Transcript of Winter Catastrophe 2022

Here's the full transcript of the call from Thursday, December 30th.

Rick Rule and Byron King are two long-time members of Bill’s inner circle of advisors.

Rick is one of the most accomplished deal makers in the natural resource industry—especially for mining companies. He was the organizer and driving force behind the annual Vancouver Resource Investment Conference for two decades and was the CEO of Sprott Global Resource Investments before semi-retiring last year.

Byron King made his entrance to Bill’s inner circle as his ‘correspondent in Pittsburgh’ in the early 2000s. Before that, he trained as a geologist at Harvard and served as pilot in the United States Navy, including a stint as an aide to the US Chief of Naval Operations. Byron was the editor of Outstanding Investments, a natural resource stock-picking newsletter, for many years.

Joel Bowman:

All right. Well, I'm hoping that as the doors are opened, that our new readers, listeners have made their way into the Zoom room. I'd like to just start off by saying welcome to our inaugural Bonner Private Research investment briefing. I'm your host, Joel Bowman. If you could see through the screen behind me, you would see that I'm coming to you from the Andes foothills down here in Argentine Patagonia, but because of the back light we had to pull that shut. You'll notice this is both our first and last briefing of the year. So I guess I should start off by congratulating you all on your unblemished attendance record for 2021. Right off the top, I just wanted to say that both Dan Denning and Tom Dyson have reached out to me and they send their best wishes for the new year.

They're spending the week with their families and in preparing their paid correspondence. So Tom Dyson, our Investment Director, he has his first briefing in hand. And you can expect that this coming weekend. Dan, who I was just speaking with, is hunkered down up at his bolt hole in Laramie, Wyoming, and he's hard at work on your January issue. So you can expect those within the coming days and weeks. Okay?

So we've got a lot to get through in this briefing and we're going to do our best to deliver as advertised and be brief. We want to leave some time for questions at the end. I'm going to moderate those. Just a couple of quick housekeeping items up top. If this is your first Zoom meeting, don't worry. This is our first time hosting one, so we've got panelists from four continents. We've got Bill Bonner, who hopefully is going to be joining us.

He's potentially a little tied up at the moment on the farm. He's over in rural France. We've got Byron King who is in the Northeast, in the US. We've got Rick Rule who is joining us from Vancouver in British Columbia. And as I mentioned, I'm down here at the Southern tip of the Americas in Argentina. All right. Well, we were going to go to Bill. Has Bill joined us here? Oh, there you are! Hello, Bill.

Bill Bonner:

I'm right here.

Joel Bowman:

How are you doing, mate?

We thought you might have been cleaning some blood off your hand from a recently slain stag that needed mounting or some such.

Bill Bonner:

No, no, no, no. I'm right here.

Joel Bowman:

Okay. All right. Well, there's probably not a lot that I can tell you about Bill that he hasn't already mentioned in the past 20 odd years of daily diary entries, keeping up an impossible schedule as he does. So Bill and Dan have identified, as many of you know, energy as a key component of a trade that they see developing over the next decade and beyond. So we're going to go to Bill first and he's going to give us a bit of a macro background with regards to what he sees as some out of whack markets that he and Dan believe are going to get out of wackier, if that's even terminology. After that, we're going to go over to Rick Rule. I'm sure you all know Rick Rule and Byron King.

Rick was the organizer and driving force behind the annual Vancouver Resource Investment Conference for a couple of decades. And until last year where he slipped blissfully into semi-retirement, he was the CEO of Global Resource Investments. So Rick's going to join us to talk about capital spending on fossil fuels and its knock on effect on producers, equity markets, and of course, consumers.

Then after that, we'll have Byron King, another perennial overachiever, who will be known to most of you probably from his essay earlier this week in which he was talking about the European situation with regards to natural gas, electricity markets, where prices are going haywire. Perhaps a Canary in the coal mine, so to speak for things to come in the US and further abroad. All right. So I think without further ado, I'm going to do like any host should do with a panel like this and get out of your way. Bill, I'll hand it over to you. Everyone just keep mute on and take it away, Bill. Thanks.

Bill Bonner:

Okay. Well, this week in my dailies, I've been looking at these stories that weren't stories last year. These are issues that were too hot for the press to handle or too controversial to report. They were things with stories that were at odds with the elite narrative that they wanted to share with the public. And in short, these were the stories that the press ditched, and I've been speculating in the emails about why that was, and it's because the media has become very different from what it was supposed to be. It's supposed to be reporting on an objective reality, at least as objective as it could be, telling both sides of the story, but now it's become a part of the story itself. It desires along with both political parties, the White House, practically all of Congress, the universities, Wall Street... It's part of the narrative that the elite is putting forward, and it says so very clearly that it wants to change the world according to the plan that it's got.

Bill Bonner:

Anyway, that narrative can be broken into agenda items and those agenda items of what we see in the press all the time is that racism is the explanation for what happens in the US. And then the country is a racist country and so on. And then any other hypothesis that explains the behavior of different groups is, well, a racist thing. And in this set of things, you can't question the Pentagon budget because remember Hillary Clinton said to Tulsi Gabbard that she was actually a Russian asset when she attempted to do that. And the lockdowns, the masks, the vaccines, they're the only way to deal with the Coronavirus issue. There is no other one, and that government spending is the driver of economy, that it's what makes the economy grow and nothing else and that white supremacists [inaudible 00:07:50]. So anyway, I'm just going down a whole bunch of things, which are now taken as gospel by the media. And one of those is that the Earth is heating up.

The biggest and most dangerous of these agenda items of the press and the elite is the idea that we can switch from these traditional energy sources, fossil fuel, the fuel, the stuff that supports 7.8 billion people, and that we can make the switch over rather rapidly and rather seamlessly. And I don't think that's likely to happen. But anyway, this is not the first time that groups in power have decided to make radical changes. And the wars of religion in Europe were like that, when one group decided that everybody should be Catholic, the other group decided they should all be Protestant. And the death toll was in the millions of that, and then Napoleon decided to unify Europe and the Napoleonic Wars cost something like 5 million. And then the biggest one is in recent memory, which was the move to communism and the communist death toll that is that the communists were sure they had a better plan for the way people should live and the way that economy should work.

Bill Bonner:

And the result of that was estimated at about a hundred million people dead. And so you have to wonder, what is going to be the result of this great energy transition? Is it going to be much different from those big, big plans, those big ambitious plans the government undertakes? Well, I don't know, but I think it's worth asking the question. And in a news item earlier this week, which I reported on, a fellow who is an activist in energy, he said that he was very annoyed with the gradualist approach taken at the COP26 UN conference. He said the way to do it needed to be much more radical, that we just had to turn the valve off. Well, you can imagine what would happen, if you turned off the valve of diesel fuel in 48 hours, all the shelves would be empty. And in another 48 hours, almost all businesses would go out of business and stop because they wouldn't have fuel. They wouldn't have supplies.

Bill Bonner:

They wouldn't have any way to do anything. And then in the three or four months that came next civilization as we know it would come to a halt. It would just stop. It can't run. Everything moves by truck. Everything we eat, everything we wear, it all moves by truck and almost all trucks move on diesel fuel. You just can't turn off the tap. Well, of course, nobody except for these radicals is suggesting that we turn off the tap. They're saying we can do it gradually, and that we can gradually replace dirty fuel with clean fuel. But clean fuel today, by my calculation, it supports about 800 million people at best, and the dirty fuel supports the rest, which is about 7 billion. And there's no way, no plausible way in which those numbers are going to change dramatically over the next few years. So here we are, we're wondering what's going to happen, and at least we're wondering. And so I think I can turn this over back to Joel, because we have people here, mainly Rick and Byron who could probably wonder a lot better about this, but go ahead.

Joel Bowman:

All right. Thanks a lot, Bill. I'm going to get out of Rick's way. And Rick, the floor is yours.

Rick Rule:

Thank you, Joel. Thank you, ladies and gentlemen. Delighted to be on this inaugural Bonner Private Research broadcast. I think I got the name right. I'm delighted to follow Bill, who always sets a very high philosophical, intellectual tone. I want everybody to know that that part's over. We're going to get away from philosophy and we're going to get down to, if you will, credit. If my segment had a title, it would probably be "Markets, while messy, work." And I think it's appropriate for myself as an investor to begin by thanking the very people that Bill was cursing. The media and the politicians have conspired over the last 18 months to make my job as an investor much easier. The interference that has gone on with private markets has meant that coal prices are probably higher than they need to be. And oil and gas prices are probably higher than they need to be. And electricity prices are higher than they need to be. And even the laggard uranium prices doubled, I guess, with a little help from Sprott.

I want to thank the powers that be for subsidizing me indirectly, by not understanding that markets work. The international energy agency, sort of the go-to for these things, suggests that the incentive price worldwide to produce a barrel of oil, is about $60. This is not the lifting cost. This is the total cost, including general and administrative expense, exploration expense, prior year write downs, social rent, and the cost of capital. So the circumstance that we had immediately post-COVID, where the oil price fell to well zero, but for a while at $20 a barrel, necessitated by itself higher oil prices. Those very low oil prices were unsustainable. The industry was unable to make sustaining capital investments and unwilling to make new capital investments.

Rick Rule:

And the consequence was a shortage. A shortage which is now driven the oil price and particularly the natural gas price substantially above the incentive cost of production. Normally in a circumstance like this, markets work, which is to say high prices begin to breed conservation and they bring on additional supplies. But for reasons that we'll begin to discuss including the disfavor that energy enjoys, if that's the right phrase, with the media and governments, these sustaining capital investments and new capital investments aren't taking place. So prices will, mercifully for me and unfortunately for mankind, be higher for longer. Something that I am very grateful for. Let's take a look at some of these things in order. The first is that particularly in oil and gas, this is a massively capital intensive business. And the capital expenditure takes place in several forms. New project investments, which can be to bring a new offshore oil field on measured in the billions of dollars. Liquified natural gas drains in the tens of billions of dollars.

Rick Rule:

These investments aren't taking place. They're not taking place because social rents are high and because political capital that needs to be spent in order to get these things built is simply unavailable. So in terms of our ability to keep up with existing demand, let alone meet higher demand in the future, the investments necessary to cause this to occur aren't occurring. We are living off oil and gas deposits that were identified 40 and 50 years ago and commercialized perhaps 10 years ago. But the truth is that every day you pump an oil field, your business gets smaller. Without the new project investments, you can't maintain production. Even worse are sustaining capital investments

Sustaining capital investments are the investments that are required to keep existing assets producing at current levels. It is estimated right now that the oil and gas industry worldwide is deferring a billion dollars a day worth of sustaining capital investments. The impact of this is fairly obvious, when you don't maintain an oil field, it produces less prolifically. Yesterday, the Mexicans suggested as an example, that they would no longer export oil because they were going to use it all themselves.

Rick Rule:

The real reason for this is that they have deferred sustaining capital investments in their oil industry for so long that their production has fallen by two thirds. In other words, they're making a virtue out of a fact, and this is occurring all around the world. So project expenditures aren't taking place and sustaining capital expenditures aren't taking place. And of course, the consequence of that is that our ability to produce oil and gas on a global basis with certain exceptions is falling.

Rick Rule:

The second thing that I think people need to realize in the context of the politics of energy is the increased cost of capital. Much is made about the technology in the United States that allowed us to produce unconventional gas as an example, but also oil from shales, three dimensional seismic, fracking, all that co kind of stuff. The great unsung advantage that the oil industry enjoyed 10 years ago was an extraordinarily low cost of capital. Equity priced at two times net present value, access to junk debt markets that was extremely cheap because the rapid production growth and the rapid free cash flow growth the oil and industry enjoyed 10 years ago attracted capital to the extent that the real cost of capital for many companies was subzero.

Rick Rule:

And this led to a capital expenditure boom, all that has turned around now, bank financing is less and less available as the big thinkers constrain the bank's ability to finance energy, equity capital is less available, both as a consequence of the COVID price decline, but also as a consequence of the political disfavor that oil finds itself in. So the higher cost of capital is also constraining the same capital investments that we talked about before. And finally increased social rents. The social rents can be in the form of regulation like the People's Republic of California, not allowing any more drilling in Los Angeles County, or it could take place in carbon taxes or other forms of taxes.

Rick Rule:

The fact is that there's only so much money to go around in the energy business. And if more of it gets consumed in social rent, say carbon tax or income tax or regulation or compliance, there's less available to maintain production. All of these things, deferred project expenditure, higher cost of capital, increase social rent, conspire and combine to reduce supply. And in an era of reduced supply, when demand, despite the big thinkers best wishes isn't declining, means that you have higher prices and you have higher prices for longer.

Rick Rule:

Again, ironically, I think the big thinkers for this, do we need hydrocarbon energy? Do we need coal? Do we need oil? Do we need nuclear? The answer to all of that is yes. One thing that the big thinkers don't think about is that 1.2 billion people on earth have no access to electricity at all. Another billion and a half to two billion people have access to intermittent or unaffordable energy. All of the people who live in these places that experience energy poverty want to live like you and I do. And one of the great things that we've accomplished as a species in the last 30 years is to rapidly increase the living standards of the bottom half of humanity on an economic scale, that's going to continue.

Rick Rule:

And as it continues, demand for all forms of energy, including politically incorrect hydrocarbon energy is going to increase. Many people don't know as an example, that the largest year on record for coal demand worldwide, despite Angela Merkel and Great Thunberg, was 2021. Despite the fact that the big thinkers don't like coal, the peons, when they walk into a room and hit the switch, want the lights to go on. The consequence of that is that despite the bad press that coal gets, the largest demand for coal that we've ever experienced was 2021.

Rick Rule:

And I think this continues, it continues because there are conflicting values. When you look at the policy statements on carbon, one of the things you learn, these political promises can't be kept, they simply can't be kept. In the first instance, in terms of a carbon budget, in the west we would prefer to look at the problem on a national basis. Of course, China and India would like to look at it on a per capita basis, which is to say emissions per capita. And in the west, we also would like to ignore historic carbon loadings, which is to say that most of the CO2 in the atmosphere, whether or not you think that CO2 is harmful or not, most of the CO2 in the atmosphere has come about as a consequence of historic emissions in the west.

Rick Rule:

And the question becomes then is the west willing and is the west able to subsidize carbon emissions at other places in a way that is actually fair, just and equitable on a per capita basis? The answer to that of course is no. So the promises that you're seeing around carbon are just that, they're political promises. They aren't promises that are able to be kept. The consequence of all of this, I think sets up the trade that Bill has discussed fairly well.

Rick Rule:

Our own calculations suggests that as an example, in the oil and gas industry, the net present value of oil producers is such that they appear to be discounting $45 a barrel oil in a $70 world. And it would appear given the level of sustaining capital investments, unless the world suffers from a severe recession or a depression in the next five years, that these high prices are going to be with us simply as a function of deferred reinvestment, simply as a function of supply constraints. And I think this sets up a really interesting investment opportunity.

Rick Rule:

If you have an industry that's priced as though they were selling the product for $45 a barrel, when in fact, the product is selling the product for $70 a barrel, or if you convert that to natural gas, the industry is priced, like the gas price was $3 per million BTU, where in fact the price is $5.50 or $6 and much, much, much higher in Europe, you set up a very interesting investment circumstance. Similarly, in uranium, although the uranium price has increased from $18 a pound to $45 a pound, the International Energy Agency suggests that the fully loaded cost to produce a pound of uranium worldwide is between 60 and $65 and gaining rapidly.

Rick Rule:

Which means that although we're in a $45 world, we can fairly accurately say that we're heading into a $70 a pound future. And this is all more likely than not to occur, certain, no, but more likely than not to occur. One of the things that I've learned in investing is there is no such thing as certainty. You speculate on probabilities, and the probability is a consequence, this favor that energy industries find themselves in. And as a consequence of the changing cost of capital, that it is one of the few sectors that you could look at in terms of pricing with a reasonably high degree of certainty going forward.

Rick Rule:

So again, as an energy investor, I thank the political class. I thank the media. I thank the general disinformation because the consequence of that is that they make my job as an investor and a speculator much easier. Before I sign off, I'd like to make an unabashed commercial pitch, any of the listeners here who care, when I think about their specific investments rather the energy industry at large, can go to a website ruleinvestmentmedia.com, enter your natural resource stocks, including your oil stocks. And I'll personally rank them one to 10.

Rick Rule:

And I'll include if you mention charts, 110 year commodity chart by Goldman Sachs, that talks about just how cheap commodities are relative to other asset classes going back 110 years. Ladies and gentlemen, thank you for your attention and Bill, thank you for identifying what I think is one of the easiest investment themes in front of us for the next five years.

Bill Bonner:

Thank you, Rick. I noticed a question popped up, which I thought is an interesting question. I know what you mean when you say social rent, that seems to me to include a lot of different things. Did you want to explain more about what you mean by that?

Rick Rule:

I'll try and do it politely. I would define social rent as mostly tax and regulation. As an example, Los Angeles City Council has forbade new drilling in Los Angeles county, that's in effect the social rent. If you are an owner of oil reserves in Los Angeles County and you are now unable to drill and produce those, your wealth has in fact, been confiscated by the state. If we put in place as the People's Republic of California has done, carbon taxes, What that means is that some of the free cash flow that comes from hydrocarbon production goes to the state.

Rick Rule:

You'll notice too, Bill, in the case of social rents around the oil and gas business, that they're not revenue neutral, which is to say that the increased revenue that they get from carbon rents don't reduce the taxes that anybody else pays. So I define social rents as the whole set of circumstances that have to do with political control of energy industries. It could be as an example, the refuse by the Biden administration or the Obama administration before, to allow the continuation of the Keystone Pipeline, which would've brought two million barrels of Canadian oil a year into the US markets.

Rick Rule:

The fact that that pipeline was not allowed to proceed raises the price of crude oil to US refiners and hence, raises both the price and lowers the supply of gasoline to American consumers, precisely probably the intent of most of the big thinkers.

Bill Bonner:

Yeah, I guess you could go even more broadly in the social direction by saying you're at a cocktail party in New York city, and you tell people that your business is drilling for oil and all of a sudden your social status declines dramatically.

Rick Rule:

Bill you've known me for a long time and you know that my social status would be difficult to diminish from here. But if you want to have fun as an investment analyst, the best way to test how unpopular you can be is get on the podium and talk about uranium. If you talk about uranium, the audience isn't merely bored by you, they're suggesting that you're championing Fukushima, Hiroshima, Nagasaki, three mile island. From a contrarian's point of view like mine, it doesn't get better than that. The idea that your investment thesis doesn't just bore people, they're hostile to it, means that you're extremely lonely. And in my experience as a contrarian investor, being lonely is a very good thing. And as you suggest as an energy investor, given that loneliness makes me happy, I'm extremely happy.

Joel Bowman:

Better to be lonely and wealthy, I think in that circumstance then, Rick, than poor amongst many friends. As usual, Rick's put a huge amount of information onto the table there. Thank you very much for that, Rick, and as a consequence, there’s been a flood of questions coming to the chat panel on the side. We're going to try and get to a bunch of those at the end, time permitting. We're just putting those together in some back channels at the moment. So we'll get to as many of those as we possibly can, but I want to get now to Mr. Byron King, who's been waiting on the sideline. Byron, can you hear us there? Are you ready to take the podium?

Byron King:

I can hear you just fine. Thank you, Joel. Thank you, Rick. Thank you, Bill Bonner, of course. And congratulations Bill, on this new Bonner Private Research Project you are embarking on. And also to the attendees and listeners out there, thank you so much for continuing a subscription to Bill Bonner's private research letter. The whole idea was to liberate from certain constraints in the publishing industry. And Bill wanted to set up a whole new way of doing things and you, the readers and the subscribers and the listeners and watchers out there, you're part of it so thank you for that.

Byron King:

I'm Byron King, I see some names here on the screen, some of you are familiar names, I've known you over the years, some of you are new. Perhaps you saw an article that I wrote and that Bill ran yesterday called Germany Marches Towards its Energy Stalingrad. And I discussed the Battle of Stalingrad and World War II, march in, capture the city, gets surrounded, be destroyed, and I use that as a metaphor for what's going on in Germany today, although it's not just Germany, hello.

Byron King:

Germany is as you know, we're green, we have got a green party and everything else. And people say, wow, this is great. This is wonderful. We're going to decarbonize and everything. Okay. But how do you plan to keep the lights on? And that gets into points that Rick Rule was making. And for everybody who's on here, you're sitting at a desk, you're sitting at a computer or a laptop, whatever, you're hooked up to the internet or maybe do a hard wire, maybe it's a wifi or [inaudible 00:31:39], you are absolutely a product of the modern age.

Byron King:

And the modern age is absolutely an evolution of the industrial revolution. And the industrial revolution was all about boiling steam and burning carbon and we spent 250 years doing it. And the idea that we can, as Bill mentioned, just turn the valve and make it all go, is absolutely ridiculously stupid, crazy, lunatic, suicidal. You're going to kill yourself and a lot of other people in the process, which is why I used the Stalingrad metaphor. It's absolutely nuts what Germany has done to back itself into a corner, close its nuclear plants, allegedly close its coal plant, but still burn the lignite coal, which is half the energy content and three times the air emissions.

Byron King:

And then, they're importing Russian gas and they say, oh, there's something wrong with Russian gas. Gas is gas, is just the molecule. Yesterday, Vladimir Putin really spoiled the party. He announced that the Nord Stream two Pipeline is filled with natural gas and they're ready to, as expression goes, turn their valve if the Germans are ready to turn a valve on their end and receive it. But again, it's all locked up in politics and it's really stupid politics. Although it's profitably stupid politics, as Rick says, people are going to make a lot of money off of this.

Byron King:

Joel mentioned that I'm in the Northeast United States. I'm actually in Pittsburgh, Pennsylvania. And I am sitting as we speak, no more than 120 feet from one of the great hydrocarbon deposits of the world. It's called the Pittsburgh Coal Seam and it's right underneath my feet by about 120 feet where I'm at. And the Pittsburgh Coal seam was one of the coal seams that really made Pittsburgh the steel city and all that. People use coal, before they use coal, they use wood, trees to make charcoal.

Byron King:

And cities are where they are for a reason. Pittsburgh is where it is for a reason, it's right on their rivers, right next to the coal seam, lots of trees, lots of transportation. Bring in the iron ore and you can make steel and you can build an industrial civilization, which is...

PART 2 OF 4 ENDS [00:34:04]

Byron King:

You can build an industrial civilization, which is where we are. We are drinking from wells today that we did not dig. People a hundred years ago, invented things and set things up. And again, the idea that this is all bogus. It was all wrong. It some sort of big mistake, you're really asking to rewrite history. And I think it's a form of modern insanity. It's a form of mass insanity to deny the history of how you got to where you are, because the idea that you're going to change it all is completely, totally crazy.

Byron King:

I was looking for something, what can I do to try to drive the point home? And part of it is that everything that you do is a product of a hydrocarbon economy. The chair you sit in, the computer you're working on, the food that you ate this morning, or the lunch you're going to have this afternoon. I mean, if it weren't for the hydro carbons it wouldn't be there. You wouldn't be here. We wouldn't be here. One particular aspect that I want to focus on, is that when people say, oh, if we could only get rid of automobiles and go to electric vehicles, we could really solve a lot of problems. Well actually, no you can't because it's really a small fraction of the world's carbon comes out of the tailpipe of cars.

Byron King:

Probably 15% of the world's energy is used to grow and process food. 20% of the world's energy is used to make cement. There's no electric way to make cement. People have been trying it for a hundred years. You must make cement in a kiln and you must use some sort of a heat source, like coal or natural gas to make it work. 30%, probably 33% of the world's energy is used to smelt, and melt, and refine metals. So you're not going to have an electric car, at least not one that has any steel in it, unless you can heat up metal to 1700 degrees and cast it into something else. You're not going to have big poles that you can put a windmill on, big steel poles, unless you can heat that metal and turn it into something. You're not going to have solar panels, unless you can make polysilicon, which involves melting Silicon. And it's a glass levels of melting, over 2000 degrees.

Byron King:

Which brings me to a concept that... It's an easy concept to understand, but nobody ever talks about it. The only truly meaningful way to get high levels of heat in an industrial economy are with carbon based fuels. You could say, well, why do I need high levels of heat? Well, I just told you. You can't do metals without high levels of heat. You've got to melt them. You can't do ceramics without high levels of heat. And that means computer chips. That means the bricks on your house. That means the plates on your dinner table, but mostly computer chips. Can't do computer chips without high heat. Well, how do you get those high levels of heat? In some cases you can do it with electric arcs or whatever, but you just can't do it without hydrocarbon.

Byron King:

How do they make steel with a blast furnace? Well, how do they make a lot of others? With electric arc furnaces. But that's steel that's already been made, and all you're doing is remelting it and turning it into something else. You can't do high heat without hydrocarbons. And the idea that you're going to do away with hydrocarbons means you're going to do away with your metals industry, your ceramics industry. You're not going to have any cement, okay? Because as I said, unless you can take limestone and burn it down to lime, in a kiln in some other way, it won't happen. And I have news for you, there's no other way. People have tried. People are still trying.

Byron King:

Bill mentioned diesel fuel. When you take a barrel of oil, it depends where the barrel comes from, whether it's from this oil field or that oil field, or maybe the average is about 15% of that barrel of oil is diesel that you can distill into diesel fuel. Diesel, being diesel that could go into a truck or a slightly different grade of diesel. You call it jet fuel, you put it in, you make your airplanes go. But only 15% of a barrel is useful for that. If you turn the valves, like the man told Bill, you turn those valves and the barrels go away. There goes your diesel, there goes your jet fuel. There goes all your other feed stock as well. There goes your asphalt. There goes your plastics. There goes the things that make most people's clothes. Maybe you wear 100% cotton. Okay, good for you. But most people wear some sort of polyester or fiber somewhere in their clothing.

Byron King:

I mean how does this work? Well, this is part of the whole craziness of this drive to decarbonize, de-fossilize. And it's a thoughtless process. That's just worshiping at some label, and some slogan. Which is not to say that there aren't environmental problems in the world. Of course there are, you know there are, I know there are, we all know there are. But it's just being addressed in such a simplistic manner. And again, getting back to what friend Bill mentioned at the beginning, it's all part of this media narrative. It's this disinformation, this ill information, creating an entire ill-informed population. Everybody from, and I'll even say her name, sorry, Greta the Swedish Thunberg there, all the way down to the neighbor down the street, with the climate action now sign up in front of their house. Yeah, climate action now sign in front of their house, with two cars in their garage and food in their refrigerator. And the hypocrisy just staggers me.

Byron King:

And I've said my piece, and all I can say is I agree with Rick, it's an incredibly good investment opportunity when people are just going crazy. If you can just sort of screw your head back on straight, plug your brain in right, understand what's going on and find the undervalued items and collect them over time. And, with a certain amount of patience and a certain amount of good luck, you'll come out on the other side. Nobody here on this call, I don't think, can change the world. If you can let, let me know. All I can do is write an article every now and then, and do some investing, and try to get around it. And really try to keep my head screwed on tight.

Byron King:

I could talk more, but I won't because we have a lot of questions from the audience. And I'm going to hand it back to Joel, who I think is going to MC it, or unless Rick or Bill have something to say. But I'll go mute and just go for the questions. Thank you everybody again. Thank you so much for being part of Bill Bonner's new project. I'm really looking forward to watching this and being part of this as it goes forward. So, thank you.

Joel Bowman:

Yeah. Thank you. Thanks a lot, Byron. And we should just make a little mention of that. That part of the idea of this new venture, which we're using the ready, fire and aim mantra to help guide, is exactly this, is the idea of being able to connect more directly with readers and to focus more on the kinds of ideas that you've just heard Rick, Byron and Bill articulate so very well.

Joel Bowman:

Fantastic stuff. Byron, thanks very much mate. As you mentioned, we've got tons of questions that have come in from our readers. We're going to get to as many of them as we possibly can with the short amount of time that we have remaining.

Now we have one, I just wanted to ask for Bill. You've written recently mate, bless you, about Janet Yellen at a recent gabFest talking about the $150 trillion that it was going to take to transition to this new pie in the sky kind of fairytale economy. I guess a lot of people are wondering, two parts to that question. And the first is where does all this freshly inked $150 trillion come from? And how does that affect the value of the existing currency units to speak to the other side of your energy trade? Do you want to give us a little bit of background to kick us off there?

Bill Bonner:

Well Joel, I had no idea where that $150 trillion estimate came from. It's sounds so ludicrous. That anybody would say that without laughing is amazing to me. But nevertheless it is true, as you say, freshly minted is the word. I mean, there is... The United States government currently saves no money, no money at all. In fact, they spend a trillion more, two trillion more than they bring in. And that by the way, is true of almost all major governments. All major governments in the world are running at deficit. So the only possible way that they could fund a transition of any sort, even if it's $500, is by printing up the money.

Bill Bonner:

And so that brings in the second part of this whole thing. Because it's one thing to call for a transition of the very thing that Western civilization, in fact world civilization, is built on. That's one thing, but then to do it by destroying the currency, which is the other thing it's built on. We need stable money, we need predictable returns on money. These projects, it takes 10 years to build a nuclear reactor. It takes decades to change from one energy source to another. These are very long term pipelines. We've seen how long it takes to get a pipeline approved, finance, built, put into production. These are huge, long term things involving millions and billions of dollars, and they don't get undertaken if the value of money itself is in doubt.

Bill Bonner:

So we have a couple things going on, the government actively trying to discourage production of the one thing that our civilization most needs. And at the same time destroying the money that would be required to make a transition to anything. I mean, we couldn't even continue producing, even if the government weren't trying to discourage the production its money is. By devaluing the dollar, by putting in question the future value of the dollar, it means that investors are going to be very wary of making long term commitments of capital.

Bill Bonner:

And Rick probably has seen it first hand, but I'm just guessing as a theoretical matter, people are not going to be willing to invest much money in a technology that is frowned upon, an industry that they're trying to stop, a product that they're trying to erase from the world itself. So, the whole thing is working... I liken it to an intersection, the most dangerous intersection in capitalism. Where the government has a big, big, big plan. That's going to cost $150 trillion. And meanwhile, the other direction comes as huge hyperinflation or inflation of some sort, we don't know how hyper it will be. But where these two meet, guess who's on the beat there? Guess who's directing traffic? Why it's the U.S. Government. So, what could go wrong with that? I think it's going to be a disaster if, and by the way we don't know what's going to happen, but it's certainly setting up a very dangerous situation.

Joel Bowman:

Did you want to comment on that there, Rick?

Rick Rule:

There was too much to comment on. I don't have anything to add, except to say from my own point of view people listening to the call probably have a duty to themselves and their families to take advantage of this, as opposed to being taken advantage by this. Where the money comes from is pretty obvious. They're looking at a redistribution, which means from you to them. And probably you can't influence their decision very much. So what you need to do I think, is to defend yourself individually. Whether or not that means identifying with the probability that increasing printing of existing currency units makes each individual currency unit less valuable, meaning that you defend yourself by some holdings in precious metals as an example. And/or you understand that energy policy is unsustainable given the way we live. And the consequence of that is that you invest in energy markets.

Rick Rule:

I think the upshot of this isn't a whole bunch of political action from the crowd listening to this phone call. I think the only thing that you can do is defend yourself, act rationally. And frankly, enjoy it. One of the things I always like about Bill is he describes these coming catastrophes with a broad smile. Which I think is a much better way to react than the rants that you see coming out of Congress.

Joel Bowman:

Yeah. Excellent. Thanks for that, Rick. A little, just follow on question with that. Just getting slightly more specific with regards to investments. We have a question from an audience member who asks, could your experts touch on oil and gas pipelines, as kind of the toll roads of the oil industry, and your sort of general outlook for them in the year ahead in 2022?

Rick Rule:

If it's directed to me, I need to say that the pipeline business is an absolutely superb business. It's a localized monopoly, and it's really easy to understand. You put goop in one side and you take goop out another side. And so you need to familiarize yourself with the quantities of goop necessary to move over time and the net present value of moving it. The bad news around the pipelines is that, over the last 20 years with interest rates declining, people bought pipelines based on yield rather than net present value. People treated pipelines as though they were unending sources of free cash. And of course, when the goop on one end runs out, the free cash runs out too. Pipelines, as a consequence of that, are unusually dependent on interest rates. If the interest rate goes up, the pipelines cost of capital increases while the capitalized value of their distributions decrease. So, although I love the pipeline business, I'm not presently a pipeline investor because I think the next direction interest rates is likely higher. Which puts me between a rock and a hard place, which is not a place I'd like to be.

Byron King:

Let me add on to that.

Joel Bowman:

Byron. Go on, please.

Byron King:

I've long liked pipelines as investment vehicles. What I'd say right now though, at the end of 2021, something you have to be aware of, at least in your investing, because maybe it's an attraction, maybe it's a detraction to investing in pipelines.

In the last two years, US domestic oil output has dropped by well over 2 million barrels a day, just because demand crashed when during the lockdowns and all that. Less gasoline at the pumps, less jet fuel, less everything, less material being refined. And so a lot of people who owned oil wells, they turned their valves and shut them in. A lot of the stripper wells, the low production well, they plugged them full of concrete and went away. It's not there.

Byron King:

So there's 2 million barrels a day not there any ore in the United States. So what we're seeing now with some pipelines, not all by any means, but some pipelines have seen dramatic drops in their throughput. Coming out of the Permian Basin of west Texas, those pipelines are about 95% full. I mean, they have no problem filling their space. Other pipelines in other places are 50% full. And so those operators are scrambling. So it's definitely a stock pickers market. If you want to get around into some of these pipelining companies and mid-streaming companies and things like that, take a good look at what are they doing? Are they serving an area that's in a permanent state of production decline? Or are they in an area where things will get back better, maybe in the next year or two?

Joel Bowman:

Byron, that actually feeds into another question that we had mailed in a couple of days ago. And it has to do with geopolitical uncertainty, particularly with the kind of the aversion to carbon based fuels, so evident in the current administration. As we have that couple of million barrel gap, I'm sitting down here in Argentina, for example. Slightly to my north, Peru has just elected a rather far left nationalist president. Just over the other side of the Andes, Chile has elected their youngest ever, president 35 years old. Goodness, what could go wrong there? A student activist who is... These are countries that have huge mining deposits, obviously Chile with copper, a lot of natural resources that are being held up in what the developed world might consider hostile environments. Do you want to speak a little bit to the geopolitics as it pertains to energy? And I know you touched on that earlier in your essay earlier this week, but kind of expand on that, on that general topic a little bit.

Byron King:

Okay. It's quite intriguing to see, as you mentioned, a student activist who becomes the president of an important country. I mean, countries like Peru and Chile, much of the world's exportable copper comes from those two places. If they screw it up, they're not just screwing up their own country. They're screwing up the global trade and everything downstream that uses copper. Ideally, you can elect a student activist, but you want that person to be educable if not coachable by wiser heads who can say, "Listen, here's what you can say in front of the crowd. Here's what you have to do in the back room." That's how politics works.

Byron King:

Meanwhile, getting back to something Rick said earlier, that literally billions of people in this world either have access to no electricity or very minimal amount, and they want to do better. The world is on the cusp of a carbon tsunami, and it's not going to be a carbon tsunami because people in North America and Western Europe are going to jump in their cars and drive around and burn up lots of gasoline. No, it's because people in India, in Indonesia, in Brazil, in South Africa, and you name it across the world. Because they want to have a higher standard of living. And the fast, quick, proven way to get there is to burn hydro carbons. They're going to burn their coal. They're going to burn their natural gas. They're going to burn their oil. They're going to burn down their forest if they have to, to stay warm and to cook their food and to do what they want.

Byron King:

And so the ethereal realms, the COP26 crowd, the Davos crowd who want to control the world, they have a job on their hands explaining to literally hundreds of millions of people, if not billions, in countries literally across the planet, why they should stay at the level they are, and not emit carbon into the air. "Good luck with that," is all I can say. I'm glad I don't have that job.

Byron King:

At a more granular level, this isn't quite granular, but what we've seen in the last let's say year or so, 2021 as we're wrapping up the year, is a lot of carbon moving around the world in the form of liquified natural gas. The LNG market illustrates this really well. Last winter, as Texas was freezing and all this sort of thing, China, South Korea, they were importing all the LNG they could lay their hands on. And they still are. For months and months and months, the LNG market has been focused on Asia. Ship it to Asia, because that's where you get the highest price.

Byron King:

And I mentioned earlier, I'm in Pittsburgh. I'm 150 feet from the Pittsburgh coal scene straight down. I'm also about 9,000 feet away from the Marcellus Shale, which is again, straight down below me. And probably about 11,000 feet below me is the Utica Shale, two prolific gas production sources in the Northeast. Not where I am in Pittsburgh because politics and whatever, but not too far down the road, not too far down Route 19 in Washington County, they produce shale gas from the Marcellus and from the Utica, they produce it to the service.

Byron King:

They put in a pipeline, they send it to Cove Point Maryland, where it gets turned into LNG and gets put on these big tankers with the golf ball things on the top, because those big, insulated thermos tankers. And they, once they're on the ocean, they can go anywhere in the world. For months, they were heading down through the Panama Canal and over to Asia. Lately in the last about month or so, those cargoes have all been going to Europe because the price of gas, LNG gas in Europe, is 12 to 13 to 14 times higher than what it is in North America. They're even outbidding the Chinese. For a while, the Chinese were paying any price. Now the Europeans are paying any price, literally to fill their pipes for the coming winter. So there's some crazy politics going on here with crazy arbitrage opportunities. And it gets back, too, to the well heads, to the pipelines, to the LNG global trade gets back to the value of money, the value of your dollars, or what have you.

Joel Bowman:

I feel like we could possibly have an entire energy briefing just devoted to geopolitical uncertainty. And it's knock on effects with price. Thanks a lot, Byron.

Just one last one before I'll ask for some closing remarks from our panelists, just because it's been something of a common question. What do you guys think? And perhaps we can go around the panel in reverse order, Byron, Rick, and then to you, Bill. What do you expect to happen to energy stock prices, specifically in an overall market downturn, particularly a severe one.

Byron King:  I'll kick off. If we have a severe downturn and the prices of well-run companies with good strong reserve base and aggressive replacement programs, go out there, and if you have some cash, take advantage and buy them up if they're big guys with solid dividends, the Exxon Mobils or the Chevrons of the world. A year ago today, or a year ago in November of 2020, you could buy Exxon Mobil for probably half what it's worth now. And the dividend was something like over 10%. Exxon's still a good buy, although big company and everything else. Smaller companies in the same way. It's all about management. It's all about what assets do they hold? And are they finding and replacing reserves? But a downturn is your chance, investor chance to find some great ideas and scoop them up and put them away for a better time.

Rick Rule:

I would start by saying a liquidity based market decline like 2008 takes no prisoners. Everything goes down, the good, the bad, and the ugly. If you think that we're heading into a liquidity related decline like 2008, understand that everything sells off. But a market isn't a source of... I mean, it isn't a living, breathing creature. It's a facility. It's a place that you buy and sell pieces of businesses. And the businesses that get too cheap in the market recover more quickly than other things do. Precisely as Byron has said, if you think of a market crash or a bear market, in fact, as a sale, and if you think that sales are good things, which is to say, if you want to increase your exposure to a certain sector like energy, for you, if you've kept some liquidity, sales are good.

I don't necessarily want to profit off of other people's misery, but the truth is that people seem to be delivering that misery unto themselves with increasing frequency. And if we have a circumstance that's reminiscent of 2008, I hopefully will have both the cash and the courage to take advantage of that circumstance, as opposed to being taken advantage of by the circumstance.

I would note, too, that in terms of investing, you need to understand the dichotomy between price and value. Most investors pay slavish attention to share prices because it's easy information to obtain, and it feels spendable. But money is made on the delta between price and value. Price information is of no use to you if you don't have an opinion as to value. And if you think as a consequence of a market decline or a bear market that a piece of a business is selling for less than it's worth, you should buy it. By contrast, if you're concerned about the value relative to the price, that you should avoid it. Understand that markets are facilities, and you need to take advantage of that facility, rather than have your emotions take advantage of you.

Bill Bonner:

Yeah. And I don't have much to add to that. Remember, what we are trying to do here at Bonner Private Research is to avoid the madness of crowds. And right now, the crowds are mad about certain stocks. The stock market generally, but particularly not about energy stocks, they're mad about Amazon and Netflix and those FAANG stocks that just this week went over a total market capitalization of $11 trillion. So in the next crash, which is sure to come, they are the ones that are going to sell off most. And the energy stocks are going to go down with them, but they're going to be relatively much safer in the down swing and much better buys at the bottom. So as Rick says, we keep our powder dry and wait for the opportunities to come.

Joel Bowman:

And I guess we're at the close here. So I want to thank Byron and Rick for joining us. And they've given us a lot to think about. And many thanks to you, too.

Bill Bonner:

Thank you. Thanks all. Happy New Year!