I went on the popular tech show TBPN yesterday to discuss what I think the US government should (and shouldn’t) do about the rising oil prices due to the war in Iran.
At a high level, my message was: There is absolutely no substitute for re-opening the Strait of Hormuz, whether through victory or a well-protected convoy. But there are other forms of unlocking access to oil that can make a significant difference.
I also cautioned against proposals I think are terrible, such as banning oil exports, manipulating oil futures, and treating Venezuela as a near-term solution.
John Coogan:
What’s going on? How should we even be thinking about oil prices right now, the impact of the war in Iran? How should we be processing this news?
Alex Epstein:
Okay. So there’s a million things to comment on, so I’m going to try to segment what I comment on, but we did get involved militarily in Iran, which I would just say, in my non-area of expertise, in general that is a good idea. I think it’s a better idea to have Congress involved if you can get them involved. And I think it’s a good idea to have a lot of expertise on international oil markets being brought to bear when you do this.
And I think this administration does a lot of good stuff on energy, but I think it’s pretty clear at this point that there was not maximum expertise brought in on this. And so the standard issue when you’re talking—
Jordi Hays:
And indicators there would be like the Strategic Petroleum Reserve hadn’t been refilled—?
Alex Epstein:
I mean, we can talk about that. So let’s make sure to get back to that one. But the main thing is just, rough numbers, Strait of Hormuz, which Iran has control over, is 20% of the world’s oil production is flowing through that every day. And so whether you’re looking backward or looking forward, there is no replacement whatsoever for opening that Strait and keeping it open.
And one of the things we’ve heard from different people is, “Oh, we have a lot of options on the table. There’s a lot of things that we can do.” There are definite things that you can do, but none of them is 20 million. So I mean, that’s more than US oil production, just flowing through that one place.
So we can talk about the other things, but I think the first thing people need to recognize is if you do not get that thing open, then you have dramatically higher oil prices. And then the other thing to get is: oil prices really matter.
John Coogan:
Strait of Hormuz, dumb question, can’t you just go around?
Alex Epstein:
I mean, you can try to some extent, but there’s a reason why 20 million a day are being routed through here.
John Coogan:
Because it actually comes out of there as well, right?
Alex Epstein:
Yeah, I mean, all of these things are very, very optimized. One of the things about just understanding the energy industry is things are just very optimized in terms of where the infrastructure is. You’re doing all of these things. So there are other, and we’ll talk about this, I mean, there are certain pipelines you can pipe more oil through. There are alternate routes, but we’re talking about in the millions a day maybe. Most of our other options are sort of in the one to two million barrels a day.
John Coogan:
Sure.
Alex Epstein:
And just so people know a barrel is 42 gallons, so you’re talking about almost a hundred million gallons a day for the stuff. So you don’t have a lot of great options. And I think that’s very important for— I’m going to give some options, but the number one option is keep that thing open. And there are basically two ways to do that.
One is you just win the war, if you want to call it that, a lot more quickly.
John Coogan:
Sure.
Alex Epstein:
If you get some form of surrender and you have friendly people controlling it, then guess what? It can open. That’s one thing. And so I’m not an expert on how to do that, but schematically doing that is very effective. The other thing, which is a little bit—
Jordi Hays:
But game theory for Iran is they actually benefit from global markets being in turmoil because it gives them some leverage over any type of negotiation.
Alex Epstein:
I mean, this is the biggest damage that they can do. I mean, clearly we’ve seen they’re not going to send missiles to Israel and get rid of Israel, let alone do anything to the US, but they have this incredible control of one of the centers of the world economy, and they have a bunch of stuff going on there. So let’s talk about that.
So option one is you get a surrender, and they don’t use all of their options, but then let’s talk about their options. So they have mines in this thing, so they can blow up mines. They have missiles. Maybe the worst thing they have, and this is a change in recent years, and you’ve had Palmer on here and Ethan on here. The drone thing is just a total game changer because you can have a small vehicle, you can launch one of these Shaheds out of the back of a truck, they can go really far, and that’s a lot harder to deal with than a fixed installation.
Jordi Hays:
They have something like 500 miles of range on a typical—?
Alex Epstein:
Yeah, depending on, yeah, right, so—
John Coogan:
The truck drives up to a beach, drone launches, as soon as it finds that cargo tanker that has a bunch of oil on it, it hits it.
Alex Epstein:
Yeah. And then you’re worried about that—
John Coogan:
So you’re not even going to go.
Alex Epstein:
—as you’re going through. So you have to think about, those are the kinds of threats you face. So how do you deal with that? I mean, basically, you need the US to lead some sort of convoy where people have sufficient security and economic assurances that it’ll go through. So what’s involved in that?
Well, one thing is, if possible, you want to get allies involved. And it’s even possible you get unconventional allies like China, who has—well, they depend on this. Unlike us—you want to go back to SPR—they’ve been filling up their reserves.
So they have more reserves relative to their imports than we do relative to ours. If you think about ours, we have about 400 in the SPR, and we can release about four million a day. So we don’t have as much— But still, they really care about this, and a protracted thing is bad. But for sure, Japan, South Korea, India.
So one thing is just at a high level, if you’re doing this convoy, can we get these countries that are aligned economically—maybe China, but definitely these others—can we get them involved? Because then they have military presence there. That’s an additional threat to Iran if they attack one of their ships. But that’s a macro thing, is just, can you do this alone or can you do it with allies? I think ideally you would do it with allies.
Then there’s a question of what you do about these various things. I mean, the other macro thing you can do is just in some way credibly threaten Iran and say—and I can’t give the details of how to do it—but, “If you attack in the Strait of Hormuz, it’s going to be very, very bad for you.” So just at a high level, can you make that threat so they understand this is going to be very, very. Now, we’ve wiped out a couple layers of leadership, so they might be taking these things seriously.
After that, I think the biggest thing from what I’ve heard from military experts is just these drones. What do you do about these drones? How do you give any kinds of assurances?
And as far as I can tell, we don’t have any one perfect solution, but you can do a certain amount of stuff from the air. You can do a certain amount of stuff from the ground, although it’s very, very expensive. And then most cost-effective where you can do it is you can take out certain stockpiles and facilities with the proviso that these things are decentralized. And of course, I have no specific knowledge about where they are.
John Coogan:
But in theory, if there’s the suicide drone, the Shahed, there’s a factory, and you take out that factory, you have reduced that capacity.
Alex Epstein:
So that’s going to be it. And I know you guys had on Ethan Thornton, who I’m friends with. And he talks about this a lot, is just this cost asymmetry issue, is you just want to be doing things, even if you’re way wealthier, you do not want to be spending $3 million to take out $30,000.
John Coogan:
Which might be what’s happening with the Patriot missile batteries, corrrect?
Alex Epstein:
Yeah. That’s the kind of thing that happened, so you need a combination of those kinds of things. Then, the other thing, so that’s all the security stuff, so you get the allies involved, you take these actions specifically against drones. What was I going to say about, the other thing you can do? I’m just making sure—
Jordi Hays:
Well, the other big factor is the loss—
Alex Epstein:
Oh, the insurance.
Jordi Hays:
Okay. Insurance.
Alex Epstein:
Yeah, the insurance. This has been floated by the president, and it’s a reasonable idea, but my understanding is the insurance vehicle we have, the Development Corporation, does not have enough funding, so you might need to go to Congress.
But basically, you want to be able to say, “Hey. We’re going to lead this as the United States. We’re going to lead it with allies. If Iran does anything, it’s big trouble for them, and we can counter their specific attacks, and if something goes wrong, you’re insured.”
You’re trying to create that confidence to get enough people going through, and then you get a certain amount of stability, and then you start to get closer to your 20 million barrels a day. Either that, or you just defeat them really quickly—or both.
Jordi Hays:
So, the other factor is just the loss of production, disruption to production, plants shutting down, plants being damaged. How does that factor in? Do refineries get brought back? I’m talking about an allied country.
Alex Epstein:
You mean just the trend over time or what?
Jordi Hays:
Yeah. Generally, I mean, just seeing the videos coming out. You’ve seen places I think like Qatar, Kuwait, places basically just saying, “Yeah. We’re going to pause production, because we don’t even have a place to store this,” and/or they’re suffering damages, and it doesn’t make sense to keep refineries online.
Alex Epstein:
But this is all just downstream of, do you have the route open?
Jordi Hays:
Yeah.
John Coogan:
Got it.
Alex Epstein:
If you have the route open—
John Coogan:
Then, you’re good.
Alex Epstein:
—it solves everything.
John Coogan:
Okay, okay.
Alex Epstein:
The way to think of the other things, because we do have some other interesting options, we have to think of them as, “These are temporary stop gaps.” I mean, you hear some crazy things. People are like, “Oh, Venezuela.” We talked about this last time.
John Coogan:
I was just going to ask you.
Alex Epstein:
Venezuela is less than a million. I mean, it’s beyond crazy. It’s just impossible. It’s not like Venezuela has the ability to just increase the oil production by any significant amount in the near future.
John Coogan:
Sure.
Alex Epstein:
I mean, we’re talking about companies considering going in harm’s way to get some incremental boosts, so Venezuela is essentially useless right now.
John Coogan:
So, best case scenario in the next year, Venezuela goes from under a million to two million?
Alex Epstein:
No.
John Coogan:
Not even that?
Alex Epstein:
I mean, two million would be—
John Coogan:
Insane.
Alex Epstein:
I mean, if we made it our entire goal in life, I don’t know, but why would you for that?
John Coogan:
Venezuela was at three million a decade ago or something.
Alex Epstein:
Yeah, some years ago.
John Coogan:
Right, but there’s a lot there. It’s not going to happen.
Alex Epstein:
Yeah, so Venezuela, I would not even. That’s just in the category of, it’s not even a bad idea. It’s just not an idea.
John Coogan:
Sure.
Alex Epstein:
There’s nothing there.
John Coogan:
No, no. That’s fair.
Alex Epstein:
So, the bad ideas, by the way, the worst idea imaginable is ban oil exports from the United States, which I have heard floated in conversations.
John Coogan:
Okay. Seems somewhat reasonable. I want the oil. Yeah, explain.
Alex Epstein:
I mean, so many different things, but one obvious one—not obvious one, but it’s obvious if you know how these things work—is the refiners in the US do not match up well to the oil produced in the United States. The refineries in the United States are based on heavier crude.
Crude is rated in terms of weight and sourness, and so our refineries are mostly for heavier crude. It’s actually one reason why Venezuela has some appeal. Canada has a lot of appeal, because they—
John Coogan:
Because they have heavier crude.
Alex Epstein:
Yeah, and we’re going to talk about Canada.
John Coogan:
And we’re good at refining it.
Alex Epstein:
We’re going to refine it.
John Coogan:
But we produce a lighter crude here.
Alex Epstein:
Yes, because the shale revolution was just this dramatic shift very quickly in oil production, so our refineries are not primarily equipped. That’s why when we ended the crude export oil ban, I forget if it was 2014 or something like that, it was just this huge unlock, because it allows us to produce for a global market.
John Coogan:
So, you can’t look at American oil production as a monolith.
Alex Epstein:
Yeah, it’s not fungible.
John Coogan:
We import heavy crude and export light crude. Is that roughly correct?
Alex Epstein:
Yeah, that’s roughly correct. Yeah, so that’s one thing is it’s just insane to do that, but in general, think about it. What is the value of higher prices? It stimulates production. We’re going to talk about all these different ways where we want to unlock oil, so you want to tell American oil producers, “Hey. We’re going to actually totally screw you over. It’s actually going to be worse for you, maybe than it was before, because you don’t even have a market, so you’re going to strand all this oil.”
So, that’s terrible. There’s also this financial manipulation idea which has been floated, which I think is terrible of, “Hey, let’s manipulate the financial markets, basically, in a way that you’re selling future short on a certain time period, and then you’re buying them. What you’re trying to do is lower the near term price—
John Coogan:
Oh, like Fed policy, basically.
Alex Epstein:
—and raise the long term, or Treasury. Yeah.
Jordi Hays:
It’s a very American way to try to solve a real-world problem.
John Coogan:
A lot of people that like that.
Alex Epstein:
The only solutions involve unlocking oil in one way or another. You do not want to screw up the markets so that people are less inclined to unlock oil, nor do you want to screw up the markets to destroy information.
So again, the main unlock is reopen that Strait. There’s no way around that. But then we can talk about other things.
John Coogan:
Yes.
Alex Epstein:
So, one category is what you call spare or emergency capacity, and there’s some uncertainty here, but it—
John Coogan:
Quickly, this is separate from the Strategic Reserve?
Alex Epstein:
Yeah. Well, emergency capacity is the Strategic Reserve.
John Coogan:
Oh, it is. Okay.
Alex Epstein:
So, spare means you could pretty easily be producing more per day, but you’re not, because you’re not happy with the price, and this is, mainly Saudi Arabia is considered Exhibit A in terms of amount of this. Now, there’s debate among experts about how much they have, but some people estimate they have one, two, three million barrels a day of spare capacity. They could ramp up on some kind of—
John Coogan:
And do they know how much capacity they have and they’re just not sharing it, or does no one know?
Jordi Hays:
I mean, that’s always been the story that’s been the story of the Gulf, right? If they just flooded the market with every single barrel that they could possibly produce, they would be getting a much worse price.
Alex Epstein:
Yeah, and there’s this cartel arrangement that does, I mean, in a sense everyone has this on different timescales. You think about US shale producers.
John Coogan:
Sure.
Alex Epstein:
If prices were sustained at $100, guess what? There’s a whole bunch of shale deposits that they could produce at $75 a barrel and make a fortune on, that they’re not going to do four weeks ago when it was around $60 a barrel.
But in terms of, the thing about the Saudi oil is it’s produced at a much lower cost, so this is them saying, “Hey. We have some of this on the table.” Then, the question is, you need to be able to produce it and then you need to be able to transport it, so you have estimates around maybe you could get one to two million barrels a day, so that’s one of them.
In terms of emergency— if you look around the world, you don’t have a lot of immediate spare capacity besides that, so we have what’s called emergency capacity or Strategic Petroleum Reserve. Jordi mentioned that we didn’t fill up our Strategic Petroleum Reserve. I think this is unequivocally a mistake. I mean, if you look at it, the whole thing of the Strategic Petroleum Reserve is you want it for when you need it, and the best possible time to fill it up is when prices are low.
John Coogan:
And is that physically a place with a bunch of barrels that we store?
Alex Epstein:
There’s a bunch of different parts of it.
John Coogan:
Is it like the Fort Knox of oil?
Alex Epstein:
Well, there’s multiple different places, but you can think of it roughly that way.
John Coogan:
We, basically, hash the physical oil in America or somewhere where we own it or can access it.
Alex Epstein:
Yeah, yeah, yeah. It’s physical. Yes, exactly.
John Coogan:
And it’s sitting there, going unused until we’re ready.
Alex Epstein:
Yeah.
John Coogan:
Got it.
Alex Epstein:
Now there’s issues of, Biden definitely misused it. So they used it to basically have lower gasoline prices during midterm elections, even though, parenthetically, their entire policy goal was get rid of fossil fuels, which means you want the price to go up so people can’t afford it. It’s a very cynical kind of move.
John Coogan:
Got it.
Alex Epstein:
They did it in a way that degraded the facilities.
John Coogan:
Interesting.
Alex Epstein:
So, let’s say we’re at about four million barrels a day. We can get out of that thing. We have 400 million in there. We should have over 700 million. We could have easily filled it up. I mean, it was a perfect time when you’re talking about $50 barrel of oil, $60 a barrel oil.
John Coogan:
Yeah, and can I do the basic arithmetic of four million a day, 400 million in the reserve, 100 days of oil?
Alex Epstein:
Yeah.
John Coogan:
But that’s not actually, if we’re talking about relieving price pressure, you could trickle it out over a year and have 1/4 of the effect or something?
Alex Epstein:
But just think about 100 million barrels a day is roughly the global market.
John Coogan:
Okay. Okay.
Alex Epstein:
So four million is just, that’s its maximum—
John Coogan:
Throughput.
Alex Epstein:
—capacity.
John Coogan:
Got it. Okay.
Alex Epstein:
It’s kind of an analogy to batteries.
John Coogan:
Sure.
Alex Epstein:
If we’re talking about batteries. So there’s a certain amount, like with a battery, if you hear there’s a one gigawatt battery installation, it usually means there’s one gigawatt for four hours. But if you wanted to do half a gigawatt, then you could do eight hours. It’s the same deal with this.
But keep in mind, this is not a hundred days of US oil demand. And by the way, for the refinery reasons, we can’t just supply it all with our SPR. It’s just the maximum output is— but four million barrels a day is something, we’re talking about, that’s 1/5 of what’s flowing through the Strait of Hormuz. Yeah, it’s a thing.
John Coogan:
Not enough.
Alex Epstein:
But, yeah, you can think of, yeah, maybe we’d be willing to do one to two million barrels a day from ours. Now, interestingly, the International Energy Agency—we are part of the International Energy Agency Reserve program. So we have about 400 million, but they have about 1.4 billion. So we have allies around the world that can also release this oil. So maybe we could get one to two million from them.
Now, at least last I checked the news, they hadn’t agreed to do this because they don’t think it’s an emergency, but that’s what it’s there for. So notice the pattern is we’re—
Jordi Hays:
At what point would they think it’s an emergency?
Alex Epstein:
I don’t know. I mean, and we can put pressure on them. I think some of these determinations have to be made in conjunction with the military determinations. You can’t make them in isolation because if you think about what’s the military objective? How close are we to that? Or how close are we at least to opening this up via high security and financially backed convoys? Then you can think about the timetable here. If you think about, well, the Strait of Hormuz is going to be closed for five years, let’s just get used to being poor.
John Coogan:
Black bill.
Alex Epstein:
No, I mean, people don’t get oil. There’s a reason why I focus a lot of my life on oil. There’s no material in the world of energy that is more valuable than oil because oil is just so unique in terms of it has this very high energy density and portability. And there’s nothing like it. I mean, nuclear has higher—
John Coogan:
What about plutonium?
Alex Epstein:
Yeah. Yeah. It doesn’t have the same portability.
John Coogan:
Five years? We’re going to be rich. We’re going to have energy too cheap to meter in five years.
Alex Epstein:
Yeah, that’s—
John Coogan:
I’ve talked to a lot of nuclear founders.
Alex Epstein:
Well, look, I love nuclear as much as anyway. They don’t even have a portability solution though for the near future, unless you’re talking about an aircraft carrier or an icebreaker or something like that. So I’m just saying the world runs on mobility and oil is ideal for mobility. So are you going to—
John Coogan:
Oh, portability in the sense of using nuclear to actually power trade and commerce and moving ships around.
Alex Epstein:
Yeah, yeah. I mean—
John Coogan:
Even if you can power the grid, you will be poor because you will not be able to trade. Is that what you’re—
Alex Epstein:
Yeah. Trade is really important.
John Coogan:
Trade is really important.
Alex Epstein:
And, well, and also it’s within the country too. We don’t have the nuclear trucks to move things around.
John Coogan:
Sure, sure, sure.
Alex Epstein:
So, obviously, you want super cheap electricity and you want super cheap transport fuel. And we want to see if we can electrify some of this stuff, if you can do it cost-effectively. It’s just—
John Coogan:
Yeah. There’s some people working on electric bulldozers, for example. It’s very hard and I don’t know the timeline but—
Alex Epstein:
And by the way, guess what? You need a lot of oil to even get that whole supply chain started because you need the mine— So anyway, bottom line, yes, I meant that thing about we can all be poor very seriously. Very seriously.
So we have, if you look at the spare capacity, I think that’s all of them. So we have the rest of the IEA, we have ours, and then to my knowledge, we have Saudi/UAE, them using spare capacity and then piping it where they can. So maybe combined, we’re talking about six million a day if you use all of those. I mean, somebody could imagine 10 million a day.
And all of these have time— particularly the emergency reserve things, these all, at least the Saudi one is you have a big deposit. Here, it’s just you have a small reserve, so you can’t do this forever. And of course there’s a risk of if you deplete the SPR more, what if you really, really—
John Coogan:
Need it.
Alex Epstein:
—need it in the future?
And then there’s a bunch of near-term stuff that you can do, and some of which I like just because it could be done anyway. So number one, to piss a whole bunch of people off is let’s stop using this Jones Act. Do you know what this Jones Act thing is?
Jordi Hays:
Yeah.
John Coogan:
I’ve heard of it, but explain.
Alex Epstein:
So the Jones Act is a set of restrictions that say that you can only transport things among ports in the United States if you have everything is basically American. So it’s owned by an American, it’s run, I don’t know all the—
Jordi Hays:
Yeah, it’s basically American ship, American crew.
John Coogan:
Yes. Yes.
Alex Epstein:
Yes. So it leads to all these crazy, crazy things. Like, we end up importing things from, instead of importing it from one part of the country to another, you end up importing it from some really far away place. It leads to that kind of thing.
But in this case, in particular, as Californians, we should all recognize this. We don’t have oil being piped into California so we want very efficient maritime transportation. And if you suspend the Jones Act, then you can get more efficient transportation, which means we can at least have lower prices here and we can have less of a price shock.
But in general, I want people to get used to having no Jones Act because I want there to be no Jones Act. So that’s a good thing to do. My favorite idea here is—
Jordi Hays:
And I imagine there’s a bunch of powerful lobbies that will fight and kill-
Alex Epstein:
Correct.
Jordi Hays:
—for the Jones Act because there’s—
Alex Epstein:
Correct.
Jordi Hays:
—an entire industry built around—
Alex Epstein:
Yeah.
Jordi Hays:
They don’t have to be as dependent, right?
Alex Epstein:
The idea that we can only have a good ship building industry. I don’t know what people think is happening with our shipbuilding industry. Our ship building industry is not going as well as other people’s.
Jordi Hays:
Yeah, well. It didn’t exactly work.
Alex Epstein:
Yeah. I mean, it worked to protect certain people’s—
Jordi Hays:
I’m just saying if you look at American shipbuilding, it certainly hasn’t allowed us to be competitive on a global stage.
John Coogan:
The shipbuilders would say we’re early, but I take your point.
Jordi Hays:
Early, but you’ve seen— but I’m just saying, how many decades of declines do you need?
Alex Epstein:
Yeah okay well, I think—
Jordi Hays:
John’s like, “We’re still early.”
Alex Epstein:
We’re early.
John Coogan:
It’s like a smiling curve, like churn. It goes down and then goes back up. That’s the bull case.
Alex Epstein:
All right. It’s definitely not going to help us near-term.
John Coogan:
Definitely not though. I’ll agree with that.
Alex Epstein:
Here’s the most interesting thing, which is a pet issue of mine because we’re— This administration, I should say, does a lot of good stuff on energy. I say that I’m in a fortunate position where a lot of people ask for advice and stuff like that. And I feel like one of my jobs is to tell people things they’re not doing.
A lot of things they’ll just do right on their own, but Canada is not one of those things right now. We are just absolutely sleeping on Canada as an opportunity. So Canada has no people and infinite resources and is really friendly.
John Coogan:
Yeah.
Alex Epstein:
They have these oil sands, you know what these things are?
John Coogan:
Yeah. No, explain.
Alex Epstein:
So they’re just like these deposits of oil. It’s like nature basically committed an oil spill, is the way to think of it. So it has all these oil sands. For years they were not very useful.
John Coogan:
They weren’t viable because it’s not just you drill down and black gold comes up. It’s like buried in the sands and need to be refined, right?
Alex Epstein:
There are different kinds of things. So you can mine it out directly or you can do what’s called in situ, which is you heat it up underground.
John Coogan:
Oh, and it liquefies.
Alex Epstein:
In any case, they have just this unbelievable oil seep. They have way more oil deposits than we do, way more oil reserves, but they have on the order of 1/3 of the production, and in part because they have absolutely terrible policies, which are their fault. But in part, we have had terrible policies, including getting rid of the Keystone XL Pipeline and this kind of thing.
But if you just think of Canada, it’s just we should be so— They have water. I mean, again, no people, 1/10 of the population, infinite raw materials. They got everything. They got timber, they got natural gas, they got oil. And we’re talking about Venezuela? I mean they’re a friendly country, right? They got smart people there. They haven’t been driven out of the country because they’re afraid of getting killed by Chavez or Maduro or whatever.
So this is an opportunity to say, hey Canada, let’s have a task force. You guys are at a low in terms of, we don’t have pipelines, but we can do rail. At least we can do rail, maybe trucks, but at least rail. Rail transports from Canada are really low right now. So let’s have an initiative where maybe you bring a couple hundred thousand, depending on your expectations, maybe we can add a couple hundred thousand barrels a day.
So that’s one that excites me because I want to be— The US-Canada superpower thing is this huge opportunity that we’re sleeping on because of the idea of, oh, we should only be doing it in “America.” But this is just by the way, unbelievable. I think they have the best uranium in the world.
John Coogan:
Maple syrup’s out there.
Alex Epstein:
I don’t have a Canadian personality, but I love that place.
John Coogan:
No, strategic. It makes a ton of sense.
Alex Epstein:
Strategically, and they’re very friendly.
John Coogan:
Yes.
Alex Epstein:
They’re very friendly.
John Coogan:
Maybe we should be friendlier.
Alex Epstein:
Yes. No, we should. And we have trade agreements coming up so there’s that. The other thing is we can increase capacity here, as I mentioned, depending on prices going up. So there’s that, but that might be a couple hundred thousand barrels a day.
So high level, open the Strait of Hormuz, that’s the only thing that really works. Then you can talk about Saudi’s spare capacity, our emergency capacity and IEA emergency capacity. And then below that, you have Canada, Jones Act, and US production.
John Coogan:
That’s a really, really thorough list. Thank you. I appreciate that. Anything else, Jordi?
Jordi Hays:
What are you going to be paying attention to most closely?
John Coogan:
Do you watch the price chart, is that important to you?
Alex Epstein:
Well, it’s important. I mean, it’s weird. I run a network of energy executives, but I’m focused on the policy side of things. So I’m often laughably out of touch. I mean, I know in general within $10 usually what it is, but as a policy, I don’t invest in energy.
John Coogan:
Because you’re looking at longer term, five years, ten years.
Alex Epstein:
But also I’m deliberately avoiding exposure to the commercial part of it.
John Coogan:
Of course, of course. You want to be independent.
Alex Epstein:
Yeah, I want to be independent.
John Coogan:
That makes sense.
Alex Epstein:
Yeah. But at the moment, yes, I am looking at the prices. But I don’t do predictions, but I’m just saying, I think there’s a service right now in just laying out the options for people because even in the government, I mean, not everyone has a lot of expertise in oil.
And this is the kind of thing where, yeah, it’s kind of why I think you texted me this morning. I mean, sometimes you need to know about oil today and sometimes you don’t. But when you need to know, you need to know.
John Coogan:
You know me.
Alex Epstein:
You really need to know.
John Coogan:
Yeah. Well, it seems like whether you’re in the business community or just humanitarian, everyone should be rooting for a swift and peaceful resolution.
Jordi Hays:
Yeah. Do you have any insight, this might be totally out of your wheelhouse, but insight into how people running businesses that are most impacted by fluctuations in oil prices, have they been actively hedging over the last couple of weeks? Are they doing— How do you run your business when your input costs can go up dramatically, potentially at a much higher rate than you can adjust your own prices?
Alex Epstein:
I mean, just in general, these guys are sophisticated. I think within the bounds of doing it, I don’t think you can hedge indefinitely for this big a price kind of differential, like somebody’s going to say— I mean, but it’s also, you think about there’s on the consumer side, but on the production side is even more dramatic if you just look at the margins of these guys.
I mean, the oil industry is just fascinating. I mean, I just remember anecdotally when I came up with my first major book, The Moral Case for Fossil Fuels, in 2014, even I could see speaking engagements correlated to these prices because you had a big price crash around them. And then you think, wow.
Jordi Hays:
Yeah, we don’t need Alex.
Alex Epstein:
Yeah. It might be nice to keep the troops motivated, but I’d probably rather be employed. But it’s a hard business. And one of these things is the people who survive have a very strong constitution and they can manage the risk very, very well. I was talking with a bunch of these guys, actually some people we know in common, and some of the better ones, some of the two of the young superstars in the industry, they’re just saying like, “We love the chaos because we can just, we can handle it when the prices go down.”
John Coogan:
Sure.
Alex Epstein:
Because you think about what they’ve been dealing with over the last year, they’ve increased production, prices have gone down and you look at, this administration is very focused, I would say too much focused, on having prices go low.
And this is one of the variables here is, although the administration I don’t think was not fully prepared for this situation, in general, they are maniacal about prices going low. Trump, in his mind, has a very strong focus on $50 a barrel, which I think he feels like that’s always the perfect price for oil.
John Coogan:
Sure.
Alex Epstein:
And the people in the oil industry say, “Wait a second, we’ve had inflation of everything else. Why does our one product have to stay at $50?” And that’s part of the appeal of Venezuela, rightly or wrongly, because it’s not going to make a big difference soon, but it’s like, how do we keep oil prices low?
But that’s hard to be in that industry as a consumer—as a producer, rather—and it’s hard as a consumer. So they have financial instruments. But the main thing is you need to just have the flexibility in your business model. And oil is, again, it’s the most valuable material in the world of energy, which is why everyone uses it, but is also why it’s so inelastic and you have these price fluctuations.
So you just need to come to terms with that or somebody needs to figure out something better, but it’s really hard. And of course, policy-wise, we can have better policy to make it more stable, but it’s still that thing where it’s so valuable that guess what? You get a little extra demand or a little less supply, price goes up a lot. It’s different than other things which you can substitute for much more rapidly.
John Coogan:
You’re out of a job when we build the Dyson Sphere.
Alex Epstein:
Oh man, I’m working on this AI thought leader thing we talked about last time. So I got plenty to do.
John Coogan:
We’ll cross that bridge when we come to it.
Alex Epstein:
I’ve got plenty to do with my time.
Jordi Hays:
Thank you. As long as we need energy, you’ll be doing just fine.
Alex Epstein:
All right, guys. Good to see you.
John Coogan:
Thank you so much for coming on the show.
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