Iran oil shock 'worst energy crisis of our lifetime'

Hi Eric. As of this recording the war in the Middle east is headed into its second month. The Strait of Hormuz remains closed. I have heard you call this the biggest energy crisis of our lifetime. We have yet to see what those lag effects are going to look like as those final shipments have just reached those final destinations to unload that cargo. What might this look like? Absolutely, this very clearly is the worst energy crisis of our lifetimes. We have lost over 11 million barrels per day of production. Inventories have fallen by over 300 million barrels. LNG liquefied natural gas flows are down 20% with long standing damage. And so there's an immediate impact. The worst is yet to be felt. The last of those ships have been reaching dock. We now have reportings of actual product shortages appearing in and parts of Asia. We think that we're days to a week away from that starting in Europe and weeks to a month seeing that happen in the United States. And so much of the buffers, be it floating storage, sanction barrels, et cetera, are now being used up. And the gravity of the challenge is too big for any public policy to make up for, including SPR releases. We really, really do need the straight opened up and, and we opened it up, we need it opened up now. We are starting to see those prices at the pumps slowly climb. Airlines including all kinds of surcharges when it comes to air travel. Where does that price point go when it, when you take a look at Brent and wti, we're approaching a scenario within the next month where the world will need to lose 10 million barrels per day of demand via high oil prices. This is essentially like Covid inverted, the necessary oil price to achieve that. Historically when the oil burden on global GDP so the amount of money being spent on energy on oil reaches five and a half percent. That is when the economy really starts to hit the wall. That would be roughly $177 WTI. And so that's. This is not a price that we want. It's not a price that is really great for energy stock price performance. But that is the logic. If the strait, nobody sober minded ever thought that the strait, given just how profoundly important it is to global energy flows, ever thought it would be closed. But here we are. And so inevitably you will need demand destruction because we're eventually reaching a point where irrespective of price, you will not be able to fly, you will not be able to fill up your fishing boat as being reported. Right now let's talk about stockpiles and those Limited supplies should the strait reopen and what that might look like. Yeah, they're essentially used up. So we had Donald Trump unsanctioned Iranian barrels, unsanctioned Russian barrels. At the same time Ukraine has been massively hitting Russian oil infrastructure, both export terminals, refineries, etc and that really speaks to the long distance dated challenge of this as well. Let's just assume the straight opens up tomorrow. As we have had so much production shut in, there's a significant risk of reservoir damage, of long standing production issues. When we look at countries like Iraq, which is shut in over three and a half million barrels per day, there's speculation that as much as a million of that is potentially subjected to reservoir damage. And so there's going to be a very long standing challenge. We'll also have to replace depleted inventories. But I would suggest floating storage has been largely fully normalized. When we look at the SPR release globally, it is at best 3 million barrels per day, more likely less than that. And so again when we look at when flows are down 15 to 17 million barrels per day, when production is down 11 million barrels per day, it just, it speaks to the gravity of the situation and it's going to be getting worse by the day. Let's bring the conversation to Canada here at home. How does Canada accelerate that, that new export capacity? There have been all kinds of conversations with respect to pipelines and I'm wondering whether or not pipelines are the bottleneck that ultimately are preventing us from getting that new export out. Yeah, our exports are essentially fully maxed out as you point out. And so any solution is really longer term in nature. There are, there are some short term fixes to either expand existing capacity, to expand further between pipelines, etc, adding compression. But frankly, Canada needs a new oil pipeline. The government of Canada needs to fully fund it. There's no private solution for this. It's in our very out of national necessity because we're bottlenecked. And in a world where the demand is going to grow for decades to come, in a world where US shield growth is largely over, non OPEC production is reaching its peak. OPEC for whatever spare capacity they do have is now bottlenecked. And even when the street we know the strait will open up, the question is when? But beyond that, what value is OPEC's spare capacity when the majority of it is subjected to a $30,000 drone shutting it down again in the future? And so Canadian energy, especially given the long dating nature of our reserves, in a world which is short oil, the Value of that is growing by the day. It's just, it's a necessity to expedite the talk and actually see some action in the coming months. To begin the process, there is a proposed pipeline framework, an MOU between Ottawa and Alberta and by early accounts it seems that deadlines will not be met. Two part question number one, what does that signal to you? And number two, from an investor confidence perspective, what does that say when it comes to the horizon and energy assets? So if you were to speak with oil CEOs, they would be the first to say we were under no timeline, we are under no deadline. It's really a talk between politicians. It's going to be the oil companies that make the decision. I think a key hindrance is pathways. This is a 24ish billion dollar project which is really designed of a world in the past, this notion that the world is strictly focused on a decarbonized barrel, etc. Fast forward to today when there is a scramble, a desperate scramble for all forms of energy. There's absolutely zero focus on that. So to, to inhibit the cost structure of Canadian companies with this project I think is a very significant barrier to getting oil companies on side with the desire to grow production. So that's really the starting base. Secondly is going to be a framework that de risks such a project enough to bring in private capital. It is challenged given the magnitude of costs, roughly 35 to $40 billion to see that as a solution. Two, you asked about timeline. Our best estimate is a brand new pipeline would take as much as eight years to build. And so we need a shorter term solution that's likely going to be maybe a Keystone XL 2.0 to bridge that gap in the term. But ultimately, given the increase in global demand over decades to come, there is absolutely a business case to construct another 1 million barrel per day pipeline to the west coast that would circumvent the United States and diversify our customer base. Eric, I'm wondering, you have your ear to the ground and I'm wondering what you are hearing from these oil companies. And when you take a look at what's happening with their business models, their I guess their balance sheets, their assets, and when you take a look at security of supply, what are you seeing on the ground? I think the increase in the oil price will not result in a meaningful increase in capital spending this year. Incremental free cash flow will go towards deleveraging, likely to increase share buybacks as well. Most companies are looking out to the 2027 and 2028 strip price for oil as a signal in terms of whether there is market demand for to increase production. And at the same time, investors such as myself still massively prefer share buybacks over absolute production growth. There will come a time when we need to step up, when there's a desperate call for incremental barrels. That call is just not today, and so I wouldn't anticipate oil companies to chase the political spike in the oil price with increased activity. Instead, that windfall is going to be flowing to shareholders in the form of buybacks and deleveraging.