It's always been interesting trying to make sense of global oil markets and for a non expert like myself. And so the recent events where OPEC plus cut another million sorry. Saudi Arabia cut another 1,000,000,000 barrels per day of production trying to prop up prices. The market didn't respond well to that. What the heck is going on?
I turned to the experts, and I'm gonna talk to Gregor McDonald, author of the Gregor Letter, who has all sorts of x excellent insights. So welcome to the interview, Gregor.
Hey. Good to see you, Mark. I'm sorry there's a little, construction in the neighborhood right now. I hope that doesn't interfere with our our chat.
It doesn't. We'll work around it. Okay. Gregor so let's start with the Saudis. Sure. You've been very critical on Twitter, about the the Saudi's decisions and their management of Right. Of things. Give me your argument.
Yeah. I'll just make it you know, it's I could I could do a long PhD dissertation here, but we'll just I'll make it as tight as possible. Once upon a time, Saudi Arabia wanted to be the central bank of oil and they were the central bank of oil. And the, and you, you achieve that position of power by being cool and rational and acting like a central banker And Al Naimi, worked in conjunction with the government and they made consistently good decisions, not perfect, but, you know, because they're future forecasting. They made consistently good decisions, increasing production when prices got too high, lowering production when prices got too low, but always with an eye on the global economy.
Now, Mohammed bin Salman is a different generation and he has entirely different concerns. I think he's incompetent. I think he's giddy with the power of controlling oil in Saudi Arabia, but doesn't realize that it's not something you wield. It's something you manage. As long as you manage that powerful position correctly, you will retain your power.
You'll retain your position as the central bank of oil. I think that's just gone out the out the window. I'll give you one example. Al Naimi would have would have helped the global economy during Russia's invasion of Ukraine. And and if Putin was angry, Naimi probably would have said something like, look, dude, you're the one that invaded Ukraine, not us.
You have to account for that, not us. We have a global economy to think about. So you see, you just don't have any of those considerations anymore. And what you have in in MBS is a bit of a a bit of a juvenile adolescent. So yep.
And there's a a lot of talk about how the Saudis need $80 a barrel to pay for their Right. Basically pay for their their government budget. And MBS seems to have a lot of grand ambitions. He's into all sorts of things, solar and hydrogen and, you know, golf league mergers, financing new, golf tours, that sort of thing. And what role does that play in his incompetence and his mismanagement of of OPEC?
So the analysis that says OPEC needs a certain price or the countries need a certain price, That is a useful component of one's analysis, but it can't be the only thing that drives, you know, OPEC policy. It's like it's like a, it's an optimal goal that you'd like to have, but you can't always you can't always achieve that. One of the ways you achieve that is you make sure that you make sure that you don't destroy oil as a product in the market. You know, you don't hit consumers with high oil prices when they're already high. You gotta lower those prices so that they're not alienated.
2022 is gonna go down as a disastrous year for oil and fossil fuels because it scared the hell out of Europe. And Europe said, forget this. We are gonna do whatever we can to get off natural gas and to get off oil. So yeah.
Okay. I I'm very fond of saying that for the first time in a 125 years, oil has a competitor, and that's electricity. And how has the the emergence of, the widespread adoption of wind and solar, but particularly solar coupled with energy storage now and electric transportation. How has that changed the calculation, that OPEC makes when it's man trying to manage this?
OPEC should have been thinking about that 5 years ago. They should have they should have been thinking about that 5 years ago. They should you know, old old idea in business, panic when your competitor just starts to get market share, right? You don't wait till your competitor gets 5, 10, 15% market share, panic when your competitor just starts to get market share. EV started gaining market share, you know, 5 to 7 years ago, and now they've now they've come on strong.
In fact, California, which is the edge economy, may be one of the first big domains where you're where you're seeing petrol demand actually enter sustainable decline. Boy, it took a while, but I think we're I think we're there in California.
Yeah. Let's talk about that because I've interviewed Kingsmill Bond from Rocky Mountain Institute a number of times about this. And and his analysis, of course, is is that, oil peaked in 2019. And what we've seen since is not so I mean, you know, the pandemic aside, I mean, that's an anomaly. But what we're seeing is is the the peak and then the plateau.
And you can never call you can never call plateaus because a plateau might be 3 years. It might be 10 years. You don't know. But but his his analysis is that you're on the plateau, and, the the decline curve is on its way. You're, you know, you're Yeah. It might be this year, might be 2 years from now, but you're you're gonna get there pretty quickly. And you seem to share some of the same views that Kingsmill would share.
I do. I just have a more extended a slightly more extended time frame for when the decline actually occurs. I think we'll be on that plateau from 2019 to at least 2025 or 2026. And when I say a plateau, I define that as fluctuations of, you know, 1 to 1 and a half percent in demand. So if you if your baseline is 2019 at a 100,000,000 barrels a day, we'll see 99, we'll see a 100, we'll see a 101, We might, you know, see a 100 and a half.
That's where, you know, that's where we'll be for a number of years. The decline isn't isn't here yet, unfortunately. But, you know, we we got the first we get we we we got the first job done, which was to plateau, and that's took a lot of work and a and a lot of factors to get to that.
So let's talk about the American market, and I'm particularly thinking of Alberta here because it produces about 4,000,000 barrels, a day, about 3.75, 3,800,000 barrels a day. A lot of it is most of it is heavy crude, and, it only has one market, and that's the US. So we've already seen gasoline sales plateau. Diesel is a peak. It's diesel is on its way to a peak.
So is is this are we seeing a a major structural change in the petroleum market in the US driven by first by decline in in in gasoline, then the upcoming decline in diesel. Will it be offset by aviation and petrochemicals? How was that how do you see that all playing out?
You can look at the chart of of American petrol demand. It's been on an oscillating plateau
for,
you know, 15 to 17 years. If California has entered sustainable decline, which I think it has, that's your sign that the decline is getting close in petrol for the United States. Sales of internal combustion engine vehicles peaked in the United States in about 2016 or 2017. That's about enough time for the fleet, the ice fleet to really slow down, but it's still there. And, and there's just, it's not, we're not a growth market.
We haven't been a growth market for oil since 2006. Okay. But we haven't been a declining market either. It's not like you're losing with the United States. You're just not you're just not gaining with the United States. So
Right. And and and there are lots of factors for that. So, even though you we the, the fleet is now static, big shift SUVs. So, using, more fuel to go the same amount of kilometers or miles, even with, more greater efficiencies, those kinds of things. But there's in that last, say, 17 years, there's never been a competitor to begin whittling away at that.
That's right.
And now there is. And now we're seeing, I think, Bloomberg, NEF, if I'm not mistaken. I wrote about the column today, but I think it was 20, EVs are are set to be a percent 26% of new vehicle sales by 2025 or 2026.
Sounds about right.
So it so it sounds like the next 2 to 5 years will really see the conditions where we can expect to see a decline. Start to ask.
Yes, Mark. You know, when I when I wrote that little ebook, oil fall, and I completed it throughout 2018, I said that the one of the big things that's gonna happen in this decade where we are right now, you know, 4 4 to 5 years later, is that when we get an economic rebound, the rebound will have other places to go than just an internal combustion engine. Now we get rebounds, and you get this buying activity in electric vehicles, not just here, but in in China and Europe. And that's that's why it's too late, and that's why, you know, Saudi Arabia needed to think about all of this in 2016 and 2017, and they and they didn't. So it's too late for them.
Well, even the IEA, you know, god bless them, the conservative and always behind the the 8 ball, IEA.
Yeah. Right.
It makes the point all the time that going forward, renewables will account for all of the growth in in, in primary energy demand.
And yep. Sorry. Go ahead.
Well, that that's the argument. Right? Yeah. And and then and then as, solar ramps up, you know, it doubles and triples and quadruples the generating capacity globally, then eventually, it will eat into that 80% that, you know, prime fossil fuels have been stuck at, for a long time, and then fossil fuel, consumption will begin to fall. And so there seems to be this you know, you you mentioned in in, petroleum in the US.
We're talking about renewables at the global level, but the idea is that growth goes to the new clean energy technologies.
Yeah. I think the IEA's argument is on its strongest ground when talking about the power grid. Right? So if if if the IEA is saying we're moving into a time when all the marginal growth in the power grid will be covered by non fossil fuels, That's a pretty good argument, and and I'm more I'm warmer to that now because we're actually getting a solar explosion. I mean, it it melts your brain what's happening with solar globally.
It's melted my brain. And I'm and I'm a guy with high case high growth cases. Right? I'm a I'm like, if you wanna find someone who's super optimistic about solar, come to me, and we're getting a forecast that's even, you know, beyond that. I I think the IEA is on not so on firm ground when it's all about all energy. We still have a we still have a coal for steel problem and a natural gas replacing coal problem, unfortunately. Yeah.
Okay. Well, let's let's set those aside because, really, we're talking about oil here. That's how we got started on on this interview.
Yeah.
And and I and I would and it it seems like you're arguing that the the growth in, in transportation, is gonna come from from electric. I think so. Yes. You know, we ran a we, came across a Reuters story a couple months ago that said between now and 2030, the, automakers and, I mean, in the larger sense, you know, people who also make buses and and, you know, heavy duty, trucks, that sort of thing. But electric transportation writ large, the industry is going to spend $1,200,000,000,000 between now and 2030 to switch over to electric.
Okay. And that's a lot of money. That's a tremendous amount of money going into plant, going into infrastructure, going into supply chains. And I think that for me more than anything, you know, it's follow the money. Well, where is the money going in transportation?
It's all going to electric. And as I say to deaf ears in Alberta all the time, your customers are talking to you. These are the people who determine what fuel goes in a car, a truck, a bus, a tractor, a garbage truck, whatever it happens to be, and they just pick the electric.
Well, you know, Canada needs to we've got new maps here in the United States. There's the battery belt. There's the EV production belt. There's the lithium processing belt. We've got rare earth material recycling, companies that have been, given grants.
This is where all the all the growth is. And as I say, you know, look at our maps and and ask yourself, do you have a map like the US? And if you don't, you know, get yourself one, get get yourself battery production. I mean, look at look at what Tesla just did pairing with, you know, Panasonic. So
Okay. I wanna I I'm all I'm fond of saying, Gregor, when I'm talking about the electricity systems, that the you look at the US and it's it's so dynamic. I mean, what the US has done in the past 3 to 4 years in terms of beginning to modernize its grid and invest in in, distributed energy resources and upgrading trends, all of that stuff, It's so dynamic compared to what's happening in Canada. But now what you're arguing is the same dynamism has now come to the auto industry, and we don't see that in Canada. We see a little bit of it in in Ontario.
And what we're and this is interesting to me. I've had some economists push back and say, oh, no. We shouldn't subsidize battery plants. You know, we should spend that on health care. Look.
If you're not investing in the in the clean enter in the industry of the future, then you are gonna get left behind. I think we've Canada has learned we would think we would would have learned that lesson, but apparently, we haven't. So give my listeners, a sense of just how dynamic capital investment plant building plans are in the US in the auto sector.
Well, we that's that's tough to that's tough to describe. Essentially, what's hap what's essentially, what's happening is is what the, investment and infrastructure professionals have been talking about for 2 decades. And essentially, what's happening is the US government is acting as the catalyst, the backer of the the the seed. It's actually acting as like a venture capitalist, and it's saying, we wanna throw money at all of this. And then out in the rest of the world, you've got private capital that says, Now I feel comfortable investing, because I'm investing right alongside the the the government, and I know that I'm not gonna face all these difficult hurdles, because they want that battery factory in South Carolina, Tennessee, Georgia, you know, Ohio, and and so forth.
So the US is the number one recipient of FDI, foreign direct investment, last year. I can't I don't think the US is good in that rank, but it hasn't never been hasn't been number 1 in a long time. So the money is pouring in because it's not an illusion. It's real.
I hear this, all the time when I talk to, American, innovators and utility executives would be, another group that that I hear it from, but they're excited. Like, when you talk to them, the opportunities, the market opportunities that have been unleashed by all of this investment and and the new policies and the and the industrial policy that the, that the Biden administration has come up with, This is I I can't remember the last time that I saw, you know, industry and and and and private capital this excited about a boom time in in industry. And, so I'm I'm I'm not I'm not making this up. This is actually happening on the ground in the United States.
No. I mean, the other thing I'd say to your Canadian audience is you're you're starting to see traditional conservative economic thinkers starting to fall into line. Like, Neil Ferguson was a well known, UK, you know, economic historian. He wrote a big Bloomberg article, earlier in the week that I was happy. He cited he cited work from my newsletter, and he was saying, you know what?
The automobile revolution is a revolution. It presents an enormous opportunity to save money on oil, and we should probably take this more seriously. Let's it was sort of like, let's stop all the ankle biting and sniping about it. This represents a, a, you know, a big gain. As I like to say, Markham, energy transitions are wealth creation events.
Okay. You've got a lot of conservatives who think it's a wealth destruction event. Nope. They're always wealth creation events, always, because the new energy is cheaper, better, faster. If it's not cheaper, better, faster, no transition.
You're not gonna get a transition. So it's cheaper, better, faster, and so it's gonna be a wealth creation event. And I think a lot of these guys who are just so concerned about, and they're crying over the future lack of growth in oil, so what, man? Like, it was never about coal or oil or wood. It's never about that. It's about the efficient use of energy so that we can have more of it at a lower price. What's the big deal, man? It's like, that's how it's always been.
Well, it's the problem with incumbents. But here, I want to point I I wanna point out an irony to you, Gregor, is that, in Western Canada, which is, you know, basically the the the wheat belt and the grain belt of of Canada. Yeah. A 100 years ago, it was farmers who led the energy transition. They were the ones who were buying tractors.
And then a couple years later, they bought a they bought a a combine. And then they they bought, you know, a 3 point hitch, something with a 3 point hitch so that they could use other implements with it. And then they got a tractor with rubber tires and a bigger motor. All of that was driven by by farmers, and here they are now, a 100 years later, they've become the incumbents.
I know.
And and now they're pushing back against the wealth creation of an energy transition that benefited their, you know, their grandfathers and great grandfathers and great great grandfathers. So to me, there's there's certain irony in that. What can I tell you?
Yeah. I mean, I like to joke, imagine standing on the street corner in Manchester, England in, you know, 18 15 and saying, this whole thing with coal is, that's not gonna work out. We need to stick with wood, even though the forests are, you know, disappearing. What's so great, you know, what's so great about coal? It's the same thing today.
It's like, oh, I can't believe we're gonna give up oil, you know, for electricity. Yeah. We're gonna give up the 50% loss that you get for every dollar you spend on oil, 50¢ of it goes up into the atmosphere as heat waste. Okay? So we're gonna claw that back with electricity. What is the problem?
Well, you're being generous. I I think the the the the loss is is more like, 65, 70, 75.
Yes. You're right.
Yeah. Yeah. It's much bigger. But let's get back to oil. We'll finish up our conversation with oil. So the American shale revolution that started in 2008 is is changing. The industry is maturing. It it's a lot of its tier one properties have now been tapped. It's not it's not scheduled to or not forecast to grow much. What's going to happen to the shale revolution?
What's going to happen to those heavy, oil refineries? There's 5 5,000,000 5,500,000 barrels a day of heavy crude oil refining capacity that Alberta supplies about 3 and a half million of that, so it dominates that particular market. Are we gonna see prices fall? Are we gonna see refineries close? Are we gonna what give us the next your your best guess on between now 2030, what we're gonna see in North America.
Yeah. So in the same way that US natural gas production moved ahead of US natural gas consumption so that it could serve on a growing and expanding export market, we're gonna see that with oil. So at some point this decade, US oil demand is finally gonna come off its plateau and it start to gonna fall. That won't stop US oil production from from being, you know, either maintaining its current level or slightly going above its current levels for export, as long as somebody somewhere in the net in the rest of the world is is growing their con their consumption. Now, when it comes to price, price is going to be well, I'll I'll make it simple.
I don't believe that there's anyone who has the trading experience that can successfully trade price from this point forward. I've kinda written about this just in the last week or 2. It's gonna be impossible because the the various forces coming at you from different directions, you just cannot interpret what those forces are. Price is actually gonna be firmer than people expect because the industry has discipline. Okay?
The industry does not wanna overproduce, so it's gonna be firmer than you expect. But it's gonna be also be more volatile than people expect because demand and supply are gonna be too tight. It's a it's a it's not a depleting resource. It's a resource for which there is depleting demand growth. Right?
And that makes for just an impossibly tricky thing to try to trade. So one advice I have is don't try to predict the oil price. Don't try to trade the oil price. Don't try to trade oil and gas stocks. That era is is over. If you if you do well doing any of those things, it's because of luck, not because of genius at this point.
I I wanna give you my my forecast, my best guess, we'll call it a guesstimate, of what's gonna happen to Canadian heavy oil exports to the US. I think Mhmm. I think, yeah, because, the Canadian producers are putting a, they've they've driven their cost down. They're already. Their breakevens are already down in the 30 to $45 range.
They're they think they're gonna get down to 20, 25 at the floor and maybe 30, 35 at the ceiling, and that makes them a very competitive barrel. And I think they can outcompete Colombia, Brazil, Venezuela, Mexico. I think they can outcompete them for a declining heavy crude market in the US. The question is, at what point do you run out of market? Because that's only a a 2 maybe a 2,000,000 barrel a day cushion, and now then you're getting into their bedrock market, their bedrock demand for their for that heavy crude that comes out of the oil sands.
And then at that point, then they're gonna have to cut this either cut back production because they haven't got enough shipping capacity to the coast to get to other markets.
Yeah. I mean, Canada's been drafting off of the expansion of export capacity in the Gulf Coast of the United States. So remember when Canada went through this whole thing, like, should we build LNG, you know, terminals, or where should we build them? No. We're not gonna build them. It didn't matter. We built them. We built them. So so the you had a price you have price convergence. Right?
Because now north it's not just American natural gas. It's North American natural gas. The same thing with with oil. So I think, you know, we're already we're already converting, really, into into less and less of an oil consumer here in the United States and more and more of a petroleum product exporter. It's like we've got this industrial base that turns all types of crude oil into products.
That's what we that's what we're really gaining expertise in now, and we're gonna keep doing that as long as the rest of the world keeps demanding oil. But as we discussed already, I don't think global global oil is going to increase again on any sustainable basis outside of that plateau.
Yeah. I I so I think that the the takeaway from this conversation is that there's a lot of there's there's a lot of balls in the air right at the moment, and it's hard to say exactly how all of those, which ones we're gonna drop, which ones are gonna stay in the air, how that's gonna all all play out. But the gen the arc of the market, the arc of demand, the arc of the technology and prices is pretty clear. And the only question now really is pace and when we get there and where even 3 years ago, we were talking about these kinds of things happening in the mid 20 thirties. Now we're talking about the mid 20 twenties and literally is right around the corner.
And this is an industry that requires, you know, 5 to 10 years to build anything or plan anything. And now we're talking about 2 years, 3 years to fundamental structural market, change.
If I was advising the Canadian national government and possibly a provincial government or 2, I would say very sincerely and in a very friendly way as my as my friend living next door. I would say, if you agree that OPEC and Saudi Arabia didn't react soon enough, 5 to 6 years ago, then you have to consider that you're not reacting enough for what's gonna happen over the next 5 to 7 years. So I I would really encourage Canada to start reacting to what's coming and to stop pretending that it's not. Yeah.
Well, on that note, Gregor, if you say that in Alberta, you're gonna get called a communist.
Sure. Why not? But I'm a capitalist.
I know, but this is not a rational conversation with us. So we're gonna call you a communist. Okay. Well, look, Gregor, thank you very much. This has been very insightful.
Thank you again, Markham. Nice to see you.