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- [00:00]
A
Arnab Data, the managing Director of Policy implementation at Employ America, and Rory Johnson, oil analyst and founder of Commodity Context, join us to discuss. We're going to have the guests do the intro to this show. What are we going to talk about this episode?
- [00:15]
B
Well, I think in the context of the Iran war, which is the large, still to date, the largest supply shock in the history of the oil market that I personally expected was going to push prices to all time highs. And thankfully for all of us, thankfully for the global economy, we avoided that fate. And I think the concern I have is that many Western policymakers, most notably those in the Trump administration, are taking the wrong lessons away from our avoidance of that kind of apocalyptic scenario. Indeed, what, what we've actually seen demonstrated is that the largest unexpected swing in global oil balances that I certainly did not see coming was China's massive retrenchment from global import markets. It's, you know, five plus million barrels a day of import demand destruction we're seeing without any real change in domestic Chinese economic activity driven from it. This, I think is important because it demonstrates that China likely has a stronger discretionary policy tool and lever at its disposal than does the West. The west is really, really good right now, in particular at market driven private sector oil production. But through this crisis we have seen that we, and Washington in particular, does not have the scale of discretionary policy control that China does or that OPEC does. And I think that thankfully China cooperated and did the good thing, at least for the broad economic picture, but we cannot rely on them in the future. And I think that tool can be equally used against us in the west. As for us. And I think it's important to grapple with that discretionary nature and that Western governments not kind of rest on their private sector bona fides, you know, to get through this next crisis because it's not going to work. The private sector does not move fast enough. We need discretionary levers at our disposal.
- [02:05]
A
Amazing. All right, so we had this whole Iran war thing and there was a moment where people were worried about, you know, $700 barrels of oil this complete, you know, utter calamity. And while, you know, prices went up for sure, we didn't quite have the sort of like Gamma short Squeeze Deluxe version that, you know, you had very breathless, odd lots podcasts and whatnot about. Why was, why was the great oil catastrophe of 20 of the Iran War 2026 ultimately not something that occurred? JD Vance has a theory, actually.
- [02:50]
B
So could you have kept going without because, because you did. We could always. We avoided the scale of global energy shock. Right.
- [02:58]
C
That a lot of people, myself included
- [03:00]
B
as an amateur reader of, you know, people writing about oil expected. We had higher gas prices, but we didn't have. Things were not nearly as bad as
- [03:10]
C
they could have been.
- [03:10]
B
Correct. But my perception was, and a lot
- [03:13]
C
of people's perception was that you couldn't
- [03:15]
B
keep running that through the fall. So by the way, I have to give credit to Scott Besant, the Treasury Secretary, and Chris Wright, the Energy secretary, because part of the reason why the doomsayer predictions about the oil and gas markets. And to be clear, I know the American people have felt some pain because of this. I don't want to discount this. But the very worst predictions never came to fruition because Scott Besant and Chris Wright did an amazing job at trying to absorb as much of that shock as possible.
- [03:42]
A
Arnab, is he right?
- [03:46]
C
Look, I think it's important to center a couple of things and I'll kick it over to Rory. One is we did see a big price spike still going into the crisis. We saw nearly a 60% increase in prices at one point. The actual physically delivered barrels in some of the hardest hit regions did hit 130, $140 a barrel. So there was physical disruption that led to a price increase. But more broadly, I would say a number of different interventions came together to keep prices from hitting that, that, that really kind of expected price increase. There was a Strategic Petroleum reserve action from the administration. I would say it had an impact going into the crisis. A lot of analysts were claiming that it would have minimal impact and that we would probably not be able to release that much. In fact, Release levels hit 1.4 million barrels per day, which is not nothing and higher than expectations. You saw capacity that was rerouted essentially through the east west pipeline and that, that kind of filled some of the gap as well some of the supply loss. And then there's this, I think the biggest story and the part of the place where the vice president is not really, you know, mentioning explicitly is the China effect. And China played an enormous role in prices staying under kind of those, those higher estimates. And I'll kick it over to Rory to, to get into that.
- [05:33]
B
Yeah. So I guess this is where I do my mea culpa as one of those breathless odd lots hosts in March who was definitely expecting 150, I think I even said $200 a barrel crude. That was literally you. Okay, it was, it was literally me. So the, I think the important thing to note here is first, you know, why. Why I said that. And I think that all the things that, that Arna mentioned, the, the rerouting pipelines, the SPR releases, etc. Those are all the. These are all known factors, right? These are things that we knew were going to happen and indeed needed to happen. The SPR releases. This is the kind of almost textbook reaction that was supposed. These are why these things were built in the first place, essentially. So we knew that was all going to happen. And even with all of those things, it wasn't going to be enough to offset the loss of supply in Hormuz. So the reason I expected, and other analysts expected, $200 or more, was that you were going to need to see demand destruction at a scale we've never seen in history. So if we've seen, you know, a million barrels a day or 2 million barrels a day of demand destruction with prices at like 120 or 130, we needed to get 5, 6, 7 million barrels a day of demand destruction. So you needed a notably higher price threshold to drive that behavior. What we didn't. Or what I didn't consider, just when
- [07:00]
A
we're talking about demand destruction, it's like the, the first few million barrels are the easiest, right? Like, that's like you change your carpool, you change your commute. Once you climb up to that, we are like, mature. Like, we are, like, shutting down economic value, not just kind of inconveniencing people. Like, economies are doing less at a serious, you know, our economies are like, actually being less productive, not just, you know, a little bit, 1 2% here on the market.
- [07:31]
B
That's exactly right. And the scale of demand destruction we were going to need to see was on par with what we saw during the depths of COVID and except without the benefit in this deranged use of the word of the. Of a global pandemic and forced lockdowns. We needed to simulate or replicate lockdown behavior through only price mechanisms alone, which is really hard because it's like, you know, I was asking all the times, like, what price would you need to go back to, you know, the depths of 2020 and the price. And it's like, well, like $100 a gallon at the pump or something. Like, it's like, you know, it's such an astronomically high threshold. You are going to need extrably high prices. So that was the logic. But what I had missed was China's tremendous demonstrated swing. Now, we always knew China had massive stockpiles of fuel. We didn't know whether or not they were going to use them to help the Trump administration. We could talk about this why later on. But I think even in my wildest dreams, and as I said on, on odd lots, on my second kind of came around on my mea culpa of what all went wrong with what I thought was going to happen was even, even if I went back in time and told myself in March, don't worry, China's going to cut crude imports by 45% or 5 million barrels a day, and nothing's going to change in the Chinese economy, I'm like, well, obviously you're an insane person, because that just isn't possible. And that is still generally almost how I think about it. Because what we have seen in China is the largest swing of any country in history in its demonstrated capacity to consume oil and its need to consume oil with virtually no repercussions on all the things that you use oil for. So during the depths of COVID we became very familiar with following things like, you know, inner city transit congestion as measures for road traffic. We, you know, follow flights, we follow. China has indicators on like, number of trucks that pass freeways. All of these things that you can use as these basic proxies of mobility within China. None of them have moved considerably, despite the fact that on paper on our oil balances, it looks like China is in the debt, in the depths of a deep depression. Not even recession, like depression area kind of levels of consumption low. The only parallel we have on record of this kind of contraction in Chinese refining activity is in the depths of COVID zero in 2022. And like I was saying to Joe, on odd lots, it's like, well, you guys were just in China. Did you see the entire country locked down? He's like, well, no, it's like, yeah, well, that's, that's what's weird about this. So we can talk about all the ways, you know, that this could have happened. We still don't know the exact way they pulled this off, but, but the, the only thing we know for certain and everything we say from this or anything that I say from this point forward is more speculative. But the only thing we know for certain is that China reduced its imports of crude oil by 5 million barrels a day, roughly the scale of a massive, you know, collective OPEC cut, and overwhelmingly solved two thirds of Asia's spot market deficit during this period. That's all we know for sure. And the other thing we kind of know for sure is that visible crude oil inventories in the country did not draw to account for this, for this change in imports. That's what we know. Now we can talk about all the things that we can speculate about.
- [11:07]
A
So we have. We basically have the world on the brink of a crisis, and China, you know, stops drinking oil or stops drinking oil from the rest of the world and just, like, turns on its own tap. And that kind of held us solid for the few months that the world needed to in order to, you know, get in a place where Hormuz was.
- [11:30]
B
I mean, and I should say, still, we have. China is still importing 5 million barrels a day less. This is the other thing. This has not actually ended yet. This is still ongoing. Which is the crazier part. If this. Maybe if this was just something that, like, a month you reduced by 5 million, then it bounced back, okay, I'm like, okay, maybe we can make sense of this. But we are now months into this reduction, and still no word on what's happening. No official word has been discussed, and no change in mobility.
- [11:58]
A
All right, Rory, so let's go through some theories. I mean, is it just, like. It's not shocking to me that she. That someone would show Xi a number for how much petroleum he would want to keep, you know, under mountains and salt caves, and he just come back and be like, no, we need to 20x this. And like, that's what happened over the past 10 years. But what else are you, our folks in this world, thinking about how the dynamics of this actually played out?
- [12:28]
B
So let's go again. It's important. I mean, again, ChinaTalk listeners will be aware of the idiosyncrasies of Chinese economic data, but some important details here. So we don't actually have official Chinese data on oil demand or petroleum product demand in China, and we also don't have official data on inventories. So what we do have is we have refinery activity that report on, and we have trade activity that we can both see customs report on in China, and I track independently through tanker tracker tracking data to validate. So based on those data, what we normally use in China is what we refer to as apparent demand, which is essentially, let's say, refinery plant out, you know, output of gasoline netted for, you know, balance for net trade and gasoline. So essentially, it's a measure of domestic disappearance of this fuel within the Chinese economy. The challenge is because we don't have good inventory or good data on inventory, the inventory measure there is obviously a big black box. High demand could actually be moderated by inventory builds, low Demand like we see right now could be moderated by big draws in inventory. And that's where we get into the kind of the wonkiness here. But what we know for sure, so 5 million barrels a day reduced in imports, but 3 million barrels a day reduced in Chinese refining runs, again the steepest contraction since COVID 0 in 22 that so already we have about a 2 million barrel delta there in crude. Where did this extra crude go? Right, so we don't see it coming from visible commercial tanks. And again, data, the knowledge of how the data is derived here is helpful. We essentially, because they don't publish official data, we use satellite tracked imagery data to see the floating roofs on storage tanks. And you can kind of see how high the roof is relative to the catwalk up top. And that tells you a rough measure of how full it is. Those floating tanks up until very recently were still higher than they were on March 1st. So that isn't the solve we need. Now China does have underground SPR storage for crude, which by definition does not have a floating roof. It's speculative as to how much they have exactly the official numbers that we know have 131 million barrels of capacity across six underground caverns. Likely that's more. But we, you know, that is the, you know, suspect number one that could have been drawn down and we wouldn't know it. Then there's this question of the actual apparent demand. So refinery output netted for trade that as well is showing the largest contraction since 22, also with no change in mobility data or mobility indicators. Then we get to this point that unfortunately, because China does not have official inventory data and most refined products are not stored in floating roof tanks, you have this massive black box in refined product storage in China, commercial and strategic. So then we get to the stage of like, okay, well if they were, if they stopped refining. And one of the things here again that we should note relative to kind of handicapping the sanity check of if we saw massive contraction in Chinese demand, again, what we were saying earlier, we need high prices to do that. And part of the thing that Beijing did to this crisis was it essentially through its normal fuel regulatory procedures, limited the degree of domestic pump price inflation through this period. You only saw in Beijing, despite global pump prices and global gasoline and fuel prices like doubling through the crisis, Beijing pump prices only rose by like 30%. So again, is 30% price increase enough to account for Covid level demand depression? It seems unlikely. But what it did do is because you had still expensive crude and you had Domestic prices that were weak, the refining margins for refineries collapsed. So some of this is explainable of what we saw with refining reductions through economic explanations. But we still don't know exactly how you maintained mobility. So the most likely your Occam's razor solve is that Beijing, in addition to having crude oil spiders, also has ample strategic stocks of refined products like gasoline, diesel, jet fuel that way. So if you basically your fineries turned off a good chunk, you're not, you know, your trade corridor is basically capped because, well, all of Asia is in crisis and then you just start releasing these barrels of fuel to the market. Now, we suspected that you had refined product stocks prior, and I wrote a piece in 2023 called Chinese Oil Demand Doubts, talking about how coming out of COVID zero, you had the strongest year on year growth in Chinese demand of any country in history. And it seemed odd because 2023 did not seem that strong in terms of China's overall economy. It still seemed like it was kind of struggling coming out of COVID zero. So it didn't really make sense that we had all time high product demand. So I said at the time you could be seeing builds of strategic stocks of gasoline, diesel, jet fuel, et cetera, and those would appear as apparent demand because we can't see those stocks at the time. The suspect, number one was that that would be in preparation for an incursion across the Taiwan Strait in 2023. This is at the peak of the kind of bellicosity of Beijing buzzing Taiwanese airspace and naval drills off the coast, et cetera. But now what we see is potentially this was, you know, preparing for some other catastrophe like we saw now. So there are still a lot of, you know, questions as to how they managed to do this. You know, there could have been flex in the petrochemical supply chain, either drawing down intermediate kind of petrochemical goods instead of refined product stocks, or going to gas and coal based chemical feedstocks rather than oil like Naftha. There's a lot of things you can kind of tweak around the edges, but it's hard to make them add up to 5 million barrels a day. So I think that is where we stand in terms of the how is it seems most likely that they pulled all over simultaneously, but that likely included some degree of injection of strategic stocks that we can't see into the system because again, the numbers are just too big. The delta, just to put in perspective, the delta between the three months prior average import pace in China, so December to February versus the Cumulative reduction in Chinese crude imports through June was roughly 450 million barrels. So when we, when we talk about the SPR injections later from other countries that we know about 450 million barrels is more than the entire IEA collective reserve release, if that is the case that they actually released just to put the numbers in.
- [19:06]
A
Gotcha. And so what this reminds me of is 2008, you know, we had a global recession. We had America that was, you know, pulling some stimulus levers sort of. Okay, and then there's a big question, what's China going to do? Right? And the Chinese, I mean, this is pre Xi, right? But the Chinese economic policymakers basically decided, no, we're not doing a recession like anyone else. We're going to go on the biggest building spree that the world has ever seen, and we're just going to keep the party going. And that made 2009-2013 a whole lot more pleasant for the US and the rest of the world because you had this big injection of fiscal stimulus which wasn't necessarily being manifested in other corners around the world. So Trump has a lot more to think for than he may think about. On the first place, no, it wasn't necessarily just Besson and Wright because they did not have the sort of levers and reserves in order to be able to, to smooth out what would have been a crisis. And this war may have had to end on faster and on even worse terms than we ended up, than we end up left with right now because of, I guess, Chinese economic policymakers again, not wanting to face down any economic contraction if they had levers to sort of control it. And I think that's like a lot of interesting second order impacts for China scholars thinking about future Chinese economic decision making, which I will not sort of like make you an ARNAB answer, but let's just like park that to aside for now. Jordan, one thing to arnab.
- [20:57]
C
Yeah, just like one quick thing to add as well is, you know, Rory's kind of unpacked what this was for. For oil markets. It particularly like early in this crisis, in the first few months, this was also the case in the LNG market. Just to give you one instructive stat, I think this was in April. By April, China had already resold over a million metric tons of LNG cargoes to Southeast Asian countries. That number was for the, that, that, that was like up until April. It had already, by April dwarfed the previous records of 2025 and 2023. So the whole year, which were record Numbers in those years was dwarfed by April in resold cargoes. So just to give you some sense as well, this was not just limited to the oil market, it was also the case in the natural gas market as well.
- [22:02]
A
So we just had Rory talk about the scale of the bazooka that China had. It could point at energy and commodity markets. What was Secretary Wright working with when the Iran war started? And what lessons should the executive and legislative branches learn from how that all played out?
- [22:24]
C
Yeah, so I think I would center on a couple things and I think despite my reservations I might have about this war in general and execution of aspects of it, I think once the administration decided to release, to participate in this global release, I would say the execution has been pretty good. A couple of things I would draw out for one, they were able to release, as I mentioned, up to 1.4 million barrels per day, a higher number than many expected. Higher than the peak during the Russia Ukraine release that had happened. So that's like one that is the result of a 10 year investment program called the Life Extension 2 program, which upgraded facility a number of different facilities. So there are four SPR sites. Two of the biggest had completed their Life Extension two upgrades during that time. These are going on over the past couple of years. And so they limited the amount of, of release capacity that was available because certain sites were just closed. And so that's one, as I'd say, like they were able to release more than was expected. And that's because we invested in the SPR's infrastructure. Then the second thing I would say that's important here is that while we talk about this, and even I've used the term release for the SPR this time around, it's not technically a release, it's actually an acquisition. The authority that the Department of Energy use that Secretary Wright used here is what's called an exchange, which means you release product onto the market now essentially as a loan to intermediaries and they then go and sell it into the market. But those people who the DOE is contracting with, they commit to, to return those same barrels plus a premium to the doe. So this is essentially an acquisition transaction. Those returns happen at a later date. But everyone that DOE has released oil to over the past, since the beginning of war in March, those parties all have to return those barrels plus a premium. And what we saw particularly at the beginning of the crisis, is that those premiums were very, very high. This essentially reflected what was a highly backwardated tight market. But the companies that were awarded barrels had to return a premium of up to 20 25% to the SPR starting in November of this year and going through to 2028. I think related to that, a third piece I would say is they have, through that exchange mechanism, demonstrated that, like, you can reward contracting parties who commit to giving you more on the other side. So what I mean here is that they designed this exchange so that the companies that were awarded with barrels now were the ones who committed to giving the most premium on the other side. And so it puts, you know, those companies that are contracting with the SBIR in sort of a competition. It's not only are they committing to the 22% minimum premium that is, you know, listed, they have to then, you know, offer 2, 3, 8%. We don't know the actual numbers here because the contracts aren't publicly available, but they have to commit to more in order to get that award. So if you're trying to get oil from the SPR right now, you have to commit to a higher premium. And that kind of creates this competitive dynamic amongst the traders and, and, and other parties who are contracting with the spr. So I think there's like some actual worthwhile creativity here. And then maybe the final thing I would just finish on is, you know, broadly, I think this, coupled with the Rory's great analysis about, you know, the, the likelihood of a China release of some kind, is that strategic reserves work. I think there's generally a lot of pessimism about strategic reserves, but this episode showed that when you build this kind of infrastructure in addition to other kinds of swing infrastructure, the east west pipeline, the more swing capacity you have to produce, I believe, you know, to transport. I believe there's a chart of Rory's that famously went viral after the President retweeted it of tankers going, you know, rerouting deliveries. All of this shows that, like, this infrastructure is worth investing in for exactly this reason. The fact that, like, oil prices did not go to that really, really harmful level of demand destruction, where you see decreased diminished economic activity, where you have to shut manufacturing down, like the things that make people's lives better and, and countries, economies better, is a success story and we should really think about that. But the fact that it happened largely because of China and not the US is something to think about for the future of policy as well. And we can talk about that more.
- [27:55]
A
Rory, so what are your reflections on the utility of having a lot of things on reserve?
- [28:04]
B
Yeah, yeah, I mean, I completely agree with Arnab. I think that redundant. I've always been a fan of redundant infrastructure. I think that, you know, one of the things we've seen over the course of the majority of my life is this like ever going, ever, ever pursuit of kind of efficiency at the cost of redundancy and flexibility. And I think what we've seen over the past five years at least, probably even a little bit longer now is unprecedented shocks to every supply chain we have imaginable. And I think that we were very, very lucky in this crisis. We went into the crisis with the kind of most overbuilt inventory position we had almost ever had. We had a glut for a year prior. Like everything was, everything was good, everything was about as good as you could have been to go into this crisis and still, even if not for China, we still would have been in a deep, deep world of hurt. I think the other thing that I think it's important to dwell on, at least on the where China comes in here is we talked a lot about the how. The other big question and the deeply uncomfortable question is the why. Because on, on the how we still have lots and lots of questions but we have a little bit of kind of data to kind of guide our way of at least what's plausible. On the why. It's completely open ended and we've got everything. And I have, you know, at this stage I've developed a little catalog of different options for why they could have done this. Some of them are more sanguine, some of them are deeply tinfoil Hatty. But I think that it's important to just briefly kind of consider them all. And I would love to hear kind of some of your thoughts as well Jordan because I think that, you know, obviously you spent a lot of your time looking at China and Chinese policymaking and this in some ways, while it does make sense a la 2008, I think there are some weirder elements here than the straight kind of comparison. So I think the one explanation is that this was kind of an altruistic move. I think this is the most, this is the most optimistic explanation. It was an altruistic move that had a bit of a self, self kind of preservation element to it as well. But they said that East Asia and Europe were going to be the two regions most direly hit by the Hormuz shock. North America, given the shale revolution, given the Canadian oil sands, these things were going to insulate North America much more than you're going to have for the rest of the world. We know that China is in the midst of this long term breakup with the United States on a trade basis or at least an attempt to diversify away from the US Market. So if you're looking to diversify away from the US Market and dependence on the US Consumer, you're really only other options are East Asia and Europe. So if you let those countries, those regions collapse into kind of depression driven by Hormuz, doesn't really serve your interests long term. I think the trouble with this is that I think if Beijing was coming in as like this white knight and saying like, Trump has abandoned you and here I am to save you, probably I think Beijing would have used that opportunity to gloat a little bit more, to kind of broadcast its, its kind of global stewardship. So I think that's possible, but potentially not totally solved. Totally. The more worrisome, and I have two more worrying explanations, the more worrying explanation is we know that the Trump administration had a very high profile state visit to Beijing during the crisis. This was at the time, didn't seem like much came of it. It seemed like kind of a disappointment. You didn't get any big announcements on trade. You. Everyone was hoping for some kind of full throated kind of endorsement by Xi Jinping to like reopen the strait. We didn't get that. So it seemed like a failure. What if it wasn't? What if there was some kind of backroom deal when they were all in Beijing to say support us through on this Hormuz stuff. We know you've got gobs of oil at your disposal. Support us and we'll do something. We'll do you a solid. Now what could that solid be? I think the most obvious answer is everything always comes back to kind of Taiwan and regional geopolitics during this period. You saw, given the devastation of US Military equipment in the Middle east from the Iran war over the first month. You saw the United States pulling a lot of military equipment from Asia, from, you know, things like drone missile defenses, radar systems, things that would have been very handy if there was ever an incursion across the Taiwanese Strait. So this kind of plays into this Dunro Doctrine kind of thesis that Trump wants Western hemisphere leaves Europe and Eurasia to Moscow and kind of.
- [32:44]
A
I'm going to stop you here, Rory, please. So I think the explanation is probably the simplest, the correct explanation is probably the simplest. If someone shows Xi Jinping a chart and says that if you don't pull this lever, we're going to do COVID lockdowns again, he's going to say, okay, we're going to Pull this lever and this sort of keeping the domestic economy from collapse has basically been the prime directive of all Chinese economic, fiscal and monetary policymaking over the past. I don't know, let's start the clock at 2005 or something, whatever. And so all of the sort of second order impacts of do we care if the war is longer or shorter? What does this mean for American defense posture, are all downstream of the central concern that you alluded to at the beginning of this podcast of the potential cataclysmic impact on economic activity. If you have the gamma squeeze of oil and gas, and once you decide we're not going to have that happen in China, then yeah, it means that it has these global consequences of price being lower. But I think we could, I think it's with like a pretty high degree of confidence. Like, it would, it would be shock. It would have been shocking to me that. To find some justification for incurring that economic pain at that moment for some, like, you know, 4D chess play of like, this will really screw over the US or something.
- [34:45]
B
So, so may I, may I push back? Because I think that if this is the case, if, let's say this is what, what you say, then why, first of all, why, why did they. We know that China has an appetite for building crude oil reserves. With oil in the 90s, why would they have stopped buying? Why would they have voluntarily. They have built up this massive energy security blanket. Why would they blow it unilaterally at a moment when everyone acknowledged that the main way that was going to push Trump to end the war was the price response from the market? Beijing's pretty smart. The reason I initially thought that Beijing was not going to come to the rescue was because, one, they knew that they had the domestic reserves. They could have insulated themselves. They've done much more than insulate themselves. They have backstopped the entire global oil market. So the question is, if you built up this massive asset of energy security, why would you blow it all at a moment that's entirely driven by poor US Foreign policy? Why not insulate yourselves? Make, you know, create the conditions that are going to create pain for the United States, are going to create pain while totally saving your own citizens? They could have done this in a way that they could have saved, you know, domestic Chinese consumption entirely, but they didn't have to subsidize Taiwanese imports, you know, South Korean imports, Australian imports, everything else. I think it's harder for me to understand. And again, even if this is the case, why are they still not buying, you know, we've seen them buy so much more at such higher prices. It just, for me, it just doesn't pass the smell test, as this is entire. Unless it was a bazooka to save the Chinese economy. And just on policy inertia, that you have no kind of way to kind of turn it off once the, once the floodgates have been opened, maybe plausible, but I think that again, they're doing well. Well, more than they would have needed, like three times as much as they would have needed to just save the Chinese economy itself, in my humble opinion.
- [36:47]
A
Arab, you're muted.
- [36:50]
C
Isn't the Southeast Asian? So I guess a question I have here, I probably lean more on Jordan's explanation here is maybe they can insulate consumption within their economy. Jordan. Rory. But isn't potentially the pain in the Southeast Asian countries, which, like their economy is important to their economy, like, they've got a weak housing sector. Now, if Jordan's right about that, you know, the economy is everything. Protect the economy right now. Like, sure, you can protect the internal consumption, but if all the Southeast Asian countries go through, like enormous recessions because they're not protected, that's going to have a negative impact on China's economy. So, like, to me that seems. It's not the altruistic thing. It's like still rooted in self interest, but it is, it is like we need to help those.
- [37:42]
A
You want to roll the dice with the global recession if you can prevent it. Yeah, is the question. Yeah.
- [37:47]
B
And again, I think that is still my base case. I was the kind of. That was the first explanation I mentioned, but I still think that it leaves way more questions than it actually answers. Again, the one final thing I'll Note, 1 non US conspiracy theory, but still more kind of less optimistic explanation is China has been building this energy, massive energy kind of security blanket explicitly for the kind of future the Malacca dilemma, the kind of future shoring up in the case of some kind of conflict with the West. The other explanation is what if this has been the world's largest dry run that Beijing was trying to figure out if this policy suite would work. And well, how could you ever have a scenario where you simulated the effects of a blockade of Malacca? Well, all of a sudden, losing Hormuz is a pretty interesting kind of natural experiment moment to say, okay, let's try this system. Does it work? Can we flex PET chem? Can we release these SPRs? Can we do all this stuff? And can we basically, you know, insulate China from the seaborne market And I think very frankly the answer has proven to be yes. And I think again, whether or not we can, we can still talk about the implications of this, even if we still don't know the why. I think the why would obviously be handy. But the ultimate implication is they have demonstrated a larger swing capacity in global oil balances than any than Saudi Arabia has, than the United States has, than any other country in the world has. We've always talked about how China is going to and is dominating energy transition industries, renewables, you know, you know, everything, you know, solar panels, batteries, etcetera, etcetera.
- [39:27]
C
Etc.
- [39:28]
B
And we've always talked in that lens, in that framework as North America in particular having the edge on fossil fuels because of, you know, revolution, etc. I think this is proven pretty squarely that as we will talk more with ARNAB on the spr. The SPR is a discretionary policy tool. The United States, Washington does not control the shale patch. Beijing controls whatever's happening right now in China. And they are very clearly demonstrating that they have much greater discretionary power in the fossil fuel market than basically the entire collective West. And I think that's a pretty staggering
- [40:02]
A
outcome because they don't make this stuff right. Like, that's the weird thing is this is just, this is not like downstream of market forces like drilling more things in West Texas. This is just a decision that has been made. I mean, this is like decades in the making at this point in order to be able to have the tools in the toolkit to bring this to bear in a crisis.
- [40:29]
B
Yeah, and again, it's working. And again, we don't even know what's working because again, we've had prices come back full circle through the crisis and Beijing is still full 5 million barrels a day out of the market. It's like, why?
- [40:44]
A
I think that, I think that the like, slow to turn off the tap thing, there's probably the Occam razor of like, oh, we just like held onto this thing too long. I don't know. This is all just like campaign style policymaking in China. Right. It's like you always overshoot the target. Once the target set, it's like everyone is running towards it and then they run a little too far. So, yeah, potentially less Machiavellian aspects there. So one conclusion is it would be kind of nice for the US to be able to do some smoothing out of crises like this for energy markets, for rare earths, whatever have you. The other conclusion, I could imagine some Democrats on the verge of controlling the House in particular coming to is this is enabling an executive branch from starting wars that we don't approve and kind of like building a bigger security blanket to not have the sort of economic pain of foreign adventures that we think are stupid, not hit faster is actually going to lead to more of this happening, not less. So what's your sense on like this being like a dangerous insurance policy of selling, you know, flood insurance to like people in the hurricane path as opposed to, you know, prudent national economic management?
- [42:18]
C
Yeah, look, I think there is a, and you're seeing versions of this as well in the critical minerals space where the Trump administration has been incredibly active, has used the toolkit available to it in very robust ways in arguably, you know, legally creative ways, but, but certainly like pushing the bounds of executive authorities. And I think there is this push to say all these things are being done in to, to further an administration that is undertaking policy that is, you know, unlawful, corrupt, etc. I think that this push to reserve, to restrict these tools though would be incredibly misguided. I would just go back three or four years to 2022 when Russia invaded Ukraine and say that was entirely out of our control. And one, you know, one distinction as well I will note going back to our last conversation is the global community begged for all intents and purposes China to release from its crude stockpiles at that time and instead they kept purchasing. They like added more demand at a time when the market was incredibly tight and we can't count on these external forces. So I would say every, like every instinct to restrict a tool, including the spr because of its like, worst case scenarios and is also going to drastically reduce your ability to use those tools in a genuine crisis. Not of your making. You know, there's all like, you can't design a tool perfectly to match your preferred policy outcomes and like minimize all bad outcomes. That's just not how it works. Like, President Trump was elected democratically. He chose to engage in this war. If you, you know, like, I think this is a place where Congress has really lapsed its authorities just in terms of like war powers resolutions. But look like this is, you know, you, I think choosing to restrict a tool that is incredibly useful for macroeconomic stability and economic stability is, would be really, really misguided at a time when these, these disruptions are increasing. This is now the third disruption we've had in the past six years. We had Covid, which was a, you know, price shock on the like downside, but it is still one that had enormous repercussions enormous repercussions for our domestic shale sector led to the tightness that then helped kind of make the Russia Ukraine crisis much worse. And then we've had Hormuz and even, you know, if you could go further back to, to the Saudi price war, this is something that is a part of our daily lives now. And I think it's better to be equipped with a tool than not. We can talk more about potential guardrails for this stuff, how you can legislate potentially guardrails, but I think it would be really misguided to limit these tools.
- [45:36]
A
Rory. Anyway, thoughts, comments, lessons for Western policymakers?
- [45:39]
B
Well, yeah, and I'd actually just dovetail and Arnab and I have worked a lot on the SPR file over the past couple years and I think one of the things that we initially talked about, you know, following 2022, but you know, and kind of in the context of everything Arnab was saying is, you know, SPRs are a bidirectional tool and we always talk about them in terms of their capacity to offset supply shocks, in terms of increasing supply to replace lost supply. But as we've seen and as kind of has been mentioned multiple times, China has been buying oil hand over fist for its SPR stock building and has manifested as effective demand in moments of especially weak consumption globally, like during COVID Those are similarly stabilizing factors that if we want global oil and like the reason that OPEC has always been this kind of important factor in global oil markets is that the, the only thing worse than high oil prices is boom bust oil prices because it's the volatility that actually drives the most kind of deleterious economic consequences. So the reason that OPEC was always so handy was that you could increase production in kind of high price moments and decrease it in weak price moments. But what we've seen is that OPEC is increasingly, increasingly bad, very frankly at achieving this job and doing this job in a reliable way. And China has actually proved to be a much more reliable and kind of technocratic in like an old and like the way OPEC used to be, that China seems like a more effective manager of these boom bust cycles. And I think, and as Arnab and I have talked about extensively before, I think the US SPR can serve a similar role that all these pushes to just refill the SPR to the brim right now, I think are, are as misguided as the pushes to kind of draw it down to zero and replace it entirely. That empty SPR capacity The capacity for discretionary buying is in many ways as valuable as the capacity for discretionary selling. And I think in this context, that's an equally important thing to consider.
- [47:46]
C
Actually, if I can just pick up on that too, is, you know, we had the shale revolution where we became the world's largest oil and gas producer, but we were, we are still vulnerable to this global market, if you want to call it that. And I think it's, you know, as, as Rory mentioned, it is becoming more volatile, more unpredictable. OPEC can't be counted on to stabilize in the same way that it may have, you know, even within its own interest. And so the question really is, is like, do we want to build that resilience into our economy and what is necessary to do it? And I think we have to take the reality of the shale patch here in the US and how that compares. We do not have the same level of low cost production that Saudi Arabia does. One of the reasons they have been the most effective swing producer is because they can ramp up capacity very quickly at a very low cost and vice versa. We need to look at the fact that our swingiest swing production is in the shale patch and it takes about 6 to 12 months to ramp up new investment. And that means that in a shock like this, you're going to be limited. But we also have, we have swing year capacity in the form of drilled, uncompleted wells called ducts. These take about four weeks to ramp up. And you know, one thing about ducts is while there used to be a high number of this, those are at a historic low in the Permian Basin. And if we could orient whether it's SPR acquisition or other policy supports to increase duck capacity, it would allow you to ramp up production more fast in terms of this kind of a crisis. And so I think the policy toolkit is going to look different there. It is going to be to some extent subsidizing companies to mitigate the risks. But we have to think about this in the, you know, broader picture of do we want to be subject to OPEC China in the future? I don't think so. I think it's like minimizing our exposure to that volatility or, you know, China's self interest, as we've talked about multiple times now, is, is a worthwhile policy goal.
- [50:10]
B
Actually, if I could just dovetail one quick thing on the end there. Yeah. Just to, just to reiterate what Arna was saying, that the important thing here is that, yeah, North America, you know, the United States clearly on a market basis, the energy power globally. But the important thing to remember is that it's entirely driven by market forces, not discretionary government policy. When we talk about what's happening in China, the belief, at least my belief, is that this is primarily a discretionary policy choice. A choice of government that can be beneficial or in another world could be, you know, you know, nefarious or non beneficial to the west. Same as in opec. OPEC is always, I think, you know, in the oil market literally, you know, you know, creating an enemy or kind of, you know, making OPEC seem evil is about as old as oil policy in the world. Like it's never been believed that, that The west and OPEC's interests are aligned less, you know, even less so now. But the effective second most powerful member of OPEC is Russia, which is obviously not aligned with, with the West's interest. So when we're talking about having Western discretionary energy policy, you know, pull. This is where we need to get into the SPR discussion because yeah, Canada, the United States, you know, yeah, absolute energy juggernauts. The west is leading non OPEC oil production growth, you know, by leaps and bounds. And part of the reason for that is our kind of, you know, our market systems are enabling other private sector to take these risks. The difficulty is that an overdependence on market driven private sector actors limits our government's capacities to actually affect change when we need to in a pinch. Because the market's always going to take longer than OPEC or Beijing to kind of turn on a dime in a crisis. As we've seen this time.
- [52:05]
A
What are all the other countries going to do? They're just screwed.
- [52:10]
B
Well, I mean, actually, so it, you know, other countries. Actually one of the things that we saw through this crisis is a lot of countries that didn't have SPRs. And, and, and Arnab kind of mentioned this. SPRs were kind of like not cool anymore. Like everyone was looking to get rid of them. You know, everyone's like, ah, we have the energy transition, we're going to electrify. We haven't had an oil crisis in forever. And then all. And like everyone was like kind of getting out of the game. And everyone grew to deeply regret that after this crisis, particularly in Asia, where a lot of, you know, less economically developed Asian countries, less wealthy Asian countries did not have the same economic and state capacity during the 1970s when many of these SPRs were initially built out. So they kind of missed that whole bandwagon effect of Building these out, most notably, I think, is India. India did not have a major SPR going to this crisis and was ground zero for the kind of human pain because not only does India use fuel for transportation, everything else, like everyone else in the world, but yeah, like a quarter, between a fifth and a quarter of total Indian demand for petroleum is actually an LPG for cooking fuel. And in terms of like, you know, Maslow's hierarchy, cooking is more important than driving generally. So I think that is an important aspect here. So what you've seen coming out of this crisis is a strong initial indication from, from New Delhi that you were going to see a build out of spiders following this crisis. And you've actually already seen confirmation between the Indian government and adnoc, which is the Emirati's national state oil company, that they're building a kind of a collective SPR in India. I think, I think the current thought is it's 50 million barrels, but that's going to serve both parties. It's going to keep Emirati crude and product outside on the other, on the safe side of Hormuz, if this crisis ever happened again. Because the other thing is like the, the Gulf producers themselves also want their oil outside of, for Moose, and they're going to follow the lead that Aramco has taken in doing this and having these station stocks all over the world that help them keep supplies going despite the disruption. So I think that's what you're going to see. So India is, I think, the first major player in this, but you're going to see that happen across a lot of the rest of the world, as well as people that didn't have SVRs are going to want them after this.
- [54:28]
A
Yeah. Let's talk about the Gulf response a little bit. You know, watching the World Cup, I kept seeing savvy games group by advertising. I'm like, what the hell is this? It's, you know, the Saudi. It's like the piff buying up every video game company in the world. I mean, when are these guys going to stop, like, purchasing Manchester United and start building, you know, buying drone defenses and building, you know, new pipelines and refineries and stuff? Has that already happened? Like, I mean, this is like a huge reckoning, right, for this whole region.
- [55:04]
B
I think the. You've already seen some of it, right? Some of the big flashy investment commitments that the Trump administration extracted from the Gulf states, they've all basically been turfed like, and, you know, that's not happening anymore because, yeah, there are much more pressing Things at play. And yeah, to your point, they are going to build, and they already are building a bunch of additional infrastructure to increase the resilience against future kind of Iranian threats. Obviously, they're trying to diversify around the Strait of Hormuz. You can't really entirely diversify around Hormuz. It's a pretty big thing. But you know, the east west pipeline, which was, you know, proved to be extremely valuable through this, is going to get expanded for sure. And the Adcock pipeline, the, the Emirati pipeline between the Gulf side and the At Fujairah, which is their major blending port on the Gulf of Oman side, the east side of uae. They've already, they were already in the process of twinning that or doubling the capacity. And that's about that expansion, about 50% done. They've accelerated that understandably through this crisis. And then on top of that, they're also announced that they're building a product pipeline, a batch pipeline that they can ship diesel and gasoline and jet fuel and everything else. So everyone's going to do this. The challenge is that it's, they're also going to need to invest in, you know, hell, a lot of drone defenses and anti missile and all of this other stuff. Because while obviously the easiest way for Iran to exert control is by threatening traffic through the Strait of Hormuz, you know that those Emirati pipes to Fujairah, Fujairah was attacked and bombed multiple times through this crisis. Like Iran can clearly hit these other assets as well as well as the upstream wells that, that kind of fill these pipelines. So Iran will never go away as a threat. But I think they're all going to try and diversify away around Hormuz. But again, it's going to be more expensive because you know, even if you're paying a massive toll, like a $2 million a toll for a VLCC that carries 2 million barrels, sure, no one wants to pay a dollar a barrel feed exit Hormuz. That was always free. But you're not going to build a pipeline around Hormuz for less than a dollar per flowing barrel. It's always going to be cheaper to use the natural waterway. So I think this is the challenge is it's all strategic insurance that they're going to pay, but it's going to take time and it's going to be expensive and not immediately remunerative.
- [57:26]
A
Can we come back to this? The idea of like India and the rest of the world trying to all build up their own reserves, I mean we have another kind of like 2008 Echo, right, where everyone's like, oh wow, we just need lots of dollars. So like nothing bad ever happens to us in the future. I mean, is there a world in which the next crisis, like everyone has enough of their own stuff that you get a sort of version of the smoothing out that China, because you know, the CCP is like super paranoid and they've been, you know, worried about energy security for longer, for way before it was cool, bail this out the first time. I mean, to what extent does this just become a trend that the buffer is not just on the US to create, that the whole world kind of gets in the game too.
- [58:17]
C
So I think one thing that's really important here is that in the context of oil markets, these strategic reserves rest upon a market infrastructure that's like incredibly developed. This is the most liquid commodity market in the world, maybe the most liquid market outside of dollars. And so I think it's really important to understand that there is resilience built into it because of how developed that market is. And strategic reserves are incredibly helpful. But they're particularly helpful in these tail risk events that you have huge losses and you want to do like a big chunky release. Oil storage, especially when you get down to the refined products line is like very expensive. It's much more difficult. Crude oil is easier to store. It's like more long term refined products tend to evaporate. Like you can invest in this infrastructure, but it is very costly. And so you're still likely to see like you can't always also predict which market is going to be disrupted. And so I think like we will see this push to build more resilience certainly, but it's very difficult for a country to build sufficient capacity to insulate against the whole suite of shocks. And so I think that's like where some of this also needs to be coordinated and support some of those more private resilience efforts as well.
- [59:37]
B
Yeah, and I think this is something that, that you, Arnab and I have, I've talked about a lot is like how to kind of structure that framework, that economic understanding of how these reserves fit into the system. Because I think the challenge, I think the legitimate criticism of this kind of thinking is the private sector does this, right? The private sector absorbs swings, it has stockpiles, it follows economic incentives and it does so much better than governments. And I think one thing we've seen both through this SPR release and this crisis and also, I mean my main criticism of the Biden Administration's SPR release in 22 was that it wasn't responsive to market signals. I agreed with the SPRO release when it was officially, when it was first announced in kind of April. But by the time it hit its full stride late in Q3, the crisis was already largely past us. So in many ways the SPRO release was actually feeding at that stage an oversupplied market and kind of almost pro cyclically kind of adding to the, the volatility rather than serving its purpose as kind of supplier of last resort. And I think that we just need to have, I think that if SPR policy is going to be really effective and fit well within kind of a broader and much larger and much more dynamic private system of inventory and merchant storage, I think we need to, I think we need to do a better job thinking about a rules based system that is much more responsive to the market, the way industry understands the market. Then just as this kind of bazooka that again, to this point, we were speaking earlier, Jordan, about like the policy inertia and China policy inertia is a problem here. If we're supposed to be trying to fine tune and smooth out the volatility in very fast moving markets, we can't have a situation where you're like, ah, well, we've clicked the button and now whatever happens, we can't get away from it because it was so hard to get going in the first place, which was my understanding of how it happened in the Biden administration. Like we worked so hard to do this big release. We're not going to back out now, which is, I understand on a human level, I think it would be very frustrating. But also that's kind of what you needed to do. We didn't need to draw down the level of SPro. We drew down in 22 because the bulk of the drawing down we did when prices, prices were already back in freefall, which is just kind of, I think too much of a good thing at that stage.
- [62:01]
A
I have one final question for you, Rory. So like I feel like Arnob's just energy is sort of like median, like DC policy person energy. Like where, how do you, like, where do you put yourself in the other commodity analyst people? Like are you an outlier in some way or is everyone kind of, you
- [62:26]
B
know, wired the same as you in terms of personality? I hope not. But for, for their sake. But in terms of like my view on this, again, I think I was pretty. I was, I think in some.
- [62:39]
A
I'm not. We're not. We're not talking about the calls. No, I just mean like you're like way of being like level of enthusiast.
- [62:48]
B
My way of being is my way of being normal for oil analysts? I don't think so. I think that you know what, you often have. I think the best oil analysts are typically very level headed and I think I. Normal, I would say in normal moments. The irony of this crisis is that I went into this crisis, everyone got to know me as this like alarmist ranting and raving kind of permeable that it's like, my God, he went on odd lots and called for $200 crude. He must be insane. He must have always been bullish. I wrote I was sort of crude on this podcast. I was so bearish going into this year. I expected there to be a massive glut. I did not expect the Iran war to happen. I did not expect the Strait of Hormuz to be closed. I think that my view on this is that like this was, this was the biggest shock that anyone could imagine in the oil market. And I think the fact that we avoided the worst consequences I think is actually very endearing for the global system. I think it's just deeply uncomfortable as an analyst that we still don't fully understand how we managed to pull it off or again, why, why Beijing managed to help as much as they did.
- [63:55]
A
Amazing. And one final. What is the like modal music genre of choice for the oil and gas industry? The modal music. Does everyone listen to who?
- [64:10]
B
I don't know. I mean I'm, I'm a. I'm a bad kind of millennial lover of like, you know, they call it like stomp clap music, like the most pejorative.
- [64:20]
C
I feel like we should do Arcade Fire or something like that. You. The Canadian roots. It's.
- [64:28]
A
Yeah, we'll have, we'll have an Arcade Fire X esque inspired AI song to take us.
- [64:35]
C
Maybe A Rebellion or something like that, you know, or Wake Up Wake Up's a good one because it's like, you
- [64:41]
A
know, well, I can't do the real songs anymore. I have to. So I have to make my own because they started getting overlay like a song on it. So no. So I do. I make these AI songs which are actually like the best work I produce nowadays with these satire songs. I'll send you some of my Iran war ones. We're on Spotify now. Chinatalk Records. Check us out. All right. This is really fun. Nice little breaking routine. It's good to talk about too much AI. You stop. You forgot that, like, there are actually things that are like, brown and sludgy that move around the world and that
- [65:23]
C
the world still runs on, you know, black, sludgy stuff. Yeah.
- [65:31]
B
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