Chevron CEO Wirth on Oil Prices, Strait of Hormuz, Venezuela

[00:00:00] Speaker 1: I get this question a lot. You're the expert. Help me answer it. Why is crude at 100, at 90, and not close to the 200, given this straight's been shut for three months? [00:00:09] Speaker 2: You know, it's a little hard to explain. We really are seeing markets tighten, inventories draw, demand for products around the world still very strong. I think there's this belief, and we're experiencing it again the last few days, that the end is near, the conflict is nearly resolved, and flow through the straight will resume very quickly, and that has kept the back end of the curve lower than it might otherwise have been. And I think the psychology of the market has been this is closer to the end rather than the beginning. [00:00:42] Speaker 3: But what about the physical world? When will inventories be at the very bottom? [00:00:47] Speaker 2: Before long. We are steadily drawing inventories down on products, on crude, in locations around the world. I think June and July are going to be critical months, and you can see the trajectory of these inventories in the data, and it's concerning. [00:01:04] Speaker 3: Do you see any physical shortages right now around the world? [00:01:07] Speaker 2: We do see some in some Asian markets, and we've seen some rationing. We've seen work weeks adjusted, other demand measures imposed in some of the countries in Asia. Markets are very efficient at moving products and barrels to where they're needed, and we haven't reached a crisis point yet. The inertia in the system is very, very strong, and turning that is not easy. [00:01:33] Speaker 3: One of the main sticking points the U.S. has when it comes to negotiating with Iran is this idea of the tolling. Would Chevron consider paying a toll? [00:01:41] Speaker 2: No, we wouldn't. [00:01:42] Speaker 3: Do you know how people are paying a toll? [00:01:46] Speaker 2: I've heard reports of people using cryptocurrency in various countries. I think the Treasury has come out this week and sanctions the new authority that has been put in place to oversee transit through the strait. It went from a toll to a navigation fee to something else. [00:02:05] Speaker 3: Would you pay a navigation fee? [00:02:06] Speaker 2: A company tax, if you will. I don't know enough about any of these things to say definitively. But look, freedom of navigation through international waterways is a very well-established principle, and anything like this would begin to say that countries adjacent to an international waterway can charge some sort of a transit fee. There are many other places in the world where that principle could be applied, and not just to energy products, but to all freight moving through the Straits of Malacca, the Bosporus. Pick your choke point. So that's not a principle, I think, that most countries in the world would find acceptable. [00:02:44] Lisa: How far are we away from having pipelines that connect some of these countries to the mainland and their production without having to traverse the strait at all? [00:02:52] Speaker 2: Well, there's a couple that exist now that you've talked about in Saudi and the UAE. The UAE sanctioned a project last year, which is about 50 percent complete, to get more of their production over to Fujaira and outside of the strait. So I think you'll see more of that, Lisa. The one opportunity there is, countries like Iraq and Kuwait that are deeper up in the Gulf don't have access to those pipelines. And for them, the route could be through the north and ultimately then into the Mediterranean, maybe through Turkey, where we see a pipeline that comes out of the Caspian Sea over into the Mediterranean in Turkey. And so I do think one of the responses to this will be infrastructure investments that will allow these energy flows to avoid the Strait of Hormuz. And that's underway now. And I think you'll see that in the years that follow. [00:03:44] Lisa: We started the conversation talking about why oil prices aren't higher. And you're saying that we're getting close to breaking the bottoms of some of the inventory bins. And we were speaking just a moment ago with Alex Altman at Barclays, who said we actually could see a glut of oil in six to 12 months time if there is a resolution here based on the production levels of so many different oil companies and countries. What's your take on that? Do you think that that's a feasible interpretation? [00:04:09] Speaker 2: Well, history says that shortages tend to be followed by gluts. And high prices send a signal and markets work. Consumers consume less. Consumers produce more in response to a price signal. And there's a time lag in the way both of those manifest themselves in the market. And what has happened historically is about the time that the new supplies reach the market, demand may have turned down through conservation measures, economic slowdown, maybe a recession. And you can see those lines cross over and the price cycles down. It's why commodity markets are cyclical is they tend to overshoot. And history says when we get into one of these situations, that is somewhere out in the future. [00:04:53] Speaker 1: What signal do you take from the futures curve? I'd love your reaction to that because so many people have pointed to the back end of the futures curve as a prediction of markets of where they think crude will be. How does an energy boss like yourself look at the futures curve? [00:05:05] Speaker 2: Not very frequently. It's not something we use for planning purposes. We do a certain amount of hedging in our business on commercial activity where you will use futures. But we don't look at futures curve as a prediction of future price. We do our own fundamental analysis on demand, supply, technology, policy, economic growth, and arrive at our own scenarios. And we don't use a point forecast or a curve. We use a range of scenarios. Prices are hard to predict in these markets. And so we don't anchor on a single price. We use a range of prices. [00:05:39] Lisa: What's fascinating is you were talking about how typically commodity markets tend to overshoot and then you get the glut just as demand falls off. Are we overshooting? Because what I keep hearing is that we're not overshooting. Actually, oil prices and the futures curve is remarkably low and that people keep consuming. And frankly, people like yourself are not investing in more production right now. You're not increasing production dramatically to offset some of what's going on. So is this time different in terms of the commodity cycle? [00:06:04] Speaker 2: Well, first of all, we are increasing production. Our production will grow 7% to 10% this year, which is a lot in a world where demand is growing 1% on average. And so there is investment in growth. Is this time different? People say that every time and often find themselves regretting having said that. This time is – the circumstances here are things we haven't seen before. 20% of the world's energy production cut off for now nearly 100 days. A billion barrels that is not in the market that otherwise would have been in the market is not something that we've seen before. So that part of it is different. How commodity markets respond have a pattern that has been proven through different types of shocks to the system that is remarkably repeatable, maybe not perfectly predictable, but it is something that you have to bear in mind when you're in this business. As you allocate capital and as you plan for your business is, you know, these patterns exist for a reason. [00:07:05] Speaker 3: When you allocate capital, I wanted to ask you about Venezuela. When will you put fresh dollars into the country? [00:07:11] Speaker 2: Yeah, we're currently operating under a system that's been approved by the U.S. Treasury and the Venezuelan government to recover debt that we're owed. We made some loans to their state-owned company many years ago, and they weren't repaid, and so we set up a mechanism to ensure repayment. Oil flows to the U.S., which is important for U.S. refiners. We're working our way through that, and we'll recover the debt over the next year or so, the final portion of it, and then we need a new set of fiscal terms under which we would invest in the country. Right now, the amount of tax and royalty that's paid doesn't leave enough for an investor to get a return on their investments. The country has changed its hydrocarbon law, has indicated a new range of taxes and royalties that would be applied to the energy sector, but they've not been specific about where in the range those would land. So there are negotiations underway, discussions even this week. We had a team in Venezuela that had some discussions on this issue. I expect over the next short period of time we may see some clarity from them on specific values on corporate income tax, on a range of things on royalties, and how that might be applied. So there's progress being made to clarify the things that would be needed in order to make those investments. But we don't have enough clarity right now. We don't understand what the regime would look like. And so it's unlikely we would put capital to work until those things are clarified. [00:08:37] Speaker 1: Inquiring minds want to know. I'm getting the feedback right now. So December's trading at 84. What is the Mike Worth chevron price this year? What's the range in your scenario planning? [00:08:47] Speaker 2: Well, the range on the low end would probably get to that number. And on the high end, if we were to see an extended constraint on transit out of the Strait of Hormuz, the question is how high is high? You get to very high numbers. [00:09:03] Speaker 1: So your low is actually where December is priced right now. [00:09:07] Speaker 2: Yeah, and these are all predicated on some assumptions, right? We don't tip into a recession. We don't have some other exogenous event. But yeah, it's going to take months, John, to clear ships out of the Strait, to make sure that the mines have been cleared, to establish, to get 2,000 ships out. They don't all go out at once. You need weeks and weeks. Somebody's got to prioritize. Do bulk freighters go out first? Do container ships go out first? Do U.S. allied ships go out first or last? Iranians? 2,000 ships is unclear at this point. [00:09:43] Speaker 3: Wouldn't it be the Fifth Fleet? [00:09:45] Speaker 2: It's unclear at this point. So there needs to be a system to prioritize traffic. Ship owners have to be convinced that it's safe to transit through the Strait. There needs to be some sort of security measures. And then that's just to get ships out. You have to get ships in as well. And the tanks inside the Gulf are full. That's why production is being slowed or stopped is because there's no place to put it. The ships are full. The tanks are full. So you need new ships to come back in. Ship owners have to be comfortable sending ships back in after having ships trapped for months and crews trapped for months. They may or may not be willing to move all of their vessels back in. There's other routes now that are trading. U.S. to Asia is a very heavily traded route. There's a lot of ships in that service. So it will take months. And then you start to clear out the inventories that are in tanks, which allows fields to restart, damage to be repaired. This doesn't happen overnight. And so this is going to be with us for some time. I've got to ask you, do you just sit here and say you first? How do you think about it? Well, we'd like to get our ships out. It's not a decision to ship. We have six ships inside the Strait right now with our cargoes. All of them are chartered, so they're owned by a third party. And we don't ultimately make the call. The shipowner decides whether or not he wants to put his vessel and his crew through the Strait. And so that's a decision we provide advice on, input to, but we can't make that decision. So it's a very complex set of decisions that need to be made to begin to get things moving again. And it will happen slowly. I would expect there'll be some stop and start to it. There still has been kinetic activity this week, some of which has been reported in the media, some of which has not. And so we see risks very real still in that environment. Mike, I'm a journalist. You can't say things like that. [00:11:27] Speaker 3: Yeah, what hasn't been reported? [00:11:28] Speaker 2: What's not been reported? What are you hearing? Well, there have been vessels that have been in transit that have suffered attacks. More than what we've heard of in the press? Yes. Our reports would indicate that. [00:11:41] Speaker 1: What do they suggest? How frequent have those attacks been? [00:11:43] Speaker 2: They're maybe not every day, but there have been multiple incidents that have occurred. [00:11:51] Speaker 1: Okay. Mike, for the people of California, people waking up early this morning, perhaps on the West Coast and tuning into this program. What's your message to them about why gas prices are so much higher in their state compared to everybody else? [00:12:02] Speaker 2: Well, this is politicians gaslighting about gas prices. The fact is California's policies for two decades have been driving prices higher. California has six refineries operating today. A little bit more than a year ago, we had nine. Refining capacity is down 17% in just the last year. California has the highest taxes and fees in the nation. California imports 60% of its crude oil, 25% of its diesel, 20% of its gasoline, similar amounts of jet fuel. And we're in a situation where world energy markets are tight. And so prices are going up everywhere. California has long been the highest priced state in the country because the policies have constrained supply. And demand is continuing to be very robust in a state where supply has been consciously constrained by policy. [00:13:00] Speaker 3: But how do some gasoline companies, stations like Costco, keep actually lower prices though? [00:13:07] Speaker 2: Well, everybody's got a different business model. I think a hyper marketer like Costco has things they use as almost a loss leader to bring traffic in and can operate on a very small margin because you go to the big box and that's where the revenue is. And the real P&L comes through the subscriptions and the memberships. A small service station owner doesn't have the benefit of that. They have to make a margin on the fuel that they sell and maybe some ancillary goods. So retailers all have different business models. And you see that in the marketplace. And they meet different customer needs. So you see a range of those prices. [00:13:43] Speaker 3: I'm sure Chevron is going to be on the mind of Gavin Newsom as he looks for a 2020 presidential run. But it's also been -- I mean, you've been front and center when it comes to this administration as well. Do you spend more time in Washington or the Permian? [00:13:58] Speaker 2: Lately, probably in Washington. I like being in the Permian. But, you know, my job requires some interaction with, you know, elected officials in the Senate, in the House, the administration. And during a time of, you know, extreme distress in energy markets, there's a lot of dialogue that goes on in Washington, D.C. So hopefully I'll get to the Permian in the second half of the year. [00:14:23] Lisa: Yeah, which would require gasoline prices going down. And recently they've been remaining at this relatively high level, although they have dipped just a bit. You talk about how we could end up seeing shortages in the next few weeks, even in the United States. Looking right now at distillate fuel inventories, the lowest levels here since 2003, a pretty shocking number. How much could you foresee gasoline prices in the United States rising outside of California because of just simply shortages that you're seeing on the ground? [00:14:49] Speaker 2: Yeah, well, right now the U.S. has come to the rescue of some of our allies around the world. We're exporting crude at record levels. We're exporting products to Europe in particular. And so what that means is products that might otherwise be used in the U.S. are being highly valued elsewhere. And so we're seeing flows in that direction. Inventories are low for diesel, for gasoline in the U.S. And we're moving into a period of time which seasonally says demand is likely to rise. The refineries in the country are running as hard as they possibly can. They're all near maximum utilization. And so the market is tight. And this is the reason why I've talked about concerns about upward pressure on prices. Because you can get away from the crude forward curve and get to diesel inventories, gasoline inventories, and the prices of those products, which are really the products that are consumed. And we're in a period where inventories are tight, demand remains strong, prices are elevated, and there's risk they go higher. And shortages that have now only really appeared in Asia could begin to show up in other parts of the world. [00:15:55] Speaker 1: Mike, you're one of the very best. A clinic as always. We appreciate your time. Thank you, sir.