Subscribe
Share
Share
Embed
Journalist Markham Hislop interviews leading energy experts from around the world about the energy transition and climate change.
Welcome to episode 176 of the Energy Talks podcast. I'm energy and climate journalist, Markham Hislop. I'm very pleased today to interview doctor Phil Verlacher. Now Phil is a very, very well known expert in global oil markets, energy markets. He earned a PhD in economics from MIT in 19 71, worked in the Ford and Carter administrations, taught at Yale University, VP in the commodities division at Drexel, Burnham, Lambert, and of special interest to me, for a time, taught at the Haskayne School of Business at the University of Calgary.
Markham:So he actually does know Alberta and the Canadian oil industry, to some extent. So welcome to the interview, Bill. Thank you. Thank you very much. Now look, I'm really excited about this because there are a number of questions that I've been asking economists, and I've never got a straight answer, but I think you might be able to give me one.
Markham:And here's the first one. So the IEA says that by, well, 2030 or so that global oil consumption is gonna rise to about a 110,000,000 barrels a day. So let's just for the sake of this hypothetical, let's let's assume that. And then it'll start to, probably hit a plateau and and begin to decline. So what happens to prices when a 108 1,000,000 barrels a day meets a 110 barrels a day of supply down the road or a 105 1,000,000 barrels of, of demand.
Phil:So the the the answer is the answer that Harry Truman president Harry Truman hated, and that's a 2 armed economist. It obviously depends on, the success of oil exporting countries to cut production to sustain higher prices. Sometimes they've succeeded, sometimes they've failed. I I can't count the number of times I've suggested my over my career that they were failing when they didn't. And I also can't count the number of times I said they were gonna hold and then they failed.
Phil:But they likely will try to hold prices up. Now the fur the first point I'll say is, you know, the 110,000,000 barrels a day is a pie in the sky number. The we'll be the oil producers will be lucky if demand is a 100,000,000 barrels a day in 2030. It's gonna fall more rapidly. But the the on prices, it will depend on how successful the oil exporting countries are.
Phil:Today, they're falling apart because of the sanctions on Russia. In in 2030, production will be lower because there will have not been a lot of investment outside of OPEC. And so a few countries, Saudi Arabia and the UAE may be holding, prices, may be able to cut production and hold prices up. My guess is that they'll have trouble and that what we'll see is prices plunging at some point between now and 2030, and they'll probably be down in the forties or fifties.
Markham:Okay. That's a that sounds to me intuitively like a reasonable explanation and or and an expectation. And I guess, what I'm getting at here I I would assume, as a noneconomist, that the days of a $100 barrel, a barrel of oil are gone. That will probably as as consumption, declines over time, we'll see that bumping along at 40 or 50, and there may be some, you know, excess supply at times, and the price drops below the cost of production for, you know, Canadian oil companies. But the the days of excess profits, of windfall profits, seem to be numbered.
Markham:Is that fair to say?
Phil:The number of times we will see windfall profits are probably numbered. I wouldn't be surprised to see very high prices 1 or 2 more times in the next 10 years. My biggest concern right now is that Russia collapses. The you know, we we look at what's happening in Ukraine. We look at the failure of Putin's special operation.
Phil:We look at, the anger that a lot of the people have, and you have to say, there could be a revolution there. And that could bring down oil production dramatically. If that were to occur, then you get a, you could get a very significant price spike. How long it would last? I don't know.
Phil:It would certainly accelerate the movement off of oil, but it would give windfall profits to US, Canadian, and Saudi producers in the meantime.
Markham:But if I was a CEO of a Canadian oil company, I certainly couldn't count on those kinds of catastrophic events that worked in my favor, when I'm doing my strategic plans, my business plans.
Phil:Absolutely correctly. Absolutely correct. There is, nobody should plan on a disruption. And even if you plan on it, you should worry, that there'll be a Joe Biden around to make it not such a a profitable event. I mean, Joe Biden has managed, to do, what nobody no other president has done, on that is stop the escalation of prices.
Phil:Prices could have gone to a $150 a barrel if a year ago in March, Biden hadn't announced that the US was going to release a 180,000,000 barrels from the Strategic Petroleum Reserve. Now the oil industry was, has been outraged about this, but I was there. I was part of the group that put the designed the SBR when at Treasury, and our thought was the whole point is to avoid economic disruptions. And having written a book about disruptions and many academic articles, what I will say is this is the the 22, 2022 energy disruption is the first time we haven't seen a serious economic loss, particularly in Europe. The Europeans played this game magnificently, and and they kept prices in the eighties nineties.
Markham:So that leads me to a question. Is the oil industry already disrupted?
Phil:Yes.
Markham:Okay. How do we know that? How do we know? What are the characteristics of a disrupted industry today?
Phil:Well, the first characteristic, if you go back and you look a lot at many industries, is and I I'd rather using, disrupted. Let me use the, word term sunsetting. Oil is sunsetting. And the first sign of a sunsetting industry is the demand for investors for the capital back. Now investors always are looking for a return on capital.
Phil:In sunsetting industries, what one sees investors demand a return of capital. And if you look at the statements that oil companies are making about increasing dividends, increasing buybacks, investors are demanding a return of their capital. They don't they want investment to be negative.
Markham:Okay. That leads me to a question about the oil sands companies in Canada, which are the big, you know, the the Canadian majors as it were, And there's 4 or 5 of them. And I regularly go, and I check their investor presentations to see what they're telling investors. And the the latest one, well, actually, this is true for a couple of years, is they're saying, look. We are going to give you 75% of our free cash flow back in higher dividends and share buybacks, And a couple have even said, look.
Markham:We'll give you half of the remaining 25%, you know, if prices stay up and we're we're doing okay. And I took that to mean that, basically, to to continue getting access to capital in a capital intensive industry, to keep their stock prices up, to keep the CEO from getting fired, they basically have to placate the in the investors. That's their first priority. And you're saying that's the number one criteria of a sunsetting industry.
Phil:That's correct. And when they say, yeah, if they're paying back 3 quarters of their cash flow, maybe more, They're not going out borrowing because because these got the banks don't wanna lend to these companies. Essentially, they are helping they're helping liquidate their companies. You know, the company's assets may be higher today because their reserves are worth more on a reserve accounting basis. But on a constant dollar basis, they're liquidated.
Markham:Okay. Well, that's an entirely new narrative in Alberta. I can tell you that. Because right now, the narrative is that the this is the golden age of the oil sands, and everybody's flushed with cash, and and, you know, things are just wonderful. But then again, if I was liquidating an, you know, an oil company slowly, that's exactly what I would say because I wouldn't want anybody to you know, I it would be a sleight of hand.
Markham:Look over here because you don't wanna see what I'm doing over here.
Phil:That's right. That's right.
Markham:Okay. Let's talk about the timing of peak plateau peak oil demand, the plateau, and then eventually decline and what the decline curve might might look like. Now I've interviewed the International Energy Agency's oil, analysts, and they were saying couple years ago that they thought peak oil demand globally was going to be 2030. Would you say now that it's likely that that has moved up?
Phil:It's probably moved up. You know, it's I read their studies and, you know, I've read a lot of other studies. It's very hard. You you know, there are no facts about the future, and it's really hard to look even 7 years ahead given the rate of technological change. The The electric vehicles are coming.
Phil:The interesting thing is that the type of electrical vehicles that really would have displaced gasoline and oil and diesel fuel are slow to appear. And by that, I mean, the vans and the, the small trucks that are used for delivery and, essentially, you see running around town all the time. There is a great article in May 16th in the New York Times where they talked to somebody, plumber from, Kansas City who had had 5 trucks and he now had one electric truck. He's discovered that the savings he's realizing on the electric truck will allow him to buy yet another electric truck in a couple of years. And other van owners, Amazon, Federal Express, everybody are looking have ordered their electric vans, but they've ordered them from these smaller companies that have had teething problems, particularly given all the supply chain issues that occurred, during the pandemic.
Phil:Now 2 of the companies that were very slow to get into this, GM and Ford, have stepped in. Now it's not surprising GM and Ford were slow to get into it because legacy firms tend not to want to move into these new technologies. But they've jumped in and they've they've created electric versions of their vans and they sell out because anybody who with a business where the they use it 8, 10 hours, 12 hours a day can charge it at night. And this is and the cost savings are so dramatic that this is accelerated. Gasoline prices go up further, it'll the the change will come quicker.
Phil:So that's why it's really hard to look 7 years in the future and say anything definitive.
Markham:You know, I wanna make an observation about that because while that's true in the US, it's not true in the in China. It's not true in some of the Asian countries. For instance, you know, China, even a couple years ago, had 400,000 electric buses. They had they've already far sooner than the US, they have begun to electrify those medium duty vans and trucks and, you know, the the work vehicles. They're already starting to think about battery swapping and other ways to do up their class 8, you know, the big semitruck vehicles.
Markham:Yeah. Europe is Europe is in between the US and and China. So, you know, looking at at the US as a a laggard in this particular market segment, you know, is maybe not a good indicator, and I would suggest that given the inflation reduction act and other incentives, that the US will probably catch up maybe a little quicker than we might have expected otherwise.
Phil:I think you're right, and I and I should apologize for for leaving China out. And, know, there's been one study, one investment banking house study I've seen that said that the Chinese actions alone have displaced, I think, 600,000 barrels a day of gasoline demand this year. And that's gonna grow, I mean, given the rapid penetration. Right? One of the places to look and I've and I use this as a good example is Norway because Norway is way ahead of China, ahead of everybody else in terms of electrification.
Phil:And once what one sees is a decline in the growth of gasoline, but not quite as much as what I would have thought just because it's their Norwegian still really have 2 cars, a gasoline powered car to go on long distance trips and a, an EV to to go on short distance trips. You know, gasoline will some gasoline will survive until, the battery, recharging structure is better. But it's yeah. It's I I, yeah, I just don't think that the peak is gonna come in 2030. I think it'll come sooner.
Phil:And, and I think particularly on gasoline. It's It's gonna be harder for, sustainable jet fuel because that's very expensive to make. And one of the key things that we find about transitions, whether it's cell phones, automobiles, others, is that the relative price the consumers pay matters and matters a lot.
Markham:Oh, let's talk about that. Let's talk about that. Because one of the things that we and and here in well, it's true in Europe, but it's particularly true here in in North America is that when we think of EVs, we think of the kind of vehicles that Tesla and now the legacy man automakers are making, which is they've gone after the high end because they wanna capture the premium you know, the profits that come with it with with premium products, the Hummers, and the the lightning f 150 pickups and those sorts of things. Not in China. China China has, yes, it has some of that, but it has put a big push on making cars affordable.
Markham:You can buy a $45100 street ready to go, EV. You they just introduced a a whole bunch of them, with lovely birds like names like the birds and, you know, they the the dolphin and that sort of thing. But, anyway, those are in around the the $11,000 mark, and they're getting 300 kilometers to of range, and they can see 4 adults. I mean and China is you know, has such a a a huge demand in their domestic market that they're not they're only they're slowly moving into other markets like Europe, for instance. Yeah.
Markham:They haven't shown up in North America, but they're coming.
Phil:And I forget the company's name would begins with b.
Markham:B y d.
Phil:B y d. B yeah. B y d is becoming a big exporter, and the European automakers are now you you can read, are suddenly looking for some form of protection against BYD and the other Japanese people. Yes. And it's but it's it's, you know, it is it's both a capital cost, and they're gonna drive that down.
Phil:And we can see it already in the big price cuts that have been taking place in China for the Teslas and so on since the 1st of the year, even in the United States. But the second is it's the question is not just the, the initial cost, it's the lifetime cost. And if, you know, if owners of vans can look at spending $50 a week on, to to for the van's operation rather than $300 a week, they're gonna move very rapidly even if the capital cost is higher. And this you know, all of this pushes for a much more rapid, change. Now Kingsville Bond, who you've interviewed and I've talked to, talks about an exponential change, versus a a relatively linear change.
Phil:I don't know which one it is. It depends on the price. If prices if prices keep coming down and they can make it go go for less, the change is gonna gonna be much faster.
Markham:Well, let's talk about linear versus exponential growth because I just literally had that conversation with Kingsmill this morning in my latest interview with them. And we went and we talked at some length about this. And and so, I mean, you know, for listeners who, are new to this, linear is is, you know, you add if sale if you add 1 unit this year, you assume you're gonna add 1 more unit to sales next year and then and so on. Whereas in linear, the the more you sell, the fast the faster your rate of growth, and that's where you get the hockey stick, curves Exactly. For for adoption.
Markham:Right?
Phil:Excuse excuse me. Well, you you said second time for linear, you meant to say for exponential.
Markham:Oh, I'm sorry. Well, thanks for clarifying. I I get I get I get rattling on here and, you know, I I sometimes I get what terms are.
Phil:All of us
Markham:do. Indeed. Indeed. So the the, I mean and his point is and and I've interviewed other, folks who who make this argument, is that exponential growth is baked into energy as a technology. It doesn't matter if you're talking about wind or solar or EVs or batteries or electrolyzers or heat pumps.
Markham:It's all baked in because it's a technology. It gets manufactured. Wright's law, right, learning curves, the the more you every time you double the production, you get a a cost reduction. You don't see that on the on the oil side, on the gas side, on the coal side. So what but what's your take about all of all of that?
Markham:The the importance of exponential growth versus linear?
Phil:The keyword is price. It is clear if you look at technological changes, whether it's the introduction of roads, superhighways starting in 1950, which essentially pushed passenger rail out of business, or the introduction of the jet plane in the late fifties, which pushed steamship lines out of business. It's the price. And we the best example for today for the people today, for people who are under 50 today is the cell phone. Sure.
Phil:Cell cell phone came in, and it was very expensive in 1985 when it came in. And there were almost none of nobody there. And if you measure this against the expand, landlines versus cell phones, everybody had a landline. The price was 4 times as high. Now it's once half the price.
Phil:And 85% of the telecommunications is now cell phones. The as the price falls, you get the rapid change. And what I have found in my research is that a linear change in price, that is, if we go from, 2 to 1 to 1 to 1, you get an exponential change in the market share. And so it's it's going to be as price changes. Now in looking at this, the question becomes one of how do we measure price for automobiles?
Phil:There's a there's a capital cost, which is what consumers look at usually, whereas in businesses and so on, look though at the lifetime cost. So if you and this is why I go I think the van story is so important. So if you if you can say, okay, a van operator is looking at now save saving 50% of the cost over the life of the van, they aren't gonna walk. They're gonna run, in to get the electric vans as quickly as they possible. And that gives Ford that gives every other manufacturer pricing power to charge more for these because they're capacity constrained.
Phil:It'll it's gonna be different for the, for the, electric vehicle. Some consumers will stay. And, yeah, it'll also depend on how the recharging networks develop because consumers tend to want to be able to go 200 miles and sometimes like we do from Denver up to Vancouver Island where you are. And it it's a little hard to find still find EV charging places out in remote places.
Markham:I wanna introduce something that I I often talk about, but I don't think I've ever asked an economist this question. And the the influence of value in that calculation because I look at, you know, the the iPhone okay. And you made a really good point in one of the papers that you sent me, and that is that while the iPhone got all the attention in terms of driving adoption of the smartphone Android phones, which were really cheap, that drove the volume Yeah. Kind of big numbers that we that we saw. And so that kind of backs up your backs up your point.
Markham:But it I think it's also true that on the higher end, you know, people will pay more for something if they receive additional perceived value. So for instance, a lightning you know, f 150 lightning, can charge your home for 3 days, And Jim Farley, the CEO of Ford, says that that's the number one reason why people buy those trucks is because they live in California. They live in Texas where they've had, you know, grid outages. And this way, they can charge keep their home, electrified for 3 days, when that when that happens. And so it's a value that I don't know, you know, how you calculate a a dollar, amount for it, but it has real value to the consumer.
Markham:And I think that electric vehicles and you see this in China where they're, like, rolling iPhones. Right? That's a big deal in in China. So the the EV brings more value than an internal combustion engine car. What role might that play in adoption rates?
Phil:I'm not sure. That you know, that's a question for, an economist who really teaches marketing, who who does a lot of marketing research. I mean, and I I live off some of these people. But, what I will say is that the ability to chart run run off the thing is terribly important for huge area huge parts of the business. Contractors really like this because for for a lot of job sites, you have to take a a generator along.
Phil:So if you have a Ford Lightning, you take the Ford Lightning, you plug all your things into it, you can run most of your equipment, and maybe you need 2 Ford Lightnings. You don't need a generator. You're running off the battery and then you recharge. And it, you know, it's gonna you know, they can't Ford can't make these trucks fast enough, and and again, so it's a question of how quickly they can be made. The, the example I used from the New York Times for the van opera van.
Phil:The guy the van operator, plumber, uses his van, to power his tools on his jobs. It's a different kind of van. I think it's a it's a GM van. But the the point is, yes. The cars are gonna have more, more features.
Phil:But I think, you know, Ted Leavitt, who was a marketing myopia in 1960 and was a the girl of the Harvard Marketing School, Harvard Business School, invented the term globalization, for example, wrote in 1960 that the gasoline station could never be more popular because consumers saw it really as a taxing, a taxation issue. They had to stop to use their vehicle. And just not having to stop at a gasoline station, but being able to stop where you wanna stop, say a restaurant, plug in charge while you're doing something on a trip or something like that, it creates huge values. There's just all sorts of these values that are created, by EVs. Now whether, the cell phone as you describe it in a rolling cell phone as you describe it in China, is it?
Phil:I don't know. But it yes. They offer a lot more to the consumer than just a plain set of wheels and a gasoline engine.
Markham:Now you and I had a chance to to chat a little bit about this on on email, and and I have interviewed others about Vaclav Smil, you know, who teaches at the University of Manitoba. So Canadians, we can we can claim him as one of our own. And and he is the dean of energy transition studies. There's no question about that. But you think he's wrong, and, frankly, I think he's wrong.
Markham:And, well, I'll talk about explain why I think he's wrong, but I'm curious about why you think he's wrong. Explain to me what's wrong with Vaclav's analysis of this energy transition.
Phil:Well, to be fair, he's right about some things. Lord I think it's Lord Stern or Rick or sir Stern, who wrote the Stern report for the UK years ago, preempted Smeal. Stern is a really good economist. And he and the Stern report looked at global warming. And he warned that if you build a coal fired plant, and I guess he was writing probably about the turn of the century, you it would run until it, it was exhausted.
Phil:And to a large extent, he's right. Once somebody builds a coal fired power plant, they're gonna run it unless the cost of coal and operations become so high relative to wind that you shut it down. What Smeal misses is the effect of technology. And in many areas of energy consumption, technology is overtaking things. And I use the telephone system as an example because all across the world, in the United States and Canada, Europe, you see these central exchanges, these buildings that were built to have where all the tele copper wires come together.
Phil:You dial pick up your landline phone. You dial a number. It goes to the central exchange. It goes out. And I say and in Smeal's view, those things will be around and be used until they're exhausted.
Phil:One factor tearing them down because technology changed. Yeah. People economists worried in the eighties nineties, how are we gonna get phones to Africa? Because we had to string all this copper copper wire. Do we have enough copper?
Phil:We have to wire the whole thing. Yeah. We never wired Africa up, and they're perfectly well connected. It's called the cell phone. So it's technology changes, and it can make, make existing capital obsolete and you tear it down.
Phil:It happened to railroads, steam ships, many kinds of ships, propeller driven planes. Know, propeller driven planes were were perfectly good. They were still selling d c 7 c's when the first Boeing 77 oh, 707s rolled off the line. A lot of those d c seven c's flew 10 years and were scrapped rather than flying 30 years as it was expected. So it is what Smeal misses in this whole thing is the role of technology, the role of Bill Gates, the role of, Steve Jobs, the the Apple, the things that have chain just the disruptors.
Phil:As Clayton Christians some Christians are called, disruption, crisis, and Joshua Gans calls the disruption dilemma. Yeah. New inventions can drive out existing capital and make it worthless.
Markham:Okay. I'll give you my view very quickly about about Shmuel, because and let's let's face it. I mean, the he's done tremendous work. He's written 35 or 40 books, and and and our understanding of energy transitions would be much poorer without his scholarship. But like all scholars, you know, others others come and stand on his shoulders and rethink how energy transitions work.
Markham:And, and so for me because I think in of in term in the of an energy transition in terms of technology, which then gets on the s curve and and travels up the s curve until it gets to market dominance. But those 1st 20, 30, 40 years, well, the flat part you know, if you were thinking about hockey stick, it'd be the blade of the the hockey stick before it gets to the the the shaft. But during that time like, if you look at the existing technology, the key technologies here, commercial solar panels, 19 seventies. Commercial wind turbines, 19 eighties. Lithium ion battery, early 19 nineties.
Markham:First, you know, modern modern, EV prototypes, late 19 nineties. I mean, all of those technologies have been on the flat part of that s curve for decades, and they've been getting better and better. It it's been an iterative process. They've been getting the costs have been coming down, and now what we're seeing is is, is not suddenly this energy transition burst onto you know, from nowhere. It's well, I guess it's like the old old story about overnight successes.
Markham:Right? You know, all the years that that people worked hard to get become an overnight success. And and and I think Shmuel forgets that. I think he he forgets the deep deep roots of this energy transition in these, you know, with the with these new technologies. That that's my take on it.
Phil:I can't argue with you, but I think that there's more to it than that. What Smeal misses and what a lot of people, even Kingsville Bond, missed, is that it's not just the engineering. It's not just making the things better. It's not just making them so they they're less expensive. It's finding the capital to build the plants, to expand the plants, and go forward.
Phil:And that didn't hap start to happen until the late seventies after the US went off gold. And after, oh, 92 when we change some, technical regulations on what pension funds could invest in. And so the suddenly, venture capitalists could go to pension funds, like CalPERS and so on and get not a few $1,000,000, but a few $1,000,000,000 to go and really start building. I mean, it takes capital. It it and, you know, Shmuel attacks economists all the time, and and and I don't disagree with him all, for some of his attacks.
Phil:But the fundamental key thing is you have to have the idea, you have to be able to bring the cost down as you said, and you have to find the money to build the plants. I mean, Tesla you know, if you look at Tesla okay. It it it's came out really right around the turn of the century, and they started moving ahead. What really made Tesla work? It's the recharging system so that my friends who've had Teslas for 10 years have been able to drive across the country because they're supercharging places.
Phil:Yeah. We drive out to California, and if we go out, to Salt Lake City, you go come to a little town called Lovelock, Nevada where I've always stopped. I actually know the guy who owns the station. One of the times I stopped there maybe 10 years ago, there were 4 Tesla supercharging things in his parking lot. I asked him about it.
Phil:He said, well, I've had 1 we'll get 1 or 2 customers a week, but, Tesla came and they're paying for it. You know, it it's a network efficiency. You have to have the network. You have to do all these things. Where the bottleneck now on on wind power in the United States and Metro the world, transmission systems.
Phil:So I mean, you know, it's it's blocked. Now you come back to to, Smeal. It's transitions can go fast if there's no money. Now he wrote if you look about look at how how he writes about in the last century, why it was slow to go from cold to other things. Back then, all the money was in the hands of a few big companies.
Phil:And as Christiansen said, the big companies, in the investor's dilemma go very slowly. They don't wanna undercut their existing business. So so the economic structure didn't support innovation. And so the reason why I think we're gonna get to net 0, and I'm I'm pretty optimistic about that, is the the whole industrial structure has changed. The whole financial structure has changed.
Phil:The money is gonna be there if you've got a good idea. There are gonna be lots of billionaires admitted, and we're and and the economic incentives are all there.
Markham:Yeah. Fair enough. So one last point about Shmuel, and that is that he often gets invoked by the oil industry. The CEOs, the the the oil bros, the oil boosters, You know, they they love to talk about shmuel because, a, slow, b, linear, and and I had a guy today on social media. We were talking about this, and he goes, no.
Markham:He said, no. It's never gonna be it's been it's been linear in the past. It'll be linear in the future. Well, no. But that the point is that it's that linear and shmuel and those ideas around it are baked into the narrative.
Markham:A narrative is for incumbent industries, is such a powerful thing because it it becomes a form of groupthink. I I see I run into industry people all the time who are a little more on the progressive side in Calgary, and they'll say, oh, Mark. And, you know, you go to the Calgary Petroleum Club, and it's just this group think about, you know, people moaning about there'll never be electric widespread electric vehicles because our neighborhood distribution, you know, system will will never handle more than 3 electric vehicles on a street, that kind of thing. And and so the the impact of those ideas to reinforce incumbency, it should not be underestimated in my view.
Phil:Well, reinforcing incumbency and reinforcing bankruptcy. I give you a I give you a classic example of this. Uh-uh. I've never used a linear when we first started, you you and Cajun talked about linear transitions. I've never really talked about that.
Phil:It, you know, it doesn't fit in the economic lexicon. But there's a couple called the East and Kodak. It had massive businesses, selling film. You remember when I was young in my my fifties, going all across Europe, you'd see all the yellow boxes. Yeah.
Phil:If I weren't doing what I'm doing, I'd be professional photographer because I'm pretty good. They have a lot of patents on digital photography, But the management of Eastman Kodak was all wedded as was the management of Fujifilm to the idea that it's going was going to be what I'll use you you know, the term linear transition. It's gonna be slow. And they, you know, they delayed matter of fact, they didn't introduce a lot of their patents because they wanted to keep selling film. And they they just, you know, they just kept pushing it.
Phil:And then when Apple and the Android came on with cameras and so on, their business just collapsed. They went bankrupt. So the companies that are thinking linearly to use your term at the end, and they're thinking, oh, it's only gonna be 3 houses or so on that are, that have electric vehicles because the transmission system doesn't handle, are wrong, and they're gonna lose. Yeah. Here in Denver, we don't have solar panels on our house because the the roof is cake cake catered the wrong way.
Phil:And we're both gonna be moving up to Boulder to a a really fancy a really nice retirement place. But a number of my neighbors have put solar on their roofs, and they have Teslas. And now Calgary has a problem with, with solar power. I learned when I was teaching at the university there, because it is just a little too far north. Right.
Phil:So in the middle you know, in the summertime, hey. It's great. You could either you wouldn't need to burn anything. You could run well, almost everything is solar. It's a little harder in the wintertime, but there I I mean, what we have now is battery technology.
Phil:So you can see people shifting to batteries. The other problem Calgary has that's gonna require some more technical change, which will come, is batteries that work better when it's cold.
Markham:Right.
Phil:A battery a battery power cars. I mean, I remember at at the Haskayne School, outside, they had places you could plug your car in, all in the parking lot so that, people, you'd cars would start it on really cold days.
Markham:They're called they're called block heaters, Phil.
Phil:Block heaters. I never had a car there. And so I and, I owe I I had a car there in the summer, not in the winter. So I'm sorry. I never learned the word.
Phil:But the point is, there is a lot. Yeah. The the transition is gonna come. The oil industry is is acting just like the same ship industry acted, just like the railroad industry acted, just like AT and T. A AT and T employed 1 out 11 out of every 100 people in the private sector in 1972 here in the United States.
Phil:And the CEO complained about offered, the programs to let, competitors in. He tried to fight it, national security grounds. Sounds like the oil industry. Lots of other arguments. By 1985 I think it's 85, The company was sold, for for a few hundred mil a few less a $100,000,000 to Southern Bell, which then renamed itself AT and T.
Phil:I it is you know, the whole the, the blinders that the industry people have, and it's not just oil, the blinders they have in the legacy industries are tremendous. The auto industry almost missed out on the electric car, but for the fuel economy standards, which forced them to kinda start thinking about it, it's just every so,
Markham:local So but let me let me ask a question, Phil. And I I I brought this up a a little bit earlier, but I I wanna pin you down for an answer. So I'm a CEO of a big oil company in Calgary, and I can see, you know, I can read I can read newsletters like yours and figure some of this stuff out, and I can see that, you know, I'm gonna face an existential crisis here in you know, sooner than I had thought. And I and, you know, and and my business model is gonna be disrupted. It's gonna be challenged, and and maybe I the moment this is my hypothesis.
Markham:The moment he says that publicly, he's toast.
Phil:Yes.
Markham:So there it's the the there's a resistance here to to addressing the disruption because the moment you do, you're gonna be punished by the stock mark by the by the market. You're gonna be punished by your investors. You're gonna be punished by and you'll probably lose your job, and and, other companies then will will suffer the same fate. I mean, it just you get this downwards downward spiral, which leads to a conspiracy of silence or of boosterism.
Phil:It does lead to a conspiracy of boosterism. Cambridge Energy Research, which is now S&P Global. Dan Yergin has has been the one of the oil oil industry's biggest boosters for years. There is an there is an approach to take to survive and move ahead, and that's being led by Exxon. And I have to say, I respect Darren Woods.
Phil:I think he's wrong on on global warming and everything else, but he's doing Exxon has always done it right. And that is, we don't know where prices are going, and we're not sure where demand is going. And we are gonna be the low cost producer, so we're gonna be the last man standing. And now they're saying, well, if we can you know, we've we've been doing enhanced oil recovery and injecting for years, maybe we can make this thing work so we can we can, make carbon capture and we have another business there. And it's the same idea.
Phil:We're not gonna go into the business of, of trying to help people recharge their cars because lots of people are gonna do that. We're not gonna go into the business of being building windmills because Veritas and others have cost advantages there. We'll be the high cost producer That's we tried our office equipment. We actually had the first fax machine, but but it was too small a business for us to go. So okay.
Phil:The whole focus of this business is be the low cost producer. So if I'm if I'm that guy in Calgary and I'm I'm running a business, I'm gonna say, gee, can I compete with oil sands at prices that Exxon is going to get in Guyana? If not, how can I get my cost down as far as possible? And then I'm gonna try to do what what farmers and others have done, which is hedge. And I help create the futures market.
Phil:What try to lock in whatever I can, but just focus be really aggressive about being low cost producer and not boast about how oil's gonna be higher or anything else. Just be sure that I'm not making mistakes that bleeds me out at the high end of the cost curve.
Markham:That's exactly what they're doing. So and in fact, I wrote a book in 2019 about the oil sands, and I interviewed, Janet who was a VP at Husky at the time. And she said, look, Markham. We, like other companies, have modeled out to 2050, you know, our competitiveness. And we have decided that, what the modeling shows is that we if we get our cost down and we get our emissions down because we if we're not carbon competitive, we're gonna we're gonna pay for that.
Markham:Yep. Yep. Right? The market is eventually going to
Phil:In pollution, emissions count as cost.
Markham:Yes. That's exactly right.
Phil:Exactly. Exactly right. Yeah. Yeah.
Markham:So we're gonna do that, and and we think that it we have a plan to do that. We get to be cost and carbon competitive by 20 you know, up from now until 2050, and that's the best business model for us. We are not going to invest in little start ups. We're not going to explore, you know, electricity and all of these other things. The only company the only Canadian major that does that to any extent is Suncor.
Markham:They've been in renewables. They've been in some of these other and they've invested in other, you know, like, Lanza Jet and these kinds of things. And, but the rest of them are all we're just gonna get bit better at our existing business model. But the problem is, you know, they may get their production cost down between $25.35 a barrel, and and and there's some logic here because they compete they don't compete in the in the light market, they compete in the heavy market. Right.
Markham:Their competitors are the southern you know, the the Latin American, the Brazilians, and the Venezuelans, and the Mexicans, and and so on. And and so and they dominate in the US in that 5000000 barrel.
Phil:That's right. Yeah.
Markham:So they they can make I think you can make an argument that the oil sands producers can hang on a little longer than the others, because they have a unique market. They have a unique resource. They can get their cost down. And so it's not necessarily doomsday, but they're not they may not go bankrupt. But here's my point, Phil, is that the prices will still be low enough that all they're doing is making, at best, a comfortable living.
Markham:They're not having big windfalls. They're not. And and here's an and we haven't talked about this, but I'll throw this in here. There are currently $300,000,000,000 of unfunded environmental liabilities in Alberta connected to the oil and gas industry. And and once that decline starts, then there is no capital left.
Markham:There's no money left to reclaim those in those liabilities. That's the real for Alberta, that's the biggest danger.
Phil:Well, you're exactly right. It if if Alberta and if the Canadian government makes the companies begin paying for the remediation. That's the question. I mean, we haven't made US company. There's a huge remediation problem in the Gulf of Mexico, and they're the EPA can reach us back.
Phil:1 of the smaller, companies that have bought shallow Gulf of Mexico production has gone bankrupt, but they're reaching back to Chevron and saying, okay. You have to plug those wells. As I understand the Canadian structure, it's you need some legislation to make that happen.
Markham:Yeah. That's not the and and it has to be provincial legislation, okay, because this is provincial, not federal.
Phil:Okay. And and, you know, I once was involved in a in a case for for the, Irvin skin Indians, Irvin skin banned and on on trying to get some money back from Texaco. And it has to go that had to go to the federal court because it was in, first First Nations. But, yeah, if it you know, having lived having I never lived in Calgary, but having spent a good deal of time in Calgary and just looking at the most recent election, I don't see that happening anytime soon. And when that happens, I think they shut down the tar sands or the oil sands production.
Phil:That's, you know, that is the that that's the breaking point. And until that happens, if they can keep their costs down, but it's it is, you know, it's, you know, being the low cost producer, you know, you have the Valeros, you have the, Marathons on the Gulf of Mexico that just love that oil because it allows them to, because they have all the facilities to upgrade it. And natural gas is so inexpensive that it just it's, you know, you know, the cokers are like roulette wheels that always that have only red on them, no black. And so you bet on red and you're always making money. It's when the it's when they when that cost gets internalized, if it gets internalized at it's gotta shut down.
Phil:But it's going to be a while, but the idea of growing yeah. One of the ways to think about this is companies like the Canadian firms, Pioneer Resources in the United States and so on, today are oil firms. They, essentially, they produce oil and they produce it the way the farmer the farmers in, Alberta or Saskatchewan produce wheat. It's not going to be a, a business where you make huge profits. It's a business which at best will earn kind of nice returns going forward.
Markham:Assuming they don't to pay for their environmental liabilities.
Phil:Yes. That's exactly right.
Markham:Yeah. Now I wanna wrap up our conversation with a a term that you use, which, is very interesting. I haven't run across it before. Pet petroenura. Am I pronouncing that correctly?
Phil:Petroenura. Where did I use that?
Markham:It's basically sort of the boiling the frog slowly
Phil:and then Oh, yeah. Oh, yeah. Yeah. Yeah. Well, I have a great editor, Tim Peterson in Florida.
Phil:We worked together since 97. I wouldn't be any place without him. And he periodically picks these words up that are just really great. He's got a book out on all these funny words. And, yeah.
Phil:Essentially, we are yeah. The the oil industry is in this pot and the temperatures are getting warmer, and eventually it's gonna yeah. That's the way we lot you you put a lot, you know, put a lot of lobster in a a pot and turn the water on it, and it'll swim around for a while and then dies.
Markham:Well, it it and it seems to me that, you know, And you make the point that the environmentalists have been turning up the heat. They've been heating up that water for for several decades, which so it's not like the oil companies are now in the pot in cold water. The water's already warm. In fact, it's kinda warm.
Phil:Yeah.
Markham:And and so the the issue here is that the energy transition then has the potential to heat up that water very quickly.
Phil:But it's the the environmentalist have heated the water up, and I give them a lot of credit. But it's the technologists and the customers that are really heating it up.
Markham:Right. Exactly.
Phil:We've talked a lot about the technologists. The other thing is the customers. Now the oil industry used to have a have a business that was just really profitable. That's selling oil to the airlines. And so the airlines figured out how to break this break the whole system apart.
Phil:The oil companies ran the, the hydrant system, all the airports like Vancouver. And the airlines got control of it. Then, United was the 1st in Los Angeles. They bring over cargoes of jet fuel, bring cargoes of jet fuel to, to Honolulu where Chevron had control of the system, and suddenly the the profits went away. Now the airlines are gradually pushing on sustainable jet fuel.
Phil:And so some of some of the refiners, for example, Marathon and Phillips 66 in on the West Coast are converting refineries to produce, renewable diesel and sustainable jet fuel. They use we various soybeans and various used oil and things like this. It's slow. It's gonna be much slower than the electric vehicle because the cost, it's gonna be a long time to bring the cost down. But the point is that the oil industry sold their refineries.
Phil:They don't wanna own the refineries anymore. So the Marathon and and Phillips 66 refineries that have been converted used to be owned by by Shell and Unical, which were integrated oil companies. So the oil oil companies essentially sold off the assets which are now being used to destroy them. It's you know, so you got your customers are turning up the heat on the oil companies. Your technologists are turning up the heat on the oil companies.
Phil:The environmentalist are turning up the heat on the oil companies. It's, they're gonna be, they're gonna be supper.
Markham:Well, I would agree. And, Phil, this has been a great, great conversation, and you've given, provided my with all sorts of, new ideas and, interesting takes on existing ideas. Really appreciate it. We'll know if you're willing, I'll have you back again in the not too distant future.
Phil:Anytime. It's it's look. This is fun. It helps me think.
Markham:So I
Phil:get I get ideas from this. I got I got it picked up a couple of ideas here just from here. So, I mean, this is the trouble is there is not enough people around who look both at who look who understand the oil industry, understand the, cold, electricity business, and understand the importance of the transition, and don't have blinders on. You know, I will say just if I I'm
Markham:gonna throw in a plug here for the kind of journalism we do. We are not we're not specialists in any particular. So we cover we cover, oil and gas. We cover electricity. We cover all of the clean energy technologies like EVs and and so on, and we do it at a fairly high level.
Markham:We'll we'll, you know, we'll drill down on some issues when we think it's important, but, generally, we do it at a high level, and then we connect dots. Mhmm. That's really our our journalism, and I think is I think in Canada, that's very we're unique. I can't think of anybody else who does it quite like we do it. And the advantages that gives you is you get to see big global trends, you know, because 50% of the people we interview are people like you outside of Canada.
Markham:You know, they'll be in Asia. They'll be in Europe. They're whatever. And when you spend half your time talking to people in other countries and other regions, the the energy transition, appears very differently, very, very differently. And so then you get to connect the dots, and then what lessons do we learn from Canada?
Markham:How would we apply those learnings to to, you know, our country and our oil industry and and so on? So, anyway, that's that's kind of the approach we take.
Phil:Connecting the dots is what all of us do. And it's you know, that's what that's why the IEA I'm critical of the IEA and it's kind of peak things. In part because you the only way to understand transitions, the only way to understand economic growth is to look at lots of different countries, lots of different industries, and lots of different history. Because if you stay focused just on one area, you get it wrong.
Markham:Well, from one dot connector to another, thank you very much for this.
Phil:Thank you.