Copper has long been touted as a big winner from the world's drive towards electrification. All those electric vehicles and new grids need lots of the metal to work. At the same time, it takes years for new copper mining capacity to actually come on stream, and so a lot of people have expected a long-term shortage of the metal to materialize. But despite all that excitement, copper prices actually fell over the past few years. Now, copper bulls are getting another chance as the metal surges towards a new record. So why didn't the thesis play out before? And what does the mismatch between short-term prices and long-term supply actually mean for the world? In this episode, we speak to Jeff Currie, a long-time copper bull and commodities veteran who's now at Carlyle Group. We talk to him about why copper is his highest-conviction trade ever, plus the outlook for oil and big changes in petrodollars. This transcript has been lightly edited for clarity.
Key insights from the pod:
Currie’s supercycle thesis and copper — 4:14
Copper as the “highest conviction trade” ever — 11:15
China and why copper fell in recent years
Growing production via M&A versus investment — 14:10
Does copper supply eventually respond to price? — 15:41
Silver and the energy transition — 18:46
Tightness in copper concentrates — 20:28
Jeff Currie’s copper forecast — 22:28
Energy Pathways at Carlyle Group — 24:28
The impact of non-OPEC supply on oil prices — 27:09
The evolution of oil demand and a ‘Lake Erie’ moment — 20:48
Moving from petrodollar recycling to “gold recycling”
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Joe Weisenthal (00:17):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:23):
And I'm Tracy Alloway.
Joe (00:24):
Tracy, copper has been on a tear again.
Tracy (00:27):
Yes. Yes, it has. It's kind of weird because I remember recording a number of commodities-related podcasts a couple of years ago where everyone was super excited about copper and there was this long-term, you know, structural theme about systemic under supply.
So the idea that we hadn't invested in new mines for ages and it took so long for new mines to come on stream that there just wasn't going to be enough copper to power all these new electric vehicles or electrify the grid, all these big things that the world wants to do. And then for a couple of years, copper just kind of went away. The price started dropping. And now it's back.
Joe (01:11):
Well, this is the problem, right? And I think that that interim fall, and it did [fall], for like 2022 and much of 2023 it was sort of back in the basement a little bit. This does seem to be the core problem that people have identified, which is that we can be almost certain that there is a long-term, huge demand for copper from all the capital spending that's going on for electrification in particular, EVs, etc.
And we can also, I think, you know, as many analysts have observed forecast supply fairly easily because we know what mines are out there, we know that mines have a really long lead time, etc., from [the] decision to break new ground to actually producing copper. So there are these certainties. But then the problem is, in the meantime, when you have these sort of periods of spot weakness where there isn't a supply shortage, where there's plenty of copper, you know, those periods don't exactly like encourage companies to get mining or get digging. And in fact they could slow down expansion plans even if everyone sort of knows the long-term math checks out.
Tracy (02:14):
Absolutely. There's that mismatch between the short term and the long-term outlook. There's also that tension on the ESG side of things as well. This idea that you want abundant copper in order to decarbonize the energy system. But at the same time, a lot of people who are ESG-minded are going to feel very uncomfortable about encouraging new mines in Chile or something like that.
Joe (02:38):
Yeah, that's right. And you know, obviously they have big environmental impact, they have big water impact and so forth, but you know, as we said at the beginning, copper is once again front and center. The price is back on the rise. We're back talking about this long-term, structural mismatch, etc. And so I think it's time to sort of delve deeper into this question and see where the math is today, so to speak.
Tracy (03:02):
Yeah. I have the Ghostbusters theme in my head and it's like, whenever you want to talk about copper, who are you gonna call? This guy!
Joe (03:09):
We’re going to talk to Jeff Currie. So we've had him on the podcast at least a couple of times before, back in 2021. We talked to him and he talked about this idea of like a new commodity supercycle, and of course oil was surging and all these commodities were surging as the global economy was reopening.
Then we talked to him again in 2022 and he said that copper specifically may end up being one of the, the tightest commodity markets he's ever seen. So real issues with supply and again, looking pretty good these days.
So we are back with Jeff Currie, who is now in a new role. So when we talked to him before, he was the head of commodities research at Goldman Sachs, but today he's the chief strategy officer of Energy Pathways at the Carlyle Group. So Jeff, thank you so much for coming back on Odd Lots.
Jeff Currie (03:57):
Great. It's a pleasure to be here. And hey, copper $10,000 and Odd Lots, here I come! Just like a clock.
Joe (04:04):
There's our headline right there. So Jeff, why don't you talk to us about the last few years. It's been like over two years since we've talked to you. So what's happening in Copper World or commodity world over that time?
Jeff (04:14):
Well, let's go back and lay out the supercycle thesis that we put forth back in, it was October of 2020. The bottom line is the story's more compelling today than it was then.
So you really have to ask what went wrong. So let's start with the story and then let's go to what went wrong over the last 12 to 18 months. So if we go back and review the story, there was structural supply constraints, which we called the revenge of the old economy. Put bluntly, poor returns in the old economy saw capital redirected to the new economy, starving the old economy of the investment it needed to grow the supply base. Pretty straightforward story, still is a story in markets like copper, even oil to a lesser extent, but it's pretty much apparent across the old economy.
So structural supply story very much intact. What about demand? If anything, the structural demand stories have been turbocharged. Let's go and review the three big policy initiatives we saw driving demand.
The way we talked about them back then was redlining commodity demand, RED, the ‘R’ stands for redistribution policies. Basically as lower income groups consumed with higher wages, higher income, they consume a greater share of commodities than the higher income groups, right? That's very much alive and kicking. You look at the low unemployment rate, who is the biggest benefactor of that? It is the lower-income groups and, you know, policy’s still very much in play all over the world right now, reinforcing these lower income groups in the consumption of commodities.
So you have ‘R’ and then you have ‘E,’ the environmental policy, turbocharged from the last time we talked. You have the IRA, the REPowerEU, China. Now part of the reason why copper's rallied recently, China's growth was over 100% in green CapEx last year, 30% this year. So everywhere you look in the world we see environmental policy through green CapEx stimulating demand for commodities.
And then the third one, which was the ‘D,’ the deglobalization, again, that's far greater than we ever thought. Look at the potential military spend in the US. $95 billion on munitions. We look at what's going on in places like Germany, a hundred billion dollars of military spend
So you've got all three going much stronger than what we would've thought two to three years ago. So what went wrong? I want to first start with the disinflation story and then I want to finish by talking about the dollar.
The dollar's been a big headwind to commodities. When we think about the disinflation that occurred late last year, in the early part of this year, one thing to keep in mind is that it was globally correlated. It occurred against a backdrop of record commodity demand and incredibly strong GDP growth in the US. And even China was plus 5%.
So what does that tell you? Was it demand-driven weakness in prices or was it supply-driven? It tells you it had to be supply-driven. It's the only thing that could give you that pattern of observations. So if it was supply driven, where did they get the supply? I would argue it’s through regulatory easing. Whether it was, you know, on sanctions, you know, allowing sanction oil to flow more freely, particularly in places like US, Iran Venezuela, obviously that had a cost with Iranian Houthis or even the Venezuelans attacking Guyana.
But that was a source of supply. The other source of supply was turning a blind eye to environmental policy around the world. We have record coal production out of China, Indonesia, and India. Actually that increase in coal production was bigger than Saudi Arabia, it backed up gas prices and power prices around the world. We saw, you know, cutting down mangroves in Malaysia or deforestation for more food in places like Latin America.
And then the third one -- regulatory easing -- was through immigration. So you got more energy, more food, and you had more labor which helped create the disinflationary pressures that we saw the last several years. I'm not going to say it's the only cost, but it put, you know, a big headwind to the commodity story.
And by the way, that's going to run its course particularly after the election because you look at, you know, the clamping down on Iranian sanctions 180 days from now, right? Surprise, surprise. That's after the November election.
Now let's turn, let's talk about the dollar. That's the other big headwind here. Historically, when commodity prices would rise, you would have places like Saudi Arabia become long US dollars. They would recycle those dollars into US Treasuries, interest rates would go down as they bought Treasuries.
This would create a weaker dollar that would reinforce higher reflation. If we called it the three Rs, you'd start with releveraging in China. So you get growth outside of the US and then you would have convergence in global growth. Then you would have the purchases and the stronger growth in the emerging markets by US Treasuries. And that would create the weaker dollar in hence the reflation.
And you were in a virtuous loop. That's how we went to $147 oil in the 2000s. And the same thing happened in the 70s. For the first time ever, that dollar recycling is not occurring. And what is replacing it? I like to call it gold recycling. It explains a lot why gold prices are as strong as they are.
And what is the evidence of that? It is that the emerging markets, the brick countries all met with Saudi Arabia and other key participants [in] November of last year and discuss how they're going to trade with one another using local currencies. And then whatever it nets out in settling, they would settle in gold.
So you've taken out that dollar recycling, China's not doing it and think about why would they do it with everything they've seen with Russia over the course of the last several years? So that's an important difference here. It doesn't mean it says it's a [inaudible] supercycle, but you're unlikely to see that dollar recycling playing out probably ever again.
Which means that what do they do with this if they're buying physical goods like gold, they could be buying things like oil, copper and other commodities as we look forward. So those are the two big headwinds why I'd argue we're wrong. But the fundamental story [is] still very much intact, particularly with copper.
Tracy (10:51):
Jeff, that was an amazing overview. I'm just going to say for our listeners that we are talking to Jeff from his office in London. There's a little bit of a sound quality issue, obviously we need more transatlantic copper cables running under the ocean.
Joe (11:06)
Well done, Tracy.
Tracy:
Thank you, that was a good segue, right? Alright, I have a very important question for Jeff, which is, are you wearing a copper bracelet right now?
Jeff (11:15):
Absolutely. You know, it is the most compelling trade I have ever seen in my 30 plus years of doing this. You look at the demand story, it's got green CapEx, it's got AI, remember AI can't happen without the energy demand and the constraint on the electricity grid is going to be copper.
And then you have the military demand. So unprecedented demand growth against unprecedented weakness in supply growth because we have not been investing, it's teed you up for what I would argue is the most bullish commodity that I actually, I just quote many of our clients and other market participants say, you know, it's the highest conviction trade they've ever seen.
Tracy (12:11):
Earlier you were talking about the sort of general commodities supercycle and why that didn't necessarily play out in the timeframe that we initially thought it would. But can you dig a little bit more into copper because this is something that I see over and over again. We talked to a lot of commodities experts on the show. Everyone seems to have a high conviction on the copper trade, or at a minimum see lots of upside potential. Why didn't that play out in the sort of immediate post-pandemic years?
Jeff (12:43):
Because investors were unwilling to take on blind faith that [the] China property market could sink and you could still be long copper in other base metals. Because for as long as many of these people had been trading commodities without China, you could not be bullish. And what happened in ‘22 and ‘23 was [when] the Chinese property market started to sink and sink very quickly. And that discouraged investors to get long.
And I think they have now seen enough evidence last year and this year for example, you know copper demand so far this year is up 6% year-over-year despite an incredibly weak property market in China. So I think what has shifted here is confidence from investors in metals that you can buy these markets based upon the green CapEx story despite a weak China property story. And I think that's what has really changed in the last, let's say six to 18 months.
Joe (13:42):
Let's talk more about the long-term supply outlook. So the basics, yes, it takes a really long time to get a new copper mine online. Maybe it takes even longer than in the past due to local opposition and concerns about the environmental impact.
What's happened in terms of planned new mines over the last three years? Are there new projects that are breaking ground or at least pencils down yet that we hadn't seen in 2021? What's happening in the planning cycle?
Jeff (14:10):
You don't have to look any further than the Anglo-American bids. BHP finds it cheaper to buy Anglo-American than putting a drill into the ground. And that's pretty much been the case across the board, is that they're finding ways to increase supply, particularly through M&A activity as opposed to having to do it through organic, let's call it, greenfield investment.
When we look at, you know, the commodity supercycle in the 2000s, how did it start off? Started off with the creation of BHP-Rio, you know, then you had ExxonMobil, BP-Shell, all the super majors were all created both in metals and energy at the beginning of that supercycle because it was easier to consolidate to grow your supply than it was to do it through greenfield investment.
And so because we observed that going on, it tells you we're not at the point right now where people are willing to make greenfield investments because they can buy other companies more cheaply, which means prices have got to go higher and the conviction has got to be greater before you start to see that substantial rise in greenfield investment.
Tracy (15:17):
So one thing I wanted to ask is what is the impact of price on investment here? This is a kind of a weird question, but does it actually make much of a difference if copper prices start rallying, if we do see another record in the price per ton? Would you expect to see an investment response of some sort eventually. Even if it's on a longer-term timescale?
Jeff (15:41):
Yes. Eventually you should. We saw in the 2000s, let's review what happened in the 2000s because I think it's pretty instructive to right now. That supercycle lasted 12 years from basically ’02 to ‘13 or ‘14. And the supercycle in the 70s basically lasted ‘68 to ’80, again 12 years.
Why the 12 years? Years one through three are usually [when] higher prices creates a confidence that ‘Hey, this is real.’ We're three years into this and the confidence is so-so, you know. The diehards that I talk to have a lot of confidence, which means you probably need more higher prices for people [to] become convicted that it's actually for real.
What creates the second big uptick in prices? Because once these companies start to spend, then you get cost inflation and that drives you up to the next level. And if you look at what happened with copper in the 2000s, it went from let's say $2,000 a ton to $4,000 a ton over that first three years.
And then around ‘06 through ‘08 it exploded to $8,000 a ton. Because that's when they started to spend, but they had to achieve that confidence that still is not apparent in this market. And then let's say, you know, the final five to six years is finally when you begin to de-bottleneck the system and the investment plays out and you know it takes another, let's say seven years and you get actual supply.
So where are we in that process? We're still in that first three years creating conviction around, is this for real? Our estimates, you need to be above $9,000, $10,000 a ton before people really start to be confident that they can make this kind of investment. And I think the other thing too is not only does their prices have to reach those levels where the breakevens begin to happen, but they’ve got to go above to create some type of confidence that they have some type of cushion, which means, well, we are likely to see much higher prices before you start to see that supply response.
Joe (17:42):
I have a very oddball question, but I, I've been wanting to ask this question to someone who knows for a long time. It's a very brief story. Sometimes I take Ubers to work, I haven't in a while but I used to sometimes take Ubers to work and when the driver sees I'm working for Bloomberg, they want to bring up something finance and usually it's like ‘Oh what do you think about like Dogecoin or Bitcoin,’ or something like that.
But one time I had an Uber driver and he is like ‘I'm really bullish…,’ you know you were talking about gold. He said ‘I'm really bullish silver because I believe there's not enough copper mining going on in the world in silver is often a byproduct of copper mining and there's a lot of silver content and some of this EV stuff, particularly solar panels,’ he said, ‘and therefore there's going to be a shortage of silver.’ And I know this is like a little diversion but I just had to get this off my head because we're here talking to Jeff Currie. What do you think about my Uber driver's thesis?
Tracy (18:33):
I like that you're asking questions on behalf of your Uber driver.
Joe (18:35):
Yeah, and I still have his contact, I still have his context. So two years later I'm finally getting get a chance to get back to him on this. What do you think about my Uber driver's silver thesis?
Jeff (18:46):
I definitely think there's legitimate arguments behind his solar thesis and you know, it's one of the arguments we put forth for prices moving higher. But the one thing that we watched, you know, particularly back in, you know, it was in March, April of 2021 when everybody, it was actually during that GameStop era when people were, they were going to move and they were going to try to short squeeze silver.
The problem with silver is there's just too much of the stuff around. There’s, you know, millennia of production is sitting above ground like gold. But unlike gold it is not as rare. So it's more plentiful. So I think yeah, it will behave similar to what he said, but I'm never going to be jumping on the super bullish bandwagon on silver just because of the fact that there's just so much of it around the world and it's not nearly as rare as something like gold.
Tracy (19:36):
Yeah, even I have a bunch of silver, I think we've talked about this before. My dad keeps giving me silver coins from his collection for my birthday and for Christmas. And so I'm expanding this collection of silver coins to the point where I think I could successfully have one of those silver stacking channels on YouTube. That would be fun.
Jeff, there's one other thing I wanted to ask you. So you know, we're talking about like the price of copper, the futures price. I wanted to ask you about the copper concentrates market and get into a little bit of the discrepancy between maybe the financialized price versus the physical price. Can you walk us through what's been happening there? Because in some respects, this is where the immediate shortage is playing out, even if it hasn't been reflected -- up until recently -- in the overall futures price.
Jeff (20:28):
Very good question, Tracy. You know, when we think about metals, the ore that comes out of the mine that typically gets turned into concentrate and shipped, you know, somewhere around the world where it basically has to be smelted into a refined type of copper that can be used and sent on into, you know, markets like wiring and so forth.
But it's there where you saw the very first signs of a shortage. It actually was in SK, in Korea, where there was not enough concentrate to go around to be able to smelt into something that was more useful. And so, and it's called the TC charges, the concentrate charges. And right now everybody's ‘Oh, they're negative,’ which is telling you the shortage is at the mine in that concentrate, not at the end use consumer yet. It's going to work its way down there.
By the way, the same thing happens in refining margins. When you have a real big shortage in oil, it crushes the refining margins. And so the fact that you have zero or negative TC charges right now is an indication that you have shortages at the mine, which says eventually this is going to work further downstream. Which is we look out further, particularly towards the end of the year, we'd expect those shortages to work further downstream, more towards the consumer and away from the mine.
But absolutely, I think that's critical, and it was about two or three weeks ago, one morning I was looking at the Koreans and go ‘Wow, here we are finally. Physical shortages happening at the concentrate level,’ which is telling you [it’s] just a matter of time before we see it at the end use consumer level.
Tracy (22:06):
So Jeff, I just want to nail you down on the price target for copper and the timeframe just so that, you know, when we have you back on in two years -- in a year or two -- we know exactly what our priors were and what our expectations were for the move. But where do you see copper going from here? Where's the sort of upside risk and what timeframe are we talking about?
Jeff (22:28):
You know, our view over, call it a two- to three-year horizon is it's got to reach somewhere around $15,000 a ton. Where do we get the $15,000? A ton is, you go back to 1968, the beginning of that supercycle and it was a big housing boom driven by the war on poverty through, you know, the great society. We saw copper prices reach the equivalent of $15,000 a ton.
We know that demand destruction occurred. Now, we'd never had another opportunity other than that time period to observe demand destruction because that's basically, you know, at the end use consumer level, you're out of supply, like that Korean concentrate situation. You ran out of supply, you're short and now you have to get the end-use consumer to ration their demand out.
That's when you find out how high these commodity prices can go. And that $15,000 a ton was, say, okay, the only time in history we've observed actual physical demand destruction or rationing of physical supplies was that time period. Whether or not that holds in the current environment, we'll find out. But that's our best guess of where prices could go because we've seen it before.
How long does it take to get to that dynamic? I thought we would've been to that dynamic by now. I would tend to think of, you know, if we meet back up in the next 12 to 18 months, there's a probability that we're looking at prices in that $12,500 to $15,000 range. Because if we know it's happening at the concentrate level, it's just a matter of time before it starts to physically happen at the end-use level. And that's where places, you know, the markets like the LME and the Comax are pricing it. And that's where you would see that price spike.
Joe (24:21):
Last time we talked to you, you were at Goldman, now you're at Carlyle. What is the Energy Pathways group at Carlyle? What are you up to these days?
Jeff (24:28):
Well, the whole idea is to focus on the pathways between the brown and the green. You know, so far this transition has been, to use, for lack of a better word, chaotic. And it’s primarily been focused on the green.
But you need to be able to think about this transition and manage it. You need to think about moving from the brown to the green. And we talk about pathways. It's those pathways between the brown and the green. And I have a say, and I like to say, it's critical here, is if you don't own the emissions, you cannot control the emissions. So you have investors out there, you know, they don't have emissions in their portfolio but it doesn't mean emissions are going down. In fact, what do they do over the last, every year since [we] started this process? They've gone up, they haven't gone down.
And the only way you're going to make them go down is start concentrating. Instead of thinking about net zero, think about what happens this year versus next year and are we going to get them down particularly inside of the portfolio. Because by taking them completely out of the portfolio, there's no way you can control or say anything that they actually went down.
And so when we think about the dynamic here is we don't know the pathway. I like to point out in the war on acid rain during the 1970s and 80s when we took the sulfur and the aerosols out of the atmosphere, it was a smashing success. They remained technologically agnostic. And I like to point out who would've ever thunk that if you put platinum and palladium in your tailpipe, you're going to get rid of these aerosols. But it took trial and error trying those, those different pathways until you found the one that actually worked.
And so we're using the term ‘pathways’ here is to really denote this whole idea that we don't know what the answer is. We're going to be trying these different ones. We may have the one we need right now and we may own it. But finding that exact pathway is really the goal here. And looking at that connection between the brown and green is going to be central to creating a managed transition that is less chaotic than what we've already seen.
Tracy (26:36):
So we've obviously been talking a lot about that energy transition and the impact of price on investment and maybe the transition itself. We would be very remiss if we didn't ask you about what's going on with oil prices at the moment.
And I think the big story for everyone in the market is probably that non-OPEC supply that has really ramped up a lot quicker than a lot of people expected. How much has that changed the way you view and analyze the oil market? How big of a difference has that made?
Jeff (27:09):
Well let's start with the big one that everybody's focusing on: US. US increased above expectations. 400,000 barrels per day last year. It was a lot more [than people expected], basically expectations at the end of last year were for 500,000 barrel per day growth. And you got something close to 900. By the way of that, 200 was in Gulf of Mexico, 100 in Permian, 100 in Bakken. You're not repeating the Bakken and the Gulf of Mexico, which means the only ones that you can repeat are really the Permian.
Now let's take that aside and then let's put this in the context of the supply increases that you saw out of Iran. You know, it was 850,000 barrels per day. Out of Venezuela, it was 150,000 barrels per day. So you're well over, you're talking about a surprise. Last year the surprise out of that sanctioned oil was well in excess of a million barrels per day. More than 2X what you got out of the US. Also remember, natural gas prices were extraordinarily high last year, that reinforced even more US production.
So you know, I mean we'll see what's happening this year so far. You know, this surprises coming out of the US are nothing like what they were last year. And then when you look at places like Mexico, if anything, many of those places are struggling to bring on their production.
So yes, it was a factor over the last year. Is it something that we need to be conscious of? Yes. Is it something I'm focused on? Yes. But has it derailed the story? I would argue that the increases in the sanctioned oil derailed the story far larger than what those other surprises that you're referring to did.
And let's think about the cost of allowing that sanctioned oil to come online. You know, it had an impact on the Iranian Houthis. You know, in fact the one that actually surprised me throughout this whole process was a British flagship carrying Russian material, owned by Swiss [inaudible], shot by Iranian backed Houthis. If that's not, you know, emblematic of the problem, I don't know what it is.
And then, you know, Venezuela similarly, you know, invading Guyana, they clearly are focused on this because they've made the efforts to cut back on those, you know, sanctioned oil. But it's not likely to take effect until you go after the elections. But the bottom line, that was a lot of supply hitting the market at a time when demand was relatively weak as we were going through what we like to call is a mid-cycle pause in the economy. Meaning that if you look at that period in 2022 and 2023, it was your classic mid-cycle pause, huge run-up in rates, energy prices, the system had to adjust to the higher rates, higher energy prices.
It slows down and then it begins the second leg of the business cycle, which is where we are right now. By the way, never in the history of the post-war era, as you go into that second half of the business cycle, do commodities not act as the best performing asset class. And there is very little history that OPEC ever tames that price spike as you go in. They can't bring it on fast enough.
So that's why I'm, it's not as bullish as copper. And I'm not going try to say it's as bullish as copper, but it is part of the overall story here. And you know, we never thought it was going to be as bullish as the base complex. But also when you look at these commodity supercycles, it's rare -- whether if it's grain, soft, oil, base, precious, that these markets can get that far away from one another because there's ultimately arbitrages across them.
Joe (30:24):
What about on the demand side? You know, obviously EVs in theory over time should cut into oil demand. But in practice you know, it's hard to see it showing up just yet. And you know, there's still tons and tons of ICE cars on the road. What is the sort of, I don't know, medium-term prospect for actually reaching peak oil demand or bending that demand curve down?
Jeff (30:48):
Right now we have used a lot of carrots to try to solve this problem. You know, if it's the IRA, REPowerEU subsidies. When I say carrots, there's no sticks in this. You really want to get oil demand down, and how did we always do these other transitions or when we had, you know, environmental issues? You use sticks, put a tax on sulfur as we have in the past.
And it's not a closed loop. And if you were really serious about getting the demand down, we would create impediments to the demand growing. I don't want to get into the politics of that because they become relatively sticky. But I think the key point here is we have the tools at our disposal to get that demand down. But nowhere in the world is there the political will.
And I think where I was really wrong on all of this is, if we go back, let's say 12, 18 months ago, I fully overestimated the willingness of western governments to pay for their politics. Whether it was through sanctions, environmental policy, and I don't care which country you want to choose, you can all come up where they loosened it.
You know, I live here in the UK and there's good examples there where they loosened it. But I think the key point here is that when the going got tough and the cost of decarbonization became very apparent and very high, that political will didn't carry through. And if we're serious about getting that demand down, which I firmly believe we should be, and by the way, I'm not going to demean the politics at all whatsoever here, because I know they're really difficult. But that needs to be front and center before we're going to start to see a, a significant decrease in overall demand.
And part of, you know, the reason is people, I know somebody who -- I'm not going to name a name -- they have one of the plugin hybrids, they don't ever plug them in. And that's a very common problem. But if you want people to plug them in, make it expensive for them not to plug it in, then they'll plug it in.
So I think we got a ways to go. But I think the key here is, you know, I actually point this out historically, I think I made this point when we were on last time, is that historically when you’ve got toget a tipping point where you actually see policy really get serious about the problem.
And when we think about the war on acid rain, it was the Lake Erie effect. [In] 1968 Lake Erie caught on fire. Richard Nixon had to respond. He created the Clean Air Act amendment, the EPA, we went to town and we solved the problem. We used tools at our disposal, which we've all learned in Econ 10. What do you do with the negative externality? You tax it. So we know what to do. We’ve just got to get to the point where the political will is there to do what we know how to do.
Tracy (33:28):
Jeff, I want to go back to what you were talking about with petrodollars and the idea of this being a sort of key difference in the current commodities rally versus commodities rallies in history where, you know, the price of oil would go up and then that additional cost would get recycled into US assets like Treasuries and that would end up having an impact on the dollar and you would get that sort of self-reinforcing cycle.
A lot of commentators tend to be kind of cynical on the idea of dollar diversification. But it sounds like you think that that's one of the things that's happening here. This idea that there are countries out there who are getting together and saying that ‘We want to trade in our own currencies and diversify away from the dollar.’ How do you see that playing out?
Jeff (34:13):
I think it's going to become more and more apparent because owning those dollars, so let's take, we know Russia and India do this where they trade oil in INR. And so anything that's left over, they're the ones who can settle this up in gold.
And by the way, western governments were very careful in maintaining the integrity of the Russian frozen assets, the $400 billion, because they don't want to create that concern. But I think the damage has been done because you don't see, you know, these countries are not trading in dollars anymore because of fear of what are they going to do with these dollars. And you don't see the Chinese who actually still get substantial dollars lining up to buy US Treasuries anymore.
So, again, I don't want to get in the politics of this, but the question is have we passed that point of no return? Are we going to see that recycling play out again? By the way, I don't think you need it to be bullish commodities, because what if they start taking those dollars and those rupees and everything else and just buying raw commodities with them, which is what they're doing with gold.
We know they're doing it with gold. You know what if they start doing it with copper, oil, and other commodities and building strategic stockpiles or something like that, it starts to get pretty bullish again. But it's a very different dynamic than what we've seen in in the past. And I would say, if you asked me really what I got wrong was, I don't know why I thought we would keep doing that dollar recycling dynamic, given everything that's happened. But that's one point where I would say it that caught me really by surprise.
Joe (35:41):
Jeff Currie of the Carlyle Group. So great to have you back on. I always feel like it's such a masterclass in how these commodity markets really work. Great chatting with you and we'll chat with you again in 18 months or two years and we'll see how this is all playing out.
Jeff (35:55)
Perfect.
Joe (36:09)
Tracy, I love talking to Jeff so much.
Tracy (36:10):
I know, I remember when he left Goldman, he published that, like, ‘10 things I learned in commodities markets’ and I encourage everyone to go seek it out and read it because, even though he was very forthcoming in that conversation just now about what he got wrong, but of course anyone who is in this investment world, analyzing things, if you do it for long enough you're going to get some things wrong. And so it's really useful to go back and look at his lessons and kind of understand the framework for the way he thinks about things.
Joe (36:41):
No, totally. He's just so clear, right? And you know what I think is interesting? Because some of the stuff, you know, is like rebuilding on themes we had talked about, but one thing I thought was really interesting is some of the easing that he described that took place over the last couple years, which is not the sort of conventional easing as we think about it, but a little bit more stealth and so less sanctions enforcement, a little bit more tolerance..
Tracy (37:05):
Environmental regulations…
Joe (37:06):
Yeah, a little bit more tolerance on environmental restrictions to mining and things like that. Things that don't show up, you know, no one comes out and really makes an announcement ‘Oh we're going to be lax on sanctioning.’ You just hear it and people sort of deduce it from the data. ‘Oh there must be this Iranian oil getting out,’ or whatever it is. Or no one really comes out and says ‘Oh, we don't really care about the environment anymore and we're going to drop all our rules.’ You know, again, you sort of deduce it from like what activity is going on. I thought that was a really interesting point.
Tracy (37:35):
You know, I was thinking the exact same thing. So I asked him about what's sort of different in the oil market right now and US oil production and non-OPEC production, because that tends to get a lot of attention. It gets a lot of headlines. So the SPR release, the Biden administration maybe has a little bit of a unusual relationship with oil drilling at the moment, but we do see those headlines that the US is making a difference in world oil markets.
But then to Jeff's point, he was saying that he thinks actually the lax enforcement of the sanctions was a bigger factor in all of this. But it's exactly right that we don't talk about it as much because it's not out in the open. You can't see those official statistics about how much oil supply is getting out of Russia. And same thing with environmental regulation as well. So I thought that was a really good point.
Joe (38:27):
His last point about the lack of sticks I thought was particularly interesting too, and this idea of like, yeah, carrots are easy, but if you actually, like there is not a lot of appetite to say just, you know, raise the gasoline tax in the US, or as he put, raise the sulfur tax. These are things you could do, people wouldn't like them. But you know, in a world in which practically trade-offs exist, it's like how much political will is there?
To your point just now, obviously we've talked about this a little bit before, but even with Russia's war in Ukraine, the sort of obviously arming Ukraine and backing Ukraine, but you know, not being particularly excited about Ukraine's attacks on Russian oil facilities and the cost that that would add to the sort of overall global war effort. It's sort of interesting to think about him saying he's been a little bit surprised by, I guess the lack of will to take the painful part of the transition.
Tracy (39:19):
Yeah. The other thing I was thinking about was the evolution of environmental problems, let's say. And he mentioned acid rain there. And this sort of Lake Erie moment that led to a lot of additional regulation that made it sort of salient and politically palatable, I guess, so that you could do that.
And now there's a tendency to think about all the things going wrong in the environment and focus on everything else that we need to do. But if you think about acid rain, this was such a big talking point, in especially the like 70s, 80s, maybe even into the 90s. But nowadays because of those regulations, acid rain has a lot less impact. At least in places like Europe and North America.
Joe (40:02):
No, when we we were kids, or at least when I was a kid, it was acid rain and the ozone layer were the two big…
Tracy (40:06):
That’s right, and save the whales. That was the trifecta of environmental concerns.
Joe (40:12):
It's certainly in my memory.
Tracy (40:15):
Yeah. Alright, well shall we leave it there?
Joe (40:16):
Let's leave it there.
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