Podcast: The Big Mistake Of The 2010s Edition

Audio length: 00:38:04

The Slate Money hosts discuss the news from Iran and its effect on oil prices, the biggest mistakes of the past decade of government policies, and the legacy of NBA Commissioner David Stern.

Plus: Carlos Ghosn.

S2: Hello and welcome to the big mistake of the 2010s edition of Slate.

S3: Money, your guide to the business and finance news not only of the week, but also of the decade. We’re going to be talking about the big news of the week this week, which is the latest conflagration in Iran, which is related to obviously the price of oil, which has gone up. We’re going to talk about whether it’s actually gone up over the long or whether it’s in Long-Term Decline. What happened to the price of oil over the past 10 years? What happened to other assets over the past 10 years? Whether things could have gone much better if only various governments in the U.S. and Europe had managed to get their act together. And we’re also going to talk about David Stern, who died this week. He ran the NBA, which is an organization which runs basketball games. You may or may not know about that.

S4: And and I have stuff to say about that. So all of that is coming up in Slate. Money.

S3: So, Anna, everyone is talking about geopolitical chaos right now. The U.S. is killing Iranians and this is causing oil to go up and stocks to go down and people to worry about war.

S5: And what I love is if you could help us just take about 30000 step backwards and put this in perspective for us in terms of like how important is, you know, Iranian oil supplies and that kind of thing to the global economy?

S3: And what’s happened to the price of oil and why does it matter? And what, you know, that kind of thing.

S6: Right. So, I mean, I think the number one thing to understand is that, you know, oil prices have been, you know, significantly lower than where they were. You know, about a decade ago, where, you know, when you had very, very high oil prices, then in 2014, oil prices really tanked. And now they’ve been in kind of this mid range. Right.

S7: And so me some numbers here. So oil prices recently, if you’re looking at Brent crude, which is like the global benchmark, it’s been, you know, just like around $70. If you’re looking at WTI, which is more like the U.S. benchmark, that’s been more like a little over $60. That’s like recently. Yeah. Exactly. And that’s basically where you’ve kind of seen oil prices stick. You know, they’ve gone up, but they’ve gone down. But that’s really around the range that you’ve seen. And so, you know, when you have movements like this where you have, you know, an Iranian general being killed and then you have Iran saying they’re going to retaliate. Obviously, that’s going to cause a spike in oil prices.

S3: People think supply could potentially decline and supply declines because there will be less Iranian oil on the world market.

S8: Yeah. And then also the idea that if there’s more tension in the Middle East that could just cause other countries oil supplies to potentially also be able to decline.

S3: So or by her compared to roughly $70 based price of oil, like how much is oil moved in, I think is about 4 percent for 5 percent.

S1: So it’s now another couple bucks. Yeah, it’s not enormous. It’s not an insignificant move.

S8: But I would also just always caution people that, you know, we’ve seen this happen before. Where where something happy, where, you know, when you had the idea that Iran had struck oil tankers and then you had oil move and then it kind of went back down or it kind of went back up depending on what was happening.

S3: So so put this in perspective for me. Just going back like ten years, like what’s been the range of oil prices? How much does it move over? Like a decade long time horizon?

S7: So over the past decade, you know, if you had oil prices before they fell in 2014, you had oil prices, you know, above $100 and then they fell. Thanksgiving of 2014. And then in 2015, 2016, they continue to be pretty low. I think the lowest was probably in 2016. I think it getting into the 20s.

S3: So we have seen, you know, in the not too distant past, we have seen massive plunge in the price of oil from well over $100 down to like 30 years in comparison to which any you like small moves right now on the order of a buck or two. You know, really not worth getting excited about.

S7: Yeah, that actually is what I believe. Now, if this does really escalate, this tension between the U.S. and Iran, which granted has been isolated for a while. But if it really, really escalates, then, yes, that actually could cause problems. But I would really argue that this is a little bit of a blip in a much longer trend. In the longer trend really has to do with the rise of shale oil in the United States as well as global demand concerns. So when you have, you know, your supplies increasing and demand is potentially not increasing, then that is obviously going to bring down prices. And also, as you have more concerns about climate change coming more and also as you have the price of renewable energy declining, that is just one more thing that can potentially weigh on oil prices. So I think that you have a much stronger long term trend and then you have these kind of blips. And I think obviously the long term trend is more important in the long term trend is down.

S9: I think what this Iran news today will show, I mean, yes. Oil prices go up a little bit and the stock market goes down a little bit. But longer term, the energy sector, the oil and gas sectors importance like in the S&P, for example, has really decreased over the past decade, as Anna said, with the shale boom. I think the number is oil and gas used to make up 15 percent of the S&P 500. Now it’s about 5 percent. And if you took out the two major energy companies, then it would be like 2 percent. Like it’s just not what it was because of the shale boom that’s begun in the 2010s that I’m sure we’ll talk about. Josh Brown’s piece and reformed broker. So even though this is major geopolitical news, it’s maybe not major economic news.

S7: Well, I mean, I would I would say that, you know, obviously because of shale. Now the U.S. is producing a lot more oil, obviously, than they were in the past. What we’re seeing now is we’re seeing a fractured market and this actually is kind of interesting. I think long term because traditionally you had oil has always been pretty concentrated. Whether you’re even talking about Standard Oil and then when you start getting into the nationalization of of that kind of oil industries and OPEC and the rise of OPEC and again, this really control over the oil market. And now really what we’re seeing when what we’ve been seeing since, again, like around that 2014, Mark, is this fracturing of the market. And that really is changing things. And I do think long term that is not only going to have economic consequences, but it is also going to have political consequences.

S3: And we talked about this a bunch and with Bethany McLean when she came in to talk about her book about shale. But it’s worth revisiting this. And I think Josh Brown did a really good job just zooming back and saying those there’s literally more than twice as much oil production in the US today as we thought there would be this time 10 years ago. No, it is an all time high. Last. I just pulled the figures for my newsletter and it’s twelve point seven million barrels a day, which is unprecedented. The U.S. has never produced as much oil. But Emily, to your point, it’s not Exxon Mobil who’s producing this oil. It’s a bunch of small little oil producers. And there’s so much oil that none of them are actually making that much money. And this flood of oil from the U.S., which was completely unexpected, has weakened the big oil producers. It’s weakened both whether they’re American or Brazilian or Saudi or anyone else. And it is May it is it is given less power to the people who hold on to the oil. And it has been largely overlooked. I think is like this incredibly dominant trend of the decade. And I think Josh, put your finger on exactly why. Because no one made money from it. You know, no one directly sort of like bought oil or shorted oil and made it. And there was no big like stock which zoomed up 100 times. It was just this background noise that quietly changed everything. And Josh makes a pretty compelling argument that it even explains the rise of Putin that, you know, without the oil and gas revenues that he used to be able to rely on, he started getting much more aggressive.

S8: So, yeah, that was actually the only part of the article I have some quibbles with because some of them, the aggressive movements that Putin took were before oil prices fell. And in a weird way, I actually think that some of the sanctions on Russia from the U.S. and the EU actually kind of gave Putin a little bit of cover as like the economy was really tanking in Russia after that point. He could blame it on the sanctions when really it was much more about other things. But but having said that, like I do think most of what you just said is very, very correct. I really do think that this this change is something that it relates to other trends that we’ll talk about later in terms of the kind of excess capital needing to find a home. Very low rates. That has really spurred this kind of growth of all of these small shale companies. But it is very, very similar to actually what happened before Standard Oil took over. Actually, like part of the reason that Standard Oil created that trust was because, well, you had a bunch of small oil companies. It was impossible for anyone to make money. It just it like it just there’s too many price swings. So I guess that just leads me to think that moving forward, it is going to be very hard to make this a stable market if you don’t have a major player.

S9: And then what I I guess my question going forward would be, given this recent attack in Iran and given how much the energy sector in the oil sector has changed over the past decade, like if there’s increasing, there is increasing. But if it gets even worse in the Middle East, like, well, how is that going to be different than it has been in the past, given sort of this evaporation of power in the energy sector, this kind of like dilution to all the smaller players? Right. Like right now.

S10: And this is going to be so different.

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