← The HC Commodities Podcast
The HC Commodities Podcast
The Commodities Trilemma with Clay Seigle
01:00:24
We discuss the trilemma facing the energy and commodities markets - between security, affordability, and sustainability, what now matters in policy and investment decisions? In the previous US administration and in Europe, sustainability was a key policy driver. Under the new Trump administration, and indeed globally since Russia's invasion of Ukraine, security has come to the forefront. How should organizations think about these three facets? How is the world changing and what does that mean for the energy and commodities sector? Our guest is Clay Seigle, Senior Fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies. Clay holds the James R. Schlesinger chair in Energy and Geopolitics and is an experienced energy industry analyst with specialization in market intelligence and political risk. Clay provides policymakers and corporate leaders with thought leadership and strategic insights to navigate regional and global energy s...
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Foreign.
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Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we discuss the trilemma, the facing the energy and commodities markets. Between security, affordability, and sustainability, what now matters in investment decisions? In the previous US Administration, sustainability was a key policy driver under the Trump administration and indeed globally. Since Russia's invasion of Ukraine, security has come to the forefront. How should organizations think about these three facets, and how is the world changing, and what does that mean for the energy and commodities sector? Our guest is Clay Siegel, senior Fellow in the Energy Security and Climate Change Program at the center for Strategic and International Studies. Clay holds the James R. Schlesinger Chair in Energy and Geopolitics and is an experienced energy industry analyst with specialization in market intelligence and political risk. Clay provides policymakers and corporate leaders with thought leadership and strategic insights to navigate regional and global energy security challenges. As always, you can really support the show by leaving us a positive review on the platform you're listening on, and I hope you enjoyed the episode. Clay, welcome to the show.
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Thank you, Paul. It's a pleasure to be here.
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Yeah, I'm glad we could finally put this together. So today we've got a kind of big one. We're talking about essentially the trilemma of the energy, the commodities world when it comes to investments to assets. And that really is from a governmental perspective, security versus affordability versus sustainability. And we're calling that a trilemma. It's very much key at the moment in how it's shifting. And it's shifting how governments are thinking about their energy security, their commodity security, particularly when it comes to critical minerals. Obviously, we've covered that a lot in the last couple of episodes. We're going to talk about where Washington is on this, where the globe is on this, how it then affects decision making and how it affects our sector. But can you just, I guess, set the scene for us a little bit? Clay, of those three, where were we a couple of years ago?
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A couple of years ago, during the Biden administration, we definitely had a material emphasis on the sustainability part. And I don't need to tell you and your listeners that that was a major focus of the Biden administration's efforts with regard to the energy industry. And when the Biden administration came to power, there was a huge emphasis on primarily just an approach to leave it on the ground. Right. I mean, they really wanted to turn away from traditional hydrocarbon sources of energy, oil and gas, in favor of renewables and cleaner tech to be a bigger portion of the energy supply pie. And a lot of advances were made in that regard and important policy advances to help industry succeed. Foremost among which in the, the ira, the Inflation Reduction act that provided material subsidies and credits to producers of, for example, renewable fuels. But pretty soon into the Biden administration, I think that it became clear that a more of all of the above approach to energy supply was going to be required. And of course, the icing on cake was the historic oil price spike that took place after Russia's secondary invasion of Ukraine in February 22. So we saw record high oil prices, 1:30ish dollars a barrel for Brent. We saw gasoline prices in the United States on average hit a record high above $5 a gallon. It was way higher in certain markets in the west and Pacific Northwest. But my point is, once the Biden administration was facing the potential of an acute energy supply crisis, we did see a pivot toward more of an all of the above approach that acknowledged the important role that hydrocarbons do play in today's energy picture and in the foreseeable future as well. So that, that was kind of an inflection point that set us up for the second half of the Biden administration and the, obviously the presidential and congressional campaigns that took place toward the end of that period that have brought us to the present day.
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Staying on that Biden administration. I don't know, there's a, you know, maybe we can talk about California, maybe we can talk about lng, just some examples about how that, how this plays out, because it elucidates kind of some of the inherent conflict here. Right. Which is historically the economist would say everything is all about affordability and trying to attach value to security and sustainability is so nebulous. You might be making decisions that are inefficient, all that good stuff. Can you just give us some example? When you take lng, for example, from an affordability standpoint, it makes great sense for the US to make all this cheap shale gas, export it globally, make lots of money doing that. How did that then? Because we had that key moment when despite Europe searching for energy security and the US being able to provide it, you also had a shutdown on, on, on the permits for new LNG liquefaction plants in, on the Gulf Coast.
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It's true. And that definitely sent a chill through some in the industry that were making big plans and big bets on the ability to export LNG in future years. But we did become a exporter for the world in liquefied natural gas during the Biden administration. And it's clear that the export outlet is needed and proper to accommodate the huge supply that we have here in the United States. So I think it's a mixed, it's a mixed picture there. The Biden administration certainly wanted to take steps to reduce the carbon footprint of energy production. And it's no secret that there is both. You know, there are environmental consequences from hydraulic fracturing of wells formations, commonly known as fracking, as well as emissions at the wellhead, particularly in the form of methane, very bad for the environment. So what we saw was that the Biden administration took a short term pause in the issuing of permits for new LNG export facilities to be constructed. But it is important to remember that the United States became the number one exporter in the world of liquefied natural gas during the Biden administration. And likewise, even though your question was about gas and not oil, it's also worth acknowledging that notwithstanding the Biden administration's significant efforts to crack down on greenhouse gas emissions and focus on the environmental consequences for energy, the United States also reached record high oil production of substantially 13 and a half million barrels per day during the Biden administration. When Trump left office at the beginning of 2021, I think US oil production was more like 11 million barrels per day, approximately. So we saw increases in the output of natural gas and crude oil, the primary hydrocarbon energy sources, during the Biden administration. So I think that one of the lessons from that chapter is it is possible to do both. It's possible to scrutinize the effects of energy supply and energy use on the environment and to take steps to mitigate adverse effects and also to increase production. So both things happened during the previous administration.
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Yeah, and we're very early in this journey of ultimately whatever percentage you put on it, right. It's 80%, 90. 90% economics. And then there are these sustainability factors that really came in that did have, that had incentive structures around them that then played on the economics. The thing about that security will come onto it. As you really ramp up how important things like security is or indeed sustainability, then you start to get, you know, these different outcomes and distortions, positive or negative one. One other bit just to get, because it is sort of one of the key stories really and really sharpens this idea of sustainability. Trumping affordability during the Biden administration is certainly around the renewable fuels piece where lots of investment went in as a result of the blenders tax Credit and so forth into renewable diesel, saf, et cetera, just significant investment flows. That really is an example of essentially policy underpinned by sustainability driving a sector. Is that fair? And can you give us some sense of how that piece was left as the Biden administration left? Because that would be a key bit in what Trump has subsequently done.
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Well, the way I would describe it at a high level is sort of a proving ground for pioneering technologies like you talked about, sustainable aviation fuel, which the science and the tech around has grown by leaps and bounds. Important investments have been made but. And right. It still represents a very tiny sliver of the supply pool right now. And in a way that's to be expected with pioneering technologies and stuff that's on the, you know, pushing the edge and pushing the envelope. But it will require a lot more time and a lot more investment by industry in order to make something like SAF sustainable aviation fuel a bigger piece of the piece of.
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Yeah, but. And then you just need that. And this is one of the inherent challenges as we sort of swing between sustainability and security, being a driver or sort of at the margin creating decision making. You know, that's when obviously you're not going to get that long term continued investment that does drive new technologies. And actually, you can see in Europe you've had 20 years of emphasis on renewables, you know, which means they are far farther ahead in terms of, you know, know, renewable power generation.
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Perhaps, perhaps to a fault. We're still, I think, unpacking the last week's massive power outage in the Iberian Peninsula. It wasn't all of Europe where I think your, your, the thrust of your comment was directed with regard to the uptake of renewables. But even right in quotes, even just the Iberian Peninsula going Black for substantially 24 hours, I believe certainly calls into question important technical attributes of a more renewable grid, like for example, how long it can take to reboot and restart the system after an outage like that. So all of this needs to be considered in the, in the trilemma.
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Yeah, and, and it's security both in that very short term, I. E. You're introducing instability into the grid, but also in the long term picture. Though, of course, Europe not having to be beholden to importing hydrocarbons from Russia, from even the U.S. now, you know.
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Is a, let's say, let's say a bit less on the margin dependent on it, because Europe is certainly still dependent on the import of hydrocarbons, notwithstanding the fact that less is coming from Russia than before to be sure.
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But, yeah, but in 20 years you would assume, you know what I mean, in the long run, actually it's increasing security. You, you could argue, but I mean, let's, let's tackle it right. Okay, so, so, and this wasn't just a, you know, this hasn't swept into Washington with, with the Trump administration, as you highlighted in the wake of Russia's invasion of Ukraine, suddenly energy security became front and center for all legislators and as you said, played out in lng and with that sort of idea that we were only really starting to think about security as a key driver. Can you give us some sense of, of how that, that understanding that knowledge, you know, has, has changed, has, has become prevalent within policy, how that's become top of mind of policymakers and where are, you know, and how that in some ways was a key part of the Trump administration's campaign?
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Sure. Well, from my perspective, and maybe putting a little bit of my historian hat on, certainly the security imperative is nothing new for energy. And in fact, ever since oil became the dominant fuel of the world's armed forces, which was substantially during the interwar period between the first and Second World wars, the prerogative to have energy security to provide for those armed forces was paramount. And you can really see the change that took place in, in the profile of particularly oil and petroleum products between the wars. And so by, in the First World War, the tank, air superiority, those were all kind of experiments. But by the Second World War, those are required, you know, playing pieces for the armed forces. And so the militaries are really going to be dependent in the rest of the 20th century on securing energy supply. And the security imperative, of course, was firmly reinforced by the, the first oil supply crisis in the early to mid-1970s, 1973, 1974, commonly known as the Arab oil market.
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Solar panels on, on the, on the White House.
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Right. Well, that's it. I mean, there's, there's such a, I'd say, like, inseparable link between security and affordability that we start to think about, particularly in, in that chapter in the 1970s, when it becomes clear that the United States is very beholden to flows of oil imports in order to keep the lights on and keep the machinery moving. And so we undertake a program, first of all on the demand side of promoting conservation. People remember the recently departed President Carter and his approach to modifying the thermostat, putting on a sweater, to thinking about ways to cushion the blow from potential future supply disruptions. And that involved the formation of the International Energy Agency and The collective maintaining of strategic oil reserves in the United States. We call it the spr, the Strategic Petroleum Reserve. But there are also holding requirements in with the other members of the IEA in Asia and in Europe, all of which have participated in the collective drawdown of strategic reserves in cases like the 2022 Russia invasion of Ukraine and consequent price spike that you mentioned. So all of this is sort of, in a way, the recent stuff is taking advantage of and capitalizing on the long term planning that energy consuming countries began to undertake after that initial price shock in the early 70s.
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Yeah, and it's not, and it's not just obviously having, you know, storage and tanks and infrastructure around the world. It's also frankly having a very large and expensive Navy with, with 10 sort of, you know, capital ships as carriers. Right. I mean, like the whole sort of orientation of this security of supply was the United States in particular having a military presence in all these key regions to make sure that the ships, the ships flowed, the oil moved as well. Right. I mean, it's a significant outlay that has been required to secure this energy supply chain globally.
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And that one's been reinforced recently for those that follow the current events. Naturally, in the last, well, really Since November of 23, we've seen the Houthi attacks on shipping, including oil and gas shipping in that part of the world, primarily around the Red Sea, which has resulted in real changes in shipping patterns and the cost of transportation and the cost of that related insurance not only for oil and gas, but for other goods that are shipped around the world between the Eastern and Western hemispheres. And likewise we have concerns related to the present day in places like, well, the Nordic Straits and Nord Stream. And so that's been well covered by the news. But the narrative has shifted a bit with more information having come out in the last recent months. But it all goes to the point that you're making. Oh, and let's not also forget that everything around the South China Sea and thinking about China's very significant oil import requirements and gas import requirements play to naval activity and military posture in that part of the world. So these are, these are perennial considerations. And as long as the world relies on trade connecting supply and demand of oil and gas, primarily oceanic, well, you know, that will be a fixture here.
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The energy and resources sector is experiencing unprecedented change. To help navigate this change and capture its opportunities, HC Group launched Enco Insights, a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds, law firms and corporates enco Insights leverages HC Group's 20 years of connections in energy and commodities to give clients the expertise they need when the stakes are high and insight matters. Learn more@encoinsights.com I think there's, there is something profound going on here in the sense that actually that security piece, let's take A, you know, 2017, let's take actually 2015 or something, right. There was this view that war, in a sense, was going to be limited to periodic trade spats and so forth. And that in the end, actually the world was becoming safer. The world was becoming more and more open, you know, to free global free trade. It was a very, a very sort of stable system. And in some ways there was this view that thinking about security and actually the extra costs of maintaining, you know, huge military presences and all this, you know, you just have to look at the UK's navy. I think it now has more admirals than it does, you know, actual ships, which is extraordinary. Yeah. Fact and that always a bit of a relic of the past. And then suddenly you had obviously escalating tension with China. Covid happens as well. There's a security element there. You know, suddenly countries realized, you know, what it was like to not be part of a very connected global system. And then obviously the key one was Russia's invasion of Ukraine. Ukraine. And suddenly this, you know, we're back in a world where this is very much front and center and has profound implications as we go through an energy transition as well. Because ultimately electrons don't. Don't flow in the same way. The world becomes far more disconnected if there is. If actually you've got localized renewable generation and energy storage in each location. There isn't the same need for a global infrastructure. I mean, it. But then you've got this, well, we're in a transition. What do we do with our refineries in the interim? Because not having a refinery now is a big thing because we can't rely on a global products trade if there are continued fracturing. I mean, all is. It is very profound. How much of that was in the Zeitgeist, do you think, when, when the Trump administration returned to Washington. And how much is that a key driver of, of decision making?
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I would say that probably the biggest factor in the, in the transformation of the energy security picture globally has been the deliberate withdrawal of the United States as the global leader, first of all, with regard to international security. And so the return of the Trump administration really typifies this outlook because I guess the philosophy here has been that the United States was over committed to international obligations to promote peace and security of all kinds, ranging from our commitment relative to the other members of NATO all the way to sort of the soft power and softer influence work that was done by the usaid. And so in that whole constellation of United States influence over matters of peace and security and the delivery of needed goods around the world, both commodities and even sustenance, I mean, all of that is being rolled back quickly by the current administration. But we already saw signs that the United States was looking to reduce its commitments overseas before Trump returned to office. I just think that again, it's quite obvious at face value that it has dramatically accelerated with the return of Trump and a very favorable Republican control of both houses of Congress. All of this stuff is being implemented at a very fast pace. But again, even before Trump arrived back in the White House, you had just scenes of historical significance, like the very chaotic withdrawal from Afghanistan and the bit about the people hanging on to the departing planes taking off from the airport. And we also incurred quite some casualties during those final weeks of the United States military presence there. So that's also a story that has evolved over the recent administrations. The United States cut a deal with the Taliban during the Trump administration, but then the final implementation and withdrawal of the forces took place during the Biden administration. So this, the movement for the United States to pull back from overseas commitments has been ongoing. It's not only in the hands of just one administration and its footprint on our foreign policy, but it has taken a dramatic acceleration during the first several months of the current administration.
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How do you thread that needle? Because that's an affordability story, right? In the end, that is a. Why should we be spending so much blood and treasure, you know, in far off, far off regions that, you know, have little to no consequence ultimately to the American people? Sound very brutal, right? I mean, this is, ultimately, this is the intractable problem of Afghanistan and the amount of money that was spent there. That's an affordability story, because the security narrative there would be. Well, actually, you know, we want to, we want to make sure that the world is safe. We want to continue to be the global policeman. Ultimately, that makes us rich because that means we've got big ships attached to our dollars. People therefore buy our dollars. They trust the dollar. And those are, those are two competing narratives.
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If I'm not right, maybe here's a different perspective, though. I, you know, I would posit that security and affordability are, in a way, sides of a coin. I mean, Economics 101 is that the law of supply is as supply becomes more scarce, prices tend to increase, other things being equal. And so the idea of securing required commodities like energy commodities directly plays into the price environment. And that you can see on the day to day or week to week headlines in the oil or gas markets how much of price formation and price change and volatility is affected by the supply side of the equation. So if one were to completely withdraw from influence in the world, and I'm not saying the Trump administration is going that far, but it's moved the pendulum in the direction of fewer commitments and less involvement overseas, you do have sort of a concomitant increase in the potential for risk to energy supply. And that's something that policymakers should consider because in the medium to long term, the world has to have the energy that it needs to keep the lights on and keep people safe and healthy. So we're going to have to secure the energy one way or another. And we're talking about how much it's going to cost not only in the short term, but in the medium to long term as well.
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I guess we're not hearing a clear policy around some of this stuff, right? I mean, we're sort of hearing, on the one hand, you know, we're done with global interaction. On the other hand, though, we are, there's intervention with the Houthis. There's obviously the escalating maximalist approach with Iran and so forth. And again, a lot of that comes down to energy, right? They're getting the Houthis because that's where the oil flows. And likewise, you know, Iran has, you know, a lot of that has energy policy underpinning it, I guess. You know, one example of this is that kind of, okay, for example, critical minerals, right? This is, this is a key one that's been playing out. And it's, you know, we're tariffing in the name of, of security and so forth. But it's very, as soon as you start bringing security into the lens, we must have a domestic supply chain for critical minerals that is very expensive. These are relatively low volume stuff. So it's not like they'll never really be economic. The reason why they're all made in China is, is that's at one place it's economic to process these things. They accept the environmental burden of it. You've got, you know, you can do it in larger volumes and so forth. You know, how. So I guess my question is how in order to achieve security in many of these commodities, true Security that is that that definitely trumps affordability. And how willing are we seeing the administration to actually or the policymakers to raise to incur costs, substantial investments, substantial subsidies to achieve these ends in an environment at the moment where everything is focused on affordability and lowering the debt?
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I think it all starts with an accurate understanding of the facts. And so when we talk about things like both for energy and for critical minerals, a solid understanding of the facts of supply and demand is paramount. And I think the administration is still struggling with some of that. Just as an example on energy, you know, we hear rhetoric that says right here in the United States we have all of the energy that we need. We don't need energy from anywhere else.
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Except for those heavy crudes.
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It's false, right? I mean, and heavy crude is a great example. Is it technically possible for United States refineries to, to run only on light sweet crude? Of course, but you would have far less refined product yield that's produced by them. And it would also be absolutely unprofitable for all of those refineries that would try to undertake that crazy recipe of light low sulfur crude, only without the heavy and higher sulfur crudes that are in short supply in the United States. That of course, we have for decades gotten reliably from our, our neighbor to the north, Canada. And so we also import those heavy and sour crudes from other markets, including some from the Middle east, but quite some from Latin America as well. And so when we say that, you know, there won't be any consequences of halting trade with those guys, that that's just not true. There will be tremendous consequences. And so we saw right. Walk backs of the initial super aggressive stance on those topics. And so at first we were talking about 25% tariff on those, I think, Canadian and Mexican imports, including energy. Then energy came down to 10%. And now I believe we are in a current phase of no tariffs are contemplated as long as the imports fall within the, the SPAC of the USMCA trade agreement. So I think that that's a little bit of a tacit acknowledgment by the Trump administration that a little bit of an overreach, maybe a little bit of a disregard on the facts as relates to industry and economic consequences of some of the initial rhetoric. It's also true with regard to critical minerals, where, as you said, substantially all of the processing is in China, and there's no roadmap to doing that quickly here domestically. And so that makes an argument for international trade to be bolstered if anything, and not inhibited. And so here we are with changes taking place in terms of company guidance on what they'll be able to do in the future in this new trade regiment and amid a trade war compared to before. They're material changes.
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And you have this profound challenge that essentially the entire market works on affordability. Right. Economics. And the minute you start having to think about security and therefore government involvement, you're introducing distortions. This has played out in the UK recently, obviously with UK steel manufacturing. Right. The last arc furnace was going to shut down. You can't start these things back up very easily. So the government steps in and we had Richard Holtom at Trafigura at the FT conference talking about their nestar in Australia. Hey, look, if it's, we're purely making economic decisions here, then this needs to be shut down. Is that what the Australian government wants? Right. So if we start taking security very seriously and it really is foundational to policymakers, we are going to start going back to a world of some level of walking away from privatization and all the gains and efficiencies that has brought. And so it is going to be very challenging. Right?
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It's.
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It is, you know, actually it makes sense to shut down the refinery because we can get the products from a variety of sources on ships as opposed to having to make them locally. Where, you know, are you seeing anything around how actually this stuff gets done in reality and how far it's going at the moment?
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Well, generally speaking, I think that markets pretty efficiently are able to capture and price in some of the exogenous to finance factors that affect investment plans and ultimately company earnings. And that's everything from regulatory risk to political risk, even geopolitical risk. But what we're seeing right now, and I think that this is a bit new, is and take the energy industry specifically, so global majors, international oil companies have for decades evaluated projects around the world. In part, one of the key attributes is political risk in the host country. That's never really been on the table for projects in the United States. But now I think we actually have reached a point where political risk in the United States is increasingly a material factor and should be justifiably for company decision making. And I'm not actually making a political statement here about the current administration. I'm actually talking about the American political system generally. And so we have had a propensity in recent years with regard to energy for the pendulum to swing pretty profoundly from one, I don't want to say extreme, but one side to the other. And so if you think about the progression and the attitude toward fossil fuels, hydrocarbon energy between and among the Biden administration, you can imagine the pendulum kind of swinging as I'm talking. The Obama administration swinging, the Trump administration, the Biden administration, and now back to the Trump administration. You know, you mentioned earlier in our conversation how the Europeans must be thinking and planning for their requirements for natural gas supply in the coming years, in the coming decades. If the United States really wants to be seen as a reliable long term supplier, then it's probably not advisable and it's not productive to have these relatively frequent swings in the political pendulum as affects the outlook and intention for the energy industry. So I'm not talking about a short term pause that turned out to be just a few months in duration, but just the idea about how significant a role hydrocarbon should play in, in the energy future has evolved quite a bit. And we've seen a lot of back and forth along with changes in the election results in the United States. So that raises a really important question about political risk here. Even though the most recent pause was short lived, short duration, future pauses in future administrations could be longer. And so that's something that I think both buyers and sellers of energy are increasingly going to need to account for in their planning. You mentioned refining capacity and the idea that in certain locations refining capacity could be culled or pared back in favor of more economic options as long as free trade is available. And I mean, you know, first of all, that last little caveat is an important consideration these days. We're in, I think, a pretty unprecedented trade war right now. The market is showing a lot of signs that it expects the Trump administration to moderate its stance on the trade war, and particularly with regard to China, but also with regard to all of the outstanding bilateral deals, the dozens of them that are on the table around the world. And so if that's the case, then the market probably is generally effectively pricing in that we're not going to see a dramatic economic downturn now. But with regards specifically to refining capacity in the medium term, you got to keep in mind that a lot of that has already been shut down and retired. And there are quite some more that are, that are on the books to be retired in the coming years. And so you have to ask yourself, if the whole forecast for oil demand is going to turn out to be higher than we have been expecting over the last few years, when those retirement decisions were made, then it's entirely possible that we could find ourselves globally short of refining capacity in the coming years. And that naturally will have an impact on, on fuel prices around the world, especially those areas that are acutely impacted by those refinery shutdowns. And we've seen several of them just here in the United States, in Texas, in California recently and some other states. And it's also happening in other parts of the world. Take China, for example. You know, China has kind of a bifurcated system of refining and petrochemical activity. The newer plants, the sophisticated plants, are very efficient and can be profitable. The, some of the smaller and older units, especially the private ones that they nickname teapots in China, are not efficient. And I think the central government in Beijing would be keen to lean on many of them for retirement and shutdown. And so even, even over there, there's an issue about refining capacity going forward. And a lot of the capacity that they do have to processed crude oil is being pushed into the petrochemical industry and not to providing the typical transportation fuels like gasoline, diesel, jet fuel. So that's what we need to watch in the medium term on the refining front is whether we're going to have globally adequate capacity relative to what still looks like fairly robust demand around the world. Hello, I'm David Hunt, founder and managing.
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Listen to my Leadership Clean Tech podcast, available on all platforms. But all that assumes, and this is sort of the way you play it out, right? If, if security really trumps affordability. We haven't even mentioned sustainability the last 30 minutes. You know, I think that's how far in the rearview mirror that is right now, much to the detriment of, you know, of bigger risks that the planet faces. But if you play it out okay, so, so all of what you just said is just true, but it's based on the fact that, you know, everyone is making economic decisions. Ultimately you start and for the most part come, you know, whether it's a Chinese teapot refiner or it's a, you know, the refining arm of Saudi Aram, whatever it might be, you know, are ultimately make, you know, they're based on market decisions. You know, they're making decisions around profitability. You suddenly get a World, though, if European Union ends up going all in to keep this refinery ticking along, even though it makes no money, it makes no sense in a free trade economic world. But they have to say, we want to keep this pumping stuff out because we need to have a domestic refining capability in case the worst happens. Everyone starts doing this and then suddenly you have the entire sort of market that we built the reliable flow of fuels on for the last 30, 40, 50 years being distorted, even disrupted, by having these zombie refineries everywhere. And this cascades across other. Other industries as well, other sectors. You know, it would be a. You know, I think you and I would argue that that would be a very suboptimal world where we go back to large public enterprises manufacturing steel. That means that private enterprise just can't compete.
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Well, I may not be up on the latest on this because my impression is that actually Europe has been one of the regions with the greatest concentration of refinery shutdowns. And so. Exactly.
- [40:00]
B
Because, yeah, what happens with the last one? Right. So, yes, it absolutely has, because it's been making economic decisions. But if someone there decides actually, well, we need. This needs to stop for security purposes, that would. My point being that that has. If you carry on down that route, you end up in a very different sort of. The commodities in the energy sector ends up in a different world.
- [40:19]
A
Well, at the end of the day, it is certainly a question of supply and demand. And as long as people keep driving and flying and producing those goods that come from petrochemicals, we will certainly need the ability to refine the oil. And if we get short, I think we're saying the same thing, if we get short of that capacity to put that oil to use and to turn into the finished products that the economy still rely on, then we will see price spike spikes. I mean, that's, that's the law of supply and demand. Now, the most recent thing that we've seen from the EU on this front, I think just this week, if I'm not mistaken, is at least the declaration of an intention to fully sever Europe's imports of the primary energy products from Russia. And so, of course, this is a consequence of the 2022 invasion and the failure for Russia to end its invasion of Ukraine thus far. So Europe got a big lesson on import dependency and political risk, geopolitical risk to win. So it wants to naturally reduce the vulnerability that the continent has experienced in the form of using oil and gas as a weapon. But even if it's not weaponized for oil and gas assets, to come under fire physically during the course of these wars. And we have, we have seen that in Europe and we've certainly seen it in the Middle East. And so that's a smart decision by Europe to keep foremost in its planning the principles of energy security and trying to find a way to meet future demand scenarios with. With secure supply lines. We'll see more of that going forward.
- [42:04]
B
Yeah, I'm just sort of. I guess I'm playing it out to this sort of Hayekian road to serfdom, where, where actually, you know, as governments start to sort of intervene more, you create distortions that require other governments to intervene more. And we kind of, you know, you end up at a much less robust market, certainly from a cost perspective, that has its own implications. And I hear people in my ear right now sort of saying, well, that's what we've done on, around sustainability and the challenge of obviously pricing in the commonalities of greenhouse gas emissions and so forth, that has absolute, in the long run, existential threats attached to them. And this kind of comes back to your political risk and this pendulum swinging. And we're seeing that globally. Is sustainability right now completely in the rearview mirror? Is there any nod to that at all from the Trump administration? And indeed, that. That poses a real challenge for organizations that have essentially geared themselves over the last administration towards actually delivering on some pretty robust commitments made in 2020, 2021 and 2022.
- [43:08]
A
I think from the government perspective, you framed it just right. It is the preeminence of sustainability and climate change mitigation concerns is substantially in the rearview mirror compared to its prominent position in the last administration. That's absolutely right. We see that all the way from the top, from the President Trump's proclamations about the Green New scam instead of Green New Deal, all the way to, let's see, the head of the epa, Zeldin's long list of changes in terms of environmental policy priorities. I think there's several dozen on his initial list. And so these are all, in a way, undoing a lot of the work that was done in the previous administration. And that's by design. And the Trump administration will certainly say that it had the mandate to do that, and that's exactly what the election results intended. Now, there's a little bit of an irony here, but it actually makes good business sense that in industry you see that companies are not abandoning a lot of the priorities around sustainability, notwithstanding the change in administration. And so that's all the way from kind of the highest level and There were some of the prominent global majors. I'm thinking of one in particular that argued against the Trump administration's intention to withdraw from the Parents Accord all the way to continuing to advocate for some of the measures that were adopted during the last administration and previous Congress around issues like methane emission mitigation and the tracking of methane at the wellhead. So industry is not looking to give up on everything related to sustainability. It has invested far too much and I think actually believes in the merits of greenhouse gas emission mitigation and doing what it can to mitigate climate change while still providing the energy, including hydrocarbons, that are going to be needed in future years. So the industry is trying to do both. And in a way, it's stuck with the sustainability agenda more than the Trump administration has thus far. Only four months into it, just looking at the early proclamation, a lot of what the industry is waiting with bated breath to see is the fate of the provisions in the ira, the Inflation Reduction act, that give substantial credits and tax breaks to renewable energy sources and the companies that are investing in them. So you've heard about the 45Qs, the 45Z's, the provisions for things like carbon capture and underground storage and things all the way to providing brakes for hydrogen development and integrating that into the energy supply chain. So all of this, in a way, is at risk, depending on how the budget reconciliation that's currently underway on Capitol Hill is resolved. And there's tremendous stakes for energy, including the folks that went big on the basis of those tax credits, to see how that's resolved.
- [46:36]
B
That is the burning question at the moment. What is your sense on that is, I mean, this is a, this is a budget, you know, that is the big, beautiful building clues, cutting, you know, things like Medicare, Medicaid and so forth. I mean, it would seem to me that they're, they're definitely in peril.
- [46:50]
A
Yeah, I think that you've got that right. I think the sense of that we get around town in Washington is that, again, the emphasis on sustainability really is in the rearview mirror. And from an economic standpoint, the critics of those tax credits will say that, you know, at a certain point, the technology has to sink or swim without. And you were talking a minute ago about government interventions. Well, subsidies are also a government intervention. They can be justified in early stage technologies such as. And a lot of stuff that we use around the world and in daily life and in business were made possible by those technological advances. They got a break in the beginning, but they got to end at some point, Right. That extra lifeline and extra sustenance the taxpayers pay for, it's reasonable to ask after how long duration they should be lifted. And the technologies people deserve a right to know. Taxpayers deserve a right to know whether they can be economic without handouts and without taxpayer subsidies. So that's the case with, I think, looking at long term subsidies that have been in place like production tax credit and investment tax credit for technologies like solar and wind. And so some of the critics there would say when, when can they be economic in lieu of subsidies, so when can they be removed? So I think that generally you've got it right, that this Congress is looking for ways to cut costs in a dramatic fashion and is also looking for money to spend on other policy and political priorities, like certain tax cuts that are on the agenda as well and have been promised in the recent election campaign. And so with all that in mind, it seems like the administration's approach is probably one of going big on removing IRA tax credits and subsidies for those renewables and then maybe evaluating in certain justified circumstances, putting something back in, rather than the opposite approach, which would be tending to keep everything in and only removing on a case by case basis for the least feasible stuff as assessed. So I think they're going to go.
- [49:12]
B
Big on cutting and as you're quite right. Right. I mean, again, it's, it's distortions from the other way because a lot of this stuff doesn't, wouldn't exist without the tax credits. And some of the stuff, like hydrogen for example, is questionable on the merits, given the journey we went on with that on this podcast.
- [49:29]
A
Even some of the technologies that industry loves, like carbon capture and use and storage, I mean, yes. And in fact, one application of that, which of course is enhanced oil recovery, has been used by decades by the oil and gas companies to increase the efficiency of their production in maturing basins and maturing wells. On the other hand, the pioneering stuff like direct air capture, it looks a little bit more provisional economically and, and we have big questions about whether that can work without substantial subsidies. So even within each type of technology like ccus, it's necessary to unpack the various elements and to evaluate the economics each on their own merit.
- [50:17]
B
And this has been an ongoing debate on the podcast. Right. You know, the idea that just having a carbon tax just levels the playing field and allows people to maximize for, you know, the, the economic piece, you know, rather than all these different sort of tweaks and distortions. You did mention the, I mean, that EPA reading is quite shocking and Again, not to go too far off the subject, but I think one of the challenges here is that the conflation of climate degradation with climate change. And if you question the science on climate change, that is Greenhouse gas emissions, that also allows you to roll back regulation that's been in place for 50 years around how much mercury can go in our drinking water.
- [50:55]
A
Right.
- [50:56]
B
But.
- [50:56]
A
Well, even the Endangerment act is, Is now, you know, back on in the spotlight.
- [51:01]
B
Yeah.
- [51:02]
A
Which what we thought was settled. Settled law and statute.
- [51:06]
B
It would make you think twice about. Yeah. Drinking some of the water if they roll back all that EPA protections. It's. Yeah, people should read that. But just, I guess wrapping up. And it's been, it's, it is a. Like we said at the start, it's somewhat. We're sort of starting down this security is definitely now trumping sustainability and both of those sort of feeding into affordability or the economics piece. It's just a question of degrees and it's a question of if, how long this trend continues for and how profoundly we take it. Where. When you, when you sort of look towards the rest of the year, you know, and beyond kind of, you know, I guess what are the major, what are the key questions you're being asked about by policymakers and kind of what are the milestones we should be thinking about and looking out for as, as the year progresses? Obviously, one is certainly this budget reconciliation.
- [51:59]
A
Yeah, great question. I'm spending a lot of my time at CSIS thinking about the intersection of foreign policy and energy security. And this has pervades so much of what we see in the news today. So take, for example, the Trump administration's approach to Iran. It looks like we're at kind of a fork in the road. He seems to have a strong preference for some type of deal or arrangement that would assuage concerns over here about Iran's nuclear program and probably also address its support of terrorist proxies. And we talked about the Houthis, but there are others too. Or, you know, he has very thinly veiled, let's say, RA rattled the saber about a potential military action against Iran. And so it seems to me like the status quo, where we're kind of between these outcomes and out of fork in the road, is not liable to last much longer. I would say that probably within the next couple, three months, we'll know which way we're going or which way we're in on that front. And so we're seeing also a lot of pressure on the sanctions front in that regard. And we saw it earlier on Venezuela and this move to I guess unveil kind of a novel approach called secondary tariffs, which at least economically have the potential to hold even more leverage against a bad guy or nefarious traders than secondary sanctions as traditionally defined. And we'll see how that goes in the Venezuelan case. But I'm thinking especially about Iran right now, now, because the Trump administration is week in and week out adding to the list of actions that have been taken to promote the President's what they call national security Presidential Memorandum 2 of early February that basically said they want to bring Iran's oil exports to zero as a means of cutting off funding for these malign activities. They accused the regime in Toronto. So which way is that going to go? Are these relatively small but increasing number of steps like expanding sanctions going to be impactful in terms of reducing Iran's 1.5 million barrels per day of exports? And you know, the substantially the only buyer, the only one that matters right now is China. And to what extent can China even still be influenced by the threat of incremental sanctions when we've already played the right 145% trade inhibiting tariff card? And what's the fate of that as well? Are we going to climb down from that and make a deal with Beijing? So all of this plays into the energy security storyline and sticking with Iran for just a second. There is another kind of wild card, even if the United States wants to dial down the temperature. And maybe we saw a sign of that this week when Trump announced that effectively a ceasefire between the United States and the Houthis. But guess who he left out of the equation? He left out Israel, which already this morning was coming under a missile attack from Yemen. I believe this one was intercepted, unlike the one the other day that actually impacted near Israel's international airport. So the Israelis are probably pretty concerned that things could go either way between Trump and Iran. And Israel also knows how vulnerable Iran is with regard to its own energy security. Meaning if Iran were not able to both export crude oil and receive revenues for those exports and also manufacture gasoline at its domestic refineries, the country would screech to a halt. And the Israeli planners must know this. So while what's kind of in the headlines and the conventional wisdom is the threat by Israel to Iran's nuclear facilities, and I'm not downplaying that, the one where they may have even more leverage and a more powerful card to play is the potential for Israel to strike Iran's key oil facilities and bring the regime to its knees that way. And I would not sleep on that risk because the Israelis are also determined to settle accounts with the regime in Tehran, which it holds responsible for October 7, 2023 and decades of anti Israel attacks preceding it. So maybe that's a good place to wrap that nexus between foreign policy and energy security.
- [56:37]
B
Yeah, there's a lot out there. Right. And we just had Matt Smith on talk about, you know, in if all things being equal, you'd, you know, crude supplies are balanced, all this kind of good stuff and we probably see lowering prices, but there's plenty of risk out there. And as you say, we're back in a world where organizations need to have this kind of political intelligence, you know, and global view to actually correctly price in these risks that have been some, you know, that were attenuated a decade ago but now are very much front and center.
- [57:08]
A
Well, my career has largely before I migrated to Think Tank World at the beginning of this year was around the private sector market intelligence for energy traders. And so when you think about the advances that have been made in elements like imagery analysis, tanker tracking and interpreting those signals, even though they're prone to distortions and other ways to measure the flow of oil and gas through the plumbing around the world, it is true that companies and decision makers have access to more data than ever before. Where I think we need to still have some concern and scrutiny is actually at the public and the government level. One of the places that has been earmarked for cuts and for, for terminations of people and resources is at the Department of Energy and specifically at the Statistical Analytical Unit called the Energy Information Administration. That raises concerns for oil and gas analysts everywhere, private, public, because we need that independent source of truth with regard to disposition of oil and gas in the United States and around the world to make the best decisions. And even though I come from the private sector data side and have great things to say about their contributions, I don't think that they, they can provide a substitute for independent analysis and data keeping that the government is empowered to provide. Just one quick example. The weekly petroleum status report that the oil market knows as sort of the EIA stats comes out every Wednesday, is sort of the universal source of truth on key supply demand elements like refinery utilization and inventory levels and others. And so that is put together by a survey that is mandated with the force of long for the surveyed companies to comply with. That's a different modus operandi than a private company estimating inventory measurements in, in tanks and pipelines around the country. Or around the world. And so I think that if we were to have a degradation or even a loss of that capability to have that independent analysis and data keeping, it would make things, would bring more distortions to the marketplace and it would introduce more risk for these decision makers. So I hope we're not moving in that direction.
- [59:51]
B
Yeah, no, absolutely. Well, Clay, it's been a real pleasure having you on and I hope we can have you back on again in a year or so. And, you know, hopefully the world's been nice and boring, but yeah, I think it's been a fascinating discussion.
- [60:02]
A
Thank you so much for having me. It's a pleasure to discuss all the above with you and looking forward to continuing our dialogue.
- [60:08]
B
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.com.