Alex Epstein on OPEC: UAE's exit is opportunistic, the Strait of Hormuz remains the world's most critical energy chokepoint

Speaker 2: What should we be paying attention

Speaker 1: to this black on black.

Speaker 2: You look

Speaker 6: fantastic. Oh,

Speaker 13: thank you. I'm good. With the the hair too. Oh my

Speaker 6: god. Do you guys remember what we talked about last time?

Speaker 1: The straight?

Speaker 6: The straight. Yeah. Yeah. So by the way, fun fact about AI. Yeah. So I think most of what I said last time was vindicated in terms of the main thing was this straight needs to open and there's no substitute for it. There's all these other little things you can do but nothing compares and that's that's still true. I would add you need to enduringly open the strait. So if you cut a deal with Iran and they have control over it, they're even if they give you control for a year or whatever, that's not then you've actually made the situation way worse than it was before the war where everyone figured we really have control

Speaker 2: Yes.

Speaker 6: Over the strait. But fun fact since you're talking about AI tokens. Mhmm. So in preparation for that, in addition to consulting experts and thinking about the issue, I have my own internal AI called Alex AI Pro, which I've invested over $1,000,000 in and

Speaker 1: oh, yeah.

Speaker 6: It's it's nuts. So to talk about and one of the things I've invested in is A stack. I don't get enough compute A

Speaker 8: stack.

Speaker 6: Yeah. Yeah. I don't get enough compute off the shelf AI. So you need, you know, if you can run your own agents Yes. Then you can do it. So that query which I think led to very valuable content was 48 kilowatt hours. Woah. So that's half a Tesla. Yeah. Wow. Think about that. That's that's three Powerwalls

Speaker 2: Yeah.

Speaker 6: Yeah. In for one query.

Speaker 2: That's a tall that's a ton.

Speaker 6: So yes. I know How

Speaker 1: long was that running for?

Speaker 6: Ten or twenty minutes.

Speaker 9: What? Oh,

Speaker 2: that's crazy. And what is it doing like like like pulling data from the internet, pulling it together, writing?

Speaker 6: It's really god mode. I'll show it to you sometime. Okay. Well actually, so here's an announcement for the first time. Yeah. That a version of that AI is now free to everyone who works in government. So it's gov.alexepstein.ai.

Speaker 2: No way.

Speaker 6: Yeah. Yeah. It's it's at so at some point, it's free. We're gonna if you use too many tokens we'll have to just charge you

Speaker 2: costs Okay. Okay. Yeah.

Speaker 6: Beyond that. But yeah. I mean I have my I have a lobbying firm which is the only pro freedom lobbying firm, the energy freedom fund which is a five zero one c four that I'm I'm the unpaid president of. And I figure like one of the best ways to spend those dollars is to give people a pro freedom AI.

Speaker 2: Okay.

Speaker 1: So I'm

Speaker 6: not gonna make any money off those queries, but I'll at least cover our our compute cost. So this is a real world example of I believe that if if you know how to intelligently integrate AI Yeah. You can make use of a lot of energy

Speaker 2: Yeah.

Speaker 6: Yeah. And and very profitably.

Speaker 2: Sure. Sure. Sure. Yeah. Yeah. Of course. Because like the the the results that come from good research or good policies and good consulting fees and all sorts of

Speaker 6: But but you need to you need to train it. A lot of the work is just literally breaking down everything I do and my researchers do. So we just I just built one today which is the policy validator which is anyone is free to send us policies and we'll lobby for them in proportion to merit, not not in not in proportion of payment. We don't take payment for this kind of But I needed to replicate, hey, I have these two really brilliant researchers and then I'm pretty good and we have some other pretty good people. Like, how do you break that down? And there turns out there's about 25 questions you need to ask Mhmm. To get the credibility of the people. Is this a pro freedom policy? Is this going to increase energy abundance? Are there better ideas? And if you if you know how to really do it, you can get and you you have human validators at the end of it. Mhmm. It's it's wild in terms of what what you can do.

Speaker 2: Okay. Let's start with there was a on the Strait, there was this interesting piece in The Economist that was arguing that the market was simply not processing or digesting the fact that even if the Strait were fully open today, there's still a massive shortage of energy that is effectively delayed Mhmm. And that that would have ripple effects on the economy, inflation, all sorts of things. Mhmm. How have you processed the the impacts, the downstream impacts? I think a lot of people see it at the pump when they go and fill up their cars, if they drive gas cars. It's starting to show up in other places. But how are you thinking about just what's at stake? Why the straight being open is important from first principles? Yeah.

Speaker 6: I'm I'm very sympathetic to that argument. Mhmm. It would be just miraculous if it didn't get a lot worse in terms of in terms of prices. I mean, you're dealing with a situation we talked about last time. You have a certain amount of spare capacity, know, we we international agencies released a lot reasonable yeah. Yeah. In terms of their oil reserves.

Speaker 1: Yeah.

Speaker 6: But these are all very temporary measures.

Speaker 2: It's like thirty days here, ninety days there, hundred and eighty

Speaker 6: Yeah. Days there was already a bunch of supply.

Speaker 2: Yeah. No one's sitting on like five thousand days of oil.

Speaker 6: And the thing you have to realize is, you know, in America we are very America centric.

Speaker 2: Yeah.

Speaker 6: So you know we don't even think about Canada let alone Asia.

Speaker 2: Okay.

Speaker 6: And a lot of what's happening with the straight is oil that is intended for Asia and Asian consumption. Now the Chinese are in an interesting situation because they they did build up a bunch of spare oil. Yep. Now there's questions of other things they need like sulfur and helium that go through the strait and I've I've heard interesting Mhmm. Claims about we're already seeing in Asia various shortages

Speaker 16: Mhmm.

Speaker 6: And you know one one analyst that I like likened it to, okay you're starting like one part of the Titanic is starting to fill Mhmm. And not everyone on the Titanic realizes this is happening. Mhmm. But you're cutting off a huge whether it's 14% or 20% or whatever

Speaker 2: Sure.

Speaker 6: You're cutting off a huge percent of global oil supply.

Speaker 2: Yep.

Speaker 6: And that cannot last.

Speaker 2: Mhmm.

Speaker 6: And even if you solved everything today, it takes a while To bring it back. To bring it back. Of course. And right now we're in ceasefire mode

Speaker 2: Yep.

Speaker 6: Which is not creating enduring.

Speaker 2: Yeah.

Speaker 6: That that doesn't enduringly open

Speaker 14: it up.

Speaker 2: Yeah. I heard I think it was Rahm Emanuel was saying that the The Gulf States do not want Iran to have a veto over the strait even if the strait is opened. Now the conversation has shifted to what what does it take that America is potentially responsible or or is being held responsible for removing that vetoes. Right? Is that is that your perspective? Yeah.

Speaker 6: That's my perspective is it needs to be enduring.

Speaker 2: So Okay.

Speaker 6: In advance of this, there was the idea that, hey, if America ever goes into this to Iran, obviously we're gonna keep the strait open, obviously we're gonna prioritize. That unfortunately did not happen to the extent that it did. I mean, you know, there are different people in the administration, but overall, I mean, we have to just be objective. I'll praise them where they deserve praise, but like they were not prepared for this. Sure. In terms of whatever the final decisions were. I think within a week of our last interview, not because of our last interview, but I just talking to people in the administration, they all became very clear that Hormuz is nondispensable. Before that, there had been people saying, oh, we have Venezuela. We have all it's just all nonsense. Yep. So they

Speaker 2: understand talked about that with Venezuela. It's like 1%, maybe.

Speaker 6: Yeah. One you might get to one no. At

Speaker 2: some You might point get to 1% and and we're talking about 20%. Yeah. We're talking about 30 Venezuelans no.

Speaker 6: In years.

Speaker 2: There's no one to do do do business with.

Speaker 6: Yeah. Yeah. So it's it's like they understand the importance but it's still in this mode where Iran now is known to have like Iran has proven that they can control the Strait Of Hormuz in a way that The US cannot obviously counteract.

Speaker 1: So

Speaker 6: if we cut a deal with them where they again, where it's where they have where they can use the same power to stop us anytime they want, then it's not open. Right? Open is a little bit ambiguous. Like it can be open momentarily Yeah. But it's open on their terms. Yep. So basically you need without giving any strategy because I don't know the exact strategy, it needs to open on our terms.

Speaker 2: Okay.

Speaker 6: That that's the only way you have a victory.

Speaker 14: Sure. So Sure.

Speaker 6: You yeah. That that's

Speaker 2: Let's shift to OPEC. Can you give me a primer on OPEC? It's the Organization of Petroleum Exporting Countries.

Speaker 6: Yeah. Yeah. And now it's, you know, OPEC plus and

Speaker 2: OPEC plus. So, yeah, you're taking talk about history and the

Speaker 6: impact Let's of talk about the cartels. I think the easiest way to understand this it's it's important to understand cartels, I think people have a uniformly negative view of cartels, which is plausible but a little bit exaggerated. So you take the

Speaker 1: People that aren't a part of cartels. There's no eye in yeah. Exactly.

Speaker 6: Well, so you think about the the if we go look at the early oil industry where, you know, Rockefeller is criticized as a monopolist and we created this thing, the Sherman Antitrust Act and other things to prosecute so called monopolists, and I'm totally against these laws for for any number of reasons. I don't think the the government should not be able to create monopolies that it enforces by force saying, hey, there's one producer, nobody can compete. But nor should it be able to say, hey, you're really successful in this market and so I've

Speaker 1: You're too good.

Speaker 6: I've decided that you're too good. And and one of the things that people will counter with is, well, what if

Speaker 2: Economic deadweight loss.

Speaker 6: What do mean?

Speaker 2: Just the idea that if if if you actually do control 100% of a resource, you can charge dramatically above market rates, which are which reduce demand and wind up having like less human flourish. Yeah. I mean Because you have less energy produced in fact.

Speaker 6: Yeah. So what happens in practice is like if you look at what happened with Rockefeller. So Rockefeller took his focus was refining. You look at the peep the early people in the oil industry, the different producers, what would happen is oil prices are decent Mhmm. Then you get a flood of new oil Yeah. On the market and people just get wasted. They get ruined. And so what does that do? That disincentivizes people from investing over time because the volatility is so high. Mhmm. So what Rockefeller was basically able to do is he said, okay. I'm gonna buy you up. You're you're exposing yourself to way too much risk. I'm gonna buy you up. I can run everything much more efficiently. Mhmm. And so in the long term, we can have something that is a profitable, and b has much lower prices on average than the very volatile situation. And in fact, he dramatically lowered prices. Mhmm. So the interesting thing so you could think of Rockefeller, they call it, it's in a sense a cartel but it's it's a free market cartel which I think should be able to exist. But you can call

Speaker 2: it Yeah. And I believe that's in that's in the Sherman antitrust act in some ways. Like, you have to prove consumer harm and this is why it's hard to go

Speaker 6: after I mean, it Yeah. Yeah. It's very vague. It's like no comp you can't do restraint of trade, which what the hell does that mean? And then later they have these different things and I have a lot of reasons for being against it but it's it's notable that the volatility is a real a really really big thing in oil markets historically and that's why people And that yields Whether you're not you think free market cartels should exist as I do Mhmm. You have to understand why these things exist. Sure. Why any cartels OPEC is not a free market cartel, but why these exist is because the volatility is just so so high Mhmm. And oil is so so valuable. So people want steady oil, but and they want people to be comfortable being in the oil business instead of just getting wrecked all the time and getting thrown out. So we had this era of Rockefeller and then that was broken up. And then we have in The United The United States had something called the Texas Railroad Commission Mhmm. Which basically cartelized America was the dominant producer and so they did these things that basically rationed how much everyone could produce. Okay. So the term that's often used is swing producer. The US was the swing producer which meant that they could basically control the supply

Speaker 2: Mhmm.

Speaker 6: In the world. Yeah. So if there were you know, and and and in particular if there was, you know, a cut in demand for some reason, they could cut supply. And if there's a huge increase in demand, they could increase supply. So that happens until, you know, the Mid East starts to boom the Mideast starts to become the swing producer with the rise of Saudi Arabia and others having very low cost oil. And so then you have the era of OPEC. Mhmm. But then you have fracking. And so for a little while, The US becomes the swing producer in the sense of we have unrestrained production.

Speaker 2: Yeah.

Speaker 6: We add a lot of oil to the market. And what happens? At a certain point, prices crash. There's overinvestment. Our US consumers benefit usually from fracking, but a lot of these companies just get wrecked.

Speaker 2: Sure.

Speaker 6: And then they start doing what they'd call fiscal discipline, which functions as a restraint on supply even though it's they're not doing any kind of cartel activity. They're basically saying, hey, we're not going to produce if prices go below this. We're not going to keep increasing our production, etcetera. So the reason if you take OPEC right now and OPEC plus, they have a lot of reasons even though there's a lot of unethical stuff and I don't think the government should own the oil and I think they stole the oil. So but if you just understand how they're thinking, they do not want a they want to sustain a certain level of price. Mhmm. So you have the different swing producers particularly Saudi Arabia and then UAE who we're talking about. They want to keep like what happens if if if there's excess supply on the market relative to demand, they will cut this is the key. They will cut their supply as a swing producer to keep prices high because if they don't, then prices will go low Mhmm. And that will have a ruinous effect on many people including US shale by the way, because we have higher production costs, but including these economies that are dominated by oil. So you take Saudi Arabia, they're so dependent on oil and they have all of these alleged green ambitions that are totally fueled by oil and they have all these welfare schemes that are totally fueled by oil. UAE is a little bit less dependent. So the interesting thing about UAE saying they're going to withdraw is can they sustain this if there's a supply glut? Right now, there's supply shortage. So it's easy to say we're going to leave OPEC because there's there's just there's no there's no need from their perspective to cut supply and then everyone will take all the supply they get and Saudi Arabia doesn't really care if UAE produces more now. But when there's a supply glut is UAE gonna in is are they gonna stay out of OPEC or is Saudi Arabia gonna be able to pressure them back like they've done? Because Saudi Arabia can say, we've got the most oil, we can just flood the market too and ruin there

Speaker 1: a of major suppliers leaving and coming back?

Speaker 6: I don't know. I mean, there's at least been threats. Like, Saudi Arabia has been able to use a lot of force. Now the they've been able to do that in the past, but the argument so there's an argument that The UAE won't stay out of OPEC because Saudi Arabia can pressure them back in when there's a supply glut. There's also an argument that UAE has become more disentangled from oil now than it used to be because it's diversified its economy. It doesn't have all the welfare obligations of Saudi Arabia, and therefore it can call Saudi Arabia's bluff. Now now people will say both UAE and Saudi Arabia have incredibly low production costs. So it's very cheap for them to bring a barrel up from the ground. But they don't just have the production costs, they have all the governmental costs of actually how they're obligated to spend that oil. Like Saudi Arabia spends $5 a barrel on oil say, that doesn't mean at a $100 a barrel, they get $95 profit because they have to finance all these schemes that they're involved in. Sure. So that's that's gonna be the interesting

Speaker 2: Yeah.

Speaker 6: That's gonna be interesting thing. The other interesting thing is so if UAE stays out Mhmm. Here's one if if they stay out they're going to increase production.

Speaker 2: Mhmm.

Speaker 6: Let's say on some timetable this Hormuz thing gets resolved then it's plausible in the next few years at some point you'll have a supply glut because you'll have added a million and a half barrels a day on top of everything else and you won't have a corresponding increase in demand and you won't have some other decrease in supply. So it's possible that they could that this could dramatically lower prices, which would be hardest for US shale. Now long term, I believe the best estimates I've seen is longer term, we're actually screwed in the other direction. We've had all of these anti fossil fuel policies that have disincentivized long term investment in oil, and oil is really hard to sustain. People need to remember oil depletes over time, so you don't just take the same well and keep tapping at the exact same amount. You have to do what's called reserve replacement, and And there are many credible arguments that our reserve replacement has been incredibly inadequate in the ESG era, and that takes a few years to show up. Mhmm. But that's actually my biggest fear. Like, my biggest fear I'm afraid of Hormuz keeping prices high, but I'm really afraid of insufficient reserve replacement with high oil demand. Because you're talking like $200

Speaker 1: That's drilling new wells

Speaker 6: or You have to drill so much. You have to replace so much. And the oil supply is so politically driven. Like, there's so much oil in the world that you could harness if everyone had the policy of The United States Mhmm. Under Trump and under a friendly congress, but most of the world has these national oil companies. We've had ESG all over the place. It's been hard to finance things. I mean, as recently as 2021, think about this, the International Energy Agency said there should be no new oil and gas development financed. So so, like, we could be really screwed in terms of higher prices.

Speaker 2: I mean, geographically, it's coming up on the map there. The UAE is directly affected by Hormuz. Like Yeah. Every barrel that they make will have to go through the pipeline. They

Speaker 6: do? They have one pipeline. It's about a million and a half barrels.

Speaker 2: Okay. So they can get some out. So

Speaker 6: Yeah. But they're they're oh, yeah.

Speaker 2: So if they become a swing producer, they are in fact they they are in fact important even in a world where the Strait is closed?

Speaker 6: No. No. It doesn't matter as much right now because they're saying we want the right to expand our production, but they can't none of them can produce as nearly as much as they want

Speaker 2: Okay.

Speaker 6: Right now. This is why they're doing it now. They're not doing it in the time of a supply glut. Yeah. They're doing it in the time of a supply shortage. Sure. Because nobody really cares. It doesn't doesn't really affect things

Speaker 2: Oh, interesting.

Speaker 6: For them to say, oh, yeah. We have a million and a half spare capacity that we'd like to use and we're planning on using it in the future. But right now, we can't bring most of that to market. No one can bring anything to market. That's different from a situation which we've had fairly recently where there's tons of supply on the mark. Like there's too much and US producers are saying, hey, we've got $50 a barrel oil. This is really hard to sustain. Imagine then a million and a half new barrels coming on

Speaker 2: Mhmm.

Speaker 6: The market. Mhmm.

Speaker 1: Who wins? Who saw the news this morning and was fist pumping?

Speaker 6: Well, I I don't think most people understand the consequences of these these things because I think many people think, oh, it's gonna be amazing for The US. Like OPEC bad, US good. But like OPEC, the the way it's set up, it it in a sense favors our shale producers because they have higher they're one of the higher cost set of higher cost producers in the world. So if you

Speaker 1: have OPEC collectively decided to just massively increase supply and flood the market, they could do real damage to our

Speaker 6: And this has happened already.

Speaker 1: Yeah.

Speaker 6: Right? This has happened

Speaker 8: in previous year.

Speaker 1: Yeah. Like you're saying, if you're if you're in in Shale and you're trying to make money at $50 a barrel, it's like very you're really hoping what what's the what's the sweet spot again? It's like somewhere between 70 and like 90?

Speaker 6: Yeah. I mean, they they all yeah. Sweet spot is interesting. Right? Because they'll they'll take whatever they can get. But, yeah, if they get to $70.80, 90, it's it's a lot more profitable. And, basically, not much changes about their cost structure when prices go low, so it's almost pure profit. I mean, a little bit they can squeeze the what are called the oil field service companies. But you have to when you're thinking of oil and particularly oil, you're just thinking like every $10 it goes up, is almost pure profit for them and every $10 it goes down, that is almost pure loss of profit or loss Correct. In in absolute terms. Now in terms of policy, look, I think we should forcibly reopen the strait, and I and I don't believe that the US government should be directly trying to favor or disfavor its shell companies, but but it's just important for people to understand these these dynamics.

Speaker 2: Mhmm.

Speaker 6: And it's it's not and also you have to understand The UAE is doing this at an opportunistic time. They're not doing it at a time when there's already a supply

Speaker 2: Sure. Gears. Where do you

Speaker 9: wanna go?

Speaker 1: I I wanted to ask you about beaming sun

Speaker 2: I had the exhaustion question.

Speaker 1: Into solar panels Yeah.

Speaker 2: So that you

Speaker 1: can get 24

Speaker 6: something In space?

Speaker 2: Yeah. They're gonna put a mirror in space that that shines light onto a solar array so that they can get twenty four seven power to a data center potentially.

Speaker 6: They're do it on Earth.

Speaker 2: They're the the the recipient of the light will be on Earth, a solar panel next to a data center, but there will be a mirror in there's a specific orbit that is always in the sun. And so and and the sun will hit the mirror, and the and the light will bounce down onto this particular solar panel in their solar array, and so they will be able to get power from their solar panels twenty four seven.

Speaker 6: There's no weather that interferes

Speaker 2: with this? Weather might interfere a little bit. Okay. So I have not Closer twenty four seven than current.

Speaker 6: I mean, here's here's the dynamic is the obviously in space, you have twenty four seven solar Yeah. And it's really hard to do things in space. Yeah. So all all credit to people who are willing to invest their own money to try to do this. It's not there are a number of variables that might make it succeed or not. I mean, the more you're talking about chips that are evolving very quickly on Earth because we don't have this moon colony yet. Right? You're talking about you're replacing chips every year. Doing these very logistically difficult things in orbit. That tends to disfavor the energy advantage you're gonna get Yeah. From having the stuff in space. If you're doing something that some of these solar things work if the energy cost is high and you don't need to change a lot about it if it can run a long time. So my view is like my view of solar is always you need to recognize its its strengths and limitations and use it accordingly. My argument continues to be on Earth with the solar that we have right now. Solar is primarily a fuel saving technology not a real on demand power source and I read a long article about this and it is if go to alexepstein.substack.com Yep. To check it out. And so by the way, that means that in some places, solar is a lot more valuable than others. And in particular, it's in valuable in places with very high fuel costs, which The United States is not really one of those Sure. Places because we have really cheap natural gas

Speaker 2: Natural gas.

Speaker 6: And could get cheaper natural gas. But like in general, what we don't have, what the holy grail would be is if you got solar and batteries so cheap that you could have self sufficient solar by sufficiently overbuilding the panels and having multi day battery storage. So overbuilding the panels means, let's just say round numbers, you know, you you have a 100 megawatts of demand in a given location, so one tenth of a gigawatt. Well, if you overbuild it by 10, then you have a gigawatt. Well, even when the solar is fairly the sun is fairly low, you're gonna be able to meet your demand and then

Speaker 2: you batteries.

Speaker 6: You can get right.

Speaker 2: Yep. And then

Speaker 6: you can get rid of it and then you can charge the batteries. Yep. So you have more to charge the batteries but then to make that work because sun is not around at night, people really underestimate this as a problem. Night is a big it's it's not as much of a problem for wind but it's a big problem for sun. Like night is a huge huge huge problem. So you need to then and you know, think about a winter day like we had during winter storm fern. Even in Phoenix, can have storms that disrupt the sun for a week.

Speaker 2: Yeah.

Speaker 6: So you need lots and lots and lots of batteries and you need lots and lots of overbuilding. And the question is how cheap can you get it and China's not even nearly there yet, let alone The US Mhmm. But it's not a bad path to pursue. It's not bad to pursue because batteries are valuable anyway. Batteries are valuable number one to store reliable power and dispatch it. Yeah. Like that and Elon is in favor of that. I've said on the show before I'm in favor of that. So it's good to get the cost of solar lower. It's good to get the cost of batteries lower. We have to recognize primarily it's a fuel saving play not a replacement play. But if you could if we had twenty four seven all bets are off then you get the benefits of solar

Speaker 2: That's the mirror.

Speaker 6: The time

Speaker 2: That's the space mirror.

Speaker 6: But so I hope that as long as they're doing it in a safe way

Speaker 2: Yeah.

Speaker 6: They should be free to try and it's interesting the schemes I've seen in the past haven't worked and I don't know if they have better energy people than they used to at Meta,

Speaker 2: so we'll see. And we'll see. Well, thank you so much for coming on the show.