Jeff Currie, global head of Commodities Research at Goldman Sachs, discusses the surge in US oil production, the changing role of OPEC and how lower oil prices are impacting the global economy.
This podcast was recorded on December 15, 2014
This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, were people from the firm share, their insights on developments currently shaping markets, industries and the global car
objects, your global out of corporate communications. Her Goldman Sachs on today
episode we're talking oil despite
turmoil in the Middle EAST. Oil prices are low,
level in years, while consumer
forcing an immediate benefit. The pomp there are significant long
implications for importers and exporters double info
the global economy for decades to come and join
to discuss these trends by Jeff Curry Global, had of commodities. Research Goldman Sachs, whose here to help us understand this,
I'll order a phrase he coin. Jeff walk into the programme to pleasure. To be here. Jeff, you wrote, a p
call the new oil order. What you mean by that exactly? There are three aspects to it: first,
We think about the shale technologies. They are transformational. They basically taken an industry that was very cap. Acts intensity,
And created in such that it is more variable, cost intensive, and why is that import?
because basically it turns audio production into a manufacturing process.
Can dial up in dial it down in response to price action which makes the into
we more nimble than when it was several years ago, the second aspect,
is that when we look at the competence
of the man now hissed
I we used to view the bricks as being base load demand,
Kay demand coming year in year out and all the
Urgent adjustment occurred in the United States today, these rules have been turned upside down.
Because of the sheer revolution in the: U S: approaching energy independence, the? U S is now being
load demand in the margin of adjustment is China in the rest, the emerging markets,
the third and final reason really
to do with the competition or the structure of the market. These supply her for shale, is incredibly flat, which,
is actually takes away. The market power the OPEC had previously because, if they ads
why or take supply off the market with a flat supply curve, has really no impact on price. In contrast in
old days, the supply curve was very steep. So when OPEC
oil on the market or took it off, it would have a significant impact on price, and so what we
you right now is aid, just process has taken place across the entire industry to these new technologies, the nuke
position of demand and a new market structure, the market phases lashes
In June, Goldman Sachs hosted the north
American Energy Summit, where we brought together
policy makers from Canada, Mexico, the United States talk about the opportunity,
and some of the costs and risks in this new energy market there were facing you ve been taught met these trends for some time now. In fact, you spoke at the north
an energy summit, about what is happening. What we see happening right now, wise it happening now, even though we ve been talking about these trends for awhile wire prices, all of a sudden, reflecting this new oil order.
There were several factors that made oil late, because we ve seen a lot of commodities already moving gas in particular, moved back in two thousand eleven in two thousand and twelve in power there
to do with the stages of the production process. The shale producers first discovered gas.
And then they discovered liquids, and then finally, they turn to oil. Why did we see this progression has to do with the way the technologies work? They simply
Fischer in the Shell Rock and what's gonna flow out that Fisher first, the least dense elements. I
gas gases are the least dense elements on the planet earth well,
produce so much gas. They finally ran out demand and crush the prices, as we saw on eleven and twelve
and then they open up the rock a little bit further out flow. They what we called natural gas liquid things. I propane beauty, so
it wasn't a coincidence that they got gas. First. Gas was the first to flow out, then, finally,
pretty so many the liquids like the propane butane? They finally ran out as a man there such that they broke open
rock further and finally discover they can pull oil out relatively cheaply. So is really only since
two thousand eleven that we see in the big
Greece is oil, which is part of the reason why oil was late
while the other factor that made oil
The fall was the fact that you had significant supply disruptions in the form
I ran and Libya that kept the market tighter far longer than what it would have otherwise been.
When I was in high school, we debated whether or not the United States should achieve,
energy independence now some time ago, won't tell exactly how long ago, but the
then was all round reducing
the demand side and developing alternative fuels, and now here
are in the United States is moving closer to energy dependence on the back of oil. What does that tell us about the technology and in the future of this industry were
I think one of the key issues here is that the Shell revolution has made a clean burning fuel like natural gas, very, very low cost.
In the current environment, as has been cheaper than coal, going back to two thousand and nine in that turns everything upside down.
Thing from environmental policy to even processing because
any of the processing technologies in petrochemicals refining, we're all
round much heavier fuels and so
We think about what the opportunity is going forward. It actually creates a difficult virus
for renewables and other type, a cleaner burning technologies, because now there competing with Russia,
we low cost natural gas and even in more recently relatively low cost oil still far more expensive. So I wouldn't MIA. We seen the pull back and price, but it still
is much more expensive than some of is the gas technologies, and so what we would argue in terms of going forward. We should see
a mix I to say, diversify across he's different technologies. Obviously, gases, the dominant one, because as clean burning in
is scalable, but one thing that gas does that actually
benefits offence. They renewables is that it can deal with the intermittences issues with renewables,
I e when the sun's not shining in the winds, not blowing, you can turn
gas fired turbine within thirty minutes to be able to meet that electricity requirement
so while natural gas clearly has changed the landscape in terms of what we're going to cost
and made made itself more competitive
against renewables, we argued towards a diversified approach. You
natural gas, along with renewable such
solar, such as wind, and look at in terms of trying to build out of
broad base grid in terms of where
It is nuclear fit into this. This broader picture, you would need to see gas prices get back above eight dollars in a man
to you before nuclear really becomes competitive, and so the focal point really as the gas technologies
solar and wind, from a lecturing agenda
in perspective and then from transportation, be combination of lecturers city. I'm some of the natural gas based fuels as well as well. What is the Eu S need to do to build
out the infrastructure on the demand side embassy there's been a lot put into the supply side, but but what what kind of policies would help us get?
The position were really able to utilise the energy bomb or saying one.
The interesting facts it came out of the north American Energy summit. Was it when we look at the investment in the upstream, which is the production of oil and gas?
We actually find that the United States in North em
more broadly, Rep Ray
it's more than fifty percent of global cap acts in oil and gas production, more
Firstly, when you look at how much is being spent in North America, North America out Spit Roy,
sure and Saudi Arabia combined. Ten to one.
Clearly the U S is producing in spending.
To be able to produce oil and gas now, and it gives you pointed pointed out
The real issue is going forward as we need to build out the infrastructure on the demand side. When we look at this
in patterns on the downstream or the demand side for oil and gas, we find that a
in the Middle EAST, outspent North America, fifteen one.
So the? U S, a spending on all the oil and gas production for the middle
in Asia are spending on all the demand to consume this oil and gas and part of that
and for that is that the forward economics on these projects are not clear. In the United States.
The far more clear in the Middle EAST or Asia can give
some idea. Why that's the case?
long term off, take agreements for supply price,
are guaranteed. Labour is available. So when we look at the U S because of the poor
Lucy uncertainty on beyond three
last year's we look at
The investment occurs in things at a quick turn around projects such as,
production. Again, I made the point earlier that we look at shale is what we call fast cycle production. I make an event,
but today, thirty days later, I can have output in some way
look at return potential from shale. We only need
think about the economics of a twelve month horizon when we think about the ECB
makes of these downstream demand projects. Let us say, like fertilizer plants, petrochemicals it's a decade, long return, so we need to have competence or what the world looks like
in five ten years from now
The reason why that is so uncertain and go back to your question of what does policy need to do? The United States needs to Heaven
very clear environmental and energy policy in the EU.
For that is to create stable, incredible rules that allow investment to come in and have confidence about what the future will look like. You know an example
We'd be rules around fracturing in water use wheels. So therefore, people can be confident that we're not gonna
racking be banned tomorrow, but be done safely, so I can make investment sedate to consume.
Cheap gas, no one would be around. Other ones include
methane emissions methane.
This is important because it far more potent than co2
It comes out of the gas process if we really want to hardest natural gas. We
need to do it in the context of containing methane emissions pipeline approvals, expedite
is clearly having access to transportation will be very important and be able to develop out the demand side. The fourth point:
we'll have to do with the transportation fuels right now.
When we look at ethanol made from
natural gas and it is cheaper than ethanol made firm corn. We cannot use it because of the renewable fuels standards, so shifting
rules like that to be build accommodate the new technologies, in other words, that the policies have not kept up with the technology.
And finally power generation focusing on land,
contracts and create an environment that stimulate investment in excess capacity.
Just part of the new oil order is a real shift in geopolitics, the United States over
position of being the swing producer with more ability to influence global oil prices. Then it is seen in decades
and oil producing nations, the OPEC, countries and others of sudden
themselves would reduce status. Hauser policymakers, here in the United States and in OPEC, be thinking differently about the new oil order. Actually, the way I could describe it is
oil is OPEC's run in one of the reasons for that it is relatively high costs production, so it will support prices in that city.
The eighty dollar Braille range on a longer term basis, which Forum and OPEC perspective, particularly core OPEC than is actually a good thing, and so, when we look
The fact that the OPEC meeting resolved with no cut it should have been expected one. We,
get shale scalable, which is the whole point
before that. The spy curve is flat, which means that OPEC no longer has a say
pricing power that had before so it wants to be a second mover, not a first mover, so from that perspective it made sense. They get other made this point before shale as their friend it supports prices at relatively historically high low,
and then I think the other that the third issue is again. The market structure of the industry has changed its far more competitive than it was before, and that has several implications. One. It means that prices are likely to be more stable. We look at
pull back. Yes, it feels relatively large, but on a historical basis. It really is, you go
away, oh nine. We saw prices drop from a hug,
forty seven down to thirty two or even back no seven. We went from seventy seven to forty nine or a three way from forty down to seventeen. So historically, this is
the least smooth, orderly, pull back and prices, and I think, when terms to think about the long when health of the the economy, the fact that we taken out that volatility is actually a good thing. It will create a much smoother environment so on on the debate today, between weather
The the price move we have seen recently is demand driven or supply driven you'd, basically take the latter
so when you look at it, we have to go back to the midnight teenaged and have another supply driven market, and that's that's important because supply events.
Very different in demand. Events in the sense that supply events you can see happening out over the horizon. Most of them
surplus in the imbalances we're all referring to that's been driving. Prices are likely to occur in two thousand fifteen and about they're, not here today in contract,
Demand event hit you over the head. Like a sledgehammer,
You don't know when they're gonna happen inside it
they carry a dynamic, the creative, quick surplus market in the way them
get prizes, them are very different. Essentially, the spot prices call
jobs in new blow out. The spreads on the forward curve of the commodity markets on we're not see that this time, that's pricing in the forward, because it trying to kind of price the future
so we look back at other supply driven events, which, I would argue the beginning of the two. Thousands with another supply by market
it was driven by long term. Price is not by the front, because we looked out in the future.
See that the re unbalanced I want emphasise is that the markets are doing their job. We actually never did
see those severe imbalances that we're forecasted during the two. Thousands, because the back in prices basically made himself negating
Similarly, what we're seeing right now is the market trying to create adjustment before the surpluses ever arrive. But again I take your point.
Supply driven, bear markets are very rare and we don't see them very often, and so we're going to learn a lot through this process, and I think the next six months are going to be particularly fascinating. What role does the dollar play in all this right now? The feds
looking at a pretty strong: U S, economy and yet lower
prices me lower inflation at a time when they're trying to encourage a more inflation. So what
what what is it as the FED thinks about higher interest rate environment? What does that mean for the dollar answer? First question: actually over the first question, and the answer is: is this good inflation?
deflation about deflation, I always view supply driven deflationary pressures as being good, and I think what you have to balance it against is the improvement in GDP. You get out of it and I think that's one thing: that's missing in many. These debates over the concerns about oil prices are falling, occupies.
Because it's a supply driven events are good things for everybody involved, except for obviously that, though, the producing countries, so that that aside, let's talk about big time,
it's a big attacks. Kind example: regressive tax got in that people on lower incomes, tenders,
more of their discussion a on fuel. Absolutely absolutely, let's go
the question is: how does the dollar dollar play into this I've? Always,
the argument that oil causes the dollar. The doll
causes the non energy markets and must go over. What why I make that make? That argument is that when we think about
in oil and by the way, this argument is starting to have less relevancy. As a: U S move towards energy independence, we go back pre, two thousand and eight the,
this was a net importer of fourteen million barrels a day of oil products against the market, there was little bit above eighty miles
Aspects of very large share of the world's supply was going into the? U S so what happens when oil prices rose? The
out of dollars leave in the United States would increase, so it would put downward pressure on the dollar relative to other currencies. That's the first point. The second point is that many of them
in countries never repatriated those dollars back in the. U S, they went into Europe into Asia and other parts of the world which did
bit up the euro. Are the asian currencies relative to the? U S dollars then
third leg of this is that the easy be target headline inflation, while the Federal Reserve targets core inflation. What's the difference between the two oil prices, so when oil prices would rise the easy b, we become more hawkish relative to the FED. So this all pointed to the cause outgoing from oil to the dollar.
How do I make glue the point that the dollar drive to non energy markets like metals and agriculture, and the reason for that has to do with the structure of the industry's when we think about Boyle? It's a very cap
Intensive industry with very relatively low variable costs, but the way like to think about it is you had spent a lot of
RO expenditures to draw your well tied into the pipeline grid.
All you would be left with a donkey going up and down the Middle EAST feel no labour, and so very capital. Intensive low variable costs incurred.
Dress when we look at the non energy markets particular thus take mine for metals. I copper your capital costs or dig in the pit after the pit is been dug. Now you have very large costs,
both trucks, minors and everything, and guess what those costs are in local currencies. Let's say like the chilean pace of into giving them
Also variable costs or local capital costs
are going to be? U S dollar terms. So now what happens when
say: the dollar weakens and
to lay and pay so begins to strengthen the cost
pain those minors. Those truck drivers all go up, so the cost structure of an energy market rises
as the dollar begins to weaken and so on,
get the that
cause, always your oil to the dollar dollar, to the non energy markets. Now everything is working in reverse, so is it
I am peso begins to weaken what happens at the cost of producing copper. It goes now. I was
Australian dollar begins to weaken the cost of producing iron ore goes down.
And so now the input costs are producing oil or Belarus. Like today, the cost of steel, the CASA seem it and everything
is far lower than what it was a year ago. So it's a review.
In dynamic? Now to the downside Jeff over the last? Several
months. We ve seen renewed commitment to international policy on climate change, so exactly key
oh accord, although the Kyoto accord in pretty much actual policy, but a lot of countries and making voluntary commitments. How is that
liable to play out give in what's happening.
Ram lower oil prices, which, presumably over time will mean,
less pressure around energy efficiency. I don't think they're they're they're going to debate because we look
most countries in the world have done some for what we call cafe. Standards in which
She's out of automobiles, readmissions out of our generation is, is being
August are in fact the way we like to think about it. It's a part
industry, so we think about
you want to minimize emissions and minimize costs at the same time, do the joint problems together and find out which technologies are superior when we think about an hour longer term basis. I dont think that
the debates gonna go away. Our I think, another potent point about the debate me saw this with the commission's programme that the administration put in place last may is that the Euro
the Americans approaches very differently. The Americans do performance targeting,
it is basically say hey. We want to reduce emissions by thirty percent by two thousand and twenty from the two thousand and five levels. Anxious twenty three excuse me,
as opposed to giving rules on how it's going to be done, so we think about the European Emissions trading scheme and it was well defined set of rules that can be
now. I'm not gonna get a debate whether the right or wrong, but the important point here is: it takes away the uncertainty in terms of thinking about make
because they knew how to navigate the rules in Europe for right or wrong, but it took out some the uncertainty when we think about the approach that the Americans are taking, it still
a lot of uncertainty, it leaves it up to the states in terms of creating how they're gonna actually respond to these new missions. Targeting
and so in terms of thinking about you know, mix going forward, focusing on creating
less uncertainty to stimulate the investments and speed up the process more fairly,
policy, perhaps a little less discretion the states. That's it.
This addition of exchanges, the Goldman Sachs thanks for joining Jeff, and we hope to see you again next time- objects
and thanks for us, the Spock asked was recorded on December fifteenth two thousand fourteen despots cash should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation
from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed them.
Expressed in this part, castor, not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too that listener, nor to constitute such person a client of any Goldman Sachs Entity.
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