How An Oil Spike Will Pop The Everything Bubble

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In this week’s episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed how an oil spike could pop the Everything Bubble. Here’s an excerpt from the episode:

Jake Taylor:
All right, so my topic this week is about what if a spike in the oil price is the pin that pierces what some people have called the everything bubble. I saw this quote from Jim Puplava. I don’t know exactly who he is, but he said that the price of oil is the new fed funds rate. And the idea behind that that the cheap oil has been what has really allowed us to sort of keep the party going here, maybe more so than we would’ve ever been able to.

Jake Taylor:
When you think about the economy as a complex, adaptive system … the second law of thermodynamics: you’re fighting entropy. So you have to take information and materials and energy to combine those in a way that fights entropy, and if one of those inputs is energy and it’s especially cheap, for whatever reason, that can be a huge boon to everything that’s happening within the economy. It’s a prime mover in a way that maybe little else is.

Jake Taylor:
But if you go back and look at … There’s some really interesting correlations when you look at the price of oil and then different prices of indexes. Even going back … The famous one is kind of 2008, because oil was … It jumped up to $150 a barrel in, what was it, May of 2008.

Tobias Carlisle:
That’s crazy.

Jake Taylor:
Yeah.

Bill Brewster:
Different times.

Jake Taylor:
So let’s say June of 1973, which was also kind of right before a big popping of a potential bubble, really rough time in the stock market, June of ’73, $20 a barrel, January of ’74, so six months later, it’s $55. It more than doubled, almost tripled. November, ’98, $17 a barrel, August of 2000, $50 a barrel.

Jake Taylor:
So we have all these little kind of interesting correlations. I don’t know the exact causation, and I don’t know how tight the linkage is, but it is an interesting thought experiment that if we were to see … what would happen to all of these valuations today if we were to see a spike in oil price for whatever reason. I’m not smart enough to understand oil and all the inputs and make any kind of predictions about the price, but if I had a lot of long-duration assets that might be repriced, or if i was an index holder, and I saw the price of oil going up dramatically, I would probably start to feel a little bit nervous about where we are.

Jake Taylor:
And one more thing to add there, wouldn’t it be kind of an interesting scenario if the price of oil was to allow all of these energy companies who have been just absolutely sucking wind that a lot of value guys have gotten caught up in and beaten down by, and what if that was what brought value back to kind of winning again, because the energy assets at $150 a barrel start to look pretty attractive again and it causes a repricing of all of the other things in the world that are dependent on the energy. All of a sudden we’ve really tipped the scales from one side to the other in an interesting way. So chew on that one, guys.

Tobias Carlisle:
That’s interesting. What’s more important: low prices for money, can you borrow cheaply, or low energy prices? I guess they’re both very important, but not every business is necessarily borrowing all the time.

Bill Brewster:
What if one leads to the other?

Jake Taylor:
Well, hold on. Low prices of money do not create any new material wealth. They don’t create new information, they don’t create more energy, and they don’t create more material.

Tobias Carlisle:
They make your multiples go up.

Bill Brewster:
I think they might actually create more energy, because you have a lot of people when the opportunity cost of capital is low that might be willing to finance a lot of exploratory projects that otherwise they would not be willing to.

Jake Taylor:
I will concede that it may pull things from the future forward, but by themselves I don’t believe that they create wealth of any kind.

Tobias Carlisle:
Well, that can’t be right, because there must be projects that aren’t financially viable at one interest rate price and are financially viable at another one. So if it’s cheap enough … And that’s not necessarily pulling forward from the future. That’s just something that is … It’s viable at one level and it’s not viable at another.

Jake Taylor:
Hmm. I’ll have to think about that.

Bill Brewster:
Yeah.

Tobias Carlisle:
We’re getting very theoretical here.

Jake Taylor:
Bill, don’t act like you said it.

Bill Brewster:
No, I did not. I didn’t. I think energy’s somewhat interesting. I mean, here, Energy FinTwit, please come at me. Shout out to them. They’re one of the funniest FinTwit groups out there.

Tobias Carlisle:
Don’t pull down the thunder. Don’t call down the energy thunder.

Bill Brewster:
No, I actually, and it’s Kyler –

Tobias Carlisle:
I like watching it.

Bill Brewster:
It’s Kyler Hasson’s idea, but I really think he might be onto something. The big MLPs, like Enterprise products and Magellan Midstream, you talk about a hated asset class and then a hated structure within that asset class –

Tobias Carlisle:
And a big… input.

Bill Brewster:
It’s really not a terrible business. You’re not in the EMP business. You’re in the transportation business. I don’t care what millennials think about what oil should do. We’re not getting off oil any time soon. And EDP is more natural gas, which is a cleaner thing to burn than oil, and they’re transporting it.

Jake Taylor:
Just to give you an idea of what the global energy usage looks like today, in case you don’t know. 32% is oil, 26% is coal, 23% is gas, 9% is electricity, and 10% is biomass. So the energy that we use on this planet is still very heavily … We’re still very much in the… carbon game.

Bill Brewster:
Dude, the authorities tried to stop you again. You went back into the Matrix. But you’re right. My buddy just got a Tesla in Denver, and my other buddy and I always tease him. I’m like, “Oh, good, the coal plant is powering your car.” Natural gas needs to take share from coal. That’s got to happen.

Tobias Carlisle:
What about nuclear? Where’s nuclear?

Bill Brewster:
It’s not politically viable, but it should be.

Jake Taylor:
I think that’s counted in the electricity number there.

Tobias Carlisle:
That’s interesting. I’d never known that there was that much of a connection between the timing of those spikes in the oil price and the collapses in indexes. We’ve had very low oil prices for an extended period of time here, too, and I own some energy, because it’s all beaten down and everybody thinks it’s going away, and I don’t know if it is or not, but it’s certainly priced that way. So if it isn’t you’re going to get paid.

Bill Brewster:
My buddy that made a fair amount in oil, he thinks that we’re pretty range-bound and that the fracking industry has sort of shortened the cycles, so somewhere north of 60 … The amount of latent supply that they can just flick on is crazy. And then below 40, it just doesn’t really make sense. Now I know people like Chanos have said that there’s never been free cash flow in the industry. I have no idea. Jim, I should call him Mr. Chanos, is way smarter than me. But my buddy has said, he’s like, “The problem that Wall Street either doesn’t understand or there’s a disconnect between how we’re doing it on the ground is the game isn’t really a free-cash-flow game. The game is prove your reserves and flip it to an oil major.”

Tobias Carlisle:
Shouldn’t they get the free cash flow then?

Bill Brewster:
You would say eventually yes. Yeah. You would hope.

Tobias Carlisle:
The thing that … Price sort of leads sentiment. In oil and gas it seems to me that there’s no discussions of peak oil when the oil price is really cheap. You get discussions of cheap oil when the oil price is really expensive, and then people say … Whatever, there’s some tiny, tiny margin. We produce … These numbers are wrong, but we produce a million barrels of oil a day and we consume a million barrels a day. The margin is just absolutely minuscule, so if you get it a little bit wrong one way or the other, the price goes up pretty rapidly.

Tobias Carlisle:
And so you get these discussions when the oil prices … I remember 2008 very vividly in relation to the oil price as well. It moved like Tesla did today. It used to whip around like that. And that was when people were very loud about peak oil. It happened 10 years before that, too. The late 1990s there was something similar going on. I kind of think when the oil price is low, yeah, there’s lot of supply around, but we’re going to move up a little bit and then I bet you we’re having a discussion about peak oil again.

Bill Brewster:
Somewhere Kyle Bass is listening to his pulling his hair out, because he claims he counts the best oil barrels out of anybody. I’ve heard him say that before. He’s like, “We have the most accurate count.” So, Kyle, reach out to us. Let us know please.

Tobias Carlisle:
He’s a listener.

Bill Brewster:
Shout out to Mr. Bass. I don’t know. Oil’s interesting. It’s interesting how hated it is right now and how loved it was in the past.

Tobias Carlisle:
Not that long ago, 10 years ago.

Bill Brewster:
There’s no barriers … Somebody on Twitter said that it’s like tobacco. It’s not at all like tobacco. There’s no barriers to entry. You don’t have pricing power. It’s not consolidated. Quit it with that nonsense.

Tobias Carlisle:
I think they meant like tobacco in the sense that people hate it.

Bill Brewster:
Yeah, well that’s –

Tobias Carlisle:
It’s politically unpalatable.

Bill Brewster:
That’s where it rhymes.

Jake Taylor:
Yeah, it’s getting dropped out of every ESG fund, right?

Bill Brewster:
Yeah, and that makes some sense. And even Kramer recently was saying, “I’m out of oil stocks.” His reasoning was no one’s going to buy them.

Tobias Carlisle:
Because they haven’t done anything.

Bill Brewster:
Well, no, and that a lot of money managers that are trying to impress younger people don’t want to hold oil. All right, I’ll buy it at the right price.

Jake Taylor:
Yeah, and take a 10% dividend or something along the way, because no one wants to own it.

Bill Brewster:
That’s sort of why I’m intrigued by the MLP idea. I’m not in it for ESG. I’m in this to make money. I’m trying to put food on the table out here. I’ll donate some trees or something.

Tobias Carlisle:
You can buy carbon offsets. I saw Bernie’s campaign spent a few million dollars on flights, and for $32,000 you can offset it all with … a few million dollars in private flights, $30,000 offsets it. It doesn’t seem to be that it’s that big an issue. That’s a tiny … That’s, what, 1.5% … covers your … that’s your carbon credits. It’s sorted out. What are we worried about?

Bill Brewster:
That’s it.

Tobias Carlisle:
Let’s move on, before we get too much hate mail.

Jake Taylor:
Yeah, please.

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