Joe Weisenthal: Hello and welcome to another episode of the OddLotss podcast. I'm Joe Weisenthal

Tracy Aloway: and I'm Tracy Aloway.

Joe Weisenthal: Tracy, did you see that oil is already technically in a bare market?

Tracy Aloway: [laughter]

Tracy Aloway: I did. I did. So, um I think the definition of a bare market is down. Is it 10 or 20%? I can't remember now.

Joe Weisenthal: 10% is a correction.

Tracy Aloway: That's right. Okay. So, it's down 20% from the high of I think Brent was at something like 120 per barrel.

Joe Weisenthal: Almost 120. 11950.

Tracy Aloway: So, yeah, it's coming down. However, it's still up quite a bit from where it was like a week ago.

Joe Weisenthal: Oh, yeah. Absolutely. I mean, it's still up 8% from Friday. I mean, that's how crazy the oil market is right now. That

Tracy Aloway: we're at that moment in time where numbers kind of lose meaning. I feel right.

Joe Weisenthal: Yes. And obviously, look, we all know the context just extraordinary surge. I think one of the things that's surprising to me or not maybe not surprising but notable to me and we'll get into this with our guest of course in a minute is that Iran war risk was well known. the price of oil had already been creeping higher a bit even prior to the first attack. So this was already a concern, but it sort of goes to show like how I don't know exactly what the term is, how unexpected or how the degree to which basically this was not priced in. The fact that traders were already very keen and aware that there was a very high possibility of a strike in Iran and yet we've just seen this absolutely massive surge in just the span of, you know, 10 days really. Well, the other thing that's happening now is because we had pretty good oil supplies out there at the beginning of the year, that's kind of become, I guess, a vulnerability because you had a lot of oil in floating storage, for instance. But that means now the floating storage is filled and it can't go anywhere because you can't get through the straight of Hormuse and therefore all the new production is getting shut in a lot faster than it would be otherwise. So it feels like some of the buffers that we had are kind of turning into I guess vulnerabilities.

Tracy Aloway: Yeah, totally right. Now the thing with a lot of commodity people is that and I love them. So this is uh but [laughter] the thing no but a lot of them are like sort of I don't know like perma doomers like sort of a little bit crankish a little bit more always thinking about risks and so forth and ways that things could go bad and how we could go back to the stone age if we don't have the free flowing commodities of all sorts. And again, I love them all, but someone else pointed, I forget who tweeted it over the weekend, but they said like even the least alarmist, I think it was might have been Stinson Dean actually. He said even the least alarmest people in the commodity space are very alarmed right now. And so, yeah, people are talking about this being one of the worst oil shocks ever. I mean, it's very extreme. Joe, if you worked in an industry whose lifeblood was the liquefied remains of prehistoric organisms and there was a finite amount that you knew one day was going to run out, you'd be a doomer, too.

Joe Weisenthal: You're right. Well, we're going to be speaking with someone who is not a doomer. Overall, very pleasant fellow, but someone who is quite alarmed, who thinks that oil could actually go to $200 a barrel quite plausibly depending on how the war unfolds. I'm very excited. We haven't talked to him in a while, but uh an oddlot's favorite here. We're going to be speaking with Rory Johnston, founder of Commodity Context, all-around oil nerd. He even teaches at the University of Toronto. So, uh Rory, thank you so much for uh coming back on Ovots.

Rory Johnston: Thanks for having me back, guys.

Joe Weisenthal: Let's start with this idea that Iran war risk was already very much on the radar of traders long before the strikes. The price had been creeping up and now we've seen this huge surge. So we were at about I'm looking at the Brent chart. We were just over at $72 a barrel the weekend before the attack. Currently right around 100. What has happened in the last, you know, just over a week that's been so far beyond what traders might have been anticipating?

Rory Johnston: Yeah. So I think you very kindly described me as a reasonable person. I I agree that I think a lot of people in the commodity space have a kind of a perma bullish bias and I think for many of the reasons Tracy mentioned when I first got into the industry I was very much like that. Oh my goodness, you know, ISIS took mausole in in Iraq in 2014. We're going to, you know, crazy levels. But I think what we've discovered and what's been reinforced repeatedly over the past half decade is just how flexible and resilient the oil market is. We've dealt with everything from CO to Russia's invasion of Ukraine to Houthis in the Red Sea to full-blown attacks with Iran and Israel last year. It's gone through a lot and despite that, the market has been shockingly shockingly resilient. These were all the things that we used to kind of stress the market with.

Joe Weisenthal: But I think the difference is and I think this is kind of almost in some ways the market's gotten used to the wrong lesson here. You know, rather than being doomers, we've gotten overly sanguin because the market is able to fix all of these problems. And I think the market is shockingly shockingly good at this. But this is one of those problems. The closure of the straight of Hormuz is something that can't really be fixed by markets. It's so large and so physical. And you kind of mentioned like why this kind of confounded expectations. You had mentioned so you know over the prior month or so we had built in upwards of $10 a barrel largely of Iran risk mostly from speculative participants kind of anticipating this. And again it wasn't a it wasn't a secret. We had the largest buildup of US military personnel and equipment in the Middle East since the invasion of Iraq in 2003. But them like myself, I never expected this to happen. I never expected to see this particular shock in my lifetime. This was the kind of this is the scenario that you give new analysts in the industry as kind of a thought experiment of okay, if this happened, how would everything break? Because I think it's actually a very illustrative and educational thought experiment. It's terrifying to be kind of speedrunning it in real time.

Tracy Aloway: So on this note, when something like the events of the past week happen, how much of an oil analyst's job is actually thinking about supply chain adaptations and where oil could get rrooted versus just thinking geopolitics and becoming an armchair military expert and thinking like, well, this is when the conflict might actually end. I think it's more on the supply chain and I think when we as a analyst like look at charts and data what we're really trying to do is both I mean obviously to understand you know and see where the price of oil is in any given day but more kind of looking at what those signals tell us about what's happening in the underlying market and when you have such a massive dislocation like we're facing right now none of those signals act like they usually do. They're all flying in all different directions in crazy fashion because this is such a massive massive loss. And again, just to put in perspective for people what we're talking about because someone that's not aware of the market say, "Oh, well 20% of the market, 20 million barrels a day that flow through Hormuz." Yeah, that's we could deal with that, right? But that's actually so 20 million barrels is the peak of COVID demand loss in March and April of 2020. That was when we were all locked inside, when airports were empty and planes were grounded. That was the type of demand destruction that 20% looked like. And now if the straight remains closed and I think this is the critical part here whether it's the war or whatever and we could talk about all the ways that this could you know the nuances and the way you know slippage and leakage but if the straight remains as it is today we will need to forcibly kind of adjust the market to that level of demand but without a pandemic just via price signals that's why 200 plus is at least I mean the longer this goes on the higher we go and it's not just oil we had already seen jet fuel in Asia hit over $200 $1 a barrel briefly because the product markets are the things that are actually going to drive that demand destruction, not crude itself.

Joe Weisenthal: Yeah. Explain that a little bit further. The product markets talk to us a little bit when you say that. What do you mean by that?

Rory Johnston: Yeah. So, you and I as global consumers don't actually typically consume crude oil.

Joe Weisenthal: Only Tracy does. Only Tracy does.

Tracy Aloway: Tracy Tracy does. Exactly.

Joe Weisenthal: Unsuccessfully. But yes,

Rory Johnston: Yeah. So, you and I as global consumers don't actually typically consume crude oil. Joe Weisenthal: Only Tracy does. Only Tracy does. Tracy Aloway: Tracy Tracy does. Exactly. Joe Weisenthal: Unsuccessfully. But yes, Rory Johnston: I think I think all of us would be pretty unsuccessful kind of consuming very very toxic liquid. But I think you know what we actually consume jet fuel, diesel, gasoline, these are things that are created, distilled and refined in a in an oil refinery. So oil refineries consume crude. So what we talk about when we we talk about you know the blowout in the product market is we're talking about so crude oil has a supply and demand curve as you'd you know see in econ 101 and then each individual product gasoline jet fuel diesel NAFA petrochemical feed everything else you know shipping fuel they all have their own specific supply and demand curves which this market becomes like fractally complicated very quickly but to simplify really what we're talking about is a refinery taking a let's say a barrel of oil for $100 which is roughly where we're trading right now in Brent we're kind of jumping another side of 100. They take a barrel of oil of 100 and they refine into a bunch of different products. The premiums they get for those products are what we typically call the crack spread or the difference between crude and a refined product that that is yielded from a refinery. And the refinery margin is essentially the weighted average blend of all those crack spreads plus other costs and everything else. But what's happening right now and the reason that we're actually seeing the refined product market jump ahead of the consequences in the crude oil market is that the worst thing for a refinery is literally running out of crude feed stock. And actually full credit to June Go of Sparta Commodities for educating me more on this cuz I would have thought wow product markets are going insane. Refiners must be chasing as hard as they can running as fast as they can to capture those exceptionally high margins. But the issue is is that for them, shutting down a facility is the worst case scenario. This is basically a giant flowing chemistry set that if you turn it off, it's really really hard to kind of turn back on properly and it takes a lot of time and money and downtime and then you're not capturing any of those margins. So what the refiners are doing, these are the fineries in Asia that basically have a massive 20 million barrel a day gap coming towards them in the market in terms of feed stock. they're preemptively reducing activity, reducing the rate of runs so they can extend their runway basically for how long they can remain in the market at all. So this means that you know with crude oil 2 weeks ago we still had crude flowing out of the Gulf. It takes a month or two for those cargos to get to where they're going. It's only then that we'll really start to feel the consequence and the supply loss and the inventory drain down. But with the refiners in Asia in particular preemptively and kind of uh you know adjusting down their run rates, we're seeing the impacts in Asian product markets immediately.

Joe Weisenthal: So, the other thing I wanted to ask you about, Rory, is so we have strategic stockpiles that are supposed to help us get through these types of near-term supply shocks and, you know, the release of which is supposed to not only push down the price of stuff like gasoline, but also maybe help the refiners keep going so that they don't have to start preemptively shutting down capacity. At the same time, we now have G7 countries that seem to be very reluctant to release from the stockpiles. And I should just mention that we're recording this on March 9th and you know there are all these headlines flying around so who knows what will happen by the time this episode gets out. And then at the same time we also have the US where there's a lot of chatter about releasing from the SPR. Talk to us about the pros and cons of actually dipping into those strategic stock piles right now.

Rory Johnston: Yeah, so I think it's important to note that like this is the mother of all supply risk. This is the boogeyman for every oil analyst when they're kind of learning the ropes. This is the purpose-built reason, the scenario precisely that the SPR was kind of created to mitigate the risk of. To me, it's insane that they haven't yet tapped the reserve already. And I think speaks to the fact that particularly the Trump administration has tied itself in knots criticizing the Biden administration for releasing SPR stocks in 2022 to offset the Russian supply shock. Now, just on that very briefly, I was a big supporter of that release. I thought that was a clear national security threat and global economic threat that Russia posed when invaded Ukraine and we we thought we were going to lose so much oil from Russia, but it wasn't executed perfectly in fairness, but still I think that was a good purpose of it. And now this is also a very good purpose of it. We could have refilled more in the interimm and we should have. Congress needs to allocate more money to the SPR to the Department of Energy. most of the money that was earned from the Biden era sale of the SPR has essentially been remitted to Congress. So you actually need to get that money back again. But I think what we've seen so this morning the the IEA and G7 countries were talking about this coordinated release of 300 to 400 million barrels was what the Financial Times uh reported as I saw. But yeah, they come out and said no. Now there's a couple reasons that you could explain why they could say no. One, they could be hoping and fearing that things could get even worse. So holding it, you know, closer to the chest on that. I would say one of the big problems is that the collective release rate of the SPRs around the world is not 20 million barrels. So the crisis is already really really bad and you can't actually fill the gap entirely with SPRs even if it was unlimited, which it isn't. Just the flow rate itself can't keep up. So if anything, you kind of need to almost start easing earlier rather than later. On the other hand, I think there's this question of like maybe, you know, repeatedly we hear that like Trump thinks this is going to be a short-lived shock. Last night when I was driving into Ottawa, you know, they were talking about, you know, this is going to be short, sharp, and then we're going to get rid of the Islamic Republic and Iran and we're all going to be better off. But this is not it. Nothing nothing that we've seen so far indicates it's going to be short and sharp. Again, I'm shocked we are this far down the road. I didn't think the president had the appetite for this kind of true and utter chaos, and we're going to see how long he remains to have the appetite for that. But that's essentially the best read I could have is they think this is short a short-lived geopolitical sentiment disruption when this is really just the largest physical supply disruption we've ever seen. The other thing they're reportedly musing which is even more insane and terrifying is renewing the export ban on both crude oil and refined products.

Rory Johnston: something that the Biden administration kind of mused about in late 2022 and I wrote a piece then on commodity context that was all about the reasons that that was a really really bad idea that I appreciate the impulse towards otterarchy particularly given the fact that the United States is the largest oil producer in the world now but not only are crude quality issues at play you know the US produces too much light and doesn't and still needs to import heavy but also there's regional issues that the US Gulf Coast is a net exporter of diesel the US East Coast is a net importer of gasoline from Europe. So basically, if you start closing these borders off, all of these individual regions start to basically shut down and kind of oify in a way that is not at all what I think President Trump would want. But I no longer have much faith that they have fully thought any

Joe Weisenthal: would have thought about the SPR. You would have thought about insurance. You would have thought about all of this already and they just clearly haven't. Yeah, this is one of the striking things to me. At least from everything I've read there, it sort of seems to have taken them a little bit by surprise. Some of the Mercury I mean, it's almost hard to believe that there wasn't more anticipating of this when you're going into war like this, but it does not seem I certainly get the same impression as you. By the way, everyone should pull up that chart of Singapore jet fuel prices. It almost looks fake. It's just like, you know, we're $90 a barrel at the end of February, broke 220 recently. It's come in a little bit. So, talk to us a little bit more about the sort of relationship between the duration of the war and the ability to flip the switch back because it does the president's communication does seem to be like, yeah, we're paying a price right now, but it's going to be worth it and then prices are going to come down. how you know as this goes on longer and longer to what degree does everything compound and make it more difficult to go back to normal

Rory Johnston: and I think this is a topic I was listening to actually your podcast on the straight of four moves flow with the shipping experts exactly on this topic and I think you guys nailed it there that this gets worse every single day it goes on but let's talk through the ways it gets worse so

Joe Weisenthal: when we we talk about the straight of her moose like you could think of it very simply as like the world's largest pipeline or like a big giant garden hose you know through which 20 million barrels of petroleum flows. When the straight was closed initially, you know, for the first day, 2, 3 days, it's kind of like a kink in the garden hose. If the conflict had ended then, which is honestly when I expected it to end, you would uncink the garden hose and things would get back to normal pretty quickly. Okay, no harm, no foul. Some issues, but like you can make that up pretty quickly. But now, you know, 10 plus days into this, we now have the equivalent of a 200 million barrel air gap in the global flow of petroleum. First of all, not to mention that in addition to this kind of kink in the garden hose, that pressure has built up because these countries can't export out of this region anymore, countries like Iraq and Kuwait in particular, both of which lack sufficient domestic storage capacity because they're they just export the stuff all the time and for for decades and decades, they have been forced to shut in production. Now, Iraq as of yesterday shut in over 3 million barrels a day of production from its southern Bosra fields. That is alone. just a rock alone so far that is the same size as the feared loss of Russian supply in April of 2020 in 2022 that sent the market you know ripping higher above 120 Brent just for perspective and and we didn't end up losing that supply in the Russia case we only lost one briefly and it came back but in Iraq we've already lost Kuwait we've already lost it in the Emirates and Saudi Arabia they have more storage capacity and a bit more optionality they can get you know there's a pipeline to the west coast in the Red Sea in Saudi Arabia that can divert some of the flow. Similarly with the United Arab Emirates, you can divert some flow out the port of Fujera. The pipeline to the west coast of Saudi Arabia can get bombed. If we get to an existential battle, you know, this keeps grinding. Same with the ports of Fujera, I think. But again, these systems can all be broken. So you've lost that. So you've lost supply structurally at least for weeks, potentially a month, even if the thing resumed, even if flow resumed tomorrow. And then on the refin, that's on the exporter, the supply side. on the demand side in the in the importers in Asia like I said you've already begun to lose refining runs and because the jet fuel is very particular I think rightfully so you don't store as much of it typically so I think part of that giant spike in fuel prices in jet fuel in particular was this sudden kind of loss of supply not a lot of inventory cover and all of a sudden you had all of these airlines all across Asia like wow I'm not hedged for this I need to get every barrel I can right now so I think even if this resolved right which it doesn't look like it's going to, but even if it did, now we have a big air gap in the system that's going to need to work itself out. And all of these different supply chains will probably end up taking 2 3 months minimum to get back to something resembling normal. And it doesn't look like we're we're about to kind of resume flow through the state of Hamuz right now, despite what the White House says.

Tracy Aloway: I have what is perhaps a silly question, but does demand destruction actually exist when it comes to higher oil prices? I I mean, you know, seriously, I know that airlines will go bankrupt eventually because of high oil prices, but it feels like it is one of those things that you want to keep using for as long as you are physically or financially capable of doing so.

Rory Johnston: I'll talk about three different angles here. So, the first is the difference between the elasticity of price versus the elasticity of income. So I think there's the one question of I think when we typically think about demand destruction we think primarily through the lens of like prices got too high so I'm not going to drive to work today. There's also the angle of prices got so high they crashed the economy and you lost your job so you no longer have to drive to work. So that is one angle if this goes on for much longer. We're not talking like we're talking serious recession if not like outright global depressionary conditions if the straight remains closed for a month plus you know two months. So there's that's the one angle. But when we talk about, you know, I agree I'm not going to stop driving my kid to school. I have a fairly high tolerance for high prices, but we live in wealthy advanced societies. I think what you saw for instance in 2022 I think is illustrative of this in the LG market when there was a very very high-profile event when a contracted LG tanker that was supposed to land in Pakistan got diverted and ended up in Europe because the Europeans were willing to pay way way more and basically the LG supplier broke the contract to service that which economics dictated but I think the human cost was very real Pakistan just couldn't afford it so what you're going to see here let's say again in this horrible scenario where the straight river remains closed until 2027. Um, this is what the world would look like. What you would end up seeing is massive demand destruction from lower income countries that can no longer afford to get those barrels and attract them to their shores in the first place. So, you and I would see this as massively surging prices at the pump and we would grumble and it would it would sap our consumer spending energy, etc., etc., but the barrels would likely be there. We are in the countries that will attract the most supplies because we're willing to pay the highest prices. But other lower income countries in the world, it's not going to be a price issue for them. It's going to be an outright shortage. And that I think is how demand destruction in this particular instance [music] would work.

Joe Weisenthal: Talk to us about $200 barrel. How do you you said so this is in the cards potentially. Can you walk us through the math of how we get there or like why that seems like where it could go and not just say 150 or talk about how you why that number seems realistic.

Rory Johnston: Yeah. And I should say I mean like 200 is you guys kind of said in the intro like these are just kind of placeholder numbers at this stage like the numbers stop meaning something when they reach that high but just to this point that you're going to need to keep ratcheting the price are higher and higher and higher until a couple things happen. One, even if this continues, even the war continues, a lot of this was predicated in this assumption that the straight remains completely shut. Important historical context is that even during the tanker wars of the 1980s at the peak of the kind of Iran Iraq war when you had I think it was over 450 ships attacked, 250 tankers and like 50 of those tankers were either sunk or scuttled entirely like a much bigger, more explosive situation than we're currently even seeing in the Gulf today. During that period, you never actually had a stoppage through the straight of had military escorts, you had other things, but the oil continued to flow. In this instance, it's effectively shut. You're seeing minor like let's say 5 to 10% of the prior flow go through, but it's effectively shut. We've never really seen this before. So, if this continues, you're you're going to keep bidding up prices to do one of either two things. We talked about demand destruction. So, I think that's one way the market solves itself. Or prices get so crazy high on the other side of the straight. And the other thing I should note here is crude prices are probably effectively negative prices right now on the wrong side of the straight because those are stranded barrels and no one can get to them. But if you can basically arb that between effectively negative prices and potentially the highest prices you've ever seen the market, that's a really compelling economic incentive to take the risk to cross the straight or to pay your crews, you know, the sufficient amount of money to cross straight or to afford the exceptionally expensive war insurance. So it's it's like that mad money meme. It's like that's what the money's for. It really is that we're we're trying to basically incentivize between two awful scenarios. Either seafarers and tanker owners risking their lives and their ships going through the straight to deliver this fuel or you're asking people to basically stop moving stop moving around the planet. And neither of those is a very attractive solution. Which is why again I I just fundamentally can't see this continuing. I think I keep saying like Trump's going to taco because he has to taco and people keep criticizing me. They're like, "No, no, it's no longer just Trump's call. It's it's Netanyahu. It's the Iranians or whatever." And I think that's probably true. It's not just Trump's call anymore, but he's still one the person that's probably movable on this by market reaction. And two, he's still probably the most important incremental voice in that conversation. So, if he pulled out, I think that does a lot to deescalate the situation. I think that's probably where we need to go here. I realize we have I don't think we've mentioned OPEC once in this conversation which probably says something about OPEC's relevance today but you know to what extent can OPEC respond with a big supply increase and maybe shift some production away from the Gulf and start firing up output elsewhere.

Joe Weisenthal: Yeah. So I think it's a it's a great question and unfortunately the straight of Hormuz is a risk concept kind of shortcircuits the OPEC's normal reaction that when you're talking about spare capacity virtually all the spare capacity in OPEC is on the wrong side of the straight of Hormuz it's in Iraq Kuwait Saudi Arabia and the UAE all of that is currently caught up in this so I think that's part of the challenge and why the straight of was always the boogeyman scenario was there's no real normal way that the market can get around it the one major producer that's within OPC us that is likely the single greatest beneficiary of this is actually Moscow. So the Russians had been under increasing pressure during you know the the Trump administration have put a lot of pressure on all of the kind of what I call like the big sanction three. You've got Iran, Venezuela and Russia. Venezuela we have a regime change. Iran were in the process of doing so or trying to. And then in Russia, they said that they were prioritizing the the war in Ukraine and they were at various points. But now they had actually been putting a lot of pressure on the Russian oil trade. India, which was one of the largest importers of Russian crude, large seabboard importer of Russian crude after the invasion with the price cap and everything else. [snorts] They got under increasing pressure on two fronts. One, the Trump administration issued blocking sanctions or like the hefty off, you know, really really tough sanctions that were on Iran. issued those on Roseneft and Luke Oil which are Russia's two largest crude oil exporting companies. In addition to that, so the Indians didn't like that and they started pulling back purchases there because they're afraid of the sanctions risk. But in addition, Trump actually imposed a specific punitive 25% tariff on India for being such large importers of Russian oil. So over that kind of between October and say January, we saw Indian imports of Russian crude drop from over 2 million barrels a day to about 1 million barrels a day. So they have that Russian oil wasn't really go it was a little bit going more to China but it wasn't finding many other buyers. So Tracy mentioned that you know we were building up lots and lots of oil and water. That's where a lot of this was ending up. So the prices for these the discounts that you that were kind of suffered by Russian barrels were exploding. They were building up on water. Russia was kind of the oil industry was on its back foot and probably going to start contracting pretty meaningfully if that continued. Now what are you seeing? Well, all of a sudden one of the major places that has any incremental supply at all to share around the world is Russia. So India's back in the market for Russian crude and the White House actually explicitly gave them a waiver for those sanctions that I I mentioned previously. So they're going to start importing a lot more Russian crude because they need to. And [snorts] even the Europeans have started clamoring about easing sanctions or reopening flow on the Dusba pipeline to to Eastern Europe and into Germany. It's a mess. And again, it's a mess that overwhelmingly serves the interests of the Kremlin above any kind of other single national actor in this oil market.

Tracy Aloway: It is pretty striking turn of events with that, isn't it? You brought this up earlier, but I feel like this is going to come up, so we should talk about it more. There actually was a headline already. This idea of curbing exports, and you know, I think in a lot of people's head, it's like, oh, we produce more oil than we need, we export them. Let's just keep it all at home and then prices will come down, etc. Like, I feel like if you're not thinking second order, it sounds like a totally fine thing. Walk us through like why you think that's like a disaster scenario.

Rory Johnston: Yeah. So I think what would be compelling to Trump is that in the first two or three weeks it would result in very meaningfully lower pump prices for US consumers. I think let's just get that out of the way. But in a way that's kind of too much of a good thing in that what you see is like as an example of the US G Coast which is the major refining hub of the United States where you have all of the outlet from the Perian and all the rest of the oil fields and directly into that refining hub much of which is exported. You see a lot of diesel exports about a million million and a half barrels a day of diesel exports out of the region largely going to Mexico, Latin America and other areas. If you banned exports, let's say across the board, what you would do is you would start building those inventories at that pace in the US Gulf Coast. So you would start overflowing your tanks of diesel. Diesel prices would crash. That would be great briefly for your kind of you know drivers of big your your big diesel trucks and shipping etc. That's great. But eventually you reach the stage where it's the same kind of thing as you're seeing from the Gulf exporters. You run out of storage space and all of a sudden you can't produce any more diesel. You can't put it anywhere. That begins to overflow your tanks. You need to cut runs. That's when things get bad because then you're starting to lose gasoline supply. You're starting to lose everything else as well. And all of a sudden you're going to get turned into an importer of various fuels. Now there's also the issue that you have a lot of trade between regions that like maybe you could put excess fuel out of the Gulf Coast into the east coast. Ah well then we get back to your favorite topic the Jones Act.

Joe Weisenthal: Yeah. [laughter]

Rory Johnston: So, I think there's a way that you could design a very specific policy that was selective with certain fuels and everything else. If this was a true, like if Trump wanted to do this for months, then yeah, I expect him to do something along these lines and it's going to get extremely messy. I also don't know if they can kind of stick handle the specifics of this industry in the way that they would need to. But you could create a scenario that the US basically cuts itself off from the world and does so in a way that doesn't completely destroy the industry. say you still allow US G Coast diesel exports.

Joe Weisenthal: But I think the other thing here is that over time the system just continues to break and erode that all of those imports into p into the US east coast. Well, those barrels will get incentivized elsewhere if you can't incentiv like let's say he goes full mixing all the 1970s oil shocks and not only do you have an export ban, let's say you have price caps or price fixing at the pump, not outside the realm of possibility with the current administration. I think that is where again you shortcircuit that mechanism I mentioned earlier that in the current situation we likely in United States, Canada where I'm up right now, these countries likely will not run out of fuel. They'll just get very very expensive. These policies that the White House could impose could create a situation of outright scarcity and shortages in North America in a way that we wouldn't be able to pay to get around them because his whole point sole purpose is to avoid [music] that pump price spike. But in in doing so, you would end up creating outright shortages instead.

Tracy Aloway: Rory Johnston, it's been too long. I was going to say we should chat more often, but you know, I don't want to chat again too soon because that would be a very bad sign, but it's very possible that we might be calling on you again, but thank you so much for [music] coming on. That was great.

Rory Johnston: Thanks for having me, guys. Always a pleasure.

Joe Weisenthal: [music] Tracy, I really I really like talking to Rory. I thought that was great. I think one of the interesting dynamics which I hadn't fully appreciated is that spread between the products and the price of crude. I mean that jet fuel I didn't totally understand why the jet fuel market or you know had blown out quite so crazy. But it makes intuitive sense that when there is such concern about the capacity at all to get the input that they have to already just sort of start slowing down their pace.

Tracy Aloway: Let me just say I don't like it. I don't like talking to Rory about how the hypothetical doom scenarios that every oil analyst has been thinking about for decades and decades are now coming to pass and turning into actual reality. That's not very fun. But if we're going to talk to one person about what's happening right now, I think Rory is a very good person to talk to. Someone who is not naturally doomerish in his thinking, but is nevertheless quite concerned about the current state of affairs.

Joe Weisenthal: I think the risks from a sort of global stability perspective are very bad. when you start thinking about, okay, here is this war that the US and Israel launched and then the ramifications could be that a lot of the world's poorer countries just get completely shut off or have to deal with like crippling oil austerity. the the fallout from that again setting aside the specific market fallout and how long it would take to get the oil market back to normal. The sort of broader fallout from that dynamic specifically that everyone's oil prices go up massively or get cut off strike me as a very disturbing potential.

Tracy Aloway: Well, the other thing that's rather disturbing is this idea of Russia as the new swing producer, right? And you know, Russia, we all know, has strategic goals and you can imagine a scenario where it becomes very strategic and political in its decisions of who gets oil where. So, lots to think about.

Joe Weisenthal: Lots to think about. Yeah, cuz you especially if Europe starts to soften a little bit on Russian energy. I don't know. All kinds of weird dominoes that I think are going to be knocked over because of this beyond just the extraordinary price surge. And meanwhile, lots and lots of episodes that we need to record. So,

Tracy Aloway: not just oil. We also want to talk about fertilizer. And given the news from today, it looks like we're going to have to do a Jones Act episode as well.

Joe Weisenthal: Jones Act SPR. We have a lot to come.

Tracy Aloway: It's all coming. All right. Shall we leave it there for now?

Joe Weisenthal: Let's leave it there.

Tracy Aloway: This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Alaway.

Joe Weisenthal: And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest Rory Johnston. He's rory Johnston. Follow our producers, Kerman Rodriguez at Kerman, Dashel Bennett at Dashbot, and Kaleb Brooks at Kalebrooks. And for more OddLots content, go to bloomberg.com/odlots. We have the daily newsletter and all of our episodes. And you can chat about all these topics 247 in our Discord, discord.gg/odlots.

Tracy Aloway: And if you enjoy OddLots, if you [music] like it when we turn out these emergency episodes, then please leave us a positive review on your favorite podcast [music] platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely adree. All you need to do [music] is find the Bloomberg channel on Apple Podcast and follow the instructions there. Thanks for listening.

Joe Weisenthal: [music]