This is quite a good if longer interview with a group that knows commodity markets well. Two short answers I thought were good, but the whole piece is worth a read.
You thought the U.S. and European attempts to use economic sanctions to cut off Russian oil from the global market was a catastrophic error. Why?
We wrote a piece called “Crazy Pills” where we outlined our views in this regard. This is the type of insight that can only come from direct experience in the commodity sector. It intuitively feels right that if we just choke off Putin’s energy-export volume, we will choke off his revenue. But that’s just not how commodities work, especially when you’re the swing producer like Russia is. If you’re a small country and you produce a de minimis amount of energy and it’s choked off by a naval blockade, the rest of the world can make that up and it’s not a big deal. But when you are the single largest exporter of energy that the world desperately and critically needs, you hold all the cards.
And so here’s the example that we would use. Let’s just stick to round numbers. Putin exports 10 million barrels a day of oil. Assume we were to blockade the country of Russia — which, of course, is an act of war, but let’s just for the sake of analysis run the thought experiment. If we were to take 5 million barrels a day of this oil off the market, shut it in, blow up Russia’s wells, pick your favorite — the price of oil would way more than double, and Putin would make more revenue on the 5 million barrels of oil that are still finding a way into the market than he would lose by our cutting off the supply. It’s the same thing with natural gas. The price of natural gas in Europe today, despite coming down by 40 percent off its peak, is still seven or eight times what it is in the United States.
And if the price skyrocketed after Putin shut off the volume, well, that price is the benchmark he uses when he sells his gas to Asia via liquefied natural gas, or LNG. And so if you’re selling it for 40 and then you cut production and you sell half as much for 80, you’re coming out even. The price elasticity of demand in commodities is such that the only way to crush Putin’s revenue is to flood the world with energy. Oil was at -$37 a barrel when we had a lack of storage at the height of the COVID shutdown. That shows you how volatile oil can be.
During the first Gulf War, we went to all of our oil-producing allies and the coalition and said “Pump” because we were trying to rob Saddam Hussein of his oil revenue. The price of oil can be pushed down, but only with supply. So attacking his volume, which we have been loudly saying is a mistake from the beginning, has indeed proven to be a mistake. And I think the numbers are pretty definitive in this regard. August was perhaps a record revenue month for Putin, and this is how he’s funding his war machine.
What about Europe’s decision to abandon Nord Stream 2 natural gas pipeline?
Insane. The world cannot live without its energy. Again, let’s do the hypothetical and pretend we’ve surrounded the entire country of Russia and cut off all of its oil and gas to the outside world. The world would descend into energy starvation and mass death. The world literally cannot live without Russia’s energy, and we should not want them to. We should be flooding the market with energy. Every molecule that Putin’s willing to sell his enemies in Europe should be accepted.
By the way, we believe that Putin would not have moved into Ukraine had natural gas not already been a crisis. This is the part people forget. The price of natural gas skyrocketed in December in Europe, long before he moved into Ukraine. He likely did the calculation and realized, They don’t have enough molecules. They’re surely going to come to the table and give me what I want in Ukraine. He moved into Ukraine. He was incorrect — they didn’t come to the table. And here they are, weaker than they were if they had. And so he miscalculated Europe’s response. And I think he overestimated the long-term impact of his play. In the medium-to-long term, we think his invasion of Ukraine is a catastrophe for him and for Russia, but in the near term, winter 2022–23 …