The Oil Industry's Double Whammy of Higher Costs and Lower Prices

0:00Your best bottling plant employs 3 ,300 people. How do you get 3 ,300 people working at peak efficiency? Your best store has reduced waste, water, and energy usage. How do you make every store like your best store? Your best property has every guest raving. How do you make every property like your best property? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. Being a small business owner isn't just a career. it's a calling. Chase for Business knows how much heart and effort go into building something of your own. Manage all your business finances, from banking to payments to credit cards, all in one place with their digital tools.

0:44Plus, access online resources designed to help your business thrive. Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2025 JPMorgan Chase and Company.

1:09Bloomberg Audio Studios. Podcasts. Radio. News.

1:25Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Holloway. Tracy, I think, at least temporarily, some of the trade-related headlines are quieting down. And so it's sort of time perhaps to understand, I don't want to say new normal, I just don't feel that's like jinxing it a little bit, but like what the new environment looks like for some of the industries that have been whipsawed and affected over recent weeks and months. Yeah, 90 days for investors, executives, and podcasters to kind of catch their breath and consider the new environment. That's how I would describe it.

2:04And then it'll probably all change again. It'll all change. We're never going to run out of fresh material and fresh stories to talk about. You know, there's always this thing. People are always surprised that there is this phenomenon which seems to occur in markets in which Republican presidents tend to not be great environments for the oil industry. Like people think, oh, yeah, here we're going to have this pro-oil president come in. But pro-oil, I don't know what that means. But if it means a more pro-drilling, pro-liberalization of energy regulations, then often that means lower prices and less profits.

2:41And then, you know, you get an environment where you get a Democratic president who wants to constrict expansion, focus more on alternatives, and then profits go up. Anyway, the pattern seems to be repeating now, and oil prices have done pretty badly since the start of the year. Yeah, so this is something we've been watching. We've been writing about it in the Odd Lots newsletter. there was that great report out from the Dallas Fed, their regular energy survey, and it had a bunch of quotes from anonymous oil officials that were really kind of extreme in various ways. And I think one of them kind of nailed the theme, which is that you can't really have$50 per barrel oil and U.S.

3:23energy dominance. It's incompatible in various ways. So I think we should talk about that tension. We should absolutely talk about the tension in addition to the supply. And we know that OPEC is pumping more. There are all the input costs going up, particularly from tariff affected companies in the U.S. What is it? Steel, tubular? Tubular components, Christmas trees. Those are the little collections of valves and spools. Yeah. So we're going to get into all that. This double whammy, so to speak. We have seen a bit of a rebound as we're talking about this on April 13th, 2025 at 10.07 a.m. Eastern Time.

4:02The price of a generic barrel of West Texas Intermediate,$62.96. I don't know how profitable it is at that level, but we have the perfect guest, someone we spoke to a few years ago when the industry was under very different conditions, but someone who has a very sort of granular understanding of the industry. We're going to be speaking with Peter Tertsakian. He is currently the founder and president of Studio.Energy. Previously, he was a managing director at ARC Financial, which did investing in the oil industry. So an expert in the space has written books about the energy industry, energy transition periods, and so forth.

4:39So Peter, thank you so much for coming back on Odd Lots. Well, I'm delighted to be back. Thank you. $62.95 now. Can the industry make money at these levels? Who's making money at these levels? Well, the industry is composed of many, many players that have many different geographic land holdings and therefore many different extraction methodologies and different grades of oil. So, you know,$62.96, if we think of it as an average price, is sort of okay. It's marginally profitable for a large part of the industry, but there's no question that higher cost producers start falling off the map. And what you also see is things like stripper wells, wells that are very low productivity start to get shut in at these levels.

5:28And then there's the boardroom discussion about, well, what is the longevity of these prices? You know, the 6296 is, and actually it was only about a week or two ago, it was in the high fifties. You know, it's, You sort of look at that in the boardroom and you just say, okay, is this going to last a quarter or is it going to last a year? And you probably say, you know what, I'm going to wait a quarter before I start making any major decisions on my budgeting. What's the funding environment like right now? Because I remember if you look back at the shale oil boom in the sort of mid-2010s, this was the big driving force, right?

6:06Like everyone wanted to invest in oil. And so we had this big boom, and then we had oversupply and prices crashed. And now all the energy companies say they want to be really disciplined when it comes to capital spending, they want to return more money to shareholders. I don't know, are shareholders interested in that particular proposition? And is funding still like a little bit difficult to get? Yeah, so let's talk about that because it's really important, you know, the equity funding, which was so much a part of the shale revolution. You know, it started really in the Bakken around 2009, moved into the Permian around 2011 and more broadly.

6:46And there was a lot of equity financings that sort of the money just came in at low cost of the capital. So things really started to change, as you pointed out, Tracy, in 2015-16 with the price wars, the drop in the price per barrel as the Saudis tried to take their market share back. But there was another moment that was really important. That was around circa 2017-18. And that was when the whole end of oil narrative started to occur. Right. That was. And if you wind back to Elon Musk, the Model S was coming out and starting to make traction, lots of buzz about electric vehicles. And it was as if the end of oil was nigh within 10 years.

7:27And so investors, sort of the combination of, hey, you guys aren't making money in the oil and gas industry. The prices are low. And by the way, it's a sunset industry. Therefore, just give us your cash flow or a significant portion of cash flow. We'll put the money elsewhere. Right. And that was the sentiment. And that sentiment, you know, recently started to come back post invasion of Ukraine and the geopolitical elements sort of coming back and the price of oil rising above$70. It made it OK. Well, let's have another look. And then the sort of the demise of the whole ESG type narrative. But, you know, this latest oil price drop has sort of taken the resurgence off.

8:09What do you call it? The sentiment has sort of turned a little, hmm, I'm going to just watch this. I've seen this movie before. What does it take? Like, oil isn't going to go away in 10 years, obviously. But there was a unique set of conditions in the 2010s. There were also the technological gains. There was the cheap capital. Like, is that gone forever? Or is the industry so cyclical and so boom and bust that it's plausible that at some point we see another crazy drilling war? Like, it feels like maybe I'm naive to think that that can't be recovered because people in the oil industry, they're a little bit crazy.

8:47And you can never count out the possibility that they all go gung ho for expansion again at some point in the future. Well, it's a great point because, as I said, it's sort of like, okay, we've seen this movie before. Yeah. If you recall, like it just only been in the last couple of weeks that OPEC plus is basically, which is really Saudi Arabia, basically saying, okay, we're going to open up the taps another 411 ,000 barrels per day on top of the 600 or so. So at a time when the economy is weak and you sort of question the motivations, okay, are these guys trying to take back the market share that they feel that they're lost?

9:22We saw that movie back in 2015. But to be able to go gung-ho, you need capital. You need to be able to replicate the low cost of capital era of the 2010s, which was coupled with low inflation, low interest rates. We don't have that. We don't have that circumstance right now. So the planets are not aligned for a gung-ho drilling. And I think that the oil and gas executives are much more savvy today that they sit in the boardroom table and say, okay, I'm going to watch this. I've seen this before. And by the way, in the world of corporate governance, it's shareholders who really oversee the board and the board oversees the management.

10:03So ultimately, the shareholders are the ones that are deciding whether or not the industry is going to go gung-ho. And right now the sentiment is no. You know, Joe made the point earlier in the intro that one of the strange realities that we all live with seems to be that the oil industry leans Republican. I think that's fair to say. Meanwhile, the price of oil tends to do better under Democratic administrations. And in fact, our Bloomberg colleagues had a really good piece out, I think just this week. It was called Trump's thirst for cheap oil irks an industry he loves to praise. And in it, they quote a guy who owns a sort of oil component store in Texas.

10:46And he has this really funny quote where he says, we make our money during Democratic administrations. I killed it during Clinton, Obama and Biden. I said that at the country club and I thought somebody was going to kill me with a butter knife, which is hilarious. But like, what is the attraction? What is the Republican pitch to the energy industry, which seems to resonate potentially in the face of reality? Yeah, it's great. I mean, I from a statistical perspective, if you want to get into the details, I mean, correlation does not imply causality. In other words, I'm a little suspicious that Democratic administrations are the cause of greater prosperity for the oil and gas industry because the overlay of the technological revolution of horizontal drilling, fracking and all that stuff has nothing to do with political administrations, nor does it necessarily have to do with other major factors.

11:38But it does speak, Tracy, to the tensions you're talking about. I read that article as well. And there's no question that the Trump administration and in the lead up even to the last election, the rhetoric was a drill, baby drill. The industry was very closely aligned with the Republican narratives, and particularly with the narratives of reducing regulations and getting rid of ESG and all that kind of stuff. But there wasn't a lot of narrative about necessarily what they're going to do with price. Right. And price is set globally. And that's a whole other dynamic that comes into play. What's happening?

12:16So you're based in Calgary. Yeah. And obviously, Tracy mentioned that Dallas Fed Energy Survey. And part of the concern for the U.S.-based players is that their cost of goods, you know, what is it? The tubular component. Sorry, I don't know why I can't remember. Prices are going up, et cetera. Can you talk a little bit about input costs and what's happening there on sort of both sides of the U.S.-Canada border? Yes, this is a big issue. The trade wars, the tariffs, and you can get into the details and call it tubular goods and valves and so on, but ultimately we're talking about steel and we're talking about the raw inputs that are fundamental to building facilities, to drilling, to production tubing and so on and so forth.

13:09So when the Trump administration started the trade wars effectively and the tariffs slopping tariffs on steel, well, yeah, the input costs are ultimately going to go up until such time as their desires. In other words, the Trump administration's desire to domesticate or repatriate the steel industry to the point where it's competitive with the cheaper steels from the rest of the world. So there's no question that you're going to see inflation in the oil field. And there's often a lag. I mean, the story is only a couple months old, right? Three months old. Like you will see the permeation of higher steel and steel product prices into places like the oil field over the course of the year.

13:55So yeah, stay tuned for the costs. You know, we've talked earlier about this$62 and whether or not that's economic. Well, it becomes less economic when the core inputs to the oil field start going up.

14:12Thank you.

14:42your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food.

15:22To learn more, visit easycater.com slash podcast. Where are we in the sort of oil technology upgrade cycle? Because I remember a few years ago, So I guess, again, coinciding with the shale boom, there was this big drive for standardized components, and that was starting to bring down some of the costs for producers. Yeah. Are people still doing that? Like, do we still have big upgrades taking place? Well, there are. Again, it depends upon the extraction methodology. So there's two sides to this. One is the drilling, the exploration completion side of the business. So I think there's still more surprises coming there.

16:03It's just amazing in terms of the types of wells that are being drilled a couple miles down, several miles across, and then horseshoeing back to be able to recover more and more oil and natural gas, by the way. And which means that the capital cost per foot that you drill, the capital cost per barrel that you liberate goes down by virtue of technology only to be offset by, we just talked about it, the capital input cost of then developing the facilities to be able to extract, process and distribute the oil out of the ground. You know, getting back to your question, there's the subsurface technologies which continue to surprise.

16:45I think there's more to come in that. And above ground, what's happening is the drive for greater efficiencies to turn the oil field more into a manufacturing operation and to drive costs down through scale. Hence, you've seen the consolidation of the industry happening. Scale does matter. And so, you know, there's a lot going on from the perspective of process and efficiency drive to bring costs down only to be offset by the, as I said, the input costs going up and then the pressures of price going down, which is the number one dominant variable, which then dictates whether or not there's a margin squeeze, a profit margin squeeze or not.

17:25Can you talk a little bit more about the discovery process and what tech looks like in May 2025 versus, say, 2015 or 2005? And what specific tech is being employed so that these companies can gain greater visibility into what's happening underneath the earth's surface? Yeah, well, that's a good bracketing. 2005, the industry was still dominated by vertical wells. You drill a well in the ground and it's like throwing darts at a board. You know, the geophysics, in other words, the ability to map the subsurface and understand where the oil is or the gas is was pretty good. But it was still sort of a hit and miss type of thing.

18:11And that was the way it was for over a century. The advent of more precise horizontal drilling, which was really nothing new in 2005, but it really started to take root with better instrumentation. better mechanics, you know, mechanical instrumentation and so on. And the ability to position the drill bit was a major advance. And then by 2015, it was, okay, you're driving this drill bit down into the ground, you're bending at 90 degrees and you're going out. And then from 2015 to today, 10 years, it's like, okay, let's go down. And now the subsurface looks like a fork. It doesn't look like a single well.

18:53And the importance of this can't be understated because now you're exposing more surface area of a well, you know, instead of one vertical well with say, I don't know, 20, 30 feet of exposure in a vertical cylinder, all of a sudden now you have miles of exposure of a well going out horizontally and then forking and then now even making u-turns and horseshoeing back i mean it's just incredible what we can do you can think of a drill bit which was this solid steel pipe it's seemingly but it's more like now a piece of spaghetti going down and winding around to make sure that we optimize it i would say one more thing that's super important is that the technology is now again that the extraction methodologies become much more technical and the ability to focus on extracting the maximum amount out of a reservoir using these new geologic penetration technologies is just amazing.

19:55So there's more to come, in my opinion, and I never want to underestimate the ability of the technology to get better. So on the pros and cons of the current environment for oil producers point. I guess you have technological advances that are still happening. You also have from the Trump administration, some regulatory changes. And I think there's something about co-mingling, I think they call it. So a regulatory change that would, I guess, allow oil producers to pull crude out of multiple reservoirs. But are the regulatory changes enough to offset some of the higher costs we've been discussing?

20:36Well, that's a good question and one to be seen. I mean, generally speaking, the number one regulatory issue is to be able to drill a well, complete it, and bring the oil and gas to market as quickly as possible because of the time value of money. Time is money. And so the removal of barriers to be able to drill, produce, and sell oil and gas is a big deal. And so, you know, we're sort of seeing some of that. But, you know, there's a big difference between what the Trump administration can do at a federal level versus what companies have to do at the state level. And it's the same in Canada here.

21:17Federal regulations are overlaying on top of provincial regulations. So we call it the pancaking of regulations is also problematic. And so to the extent that pancaking is reduced and regulatory drag in terms of the time it takes to do things is reduced. Oh, and particularly, it's not just the drilling and extraction process. It's then building of the pipelines to get the commodities to the market. What's the state of pipeline politics these days? Because I know that seems to go in and out of favor. But maybe tell us about Canada. What is the state of the appetite to expand pipeline networks? Yeah, that's a great question.

21:58So it was definitively out of favor for 10 to 15 years, starting to come back into favor within the Canadian public. And we now have a new prime minister, Prime Minister Mark Carney. And he has indicated that, okay, we're ready to think about pipeline and export facility development and infrastructure development. it's it's i would argue more biased to the natural gas side and particularly lng liquefied natural gas exports off our west coast but what was considered almost unthinkable say five years ago is all of a sudden invoke and it's largely driven frankly by the trade wars yeah desire for sovereignty here in canada over our oil and gas supplies and the need to diversify our markets away from the United States, because for 70 years or longer, the United States has been our number one, in fact, our only market for oil and gas.

23:01It's pretty striking, Tracy, that Mark Carney, of all people, I mean, it sort of does tell you a lot about how the winds are changing, that Mark Carney is also, you know, sort of on board or much more comfortable with pipeline expansion. Yeah, it's a shift for sure. Peter, since you mentioned LNG just now, can you sort of give us the state of play there as well? Because this is something that's also been coming up, I guess, like the differing fortunes of crude oil versus LNG in North America. Yeah, well, to get the North American sense, you got to get the global sense. So which commodity is growing faster and in demand?

23:40And it's natural gas. Natural gas continues to grow quite handsomely. Oil is starting to level out. I don't think it's peaked yet. I think we've got a few years before oil consumption peaks, but natural gas continues to rise. And we also now see the expansion of liquefied natural gas, certainly from the United States. In Canada, our first big terminal opens up potentially in a couple months and more to follow. So globally, LNG, whether it's Australia, the Middle East and other places, is growing. And so it's becoming competitive, but the competition is also matched by growing demand. So LNG is definitely the hydrocarbon fuel of the future in terms of growth.

24:30And I think you're going to see more. And you talked earlier, Tracy, about regulation. I think that the Trump administration was definitely on board with reducing regulatory drag on building liquefied natural gas terminals. And I think the drill baby drill narrative is much more tuned to natural gas than it is to the oil side of the equation. Yeah. Does the expansion of LNG export terminals raise prices domestically for domestic consumers of natural gas, say, in the U.S.? Yes. And the reason is because for the past several decades, natural gas has been bottled up in North America. And particularly the last, I would say, 15 years with the shale revolution and the liberation of prolific amounts of natural gas here in North America.

25:23It's made our prices here. I mean, it's what is it? Three dollars an MMBTU, something of that order. Three fifty maybe. I don't know what it is today. Maybe you can pull it up. But whatever it is, I mean, globally, the price is much higher. It can be$8,$9, depending upon the geopolitical state of the world. Yes, there is liquefaction costs. Yes, there's transportation costs. But there's no question that there was an imbalance in supply and demand in North America that has kept the price low. The producers have adapted to that and can make money off of it. But the whole desire to export globally is to liberate North American gas into the global market and raises the prices.

26:09So you're going to see the prices rise. And the forward curves are indicating that already.

26:28For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side.