Oil prices are sky high. And there’s plenty of oil in the ground in North America. And so far the supply response has been disappointing. Frustration is boiling over among drivers and politicians, and of course higher gas prices are contributing to inflation. So what’s the hold up? On this episode, we speak to longtime energy investor and industry participant Peter Tertzakian about the reality on the ground. He explains that there are numerous operational factors constraining oil supply, including degraded quality of equipment and a shortage of labor, not to mention a reluctance among investors to splurge on new production. We discuss the specific constraints, as well as what it will take to get supply going on. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
On energy workers cashing out — 4:02
Where energy industry talent comes from — 06:18
Enrollment in resource management courses — 7:06
Peter’s energy experience — 11:03
What’s the hold-up for drilling more oil? — 13:45
The impact of the pandemic on oil drilling — 22:40
What happens to drilling at negative oil prices — 25:38
The role of oil financing — 27:46
The role of ESG in curbing oil production— 31:35
What does an orderly energy transition look like? — 33:30
What could encourage more oil production? — 35:10
When is peak energy demand? — 39:10
Joe's hatred of used Land Rovers — 46:12
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Joe Weisenthal: (00:11)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:16)
And I'm Tracy Alloway.
Joe: (00:18)
Tracy, you know, we recently talked with Goldman's top metal strategist, Nick Snowdon, and one of the things that really stuck out -- there are a lot of things. We talked about copper scarcity, but one of the things among many interesting points was the idea of there's been a talent shortage in this industry.
Tracy: (00:36)
Yeah. And you can kind of see why. I mean, first of all environmental concerns, and I imagine that particularly the younger generation might have some reservations about going into something like mining. And then secondly, it just wasn't a profitable industry for quite a long period of time, or at least I'm thinking specifically about shale oil in the US, but you had the big boom and people made a lot of money in that, but then you had the massive bust and it often feels like kind of an uncertain industry that swings between feast and famine all the time.
Joe: (01:15)
Yeah. So imagine you're thinking about your career and you're pretty technical minded. You're pretty smart. You could do a lot of things with your intelligence and you're faced with like two options. It's like, okay, do you want to like go to North Dakota or somewhere up in Canada and analyze rock formations? Or do you want to live in California and work for Facebook and get lots of free lunches and free dry cleaning and maybe make millions of dollars? I don't know. It seems like kind of an easy choice from the perspective of a potential talented person thinking about which direction they want to take their life in.
Tracy: (01:50)
Well also, I mean, Silicon Valley was very good at selling the idea of making the world a better place too, which I don't think is as impactful as it once was, that message, I don't think as many people believe it, but certainly for a while it was about ‘come build a better future in tech versus come dig out a rock in Northern Canada.’
Joe: (02:11)
Yeah, so come to Canada, dig out a rock, be cold all the time. Oh. And by the way, you're contributing to the worsening of the planet through global warming. Oh. And by the way, this industry has no future. These were like the messages, this is the message being told. It's like, you're going to contribute to climate change by participating in this industry. Also the industry has no future, because it's all going to, you know, disappear because of electric cars or whatever. So all these things, or you know, do software make a fortune. It seems like A) you can see why people made one choice and not the other.
Tracy: (02:42)
Yeah. So we obviously have to dig into this -- no pun intended, but yeah. We're going to dig into the talent shortage in energy and mining.
Joe: (02:51)
Right. And so there's all kinds of bottlenecks, you know, now of course everything's flipped and you know, there's like, well, why can't we restart the mines? Why can't we get drilling again for energy? You know, natural gas and oil, there is a pickup in activity, but it has not been as robust as people expected. So what are the constraints on getting everything going again and getting dirty stuff out of the ground, whether it's gasoline or fuel or metals that we need for decarbonization electricity. I'm very excited, , about our guest, someone who understands the space deeply. We are going to be speaking to Peter Tertzakian. He is the managing director of ARC fnancial, a private equity company that specifically focuses on energy and he knows a lot about the nuts and bolts of this space and investing in this space. So Peter, thank you so much for joining us.
Peter Tertzakian : (03:44)
Well, it's my pleasure. I'm delighted to be on the program.
Joe: (03:47)
So is that true? The premise that we started off this conversation that really, the number of people wanting to make a career as sort of like petroleum engineers or mining engineers has really tailed off over the last decade?
Peter: (04:02)
Yes, that's true. Actually, there's a double whammy. Also what we're seeing and we're going to see more of is that the older generation is set to retire and now with these higher commodity prices, they're going to cash in, so to speak, and be much more apt to exit the business and with nobody coming into the business, it's going to make the problem more acute.
Joe: (04:26)
So the higher prices increase the need for talent but but what they do in the immediate term is a bunch of people are like, ‘oh, I can finally retire because my oil stocks are up, or my commodity, whatever it is, my copper stock, that company that I worked for.’ So the first order effect, even before it has the effect of bringing new talent in, is to accelerate the departure of the existing talent?
Peter: (04:47)
Yeah. That's going to be a big problem. And the other part of losing the older generation is that resource exploration, certainly oil and gas, has a lot of tacit knowledge. In other words, it takes years to really build up gut feel expertise, which is just as important as, you know, raw numerical expertise.
Tracy: (05:10)
I have this image of like Bruce Willis in Armageddon teaching the youngsters how to mine properly. Right? Remember that?
Joe: (05:18)
Yeah. Right. The asteroid.
Peter: (05:21)
Yeah. I mean, those are the sort of the Hollywood perceptions of the way things work. I mean, I have to say that the industry is actually very technologically advanced and that, you know, that loss of knowledge is much more than just sort of these perceptions of people going and digging holes in the ground. It's much more complicated than that, which exacerbates the problem because there's a lot of tacit knowledge that needs to be replaced.
Tracy: (05:47)
So when you mention an older generation potentially entering retirement, it reminds me a lot of the pilot shortage that we saw this idea that, you know, we had a lot of pilots that were coming through the military primarily. And then after they completed their service, they would go into commercial flying, and then they entered retirement age and we don't have a lot of people to replace them. Where historically has energy talent come from?
Peter: (06:18)
Well, energy talent comes from two places. First of all, there's the field. And that talent typically comes from hiring people and training them. Also out of technical schools, and there's a lot of training that goes on in terms of safety and how to operate equipment. And that can take many months’ certification. And then in the offices where a lot of the engineering is done and the the geoscience is done. I mean the talent pool there comes from universities, petroleum engineering courses, geophysics, geology, chemical engineering, you name it, petroleum engineering.
Joe: (06:58)
So what has enrollment been like at the university level for petroleum engineering in some of these related fields?
Peter: (07:06)
Well, it's declining and in the handful of universities in the sort of Western hemisphere, I'll call it -- Europe, United States, Canada, where there's a lot of expertise in the universities to train students, the enrollment is going down. In some instances, the universities are shredding programs down. And it's what you said earlier. I mean, the emphasis for students and the desire for students with technical backgrounds, is to go into Silicon Valley-type ventures and so on. It's not to go into the resource economy. So it’s problematic.
Tracy: (07:42)
What was the sales pitch earlier? So, you know, I guess in the seventies, eighties, nineties, if someone was thinking about a career in resource management, what would be the benefits of such a career?
Peter: (07:57)
Well, the benefits certainly would be pay, to start with, because historically, and even now, these are very high paying jobs, and even so it's difficult to attract people, but historically it's also been viewed with the growth of the economy. You need more energy, energy’s dominated by fossil fuels over the course of the last couple centuries. Therefore you are contributing to the growth of society and energy needs in the economy. And so it's historically been the paradigm, but now that paradigm's broken, certainly in the Western world, it's broken. And that leads to the problems that we're going to see, are already seeing, in terms of the price of the commodity and the supply shortage.
Joe: (08:46)
What schools have actually shut down? I went to the University of Texas. So there was a geology program there, I think at the time there were a pretty decent number of people going into the petroleum industry, but where have we actually seen, you said some schools have shut down, they just get rid of their department?
Peter: (09:02)
Yeah. I can't speak for the American universities as much. I mean, there's certainly the Texas universities, including SMU, some of the schools in Louisiana, you know, Oklahoma, those big, I mean, those are the states where that have a lot of the resources, not surprisingly, that's where the schools are. Ditto here up in Canada, where I'm located. University of Calgary. Canada's the fourth largest producer of oil and gas in the world now. And so we have the schools here. University of Alberta, University of Calgary, the enrollments are way down and some of the programs are likely to be shut. So we are going to see a talent and talent pool shortage. There's no question.
Tracy: (09:47)
Can you give us a little bit more color on how much enrollment is down or exactly what the extent of the talent shortage actually is? And are there particular areas where it's more acute versus, you know, other types of energy jobs?
Peter: (10:04)
Yeah. So the petroleum engineering department here, I had a conversation a couple weeks ago with one of the faculty members and he indicated…
Joe: (10:15)
Sorry, which school are you referring to?
Peter: (10:17)
This is the University of Calgary. I mean, you know, typically you'd probably see 30 students a year in a graduating class, maybe more. I mean, historically it would've been much more than that. I think they have enrollment for one student, you know? It's that kind of thing. Now that may pick up as we get closer to the fall session, but the numbers are not looking positive in terms of replenishing the knowledge base.
Joe: (10:43)
Oh, one student. I introduced you as the managing director of ARC Financial, but can you just sort of give the summary of, like, you've seen these cycles come and go for a while. What's your sort of general background and story having watched and been involved within the extractive resources industries?
Peter: (11:03)
Yeah, well, I started out as a geoscientist back in the 1980s. I worked for one of the multinational oil companies. I worked in the field, I worked in the office, and then I migrated to the world of finance, the world of technology, the world of energy technology. And so I sort of have a very holistic background in energy and energy technology. And in my career over the last 20 years have financed everything from oil and gas to solar, to wind, to you name it. So, as I watched the boom and the bust cycles, there was always a repetitive theme on the oil and gas side, is that when the price of oil and gas went up, that was the signal. The siren goes off for the companies to go back and drill more and bring more supply on. Now, as we all know, over the course of the last half dozen years, that signal's been broken, right?
It's because of the vilification of the industry, the climate change concerns, the divestment movement, end of oil narratives, all that kind of stuff. And then of course, the turnover of investors in many of the publicly-traded Western oil and gas companies, basically who want their money back in terms of dividends. So that means that there's not a lot of money going back into the ground -- certainly not as much as there used to be, to give a supply side response to meet the demand, which is still there -- and as we can see growing. Everybody's back flying and going on vacations and driving. And then you lose your upstream talent pool and that just combined with a war in Europe, with Ukraine and it, boy, it’s just sort of like the perfect storm to create an energy crisis, the likes of which we have not seen since the 1970s.
Tracy: (12:55)
Perfect storm. We hear that phrase so much on this podcast, but, you know for very different things. But okay, so I'm looking at the chart of Brent oil and it's currently above $120 a barrel. So in olden times -- olden times being, you know, just 10 years ago or so -- you would expect a shale driller of some sort to see that chart and go, oh, we're going to restart some of our old wells. And presumably they would've gotten that done fairly quickly, given the incentive there from the price. When that happens now -- when oil goes above $120, as it is now -- what's the hold up for restarting those drills? Walk us through exactly all the chokepoints in actually ramping up that production.
Peter: (13:45)
Well, first of all, a little bit of perspective. $120 a barrel today, if you inflation-adjust the price of oil and take it back historically all the way to the beginning of the last century, in other words, 120 years ago, $120 is typically the high point on an inflation-adjusted basis. Like beyond $120, all of a sudden you will get a demand response and people will start peeling back. The supply response typically starts around $75, $80 in earnest. Now we didn't see that this time around. So last year when the price started to escalate -- through $75, $80 and the call went out, ‘Hey, you know, the price is going up. We better get some more production going.’ Well, the publicly-traded companies and the CEOs basically said, ‘well, wait a minute, everybody told me to focus on profitability, not production growth, and give the cash flow back to the shareholders. What are we doing here changing the tune, right? And, you know, by the way, everybody's saying, it's the end of oil, so why should I go back and drill?’
So that’s $80, $90, then you get into a hundred. ‘Oh, that's interesting.’ And the rig count starts to go back up a little bit, but it's very muted relative to what it would've been historically. And so here we are today at $120, the allure of going back and bringing on production will be irresistible, but it's still, I believe, not going to be the same level of drilling. And then there's all the field level constraints, which we haven't talked about yet. The physical equipment and the people in the field. I mean, to this point, we've talked about university graduates and engineers who typically go work in the office. Now you’ve got to talk about the shortages in the field.
Joe: (15:39)
So yeah, let's talk about those. So how many people, like compare the sort of upswing cycle now, the ease of hiring, the number of people willing to do the work, how is that different than, you know, previous cycles that you've seen? The challenge of staffing the field?
Peter: (15:56)
Yeah. So what we've seen, well, you have to wind back to late 2014, early 2015. At that time, shale drilling was so prolific and the money was being given to the industry from Wall Street to drill. We created a supply glut. The Saudis said, ‘well, wait a minute, we're not going to give up our market share.’ So that started the price war. They flooded the market, the price of oil collapsed down to 30 bucks, 35, and that started a prolonged period where prices were low. So the industry went into sort of a downturn. Prices recovered back to kind of like the $50-level and stayed there. $50 is not compelling. $50 is not compelling. And then layered on top of that, the end of oil narrative started. And so there was this whole negative pall around the industry. So in that context, it's been now seven years of negativity.
And so the service companies that go out to the field with their people, basically say, ‘well, why would I build new equipment? Why would I even maintain equipment? I'm just going to cannibalize parts off old equipment to keep the equipment, a smaller equipment fleet, going.’ So here we are today with a shrunken field capacity. And by the way, a lot of loss of knowledgeable -- people trained on how to operate this equipment. That's being called back and saying, ‘Hey, go, go drill again. We need it because we want to get off Russian oil.’ Well, wait a minute. I can't just tool up and hire a cruise overnight to do this, even if I wanted to. And then on top of that, you have the inflationary effects of things like steel and chemicals and raw parts, supply chain issues. And, and so even if you wanted to grow it meaningfully, it would be very difficult.
Tracy: (17:50)
Can you talk a little bit about this from a technical perspective? So if I have a well that I haven't been using for a while because oil prices were so low, what does it actually take to restart it? I mean, assuming I can get the labor, what are the technical things that I need in order to get it going again?
Peter: (18:08)
Well, it's not so much restarting old wells because wells, you typically do not want, especially oil wells, you never want to shut them in because restarting them is problematic. So a lot of wells, they either get choked back, but if you want to grow production back to where it was before, you have to drill more new wells. And so that's where the problem lies is you need drilling rigs, you need hydraulic fracturing crews, you need all sorts of peripheral services to get these things going. And so the ability to bring on new wells and then, you also need service equipment by the way, to ramp up the old wells again. It’s as I said, if you want to bring on the amount that we're forfeiting from sanctioning Russia, I mean, you're talking several million barrels a day, which the Permian and fields like that up here in Canada, we can do, but you just can't turn the spigot on overnight. And then there's just this general reluctance by investors and others saying, well, I don't know if I believe all this and by the way you told me it was the end of oil. So why would I put money in the ground?
Joe: (19:33)
I'm sort of fascinated by something you said about equipment, either having been not preserved or preserved in a bad state, like what equipment, where was it housed? You know, for these last seven years while the industry was sort of shrinking or downsizing, where was it housed and what you know. Now it's like, okay, we're back. And then they opened the warehouses. Was it like literally rusted? Can you tell us what type of equipment and what is actually…
Peter: (19:59)
So I mean, the whole thing is that when prices fall -- commodity prices -- when they fall and they stay low, that's a signal to just contract, right? So basically the service companies, unfortunately, especially if the downturn is severe, which it was, have to shed people and they basically have to stop building new equipment. In fact, you have to contract your fleet. So you say, well, why would I keep say a hundred units active and maintained? When my customers, the oil and gas companies, only want the equivalent of 40 units. So basically you park everything in a yard and you keep the 40 units going, but instead of buying a whole bunch of new spare parts, you just start cannibalizing the other parts…
Joe: (21:00)
So for the equipment, 40 units that are in action, you're cannibalizing the other 60 to keep them going rather than buying new spare parts, because you don't want to buy anything new. But then when it's time to go access those other 60, they're missing parts.
Peter: (21:15)
Exactly. So that's what's been happening over the last seven years is say, well, why would I buy new stuff? I just sort of keep things going. And so, you know, this creates the situation now where you say, okay, I need a bunch of spare parts if I want to ramp up. And then you say, okay, now we got supply chain issues. Now we got people issues. And so the ability to ramp back up at a snap of your fingers is very difficult.
Tracy: (21:41)
So I remember back when oil prices were quite low, so I guess around 2015, 2016, one of the talking points in the industry was, well, why do people keep pumping at these prices? And we saw production be a lot stickier, I suppose, than many people had expected. And so A) why do you think that happened? And then B) one of the things that I remember people talking about around that time was standardization of parts for rigs and drills and things like that. And basically just a discussion that technological advancement and standardization meant that producing oil was a lot more efficient than it used to be. So you could pump more without necessarily spending tons of money. So is that like, doesn't that also work the other way, you know, with high oil prices? Shouldn't standardization help keep some production up and hopefully increase it?
Peter: (22:40)
Yeah. Okay. So I think you’ve actually brought up some of the important points, but let's tackle the one about ‘Why keep pumping if prices are low?’ As I said, because it's very, very costly for oil wells to turn them off. So you, you want to keep producing for as long as possible. Now in 2015, when the price went down, you know, we went down to $35, $40 for a while, but for the most part over the course of the latter half of the 2010s, it was mid-50 bucks a barrel. So there's three kind of costs here. There's operating costs, which is the cost to keep pumping. And the op costs are typically lower than that. And so you make money just by pumping. But what happens is, is that if you don't drill more into the same reservoirs, the production declines, and it's called a decline curve.
In other words today, you're pumping a hundred barrels. And typically some of these wells decline at 20%, maybe more, a year. In the first year, it's even more. So a year on you're only pumping, let's just say 70 barrels, for the sake of argument. And then next year it's only 50 barrels. So the basic operating cost keeps the oil flowing. Then you need the maintenance capital costs, which is drilling just to keep production level. So what happens is when you go into a downturn, depending upon your cost structure of an individual company, you typically pull back on your maintenance cost and you might decline your production. But if you're in growth mode and there's the call because prices are high, then you start drilling new wells to not only offset your declines, but to grow. So for the past seven years, it's largely been op cost plus maintenance cost to keep production level. The big event was the pandemic. Okay. In the pandemic, you know, we saw a prolonged period. That's when they said no maintenance cost, no growth, no nothing. And American production fell by at least a couple million barrels a day. And we haven't really recovered.
Joe: (24:51)
Actually, I realize we haven't really discussed like what happened in those months, the early months of the pandemic, you know, of course there's the infamous -- like briefly WTI, at least on a computer screen, traded at negative $40 a barrel, I think at one point, but obviously it seems like something snapped there. So you had this degradation of the industry from 2014 through 2020, and then something broke there. It sounds like that really changed the trajectory so that the energy players were just not going to go back to the old way of losing a lot of money basically. But what was it, can you talk a little bit about more like how transformative and significant those few months in 2020 were?
Peter: (25:38)
Yeah, it was huge because you know, the 2014, ‘15 event really weakened the industry and created the contraction and the capacity and the cannibalizing the spare parts and so on. But you know, many companies still hung on. But when you get to $20 a barrel and you know, momentarily zero, and all of a sudden all the pipes are backing up because there's no demand. And there's global immobility with lockdowns and nobody's using the stuff momentarily. Then you create cash flow crisis for service companies and producers. And those that were on the verge of bankruptcy went bankrupt. And certainly there was more layoffs. And so you lose more talent and more tacit knowledge. And so the pandemic really was problematic. And that was at the same time, again, that was layered on top of that whole end of oil narrative, like, okay, electric vehicles are taking over the world and so on and so forth. We don't need this stuff anymore. And Zoom is going to help us, you know, overcome our commuting and blah, blah, blah. And so it really weakened the industry further. And then all of a sudden, of course the demand comes roaring back. And the supply side is hampered, especially the Western oil and gas industry, which has been under intense pressure to decarbonize, cut its production so on and so forth. And so here we are.
Tracy: (27:14)
So talk to us a little bit more also about the financing aspect of it. And this is something that we hear from energy producers in particular, this idea that well, for them credit, you know, for the rest of the world, credit has been in ample supply for the past few years, but for anything that's considered a polluting industry or a non-ESG compliant industry it's much more difficult. So how real has that been for the industry?
Peter: (27:46)
It's been very real. I mean, there's two major sources of financing, like in any company, it's equity and debt. So historically certainly when the price of the commodity goes up, equity players from Wall Street come in and say, ‘here, go drill, go produce more.’ And you produce more, the cash flows are strong, so you're able to borrow more, but the combination of seven years of low prices and not making any money already investors were saying, ‘well, you know, give me a call when you make money.’ And then on top of that, the divestment movement and end of oil narrative, ESG, and many financial institutions’ pension plans, for example, saying, ‘Nope, we're not allowed to invest in these companies in anymore.’ And banks coming out and joining -- things like the Net-Zero Banking Alliance, which basically says no more fossil fuel debt investing. And so now we're in a situation where the oil and gas companies are making a lot of cash flow, right. They can finance themselves and they can even drill themselves. But the investors who stuck with those companies are basically saying, ‘well, you know, I stuck it out with you, give me my money back in a dividend and buy back shares and so on.’ And so again, we're in a situation where the ability to make decisions to put money back into the ground to grow production is very encumbered.
Joe: (29:22)
So in theory, okay. So the shareholders of these companies who are sitting on years and years of cash losses, they're like, ‘no, don't invest.’ So the idea is they don't want to invest because they want to get repaid after years of losses. And then there isn't some pool of other money, and that would be more the sort of ESG defined broadly, but that would be more of the ESG-impaired financing because all different kinds of industries, it sounds like, or all different sorts of players, basically made a formal decision to get out of the game?
Peter: (29:57)
Well, so what's happening is that there's what I call the alt finance universe that's starting to emerge. So the alt finance universe are equity providers, debt providers that are not overly concerned about ESG and they say, ‘fine, sure. We'll give you the money. It may be at a higher price.’ So they come in and they start financing these companies. At the moment though, I'll reiterate, at $120 a barrel or even a hundred bucks a barrel, oil and gas companies are actually vigorously paying debt down. They don't need any money and they are issuing special dividends and so on, but the issue's going to come when the price of oil falls back to, say, $80 and we think it's all okay. But really, it's not, it's a very precarious situation because you know, the root issue of still the need for fossil fuels, oil and gas for several decades in my opinion, is not going away.
Tracy: (31:01)
So just to play devil's advocate on that question, I mean, a lot of people in ESG would presumably say, ‘well, this is exactly the kind of dynamic that we do want.’ Okay, so we don't necessarily want oil at $120 a barrel, but we want people to go into other industries. We want to choke off funding for dirtier industries in order to encourage newer types of energy, cleaner types of energy. What would be your response to that message.
Peter: (31:35)
Well, I have the benefit of financing all types of energy and have seen how transitions work. In fact, I’ve even written books on energy transition before energy transition was even a buzzword. So, you know, the thing is that it's not a good idea to prematurely abandon this industry because the price goes up to 120 bucks. Gasoline goes to $5 a barrel, it's like a massive carbon tax, let's say the equivalent from going from $50 a barrel to $120 barrel, that's like imposing a $250 a ton carbon tax on the people, right? Which is huge. And it disenfranchises obviously the lower income strata of society and creates all sorts of social issues and polarization. So, yeah, it's one way to think about, you know, forcing people to switch off of oil and gas into alternatives, except the alternatives are not available easily. It costs people money, which they don't have now, to, say, buy a new vehicle electric vehicle or replace their heater, their furnace with a heat pump or conditioning or whatever. And, and so we're just creating this really distorted economy that speaks to a very disorderly transition that has potentially a lot of civil unrest and problems.
Joe: (33:09)
So you're someone, and this really key, because you're invested in the transition. I guess sort of a one and a half part question is like you're invested in the transition, what new tech, I guess it sounds like this is a really bad way to accelerate it, in your view, but what do you see as like the problem? You know, what does the orderly transition look like?
Peter: (33:30)
The orderly transition is that, you know, I'm still bullish on renewables. I mean the cost curve’s coming down on the adoption rates. Personally I've been driving an electric vehicle for five and a half years. So I'm a fan of electric vehicles. However, I'm also a social, what do you call it, color commentator in energy. And I can tell you like the transition does not occur overnight. I mean, if you look at the historical transitions, they take decades. And to think that, you know, it's almost a lot of hubris to think that we could get off this stuff in a matter of a few years and make a switch, it’s being disproven right now. And you know, it's going to be disproven doubly because as I said, what we have right now is the equivalent of a $250 carbon tax. And all it's doing is creating a lot of animosity in society is what I can see and disenfranchising the lower income strata.
Tracy: (34:47)
So if this is my new favorite question to ask people, but if you could wave a magic wand and change one thing about the way the current world works or the way policy is formed or whatever, in order to help some of the problems or help alleviate some of the problems we've been discussing, what would it be?
Peter: (35:10)
Well, I mean, it's probably not one, but I'll just say one thing that we should be doing is focusing back on the core objective, which is to reduce emissions. So reducing emissions is not the same as shutting down and thinking the oil and gas industry is dead. Putting an industry out of business is a lot harder than reducing emissions in my opinion. And you can go deep into the subject, but this to me is the core issue that, and the core mistakes that have been made to this point is that the only way to decarbonize quickly is to shut down the oil and gas industry and call it dead and buried, which is what we've been doing over the last half dozen years and has resulted in the situation that we're in right now. You know, we need to get people back into the industry that is innovating now fairly vigorously in terms of how to reduce their upstream emissions and with carbon capture and other technologies that are yet to come to the fore so we can reduce emissions dramatically. And we can have a transition to electrification and all sorts of things that will help us, decarbonize going forward and create clean and prosperous energy. But, you know, we have to do it smoothly because if we don't do it smoothly, you're going to create all sorts of social tensions, which we're seeing get manifested. And that's just obstructionist in terms of getting, it's friction in terms of getting to the end goal.
Joe: (36:57)
What about, is there anything in the short- to medium-term, either in the US or Canada policy-wise that could just simply accelerate the production of oil right now? I mean, because that's a big thing. Just getting in the US, right, supposedly Biden wakes up every day and he and his Chief of Staff look at the price of gasoline every day – supposedly, I read a report that said that. Are there policies that could meaningfully accelerate, I mean, as you mentioned, you know, you can look at the rig counts, they are going up, other policies that in the sort of short- to medium-term could accelerate both production and refining such that the prices come down?
Peter: (37:35)
Yeah, well I think actually it's as much policy. Now Canada's a little bit different than the US, but maybe not too far different. I think the industry and the shareholders of the industry are really exhausted by the vilification and the negative rhetoric. And so actually having leaders right at the top say that our domestic industry is among the best in the world and plays a valuable role, not only in terms of decarbonization, but plays a valuable role in energy security and energy affordability globally. Just to say that, just to say the industry is important, I think would make a lot of people be much more inclined to be part of the solution and maybe even encourage people to come back to work on the industry. You almost need like a rally cry and say, you know, this is important to us that we have a smooth transition with safe, secure, cheap, clean energy.
Joe: (38:47)
You know, in your view, we're nowhere close towards this sort of end of fossil fuels, oil and gases. What does like the transition look like when you think about this and you say, is it decades? Two decades, one decade? What does it look like? When's peak energy production, peak energy demand? What's the sort of like ideal transition look like from your perspective?
Peter: (39:10)
Yeah. So let's focus in on the word transition. Well, first of all, I think the peak oil demand is probably around 2030-ish. That's my estimate based on numbers and things, but let's think about transition. I mean, the transition say from DVD players to streaming, you know, basically, the demand for DVD players and DVDs goes down and the demand for streaming goes up. You know, what we're seeing in energy is that we have oil and gas and actually unfortunately, even coal, continuing to rise at the same time as renewables are rising and electric vehicles are rising. It's more of a diversification of our energy system rather than a transition that's occurring. And there's a big difference. And so let's bring that to cars, which is really important. You know, there's all these headlines and metrics measuring the sales of electric vehicles. And I think that's great. As I said, I've driven one for five and a half years. I love it. But the real metric in terms of decarbonization and transition is, well, how many cars are we taking off the road that are combustion vehicles? Because the reality is that when somebody sells our combustion vehicle to buy an electric vehicle, that combustion vehicle goes to somebody else. And then when that person's done with it, it typically goes to a developing country and it gets driven for another 20 years.
Joe: (40:33)
Right. Wow. Really
Peter: (40:34)
So, yeah, because I mean, if you think about vehicles today, I mean, they'll go 2, 300,000 miles easy, right? Because they're built robotically. The quality is a lot better than the cars we even produced 10 years ago. And so, you know, the real metric for a transition is how fast are we not using legacy paradigms for energy versus just focusing on the growth curve of new energy systems. We have to figure out how to retire the old stuff. And this is one of the big issues with oil and gas -- oil in particular in petroleum use, is that oil demand is not likely to go down because the population continues to grow in developing economies. People are buying more and more vehicles still. And, you know, they're not necessarily buying electric vehicles. They're buying somebody's used combustion vehicle that just gets shifted in container ships around the planet. And so it's, you know, the real transition, as I said, where you get the decline of the fossil fuel systems and the growth of the new clean energy systems in earnest, I don't really expect that to happen until 2035, 2040. So that means between now and then we've got this massive gap that's deteriorating in terms of the incumbent systems.
Joe: (42:01)
Well, Peter Tertzakian really great perspective, you know, we've been sort of talking about some of these topics very generally in terms of the financing and the constraints, but it was great to get the sort of very clear ideas of how they're thinking through these things and the constraints, and course the machinery. So really appreciate you coming on Odd Lots. That was very, very educational.
Peter: (42:22)
Well, my pleasure. Thanks for having me.
Tracy: (42:25)
Thanks so much, Peter. Yeah, that was really interesting.
Joe: (42:43)
Tracy, that example of just thinking through, okay, you have a hundred pieces of equipment, you only use 40, but then you cannibalize the other 60 to maintain the existing 40. And then at the end you do not have a hundred anymore. Because you didn't buy anything new. I think it was actually one of the clearest sort of examples of, I guess like hysteresis or supply side degradation. What happens when you have a protracted slump in an industry.
Tracy: (43:09)
Totally. And then I guess extending that to the labor side, that anecdote of one person enrolled versus classes that used to be, you know, 30 or more, that's kind of stunning to me, but I guess, you know, to Peter's point, what would you expect when for years and years and years people have been like, ‘oh, this is a terrible industry. You're ruining the planet.’ Like who in their right mind would want to go into that?
Joe: (43:35)
No, it doesn't seem like, you know, okay. Yes. I'm sure in many cases there were very like very well paying jobs still, even during the downturn years, but very little about that career over the last 10 years, would've seemed to be particularly appealing for a lot of people. And then it's kind of mind blowing to think, , you know, the first order effect of a surge in energy stocks is that you probably have a lot of people who work for Exxon or whoever else say like, finally, my portfolio of stocks is high enough that I can retire. So even before you have the positive price signal of putting people into the market, you finally get people who could cash out and retire.
Tracy: (44:17)
The two other things that struck me was one, just the idea that maybe if people were a little bit nicer to the industry and, and again, like so much of it, it sounds like messaging and it is, but I think that matters to people, right? Like no one wants to feel like they're coming into a job and they're not making a difference.
Joe: (44:37)
Yeah. I know it's weird. But on the other hand, and that's true, but something else I was I've thought about is like, Trump was really nice, like rhetorically, to the industry. And that was in the years when they lost hundreds of billions of, you know, how many hundreds of billions of dollars did the industry lose from 2016 through 2020?
Tracy: (44:56)
Yeah, but I mean, they were still producing. That's the difference.
Joe: (44:59)
I know it's so weird. It's like, oh, we're nice. And we're all like going bankrupt. And now we have a president who doesn't, you know, doesn't quite say as nice things, at least in the US, but the industry, but they're all making a fortune. It is sort of this weird, I don't know. It’s kind of perverted.
Tracy: (45:11)
The other thing that I thought was interesting was this notion of, you know, when he was talking about peak oil, which is a something that I haven't heard about for a long time, because it kind of died during that 2015, 2016 era, which again tells you, you know, how extreme the sentiment kind of swings here. But when he was talking about the energy transition, we're not actually replacing all these combustible engines with new electric vehicles, we're just moving them to a different place.
Joe: (45:42)
So if the pool of the global population that needs a car continues to grow, then you can have a situation in which maybe, you know, in the US and Norway and some of these other places you have booming EV demand, of course China as well. But then still all of these used combustion vehicles don't actually leave the road and go to poorer countries. And the fact that, you know, cars are made pretty well these days. They might live another 20 years even after the second owner in the US sells it to someone in emerging markets.
Tracy: (46:12)
Well, I mean, even like Land Rovers from the 1990s are really desirable.
Joe: (46:17)
No, they're not. No, no. I had a really bad experience with the used Land Rover. Never buy a used Land Rover.
Tracy: (46:24)
I think you would feel differently if you were living in like Tanzania or something.
Joe: (46:27)
No, no, no, no. I would never wish anyone, even the most desperate person for a car to buy an old Land Rover. They’re great. I love them visually and aesthetically, but I would never, no matter how hard up you are never buy an old Land Rover.
Tracy: (46:45)
Okay. I feel like we're going to have to talk about this.
Joe: (46:47)
Did you ever look at that website ‘Bring a Trailer’?
Tracy: (46:50)
No.
Joe: (46:51)
It’s so cool because they have all these like old classic cars, but it's called ‘Bring a Trailer’ because, and its old classic car auctions, but like these really like beautiful like Land Rovers or these BMWs and Mercedes that are like from the eighties and nineties that are so cool and retro looking. But you just know like it's not going to work and you're going to drive yourself crazy.
Tracy: (47:13)
Okay. But here's my point before I clearly touched a nerve by mentioning Land Rover, but you know, a lot of the newer cars, people don't have the expertise needed to fix them, if something goes wrong, because they’re computerized.
Joe: (47:26)
Trust me. You don't have the expertise. I know this because we had a Land Rover that we got used in our family and the problem was not that like, actually no one had the expertise. We had to like find someone manual, no don't do it. Never. It, it doesn't matter how cool they look. Don't buy it.
Tracy: (47:45)
What if I, okay. What if instead of like Rover, I say Land Cruiser, would that be better? Like a Toyota Land Cruiser?
Joe: (47:53)
Toyota would probably be a little better.
Tracy: (47:53)
Okay. My point is there are different reasons why you might want an older vehicle. And so to Peter's point the assumption that we're just all going to switch to electric vehicles might be unrealistic.
Joe: (48:08)
The broad point. You just picked a category that I have opinions of.
Tracy: (48:11)
Look, if anyone wants to get a reaction out of Joe on Twitter, just tweet like pictures of Land Rovers at him.
Joe: (48:19)
I love the way they look. Just don't drive one.
Tracy: (48:21)
Tell him you're thinking of buying one. Okay. All right.
Joe: (48:24)
Don't buy, I don't give it financial advice, but don't buy a 1990s Land Rover.
Tracy: (48:29)
Okay. Shall we leave it there?
Joe: (48:31)
Let’s leave it there. at podcasts. Thanks for listening.
You can follow Peter Tertzakian on Twitter at @PTertzakian.