Transcript:
Easan Arulanantham:
Could you go into a little bit more detail why you see, gas being the beat, or Russian gas production being the biggest risk to the stock market in the cover? Seems like a trigger event?
Tom Vaughan:
Yeah. So I mean, that’s the question I’ve gotten several times is just, you know, what’s the biggest risk to the stock market. And right now, I see the situation in Russia as being the biggest risk. I mean, it’s just kind of the way it is. Just because if you look at how it works, or how it’s worked, even in the 70s, when we had this giant increase in energy costs, it’s, it’s a really big issue, because energy is used for everything and look at what happened with target, right, they reported earnings are supposed to be at $8 million, or, and they ended up at five, and, you know, for the quarter, and basically, the stock dropped 30% over a two day period, the number one thing they talked about was the cost of transportation increasing at a much higher rate than they thought means their gas costs more, you know, they transport in different ways, probably diesel, too, but nonetheless, it goes through everything. And so what would happen is that a company like Target can, if they’re if their energy prices continue to go up, and up and up and up, they’re only going to be able to raise the price of their goods to the consumers to a certain level before they can’t raise them anymore. And then their costs are still going up, and all of a sudden their profits disappear. And the consumer is going to be under pressure, because their cost for energy is going up, right? It’s just it goes everywhere. It’s an every part of the of the whole equation here. This is a fantastic reason why we should get off of this whole oil train. Because it’s set on a global basis. You know, why don’t we look at some of these Clean Energy things and some energy independence. Because you know, even here in the US, we produce enough oil to support the US, it doesn’t really matter, because the price is set on a global basis. And you know, Europe’s in more trouble than we are in that regards. But it’s really interesting.
So I see this whole scenario of Russia weaponizing oil as a big risk. Now, you know, and again, JP, Morgan’s stats are fascinating. If they cut back 3 million barrels, the current they’re currently doing 11. So if they cut that back by 3 million, JP Morgan’s estimate is price will go to 190 as dramatic. If they cut back by 5 million, the estimate was 380. That’s more than dramatic. That’s ridiculous. And so now, think about that. Why would Russia cut back their own way they’re making money selling oil? Well, if they cut back their production by half, right, and the price goes up by four, they make more money, at least for a little while. And so the one reason I can think of why they wouldn’t want to do this is because that 5 million barrels of oil probably gets replaced and somehow someway, not right away. And the market drops based on that. But in the in the, you know, relative short term, 612 1824 months, something like that. We replace that 5 million barrels when it comes from, you know, Venezuela, Iran, you know, new negotiation there, some from Saudi Arabia combination of all of them. And they’re going to be people coming out of the woodwork wanting to sell oil at $300. Yeah, they’re all right. And so then what happens is now, Russia is not selling that doesn’t have a customer for that 5 million barrels. They’ve already found other suppliers. And so that’s a huge issue. Right? I mean, that would be a problem for Russia. long, longer term. Russia could really suffer from that. But you could say that about Ukraine invasion, and they did it anyway. Yeah. And they continue to do it.
Easan Arulanantham:
Yeah, the idea is like, do I want a cause? Or do I want like something my supplier to be unreliable? And like Russia starting to show? Are they going to be a reliable supplier? Can I depend on you to be my supplier? Right. And as a business, if you’re thinking about a country as a business, if this country, I can’t tell them every month, how much I’m exploring yet? I’m going to find an alternative source. Yeah, I can predict.
Tom Vaughan:
Yeah, exactly. Although reliability in that whole world is kind of a weird deal. Right? I mean, so now Iran is going to be the reliable one or, you know, Venezuela, or, you know, it’s, it’s why Clean Energy should probably be, you know, considered more because it gives an energy independence to that specific country. I mean, Germany really made a mistake here with their reliance upon Russian oil, you know, and that they’ll, they’ll eventually rectify that, but it’s going to take a really long time to figure that out. And so anyway, it’s it’s it’s a fascinating concept, this whole thing so that I see that as the stock market’s biggest risk is the possibility of Russia weaponizing their energy. They’ve already started. There. have been several different things. The Nord one pipeline is closing down for scheduled maintenance. I think right now actually. And I know I read articles were in Germany, they’re really worried about, you know, the fact that they might not turn it back on. We know we’ll, we’ll see how that plays out. That would be big time. That would be huge deal. So anyway, keep your eyes on that ball and make sure you understand what’s happening there and be ready to get defensive if those things continue to deteriorate might not happen.