Iran War, Oil Prices, and Canada Implications
On February 28, the United States and Israel launched an attack on Iran, killing the Supreme Leader along with other senior leaders of the Islamic Revolutionary Guard Corps (IRGC). In his initial statements following the attack, President Trump signaled that regime change was a potential objective.
Iran responded aggressively, targeting a range of military, civilian, and energy infrastructure across nine countries at the time of recording. Energy facilities have been hit, including a refinery in Saudi Arabia and LNG export facilities in Qatar. The Strait of Hormuz, a strategic chokepoint handling roughly one-fifth of global oil flows and a key corridor for Qatar’s LNG exports, is effectively blocked. Shipping companies and insurers are unwilling to risk moving through the narrow chokepoint amid ongoing missile and drone attacks in the region. Several tankers have also reportedly been struck.
As a result, oil and natural gas prices have risen. If the Strait of Hormuz remains blocked for an extended period, even higher prices are expected.
This week on the podcast, Peter and Jackie are joined by Josef Schachter, President and Founder of Schachter Energy Research Services Inc. They discuss the recent events, oil prices, available spare production capacity, and inventories, and what these developments could mean for the Canadian oil and gas industry.
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Episode 316 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian, and welcome back. Well, Jackie, I think we can skip the trite banter because of the seriousness of the issues that are going on. We are recording Monday, March 2nd, first thing in the morning, two days after the United States and Israel bombed around in a coordinated attack with the goal of regime change and potentially more. So we are now into day three of the conflict.
Jackie Forrest:
Yeah. So let’s just go over a summary of what we know right now. And Donald Trump has made a number of statements that imply that the goal is regime change. Before it was like, get rid of the nuclear program. But it looks like regime change is the goal, but it doesn’t look like the US wants to put boots on the ground. He’s saying, “When we are finished, take over your government.” He’s talking to the Iranian people. “It will be yours to take. This will be probably your only chance for generations.” So implying that the US is going to be striking from afar, but wants the people inside the country to somehow set up a new government. Of course, the authoritarian supreme leader, along with about 40 senior leaders, were killed on Saturday’s attack.
And the big question was, will the Islamic Revolutionary Guard Corps fill this void? It looks like they are filling the void. They’ve put some new members up and also they’ve been fighting all weekend. So it looks like there is some leadership there that’s still directing things within what’s called the IRGC.
Now, they have also struck back Iran hitting nine countries in the region, places like Dubai, Bahrain, Qatar. And even as of this morning hearing some news that there may be some energy infrastructure hit, there was a Saudi oil refinery drone strike. And then places like Qatar and other oil and gas producing areas have shut in their production. Big important thing to watch is the Strait of Hormuz, which normally about 20 million barrels a day of oil or about 20% of global supply transits it’s this narrow channel, which of course is bordered on one side by Iran. As of this moment, traffic is not passing through. Of course, this is going to be a problem if this is prolonged because that’s going to cause quite a shortage in oil. There has apparently been reports that three tankers have been impacted. There’s also issues with insurance, so ships aren’t going through the channel because insurance won’t cover if you end up getting your tanker hit.
Oil price, what has it done?
Peter Tertzakian:
Well, it’s popped up to $72. And as of this morning, it was $70, open last night.
Jackie Forrest:
WTI.
Peter Tertzakian:
WTI. And well, it is up because I mean, the price before the aircraft carriers and such were starting to move into place was $60 or the low 60s. So arguably it’s popped up a good $10 a barrel. But I think this is just the beginning. I think if we take Trump assessment, which I actually subscribe to that this is going to go on for a while, then the longer the straits are blocked, both oil and natural gas prices, by the way, are going to continue to rise.
We have Qatar, which has, as of reports this morning, shut down its LNG production. Again, I think there was some damage to some of their facilities. So these highly flammable and soft targets are definitely the nightmare scenario that the regional expansion of the conflict represents.
And so I think this is going to be an ongoing thing and by the time people listen to this podcast, we’re going to have even more information that is going to make us think about where this is all going.
Jackie Forrest:
But before we get into that, we want to welcome our special guest who’s going to join us for today’s conversation. Josef Schachter, the President and Founder of Schachter Energy Research.
Welcome, Josef.
Josef Schachter:
Glad to be with you. Quite the interesting day for us to be having this conversation.
Jackie Forrest:
Yeah. We had booked this earlier and we were going to talk about Canadian energy and we might get to that near the end, but we’ll obviously just-
Josef Schachter:
Stocks are cheap, but they’re going to run today.
Jackie Forrest:
Yeah.
Peter Tertzakian:
Yeah.
Jackie Forrest:
Maybe before we get into the Iranian news, maybe just briefly tell us about yourself and some of the reports that you issue.
Josef Schachter:
Yeah. I’ve been in the oil and gas business since the early ’70s. So the ’74 to ’81 was one of those energy super cycles. The second one for me was ’99 to ’08, another energy super cycle. I think this one started in 2020, and I think it’s going to go into the 2030s. Each of them is caused by underinvestment at the beginning. All of a sudden, a new entrant comes in to buy. In the ’70s, it was Japan. We started buying Toshibas and Panasonics and Toyotas and everything. So their economy needed more energy, and that was at the margin.
In ’99, it was China. Capitalism under a communist umbrella, under four million barrels consumption to 14 million by 2008, and that was quite the cycle. And then 2020, of course, post COVID, the issue now is do we want copper and lithium and nickel and all the rest of the stuff that’s going to come from the third world? They’re going to be the big incremental users of energy and the OACD countries may be flat to down, but that incremental will drive this cycle. So I’m quite bullish.
But there’s always going to be corrections along the way. Price of oil, of course, with what’s going on in Iran, we can talk about that, of course. How high it goes, nobody knows. Do they mine the Straits of Hormuz? Does it last more than four weeks? Do they attack any of the energy facilities? Do they somehow Iran calls that they’re going to be able to knock out the Abraham Lincoln Strike Group? So you never know what’s going to happen. But at this point, $72 is up from 65 on Friday. And we were 56, not a month ago. So I think we’re going to see much higher prices in the near term. But just like what happened when Russia invaded Ukraine, we went from $80 to 120, and then four months later, we were back at 80. So these things are spiky.
Same thing when Saddam Hussein invaded Kuwait, you had a big spike up and then it backed off. So I think this spike, how high is unknown? Do the Americans have the ability to, with the Israelis to knock out the ballistic missile manufacturing sites and the drone sites? If they’re able to do the knock those out, then we could see something end quicker.
Peter Tertzakian:
Yeah. But these spikes, they’re different from say Russia-Ukraine, because Russia-Ukraine, I mean, there wasn’t really a choke point as the word in the oil parlance where you choke off a major supply point. And I mean, if I go back and we’re both veterans of this business, we had the Iran-Iraq war of ’79. We had the Gulf War when Kuwait was invaded and then pushed back by the coalition. We had the invasion of Iraq in the early 2000s. Then we sort of fast forward to other events, both positive and negative for oil, but the ones that spiked oil up. I mean, this is the one that we’ve talked about for a long time, and that is what happens if the supply point, the choke point of 20 million barrels a day, and I don’t even know how much LNG, it’s very substantial from Qatar, is actually impeded for a prolonged length of time? And in this business, when the world is consuming 105 million barrels a day, it doesn’t take very long to go through inventories.
Josef Schachter:
Yeah. And going back a month ago everybody was saying that there is hundreds of millions of barrels of excess inventory, mostly on the water, being the shadow fleets of Venezuela, Iran, and Russia. Now you’re hearing people saying that OPEC doesn’t have that much more they can bring on. And of course, the Straits of Hormuz block, which means even Saudi Arabia and others can’t ship out from the Gulf. So the reality is, if this is a short war, then the spike will be short. If it takes three, four, five weeks or longer, how high is high? If you go to 2008 when we had a shortage of oil and strong demand, we went from $80 at the beginning of the year to 147 in seven months. So you can see those kinds of spikes. And then again, look at the invasion of Kuwait. That was again, a very sharp 50% move, and then six months later it backed off.
Peter Tertzakian:
So what’s your sort of best call right now as to where the price of oil’s going as a consequence of this?
Josef Schachter:
Could we see $100 if it’s a week from now and some major oil facilities have been disrupted? Yes. On the other hand, if there is no attack on infrastructure and the Americans and the Israelis are efficient in knocking out the ballistic missile sites and the drone manufacturing sites, then we could start seeing the markets come back off. I don’t think we’re going to go back to a zero risk premium until Iran capitulates and we see the Artesh, which is the regular military, take out the rest of the IRGC. And if that happens, then we could see risk premium come down. But I just don’t know at this point, it matters what happens in the next week or two with infrastructure and with the IRGC.
Jackie Forrest:
Okay. Well, let’s talk about Iran’s ability to keep striking its neighbors now. We did see over the last day that Iran’s proxies Hezbollah is active, but generally their proxies are pretty weak. I would think they’re weakened at this point, they had the 12-day war. They’ve been even using a lot of their reserves here over the last few days because to me, that’s really important because as long as Iran continues to strike other countries in the region, I think the Strait of Hormuz is pretty much closed. So any thoughts in terms of their capacity to keep striking back?
Josef Schachter:
Well, that’s where it surprises me because I think the intelligence was so good on finding the leadership that you think their intelligence on where the manufacturing plants are for the drones and for the ballistic missiles and also the sites that would have been good. So now it’s just a question is that there’s so many. I think they’re saying there’s 2,000 ballistic missiles that they had, some in storage, some out in the field. The drones, they have tens of thousands that they built and sold to Russia. So there’s big plants out there. But if the Israelis and the US government and the British government know where they are, they could get them and start knocking them out. And so then it’s a question of, is that a day’s campaign or a week’s campaign? The other thing to I think-
Peter Tertzakian:
I think we underestimate how large this country is, Iran, and how entrenched the military is and the sophistication of the military, given that they’ve been supplying all their proxies, they’ve been supplying the Russians in the war against Ukraine. I mean, this is not a country that is technologically behind in many aspects. I mean, the thing where they’re technologically hampered now is the ability to intercept air even in the June Israeli war with Iran of last year, a lot of the air defenses were knocked out. And I think this is one of the reasons why they saw opportunity right at this moment of weakness.
But at the same time, flying across Iran, even in a fast jet takes time. This is not a small country.
Josef Schachter:
No, it’s double or triple Texas.
Peter Tertzakian:
And a lot of these sites, they are reinforced in the mountains of Iran and a lot of these drones, they can be launched off pleasure craft as the Ukrainians showed. I mean, to me, actually, this is more representative of a big country like Russia invading a small country like Ukraine, thinking it’s going to be over in days. But in actual fact, the resistance by various means has been surprising in terms of the ability to fight back.
And so I agree with President Trump’s assessment. This is going to go on for a while because I don’t think there’s going to be capitulation by the regime. The regime has two options, both of which are bad. One, which is surrender and have some new crew takeover, in which case you’re going to arrest them all, throw them in prison and hang them, or the other one is they’re going to die like martyrs in battle. And I think they’ve chosen the latter very, very much so. So it’s not like Venezuela.
Josef Schachter:
I agree. The IRGC has become a formidable military force. Their ability to create drones, their technological capabilities are first class on that, but the ability to close the Straits of Hormuz and mine the Straits of Hormuz with the American Navy there, I don’t think that’s a viable opportunity for that.
Peter Tertzakian:
No, that brings about another point, Jackie, that the Straits of Hormuz are already mined in a different way. Insurance companies are not insuring any tankers going through and ship owners have cranked up the rates to astronomical amounts to infinity because they’re saying, “As an owner of this tanker, I am not shipping anything through this.” I think Maersk came out yesterday, one of the biggest cargo shippers said, “We’re not putting our ships through there.” I’ve looked at my app, by the way, my maritime app. If you don’t have one, you should get one. I’m sure a lot of you have the flight apps, which shows you where all these airplanes are, but if you get the Marine traffic app, you can actually look at the Straits of Hormuz and basically the tankers are all anchored on both sides of the narrow choke point. They’re not going through.
Josef Schachter:
Yeah.
Jackie Forrest:
Well, and that’s why this conflict has to kind of just be in Iran at some point for those tankers to move. As long as it’s drones and missiles hitting nine different countries in the region, I don’t think anyone’s going to be moving any energy.
Josef Schachter:
The difference why I disagree with you is that the IRGC are formidable. The country is big and they have a large number of soldiers and dedicated martyr types that are willing to fight to the death, but the Artesh, which was the original military under the Shah is still there. And they have been put in second place. They haven’t gotten the money, they haven’t got the military equipment, they haven’t gotten the goods that the IRGC got, but they’re still in place.
So if the Americans degrade the IRGC sufficiently, knock off most of their heavy weapons, knock off their ballistic missiles, knock out their drone construction site and ballistic missile sites, then the IRGC can be taken on by the Artesh. And at that point, the game is a local one where it’s a domestic civil war. And the Artesh, you can see around the world, the protests and supporting the American and Israeli attack and the support for Crown Prince Crown Prince Palavi, then you’ve got yourself potential a leadership opposition that could come in just like when the Ayatollah came in, they deposed the Shah and then all of the Amolis came in with Kamani, and all of a sudden they were able to establish a government.
So the thing is you could have a big enough group of opposition in the United States, in Europe, wherever, plus the attach that could take over. So I’m in a different camp about the resolution. I think it will be a civil war. And I think in the end, if the Artesh comes out in full force, then the IRGC days are limited.
Peter Tertzakian:
Yeah. Well, I’m not going to pretend to understand Iranian theocratic governance and all the complexities and the various factions. I agree with you that this is a very destabilizing moment that could lead to civil war.
But let’s just get back to sort of what we do understand and that is oil, supply and demand. And Jackie, how much spare capacities there do you think and how long could actually the world go without actually starting to feel a crunch and SBRs have to start to be released?
Jackie Forrest:
Right. Well, I think part of the reason, I actually am surprised that oil price is only at $72 WTI and near $80 Brent, I would’ve thought it would’ve went higher. If you think about like Libya is a great example. In 2011, when Gaddafi fell due to the rebel groups in the country, the oil price went from about $90 immediately up to 110, and they were only a 1.6 million barrel a day oil producer. Here we’re talking about choking off the Strait of Hormuz, and you talk about OPEC spare capacity. Well, most of it’s sitting behind the Strait of Hormuz. So effectively, there isn’t a lot of spare capacity. So I am surprised how oil price has reacted so far, but I think it’s because of this belief, there’s lots of spare capacity. The market has all this like oil on water and inventories are high.
The IA, if you look at their latest oil monthly report, they think there’s still four million barrels a day of spare capacity. Josef, I’m sure you have a view on that. I don’t think a lot of that’s real, especially at this moment.
Josef Schachter:
I don’t think it’s real at all. If you just go back to the last two months of data from OPEC, they have had negative numbers. They just haven’t been there. The data that came out in the middle of February showed that the OPEC itself had 135,000 decline in terms of production. And of course that was Iran and Venezuela, but Venezuela’s now coming back. But OPEC+ is really where the big number was minus 305, and that was Kazakhstan down 249 because the Black Sea ports are being blown up by Ukrainian underwater drones. And so all of a sudden the ports there are not able to ship Russian or Kazakh oil. So the reality is they had a 439,000 decline in the month of January, and then they had a negative number, I think it was 200,000 in the month of December.
So I think that if you want to say that OPEC has more production, the big one would be Saudi Arabia. And the argument is that they were 10.09 million in the month of January, could they be 12 and a half? So everybody talks about 12 and a half. The reality is in field production, they just don’t have it. They didn’t have it in 2008. They were able to raise production by 500,000 to 9.6 million from 9.1. But the only way to get to 12 and a half is if they use their onshore storage and they’re on the sea storage and they move that up by two million barrels a day for a period of time. And they could do that because there’s floating storage off of Singapore, there’s off of China, there’s off of other places where you could bring that on off Rotterdam.
And so we could see an increase by OPEC in the short term without the worries about what’s going through these Straits of Hormuz. But if it lasts longer, then the problem becomes very serious. So I think people-
Jackie Forrest:
So you think there’s a few weeks of inventory there?
Josef Schachter:
There’s a few weeks of inventory that is not in the Straits of Hormuz that could be brought to be used. But once you take that down, then all of a sudden you’ve got a problem.
Jackie Forrest:
All right. Well, it’s interesting, just after this war broke out and somewhat lost with all the news headlines, OPEC+ did decide to raise their production in April to 206,000 barrels a day above what they’re currently doing. And they had put a pause on those raises for the last quarter or so. Now this was higher than people thought. People thought generally it would be lower than this, maybe about 140,000 barrels a day.
So despite this war related disruption going on in the Middle East, why do you think they wanted to signal that they’re going to increase their production?
Josef Schachter:
Well, there’s a difference between production and their quota, and they announced quota changes. And the reality is, if you look at the data that I talked about just earlier about production in the months of December and January, both of those months were supposed to have increases in production because they increased the quota. But the reality is in the field and the ability to produce, because many of the countries that are getting increased quota just don’t have the ability to invest. Libya, Algeria, other countries like that, they haven’t invested in the ground to increase production. And so they don’t have it.
The only place where you can say the taps can be turned on are Saudi Arabia, UAE and Kuwait. And if you go through the numbers, they haven’t been able to increase them. In the month of January, Saudi Arabia was up by 13,000 UAE by 14,000 BUEs a day and Kuwait by 5,000. So it’s not material. They just don’t have it. So even though they get more quotas, they don’t have the ability. You look at the negative side and you had Nigeria down by 19, we talked about Venezuela and Iran before. You go to Gabon down by nine, Algeria down by two. So they just haven’t invested enough. So the quota is one issue. Actual field production is a different one. And so far, OPEC, for all of the times, and they said they were going to increase production over the last year, they never reached a number that the quota increase was. And easy to find out, just go to the OPEC monthly reports.
Jackie Forrest:
Okay. So they still want to send a signal though that they have more supply. These quotas aren’t matching reality. At one point, are they going to revise what their actual productive capacity is?
Josef Schachter:
Look, I think the key thing is we need higher oil prices even for them because so much of the money that comes into the government. In the case of Saudi Arabia, they’re building a new city. They have military forces to keep the princes happy. You go to every other country, the graft and the amount of money needed for military and the rest of it. They’re not putting the money in the ground. It’s like Mexico. Mexico, Pemex has a financial problems. They don’t have the money to reinvest. They haven’t been investing in the Gulf of Mexico.
And so if you don’t have the money to reinvest in the ground, there’s a lead time from the discoveries. Look at Guyana, the discoveries were made years ago and they’re just starting to ramp up now. There’s a lag of that offshore west coast of Africa. Many discoveries been made in Namibia and South Africa and more in Nigeria. Again, Marin is a big company that’s offshore there. They do have production from Nigeria, but they’re now talking about spending money on drilling, but they haven’t drilled for a couple of years. That’s part of the problem is there is discoveries out there, but the time from those discoveries to come to market is long, number one. Capital costs have been blown up for everything. No budget has been reached, has met their numbers. Just look at Coastal, look at Trans Mountain, look at some of the Gulf of Mexico, look at some of the things offshore Africa, they’ve always blown up multiples of the original estimates. And so I think that’s really the basic story is we cannot bring on more oil at reasonable prices in a reasonable period of time.
Peter Tertzakian:
Right. At a time when people are realizing the end of oil is not nigh, that actually we’re still consuming 105 million barrels a day because of the versatility of the product well beyond just combusting and light duty vehicles. This is a vital economic commodity that goes into almost everything that we do in our daily lives. So this is a major event.
So I want to talk about these oil price shocks again, Josef, because you’re a veteran much as I am of many of these past episodes. I want to go wind back to the oil price shocks of the 1970s, which led to substantial oil price increases. I think went from $2 to $40 at the time in nominal terms and lasted for quite a while before it all calmed down. But that was the impetus to form the International Energy Agency and to figure out how to shield ourselves from this type of thing, which ultimately led to the institution of the Strategic Petroleum Reserve.
And that network of Strategic Petroleum Reserve amongst its member countries is still out there. But also the EIA served a purpose, which for example, the early 2000s with the Iraqi invasion, they came out and basically said, okay, we need more investment in oil, we need more to fuel China, which was a growing economy and so on. So the IEA has served this big signal for what the world’s energy systems should be doing. Now in the late teens, of course, they basically came out and said, “We don’t need any more oil.” They said, “No more oil, don’t want to even bother exploring-”
Jackie Forrest:
That was like around 2021 when that message came out.
Peter Tertzakian:
Was that 2021?
Jackie Forrest:
Yeah.
Peter Tertzakian:
Okay. So-
Jackie Forrest:
Not long ago.
Peter Tertzakian:
And now here we are, reality of choke points, et cetera. What do you think the IAA is going to say?
Josef Schachter:
Well, let’s go back a little bit to that ’72, ’73 period. 1973, it was the Yom Kippur War, and it was Israel against almost all the Arab neighbors there attacked, Israel won that after a period of time, given the support of the United States with munitions. But that’s when OPEC was founded and OPEC was founded because they didn’t want $2 oil for the rest of the time. They wanted to be able to control it. They nationalized the oil companies. And so that’s where Aramco came into being, and that was the big start of the price rise. And they wanted to lift it to $6 from 250. And then of course with the demand picking up and all the rest of it.
So from the point of view of the IEA as an institute is coming out with ideas based originally on going back a few years ago, we’re going to have climate change, we’re going to use less fossil fuels, and that was the right call at that point. But since then, it’s been very, very clear that the transition to renewables is not happening as quickly. It’s not as efficient in terms of economics.
And then the big thing is the third world. If the third world is going to bring us the copper, the lithium, the nickel, all those things that we need, they will use fossil fuels. They will be wanting to have the quality of life like us. Remember, there’s two billion people out of seven billion who do not have running water in their homes and do not have electricity. That’s where the copper is going to come from and the lithium and the rest of it. So if those countries are going to do it, they’re going to do it if the economics are good for the country, the royalty income’s going to be good, they’re going to be high paying jobs. And the people working in those mines and those processing plants for nickel or batteries, whatever they decide, Indonesia wants to do the whole thing, nickel upgrading the whole bit, they’re going to need to be paid properly and they’re going to want a quality of life like we do with running water and electricity.
That’s where the demand is going to come from, both for oil and natural gas and not happily, but coal because money of those countries will still be using coal. So I think the growth story for energy is still intact. Is peak oil going to be 2040, 2050, 2060? I don’t know. All I know is that in our lifetime, we do not have fusion power. We do not have the Star Trek world of ability with the technologies beyond what we have today. I think the reality is that we’re looking at 1.2 to 1.4 million barrels per day of demand growth X recessions, and we’ve seen that in the last few years, those kinds of numbers.
Jackie Forrest:
Right, each year?
Josef Schachter:
Each year. And so if we go from 105 to 106.2 to 107.5, there’s not enough coming on.
Peter Tertzakian:
So on that point, this is what I’m saying is, do you think the IEA in its next monthly report or big report is actually going to make a turnaround and say, “We need to invest in this vital commodity.”
Josef Schachter:
I’m not sure they’ll do it in the next month, but I think it’s very clear in the next six months that I think that they will say that because I think they’ll realize that OPEC does not have the spare capacity that they expected and that the lead time-
Peter Tertzakian:
And that this long cycle under investment is going to start kicking in. And now on top of it, we have what we have today with the conflict.
Josef Schachter:
Yeah. Look at the North Sea. Norway is continuing to spend money and bringing on new production and new reserves. The UK went against oil and against natural gas, and yet the basins are very similar geologically. And of course, in the 2000 cycle, there were a lot of nice discoveries made in the UK basin. So I think that even the UK is going to have to make a reversal of their decision to be anti-energy and be more positive towards energy too. And is it going to be because of IEA? Is it going to be because of the cost of oil going up here because of what’s going on now? But I think there’s going to be a switch by many of the countries that were anti-fossil fuels where they say, “We need to do this in the near term, even though our long-term goal is to not use as much.”
Jackie Forrest:
I will point out the IA did release a report in the fall of 2025 that said we need to invest if oil demand will stay flat, at least at the current level all the way to 2050, so over 500 billion annually. And that in the current policy scenario, which is like where oil demand is going, if we don’t have any new green policies, we need a hundred billion more. So they’ve been pretty soft with the messaging, but they have really changed the messaging in the last year.
Let’s go to this civil war scenario because I think it’s going to become even more urgent. So I think from our intro discussion, it seems both of you, Peter and Josef, seem to think that civil war is probably a pretty likely outcome here. The regime falls, but it’s replaced with chaos. I looked at Libya with Gaddafi, and this could be a similar thing. When he fell, rebel groups in the country got hold of military equipment and things like that and started fighting amongst each other for control of the country. That went on for an entire decade. So oil production was 1.6 million barrels a day prior to 2011 civil war, and it stayed almost half that level for the next decade. And even today, oil production is lower and there’s still uncertainty in the country where there’s multiple governments that claim that they are the government in control of the country.
Could we see something like that in Iran? Because they are a four million barrel a day oil producer when you consider liquids and crude oil or more than four million barrels a day, could we see a big loss in supply from Iran?
Josef Schachter:
Libya produces 1.3 million in January, but half of it is controlled by the government and Sanusi and the other half by Haftar and the Rebels in the northeast of the country. So they’re effectively two governments, two groups that are taking it and they finally said, “Okay, let’s not kill each other. We’re making lots of money. Let’s continue doing this.” But they’re not increasing production and they’re talking about maybe opening up and allowing new license approvals. But again, until the country is stable and you don’t have to worry about your expats being killed or taken hostage, I don’t think they’re going to see much growth there.
If you look at Iran, there’s basins everywhere, but there’s also different groups there. There’s Azeris, there’s Kurds, there’s so many different, Baghestans, there’s so many different ethnic groups there that unless that ethic group gets a piece of the pie, they’re not going to want to be supportive and they’re going to be anti. It’s like Nigeria, the Biafran war, the Christian Biafrans against the Muslims and majority in Nigeria. They were almost decimated because they had the oil in their part and they wanted to be taken.
So I’m of the view here that a group that comes in and if there is going to be one year from now, X number of years from now, some kind of coalition government after this nasty civil war is over, I think that there’s going to have to be more sharing of the wealth of that country, which is enormous. People don’t remember, go back to histories, Darius and Xerxes and Persia at its element. It was as big as the Roman empire and wealthy as well.
Peter Tertzakian:
Jackie, I think I’m not sure if civil war is what I think is the end point here. I think civil unrest or more defined by what is not the likely outcome, which is not an orderly transition and not a stable government for a while because of all the factionalization that we’re talking about and also the entrenchment of almost half a century of this theocracy combined and interwoven with the military and interwoven with some sort of very complex parliamentary system. So I think it’s going to take quite a while to get some sense of stability.
And if you think about it, like we were talking about OPEC earlier, whether or not 100,000 barrels a day increase makes a difference or not, and the market typically does react to these sorts of things a little bit. Iran, I think post whatever happens here is going to be impaired in its oil output and is very likely to be impaired more than 100,000 barrels a day, potentially of the, what is it, three million?
Josef Schachter:
3.1.
Peter Tertzakian:
3.1?
Jackie Forrest:
Yeah. But then there’s another million or so of light liquids and condensates and things like that.
Peter Tertzakian:
Yeah. So I think there’s a very high probability that there’s going to be impaired output that the buyers of the Iranian oil, like the Chinese and others, but whatever it is that’s going to be taken off the world market. And so I think this is a situation where we are going to see a higher floor on the oil price, whatever comes out of this.
Jackie Forrest:
Right, because we’ve structurally lost some of this production. So you can argue about OPEC spare capacity. If this goes, well, there’ll be very little OPEC spare capacity potentially. Even if half of the production is impaired, as we saw in Libya’s example, that they still were able to maintain about half of their production through all of that strife that happened, right?
Josef Schachter:
Just going through days of inventory, about 90 days of inventory in the OECD right now. When we had the COVID problem and demand fell off a cliff, we went to 120 days of inventory. That lasted for about six months and then it went into the 90s, low 90s again. Going to 2008, when we had the spike up to 147, we went down to 79 days of inventory. So right now at 90 days, we’re okay. But if that number comes down to 84, 83 and goes lower, that’s when you see, I would agree with you, that you will see sustained prices at a higher level until we get back to that 88 to 92 happy inventory range.
Peter Tertzakian:
Yeah. Actually, the pandemic reminds me of a more important dynamic. And that is what did people do when they saw that there wasn’t enough vaccines if we sort of wind our mind back to those dark days, that there was hoarding that started to happen. And this is the thing, by the way, that also happened in the oil price shocks of the 1970s is you don’t have to wait to the end of the 90 days to wake up and realize we’re running out. As you get week by week, you see that your inventories are depleting, then at some point a hoarding mentality kicks in. And I think that’s sort of the dangerous part of this. I don’t exactly know when that’s going to happen, if it happens, but when hoarding starts to kick in, countries without an SPR, read Canada, particularly for Central Canada, all of a sudden they’re in trouble as they were in the 1970s.
Jackie Forrest:
Well, and the Americans have really drawn down their SPR, so they may be regretting not refilling that.
Peter Tertzakian:
Well, and I think that you’ll see hoarding and so much of Central Canada relies on American oil. And we’ve talked about that on this podcast in the past, that in the 1970s the Canadian government had to charter a bunch of Greek tankers to take oil from the Trans Mountain pipeline from Burnaby all the way around the Panama Canal to Central Canada through the Gulf of St. Lawrence. So I mean, it’s not to that point yet, but when we talk about energy security and the knock-on effects of these sorts of choke points, we are entering into territory that is not uncharted actually. It was charted in the 1970s as what happened, and that lasted for quite a while.
Jackie Forrest:
Well, and we’ve had almost no geopolitical risk in the energy price. If we go back maybe past two years ago, it was almost nothing, right? And now we’ve got the US, this is the second military action they’ve taken this year, totally unexpected, really, like surprise to everyone except for themselves. And could we actually see US doing this more as a way to advance its interest? Could we see other countries like China or Russia be emboldened by the actions that the Americans are taking? “If the Americans can do that, well, why can’t we take another country?” If I’m Russia or China. So we might be entering an era here where that geopolitical risk premium is a structural thing that sticks around when it comes to oil markets.
Josef Schachter:
Look, the Americans are the biggest consumer, 21.5 million barrels a day. They produce 23.8. So they’re self-sufficient. China has 1.3 billion barrels according to reports of strategic reserves. They’re consuming 17, 18, so you can divide that number into the number of days that are available. They’ve been talking about building that to two billion barrels. So they still are out there and they’re going to still buy Russian crude and whatever crude they can get from Venezuela, which the Americans are now saying you can buy, but at much higher prices than the 40s you were buying at just a few weeks ago.
But the thing that I find that was interesting, not getting a lot of press, was last week, the US had a 16 million barrel increase in their commercial stocks. So demand in the States is softening a little bit. Overall demand fell 193 to 21.4. And then the one that was interesting is the SPR continues to grow and it’s 20 million barrels above a year ago. So it’s 415 million barrels.
Peter Tertzakian:
That’s like one day of consumption.
Josef Schachter:
No, but remember, the US is producing 23.7-
Peter Tertzakian:
Yeah. I know…
Josef Schachter:
… and 21.5.
Peter Tertzakian:
I always like to put these numbers in context because I mean, it sounds like a lot, but-
Josef Schachter:
Yeah, but they don’t need it because they’re self-sufficient. So as long as the price stays firm like we’re talking, Harold Hamm’s going to go back in and drill wells in the Bakken, which you said he wouldn’t do at 65, but he may do it 80. And then we may see tier two wells become tier one wells in the Permian and in the Eagle Ford. $80 changes a tier tier well to a tier one well. So I think all of that means that the US is not out of the woods in terms of being an exporting nation.
Peter Tertzakian:
But I mean, what this is tell us? To your earlier points about under investment long cycle, that the long term price of oil is not 60 bucks.
Josef Schachter:
Yeah.
Peter Tertzakian:
Isn’t that-
Josef Schachter:
Every decade it’s changed because the costs have gone up, demand has gone up. And so is the efficient price now 80 or 90? I don’t know, but I think it’ll be higher than that until we get more balance in supply and demand.
Peter Tertzakian:
So Jackie, back to your point about structural change, I think one of the structural changes that was already underway was the fragmentation of the oil market. If I wind my mind back to about 10 years, it was considered oil, a lot of commodities to be global markets. You can buy from any country back and forth, but now who you buy from matters.
Josef Schachter:
Agreed. I totally agree.
Peter Tertzakian:
The supply chains and countries want reliability. So the geopolitical overlay and we’ve talked about the geoeconomic overlay, the trade wars, who are your allies that’s all shifting.
Jackie Forrest:
Well, we had Edward Fishman on a few weeks ago, right?
Peter Tertzakian:
Yes.
Jackie Forrest:
And sanctions, I don’t think those are going away, and that means certain sources of crude, like Russian crude, before it was Venezuelan, isn’t like something that, Iranian crude, everyone can buy. So that creates another distortion. So I think there’s some non-fundamental things like geopolitical risk, sanctions that are going to elevate the price of oil too as we think-
Josef Schachter:
And the quality of the basins, if you go through the United States we’ve talked about as the number one producer, 23.7. You go to Saudi Arabia is 10, 9, 2 is Russia. Canada is what, 6.1? So we’re an enviable, like if you look and you maybe say, “Okay, I don’t want to buy from Russia. I don’t want to buy from Saudi Arabia because of human rights.” All of a sudden, Canada becomes a very attractive one, especially now with our political leaderships not being so anti-energy that I think that we are sitting in a very enviable position. The problem is, of course, takeaway capacity at some point may be an issue, but definitely for the next couple of years, Canada is going to be the golden child where people are going to come and say, “We want to buy your product. We want to buy your oil, your natural gas.” Hopefully we’ll get more of the FIDs on the West Coast for the LNG plants, and then hopefully the go ahead comes for expansion of Enbridge and Trans Canada.
So we’ve got a lot of growth ahead of us and we don’t have to use rail for a long time. So I think people need to look at the Canadian oil stocks, which are cheaper than American. And yes, we’ve had a big bounce here because of takeovers, NuVista, Kiwetinohk, and on the service sector step, but they are still on a multiple basis trading under let’s say three or four times cash flow. So I think that people should be looking at Canadian companies and we tell everybody that you should be looking at both the natural gas sector, the liquid sector, light oil, medium gravity oil. Also, you want to look at the oil sands because of the upside and the long life reserves there and the service sector. So you almost want to have one name in each of those areas.
So if you’re an investor in Eastern Canada, maybe you have four names or maybe a lot of people just jump right away into CNQ and Suncor and Imperial, but I think you got to go down into the names. My favorite is the West Coast LNG. You want to look at the names that have the reserves that have 25, 35 year RLIs and look at some of them that might even get taken over as the big boys who have LNG plants have to tie down those reserves. We saw NuVista being taken out by Ovintiv. We saw Kiwetinohk by private equity. We’ve seen Tourmaline make a number of acquisitions in the last couple of years.
Jackie Forrest:
Well, let’s finish on that high, what this means for Canada. And I’m very optimistic we’re going to get these LNG FIDs and have six BCF per day of exports potentially by 2030 or close to that time period. We’ll find out more about this oil pipeline, this West Coast oil pipeline in April with this MOU, but certainly the chances of it are much higher than they were a year ago And there’s the expansion to the Trans Mountain, which looks to be a very high probability that 360,000 barrels a day of additional flows on that. We have some ability to send more to the Americans.
I am a little concerned though about sending more oil to the Americans because where’s it going to go? I mean, Venezuela is now coming into the Gulf Coast. So we are dependent on re-exports of our product out of the Gulf Coast. Why ship our oil 3,000 kilometers and then re-export it when the Americans could stop us at any moment, right? So I really do hope we build the West Coast. But back to Canada, if you look at the last decade, it’s really been a story of US and international companies leaving Canada. Most recently, Chevron in the end of 2024, not that long ago, but as you say, we’ve seen more interest come here.
So it sounds like you’re thinking that there’s the potential for more M&A, more international groups, whether it be American or other international groups. I mean, back in the heydays of the oil sands, we had Europeans, we had Asians coming here. Do you think we’re going back to an era where we’re going to see a lot of M&A from outside the country?
Josef Schachter:
In all of the previous super cycles, ’74 and ’81, they were not here at the beginning and then they all came running in and buying up everything at ridiculous prices and paying top dollar for them. That same thing happened in 2006 to 2008. They came back in and then they ran away again. I think the runaway is gone and I think they’re all starting to look. We’re seeing it from the fact that private equity is coming back into Canada. Ovintiv, which was the old end Canada, Pan-Canadian has come back into Canada. They’re now going to be producing more in Canada than the States. Hopefully we see that our basins are so attractive and we have growth. We have lots of growth in natural gas. I think we all agree between our basins are less mature than the Permian and the Eagle Ford and the Haynesville and all the other US basins. So Montney, Duvernay upside is still there on the heavy crude, clear water with water flood and all the other different ways or ways to get growth. So I think there’s enormous opportunities here.
Peter Tertzakian:
Well, I want to come back to this notion of supply chains and who you buy from matters because already the Japanese and the Koreans were thinking about buying more LNG and potentially oil from Canada off our west coast because they understood that being beholden to the supplies from the Straits of Hormuz was risky. So the building of infrastructure, as you said, I think is going to happen, but it has to happen quickly. It’s not a 10 year program. It’s got to happen much more quicker.
Do you think this Iranian incident now is going to actually further accelerate, get people more motivated in Canada to actually build this infrastructure?
Jackie Forrest:
I hope so. We have our prime minister actually, interesting enough, he’s in India. He has actually some other Asian countries he’s visiting, I think on this tour. I think that the buyers there are going to be saying, “We need more Canadian energy as soon as possible.” And hopefully he comes back and really feels the urgency to build the West Coast pipeline for oil, the natural gas projects to accelerate those. I mean, we have the legislation and the will, I think, to move more quickly, and I certainly think this makes it even more urgent.
Peter Tertzakian:
Yeah. Well, great. So thank you, Josef Schachter. You’ve given us a lot to think about. In fact, even notwithstanding the action in Iran and what’s going on there, you’ve highlighted the long cycle structural problems of underinvestment in the business that was going to catch up with us anyway. And now we have the geopolitical overlay. And I think all three of us are pretty much in agreement that there is a structural change here and that the floor for the price of oil is likely to be higher than it was before we got into the situation that we’re in right now, but we shall see. It’s very dynamic. And as I said, at the outset, we’re going to have to take this day by day because by the time we even post this podcast tomorrow, I’m sure there’s going to be things that are going to make us think about all sorts of other things in terms of potential outcomes in this very volatile and frankly tragic situation that is going on over there.
So thank you again for joining us. We are going to post a couple of your reports that you publish, Eye on Energy, I understand comes out every Wednesday. That’s a macro piece in your Schachter Energy Report. We are going to put links to both of those on how you access them on our podcast.
But thanks for joining us as a veteran of the oil markets for giving us your insights.
Josef Schachter:
My pleasure. There’s not many of us left that are from the 1970s cycle. So well, I enjoyed it very much. Thank you.
Peter Tertzakian:
Thank you.
Jackie Forrest:
Yeah. Thank you, Josef, and thanks to our audience. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
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