Saudi Arabia currently has more spare oil capacity than any other nation globally, and their understanding of global petroleum markets is second to none. In my view, they stand out as one of the few rational actors in today’s energy markets. While some may argue that their recent reduction in oil exports aims to manipulate prices upward, my research suggests that they are doing a significant service to humanity.
From Saudi Arabia’s perspective, it makes perfect sense to cut back on exports. Why sell oil at lower prices when they are well aware that oil supply is nearing its peak in many regions, with an expected decline in the coming years? This becomes especially concerning when considering that the United States’ shale fields, which have been a prolific source of new oil and natural gas production for the past 15 years, are showing signs of plateauing and decline.
As we look beyond the immediate future, a pressing question arises: Where will the United States source enough oil to meet its substantial demand over the next 5+ years? This is not a speculative or distant scenario; it’s a very real concern.
Did you know that virtually every major shale field has either peaked, plateaued, or is already in decline, except for the Permian Basin in the U.S.? Even the Permian Basin, which had been a stronghold, recently saw a decline in rig counts – a first in its history – despite rising oil prices. This decline in productivity is a critical issue for future production growth. If there were a lot more Tier 1 untapped wells, we wouldn’t witness declining productivity or falling rig counts with oil at $80 per barrel. This situation is unfolding right now, not in some far-off future.
Even if there’s a short-term reversal of this trend in the Permian Basin (which could happen with higher oil prices), it’s inevitable that the Permian will eventually peak and plateau in production. So, once again, we’re left pondering where our future production growth will come from.
I don’t blame Saudi Arabia at all; in fact, I would thank them for potentially bringing these issues to the forefront with higher oil prices sooner rather than later. Every month we delay addressing the impending supply shortage is a month wasted. Time is of the essence.
The sooner our politicians and their constituents grasp the potential consequences of an oil supply-demand shortfall, the sooner we can align our policies with our country’s needs. We must incentivize producers to allocate more towards growth capital expenditures (exploration, new technologies, etc.), possibly through initiatives like a zero-tax policy on profits, provided that most of the savings are reinvested in growth capital expenditure. It’s alarming that the “Magnificent 7” (Amazon, Meta, Google, Apple, Microsoft, Nvidia, and Telsa) spends more on capital expenditure than our entire energy complex at this stage of the energy cycle.
To emphasize, most global market participants, especially in the United States and the West, seem remarkably complacent and often ignorant regarding medium- and long-term oil supply and demand imbalances. At FMT, we are among the few who do not share this complacency.
While I firmly believe that our holdings, based on underlying factors and fundamental values, will yield significant returns, I am saddened by the direction we seem to be heading because it does not align with the best interests of our country and its people.
I cannot stress enough the prevalent complacency. Hopefully, Saudi Arabia’s efforts to retain as much oil as possible while prices are still reasonable but heading higher will awaken many to the looming crisis. Owning companies with such low prices to free cash flow (some of our holdings sell at 2 to 4 times free cash flow at WTI $80 to $85) is a testament to the current energy complacency. What happens when oil inevitably surpasses $100 and remains at that level for an extended period?
Nicholas Green, CIO