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March 16—As most of the world shuns Russia and its oil in the wake of the Ukraine invasion, the implications are vast for reduced global supply and skyrocketing gas prices. Will the harsh reality of international energy codependence spur the transition to green and clean? Which solutions like increased drilling and Keystone XL are in—or not in—the pipeline and why? To walk us through this and more, Chief Investment Officer Tony Roth speaks with Tom Seng, director of The University of Tulsa’s School of Energy Economics, Policy & Commerce and author of Energy Trading & Hedging: A Non-technical Guide.

Please listen to important disclosures at the end of the podcast.

Will the Oil Supply-Demand Price Scourge Spur the Transition to Green Energy?

Tony Roth, Chief Investment Officer, Wilmington Trust Investment Advisors, Inc.

Tom Seng, The Mervin Bovaird Professor of Energy Business and Director of the School of Energy Economics, Policy & Commerce at The University of Tulsa

TOM SENG: Russia exports about six million barrels a day. As a planet, we consume about 100 million. So, yes, there were fears that this 6% would come off the market and we already have a very tight supply/demand imbalance. We are short supply and have been so for maybe a year now.

 

TONY ROTH: That was Tom Seng, Director of the University of Tulsa School of Energy on how the Russia/Ukraine conflict shifts the conversation surrounding energy supply and demand dynamics.

 

Welcome to Capital Considerations, the market and economic podcast that’s fully invested in your success. I’m your host, Tony Roth, Chief Investment Officer of Wilmington Trust.

 

As Russia faces increasing isolation over its invasion of Ukraine, the implications continue to reverberate through global markets. Nowhere is this more top of mind than in the energy sector. Russia is the world’s third-largest oil producer and provides nearly 40% of all European Union natural gas, making it a massive player in the European energy space. Uncertainty over continued supply is being felt by consumers globally and is propping up already high inflation concerns. How should we be thinking about a possible future without Russian energy exports and what impacts might that have on our economy and inflation?

 

To help us unpack how to alleviate supply/demand imbalances and think about these issues generally, we are very fortunate to be joined by Tom Seng. Tom is the Mervin Bovaird Professor of Energy Business and Director of the School of Energy Economics, Policy, and Commerce at the University of Tulsa. He is also an instructor of energy investing and trading at numerous colleges across the country. He has over 30 years of experience in the natural gas and natural gas liquids industry, including trading, risk management and hedging, pipeline and midstream operations, transportation and storage, and risk control. And, in fact, he’s written a book, Energy Trading & Hedging: A Nontechnical Guide, which was published in 2019. And for anybody that really wants to understand how the energy markets operate in laymen’s terms, it’s a great read. Tom, thank you so much for being here today.

 

TOM SENG: Thanks, Tony. It’s my pleasure.

 

TONY ROTH: So, Tom we’ve set the stage by dimensioning how large a producer Russia is as it relates to Western Europe. And it’s not surprising, given our relative energy independence that here in the U.S. just in the last couple days or so we have sanctioned all Russian energy. So, no Russian energy products can now come into the U.S., be purchased by U.S. companies. Western Europe doesn’t have that luxury from an independence standpoint, energy independence, they haven’t done that.

How do you see that evolving? Do you think that as the political or moral difficulty of watching what’s happening in Ukraine continues to ramp up, they’ll be able to maintain that, if you will, deal with the devil? Or do you think that at some point that may actually turn the tables, and which would have a real crippling impact on potentially their economy and a profound impact on energy prices. What’s your thoughts on that to start the conversation?

TOM SENG: Yeah. I think, Tony, you know, to your point, it’s, I think it’s been the escalation of the violence in Ukraine. I mean the initial invasion, oil prices spiked because of the fear of what we’re talking about right now, would in fact the exportation of oil from Russia be basically boycotted. So, you’d be taking those barrels off the global marketplace.

But I think as, you know, we see more and more of what’s happening in terms of civilians being targeted, I think you’re starting to have countries, or at least I hope, look at the moral situation and say, you know, we need to do more than we’re currently doing. The financial sanctions, you know, basically were first rounds types of initiatives. And I think now it’s going to have to be, okay, enough is enough.

Again, no one knows that this will stop Putin. But I think it’s one of those where given what we’re seeing it’s kind of let’s do everything possible to maybe thwart his action in Ukraine.

TONY ROTH: Well, because it’s sort of ironic, right, that the markets, to your point, Tom, have moved upwards not because energy’s been cutoff, although now it has been for the U.S., admittedly. But we got to $125 on oil before that even was announced or decided. And so, we’re actually putting more cash in the pocket of the Russians just based on the activity, yet hadn’t really had a significant reduction in the flow of energy from Russia. So, that’s sort of the irony in the situation at the moment.

TOM SENG: Yeah. That’s exactly correct, you know, because again you’re, when you talk about oil prices, you are talking about, right now, April futures on the New York Mercantile Exchange. And so, yes, the traders, I mean they’re emotional human beings. They react to fear. And so, there was a, to your point when we ran up to $125–$130 there was a lot of fear factor of the curtailment of Russian oil. That’s not happening.

Russia exports about six million barrels a day. As a planet, we consume about 100 million. So, yes, there were fears that this 6% would come off the market and we already have a very tight supply/demand imbalance. We are short supply and have been so for maybe a year now.

TONY ROTH: The heart of the matter is going to be really how this all impacts U.S. pricing dynamics. But let’s just stick a little bit longer on Russia for a moment, which I’d like to talk a little bit about foreign capital reserves. And, what do you think the implications are for Russia’s foreign capital reserves if countries stop importing oil?

It’s really interesting to see that Russia is not, has not weaponized their provision of energy to the West given the massive sanctions that have been imposed on Russia. They must desperately need these foreign capital reserves that are coming from the sales of the oil, particularly because a large component of their foreign capital reserves were held in these countries that are sanctioning them and they no longer have access to those legacy foreign capital reserves.

TOM SENG: The estimates are upwards of 40% of the revenue that Russia gets is from its energy sectors, the oil and the natural gas. And, yeah, not having access to those capital reserves, the question now becomes, you know, so if there’s a ban and if countries do, in fact, boycott, whatever they’re able to sell, whether it’s to China or, you know, another country willing to take their barrels, are they going to be able to expand their operations?

They’re not going to have access to capital. How can they? You can’t continue to produce at a set level unless you’re constantly replacing reserves and increasing the production that you have.

TONY ROTH: One of the things that’s really interesting to me about this dynamic is that I think of oil as the ultimate fungible commodity. Now, of course, there are different grades of oil. There’s the really thick stuff and then there’s the light stuff that comes out of Saudi Arabia.

But just humor me here for a moment. Let’s say today China is purchasing a large proportion of their oil from the Saudis. Can’t China just turn around and buy Russian oil instead and the Saudis could turn around and sell their oil to Western Europe? Everyone’s happy. Everyone gets their oil. Everyone gets paid. We’re not happy that Russia’s getting paid but at least we’re not buying their oil. Is that possible?

TOM SENG: Yes, it is. Yeah, most definitely. Yeah. An arrangement like that would probably be one of the, you know, sort of the cleanest and fastest ways to have things happen.

But, I think what we would find though, at least we would hope, Tony, in this day and age with, you know, everybody knowing everything at every second of the day, that somehow it would be figured out that the Saudis were facilitating this particular arrangement. I don’t know that we would have leverage over them. But I think at least would be brought out that the nature of those barrels essentially were allowing Russia to continue to export.

TONY ROTH: I suppose I’m asking from the perspective that if I’m a Western European politician, why wouldn’t I just say, okay, we’re done with buying Russian hydrocarbons. And, yes, they provide 40%, but we can source them elsewhere. We can source them from the provisioners today of Chinese hydrocarbons, because know the Chinese will just by the Russian instead. Or is it more complicated, because in order for them to get the natural gas that they really need, the only place they can get it is through the pipelines that have already been built from Russia?

TOM SENG: You bring up a good point, because there is a different, obviously a difference between the exportation of the oil out of Russia and the natural gas. So, yes, the, you know, the – I think there would be ways around the movement of oil out of Russia. Yes, you could have a proxy like China and Saudi Arabia. And to your point, Western politicians, they may say, yeah, as long as we’re getting oil and what —the label on the barrels we get doesn’t say Russia, you know, we’re okay with that.

But to your point about natural gas, yeah. The original Nord Stream pipeline, I mean there’s a stranglehold there on Western Europe and has been for a long time. There was conflict years ago between Ukraine and Russia. Ukraine wanted a certain tolling fee because that pipeline runs through their country to get to Western Europe.

And so, of course as you know, Germany has basically decertified Nord Stream 2. They don’t want that additional natural gas coming to them from Russia.

TONY ROTH: One of the things that really surprised me, Tom, is that the EU has now announced that they’re going to decrease by the end of this year, in nine months, their reliance on Russian gas by 80%. And I don’t see how that’s feasible. In other words, I could understand how they could replace the oil flow in the way that we’ve talked about because oil is more easily transported and substitutable from a transportation standpoint. But the gas, which goes through those pipelines is not. And liquid natural gas facilities take years to build. So, how could they possibly accomplish this stated objective?

TOM SENG: Tony, I have to agree with you on that. I don’t know how it’s feasible. It would be interesting, you know, was this a cocktail napkin number? I mean how did they come up with this? What’s the detail? Where are the supplemental supplies going to come from?

And again, to your point about liquified natural gas, I mean United States happens to be the number one exporter now of LNG, but we are at max exportation capacity. Now, we are, you know, we are commissioning new trains every few months. We can certainly increase that supply. But, yeah, this is not going to happen within nine months. I just don’t see where the additional supplies are going to come from that quickly to be able to say to Russia we don’t need any of your natural gas.

TONY ROTH: So, let’s turn to the main event of this conversation, which is the pricing dynamics within the U.S. Are you surprised at all that oil prices, West Texas crude, has moved as quickly as Brent? Because we only import 8 or 9% of our overall energy or oil from Russia.

But it seems that the increase in price in the U.S. maybe is a little ahead of itself because our supply is not being impacted that dramatically. Or is it because of the transportability of the oil that you’re only going to see so much of a divergence between Brent crude and West Texas, such that the U.S. can’t really just decouple from the overall global situation?

TOM SENG: And that’s really it. It’s one of those things where when people talk about energy independence, that always bothers me, because it’s an inaccurate term to use. You know, we could consider ourselves energy sufficient. But currently, we are, we’re having to import about five million barrels a day, the bulk of which does come from Canada, which is a good thing.

So yes, what we’ve seen is, again as I mentioned, the fear factor among the traders that shot us up to $130 and then back down again was will these barrels from Russia actually be curtailed. And then, the Biden administration, I think the significance of that was, I really believe, they were looking for other countries to get on board. So, in other words, we had fear, fear, fear and then Biden took action. Although, as you pointed out, we don’t import much from Russia at all. In fact, the numbers that were out there really were total petroleum and petroleum products. From a raw crude standpoint, we got very, very little oil from Russia. But there were refined products delivered to the West Coast, for instance, gasoline, diesel, those types of things.

So, you had these, the larger sounding number out there. So, yes, from the standpoint of the United States this is a minimal impact. But I think the signal was somebody needed to start this ball rolling and I think we expected EU countries and the UK to jump on board and say, yeah, we’re going to boycott Russian oil as well. And we haven’t seen that. And so, we’ve kind of settled back down.

But because we are an importer and we are an exporter, these global prices do, in fact, impact the price of West Texas Intermediate here in the U.S.

TONY ROTH: Let’s say that the rest of the Western world that’s participating in these sanctions does come to the conclusion that for moral reasons it needs to stop buying Russian oil and does so. Where does that take the price, do you think both at West Texas and on the Brent price indicators?

TOM SENG: Looking back at the action that took us to $130, I would say we would get there fairly quickly, $130 WTI and maybe a little more than that, $133–$135 Brent. But, again, you know, as you know the way these markets are, there’s the reaction and then we have to step back, let the dust settle and see what the reality is.

So, getting back to what you and I spoke about earlier, so EU countries come out and UK says, you know, we’re, we are not going to import anymore Russian oil. Well, we’re going to have to figure out does that truly mean that those barrels are going to stop flowing into the global market or are they going to flow under one of the scenarios that you and I talked about? What there will be, there’ll be the initial reaction of, okay, these barrels, which as far as we know the signal is these barrels are coming off the marketplace at a time when we’re already supply tight.

TONY ROTH: I guess it’d be unfair to ask you at this stage if you have any read on whether you think these Western countries are going to move in that direction.

TOM SENG: I don’t know. We are asking a lot of Western Europe. It’s still wintertime over there, you know? If this was April or May and you had milder weathers, they might be able to get by with not so much reliance on Russian crude and Russian natural gas. But we are asking a lot of them.

But I think, at what point in time does what is happening in Ukraine become morally repugnant enough to say, okay, we have to throw everything we can at him. Here’s a tool, so to speak, that we’re not fully utilizing. Let’s at least give this a try.

TONY ROTH: So, let’s go back to the U.S. One of the topics the media likes to talk about a lot is Keystone. How important was, in your mind, essentially the cancellation of the Keystone pipeline as it relates to the pricing dynamics of the U.S. market? If Keystone had been completed, would we be in a position today where we could much more readily keep our domestic oil prices down by getting more flow from Canada?

TOM SENG: The simple answer is yes, you are correct. Honestly this is a personal moral dilemma. I am a protect the environment type person, but I’m also a very practical person and I look at hard data.

What we were talking about in this scenario was, you know, and you alluded to it earlier, Canada produces bitumen, which is a very thick molasses-type of oil. It comes from their tar sands. The issue is they have to separate that tar sands using steam. That steam is created using natural gas.

So, the environmentalists that objected to Keystone XL were mainly saying essentially this process increases greenhouse gases. And so, the nature of this oil we would get from Canada is harmful to the environment. There are also issues, of course, of, you know, pipeline safety and the industry itself is to blame for the reputation of things like leaks and other issues there.

However, my personal opinion is twofold. One is this was going to be a brand new pipeline. So, you use brand new materials, the latest technologies, monitoring systems, safety, hopefully lessons learned.

The other thing is 70% of the oil we produce in the United States is this shale oil and you mentioned earlier, Tony, light and thick, you know, so light and heavy. The shale oil is the light. So, refineries can’t extract as much refined product. They can’t make as many products out of the shale oil. However, the ideal circumstances happen to be that we bring in the Canadian oil and, again, a lot of people do not understand there is a Keystone pipeline in place. The controversial one is Keystone XL, which was an expansion of their entire system.

So, presently we are getting this bitumen delivered to Cushing, Oklahoma, just down the road from me. There are tanks at Cushing that are dedicated to take this very thick molasses-like oil and blend it with the U.S. lighter shale oil to get the grade of oil that the refineries would like to see and what they need.

So, again, yes, I am a person who believes that the pipeline should’ve been built. It would’ve been another 800,000 barrels of oil added to our supply and it would’ve been perfect to blend with the shale oil that we have.

TONY ROTH: It would’ve been 800,000 a day incremental.

TOM SENG: Correct.

TONY ROTH: Now how many barrels a day do we get currently through the baseline Keystone pipeline?

TOM SENG: Well, they bring in about almost a million barrels. Some of it’s diverted to refineries in the mid-continent and the rest of it comes down to Cushing.

TONY ROTH: So, this would’ve doubled our capacity essentially or our resources as it relates to this kind of commodity from Canada.

TOM SENG: I mean I’m sure you saw the press conference the other day. You know, Jen Psaki was asked about that, and she said, you know, her point was, well, the barrels are still flowing. Well, you know, that, that’s a bit misleading.

The fact is, yes Canada didn’t say, oh, the U.S. environmentalists have a point; we’re just not going to increase our production of bitumen anymore. No. They are producing it. There’s the Trans Mountain pipeline that will basically move that to the western ports of Canada and they’ll ship that to Asia.

TONY ROTH: Is there any prospects for the decision to be reversed on Keystone? Or that ship has sailed and it’s just never going to happen?

TOM SENG: Well, again, you know, right, you and I can speculate about how President Biden would approach it. But I mean he was dead set on doing that day one. I don’t see how he would reverse it. Yes, I’m sure there’ll be pressure from a lot of congressmen and senators to rethink that. But, you know, as President of the United States, you say, okay, maybe I was a little bit hasty. I just don’t see that happening, I’m afraid.

TONY ROTH: So, what do you think the implication is for the green movement? In other words, I mean when we’re watching TV now, right, and we’re seeing the reaction of the administration to the fact that people are paying $100-$150 to fill up their, the vehicles and the administration’s saying, well, then you should buy an electric vehicle. On the one hand as a green person myself, I think that’s exactly the right answer. But on the other hand, it seems quite tone deaf, if you will, as it relates to trying to get through this crisis.

And just to remind everybody, we are totally nonpartisan here on our Capital Considerations podcast and I’m only trying to describe things in a sort of a neutral way based on what we’re seeing happening.

TOM SENG: Personally, Tony, I mean, you know, I’m essentially an oil and gas person who came into academia to teach about the industry. I have a residential solar system at my house. I believe we need to get there. The transition is happening.

Let’s back up just prior to the Ukraine invasion and let’s go back to February of 2021 and come on through to February 2022. What I observed was Mother Nature kind of smacking us in the face and saying, hey your timeframe for the energy transition moving away from fossil fuels into more greener energy sources is not practical. We learned that in Texas. We learned that in the UK and Europe over the summer. We learned it in California over the summer.

And now, you have a situation that is even magnified. Those events I’m talking about and this current situation, I think people are finally waking up to maybe they don’t know exactly how much they rely on fossil fuels day to day. But I think they have a bigger appreciation of how much they themselves consume on a day-to-day. And as you know, if you’re talking about energy, what’s the most visible sign of energy prices? It’s that gas price.

TONY ROTH: So, one of the things that’s been I guess disappointing in a way when you think about the whole ecosystem and how it’s evolved over the last few years is that—is the volatility, if you will, that the pandemic has brought to the situation, But we were sort of on this path of increasingly producing more and more good quality oil from our own shale fields. And then we had a scenario after the pandemic where we almost got to the point where, you know, people couldn’t give away the oil because there was nowhere to store it.

And it really, I think spooked in sort of a deep way producers to the point where today, even though oil is well over $100 they don’t want to deploy assets to capital to increase production

TOM SENG: It’s one of the things that I have not seen the media cover very well. Let’s go back a year ago and, to your point, right, in—we had negative pricing in April of 2020. There were bankruptcies. There were huge layoffs in the oil and gas industry. It looked like it was flat on its back. You know, it looked as though we were slowly but surely weaning ourselves away from fossil fuels, but all of a sudden it looked like, wow, this is the death knell.

But what happened instead was we, again about a year ago we started to reopen up again, states, countries. And so, we started to see demand for energy across the board increase. But, again, you pointed out, Tony, the industry had been devastated. So, immediately it’s like, well, they’re out looking for sources of capital, they’re looking for labor. So, we had this slow sort of rebound. We went through $60 about a year ago. Then we got to $70. Those are healthy, very healthy profitable levels.

But what happened was, the investors behind the publicly traded oil and gas companies stepped in and said, okay, wait a minute. Prices are rebounding, but the one thing you’re not going to do is drill baby drill and you’re not going to go into debt to finance your capital expenditure programs for drilling and production.

So, they’ve restrained them. They’ve pulled them back in. They’ve said here’s what we want to see. We want to see free cash flow and with that free cash flow you’re going to pay down debt, you’re going to pay us dividends for a change, and if possible, you’re going to do share buybacks to appreciate the value of the shares. After all, we are the investors.

And so, I find it interesting that what we’re seeing, like with that press conference the other day or just in general, the America Petroleum Institute, talking about how it’s the Biden administration holding back federal leases that is the problem and that, quite frankly, is not true. These publicly traded oil and gas companies, the investors want these things and that’s what they’re responding to.

So, it sort of became almost the perfect environment for them. If you think about it, slow production growth at a time when demand was taking off, your margin per barrel goes up, you have more free cash flow, you can satisfy the wants and needs of your shareholders. So, you know, why would you change anything?

Right now, in Houston is what’s known as CERAWeek, Cambridge Energy Research Associates that was founded by Daniel Yergin, who wrote The Prize. And there’s a lot of really good news coming out of that. And but some of the more interesting things are these side talks that are going on.

And I noticed the other day the CEO of Pioneer Resources was asked this question, why aren’t you picking up production, why aren’t you ramping up? And he kind of alluded to capital resources, which again they have, they’re reporting tons of free cash flow. You look at any earnings report right now of these publicly traded oil and gas companies, the first thing they’re talking about is the free cash flow and their ability to pay dividends.

The second part of what he said is, we need to speak to the shareholders. So, you could kind of tell from that alone, Tony, they’re hesitant to spend more on drilling and production because there might be negative pushback from their respective shareholders.

I find this somewhat baffling. If I’m running a business and if I’m producing something like fossil fuels and I know that society in general wants to wean away from my commodity and I have an opportunity right now to sort of, make hay, why would I not do that? This ballgame could be over in ten years for fossil fuels, meaning we could see a dramatic drop in the use of fossil fuels in 10 to 15 years and here’s your opportunity to produce more, make a profit, and then, let the chips fall as they may in the future.

I think part of what my dilemma is, do the shareholders not understand where this free cash flow is coming from? They have to produce, and they have to sell the oil to have free cash flow.

TONY ROTH: You know, it sounds like the, in a way it sounds like these companies are behaving irrationally. The markets are not actually operating efficiently because some companies should be willing to break out and start to really ramp up production in this environment, unless they just don’t believe the prices, right, if, in fact, they feel that any day now there could be a truce and the prices could come back down. But even if they came back down, there’s still an imbalance even before the war such that they should be producing more.

TOM SENG: I am a big proponent of energy hedging, Tony. In other words, if these producers, right, if they decide, hey, you know what? We are. We’re going to go out and we’re going to lease some rigs and we’re going to take some of this property that we have where we have the leases, and we are going to drill then start producing. They can literally lock prices in today for future months. I mean that is what the New York Mercantile Exchange Futures Market is all about. And when we’re talking about West Texas intermediate being at $110 today, that’s the market that we’re talking about.

A producer right now could lock in a price. You’re still around $100 by November. We’re well north of $90 into January of next year. So, the market provides these prices. They just have to actually take action and enter the marketplace.

TONY ROTH: So, in other words, they could actually hedge the downside, and essentially, they’re walking away from free money by not producing more, if you look at it from that perspective. In other words, they could hedge the downside, know they’re going to get $90 to $100 for the rest of the year. But instead, they’re just paying it, paying out more dividends to shareholders instead of taking advantage of that opportunity

TOM SENG: I agree. I think Exxon had I think it was somewhere in like the neighborhood of $9 billion of free cash flow. Okay. So, do you have to take all $9 billion and disperse that in terms of dividends and share buybacks? Can you not say, hey, we have $9 billion in free cash flow and we’re going to take a couple billion and we’re going to increase production. They have huge lease asset positions in West Texas because of the acquisition that they made several years of XTO Energy.

That statement out of CEO of Pioneer Resources almost made me think that they’re afraid of the shareholders, well, we don’t want to rock the boat, everybody’s happy. Well, gee, we’re going to have to check with them and see if they’re going to let us spend some of this money on the nature of what we do as a business.

TONY ROTH: Do you think there is a role for the administration to play? In other words, can the administration or Congress even provide a kind of incentive, tax credit, something to cause this activity to accelerate given the crisis that we’re potentially facing?

TOM SENG: I am definitely a free market person. I hate when the government gets involved. I don’t care who, who’s in the White House. Let’s put it this way. If $110 is not an incentive to drill on the properties that they currently have under contract, I don’t know what is.

You alluded to this earlier, Tony. March of 2020 as a country we were producing a record high number of 13 million barrels a day of oil, domestic oil. We’re at 11.5 and we haven’t moved up much over the last six months. So again, looking at these prices, they are reluctant to basically say to shareholders we’re going to allocate X amount of our free cash flow into drilling and production.

We’re in a crisis. This is not a 10-year plan. We have a crisis. I think it’s the time for these publicly traded companies to come out and say, listen, tell their shareholders, make it patriotic. We are going to spend some of these free cash flow to increase production. We have leases. We don’t have to wait on the Biden administration to release the federal leases that they’re reviewing. We have leases. We’re going to go out; we’re going to produce. Maybe they just say, well, for the 6 months or 12 months we’re going to be very, very active and then we’ll see what happens after that.

 TONY ROTH: Tom, one of the things that we hear a lot about, particularly in the financial media, is the notion of demand destruction. And it’s interesting, because as economists we typically think of oil in general as being and the consumption of oil as being very inelastic, that if you need to fill up your car to get to work, you need to fill up your car to get to work; if you need to fill up your car to go see your parents or your grandkids that’s what you do.

Yet there’s also this narrative around once oil reaches a certain price it results in demand destruction, notwithstanding the inelasticity, if you will, of the usage of these different oil-based products. How do you see that narrative?

TOM SENG: To me the only time that we really used a true term of demand destruction was the COVID lockdowns because it was so far-reaching in terms of commuter miles, driving miles, all of these types of things, air miles. So, I mean fossil fuels just literally got hit. So, I think we are in such a different situation at the present time. The question becomes, so for instance at these price levels are we going to see consumers saying, you know what? I’m going to check the air in my tires. I’m going to get the oil changed regularly.

The Yukon XL, it’s a massive SUV. I mean we like our vehicles and, if anything, right, we have started dropping mask mandates. So, I would look for this summer to probably be the most traveled summer in a few years’ time.

So, I don’t think that these high prices are going to sort of hit the demand side. I just don’t see. I guess mainly, Tony, because we still have this true imbalance of consuming more than we are producing. And until we get to a point where that’s a bit more levelized, then you might see some folks making those choices. But right now, I don’t see that we have any choice.

TONY ROTH: Do you think that this will, when we look back at this moment, this will, we’ll see this as having been an accelerant, if you will, to the green movement? Or do you think that’s not really what’s going to happen?

TOM SENG: I think two things will come from this, at least I’m hopeful. I definitely agree, Tony, we will see an acceleration and maybe some of the things that you were talking about, you know, maybe different types of tax incentives and things. I think we will find ourselves saying, yes, look at this. Here was this global fossil fuel crisis. You know, we really don’t want to have to be in that situation again. I think that will accelerate.

But I’m hopeful too though that we will step back and say, wait a minute, the timeframe. We know we talked about 2050, right? And some companies are pledging, you know, zero emissions in their operations by 2030. That’s only – that’s less than eight years away.

So, I’m hoping we step back and we’re realistic, number one, that we acknowledge as individuals, we acknowledge our own carbon footprint. How much do we as individuals rely on fossil fuels? And that we step back and say, yes, we’re going to accelerate green energy in this country. We are going to slowly but surely wean ourselves off fossil fuels.

But this 10- or 20-year timeframe no longer makes sense, that there’s some lesson learned there that it’s going to be a much more gradual process. The goal is the same, but the timeframe needs to change.

TONY ROTH: Tom, do you think that are we as an empirical matter, are we accelerating today? I don’t mean because of the war. But if you look at the amount of infrastructure that’s going into the country that’s green, whether it be wind or solar or even additional nuclear, and I don’t think any of that’s happening, but if you looked at it as an overall category and you look at the total amount of capacity that’s being installed sequentially year over year, are we on a trajectory right now where that’s actually increasing or have we sort of plateaued?

TOM SENG: No. We actually are increasing. In fact, we saw kind of the largest increase between ’20 and ’21 and we expect that when the numbers come in for last year that, you know, we’re going to see an increase this year as well.

So, if you go back about three years ago, only about 14% of the energy consumed in the United States came from all sources, all green sources, so hydro, wind, solar, biomass, all of those things together. And now that’s up to about 18%. So, we are getting there but, it’s that thing where that has to grow before we can let go of the other energy sources that we are so relying on, which happen to be fossil fuels.

And to your question about nuclear, Bill Gates is backing a, an initiative and there are some others out there that are looking at small scale nuclear power plants, right. So, I think those will grow. I really do. I don’t think anybody is saying let’s just build another one of these 1,500-megawatt nuclear power plant monsters. But I think the small-scale nuclear plants have real potential.

And, of course, as you know, we’re also looking at blue hydrogen, green hydrogen. If we can ever get, nuclear fusion going, then you got that too. But, you know, I mean fuel cells are taking off. So, yes, I believe that we are accelerating our non-fossil fuel energy sources. It’s just that it cannot replicate what we’re currently using. So, we’re kind of playing catch up.

TONY ROTH: It’s funny. One of the stats that I think is very misleading in a way, but it, but I, it’s one that I’ve been guilty of citing is that around 47% of our total electricity in this country is essentially created through green sources, whether it be hydro, nuclear, solar, or wind. And I find that to be astoundingly high. But then when you consider that electricity is only a portion of our overall energy usage and you conclude non-electricity sources, you know, gasoline and automobiles, diesel fuel, all those types of things, green contribution to our overall usage drops to the 18% number that you just cited.

TOM SENG: Exactly. And it is in perspective. I mean I think one of the things that we run into, Tony, is, you know, especially out here, you drive across Kansas or Oklahoma or Texas you just see literally hundreds and hundreds of wind turbines. And so, that’s extremely impressive. And so, people think, gee, we are, we’re creating quite a bit of green electricity. And yet, last year it was only about 3% of our electricity came from all these wind turbines in general.

But again, to your point, we’re going to get there. It is increasing. It is accelerating. The problem is we’re sort of wanting to force fit a situation where we start abandoning fossil fuels as though we really don’t need them because we are growing these others. And yet, like I said, between Mother Nature and the Russian invasion of Ukraine, we’re getting smacked in the face with, hey, timeout. You rely on these more than you think you do right now, and you have these disruptions that occur which are not good for anybody. So, kind of let’s slow down and look at the reality of how much longer are we really going to rely on the fossil fuels and how quickly can we build up the green portfolio?

TONY ROTH: Well, Tom, this has been a terrific conversation, and unfortunately, we have to stop here. But let me summarize a few key takeaways from the conversation today.

One is that this has really been a wakeup moment with this conflict for a lot of the world around energy sourcing, usage, and certainly nowhere more so than Western Europe as it shows their dependence on Russia. And it’ll be really interesting to see how the, ultimately the moral or the ethical question is arbitrated, if you will, or litigated in the world and whether or not these Western countries continue to consume the hydrocarbons from Russia and if, in fact, they do cut off Russia what impact that will have once the market reaches equilibrium and whether or not the flow can just simply go to a different place in the world and then it can be replaced, if you will, in the way that we’ve described. So that, we’re just going to have to wait and see how that all plays out.

Second thing I think is that somewhat unintuitively I think for a lot of Americans, but due to the global nature of these markets and the transportability of oil through big container ships, the conflict over there has a direct impact on us, not to mention of course also because of our sanctioning and embargoing any type of Russian hydrocarbons, not just oil. And that’s having a real impact on inflation here in the U.S. And it is interesting to see how these oil companies are responding and their reticence to want to take advantage of what seems to be, particularly on a hedged basis, I think as you very insightfully described for us, Tom, the financial opportunity that they have to take advantage of these high prices. We’ll have to keep an eye on that and see whether or not they actually recognize that over some time, if the war continues.

And then lastly is the transition to green is probably going to be even further accelerated due to what’s going on, especially in in Europe where they already are ahead of us. But I think that their desire to be independent and disconnected from Russia is going to be even more intense now. And so, I think we’ll see an even greater acceleration in countries like Germany and other Western European countries to green energy.

But nonetheless, they still have a long way to go, and we have even further to go. And so, hydrocarbons are going to continue to play a very critical role in the overall economy in the Western world, in fact the global world for at least another couple decades. And so, we’ll have to just keep an eye on that balance as we move forward.

So, thank you, Tom, for your insights today. It’s just been great to have you and I think it’s been a real treat for our listeners to hear how you see things.

TOM SENG: Thank you, Tony. Yeah. And I think you just did an excellent job of summarizing the issues. I appreciate that.

TONY ROTH: Oh, thanks so much. So, I encourage all of our listeners to go to wilmingtontrust.com for a roundup of all of our ideas. You can subscribe to Capital Considerations, which is available on Apple Podcast, Spotify, Stitcher, or wherever you get your podcast content. And I want to thank everybody again for listening today.

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Featured Guest

Tom Seng
Director of the School of Energy Economics, Policy & Commerce and Mervin Bovaird Professor of Energy Business, The University of Tulsa

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