun murthy.substack.com, that European insurers are saying they’re not going to issue insurance for hydrocarbon products or projects of any kind. Will, that potentially has global ramifications? Because the European insurers are such big players? Can you talk about that scenario, if you add that on top of the ESG decline curves 1% growth we’ve already talked about? I mean, is this where you another reason to for your outlook on superball to use your term, then that would be the other wildcard in the mix here?
Arjun Murti 57:43
That’s exactly right. A lot of attention is placed on ESG. And we can certainly talk about it, I actually think to some degree, it gets too much attention and is too much of a hot button issue. And I actually think the impacts of ESG on investment on investment in traditional oil and gas, it’s actually often overstated, that it’s had a more modest negative impact and a major negative impact. The bigger risk is the Glasgow financial alliance for net zero, which is what you’re referring to, which is I’ll just going to call that the umbrella organization for the net zero insurers Alliance, and the net zero banking Alliance. And what they try to do is they say, as a bank or an insurance company, you should have an emissions finance target, that should be quote, Paris aligned, which means it should be net zero by some year, and it should be declining every year, especially starting now through 2030. And therefore, by again 2030 2040. Your financed emissions should be should go down by some prescribed amount. And the issue with that is I What if the new technologies aren’t ready, what if we continue to need the old stuff? And of course, when we talk about these insurance alliances, who are we talking about? Are we talking about Russian insurance companies? Are we talking about Iranian insurance, capital markets providers? No, we’re talking about US and European firms. And who do they insure? And who do they pay US and European companies? So we’re basically trying to cut off the knees of companies that provide capital markets and insurance access to American and European companies, and to a lesser degree, Canadian companies. How does that make sense in any world that we live in? And the presumption again, that these newer technologies are going to scale at cost? keywords that it’s just same quickly? That there’s such certainty to it? I find completely insane. You know, and so there has been the net zero insurers Alliance, under pressure from Republican attorney general’s for antitrust concerns has actually disbanded since I wrote that last article, which is a step in the right direction, but the pressures are still there. And a lot of them are still saying we’re not going to finance new oil and gas pipes again, what does that mean? They’re not not financing new Russian oil and gas projects or reading oil and gas projects or any other country the talking about US and European oil and gas projects. It is not such a good thing.
Robert Bryce 59:54
And so to be specific, then because these European insurers play such a big role in the global market. So you’re talking about Swiss Re Munich Re Lloyds, right, these are going to be the big players that are not are either primary insurers or what I’m calling it the line slips right there. They’re providing these lines of insurance globally to other insurers to other who are then reselling that coverage. Right. So the potential impacts of this on the particularly upstream, I would assume would be the key here, that those are the things that are that are could be another source. I said it before but another source of volatility if they say, Oh, well, we’re, you can’t insure it, and you can’t, you know, you can’t expand into whatever field then that stops that production domestically, which then makes it to your point makes the US more reliant on foreign hydrocarbons, then is that have i restated what you just said?
Arjun Murti 1:00:50
You’ve nailed it. The only thing I’d caveat in what you said is I believe Lloyd’s has actually been one of the few brave firms to continue to provide insurance. I think they deserve to be favorably singled out. But some of the other ones you mentioned Munich, re, Swiss Re, etcetera, ing HSBC? I’m going to forget some of the names. Yes, it’s it’s a huge issue. It’s like it’s an issue for capital markets, and insurance markets. I think capital markets will be okay, because there are more capital markets providers. And that is where the JP Morgan’s And the Goldman Sachs’s and Morgan Stanley’s of the world. I mean, they’ve resisted the worst of these pressures. It is really the European insurance companies that the kind of the group that I probably worry most about now, the oil and gas industry does have some some self insurance mechanisms, and they need to figure out why they still are a strong industry probably had a boost, and to enhance their own self insurance out there as one of the avenues so that they are not dependent on these European firms in particular, you Europe is really where I think the biggest issues are on this entire discussion.
Robert Bryce 1:01:47
Well, that’s interesting that you say that, because that I know. And as I said, I’m proud of my brother and what he’s done, but you know, he’s creating his self insurance pools. And because what I’ve heard from other people in the oil and gas industry is they’re excited, well, we’re gonna raise our own capital, we’re gonna commercial banks are shutting us out, we’ll we’ll raise our own capital, we’ll do it ourselves and make it make that happen as an alternative. So Arjun, we’ve been talking for about an hour, I don’t want to keep you too much longer. Let’s well, I’ll ask you this question again. So because your former Goldman guy at Goldman Sachs, obviously has a long reputation. So not asking you for specific names. But we’ve talked a lot about hydrocarbons. But we’re looking at also a world in which there’s a lot of volatility, a lot of uncertainty, right, more as much uncertainty in my adult life as I can remember. So if I said, here’s $10,000, Arjun, go put it where you think I can make the best return on it? Would you put it in gold and crypto? Tell me what, how would you allocate $10,000 right now.
Arjun Murti 1:02:43
So I’ll speak for myself and how I kind of think about my own personal investments, which is I am not a day trader or short term person. So that’s just not how I think about things that I’m fortunate that I’ve had a good career where I’ve been able to, like invest for the long term. We if we were if we were in 2030. And I look back over the previous decade, will I have been happy to have owned oil and gas companies? I think the answer is yes. So they’re broad based indices, like the XR Li. They’re individual companies that people can do work on, but I will be focused on, okay, I think this sector is going to pay a bunch of dividends, there’s gonna be a lot of volatility along the way. But through all that volatility, you’re gonna have mid teens or better returns on capital, and that will compare favorably with the broader market. So right now, energies about 4% of the s&p 500, the major index, its earnings are about 8%. That kind of got to the PE point you made at the beginning of the discussion. Now, you know, will they get back to eight or nine or 10%? I think they will, you know, so do I think this sector will outperform the broader market looking out over this decade? Yes, I do think it will, it’s going to be very volatile along the way. But I really do like a lot of the traditional energy names and in part, because there’s assumption that it’s going away. And I’m going to argue not only is it not going away, I think it’s actually going to continue to grow. And it’s actually going to grow with from a sector average perspective, better profitability is after a 15 year down cycle, it’ll be a 15 year upcycle. But then for the best in class companies, they may be able to even sustain that through all the ups and downs that we expect. And so I do like the traditional oil and gas sector, I think, Canada, within North America is an interesting place, we’re going to need Canada’s oil sands to be part of the energy transition solution to be it’s going to be needed supply in the world. They’d been out of favor as any US company has been to kind of the little bit more like the mining stocks we were talking about before where it’s long lead type production. If you’re concerned oil demand is going to go away you’re not going to want to invest in some Canadian oil sands mine but Canada within kind of the global sphere is an area that I like a lot as well. Can you say oh, yeah,
Robert Bryce 1:04:41
so your your short answer on the $10,000 is buying oil and gas in the US. equities in the US and Canada is am I
Arjun Murti 1:04:48
reading that Baghdad is where I’ve personally invested? That is correct. So so you’re not
Robert Bryce 1:04:52
a gold guy. You don’t believe in any other asset. That’s your favorite asset class is what I’m hearing you say?
Arjun Murti 1:04:56
I think we have lots of currency issues that are definitely for us. little speaker and a different podcast. And gold probably play some role in that. But I’m for sure not a gold expert. So I think the copper in the mining stuff, it’s also got a role. Again, it’s not quite my area of expertise I don’t think I worry about with copper and some of those commodities are a lot of the code is based on, we’re gonna have a rapid energy transition, which I don’t think we’re going to have. So if you start taking down your Eevee forecast, and you start building more sanity into the projections, it does take away some of the upward pressure from demand. And if I also had the view that we’re kind of past peak China, and it past peak industrialization in China, than some of the heavy industry that also drove the demand of those other commodities I worry about where I feel like people feel most confident that oil demand is going to go away. And that’s a it’s like the last thing to go away, that we are most likely to have oil demand continuing to grow for the foreseeable future, even natural gas, like you could do coal, or you could do nuclear, or you could do solar and wind are anything that you might like or just like some of these things. But there’s lots of ways to do power generation. There is a miracle to gasoline and diesel. And you alluded to it, but I share. And I think there’s a certainty there for oil demand growth, assuming we are still optimistic that the world wants to get lifted out of poverty, which I think it does. Right.
Robert Bryce 1:06:14
Well, one more question, since we’re on that, and then I’ll have the final two questions. So I noticed in your subject, you’ve talked about Roc E, return on capital employed a lot. Is, is that your favorite? Well, it appears to be one of your favorite metrics. Am I reading you correctly? And if so why is that such an important metric? Compared to, you know, again, I just, I’m an observer, most all of my money is in Schwab dividend, right? I have an ETF. And I know how that works. It’s low cost blue chip stocks that pay dividend that I can understand, right? I’m not sophisticated enough to do these deep dives. But you do you feature Roc II a lot? What Why is it and why is that such an important metric for you?
Arjun Murti 1:06:54
It is one of my favorite metrics. But I’d say people can use different metrics to play with simply be the goal of a company is to generate profits for its shareholders. And in doing so we will meet societal goals and so forth. So I’m profits first. That is the purpose for why companies exist to neat profits. You can’t have your plants blowing up. You know, you can’t violate government laws. There’s a whole bunch of rules and regulations and environmental standards, you do have to live by to generate good profits, but it is profits first. And I think in the oil industry, oftentimes companies will focus on barrels, and let’s produce more and hey, I think this is low cost, and maybe it is low cost. And maybe some of the costs are higher costs. Everything ultimately has to reconcile to fullcycle profitability. So you mentioned this shrub, blue chip dividend fund that you you prefer, I will, without knowing anything about that fund for those companies be able to pay dividends, they’re going to be profitable companies from dividend from profitability comes dividends. And so it is a way to, to me, this is the purpose of companies it is to generate profits. I am a proud believer in capitalism, it doesn’t mean doesn’t mean we don’t need rules and regulations we do. I may like limited government, but I’m not for anarchy, you do need some amount of rules and regulation out there for sure. But the goal of a company is to generate profits. And I think in all industries, people often get wrapped up in a lie produce barrels that produce this widget or this technology, what have you, you have to make money. It makes your company better and makes your employees better. It makes society better.
Robert Bryce 1:08:17
Well, that’s good. Yeah, I liked the way you put that. My line would be in my response would be able to if it’s not profitable, it’s not sustainable. Because I hate the word sustainability. It’s overused.
Arjun Murti 1:08:28
You’re better with the buzzer city. That is a much better line. If it’s not profitable. It’s not sustainable. I like that a lot. I may you may see that chip on my stuff deck. If I may borrow it.
Robert Bryce 1:08:36
No, don’t don’t borrow it, steal it. It’s yours might with my compliments. Thank you. Last few questions. Arjun, what are you reading? What’s on the top of your see books behind you there one looks like what are you reading these days?
Arjun Murti 1:08:50
So I’m reading two books right now. One is called the Big rich, which is the rise and fall of the Great Texas oil fortunes. It’s written by Brian burl. I think it actually came out like a decade ago. It was a gift I received on that trip to the Permian Basin last year. Really enjoy that. It’s
Robert Bryce 1:09:03
it’s probably 20 years old. Now. I have that book. Right. And that’s a it’s an old Yeah, sure. I know that.
Arjun Murti 1:09:10
Then I’m also reading coal in India. Coal is one of those topics where coal is now basically not used in any appreciable way in the OECD. It is now 90% and non OECD fuel. And I don’t see why China is going to stop using its coal, especially if it’s past peak population and peak industrialization. Why would they build a new electric grid? It makes actually no sense. And when think about China, India and Pakistan, why would they be paying world LNG prices when they have a domestic coal that is low cost? It’s reliable, it’s jobs, it’s tax dollars, bureaucracy, but I think there’s a general understanding that I don’t have I’m not a coal analyst by background. So it’s a book called coal in India. It’s by rule Tong tongi. I may be mispronouncing his name and two other individuals all of seeming Indian heritage. I’m reading that as well. And I’m also reading in Rand’s The Fountainhead so I’ve read Atlas Shrugged. A couple of years ago, I actually never read the final and headed, I’m about a quarter of the way through that. So meeting that one as well.
Robert Bryce 1:10:04
Yeah, well, we didn’t touch on coal. But that’s another topic that I think is really interesting. Vietnam is boosting its coal production. Pakistan in February said, we’re out of the LNG market, we got priced out, we’re going to quadruple our coal fired capacity, which, you know, this country that is desperately poor, as you know, and desperate and desperate, and will having, you know, ongoing blackouts, and desperately needs a more reliable grid. Last question, then Arjun, what gives you hope?
Arjun Murti 1:10:33
Here, what gives me hope is things like substack, in seeing more voices come out there where they like, so like, I was happily sort of retired at Goldman and doing all this board and advisory work. But as this energy transition discussion, just to me went completely off the rails, I did feel an obligation like, Hey, this is something I know something about the oil and gas industry. And what I’m hearing is not accurately portrayed in the mainstream media or by politicians, or what have you. And I felt an obligation to simply write about it doesn’t mean I’m right, I can fit any claim will tell you, I’ve made many wrong calls about many things. And it could well be wrong in these perspectives. But I know that the other people are wrong, too, for sure, I know, some of these perspectives on oil and gas are just simply the wrong, they’re not accurate. And so I take hope in things like substack, and your invoices like yourselves. And again, I listened to people across the spectrum, both domestically and globally. There are many different views out there. And it does give me hope that there is an opportunity for people to get educated and to make better choices going forward, I actually feel very hopeful that we’re through the worst of the energy conversation. We may not be through the worst of the energy crisis. But we’re through the worst of the energy conversation, and people can start recognizing some of the falsehoods that have been told to them about how easy it is to transition and how this technology that technology can ramp up and is to build an endowment, there’s no way it is there’s no chance it is. And I take hope in that I take hope that people in Africa are starting to speak up their own voices. How is it that Africa with 1.4 billion people sit and 17 18% of world population only uses 4 million barrels a day 4% of the world? So if there’s no justice in that, where’s the justice in Africa using just a fraction of the world’s oil, they actually export more oil to the rest of the world than they used domestically. That is not okay. So the exploitation of that continent, which is comprised of 52 or 53 individual countries, that is something where I am happy to start hearing African voices rise to self advocate for their needs, and not rely on these frankly, awful European based institutions like the United Nations like the IEA, like Glasgow financial alliance for Net Zero, more African voices are a good thing. And to me, it is going to be the key to having a healthy energy revolution, the actual fate of Africa, that is where this energy evolution will lie.
Robert Bryce 1:12:48
I think that’s a good place to stop. And I can say amen to that. And I agree with you on many of these issues. And I just recently wrote about that and on substack, in a piece called Let Them Eat solar panels, which is about ExIm Bank, loaning $900 million to build a solar plant in Angola when they should be building a natural gas fired power plant, but that was my work. My guest has been Arjun murky. He is a partner at Veriton veriton.com. He also is the publisher of super spiked on substack. You can find it the Argent murti.subtract.com. Argent, this has been great fun. It’s one of the joys of the podcasts, I get to talk to people like you and to learn and that’s why I do this. So many thanks for coming on the power hungry podcast.
Arjun Murti 1:13:32
Robert, thank you so much for having me. Thank you for all you do. And it’s been a real pleasure to speak with you today.
Robert Bryce 1:13:37
Thanks and all you had podcast land. Thanks for tuning into this episode of the power hungry podcast. Be sure to tune in next time until then. See ya.