FULL INTERVIEW: Alex Epstein on The Oil Market’s Biggest Geopolitical Threat

10:15Jordi Hays:Like, yeah, yeah, some. Yeah, some years ago. Yeah. Right. But but there's so many.

10:19John Coogan:But there's a lot there. It's not going to happen.

10:22Jordi Hays:It's just so. 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. Sure. There's nothing there.

10:31John Coogan:No, no. That's right.

10:31Jordi Hays:So the bad ideas, by the way, are the worst idea imaginable is ban oil exports from the United States, which I have heard floating in conversation.

10:41John Coogan:Seems somewhat reasonable. I want the oil. Yeah, of course, because we have oil, so we don't want to sell. So, I mean, so many different things.

10:47Jordi Hays:But one obvious one, not obvious one, but it's obvious if you know how these things work, is the refiners in the U.S. do not match up well to the oil produced in the United States. The refineries in the United States are based on heavier crude. Like crude is rated in terms of weight and sourness. Okay. 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 have heavier crude.

11:12John Coogan:Yeah.

11:12Jordi Hays:And we're going to talk about Canada.

11:13John Coogan:We're good at refining it. We're going to produce a lighter crude.

11:16Jordi Hays:Because the shell revolution was just this dramatic shift.

11:19John Coogan:Yeah.

11:20Jordi Hays: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, it was 2014 or something like that.

11:28John Coogan:It was just this huge unlock because it allows the global market.

11:31Jordi Hays:It allows us to produce for a global market.

11:33John Coogan:You can't look at American oil production as a monolith. Yeah, it's not fungible. We import heavy crude and export light crude. Is that roughly correct? That's roughly correct.

11:43Jordi Hays:Yeah, so that's one thing. It's just insane to do that. But in general, think about it. What is the value of higher prices? Is 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 gonna actually totally screw you over. It's actually gonna be worse for you maybe than it was before,

12:00John Coogan:because you don't even have a market.

12:01Jordi Hays:So we're gonna strand all this. So that's terrible. There's also this financial manipulation idea, which has been floated, which is terrible. Hey, let's manipulate the financial markets basically in a way that you're selling futures short on a certain time period, and then you're buying them. What you're trying to do is lower the near-term price. Oh, like Fed policy, basically. And raise the long-term, or treasury, yeah.

12:21Alex Epstein:So you're a very American way to Yes.

12:24Jordi Hays:So this is, again, 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 straight. There's no way around that. But then we can talk about other things. So one One category is what you call spare or emergency capacity. And this is, there's some uncertainty here, but it -

12:53John Coogan:Quickly, this is separate from the strategic reserve? Yeah, yeah.

12:56Jordi Hays:So, well, emergency capacity is the strategic reserve. Oh, it is. 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 that could ramp up on some kind of -

13:20John Coogan:And do they know how much capacity they have and they're just not sharing it? Or does no one know? I mean, that's always been the story.

13:27Alex Epstein:That's been the story of the Gulf, right? They're not going to, if they just flooded the market with every single barrel that they could possibly produce, they would be getting a worse, much worse price.

13:36Jordi Hays:Yeah. And there's this cartel arrangement that does. I mean, in a sense, everyone has this on different timescales. You think about U.S. shale producers, 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. And then the question is, you need to be able to produce it and then you need to be able to transport it.

14:09Jordi Hays: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. You know, it's, it's, 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 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.

14:40John Coogan:And is that physically a place with a bunch of barrels that we - There's a bunch of different parts of it. It's like a Fort Knox of oil?

14:46Jordi Hays:Well, there's multiple different places.

14:48John Coogan:But you can think of it roughly that way.

14:49Jordi Hays:But we basically cash the physical oil in America or somewhere where we own it or can access it.

14:55John Coogan:Yeah, yeah, yeah. And it's sitting there going unused until we're ready. Yeah, now there's issues of Biden.

15:00Jordi Hays:Biden definitely misused it. So they used it to basically have lower gasoline prices during midterm elections.

15:08John Coogan:Oh, okay.

15:08Jordi Hays: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.

15:14John Coogan:Yeah. It was a very cynical kind of move. Got it.

15:16Jordi Hays:They did it in a way that degraded the facilities. Interesting. So let's say we're at about 4 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 oil,$60 barrel oil.

15:32John Coogan:Yeah. Yeah. And can I do the basic arithmetic of 4 million a day, 400 million in the reserve, 100 days of oil? But that's not actually, if we're talking about like relieving price pressure, you could trickle it out over a year and have one quarter of the effect.

15:50Jordi Hays:But just think about 100 million barrels a day is roughly the global market.

15:54John Coogan:Okay.

15:55Jordi Hays:So 4 million is just, that's its maximum capacity. Got it. It's kind of an analogy to batteries. Sure. I'm talking about battery. So there's a certain amount, like with a battery, if you hear there's a one gigawatt battery installation, that usually means there's one gigawatt for four hours. But if you wanted to do half a gigawatt, then you could do eight hours, right? It's the same deal with this. But keep in mind, this is not 100 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 more tight.

16:29Jordi Hays:That's one fifth of what's flowing through the Strait of Hormuz. So yeah, it's a thing. 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, but they have about 1.4, 400 million. They have 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.

17:02Jordi Hays:Sure. But that's what it's there for.

17:04Alex Epstein:Yeah. So notice the pattern is - At what point would they think it's an emergency? I don't know.

17:09Jordi Hays: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 straight-up form is gonna be closed for five years let's

17:37John Coogan:just get used to being poor black bill no I mean this is people don't get oil

17:43Jordi Hays:like oil is there's a reason why I focus a lot of my life on oil there is nothing more 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 i mean nuclear has plutonium yeah yeah it doesn't have the same portability we're gonna

18:05John Coogan:be rich we're gonna have energy too cheap to meter in five years yeah i talk to a lot of

18:09Jordi Hays:nuclear founders well look i love nuclear as much anyway they don't they don't even have a portability solution though for the near future unless you're talking about aircraft carrier or icebreaker or something like that. So I'm just saying the world runs on mobility and oil is ideal for mobility. So you're going to go back.

18:24John Coogan:Oh, portability in the sense of like using nuclear to actually power trade and commerce and moving ships around. Yeah, yeah. I mean, even if you can power the grid, you will be poor because you will not be able to trade. Is that what I'm talking about? Yeah.

18:34Jordi Hays:Trade is really important. Trade is, and well, and also it's within the country too. We don't have the nuclear trucks to move things around. Sure, sure, sure. 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.

18:53John Coogan:Yeah, there are some people working on electric bulldozers, for example. It's very hard. And by the way, guess what?

18:58Jordi Hays:You need a lot of oil to even get that whole supply chain started because you need the mine. 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 slash UAE, them using spare capacity and them piping it where they can. So maybe combined, we're talking about 6 million a day. If you use all of those, I mean, somebody could imagine 10 million. And all of these have time, particularly the emergency reserve things.

19:33Jordi Hays:These all, like at least the Saudi one is you're sort of, you have a deposit, a big deposit here. It's just, you have a small reserve. So you can't do this forever.

19:41John Coogan:And of course, there's a risk of if you deplete the SPR more, what if you really, really need it in the future?

19:48Jordi Hays:And then there's a bunch of nearer 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?

20:00John Coogan:I've heard of it, but explain.

20:01Jordi Hays: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...

20:14Alex Epstein:I don't know all the... It is all this... Yeah, it's basically American ship, American crew. Yes, yes.

20:19Jordi Hays:So it's, it's, it leads to all these crazy, crazy things. Like we end up importing things from, like, 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.

20:52Jordi Hays: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. So my favorite idea here is...

21:03Alex Epstein:And I imagine there's a bunch of powerful lobbies that will fight and kill for the Jones Act because there's an entire industry built around. Yeah, it's the idea that we can only have a good shipbuilding industry.

21:16Jordi Hays:I don't know what people think is happening with our shipbuilding industry. It's not going as well as other people's.

21:22Alex Epstein:It didn't exactly work.

21:24Jordi Hays:Yeah, I mean, it worked to protect certain people's...

21:26Alex Epstein:I'm just saying if you look at American shipbuilding, it's certainly allowed us to be competitive on a global stage.

21:34John Coogan:The shipbuilders would say we're early, but I take your point.

21:37Alex Epstein:Early, but you've seen, but I'm just saying like, how many decades of declines do you need? I think we're early.

21:46John Coogan:It's like a smiling curve, like churn. It goes down and then it goes back up.

21:51Jordi Hays:So, that's the bull case. That's the, all right, well, it's definitely not going to help us in your term. So here's the most interesting thing, which is a pet issue of mine, because we're, like this administration, I should say, does a lot of good stuff on energy. I say that I, you know, I'm in a fortunate position where I get 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.

22:23Jordi Hays:So Canada has no people and infinite resources and is really friendly. So they have these oil sands, you know what these things are? Yeah, you know, explain. 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 there's all these oil sands. For years, they were not very useful.

22:41John Coogan:They weren't viable because it's not just you drill down, black gold comes up. It's like buried in the sands, need to be refined. There are different kinds of things.

22:48Jordi Hays:You can mine it out directly, or you can do what's called in situ, which is you heat it up underground.

22:53John Coogan:Oh, and it liquefies.

22:54Jordi Hays: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 a third 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. So, but if you just think of Canada, it's just, we should be so, they have water. I mean, they get no people, one-tenth the population, infinite raw materials. They got everything. They got timber. They got natural gas.

23:26Jordi Hays:They got oil. Like, and we're talking about Venezuela. 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 work. 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 like 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, quote, America.

24:13Jordi Hays:But this is just, by the way, unbelievable. I think they have the best uranium in the world. Yeah. It's...

24:19John Coogan:Maple syrup's up there. Yeah.

24:20Jordi Hays:I don't have a Canadian personality, but I love that place. No, strategically. It makes a ton of sense. Strategically, and they're very friendly.

24:26John Coogan:Yes. They're very friendly. Maybe we should be friendlier.

24:28Jordi Hays:Yes. You know, we should, and we have trade agreements coming up. Yes, yes. The other thing is we have some, you know, 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 Mideast spare capacity, our emergency capacity, and IEA emergency capacity. And then below that, you have Canada, Jones Act, and U.S. production.

25:00John Coogan:That's a really, really thorough list. Thank you. I appreciate that. Anything else, Jordy?

25:04Alex Epstein:What are you going to be paying attention to most closely? Do you watch the price chart?

25:09John Coogan:Is that important to you?

25:11Jordi Hays:Well, it's important. I mean, I'm, it's weird. I work with, I run like a kind of 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.

25:30John Coogan:Because you're looking at longer term, five, 10-year plans.

25:33Jordi Hays:But also like I'm deliberately avoiding exposure to the commercial part of it. Of course, of course.

25:37John Coogan:You want to be independent.

25:38Jordi Hays:Yeah, I want to be independent.

25:39John Coogan:That makes sense.

25:40Jordi Hays:Yeah, I'm not, 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.

26:06John Coogan:You really need to know. Yeah. Well, it seems like whether you're in the business community or just, you know, humanitarian, everyone should be rooting for a swift and peaceful resolution.

26:17Alex Epstein:Yeah. Do you have any insight? This might be totally out of your wheelhouse, but insight into how how people running businesses that are most impacted by fluctuations in oil prices like are that where they have they been actively hedging over the last couple of weeks? Are they doing like 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?

26:44Jordi Hays: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 is 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 out 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.

27:22Jordi Hays:And then you think, wow, like this.

27:23Alex Epstein:We don't need Alex. Yeah, it might be nice to keep the troops motivated,

27:28Jordi Hays:but I'd probably rather be employed. But it's a hard business. And one of these things is you just – 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 and actually people we know in common. And like 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 – no, we can handle it. like when the prices go down.

28:02John Coogan:Sure.

28:03Jordi Hays:Because that's, 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, this administration is very focused, I would say too much focused on having prices go low. This is one of the variables here is, although the administration I don't think was fully, was not fully prepared for this situation, in general, they are maniacal about prices going low. Like 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. And the people in the oil industry say, wait a second, we've had inflation of everything else.

28:37John Coogan:Why does our one product have to stay at$50?

28:39Jordi Hays: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 it's 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.

29:20Jordi Hays: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, a little less supply, price goes up a lot. It's different than other things which you can substitute for much more rapidly.

29:38John Coogan:You're out of a job when we build the Dyson sphere.

29:41Jordi Hays:Oh, man. I'm working on this AI thought leader thing we talked about last time. So I got plenty to do.

29:48Alex Epstein:We'll cross that bridge when we come to it.

29:48Jordi Hays:I got plenty to do with my time. Thank you.

29:50Alex Epstein:As long as we need energy, you'll be doing us fine. All right, guys. Thank you so much for coming on the show.