Episode Details

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We recorded this video podcast on Wednesday, March 11. As we think everyone by now realizes, the Strait Hormuz is a critical bottleneck to not only crude oil exports from the region but also LNG from Qatar. We have no idea how long the current war will last. The longer it goes, the greater the risk of a painful energy crisis materializing. We do not think that fact is lost on anyone that is participating in or observing the conflict.

In this kind of very acute situation, an energy crisis would be bad for everyone be it citizens, governments, and even traditional energy companies over the long run as whatever benefit accrues from short term price appreciation would likely be lost from future economic weakness. No reasonable person in and around the energy sector is rooting for war. Even if shipping were to resume in coming days or weeks out of the Straight, we suspect the realization of what has long been considered a “worse case” geopolitical risk for oil markets—and now LNG—will motivate countries to pursue changes that mitigate this risk of future disruptions.

This week we have two key messages: (1) we revisit our “Super-Spike” oil demand destruction framework we first rolled out in March 2005 at Goldman Sachs. It was a career call for us. The basic points of our analysis we think stand the test of time. (2) we discuss various diversification opportunities that we think countries will or should take to reduce the risk of future disruptions long after this current crisis has hopefully abated.

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SLIDE 1: Cover Slide

SLIDE 2: Strait of Hormuz: Long-Term Impacts On Oil, LNG

* How will it be secured in an age of drones?

* Inverse COVID: Refreshing our oil demand destruction framework.

* Baseload energy diversification opportunities:

* US Natural Gas: Lots of growth, where to invest?

* Coal: A base-load domestic fuel, why not an EU comeback?

* Nuclear: Back in vogue, but how long to grow again in US/EU?

* Considerations: (1) What’s real, what’s hype? (2) Where in value chain to invest? (3) Who do you trust to allocate capital?

SLIDE 3: Revisiting Our Oil “Super-Spike” Framework

Key points:

* We used the US since it has sizeable demand and freely floating retail gasoline prices.

* Wider economy structurally outperforms gasoline.

* But that means a much higher nominal price is required to destroy demand versus a prior cycle.

* Gasoline demand is highly inelastic.

* Both absolute price and rate of change are relevant.

How to read the table/graph:

* The graph shows historic gasoline spending (demand x retail price) relative to personal consumer expenditures.

* Retail gasoline price equals the crude oil price + refining margin (to turn crude oil into gasoline) + gasoline taxes + “all other” (retail margin + othe