Transcript:
Easan Arulanantham:
Why is oil crashing we’ve seen this week where it just kind of dropping quite hard compared to where it was a month ago.
Tom Vaughan:
Yeah, so the, I think the biggest reason oil has been coming down because it actually hit $130 A barrel as a high, got down to $95. This week, give or take. And really what has been happening is that there’s a fear of recession coming, as the Federal Reserve has been more aggressive in their conversations, as we’re seeing more softening, you know, in the overall indicators that we see new homes, building permits, applications, you know, mortgage applications, so housing is looking like it could soften up, you know, all those things. So when when you have less economic activity, you use less energy, right. And so the price of energy comes down in recessions. And so we’ve seen that and matter of fact, it’s been pretty dramatic. You know, just in the last month, a lot of these ETFs that have energy stocks in them have had a really bad time. Really good year altogether, still, even with that downturn, but big downturn. And so that’s why although, please keep in mind, if you look real closely, just at the last couple of days, we had, you know, Russia, essentially Russian courts had cut off a one and a half billion gallons a day, sorry, gallons barrels a day of oil production from Kazakhstan. And we saw a big jump, we went from 95, I think it’s up to 105 now or something. And so, you know, that can change very quickly.
And that’s one of the problems with investing in oil or energy, in my opinion. So okay, Russia starts to get aggressive and cut back on production in different ways, even their own production, make less deliveries price starts skyrocketing, you start seeing those ETFs, you know, moving up, like Vanguards energy VDE, or whatever. And all sudden Saudi Saudi Arabia comes in and starts to, you know, talk about increasing production, or China starts to learn more and more, because this be a five Omicron variant is running around, they got the zero COVID. And all of a sudden, boom, you know, you start to see a slowdown, because China uses massive energy, because they’re a huge producer. So China locks down, they’re using less energy oil starts to come down. There’s a lot of inputs into energy. It’s why I don’t really prefer it as an individual target. I have used it a few times. But it’s really difficult one to use just because of what’s going on all together. Right?
Easan Arulanantham:
Yeah. And like, Kazakhstan could eventually come back online, it’s just gonna take some time, you know, they’re not, the pipelines always gonna be the easiest way to transport oil. But there’s other ways and if countries are willing to invest, and I think countries at this point are going to invest in alternative routes, that kind of exclude Russia.
Tom Vaughan:
Yeah, yeah. And, exactly, you know, whether that’s getting oil from other countries, at some, like liquid, like gas is a tough one, you know, because most of the big gas comes through a pipeline that can do liquid, you know, liquefied natural gas, LNG. And, you know, but you got to have a certain port, you know, to capture that from one ship onto the port. And so those have to be built. So the US has surplus in natural gas. And but getting that to Europe, it will happen, actually. So that will be one of the alternatives that come, the US will start to produce more gas for Europe than we are now and ship it across. But it just takes time. And so there, they have a December 5 cut off for Russian energy. I don’t know the exact parameters, but they’re cutting back in Europe on a very aggressive basis on the Russian oil, natural gas and coal. And so that’s going to create a big restriction in the market. So they’re gonna be going other places to get that. And so, you know, we’ll see how that plays out. So that that’s why even if oil is crashing, I actually think oil is one of the biggest threats to the stock market right now, because of what could happen as as Europe starts to push away from Russia, and potentially as Russia starts to use that as a weapon to push Western economic economies into recession by making oil 160 $250 a barrel. That’s a pretty good weapon. I’m surprised it hasn’t happened yet.
Easan Arulanantham:
And there’s probably something I don’t know about that doesn’t make sense and that’s why I think the other producers would cut in if you know if if you give me $200 A barrel hunger, I’m gonna find a way to get more oil out there.
Tom Vaughan:
Yeah, but even that might take time. I mean, you know, because they’ve had some troubles getting things restarted. Like here in the US. There’s an awful lot of oil pumping that how hasn’t restarted yet, even if they want to, there’s some issues and oils got this weird thing going on where people are afraid to put big money into it, which sometimes it’s what it takes to refine it and pull it out of the ground. Because they’re afraid that you know, Clean Energy is going to be a big replacement. You got states like California saying, you can’t buy a new gas car here by I think it’s 2035 Now originally was 2030. You know, other states have fall along and you’ve got China trying to become you know, energy independent, which means a lot of Clean Energy by 2060. If you’ve got a big investing pool that wants to put money into drill, or restart, you know, it takes money. And there’s less money coming in there because of this fear of the because the payback usually on those investments is so long. Yep. And so do we really have that long, you know, if it payback is 1020 years, why ROI will be in 10 or 20 years versus the Clean Energy, the battery storages and those types of things. So it’s a tough environment right now to figure out what’s going to happen. There is a lot of different things going on. It’s really, really interesting.