Jeff Currie on the 'Volatility Trap' Keeping Commodity Prices So High

at least as of March. Yeah, that's certainly right. And last month would have captured the worst of the energy spikes. So a lot of commodities prices have come down ever so slightly. But it does feel like there's just generally a lot of angst and concern about what's happening with commodity prices at the moment. And I have to say, I just realized the last time we spoke to our guests it was also cp I Day and we started

out the discussion basically in exactly the same way. Okay, so in a year from now, some good news here, but OI. But yes, oil and other food related commodities, energy, natural gas is very expensive. There is, of course. I think two dimensions. One is like pure price, and then the other is availability. Ya as we've been talking about with some recent guests, including up here on Grand like those have become two separate things. Also, Salton Post are

like there's this fracturing of global commodity supply chains. Were absolutely right, and even financial exposure to commodities, you might make a lot of money at the moment, but you're not necessarily guaranteed to take delivery. There seems to be a chasm opening up between financial commodities exposure versus the physical and we saw that very dramatically with Nicol and some of the dislocations there. Well, no more, no more intro.

I want to get right into our guests because we've had him on twice before, and I would say, of all the people you talked to, he's probably called this commodity cycle. Maybe it's a supercycle as well or better than anyone we're going to be speaking with. Jeff Curry, he's a Goldman, he's the global head of Commodities Research. We had him last on in the middle of October and he said there was more pain ahead in this commodity supercycle, and that has proven clearly to be true. Jeff,

thank you. So much for coming back on oddlines. Great, it's a pleasure to be here. Let's just didn't realize it was CPI weekly. Well, let's just start it off like really simple, Like is there you know, in in the middle of October you said there was still more pain ahead. That clearly proved to be true. Start really general, is there more pain ahead? It's a different kind of pain.

We like to argue we're entering a volatility trap where higher of all discourages UM investment, which then reinforces higher ball. And to think about what ends a supercycle, there's only one thing that And in a supercycle investment you've got to grow supply and deep bottleneck the system so that you can accommodate more demand growth on a forward going basis. And that's how you ended the seventies, how you ended the two thousands, and that's how we're gonna end this one.

But at this point right now, UM investment, whether it's investment and through capital markets, through banking, you know, in the commodity markets themselves, it's all declining right now in an environment in which it needs capital more than ever. So you know, it's I like to say, we're in the early inning. Still maybe it's the second or third

inning of the supercycle. But we're just getting going now. Well, why don't we just jump into that point then, because this is something that has come up quite a lot on recent episodes, this capital investment point. What is it in your opinion that's holding back that investment and when would we perhaps expect that to change as higher prices

start to incentivize more producers. Well, this one is a little bit ferent than the other cycles, But why don't we start with the other cycles and then talk about how this one is different. The way this one is different is through e s g. In banking regulation following the financial crisis in the way oh nine, So let's

go back to the nineteen sixties. You had the nifty fifty that was your new economy booming along UM, absorbing much of the capital from the old economy and starving the old economy of the capital that needed to grow the supply base, which set you up for a very tight supply environment when you got the big uptick in demand off the Great Society UM in the late sixties. In the early seventies, similar dynamic that happened in the

two thousands as well as today. You think about in the two thousand's you had the the dot com boom, and in the two thousand tents you had the bag boom, so it was a very similar dynamic um and you saw that. You know, basically it was this whole idea, the revenge of the old economy is investors preferred growth names like Netflix to old economy names like Exxon Um.

That created the capital deficit that led you into this environment. Now, why is this one so much more extreme than ones that we've seen in the past, is when you have E s G policies overlaid on top of that. I'm not gonna be labored those points much further because we've talked about them in the past. But it's important to remember that E s G is not a substitute for a a carbon tax um. It's a blunt instrument that

is reducing capital flows into a very critical sector. So if you had a carbon tax, you put the carbon price into that energy company model, look at its carbon emissions and think, hey, is this a good investment or that investment. What we're seeing is entire sectors being shunned, and that's made this one much tighter and it's not just the oil gas guys, it's the metals and mining as well as the agriculture sectors. But banking regulation, and that's the one that I've really began to focus on

over the last let's say two to three months. And it really boils down to leverage ratios and those were put in place back in you know, Dodd Frank back after following oh eight o nine. And let's think about what that leverage ratio is. It's tier one capital on the top and the total assets of the bank on the bottom. If you think about what are two what is tier one capital? It's bonds? What are all the assets that go into the economy. All that lending is

based off commodities, So it's things the real world. And so let me ask you if if you have and most policymakers are gonna tell you it's inflation proof because it's the price level times the bonds and then the price on the numerator, and then the price level times the overall assets on the denominators. So the price level drops out, it's you know, inflation proof. The reality it is not, and why because bond prices are negatively impacted

by commodity prices. So essentially, what is that ratio. It is bonds on the top and commodities on the bottom. And what we're seeing is that these leverage ratios are starting to become really binding. You think about how much more capital of the market needs today than it did. Let's say, you know a year ago, we have oil prices are two x what they were a year ago. You're gonna need two times the amount of working capital out there. And it's in an environment you're are already

bumping up against those constraints and banking. Do you think about banking. Banking's old economy too, it's you know, anything that is at you know, capital heavy. The world was focused on asset like, capital light, everything of that investing. But we've now focused on the need for having capital heavy investments, particularly in commodities at a time and it was already under invested and at a time that you

have E. S G constraints. So I think you get the idea that the capital deficit in this market is extreme and now it's kicking off this volatility trap where the under investment um leads to decline in inventories to raise cash, liquidation of financial positions to raise cash. All of that accentuates the volatility and then scares off further investment.

So you now are entering this volatility trap. You know that we've made the point I've testified in Congress on this point before, is the only way out of this is you need somebody to stop that vicious cycle and create some type of stability to I saying, I like to say, is spot prices, solve surpluses, long term contracts solved shortages. Can I just ask, because I know we'll have people who listen to this and they'll hear someone from Goldman Sachs, you know, a big bank cell side analysts.

They'll go, oh wait, it's someone from Goldman complaining about bank leverage ratios and E s G and regulatory um capital requirements. Can you just can you flush that argument out a little bit? Or what would you say to the critics who are immediately going to well, this is just you know, a bank talking its own book. Obviously a bank would like to lend more to the energy sector. Well, um, one is that the banks, um, you know, all of them, are are very much behind the the the E S

G push. And I want to emphasize I am very very much a pro climate change and really believe it's a problem that needs to be solved. What I'm arguing at E s G is probably not the best way to go at it, you know, as I really believe a carbon tax is the right way to approach this, you know, and most economists would agree with me on that.

And the you know, the way I could think about e s G is an effective carbon tax on the consumers in places like the United States, in Europe, and preticularly high carbon tax in places like Europe where the tax revenues do not go to the local governments, is going to places like Russia. Um. You know, in fact, like to point out, you know, the quarter over quarter growth in oil revenue for Russia funded its sixty two

billion dollar military budget last year. UM. So you know, the impacts of e s G in the fact that you're not collecting that tax revenue is significant, but more importantly creating big distortions and investment. So you know, I'm not you know, you know, I want to really emphasize I'm very much pro climate change. It's a problem we need to deal with decarbonization. It's just E s G is not affected tool and approaching this um, well, there's

a more effective tool of doing it. In terms of the question about about bank bank regulation there, um, you know, at the point, I'm just going to point out that the energy companies and the and the the the trade houses in Europe, they went to the regulators asking for more funding. So clearly there's not enough funding. And whether if it's coming from the likes of banks, there's the point is that that you're bumping up at these constraints.

The whole industry was focused on being capped at a light and it was all It goes back to this whole revenge of the old economy because banks are old economy to in fact, you look at banks price shares and you look at them to metals prices where you are in the capex cycle. They're very much correlated because ultimately the banks of the conduit of that capex cycle. So they're all really old economy and pretty much more broadly since oh eight oh nine, old economy was bad.

If I could just show you pictures at the equity prices of anything that was capital light, it went straight up. Anything that was capital heavy, you know, like the big oil companies went down or sideways over the course of the last ten years. And it's not just you know, so I'm not gonna blame it all on E. S G. And let's be only be very careful here so it doesn't sound like I'm so anti EU s G. This industry had really bad returns, investors were not interested in it.

And if we go back and we look at the previous supercycles, let's say the one in the in the two thousand's, prices started to move up in oh three and it wasn't until oh six that that capital came in. Why they want to see a track record of good returns that still holds today. So I'm not want to blame it all on E S G, all on banking regulations and say it's just a combination of many different

factors that's created a huge capital deficit. And I want to point out it wasn't just all vulgar that solved the seventies. There was a huge amount of investment that went into North Sea Alaska, North Slope, Gulf of Mexico, Mexican production, Brazilian, Norwegian. I can keep going going down

the list. That investment that came to fruition did a lot to ease the inflationary pressures if you went into the eighties, so you can just get you know, contribute all to the rate hikes by the Fed, because there was a lot of that investments. That investment is critical, and we're at a junction right now with eight and a half percent inflation, but we still haven't seen the underlying investment that was already there, let's say in the seventies,

that is not here today. We need that investment because the only way out of this is investment in the appropriate ability to grow that supply. You know, you hear from say the CEOs of independent oil companies and they talk about the demand among investors for returning cash and that's totally understandable because after a decade of the industry having lost half a trillion or whatever the numbers are, you can understand investors who want to optimize for cash flow.

And you can also understand, as you've been pointing out, the reluctance of banks to you know, bump up against

their capital requirements by lending further. Why not the more opportunities on the private side, or why not you know, why haven't we seen you know, me and Tracy just start a private h private oil company, and forget about the public markets, forget about borrowing from banks, and uh, you know, borrow money in the bond market and return money to our investors privately without some of these outside

financing considerations. Why why aren't more players taking advantage of seeming like you know, with oil, where it is roughly a hundred dollars opportunities around that scale, the alee of these industries are unlike anything else on the planet Earth. You take a Cashigan and and caspping its nickname was cash All Gone, why you know, was somewhere around a sixty billion dollar project. I mean the magnitude in the scale of these investments or unlike anything. And take a

company like VP with that that horizon spill. It had to write over a check the fines for something like thirty eight billion dollars. Tell me another company on the planet Earth who could write over a check for thirty eight billion dollars. So the first and most important is

the scale, and then the access issues really critical. I like to point out things like copper are very narrowly geographically distributed, so that you need to have the scale to be able to get into these places, and you have to have the ability to know how to the technological know how, the political know how um to go in there and do it. So I think that is one of the real key reasons here. But by the way, I want to point out, why are the oil stocks

going up. It's because private investors are going around the institutional players and making these investments in these companies. So where it can go around it it is, which is why you know, ultimately, if you're going to solve climate change. You know, I don't want to you know, sound dismissing here, but when you know the Russian army is coming barreling down, you can't have Germany turning back on the coal plants. You know, Historically, when you deal with these problems, you

have to have policy, create rules. These rules need to be enforced and that those rules that they're violated, there has to be punishments and there has to be a price associated with There's why you know, trying to go down this E. S G type path to deal with this is gonna miss a lot of these really critical points. They are going to be required to solve this problem.

So point you know, looking at this on a you know, a longer term basis, we need to have policy put in place that is created a framework that's gonna be conducive to getting these capital flows coming to the right places, because even if the private investor probably has to do it, he still needs to do this in a way that

environmentally friendly. And I think that you know, again, you need to have this scale the policies put in place in a such a framework that it's done and that it addresses the unique for investment in a very environmentally

friendly way. So you're talking about this this volatility trap, and I think you briefly mentioned this earlier, but there has been talk of maybe there is a role for either governments or central banks to play in this space to make things smoother, maybe smooth out price volatility, or provide financing or funding for energy firms or energy traders that need it. First of all, is that required in your view? And secondly, what is the best way to try to smooth out volatility to give players in the

commodity space confidence to actually invest and produce. Well, it goes back to that that saying I've made before. You know, spot prices, salt surpluses, long term contracts, solved shortages. Why is that the case is because if you can take out that volatility and lock in that return through a

long term contract. That investor feels, you know that he is safe to be able to make that investment because there's a minimal rate of return because remember these things are these things are not like tech tech is you get you have a low chance of getting it, but you have get a big return that lasts over maybe twelve to eighteen months. You know, it's something like an iPhone is very short cycle and it's high returning. These

are low returning, very long cycle type of investments. So locking in that rate to return throughout that volatility is really critical. And so when we think about you know, what you need to do to get that, you need to create an environment that's conducing to creating that type of long term contract structure. You know, actually, if you look at what happened in the seventies, that was when we created many of these long term contracts around l

en G and gas and so forth. But there was also conglomerates that were put together to be able to to shield the upstream, downstream type of volatilities. There's lots of ways. And then we moved into two thousands to a market based and This will bring you to the Nickel story. Why was this Nickel story because the seventies we did this with like conglomerates in long term contracts. If somebody failed a long term contract, this thing would

be resolved in a court of law. So then in the two thousands, the banks got in between these conglomerates. Let's say between like a a GM and an al COHA could squeeze in there, um provide lower cost of capital, and you had the financial market squeeze in there, and then create that new kind of long term contract that was financially based. Now, the problem with that is that when you go through periods like we are right now in that price of that long term contract goes up

because it's traded on the market. You get a huge capital call and our margin call, which is what was happening with that case in Nickel. Then you need the cash to fund that that that margin call. You didn't have that back in the seventies, you have it today.

So that's can we all The question is are we gonna gravitate something back closer to the seventies to deal with this problem, or we're gonna try to fix the structure that was created in the two thousands, which means you're gonna need different type of lending too, agreements and people have to be more comfortable in that risk and how much capital these sectors needs, you know, obviously, I think the easiest way to solve with this is create

a regulatory framework, you know, Tracy, as you talk about that would be able to address these issues, take out that volatility, make banks, investors and so forth comfortable with that kind of risk. Otherwise we will go back to the period of the seventies, which is vertical integration conglomerates and these longer term contracts that end up in court

of laws, not in in financial institutions. Is there more so one proposal that's floating out there would be to be more creative with this would be oil specific, of course, with the spr and so we know that the administration has authorized daily sale of oil included. Solve the long term contracts problem or the challenge by pairing that with more robust commitments to buy back at a certain price.

We have seen this sort of flattened a little bit, but it's heavy backwardated oil futures curve, essentially putting a floor underneath the longer term prices, and could it use the SPR to sort of create more domestic supply in investment right now. I mean you can do that what you're describing at the farm subsidy programs that the US has with you know, it's farm Bill with the farmers in terms of giving that kind of basically buying the farmer put on soybees in case some bad weather shock

or something like that occurs. You don't need the SPR to create that type that type of dynamic. But what you're talking about is a physical version of the you know, the farm bill really is one that the farm subsidies are ones that are more like a financial put, but what you're describing is more like an in kind physical put.

Both our ways to think about solving it. But the one thing I will say about dealing with higher oil prices with an sp our release like what we're seeing right now, that's crowding out private investment, which doesn't help solve that longer term problem of getting investment into the right place. So these policies need to be thought through in such a way that they're conducive to creating decentis

in place to make the longer term investments. I wondered if I can ask something I've been wondering about when it comes to the SPR release, and I'm sure a lot of people have been asking this as well. But you know, it's a pretty big release, and we saw a very immediate impact on prices, and I think Goldman also cut its price target on oil because of the release. What happens after this, like, how does that actually get topped up in the future, and how does the US

source that oil? And at what pace would you expect it to replenish that stockpile. I mean, the details on the replenishment rates are not that clear at this point, but you know it would be at least a year or two before you expect them to come back and by, And I think the plan right now is that they would go back and by. Let's talk about the impact that it has had on prices. There's two factors that have created the recent downdraft in oil prices and commodities.

More broadly, is the SPR announcement, which was a you know, a million barrel per day throwing the Europeans. It gets up to around one point two million barrels per day release for about six months, and then you know, it's meant to be a bridge the gap until you get the investment that brings on new supply that can be used to refill the the SPR. So you can see

it's a temporary patch. And then you have the COVID situation in China, which is another two million barrel per day to man H so you've had a big hit to the situation more near term. Now, I want to emphasize that that you know, these are all transient events, a loss in demand. Once you normalize China, you get the problems come back back again. Once you have to buy back those barrels of oil that go into the SPR,

the problems come back again, you know. So we're in a down draft right now, which is part of this whole idea of higher volatility. But it doesn't mean that any of this is signaling into the longer term problem you like to point out. Let's see right now is a temporal solution into a structural problem that needs to

be readdressing. I wanted to pivot. Actually, you know, so much of our conversations and I think like over the last several years, most commodity conversations, including this one and stuff farther there's obviously a high emphasis on oil, but natural gas is also really at the forefront of mine. We see prices they were already surging in Europe even prior to the invasion. Obviously the politics of Germany and other countries cutting such a big check to Russia every

month is incredibly uncomfortable. And we've seen prices rising here in the US. I think it's like a multi decade high at the Henry Hub prices for natural gas. What is the where is the how much further? Let's start just simply does that? Do prices there have a lot further to run? Uh? In the US and Europe. In the US, yes, in Europe you're at the demand rationing phase. You're gonna have periods, We're gonna have more severe shortage, you need more upper price bikes, and maybe you have

periods that less tightness. But you're at that. You're at that you can think about a commodity cycle that's going you know, from you draw your inventories down in the price begin to trend up. Once you've exhaust your inventories and have to go into demand rationing phase because you don't have enough supply. Um, that's when you know you get the high volatility. Europe is at that phase right right now. The US, on the other hand, is not one.

It has the shale production that can be brought online, you can't continuously export it because there's constraints around l en G liquid liquid faction capacity in the US, which means the US is is much more immune to this than the rest of the world. I'd like to say it's East of Rocky US California has that has a

problem similar to the rest of the world. But East Rockies US is is a relatively well supplied market, but it won't be forever, particularly as you continue to build more llergy terminals, and the policy more recently in response to the situation in Russia Ukraine is you know, to build more llergy terminals to supply Europe, which will ultimately exhaust that cushion and then push you up into a much more higher ball regime. But I don't think we're going to get there any time in the next year.

So this is something that's curious about, is expanding llenergy export capacity, Like how should we think about it from the perspective of US national interests, because it does seem like a more globalized llergy market would cause prices to go up. On the other hand, we would have more export revenue. So how should we think about like from the policymakers, is an unellied good to continue to build

out llergy export terminals and so forth. You know, if you do it with all the permitting suwhere around four years, you take out the hermitting, you can get it down to twenty three months, you do you know, a Defense Act Production Act type, maybe you can squeeze it down to you know, twelve to eighteen months. I don't know what you could do get it down to, but you

get the idea. It's a pretty long drawn out process to create one of these liquid faction terminals, and you know, that's definitely one of the goals in terms of dealing with this geopolitical situation. But I want to emphasize the following. You know, I've talked to many German industrials that made

this point. The German industrial manufacturing base can't operate off leg Move the BMW plant to the US and build the BMW's on top of the gas plant and then export the BMW's or build the BMW's and Qatar don't move the gas to you know, move the gas to heat people. But you can't run a an industrial base off of, you know, liquefied gas. You know, I've never been a fan of that. You know, think about what

this thing. It's a three hundred million dollar floating third, a mess that is frozen, and you pump a bunch of of gas into it and you move it around the world. It's a lot easier to move manufactured goods on bolt ship containers and it is in lergy tankers. So I'm not a fan of using lergy to run a manufacturing economy, but it does work for heating and things like that. But you know, the question is, um, you know, is this the most viable solution to this?

Thinking about it on a longer term basis, it's probably not. So this actually leads into my next question quite well, which is how should we think about the fungibility of commodities in this situation, Because it seems like one thing we are learning over the past couple of years is that if there's a crunch on coal in China, it's not that easy to source alternates. If Russian gas is suddenly taken out of Europe, it's difficult to source replacement supplies.

As well. So how are you thinking about that and how does that inform your overall supercycle commodity East thesis. It's it's critical here. And you know, as I like to say, there's BTU conversions across all these commodities. We saw it in the seventies, we saw it in the in the two thousand's, and we're beginning to see it happening again. I mean that if you think about commodities

and you you rank order them. We chose all these commodities to do what they do for us by their cost basis, and you know, I actually I've come to the point there's there's four things we use use commodities for. Obviously transportation, and we figured out oil is the best to the lowest cost way to create that transportation. You can do it with electricity, um, you know with us a nuclear, but it's a it's got a different cost basis,

and actually it's higher. If you just look at the density of oil and you put it into the car, it's pretty much the it's the lowest cost way to do that. In fact, Ford and Edison had this debate well over a hundred years ago about which one was better, and we determined at that point in time that the the oil was. Then the other one is we need to build things, and you know copper is best for

things like plumbing, electricity, conducting, conducting electricity, UM. And then you have we got to feed ourselves, and we figured out using corn, wheat, soybean, which are your workhorse grains to do it. We're the cheapest to do that. And then you have to cool yourself, heat yourself, which then you know you look at natural gas and nuclear and those other types of com mine. So we chose all these things for that reason. But let me point this out, and this is fairly obvious. We could do all of

that with corn. We can drive our cars on corn. We all know that. You know, you can make plastics out of corn, you can build your house out of corn. You obviously can feed yourself with corn, and you can use corn to generate electricity, heating, cooling and all those things. So we would only need one commodity to do that, which is corn. But we don't do it because it's too expensive. And so what you're asking now is, okay, we look at some of these other commodities like oil

and gas. They have these admissions that we don't like, Let's figure out how to replace them and the best way to do it. I'm gonna go back to my carbon price, carbon price. Put the carbon price out there, this is how much it's gonna cost, and do it. Then let's sit and let's figure out is nuclear the best way to do it? Is hydrogen the best way to do it? Um that would be the appropriate way to do is create a market based solution to find

the answer to this. Let me, you know, I want to go back and talk about, you know, the seventies because it was very similar to today about the war on acid rain and how we solve the war on acid right. In fact, the same three big themes we talked about the supercycle, about redistribution of policies, environmental policies, and deglobalization. They're all the same ones you had. Reistribution was the Great Society of the War on poverty, the

environmental was the was the war on acid rains. And let's talk about how that war on acid rain was solved in the seventies. Is there was the Soviets and the Americans wrapped up in a nuclear treaty that was enforceable. The rules around desilpization, and in doing that, they had an enforceable rules that then was imposed on NATO countries and Warsaw Pact countries, which is, you know why they were able to enforce them, but you got a functioning

sulfur market at it. Once you have the soul functioning soulfer market, you were able to, let you know, venture capitalists come in there and create the solutions to it. By way, ended up solving the soulfur problem was much cheaper than what we had ever envisioned. We're now focused with a very similar part. By the way, the other lesson to learn from the Acid Raine. When did the Americans get serious about dealing with the the acid rain?

When places like Lake Erie were on fire. They had to see it, and once they saw it, they passed the other thing to do. It was Nixon who passed the Clean Air Act, and you know, a pact hat to. Somebody pointed this out to me that you know, conservation

conservatives and conservations historically had gone hand in hand. But I think the key point here it was a sulfur market with a price signal, and it was enforceable policy that led to that solution, and we need something similar to that around carbon to deal with this current problem that we're dealing with, call it the war on climate change. So just to put all together, you know E. S. G. And your view discourages investment. What we need is a

price on carbon, some sort of tax. But then that would in theory create the encouragement of investment because okay, you know the rules, you know the cost that any given entity is going to bear, and then the challenge is out there to to do better, to find a way to make it problems. And then you you would look at some oil companies and you would put their total emissions and you know what that number is. You put a cost on it, and then the equity analyst

may go, hey, this is a good company. This is a bad company, And I did it was like looking at the economics that they're imposing on society, and then we wouldn't have this blanket under investment that's creating many of the problems we're witnessing today. Can I ask you know, how do you see like these various shortages and tightness

is in markets affecting all the other ones? Because it's interesting, you know, one of the reasons cited for the slow ramp up of US production is shortages in metal pipes and shortage well, shortages in labor as well, and other commodities sand as well that are needed to expand domestic production. How much is essentially the shortage and the tightness of every commodity at the same time contributing to slowness in the ramp up of of of new production and new investment.

The revenge of the old economy. Like my point, banks are old economy too. It's why they're not providing the capital. They don't have the capacity to it. We didn't invest in everything you just mentioned. Plus you know old economy banking. I can just give you a list of all the things that were under invested, you know, warehouses in the US ports facilities, you know, the trucking chassis. The list goes on and on, and then all of a sudden we gotta pull in demand that stressed the system, and

then we find out where all these shortages are. Um. You know that part of the reason why you know, you go back to you know, the seventies and the two thousand's what made it very similar was you had that same dynamic of that you know, revenge of the old time. I mean the new economy, the nifty fifty sucked all the capital way it was, the dot com bom did it again in the two thousands, and the things again this time. That's why you have this. You know,

it's a very broad space. But once you broad based shortage that you get this persistency in transitory shocks, meaning that one shock in one market then leads to another shock in another market, which then makes it feel like, you know, the transitory becomes much more persistent. That's what we've seeing. But the core reason is the everything you just listed were poor returning industries also were very much impacted by m de carbonization, which as a result we

under new lesson. Can I ask another question on a topic that has been coming up quite a lot recently, which is this idea of the demise of the dollar or the long term decline of the dollar, And maybe that starts with certain commodities producers asking to be paid in something other than US currency. So we've seen Russia talk about getting net gas payments and rubles, for instance, and they've long been rumors and speculation about China taking un payments and things like that. How do you see

that playing out? In the commodity space. I wanted to make. To make a one of these reserve currencies work, you need to have a current account deficit in a very large bond mark, of which China does not have. But I think, you know, let's go to another point about you know all this, you know talking about the demise of the of the dollar is you know that everybody's focused on the demand of the dollar. Let's talk about

the supply of the dollars. And you look at the commodity bullmark, it's in the seventies nearther in the two thousand's. What was associated with both of those was a savings glut. And the reason why everybody thinks that that higher commodity prices and oil prices is bad to the the economy is because when could you think about if you just took a close economy raised oil prices. Let's say the US. Let's take the US and produced enough oil, you raised the oil price. All it is is a transfer from

Chicago to to Houston. It should have no impact on the broader US environment. Maybe then they'll spend, you know, through the wage increases in Houston. May take time. I don't want to get it you get the exercise I went through, if everybody had the same consumption and savings and have no impact. The reason why the seventies and the two thousands had such an impact and we saw

it was that savings glut. You had a transfer from groups in the U s that would consume something, you know, like two groups that were consuming somewhere around fifty to six and then so that you created that savings glut. You know what, this time around, they're going to spend it. You're not gonna get that savings glut off the higher commodity prices, which is going to reduce the availability of

dollars on the global market. In fact, the reason why you had that sharp oil dollar correlation in the seventies as well as in the two thousand's is let's think about this, and this was you know, you know, Ben Berniki was the one who coined the terms, you know, savings glut is as oil prices went up, the dollars would go to Saudi Arabia, Saudio Atavia take those access

dollars and then by US treasuries. In fact, when they were hiking rates between Juno BO four in Juno BO six, the front of that curve was going up in the back end was going down because you had such higher commanding prices going in and buying US treasuries on the back end. That was the recycling. You know why they had to do that. They didn't have anything else to do with those dollars. I remember one time I was in in China in oh five, I was talking to save.

They were spending a hundred billion dollars. They needed to place a hundred billion dollars per month. That's a huge amount of amoe of the key reasons you couldn't spend a hundred billion dollars inside China in two thousand five. Guess what today you could. You could easily same thing

with Saudi Arabia. And so you have these entities that are developing in places like Saudi Arabia take p I F. The only market that had enough liquidity to absorb that kind of potential investment were U s treasuries, which is why we saw that savings glut and saw the capital move into places like um you know, US treasuries. And you can think about that period between June of BO four and June a BOE six, when the FED was high team rates, the back end was coming down. Why

was the back end coming down. It's because you had all of that capital going into the emerging market that was being recycled back into US treasuries. Hence the term the savings gluts. Now, the difference between today in the two thousands of the nineteen seventies is you can place a hundred billion dollars into some place like China immediately. You can place a hundred billion dollars into some place

like Saudi Arabia immediately. So if you could think about if we had a savings glut in the nineteen seventies and in the in the two thousands, today what we're seeing ourselves up for is the spending spree. And I even say team up. You look at a an entity like p I up in Saudia Arabia. It was the intention of that investment vehicle is to go out and invest in Saudi Arabia. Um there's similar entiticent places like

agu Dhabi. They're going to invest in power, gas, but just the ex transportation, healthcare, all these things in their

own economy. And this is part of this whole idea of the globalization, is that you're going to get a lot of this investment locally, So if the savings glut was able to um you know, create a slow down and growth from higher oil prices, as spending spree is going to do the exact opposite, and if anything, it's going to reduce the available supply of dollars being recycled back into the US, run up funding costs in places like the US, but also create more commodity inflation out

of spending in places like Saudi Arabia with a NEOM city or in China like one Belt, one Road. Can I just ask where is the production response from OPEC, because again, you know, traditionally in a situation like this, you would expect OPEC to start ramping up production, but it hasn't really happened, or at least not to the scale that people have anticipated. And one of the things that comes up is that some of the smaller OPEC

members actually have trouble increasing production. They have under investment in their own oil sectors, and so they can't you know, immediately press a button and satisfy the world's energy needs. You gotta ask yourself, who's going to put money into a billion dollar deep water offshore project going to be producing oil twenty years from now. Answer is not very many people. Hence why you don't you don't have capital going to places like now Gerry and Angola, and why

production is starting to decline. I wanna you know, speaking of oil, obviously, the surgeon gasoline prices has talked people about upping e V production, and so you know that does seem to be happening. Demand for electric vehicles seems to be growing pretty rapidly in the U S and elsewhere. I guess they have two questions like when, in your view, do we see the peak of petroleum demand as a

result of this shift? But then related to that, what kind of deficit do you think we're facing for the other commodities that go into evs, such as all the different metals and chemicals that go into batteries. How are you thinking about that? Yeah, you can think about the

hydrocarbon commodities like oil and gas and coal. They face under investment and supply constraints that that that you're referring to, while most of the other non energy and metal commodities can copper and aluminum in particular, are going to see significant increases in the demand. In fact, I would argue copper is likely to be the tightest commodity will have ever seen. You. It's much tighter than what oil was during the two thousand Let me remind you oil went

up seven x in the two thousand's. You know, our forecast is fifteen thousand a time on copper. But no matter what technology you use, you're gonna be using electric electricity, And the only thing that can conduct electricity, given the rules around the periodic table and the rules of chemistry, is copper at the rate we need to conduct it, which means that the demand for copper is going to

be there. So, you know, I think the upside around our fifteen thousand target, which by the way, if you started this cycle at five thousand dollar copper fifteen is a three x if oil was seven x over that time period. The upside potential and copper, I think it's significant. But I think there's the big disconnect here that I think is why people are going, you know, how is this happening? Get we just invest in in green um e v S more to solve this problem. Is the

scale of evs. There's maybe ten million of them on the road today. Uh, there's one point to five billion internal combustion engine cars on the road today. You're gonna have to grow those eases very rapid rate to overtake

the combustion engines to get to that point. You're asking, when is the you know, peak oil demand and you know, I'll take our base case, which has been generated off of our base case is generated off of uh, you know, announcements and investments and everything, would say that, you know, we start to slow demand growth. And this was pre rushing Ukraine and invasion. You start to slow demand growth somewhere around six you hit a peak in the early

twenty thirties, and then you begin to roll over. That's probably optimistic thinking you're probably gonna overshoot to the upside near term. Let's not forget there's also the constraint about the damage we're doing to the environment. Eventually, there's going to be a point. Remember the seventies, I said it was we started dealing with the war on acid rain when people started to see you know, fires in on

Lake Erie. Um, are we going to see a similar dynamic where people start to see enough of the damage is being done by carbon emissions, they go, hey, not enough, and we're gonna do an about phase and start to deal with this thing in a much more efficient way. They try to get results more likely just watching things. Historically, you don't deal with the problem until it's knocking on your back door. We think about what we learned from COVID. If that's the case, oil demand probably goes well about

those projections near term. Then we hit a wall and they go, hey, time to deal with this, and then it starts to drop. Precipitously, we showed dear in COVID that you know, ingenuity was able to come up with the vaccine in six months. Now, if you have to remove this stuff from the sky and figure out how to you know, store it and do you know, removal or capture or something like this to do it on that very rapid basis, that could potentially be a solution here.

But I think the key point here if you need investment, technology, people, everything directed solving this problem. Like I said, don't ever bet against an engineer. You give them enough time and money, they will solve the problem. The problem with the organization, we just haven't given them enough time and money to

solve the problem. So, if you're an investor and you're bullish on the commodity cycle, How do you actually go out and play that at the moment, because you know, I feel like we talked conceptually about, for instance, the copper price going up, but as we've seen over the past six weeks or so, there can be a difference between financial exposure to commodities and the physical So how do you, you know, just bought a wheat et f for instance, you might have experienced problems in the past

couple of weeks or so, So how would you recommend people actually get commodities exposure at the moment? By the way, you know, the thing that I've really learned in the last six months is nobody has to buy a financial problem, but somebody has to buy a commodity. Somebody has to buy oil, and somebody has to buy We say, commodities have a captive consumer and a captive producer who can do nothing about their position in the very near term. In contrast, is you know, nobody has to buy an

oil equity. We now learned that oil prices you can keep going up, the fundamentals of the company can get better and better, but nobody has to buy it. And that's why you have that huge disconnect between commodity prices and the commodity related financial instruments. So to answer that question, what do you want to own? You want to get as close as to that person who actually has to

buy this thing as possible. And these things like the b Commune, the Bloomberg Commodity Index that rolling front month, and I'm not pitching Bloomberg here. The b comm Index is an excellent product that does this. It's rolling the front month of these commodities. It gets you right up as close as you can to that consumer who actually has to buy this commodity, because that's where the returns

are going to be generated. And given this pullback that we've see more recently, you know, with oil down below a hundred dollars apparel yesterday, you're you're in an envirn in which that entry point, i'd argue is is relatively good. Particularly you're going to have volatility going forward because a new thing too, that rolling front month strategy. It's just

another way to say your long commodity ball. And if you believe our view that commodity ball is going to be rising over time, being along that kind of product, you're going to be your best bet here. So you know, I don't know you if you don't even really have to think about trying to too which sector to own, just go out the overall d common that gives you a nice waiting across energy, metals, agriculture, and the rest

of the commodity complex. If you want to be more weighted towards energy, um the old Goldman Fact Comodity Index which is now the B S and P one um, the G S c I is more energy weighted. The b COM is a more uh you know, broad based weighted commodity index, and then you can pick the sub industries. But I know the thing that you're that you're capturing here is you're as close to that consumer who have

to buy it as possible. I will just want to ask a quick question about copper again, real quickly, and you talked about dollars a ton of plausible where I think roughly we also said the tightness that we're seeing in copper rivals or perhaps exceeds even what we sell with oil in the sort of earlier two thousands during that cycle, what are the numbers like how much what's the potential deficit we're looking at given word demand is going and how much new production needs to come online,

like quantify the tightness beyond just the sort of word the dollar worth the press. Okay, good question. So if you go back to two thousand to two thousand and three, when we first started getting really bullish on oil, and you looked out, you would say peak oil, you know, somewhere around on oh five oh six it will by the way it rolled over on conventional oil late oh four UM. And then demand with China was going um, you know, you would get a deficit of somewhere around

five of the market. The numbers were coming up with copper or like pent of the market three times is tighter than what you would have seen oil the two thousand's. And you know, part of the you know this point right now, oil is not our copper is not responding this because you have the inventories are going down. But investor interest is very concerned about China. So you know the site the fact that pundamentals are getting tighter and tighter.

You don't have investors and consumers worried about copper because they're focused on the China property market. But this is the main gear which you see the passing as the baton from Chinese property market to the green cafex story and by three it's a green cafe X becomes the dominant force there. You talked about we need to create sort of a regulatory structure that encourages long term investment, and that's really the only thing that's going to solve this.

So the White House calls you up and says, Jeff, we need to craft a plan and anything you say will get implemented. What are the basic ideas of what the ideal policy response, at least just let's just say in the US, what would what is the ideal policy response look like to to induce that increase in the investment? What are the components of it? First, first and foremost,

you need a policy around how we're going to do decarbonization. Um. Whether it's right now there's a focus on the demand side, but it's a very asymmetric response in term, there's no policy around how you're gonna wind down the supply side. UM. So first and foremost is create a policy framework around how we're going to actually decarbonize, and then create it in such a way that it can be rolled out in US, Europe and Chronic because that's two thirds of

the world emissions right there. The second thing is then create once you have the rules in place that are enforceable by punishment, and that's the key. They got to be punished. We saw with Volkswagon with the catalytic converters UM they got punished for cheating. If you cheat on this, you've got to get punished. Once you have that, then you can now create the cap and trade Marvel attacks carbon price and once you have that carbon price but in place, this solving a lot of these problems and

getting the investment to flow becomes much more easy. The other thing that that you know advocate is creating. You know, Tracy came up with a few ideas or something around the str or whatever it might be, to create that idea of a long term contract to take out the volatility that investors would potentially be focused on. So, I mean, those are the two ways. I think first and foremost

is we need a policy around decarbonization. And if you go back to the seventies example, that didn't happen until you saw a lake erie on fire, I don't know what's going to take um in the two thousand and twenties to get that. That's first and foremost, we need that policy around decarbonization and a carbon price. Well, Jeff, always fantastic to talk to you, this question how we're going to finance and crease that abstraction of udities, musique

question and fantastic perspective. So thank you for coming back on a great Thanks for having me. Thanks, thanks, Yeah, that was really good, Trazy. I obviously I love talking to Jeff. I mean, that really does seem to be the fundamental challenge that we face right now. It really does seem to be on the investment side. However you want to slice it, like what do you want to talk about moving away from fossil fuels and the copper deficit? What you're talking about just what do we need to

bring balance to the oil market right now? Solving this sort of like long term it's kind of like a game theory problem. How do people to commit to investment seems like a huge is the huge challenge at the moment. It is weird to think. I mean, if you think about what human beings need on a day to day basis,

it's basically food and energy. And you could argue that the entire role of the state is basically to ensure those two things, um maybe as well as social order security and things like that, but clearly too vital things. And yet it seems like structurally there have been years

and years of under investment now. And this is something that's come up both from from Jeff as we just heard, but also Salton Posar's idea that a you have previous under investment, but now you have the cycle of volatility, increased transport costs, things like that. That just means you need even more capital to support commodities trading and production.

I love Jeff that the volatility trapp Yeah, that's a really good one, and I think you know, it speaks to obviously, look, the job I guess of the capitalists of capitalists is to take risks and including price volatility. But if you have this sort of like volatility that feeds volatility overall, you can create this situation which you

have this dearth of investment. And it's interesting too because so Jeff talked about obviously bank capital requirements and the discouragement air and then the E. S G overlay on top of that, and then also this extraordinary tech boom that we saw, and so the rise of like the Netflix is in our life and the rise of the

iPhone and the rise of Facebook and social media. You just like, in an environment like that, you could just see like who wants to invest in digging up you know, fossils, you know, dead animals that turn into liquid out of the ground. It's just in in that in that period you can just see why there had been such a

dearth of interest in this, right. Well, this is also just I guess the sort of headspace that a lot of investors tend to be in, which is you're always looking for the next big thing, and oil has never been or you know, for a very very long time, it has not been considered the next big thing, and so it just doesn't have a good story behind it. Well,

and I think there's another thing. You know, we talked about normalization all the time, right and so normalization I think of the very sort of crude senses all the restrictions from COVID slowly getting lifted and we go back to services. But I think that, like implied, is just the idea that like, yeah, and then oil prices are going to go back down, and then everyone's going to

invest in tech and web three, in crypto, etcetera. But I feel like as long as we have that mentality, or as long as everyone sort of has this feeling like, well, yeah, we're having this like temporary surge because it's weird, like you're not going to actually get there. It's almost like in order to get you know, in order to get prices down, people have to believe the prices will never come down, which is very tricky from a narrative perspective.

I mean, I think like if you you know, you think like back to two thousand and four, two thousand and five, we thought that the prices were that that was the exact opposite. I think people thought there's this big oil boom that's happening, China's usually got an infinite amount of oil, will never catch up, and that then you would get the investment. We have the peak oil

narratives exactly right. And so now it's like, well we are still in the opposite where these sort of conditions it seemed temporary and we're going to move to e VS and we're going to normalize and everything we'll bring back into balance. And that's not a sort of it's not a great headspace for actually bringing stuff into balance.

We need to think of a good story for like wheat, right, what is But you know, in all seriousness though, like the copper thing, I think is really interesting and I hadn't thought about that that people may be associated copper as largely a Chinese construction Chinese real estate story. But if we're going to electrify everything in the world, that creates a lot of copper demand and so then it's just a matter of like, well, what's the psycho for

building that out? Well, this is another thing that we are discovering on these episodes, which is that you actually need a lot of these old economy metals or dirty fuels or whatever in order to get off the other dirty fuels. Yeah, exactly, yeah, exactly. Alright, shall we leave it there, Let's leave it there. Okay. This has been another episode of the ad Thoughts podcast. I'm Tracy Allowaite. You can follow me onto at Tracy Alloway and I'm Joe Why Isn't All? You can follow me on Twitter

at The Stalwart. Follow our producer Carmen Rodriguez on Twitter at Carmen Arman. Follow the Bloomberg head of podcast, Francesca Levi at Francesco Today, and check out all of our Podcasts at Bloomberg under the handle at podcasts. Thanks for listening. Hey, there are odd Lots listeners. We are very happy to let you know that we've been nominated for a Webby Award. Yeah. I'm not you know, Tracy, I'm not normally like a big awards person, but now that we're nominated for one,

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