00:00Quantify the cost for us so far.
00:04The cost?
00:07So what's happened is, if you think of it as a series of steps that have gotten us to this
00:14price pivot,
00:15the first thing that happened, of course, is that the straight was essentially closed,
00:21and then producers started building up inventory,
00:24and now what's really changed is that producers are now announcing that they're shutting in production.
00:30And that has sort of spun the price up.
00:33Although, you know, I think we need to wait until the WTI price opens in the United States.
00:39I think we might actually see a little retrenchment back under Brent.
00:45The thing is, just last week, people were saying that oil would get to $100 a barrel
00:50if everything goes wrong in Iran.
00:52We're headed towards $120.
00:54What is that saying about what's transpiring, what we're seeing in the situation in Iran?
00:59How are you reading it?
01:01I'm reading it as uncertainty.
01:03You know, I think there was the expectation that this conflict could be resolved in a couple of weeks.
01:12And what we've learned is that that's not going to be the case.
01:15So now it's a question of, well, if it's not one or two weeks, is it three weeks?
01:19Is it four weeks? Is it five weeks?
01:21You know, how long is this going to last where the strain is actually closed?
01:25And producers are now being forced to shut in production.
01:29So I think it's just uncertainty.
01:31So when you're uncertain, what do you do?
01:33You go out, you scramble.
01:35You go and you buy, you know, there's a snowstorm coming.
01:37You go buy extra water and milk.
01:39This is sort of the same idea.
01:41Grab what you can now.
01:42And that bids the price up.
01:46There is no need, according to the IEA, to release the Strategic Petroleum Reserves.
01:52Is the IEA right?
01:53I mean, there seems to be quite a bit of panic among oil importing countries.
01:59OK, so there's several layers of protection, if you will.
02:04First of all, we entered this period with a relatively oversupplied market.
02:09We also entered this period with about 300 million barrels of sanctioned crude in tankers.
02:17And in the last two plus years, China has been building tremendous government stocks.
02:24So it's not as if this is just a supply chain issue, a real-time supply chain issue.
02:33We actually have quite a bit of inventory to draw down.
02:36If you think about the 300 million barrels that is in, that is Russian and Iranian crude,
02:42essentially sanctioned barrels in tankers, and you think about the 12 million barrels a day,
02:47or let's say 14 million barrels a day that have been disrupted from the Gulf,
02:51you know, you're talking about 20 plus days of supply that can be covered.
02:56So I think that's the first thing, is people will begin, or analysts and the governments
03:00will begin looking at that drop in the stocks at sea.
03:04And then the next thing will be commercial stocks.
03:06And then we have the SPR in the United States, Japan, Korea, and parts of Europe.
03:11And we also have a very substantial strategic inventory in China.
03:16So there are a number of ways to address this problem.
03:19Again, it comes down to how many days will the strait be closed.
03:27What does the IEA do in the meantime?
03:30What should oil-importing countries do in the meantime?
03:36Well, you know, I think you've got to, even though oil prices are made in a global market,
03:42there are different consuming countries with different problems.
03:46The United States, with crude in products, is a net exporter of oil.
03:51Most of the oil that comes out of the Strait of Hormuz goes to China or other Asian countries.
03:57So that's the focus.
03:59That's going to be the locus of the crisis in the beginning.
04:02And as I say, there are strategic reserves in the region, and there are stocks at sea in the region.
04:07The IEA, which has a strong European orientation, and obviously North America, and OECD countries,
04:15I think they're at that point now, I mean, I don't know when exactly they said they wouldn't draw down.
04:20I think it was Friday, maybe.
04:22You know, when a conflict like this is having such a massive impact, every single day there'll be new decisions
04:29to make.
04:30So I wouldn't be at all surprised if this coming week there are discussions about drawing down SPR or strategic
04:36reserves across the OECD countries.
04:40Sarah, we know that millions of barrels of Iranian oil and Russian oil out at sea, for the most part,
04:46there were no buyers from them.
04:49I'm wondering if this changes the situation.
04:52Might there be increasing demand for these barrels of oil out at sea?
04:57Well, the Chinese were buying them, and will continue buying them.
05:01And then the U.S. Treasury Department basically gave a green light to India to buy Russian barrels.
05:10And what we suspect is that Russian production will probably go up a little bit.
05:15It certainly won't fall at this point.
05:17So, you know, we'll see more Russian barrels going into India.
05:21We'll see more Iranian barrels going into China.
05:23You know, again, it doesn't solve the problem, but it just pushes the uncertainty out a little bit as everyone
05:31waits to see how long will it take for this conflict to wind down.
05:35And it probably will be a wind down.
05:37I don't think it'll stop one day, but there'll be a winding down.
05:40And at some point, it will become apparent that it's safe to move ships through the strait.
05:48And then things begin to turn back around.
05:51I just don't know when that day will be.
05:52I don't think anyone knows when that day will be.
05:56But you seem pretty calm, Sarah, which is great.
05:58I'm just wondering, could you perhaps explain the energy market today versus 10 years ago?
06:04What's different that could perhaps allay some of the concerns that people have today?
06:11Well, I mean, one thing to take into consideration is that, you know, there has been the nascent energy transition.
06:20So we have seen countries, China being the most notable, that have their vehicle fleets have shifted over to electric
06:29vehicles or hybrid electric vehicles in the case of Japan.
06:32Even in the United States and in states like California and across the country, there are more electric vehicles.
06:38So the gasoline consumption is not growing at the pace it used to grow at.
06:44And so when you think about, you know, if you go back to the 70s or even into the early
06:502000s, oil demand was growing at, you know, anywhere from 1.6 to 1.7 million barrels a day.
06:56It's growing at about a million barrels a day now.
06:58So we have a lot less demand each year or demand growth, I should say.
07:05And so that's a little bit of it.
07:07And then, of course, on top of that, China has pursued this policy of self-sufficiency in critical goods, commodities
07:15and minerals.
07:16And that's had a big impact on their ability to weather a storm like this.
07:20And of the 14 million barrels that are coming out of the strait, typically about 4 million are going to
07:26China.
07:27So they have many ways to manage this.
07:30The other thing to take into consideration is we learned during the pandemic the impact of demand controls and demand
07:37restraint.
07:37So there are several countries who now know how to restrain demand.
07:41Not that we're, I don't want to suggest that we're going to something like the COVID demand reaction.
07:48But there are ways to reduce demand for short periods of time.
07:53And we may see some of that.
07:56So we've also seen a growth in drop-in fuels, whether it's biodiesel, ethanol, the very, very small sustainable aviation
08:07fuels.
08:08We've seen electricity.
08:10You know, we have a much broader range of sources of electricity.
08:12So I'm not suggesting that, you know, this is a significantly easier crisis.
08:19It's still a crisis of uncertainty.
08:21It's still a crisis of supply.
08:22It's just it's not quite where we were at the beginning of the 2000s.
08:27Right.
08:28So, Sarah, very little chance of an energy crisis, which we saw in 22, in 1973 even.
08:36What signals should we be looking out for before deciding we're on the cusp of yet another energy crisis?
08:46Well, I think we are on the cusp of an energy crisis because we don't know how long this supply
08:51will be disrupted.
08:53So I think we're there.
08:55I mean, that's why the price is at $105 or $115 a barrel.
09:00I think the issue right now is how long can this conflict go on?
09:04How long will the strait be essentially closed?
09:07And, you know, I think we have to decide what is, how will we define the end of the conflict?
09:14Will it be absolutely no exchange of missiles or bombs or drones?
09:20Or will it be the occasional drone?
09:24I think that we will get to a point at which the benefit of transiting the strait will outweigh the
09:31risk.
09:32We just don't know where that point is.
09:34We're certainly not there now.
09:36But in a week, we could be there.
09:38In a month, we could be there.
09:40I don't see this going on for months and months and months.
09:42So I think there's also, as much as there's uncertainty, there's also a sense that this will probably come to
09:49an end.
09:49And when I say to an end, I don't mean necessarily the conflict between the countries, but the ability to
09:57then transit the strait.
10:00What is the most underpriced risk out there when you take a look at the, you know, the situation in
10:06the energy market?
10:09Underpriced risk?
10:11I'm not sure I follow you.
10:13That's right.
10:16What are investors underpricing right now?
10:20The possibility of?
10:22So I think what happens when, I mean, energy and particularly oil is a very significant part of what drives
10:29economic activity.
10:31So you have concerns about economic activity slowing.
10:35So that would be, you know, GDP slowing, potentially even pushing into negative decline, which would be like a recession.
10:42You obviously have inflation.
10:44Inflation will now be significant in many countries that are importers.
10:49So there's, yeah, there are a lot of risks.
10:51There are a lot of macroeconomic risks here that haven't really kicked in yet because we're still, again, in early
10:57days.
10:58But for sure, there could be economic fallout from a oil supply disruption that keeps prices at this level.
11:06So go.
11:06You
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