[00:02:18] Josh Young: Their production and their exports actually didn’t fall how consensus expected. And my view was that their exports would’ve fallen by about a million barrels a day from February of last year to around this time. And they did not fall. They’ve only come down recently because of OPEC cuts. And then the other big sort of negative factor in the oil market has been China’s reopening, where from a logistical perspective, logistics demand, so gasoline and also jet fuel have actually been pretty strong from a demand perspective.

[00:02:50] Josh Young: But petrochemicals, and to a lesser extent, diesel demand has been pretty weak. And so the combination of essentially weaker petrochemical demand in China along with stronger exports from Russia, and then a bunch of sort of secondary factors in both directions. So I and Venezuela have been shipping more oil and various oil products, particularly I dumped a bunch of their floating storage in the last few or so.

[00:03:14] Josh Young: And then various countries either having way worse economies than one would’ve expected, like Europe, Germany’s economy has been going through a degree of de-industrialization. While on the other hand, India has been growing actually faster than expected and certain other emerging markets are doing quite well.

[00:03:30] Josh Young: So I think that’s the summary. It’s been more negative than positive for the oil market in the last year with those couple of big sort of surprises hurting the market in the short term. But subsequently, there’s been multiple OPEC supply cuts. And as OPEC has pulled back on their supplies, that’s brought the market back into a deficit and we’re seeing oil prices starting to rise again as instead of Russian production coming offline, we’re seeing Russian and Saudi and various other OPEC plus countries with their production coming off.

[00:04:03] Josh Young: So that’s the high level what’s happened in the oil market in the last year or so. 

[00:04:08] Clay Finck: Our audience absolutely loved your update on what Buffett was up to last year. He purchased substantial stakes in Occidental and Chevron. I looked up the recent quarter here and Berkshire stake, and Chevron now sits at $21 billion and Occidental’s around $13 billion.

[00:04:25] Clay Finck: And a couple other headlines I caught was that Berkshire has agreed to spend $3.3 billion to boost its stake in a liquified natural gas export terminal that’s in Maryland. And then they were also making a push for a bill that would see Texas spend at least $10 billion on natural gas fired power plants to back up its grid.

[00:04:44] Clay Finck: So with his large stakes in the Occidental and Chevron, he is still certainly still seeing value in the energy sector. And the energy sector is actually one of the cheapest sectors right now. It’s the cheapest in the S&P 500 on a PE multiple basis. So I’d love to get your comments on what we’ve seen from Buffet recently, if how much he’s been adding to his positions and maybe any other comments related to those other headlines.

[00:05:10] Josh Young: Yeah, sure. So as I recall, I think Buffet actually has been selling some of his Chevron while adding to his position in Oxy. And just Chevron has performed better as a stock than Occidental Petroleum. So my understanding of the investment thesis of Berkshire’s investment in Occidental was that it was a higher cost, higher leverage producer relative to the other large oil and gas publicly traded producers in the US.

[00:05:34] Josh Young: And so there was a bet on higher oil prices for longer, and then the bet on Chevron was more related to refining as well as just being the leader where it’s one of the highest quality companies. The business on the large cap side. And so it’s interesting seeing and Chevron has significant exposure to refining and downstream, whereas Oxy, while they do have a chemicals business and they do have some renewables there, predominantly an oil producer.

[00:06:01] Josh Young: And so it is interesting to see Buffet selling some of his Chevron, even though dollars wise he has more buying, more Oxy and then positioning with just those two stocks essentially in the oil and gas space for Berkshire’s portfolio. So all of that is pretty interesting. My interpretation is that.

[00:06:18] Josh Young: Buffett seems to be quite bullish on the price of oil and on the value of oil producing assets. And that is maybe less bullish on refining where selling down his stake in Chevron. I guess because of their large refining aspect Also as well as their sort of more demanding valuation. It’s been a great debt for Berkshire and it’s performed really well.

[00:06:39] Josh Young: And the downside of the stock that’s performed well is sometimes it trades into territory where it’s no longer a value purchase and where it might be at a valuation where it merits selling for Berkshire’s portfolio. And again, I think we’ve seen some of that. The other headlines are interesting. I think people forget that Berkshire is a holding company.

[00:06:56] Josh Young: So they have the investments that Buffet makes with the calfs and the float from the insurance that his insurance subsidiaries underwrite. And then he has all these different specific businesses that Berkshire owns outright. And so the investments in Oxy and Chevron are investments that Buffet seems to be directing personally, essentially himself.

[00:07:19] Josh Young: Whereas the Berkshire Hathaway energy subsidiary, which is. Managed by others and Buffet technically oversees it. It’s a subsidiary of Berkshire Hathaway. But a lot of those sorts of decisions, frankly, even though they seem like they’re big in the billions of dollars, are just normal course of business for Berkshire Hathaway Energy, which is that it operates, I believe, regulated and unregulated infrastructure assets in the energy space.

[00:07:42] Josh Young: Running all the way from coal to renewables, and so investment in natural gas exports, attempting to get essentially taxpayer funding for natural gas power plants. I mean, that’s just the normal course of business for Berkshire Hathaway energy. And I would think that’s actually not, it’s noteworthy that people don’t really understand just how much, for example, coal power generation Berkshire operates and how much infrastructure they own across the space and how much coal they’re transporting at Burlington, which is a subsidiary of theirs.

[00:08:12] Josh Young: I guess technically not in Berkshire Hathaway energy, But similar idea. And so it just fits in the, their normal course of business. It’s similar to See’s candy launched. Some other sort of candy line, and again, different because it’s more capital intensive, but similar in terms of, you have to wonder exactly how much Warren Buffett personally is associated with those sorts of decisions versus the Occidental Petroleum where he’s going or, well, I guess he’s having Oxy, CEO fly up to Omaha, but he’s meeting with her directly and making that sort of investment decision. Personally, 

[00:08:46] Clay Finck: since we mentioned natural gas, I find it interesting to think about how stable oil prices have been, at least relative to some of these other commodities. When I look at natural gas that was close to $10 in 2022 and now is around $2 and 60 cents. So I’m curious if you have any thoughts on the volatility and natural gas and maybe how that relates to oil and even Buffett’s businesses as well.

[00:09:12] Josh Young: I don’t think many people really understand what’s going on in natural gas. Even some of the best natural gas traders ever have bowed out of the market ’cause they think it’s too hard and too complicated. There are a few folks who have done well, betting on the direction for natural gas, but it’s very hard.

[00:09:27] Josh Young: It’s just so many different factors coming into play, along with the sort of incredible productivity, almost miracle of shale gas in the US And then the associated gas that comes with shale oil activity. So there’s many different cross currents. It’s its own whole topic. I’m moderately bullish on gas and with oil, I think the forward curve it’s in backwardation, which is if you sell a contract, if you want tosell your oil, sorry, via a futures contract a year out, you might sell it for five or $10 a barrel less.

[00:10:01] Josh Young: Then the current price for the, for spot oil, if you were selling it today versus selling it via that contract for a year out. If you’re selling natural gas in a spot contract today versus a contract a year out, you actually could get almost twice the price a year out as you can today. I think the winter 20 fours over $4 an MCF, whereas the current price, like you were saying, is just over $2.

[00:10:24] Josh Young: So there’s the forward curve is in contango and I think it actually the forward curve’s never right, but it’s, I think, pretty close. I think probably $4 over the next couple of years as more export terminals come online. It’s probably the right number depending on industrial activity in the US depending on power burn and what the winter and summers are like in the next couple of years.

[00:10:45] Josh Young: As well as, you really have to wonder what the impact is going to be of this drop of about 120 rigs from the peak rate of drilling, both for oil and natural gas in the us, which I think peaked in Q four of last year. You 

[00:11:00] Clay Finck: had mentioned that some of the big drivers of oil prices were the production within opec.

[00:11:06] Clay Finck: What’s happening with the relations with Russia and then the China reopening, and I think about the OPEC, their production cuts, and they’ve kind of been sounding the alarm bells on just this underinvestment in oil. And I think about maybe what their incentives are and what their motives are.

[00:11:24] Clay Finck: What do you make of OPEC kind of sounding the alarm bells on this underinvestment and the production cuts as well? 

[00:11:32] Josh Young: Yeah, so we put out a thesis a couple years ago that we thought that OPEC had way less spare of production capacity than they were claiming. And at the time it was very contentious and we were making jokes about there being a bone saw sharpened for me in Saudi Arabia because their history with a reporter who had reported negative things about their regime.

[00:11:53] Josh Young: And it turned out within a month of our publication of our white paper, I think it was the number two executive at Aramco, came out and publicly talked about how there was less fair capacity than people thought. And he wasn’t directing it specifically to Saudi Arabia, it was more of a general comment.

[00:12:09] Josh Young: And subsequently everyone from MBS to ABS, the Prince of Saudi Arabia to the mark to the head energy minister to various folks were senior at Aramco, have all commented on massive underinvestment in oil in particular and being worried about there being undersupply. So I mean, I think just the simplest explanation for that is that they’re worried about their ability to adequately supply the market.

[00:12:34] Josh Young: And I. If you’re a producer that has maybe they have decades of reserves, but they’re higher cost and they have less of it than they’re expecting, I think they see a risk that oil prices go so high when there’s a market under supply and they’re just not able to manage it. That actually destroys long-term demand and oil.

[00:12:52] Josh Young: They produce, let’s say 20 years from now, we’ll get. We’ll not have a market, or we will, we’ll have a much lower price. And then I think they’re also worried that if there’s a huge spike in price, again from an inadequately supplied market, that it would encourage substantial additional capital investments that could actually bring on much more supply over the long term.

[00:13:13] Josh Young: So I think when they say they want more supply, I think they want, let’s say a couple million barrels a day, more supply, maybe an extra 30% more activity than you’re seeing globally. I don’t think they want double or triple the activity levels that you’re seeing. And again, you can’t really know for sure, but I think it helps to think about that and what it means for a producer of something that’s in a cartel that’s limiting the supply of it to go tell everyone that they need to invest more.

[00:13:38] Josh Young: The one other interesting note, this is not our firsthand analysis, this is secondhand. From having published our own sort of math on the productive capacities of these different countries. After we published that and after we disseminated it, we had this great benefit and it’s a reason why we disseminate our research through white papers and other sorts of mediums, including podcast interviews and TV interviews.

[00:13:59] Josh Young: One of the nice benefits is that people reached out to us. Who have personal experience in these various fields, or who are manufacturing supplies, chemicals, or equipment or various other things to service these fields or who have worked on them in the past. And the feedback that we got was actually, we were understating the problem with the productive capacity of fields in Saudi Arabia and Kuwait and various other countries.

[00:14:25] Josh Young: And so again, we haven’t verified this. Fully, but the one supporting factor is that there is a huge amount of offshore activity using very expensive, very sort of advanced rigs by Saudi Arabia, as well as by Aramco, as well as by other sort of Gulf countries and other countries where you would think that they would have adequate or more than adequate available supplies to bring on at very low cost onshore.

[00:14:52] Josh Young: So it’s no longer the sort of Beverly hillbillies shoot of the ground and oil comes out sort of idea or analog. It’s totally the other end of the spectrum, and I think when you see Saudi Arabia going and spending hundreds of thousands of dollars a day, Per offshore rig and bringing, what is it? They have 50 or something running right now, 55.

[00:15:09] Josh Young: I mean, that should tell you that there’s a real issue on shore and that they’re concerned. It’s sort of their actions, as Buffet would say, do you want tolook at, ignore what people say and look at what they do? And what they’re doing is investing very heavily in their productive capacity. So again, that would be confirming that.

[00:15:26] Josh Young: And again, it’s it’s very important I think, to try to stay away from tinfoil hat, twi in the desert sort of theories. And again, like was Matt Simmons right? And early, or just totally wrong or wrong because he was 20 years early, unclear. But I think it’s really helpful to stay oriented on specific facts and then a simple analysis.

[00:15:46] Josh Young: That is logical and then go get as much feedback as you can on that sort of thing and not make it too complicated is that’s how we’ve approached it. And again, I think there are real capacity limitations and the simplest explanation is probably correct here, which is just that there is limited spare capacity in OPEC and it’s costing them more than they expected to add capacity, and so they’re telling other people to do it to avoid some of those longer term problems that I was mentioning.

[00:16:13] Clay Finck: It’s very interesting. I’m also really curious about the China reopening and how you view this and how it plays into the market. With today we see global oil demand at around 101 million barrels per day. So you know when China goes off the zero Covid policy and they want to reopen their economy I think that’s just huge demand coming on the market in terms of China being one of the largest economies in the world.

[00:16:39] Clay Finck: So could you talk more about this and how this plays into your oil thesis? 

[00:16:45] Josh Young: Yeah, so. I mean, I’m generally very opposed to me list economies and centrally controlled economies like China’s, and they have predictable long-term structural issues. So when you look at Japan, there was a period of significant growth in the Japanese economy and then it hit a wall in the early nineties and basically Japan stalled out for a long period of time.

[00:17:06] Josh Young: So the China bearers point to that. They point to demographic issues and say, Hey, this is the problem and I don’t disagree that there will be problems in China. And there China’s definitely experiencing economic problems, but it’s also very different in that there’s this giant population that has very little energy consumption on a per person, the per capita energy consumption.

[00:17:27] Josh Young: Still very low. And there’s still, even with negative demographics and even with all kinds of other problems, there’s still enough room there for there to be significant additional growth before having this sort of Japan problem. And so, It’s one of these things where I’m very sympathetic to the China Bear case.

[00:17:44] Josh Young: It’s just, I think it’s been too early for a long time and it’s still too early. So that caveat outta the way, I think China actually played this reopening trade extremely well, and where the US was running fiscal and monetary, essentially stimulus concurrent with a reopening, which was a natural stimulus, and where we were essentially bribing businesses and giving government funds to businesses as well as.

[00:18:10] Josh Young: Direct payments to individuals as well as suppressed interest rates while the reopening was happening in the us. China did it differently, right? They haven’t done 

[00:18:18] Josh Young: the same sorts of stimulus that we did. They did some of it for certain periods of time, but their reopening, they focused almost entirely on the sort of services side.

[00:18:28] Josh Young: They allowed the services side to boom. They sustained their real estate market enough that it didn’t totally implode. I mean, you had issues at ever grind. You had a couple of other real estate developers that had issues, but they kept it from totally exploding, but they were imploding in your perspective.

[00:18:44] Josh Young: But they put it in stasis to some extent. They let their economy run hot on the services side, and now that services boom is starting to slow, they’re in the process of working on stimulus. And so two other thoughts on that one. Their stimulus is shifting now that they’ve built out plenty of real estate developments.

[00:19:02] Josh Young: I mean, there’s really not that much of a need for new housing in China at this point, given how much they’ve built versus their demographic trends. But they’re shifting more towards sort of consumption oriented stimulus, which is very positive. And then a non-China observation that’s very important for Chinese oil demand, which is that we’re starting to see green shoots in freight demand and freight activity in the US and that consumption of diesel and that those extra trucks and extra real cars are bringing in many cases goods that are manufactured in China.

[00:19:33] Josh Young: And so there’s a little bit of a lag effect, but I think that the strength of the us, the sort of surprising strength of the US economy and this resurgence in freight demand, green shoots across trucking, and rail as we see inventory restocking, I think it could end up being another sort of similar effect for China.

[00:19:54] Josh Young: When you think about what’s suffered in China in terms of diesel demand at Petchem, if you see this pickup in factory activity and other sorts of parts of the industrial economy in China from demand in the US and elsewhere, I mean, you could see a major economic surg in China for a period of time.

[00:20:13] Josh Young: And again, I’m not saying this will last forever, but there’s room for another, I don’t know, somewhere between two and 4 million barrels a day of incremental oil demand in China. Above where we see them consuming today. Whether it’s 16 million barrels a day or 17 and a half, depending on who you’re asking, whether it’s Jody or I can’t remember the EIAIEA.

[00:20:34] Josh Young: Everyone has this sort of bracket of just under 16 million barrels a day on one side in May to 17 and a half or so. And then just one last thought on China. So when you think about that consumption, when you think about the trajectory of that consumption, you want to think about their purchases recently of oil to fill up their own strategic petroleum reserves and their own commercial inventories.

[00:20:59] Josh Young: And so that the bear thesis on oil this year had been, oh, their inventories are full and they keep buying anyway. What happens when they sell or dump those inventories or refine that oil and then export it? And there’s two things. One, they’ve been building more and more of this storage, right? And they’re not building it.

[00:21:16] Josh Young: For fun, and they’re probably not building it just to arbitrage the price of oil. They’re building it because I think they see what I see and what others see, which is this. Likely scenario where they end up using millions of barrels a day, more oil. And I think they see what OPEC’s sees, which is they don’t know where it’s going to come from.

[00:21:32] Josh Young: So if they don’t know where it’s come from and they know that they’re going to need it and they need to stimulate their manufacturing anyway, they might as well be able build a bunch of steel drums and put concrete under them and sell ’em off with oil and refined products. And so I think that’s noteworthy.

[00:21:45] Josh Young: And I think the big thing that China bears get wrong is that, There’s somehow going to be oil coming out of China. The oil goes to China, it’s getting used in China, and they’re not just speculating on the price they’re strategically purchasing it for future consumption. And again, I just think there’s so much noise in there.

[00:22:03] Josh Young: There’s so many sort of specific statistics that can look really alarming or really promising. And there’s just a reality, which is these guys, they’re centrally managing their and centrally planning their economy, and they expect to use more oil and therefore they’re buying it and storing it. And their storage levels are actually pretty stable.

[00:22:18] Josh Young: And they’re in the mid sixties or so percent capacity utilization of their storage between technically SPR and commercial inventory. So again, there’s lots of noise, but when you look at the specifics and you think about what it means for a country like China to be going and buying more oil and putting it in storage, they’re buying it to store it, to use it.

[00:22:38] Josh Young: And it’s likely not for more, it’s likely not for these other sorts of far fetching. It’s possible, but the simplest explanation is just they’re buying to use it. They see the potential for millions of barrels, a day of demand ramp up. They don’t know where they’re going to get it from. And so they want tomake sure that they have an adequate supply to be able to have some buffer in case prices spike due to some either supply disruption or unanticipated demand.

[00:23:03] Clay Finck: So the US has been selling off their strategic petroleum reserve while China has it been building theirs up. How do the reserve levels compare between the two countries? 

[00:23:13] Josh Young: Yeah, the US SPR is down it looks like 50% or so from its recent high. And that’s really interesting because there are limitations in terms of how much more you can pull out before you cause structural damage to these caverns.

[00:23:26] Josh Young: It’s not like a steel drum where you can pull it all the way down and fill it all the way up. There’s some structural limitations to how much you can pull out to maintain the integrity of it. But if you look at the trajectory, I mean, China’s been building more of these things and filling them. Again, it’s not a calamity, it’s not, they’re not sold to the brimm.

[00:23:43] Josh Young: They have plenty of additional room, but they keep building ’em and selling ’em about 60 something percent and then their use of oil has been growing. So their days of storage in terms of the amount divided by the amount they’re using per day has actually not increased by much. The US the day of storage has collapsed.

[00:24:00] Josh Young: As we’ve dumped our SPR and then frankly our commercial inventories are starting to fall too. And when you net out the structural amount, so similar to the SPR, you need a certain amount of oil in pipes for the pipelines to actually function, you need a certain amount of oil in silos and various other spots just for the normal flows for exports and imports and refiners processing stuff you need just working capital.

[00:24:24] Josh Young: When you net out the working capital of US commercial inventories, we’re actually at very low levels and I think people just haven’t done the math on that. There’s an extra roughly a hundred million barrels or so that’s it’s counted as inventory, but it’s just structural that just needs to be there.

[00:24:40] Josh Young: And so we’re pretty low on commercial inventories too, in addition to scarily low on the S p r one note on that, it’s okay that we have less in the SPR ’cause we do produce more oil domestically, but. It still was nice to have, and if you look at why we built the SPR there were strategic reasons to have it, even if we are a large oil producer at this point.

[00:25:02] Josh Young: And so it’s a, there’s a lot of political arguments on both sides of that, but we are in a less secure energy position today than we were a year and a half ago when we had twice as much oil or so in the SPR. 

[00:25:14] Clay Finck: Luke Groman on our show he was on with Preston Pich. He was kind of sounding the alarm bells on shale rolling over here in the US I pulled this Wall Street Journal article that was recently published.

[00:25:25] Clay Finck: It explained that the US shale production is dropping at its fastest pace since the Covid 19 pandemic. I saw that the number of rigs drilling for oil has dropped from 800 to six 70 with private drilling accounting for nearly 70% of that decrease. And we’ve seen us drilling rise and fall in these different waves over the past 20 or so years.

[00:25:47] Clay Finck: So I’m curious what your take is on how previous declines in the shale production in the us, how that sort of factors into the oil price and what history is telling us on this front. 

[00:25:58] Josh Young: I think I have a view, but I have it loosely helped because there’s a history of people being totally embarrassed by bad calls on shale production growth and declines in both directions.

[00:26:10] Josh Young: And so my current view and this may change because again, it’s a very complicated subject. Each of those rigs are drilling specific locations in specific spots. They can get shifted to more productive locations or less productive. They can get shifted to locations that can produce more oil or more natural gas or more natural gas liquids or some combination of those.

[00:26:30] Josh Young: So, so it is a dynamic problem, but. High level shale productivity on the oil side has been falling over the last few years. It may have peaked around 2018, so that’s the productivity per rig and essentially per thousand feet of lateral length in the horizontal of these shale wells. And it’s been falling since then.

[00:26:52] Josh Young: And so as you have declining productivity per well and per a thousand feet, and as you you hit the upper limits on rig productivity in terms of just how many feet you can drill, Per day with your Rick. And again, there are some extraordinary people and technologies for that, but we are it does look like peaking out on drilling productivity.

[00:27:13] Josh Young: And again, watch me totally be wrong on that at some point in the future with some new technology or drilling technique or what have you. But I think they’re right. I think there’s a real risk of production declining. And we also, we put out a bison white paper on this issue of drilled un completed wells.

[00:27:28] Josh Young: We called it the duck dilemma. And that sort of played out where we saw many more rigs getting added relative to frack stacks pressure pumping, equipment getting added. And so we needed more. Of those rigs just to make up for the underinvestment. And under the, there was disproportionately too little drilling activity or versus pressure pumping activity.

[00:27:50] Josh Young: So that sort of balanced itself out. And what we’re seeing now is with there being a smaller inventory of drilled on completed wells relative to the rate of drilling wells, there isn’t that sort of flex to bring on additional production very quickly to the extent that we see an oil price spike. So there is a little bit of a buildup in drill down completed wells on the gas side, which makes sense given the shape of the gas forward curve and the fact that you can sell gas right now if you want, for 18 months from now, way higher than the current price.

[00:28:19] Josh Young: So if that’s all rational with the back radiation, along with just this increase in drilling rate activity and decrease in pressure pumping, we saw the drill that completed wells go away, which means that. Whatever the error rate is going to be in terms of does shale surprise to the upside or the downside on the oil side, it’s more likely to surprise on the downside and then it’s much less likely to correct as quickly as it did in this sort of post covid recovery where you saw production rebound by, I know it’s close to 2 million barrels a day over a couple year period, just because you had all these drilled uncompleted wells that you could bring back on, or that you could go and complete without having to go drill new wells to fully replace them.

[00:28:57] Josh Young: So, long answer short, probably we’re going to have less production than people are still forecasting, and we may actually see us oil production decline if we don’t see a big step up in rigs as well as pressure pumping units. 

[00:29:13] Clay Finck: Since we talked about Occidental and Chevron, I’m curious what you’ve seen from some of the super majors in terms of production and just some of the big names in the US.

[00:29:26] Josh Young: It’s an interesting question because the industry generally has been under investing relative to its cash flows versus how it’s invested in the past. So historically, the industry would invest about a hundred percent. Of its cash flow. Some of the shield producers prior to the, I mean, even after the 2014 crash running into, let’s say 2018, they would invest a hundred percent or more of their cash flow.

[00:29:47] Josh Young: And right now they’re all producing a fraction of that. And Buffett cited that as one of the reasons he’s a big buyer of Oxy as well as Chevron and why he’s bullish on oil that under underinvestment of cashflow. Yeah. When you look at companies like Chevron, I mean, they’re doing a big acquisition, which is brilliant because they bought a company at the low end of the valuation spectrum, but that was still big enough to be material to them, and they bought it for about half of their current valuation.

[00:30:11] Josh Young: And so I think they should go buy more companies. And I think Chevron has done a really good job from a value perspective in terms of not paying too much when they’ve done acquisitions. And for example, when they were in a bidding war with Occidental over Anadaco, they actually let. Oxy win. And they won by getting a, I think it was a billion dollar break fee or something like that.

[00:30:32] Josh Young: And they didn’t overpay and Oxy paid a lot more than Chevron was going to pay for an Darko. And Chevron moved on and they bought other companies for lower valuations. So I think Chevron is proven that they’re good at that and I think they should do more of it. And they seem likely to, in terms of when you look at their capital programs versus their cash flows.

[00:30:52] Josh Young: Exxon has a sort of worst track record, particularly with onshore shale. Their X T O acquisition was abysmal. They had to write down almost a hundred percent of the purchase price over time. I think they should still probably buy stuff. They’re just 

[00:31:05] Josh Young: I think they should, they probably need to be more cautious and I think the market might also be more hesitant in terms of seeing them buy assets just because of their history.

[00:31:13] Josh Young: That was a little more mixed on the capital allocation side. The other interesting thing for both of those companies is that their wealth productivity, so when you look at their land, In the Permian in West Texas and southeast New Mexico is top decile, but their well productivity is average.

[00:31:28] Josh Young: And so they think that they’re good at it, which is so odd, right? You hear their comments, you talk to services providers and hear what Exxon and Chevron tell the services providers about how good they are, and it looks like they just comp themselves versus their own wells, which is, again, it’s a very dangerous thing.

[00:31:44] Josh Young: You want tojust, you don’t want to be envious of others, but in an industrial process, you want to not just consider how you’re doing it, but especially for drilling wells where it’s pretty similar, you want tocompare to other companies too. And so it’s been this thing where Exxon in particular, was spending a ton of money and trying to grow their production very rapidly, very aggressively.

[00:32:04] Josh Young: And they were not doing a very good job in terms of growing it relative to how much they were spending. They have pulled back a lot, and their wells are less bad, but they’re still not impressive at all, in my opinion. Relative to just the resource maps, when you look at. How companies are doing on the edges of their core positions in Southeast New Mexico.

[00:32:25] Josh Young: I mean, it’s just not comparable. There are way better wells drilled by other operators like EOG, immediately adjacent to them. So they are investing, they are growing a little, they’re growing their gas and NGL production more than they’re growing their oil. And they’re frankly wasting, from my perspective, some of the best rock that’s out there.

[00:32:44] Josh Young: I mean, it’s bullish for oil, but it’s one of these very odd things and you hear them talk. And again, like I’m a fan of their, especially Chevron’s m and a strategy. I think some of their offshore stuff, especially Exxon’s activities and Guiana, very promising, very high return, but they just. There was this theory that the oil majors and super majors were going to be the best at shale ’cause they could allocate the most resources and so on.

[00:33:07] Josh Young: And it turns out you need to be more entrepreneurial and have the executive team be closer to the ground and more directly involved because of the complexity of the processes as well as the number of decisions that need to be made and the amount of authority that needs to be delegated.

[00:33:21] Josh Young: That seems to not be consistent with the cultures that were built around these sort of very large projects with limited numbers of very expensive wells. Like the activities in Giana that Exxon’s doing. 

[00:33:34] Clay Finck: I wanted to briefly zoom out and look at the bigger picture. One of the most interesting charts that I’ve seen recently is the long-term trend of energy consumption.

[00:33:45] Clay Finck: Ever since around 1950, global energy consumption has just exploded and gone. Parabolic and coal and oil and natural gas has fueled the majority of that growth in consumption. Do you envision the demand for oil to just continuously grow over time or remain stagnant? I know we don’t expect oil demand and gas demand to just increase into perpetuity.

[00:34:09] Clay Finck: So where do you see this energy dynamic shifting and playing out how it plays out in the long run? 

[00:34:16] Josh Young: So probably, hopefully we’ll use more energy every year going forward like we have in the past. And that growth of energy consumption broadly has been associated with dramatic improvements in lifespan as well as quality of life across humanity.

[00:34:32] Josh Young: So hopefully in places where people use very little energy, they’ll be able to use more and they’ll be able to benefit from basic sanitation. Basic things like air conditioning and refrigeration. I mean, these are things that dramatically improve people’s lives, but they require energy. So I hope that increases.

[00:34:50] Josh Young: I’m concerned about policies that make energy much more expensive, and I’m worried that in this sort of trade-off of climate risk and other risks from using certain fossil fuels versus the risk of under supplying cheap energy or making energy more scarce to the poorest people who could benefit from things like air conditioning and refrigeration and better transportation for themselves or their crops or whatever other sort of basic needs that they have that can be filled by energy.

[00:35:22] Josh Young: I worry that our current sort of policy course is to affect the trajectory of consumption of energy on this chart, and so, I think it’s less of a the people say like all of the above and there are energy return on investment issues with some of these sources versus others. But I think just holistically, policies that promote the production of energy as well as the distribution of it broadly are very pro humanity.

[00:35:48] Josh Young: And the opposite is anti, and then just the people that are anti certain energy sources, you’ll find them on their private jets to conferences where they talk about it. So it’s a very sort of weird colonial, like there’s all kinds of open questions I think, about what those people actually want.

[00:36:04] Josh Young: And again, getting back to Buffett. I think you just look at what people do and ignore what they say, and you know what they actually want. And I don’t know why this conversation doesn’t always start and why it’s not covered in the news, like what these people actually do who are trying to restrict energy consumption.

[00:36:20] Josh Young: But again, I hope that we continue on that trajectory. It’s most likely that we continue on this growth of energy consumption, this dramatic growth of energy consumption trajectory. But I also worry that we’re ruled by people who consume enormous amounts of energy themselves, but are promoting increased restrictions and scarcity of energy for others.

[00:36:40] Clay Finck: To my knowledge. You’re solar and wind energy skeptic. I might describe it as So, where do you see things transitioning in terms of energy production? I’m sure this is something you’ve talked about before. 

[00:36:55] Josh Young: My problem with solar and wind are that the technologies don’t seem to be fully perfected from a r and d perspective.

[00:37:04] Josh Young: And so what you have is huge amounts of subsidies on imperfect. Technologies that are ruled out in a way where you end up consuming polluting fossil fuels in some cases, much more polluting, right? You end up burning more coal or engaging in strip mining in various parts of the world using child labor.

[00:37:24] Josh Young: Very, some combination of things that are very non humanistic, along with things that are very polluting. To end up with something that doesn’t even work that well. And so it’s not that I have a problem with solar. I would love for there to be really highly efficient, highly effective solar, and for it to be rolled out broadly similar to wind.

[00:37:43] Josh Young: The problem is that it just doesn’t work as well as advertised, and it somehow became a political thing where observing that or sharing, Hey, this wind turbine blew up and it’s on fire. Or Hey, here’s what happened to all these wind turbine blades after they were, they last for 20 years or 10 years, and they get disassembled and here’s where they go.

[00:38:03] Josh Young: Or This is what happened to this solar field after it was ran through its useful life. Somehow that became a political thing instead of just being able to say, Hey, this is a downside of this technology. So my hope is that the technologies get improved dramatically through research and development. And that there would be more funding oriented towards those improvements rather than to subsidizing the implementation of these imperfect technologies in increasingly less favorable locations.

[00:38:31] Josh Young: So the other problem is you see these pictures of solar panels covered by snow and Alberta, and it’s like, like what are you actually trying to accomplish by burning coal to melt silicon, to build your solar panels in China? In some cases using Uyghur, like slave labor essentially, to then ship it again using oil to the west coast to then put it on a truck and drive it or put it on a train and you again use diesel to bring it over to install it, to have it not run for 80% of the time because you get snowed and then you don’t have a lot of sun anyway.

[00:39:04] Josh Young: And so again, it’s less about the thing, right? The thing is great and hopefully it gets a lot better. And then the actual implementation the idea versus implementation and the problem I have is on the implementation side, and I think when you compare it to oil or natural gas, you have huge taxes and regulatory burdens on the implementation of a natural gas solution to something.

[00:39:24] Josh Young: And you have huge subsidies. And stimulus is essentially to encourage the consumption and use of the solar solutions. And so it should be a really easy economic solution when it’s not, I think that tells you that there’s something wrong. So again, nothing against it specifically more of a problem of the actual, the economics which tell you the effectiveness of the current generations of these things.

[00:39:47] Clay Finck: I know you’re not one to really try and time the market. You post a lot of stuff related to buffet and not trying to time the market or forecast when a recession’s going to happen. And I would mention that you were taking advantage of very attractive prices when oil dropped in recent months and has since rebounded back above the $80 mark.

[00:40:07] Clay Finck: I’m curious with that, if you expect oil to perform similar to previous recessions where it has a little bit of a free fall before the economy recovers, or do you see the current dynamic much differently given you know, all the underinvestment that’s been occurring? 

[00:40:25] Josh Young: We’re in such an interesting time that it’s really hard to answer that because I don’t know that anyone really knows if our economy is booming or if we’re in a recession right now and it’s like a very strange time.

[00:40:37] Josh Young: We know what happened a few years ago, but we don’t really know what’s happening right now. People are asking me that about oil and I would say, Hey, more broadly, we just don’t know. Right? There’s a lot of complexity and there’s a increasingly inaccuracies in government reported data along with increasing inaccuracies in company reported data to, it’s just really hard to say what it looks like right now, and again, very loosely held.

[00:41:01] Josh Young: There’s just what the data seems to be showing and credible analysis seems to be indicating. We had a downturn last year. The stock market bottomed in, what was it, November or so last year. We’ve had a stock market recovery. We’re seeing freight green shoots, we’re seeing inventory restocking.

[00:41:18] Josh Young: This sort of looks like. A recovery post-recession. And we also saw oil prices fall essentially 50% from their high to their low, which is what you would see in a recession. And we’re seeing a rebound after that, which is again, what you would see. And so the question of, Hey, what are your recession fears?

[00:41:34] Josh Young: It’s like, okay, well I wasn’t managing money through the seventies, but I was in the two thousands and I got to see how scary and awful it felt in 2009 to be buying stocks, particularly oil and gas stocks. And everyone just thought the world was ending. I remember I attended an event where the chief investment officer for the Disney Family Office was presenting and discussing, and I asked him, Hey, like, you actually seem pretty bullish on stocks.

[00:41:59] Josh Young: What’s going on? And he pointed to the inventory restocking and said, Hey, I can’t predict the future, but I know what’s happening right now. And valuations in his words, were very cheap and there was this increase in economic activity. And so, again, I don’t know for sure. And there’s really wide bands on the accuracy of data that we’re seeing.

[00:42:17] Josh Young: Right now it actually looks like we may be in a recovery from what may have been a recession last year, and I don’t really know. I just know where will consumption is. I can actually see oil inventories a lot better than I can see some of these other sort of broader economic questions. So when I think about the risk of a recession, I look at the trajectory of consumption and I look at the things that could affect that.

[00:42:38] Josh Young: Again, most of the trajectories of most of those factors are actually positive, not negative. And the sentiment got really bad for oil in particular earlier this year as it was getting great for tech stocks as it getting great for various other actually quite economically sensitive businesses. And the idea is that tech does well in a low growth environment, but it does very poorly in a negative growth environment.

[00:43:00] Josh Young: And so for those stops to be running, I mean they were indicating there was something, right, either it was a speculative mania or it was that the economy was recovering or both. And so again, really hard to say and one of those things where I’m sure some of my econ professors, if they see this who I took classes with at Euro Chicago are not going to be thrilled to hear me say this, but I just don’t know.

[00:43:22] Josh Young: I don’t think people know. But, and like you said, value-wise, there were extraordinary bargains on these stocks still. I mean, we got to buy them for even cheaper a couple months ago. But high level, the SS and P energy was like 4% of the s and p. On a market cap basis, but 10% on a earnings basis. So that was clearly unsustainable.

[00:43:41] Josh Young: We’re up to, I think 4.5% right now, but that’s still way too low. And historically, if you just bought things on that basis, that’s one of the buffet approaches. You just, you end up over time converging, maybe earnings come down a little and the market caps go up or earnings go up and your market cap goes out more.

[00:43:58] Josh Young: But either way, that tends to be a really good trade, historically has tended to be. And then on the specifics, I mean some of the companies, because there’s so few people looking at it, there’s so little index participation and then there’s just such negativity associated with the space. There are mispricings that are just astonishing and it’s three years into a recovery for these stocks.

[00:44:20] Josh Young: You’d think there’d be smart institutional money going for it. And sub 10, sub $20 million a day trading volume stocks. I mean there are just gross mispricings and both directions and we’re finding great opportunities. 

[00:44:33] Clay Finck: It’s funny because as you’re an investor in the markets for a number of years, and you look at the big picture and you look at what’s happening, things always feel really uncertain.

[00:44:44] Clay Finck: And a lot of people kind of see that as a bad thing. Like, are we going to enter a recession, are things going to turn down? But when you’re looking for bargains, you want uncertainty. You want other people to be worried and scared. And then obviously you obviously should use caution with investing.

[00:44:59] Clay Finck: But when everyone else is really uncertain about things like oil prices, then someone like you looks at the fundamentals and you’re able to take advantage of opportunities. Other people are too scared to dive into. And it also reminds me of the Peter Lynch quote that I believe you’re also a big fan of.

[00:45:17] Clay Finck: It’s where investors they lose more money trying to anticipate recessions than in the recessions themselves. One more point. You mentioned that investors don’t know if the economy’s ripping or if we’re in a recession or not, and price discovery is one of the great signals within the markets.

[00:45:34] Clay Finck: It was interesting to me how you’ve talked about how the oil price can actually be an indicator for the economy. Oftentimes people talk about things like the yield curve inversion to judge where we’re at in the cycle. So I’d love for you to talk more about oil prices and what oil prices signal for where we may be at within the economic cycle.

[00:45:56] Josh Young: That’s a really good question. One thing I will add, I think up there with buffet and Peter Lynch who both have great investment track records as well as great quotes. My friend Morgan household has this great quote about downturns and he says that every past downturn looks like an opportunity and every future one looks like a risk.

[00:46:17] Josh Young: So I think it’s important to be able to frame things the right way. And when everyone is scared, I like to joke, I hide it, my desk and click buy. And so it’s just, you gotta be able to just invert it, right? The more confident I feel in something, the more scared I am and the less likely I am to really go buy more of it or buy it and the less confident, but you, it’s really scary, but the math just checks out and I can’t kill the idea and I can’t not buy it in size.

[00:46:45] Josh Young: I mean, those are the things that I’ve done the best in by far. And so it’s really, it’s not about, it’s not about comfort. It’s not about feel good. It’s not about sleep at night, all those stuff. I mean, we saw in Canada recently, there was a midstream stock that fell. They were doing a spin out, which looked promising.

[00:47:01] Josh Young: I didn’t get involved in it at all, but they’re doing a spin out. And the stock fell, I think 15 or 20% on the announcement of a spinout, which historically would’ve actually been an indicator of promising return. And Greenblatt has written extensively about how spinouts unlock value and there’s extra returns potentially from buying them both before the spinout and after.

[00:47:20] Josh Young: Depending on which one you buy, the bigger the CO or the spin out co. And It was just so interesting to see how quickly price can drive narrative and set this like selling loop and then that can reset and you can see a buying loop. So it’s very difficult. That’s relevant for the question, which is what does the price of oil mean for the economy?

[00:47:41] Josh Young: And I think not much because when I look at the participation in the futures markets right now for oil, it’s very low. When I look at the physical markets, there’s very little risk taking by physical market participants and there’s very little incentive for folks to buy oil to store it, given the shape of the forward curve it being in back radiation.

[00:48:00] Josh Young: And so when I look across that, I’m not seeing a lot of activity that would suggest that there’s a strong price setting in the physical market. It looks like it’s more being set on the future side, and the bulk of that activity seems to be via CTAs and hedge funds that are basically just trading momentum and sentiment.

[00:48:19] Josh Young: And so you have this just game of telephone where it’s sell sell, and then someone mieses sell is buy and buy. So I actually don’t think there’s very much information right now in the price of oil, especially relative to where there might have been more information in the price.

[00:48:35] Josh Young: In the past, so not saying much, I mean over $80 a barrel. Having said all that, probably we’re not in a recession, but we may be in a inflationary recession and inflationary recessions cause they say monetary illusions. Like you have weird things happen when you’re in periods of inflation that are higher than recent past periods.

[00:48:56] Josh Young: And so a little bit of a mess, but just generally, I don’t think there’s that much information in the price at the moment relative to the broader economy. 

[00:49:06] Clay Finck: When looking at some of the opportunities you’ve been diving into you and Trey talked about this quite a bit in your last discussion when talking about Buffett’s picks and you highlighted how Buffett’s managing large tranches of capital and he forced entities, super majors, even though they’re trading at higher multiples in some of the small caps.

[00:49:26] Clay Finck: Can you talk about what investors should keep in mind when they’re thinking about small caps versus the super majors? Because I think about how smaller companies are probably more susceptible to price swings. They probably need to be a little bit more conservative in some ways. So can you talk about that?

[00:49:42] Josh Young: Yeah. I had to eat crow in that a little bit because the super major stocks have done a lot better in the last year than the small caps. Why is that? I mean, it’s not valuation because the super majors went from expensive when we talked a year ago to more expensive now. And you see that shift where Buffett has been actually selling Chevron, it looks like.

[00:50:00] Josh Young: So I think there’s not, that’s not an accident. I think that’s, again, valuation driven. I don’t know for sure, but I don’t remember that he’s talked about that specifically. But you just, you see it. So I don’t know. It could be that there’s been fund flows towards large cap stocks generally in the US and so as you have SS and P 500 index fund flows, you end up with sort of structural buying of some of these stocks, particularly the largest ones.

[00:50:26] Josh Young: And so Exxon and Chevron may ironically be getting bid up, partly because Apple and Amazon think Google. Or in Microsoft are all doing really well and you’re their all time highs or at their all time highs. And so it could just be that where there’s sort of these incremental purchases.

[00:50:42] Josh Young: It could be from share buybacks and it could also be that there are folks who are more interested in making the oil macro bet through equities rather than through buying oil. And if they end up buying XLE, which is that S&P 500 index fund focused on, or ETF focused on the energy sector, 50% of that is Exxon and Chevron.

[00:51:03] Josh Young: So folks that are looking for that sort of broader diversified exposure through an ETF end up owning just a whole bunch. Of mostly Exxon and Chevron. So those are some possible theories. I mean, we’re just, we’re in a market where I think we’re at near record levels of concentration in a very small number of stocks and in the largest stocks, like the Nifty 50 or like the Ciscos and a few other stocks in the nineties.

[00:51:27] Josh Young: And in those time periods you saw large companies that weren’t even in that sort of set of most favored companies. You saw their shares trade up a lot. So that’s my guess. I don’t think it’s related to fundamentals. The fundamentals of those businesses versus small oak or mid cap oil and gas stocks have not really, there’s been some benefit to refining, but refining margins are starting to fall again.

[00:51:47] Josh Young: I don’t know that there’s really big differentiation. I think the one comment on risk, and again, none of this is a recommendation, people should do their own diligence and. Consult their own financial advisors. But there are companies that are small that are very low fundamental risk and fundamental risk measured as solvency questions and viability questions.

[00:52:10] Josh Young: I mean, there’s companies that I’ve talked about before that have hundreds of millions of dollars of net cash on their balance sheet and no debt and positive, free cash flow. And so it’s like, okay, like how do you kill a company like that? You could, right, but it would be really hard. And I don’t know that being smaller, but having half or a third of your market cap and net cash.

[00:52:31] Josh Young: Really makes you more risky. Like technically it’s more risky from a share price volatility measurement perspective, but it’s not from a fundamental perspective. So I think there’s some complexity there. And then I think I just worry that people end up missing, even though small cap stocks have done poorly.

[00:52:47] Josh Young: I guess one change in the last year we’re allowed to talk about our returns against, it’s not a solicitation, but I think it’s illustrative for the difference in between small and large caps. So XLE we launched in May of 2015. XLE I think is up maybe 10% or so since then. And small cap oil and gas stock index, the SS and P 600 energy is down.

[00:53:07] Josh Young: Last I checked about 65% or so. Then the ETF is down about the same and we’re up like 115% net of all fees and expenses and whatever. And so there’s room to do really well in small caps because they’re so big. Differences in valuations. There’s really wide valuation dispersion and there’s just less room, I think to earn differentiated returns on the large cap side because everyone knows about Exxon and Chevron and Shell and bp.

[00:53:34] Josh Young: I mean, there’s just a limited set of these very large companies and very little differentiation possible I think in the research and tons of sell side notes on these companies and just, there’s just less of a information asymmetry available. So I think even seeing outperformance by large caps over a period of time, even if it was over a long period of time, that doesn’t necessarily mean that there aren’t opportunities in small caps to, or micro caps or midcaps to materially outperform even when that sector is out of favor.

[00:54:04] Josh Young: And then when it goes back into favor, if it goes back into favor, there’s room for even more exceptional returns in that sort of strategy. 

[00:54:13] Clay Finck: Are there big differences in the break even price between the larger super majors and the small caps, or how do you think about that aspect? 

[00:54:23] Josh Young: Yeah, sometimes, but there’s also big differences in breakevens among small caps between one small cap to another.

[00:54:31] Josh Young: And so there’s supposed to be, I wrote some articles during Covid about how Covid challenged the super major business model, but Rockefeller came up with this model where through integration, it made the super major model that design of business sort of bulletproof because they were supposed to, when oil prices went down, they were supposed to make more on refining.

[00:54:54] Josh Young: When refining was doing bad along with oil, they would make more on chemicals. They would make money on transportation, and these companies have shifted away from that to some extent. And so while there’s some brilliance to the model that Rockefeller created, it’s not as bulletproof today, and there’s not as much stability as there was for standard oil.

[00:55:16] Josh Young: I mean, he also had the benefit of running a monopoly, but even the monopoly constituents, when they got broken up, Still did extraordinarily well for a long period of time. So I know that’s a tangent, but I think it’s important in thinking about it, it’s not obvious that mega cap company in the oil and gas space will necessarily have lower breakevens than a small cap or micro cap company at all depends on the specifics of the assets, the specifics of the business strategy.

[00:55:43] Josh Young: And then the other aspect is what will the incremental returns on invested capital look like and what are the opportunities within those companies to earn those high returns? Because the way you make money as a company over time and the ways stocks outperform over time is through displaying high return on equity, return on invested capital.

[00:56:02] Josh Young: You really want those measures to be very high, and there’s a lot of research showing over the long run that’s the biggest single factor. And so, These companies have big benches, right? Exxon has Guiana. They have this great land in West Texas and southeast New Mexico, similar for Chevron with some great offshore opportunities as well as some of the best land in Southeast New Mexico.

[00:56:24] Josh Young: But if they’re not effectively addressing them, and if they’re not rebuilding that inventory, you can have small companies that actually earn far in excess return on equity over time. And those companies, again, statistically should do better because they have that better return opportunity. And then they’re also smaller, so they could be more nimble, more flexible.

[00:56:44] Josh Young: And it’s a reason I think why in past small caps have actually traded at. From a valuation perspective, from cashflow and so on, to larger companies. And so I think there is a reasonable case that we’ll see that reversion from a big discount for small caps to a premium. And a big part of that, I think, is just this opportunity to find, to be more nimble and be able to find mispriced opportunities that an Exxon or Chevron just can’t address because they’re too big and it just takes too much change to, to refocus their capital.

[00:57:19] Clay Finck: I’m really glad you mentioned the return on capital and the importance of that. And oil is just a really tough business. A lot of stocks just don’t go anywhere because stocks might do well over one or two years as the oil price goes up, but over a long enough timeframe, the return on equity, return on capital for a lot of those businesses is a very high, which is why probably a lot of investors just don’t park their money into the oil sector.

[00:57:42] Clay Finck: So Josh, part of being a great investor, you’re a big believer in Buffett’s idea of value investing, investing with the margin of safety, investing in companies with strong return on capital. Part of being a great investor is understanding what can go wrong. So I’d love for you to talk more about if there’s a feasible scenario in your thesis on oil, a scenario where the thesis doesn’t pan out, say over a five year timeframe.

[00:58:09] Clay Finck: What does that look like? 

[00:58:11] Josh Young: I think the biggest risk to my thesis, which is finding small cap companies that are materially undervalued and owning them for the repricing close to fair value. The biggest risk there is that there’s some giant discovery of new oil that oversupply the market, whether it’s through a big discovering, you’d have to discover a lot.

[00:58:31] Josh Young: You have to find a really big field that could come on really fast, and the history is not very promising for that. The last truly big fields were some of these shale fields, which from discovery to ramp up were a decade plus, so you know, you’d need something much faster than that. Maybe you would have to be a discovery in an existing field such that there’s enough infrastructure in place to be able to adequately supply the market.

[00:58:53] Josh Young: Four, you’d need an absolutely devastating economic downturn that would have to be global and would’ve to look like some of the stuff that we saw in the thirties with countries essentially going off the grid by going communist or similar type just absolutely torching their industrial bases and torching their consumption of basic materials, including energy.

[00:59:15] Josh Young: And so that’s a, and it’s not a there’s a non-zero probability of that, and it has happened in the past, which means the history doesn’t repeat what it rhymes. And we are in a unstable, uncertain time. So that is a risk. I don’t think it’s very likely, but between those two, I think those would be the biggest risks that I could see that are non-zero and would have the biggest, and I guess the last one would be another sort of pandemic.

[00:59:43] Josh Young: So another either terrible covid wave or some other sort of thing that would necessitate lockdowns that might be more permanent than what we saw in this last wave. And that doesn’t seem as likely to me because it seems like there’s just general public resistance to that. And I think if the government said tomorrow everyone needs to lock down, I think you might actually see significant civil disobedience and maybe just that not stick.

[01:00:06] Josh Young: I mean, we’re even seeing that in China at some point, where the Chinese people were just saying either there were actual like protests and in some cases riots. And that’s very unusual for China, that scale that they saw it. So not likely. But again, any of those three things are left tail risks.

[01:00:21] Josh Young: Nothing is certain. There’s always risk in any sort of investment. And the lessons from the Buffets and Peter Lynch’s of the world are that you, you have to, you want todo what you can to minimize your risk, but you have to take risk in order to earn above market or even a market return. And if you don’t take that risk, then you won’t earn a great return.

[01:00:42] Clay Finck: I had one more question for you, Josh. One thing that’s been on my mind is the impact of higher interest rates on this industry. We’ve seen the US selling off their S P R and it’s put downward pressure on oil and higher interest rates, of course, make it more expensive for these companies to go out and invest in new production, assuming they’re taking on debt.

[01:01:02] Clay Finck: Has higher interest rates played as big of a role as investors anticipated? Or what? What are you seeing on this front? 

[01:01:10] Josh Young: So high level, it was a giant mistake for the Federal Reserve to raise interest rates in the way they did. And it was a similarly terrible decision by the A, c, B and other global banks to do the same thing.

[01:01:23] Josh Young: And so the reason I say that is that higher interest rates. Have suppressed capital investment and we had a supply problem from pandemic after effects and underinvestment. And the solution from a central bank perspective has been to kill demand. And as we saw with that chart that you showed for energy, there’s a natural tendency for demand for energy to increase.

[01:01:47] Josh Young: And so the solution from a humanitarian perspective is to supply more energy, not to kill demand for it, because killing demand for energy is very bad. It kills people, it ruins their lives. It’s really bad. And so we’re seeing that right rig counts are down a lot since interest rates have risen. And again, partly that’s commodity price driven, but it’s also capital availability driven, which is a direct interest.

[01:02:11] Josh Young: Rates are a direct proxy for capital availability. We’ve seen inventory destocking, so while you’ve seen inventories increase in China, which appear to be strategic and economic, we’re seeing oil inventories falling in the us, falling globally, ex China. That sort of destocking along with lower capital expenditures, they increase the fragility of the energy supply chain.

[01:02:35] Josh Young: So we have less investment to bring on new supply than we had prior to some of these large interest rate increases, and especially relative to where we are at from a commodity price perspective. And then we also have a destocking of inventories. And I thought one of the lessons from Covid was that you wanted to have, not just in time inventory, you wanted to hold some extra in case.

[01:02:57] Josh Young: Of some sort of disruption and it appears that I was mistaken. And businesses right now that have destocked were correct clearly because nothing has gone wrong since covid with inventories. But you know, when the next thing happens, then we’ll find out that inventories were important again. So, so yes I think there have been significant effects from it and it’s one of those weird things where I think in the end I make more money from this terrible policy error.

[01:03:19] Josh Young: I made more money from the policy error of low interest rates. And I think value stocks and small cap stocks will do very well in the context of a higher rate environment with lower capital investment. But it’s really unfortunate to see, I’d rather make a little less money and make it through stock selection and finding great opportunities than having some sort of like terrible policy failure macro tailwind.

[01:03:43] Josh Young: We have it, which I guess is good for oil and gas investments, but it’s, I think we should have more investment and interest rates being higher. Are really constraining that. And frankly, even on 

[01:03:53] Josh Young: the solar and wind side, alternatives outside of stimulus and subsidies, higher rates are dramatically reducing investment in those categories as well.

[01:04:02] Josh Young: And again, I’m not a huge fan of those in their sort of current context, but I do think that we need more energy and it is unfortunate to see demand for alternatives get hurt by higher rates. And again there are subsidies and stimuluses and so on for the purchase and manufacturer and installation of those.

[01:04:21] Josh Young: But higher rates counteract that to some extent. And they cut down dramatically on projects that aren’t beneficiaries of stimulus. 

[01:04:32] Clay Finck: Josh, thank you. Thank you so much for coming back on the show. I always enjoy getting your insights and it’s great to finally have the chance to meet you. Before we close it out, I want togive you a chance to give the handoff for our audience how they could get in touch with you and in any other resources you’d like to share here.

[01:04:48] Josh Young: Sure. Yeah. Thank you. I really appreciate it. It’s awesome to be able to be on your guys. Your guys’ show. People can find me@bisoninterest.com. We have a email list where we share various things we find interesting on a sort of monthly or so basis. And then you can also find me on Twitter. The bison Twitter is at bison interests.

[01:05:07] Josh Young: You can find my Twitter where I share too many random investment and energy investment thoughts, energy industry thoughts at Josh Young one, and always happy to hear from people and get feedback. And I’m really it’s an honor to be on this. Thank you very much, clay. 

[01:05:24] Clay Finck: You bet. Thanks again, Josh.

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