Dan Dicker: A Basket Case Study of Oil

America loves to blame the President when gas prices are high but the fact is the U.S. President has very little control over the price we pay at the pump. This week on Sea Change Radio, we speak to oil expert Daniel Dicker to discuss the politicization of gas prices, how Russia’s invasion of Ukraine is rattling global prices and, in a very useful lesson on the complex world of commodities, we learn how oil markets are not that dissimilar from buying hand-woven baskets in a Turkish bazaar.

Narrator 0:01  This is Sea Change Radio covering the shift to sustainability, I’m Alex Wise.

Dan Dicker  0:24  It would take years for traditional sanctions to have the kind of effect on Vladimir Putin and his machine that this oil ban and the resulting curtailment of energy sales from Russia will have they’ll be bankrupt by July.

Narrator 0:57  America loves to blame the President when gas prices are high. But the fact is the US president has very little control over the price we pay at the pump. This week on Sea Change Radio, we speak to oil expert Daniel Dicker to discuss the politicization of gas prices. How Russia’s invasion of Ukraine is rattling global prices. And in a very useful lesson on the complex world of commodities, we learn how oil markets are not that dissimilar from buying hand woven baskets in a Turkish bazaar.

Alex Wise  1:47  I’m joined now on Sea Change Radio by Daniel Dicker. Dan is an energy expert, and folks can find his work at DanDicker.com. Dan, welcome back to Sea Change Radio.

Dan Dicker  1:59  Well, thanks, Alex. Always good to talk.

Alex Wise  2:01  It’s been too long. And we’d love to get your insights into oil and gas industry happenings. And there haven’t been happenings like this in quite some time with Russia’s invasion of Ukraine. Why don’t we first talk about what’s on everybody’s mind? Why are gas prices so high?

Dan Dicker  2:25  Even though oil prices have kind of leveled off, it’s always hard for people to remember. But oil prices were already at a fairly, significantly high level before stuff started happening in Ukraine. And that was a function of things I’ve spoken to you in the past about. And that was about, you know, an oil industry that had been decimated by low prices for five straight years. And, you know, the 500 bankruptcy 600 bankruptcies that happened in the industry. And the true shortage of supply that kind of was created during those years, that all of a sudden made itself felt as the entire, you know, global economy was coming out of a pandemic. So what you have is you have a lot of pent up demand for fossil fuels. And you saw that first in a European energy crisis. Well, before anything started in Ukraine that had been driving prices here in the United States and elsewhere, you know, already to $90-95 a barrel.

Alex Wise  3:28  Yes. And there’s a lot of misinformation disinformation going on. People don’t necessarily know how this all works. So why don’t you kind of spell it out? When oil prices went from 80 to $150 a barrel, all of a sudden, gas prices like in my neighborhood in San Francisco went from four to five and a half $6 pretty quickly. And then we see that it’s kind of settled back down around the $100 a barrel range. And yet, gas prices still stay the same. So a lot of people say, well, the gas companies are just gouging us. But there’s more to it than that, isn’t there?

Dan Dicker  4:08  Yeah. And it’s it gets very complex, but understand that, you know, the, the timeline of turning oil into gasoline, and then getting it into pumps is not instantaneous. And therefore some of the prices that are being reflected the pumps are reflecting crude oil prices that are two weeks old already. And so you know, when you see oil prices dropped by 15, or $20, like they did this week. But you don’t see prices go down at the pumps. I know it’s a natural reaction to say, well, you know, we’re getting gouged for gasoline. But the truth is that that’s that’s not the way it works. And in fact, it can’t. I mean, the law really is very clear. And the markets are very clear in what you know, gas companies, whether they’re independent or they’re from major oil companies, or they’re just distributors can charge for gasoline. Whether it’s at, you know, BP or an Exxon station, or it’s from your local BJs, or, or Speedway or you know, a lot of these independent small gasoline, you know, gasoline service stations, it’s, it’s not something that they can manipulate, you know, all that much, you know, five or 10 cents a gallon, yes, depending on additives or what they think the market can bear. But for the most part, you know, gasoline prices are the same for everybody, depending on what the market says they can charge.

Alex Wise  5:33  It does seem a little suspicious, though, that they may take advantage of the window of news. On the flip side, yes, yes, on the, it takes two weeks, let’s say for the refining process, and to get it from tanker to somebody’s gas tank. But when we hear that Russia has invaded Ukraine and gas price, oil prices in the world and the global commodity markets reflect that, it doesn’t take two weeks to go to your local exon station and find that the prices have gone up accordingly.

Dan Dicker  6:04  Yeah, I would say it’s probably true. And anecdotally is probably as well as any way to say that, yeah, they probably do take a little bit of an advantage of some sort of news to make the price of the pump go up a little faster than it comes down. But as to whether this is, you know, really gouging or not, I would say it’s, it’s the smallest part of the puzzle to worry about whether, you know, prices get raised at the pumps, maybe four or five days, or three or four days before they probably should get raised.

Alex Wise  6:38  And one thing we definitely agree on is the politicization of gas prices. And Democratic and Republican Presidents have been guilty of this since the oil crisis of 1973. But every president I can remember always refers to gases as low as it’s been in five years. But explain why the US president does not have an effect on gas prices in general, and why it’s toxic for politicians to be talking this way.

Dan Dicker  7:11  First off, oil companies don’t set oil prices, markets set oil prices, and that needs to be understood from both sides, the right and the left. Because if if oil companies could set prices, I mean, we’d never see oil under $100 a barrel, would we I mean, they, and we’d never see what price and RON are $50 a barrel, there’s always a certain amount of demand, it’s not like you can raise the price, the price could be just about anything, while almost anything, and a certain number of barrels would be sold because the the world needs it to run. So if oil companies could control oil prices, they’d be certainly happy to sell half as much as they’re selling now, at three times the price. If they could do that, they can’t do that. Think of it like a Turkish Bazaar, where you know, everybody who sells a certain product, let’s let’s call them like baskets, woven baskets, comes to the bazaar, and all the buyers who want to buy baskets come to the bazaar. And nobody knows beforehand what the price is going to be for those baskets. But you know that this, the sellers want to sell it for as much as they can. And the buyers want to buy it for as little as they can. I mean, that’s just that’s human nature. The only thing that happens in these bazaars is that the dealing starts to happen, the negotiation starts to happen, that’s what bazaars are I bid this, you want to sell it for that we come to an arrangement. Now imagine that you know, all of these, you know, Bescot, we come from all around the world. And you know, while there cost to make baskets might be different, one guy might be able to make a basket for $2. Another guy might need $40 to make a basket, they all come to this market together. And you also have to assume that all the baskets are basically the same. Anyone, any basket makers basket is as good as the next guy, you don’t care which guys basket you buy, it’s all the same to the buyers. And they all go in and start making deals for baskets. Now the difference is that everybody knows everybody else’s deals. Everybody knows the negotiations, everybody knows what price is being bid. Everybody knows what price is being offered. And sooner or later, what you get is you get a you know, an agreement, a balance between buyers and sellers, where there is one price, that price is what we call a benchmark. And in general, that’s how markets work. Everybody who’s engaged with a market, whether they’re a buyer or seller, or if they’re only trying to, you know, speculate on baskets, if they’re looking to buy baskets cheaply, so they can sell them more expensively. I mean everybody’s engaged there is Part of the process at what we call price discovery, you know, the the sellers of this have as little to do with setting the price as the buyers do. The sellers being obviously oil companies, the buyers being, you know, all of us. So the bottom line is, oil companies don’t set oil prices, the market set oil prices. And you know, generally things can change that that benchmark price of oil. But oil companies don’t have a lot of input. And even more importantly, governments have like zero input into that bizarre, they don’t even show up. They only complain about it. That’s all they do.

Alex Wise  10:42  And to stay on the basket analogy, the absurdity of the politicization of this marketplace could be the mayor of the town comes in after all these basket prices have been negotiated and touts that the basket prices are as low as they’ve been in a few years even though he had absolutely nothing to do with this negotiation.

Dan Dicker  11:03  Exactly. There’s never been administration republican or democrat who didn’t want the baskets to be cheap. Okay? Because it is a political nightmare. Generally, when a whole bunch of buyers have baskets, who really need baskets, they can’t live without baskets have to pay a lot for baskets.

(Music Break)

Alex Wise  12:09  This is Alex Wise on Sea Change Radio, and I’m speaking to energy expert Daniel Dicker. We’ve talked before on the show about solutions to weaning ourselves off of oil. And you’ve said, you know, it’s gonna mean some pain for the most vulnerable populations ultimately, but you are not shy about not advocating for but seeing $300 a barrel oil as a possible solution, a painful one but a possible one, why don’t you expand?

Dan Dicker  12:39  I don’t know if I put a number on it. But what we need to do in these markets is we have to start, if we’re if we’re going to get to renewables, we have to start with the stability of the basket sales. Because one year we come out and baskets are selling for, you know, $30. And one year, we come out in baskets selling for $110. And you know, and one year we come out and it’s selling for $150, then a week later, it’s $90. And, you know, that’s just no way to run a basket shop. You can’t figure out how do you get from oil to gas to solar to hydrogen without having a stabilized and a dependable oil market first. Because what happens is, when oil markets are really, really low, nobody cares about making that next step to gas and renewables. Because Why should I, I can fill my tank, basically for nothing. And I can run my my house with you know, $2 natural gas. And I don’t need solar, because I’m perfectly happy to pay these very tiny prices, then you get like a situation we have now, we are oil companies because prices were so low are incapable of responding to demand for new oil. And then we get prices that are very, very, very high. And then we have crisis, we have the entire entirety of Europe, that screaming for energy of any kind, otherwise, they can’t run their economies and people freeze. And that’s what’s gonna happen in Europe right now you can guarantee it, they’re going to have no choice as much as anathema for Europe, they’re going to be forced to burn a lot more oil, a lot more coal and a lot more natural gas than they ever planned on doing because they don’t have access to the amount of energy that they need to keep, you know, their recovery going their economies going, and particularly now that they’ve shunned Russian supplies from the marketplace or trying to shun Russian supplies going forward.

Alex Wise  14:51  So Dan, let’s get into the weeds a little bit more about Russia and Ukraine. Why don’t you put Russia’s role in the oil and gas into history into context for Americans. And it really is much more significant for the Europeans, as you’ve mentioned earlier in our conversation, right?

Dan Dicker  15:09  Right. First of all, Russia is the number one, at least the number one US natural gas supplier in the world number three for oil. They were very significant part of the global energy chain in fossil fuels. That, of course, impacts Europe the most, and obviously, to the East, China and India are big buyers of Russian oil and gas. What’s important to note is that, you know, we’re number two in natural gas, and number one in in oil production. And, you know, our economy is about 13%, oil and gas. For Russia, it’s closer to 45%, oil and gas. So you must understand that Russia is for all intents and purposes, a Petro state. They rely upon oil and gas revenues in order to survive. In fact, they rely upon oil and gas revenues in order to invade other countries, the tanks that are rolling through Kiev right now, were bought with euros, the yachts that the the United States and other European countries are targeting with sanctions were bought with euros, euros that were sold via oil and gas to Europeans. And when you look to inflict the most damage that you possibly can and have the most impact you possibly can, short of military action, which of course is unfathomable, for good reasons that Biden clearly understands. Then what you want to do is target Russia’s machine of oil and gas, which has been Biden’s masterstroke. And his ability to not only get the UK to go along with this, because they are a little more beholden on Russian supplies, but also to get the Europeans to start a very, very serious conversation on how they can divest themselves and supplant Russian energy supplies. It puts the kind of hurt on Russia, that sanctions alone could never, never, never, never do. It would take years for traditional sanctions to have the kind of effect on Vladimir Putin and his machine that this oil ban and the resulting curtailment of energy sales from Russia will have. They’ll be bankrupt by July, which is the reason the main reason in my view, that they are talking seriously with Ukraine right now, with the prospects that there might even be a deal on the table. I saw from ft today possible deal in the works between Russia and Ukraine. This is an impossible outcome from what was happening two weeks ago. And I think if it does happen, Biden will solidify himself as the finest leader of the free world the greatest president we’ve seen in 60 years for having found the opportunity here and had the courage despite the fact that it is a political nightmare normally to knowingly make gas prices go up which is what he’s done and found a way to isolate the Russians to this degree such that you know we’re really looking at hopefully soon a succession of hostilities in Ukraine.

(Music Break)

Alex Wise  19:47  This is Alex Wise on Sea Change Radio and I’m speaking to energy expert Daniel Dicker. People can follow his work at DanDicker.com. So Dan, you mentioned state run oil companies. Let’s look at Some of the reaction from the Russian behemoths, namely Gazprom and Lukoil. I saw a new story recently that Lukoil has condemned the invasion by Russia into Ukraine. So Lukoil is working with Iraqis to expand production in its largest field West Qurna to, what does that mean, in terms of the global marketplace? Is it enough for Lukoil just to condemn what the Russian government is doing in Ukraine? How independent is a company like Lukoil? I guess, is the question.

Dan Dicker  20:39  They’re not very independent, you got to remember that the Russians, for the most part need Western technology and Western expertise to get their more difficult resources out of the ground. And they’ve relied upon partnerships with Western oil companies in order to do that, for the last several decades. What has been to give Western oil companies a pat on the back? Those Western oil companies were some of the first industries to leave Russia. When the invasion began in Ukraine. BP ran away from assets worth 25 billion on the second day of the invasion, with absolutely no hope, or at least they know no professed hope to get back any investment. And that’s a lot considering their market cap is 100 billion, just 25% of their market cap. Exxon ran away from the Sakhalin gas project, shell ran away total ran away, Ecuador ran away. So this is Western expertise, supporting in a way that I’ve never seen in my lifetime,

Alex Wise  22:02  Yes, I mean, when you say run away, that’s these are major investments, not just in, in dollars, but also manpower, and they’ve taken years to develop, and then on a dime, these companies have pivoted away from these projects.

Dan Dicker  22:16  I’m glad you said it. Because I in my lifetime, I never would have thought I would have seen that from oil companies. These are not companies that normally have a very strong moral compass, that perfectly happy dealing with corrupt governments that are run by authoritarians and butchers. They’ve done it for a long, long time. I mean, that just happens to be where the oil is. And for them to respond, mostly as European and American companies, to this call, to sanction Russia is just remarkable, just incredible. You know, I can’t, I can’t describe just how incredible it is. And in terms of hurting Russia, where it counts, and why a lot of these Russian oil companies are searching for other sources of oil is because this kind of retreat from Western oil companies from the Russian oil production scene is something that will hurt them in a way that all the Starbucks in the McDonald’s in the world can’t hurt Russia. So I wanted to point that out. And I do that in every opportunity. Because normally from the left, which is basically your your audience, I mean, oil companies are the devil and they’re looking to to gouge you and, and destroy and take advantage. And, you know, this, this, there’s a lot of truth to that. But in this particular case, you know, give them a pat on the back. They’ve really, they’ve really stepped up and and supported Europe in their fight against, you know, this authoritarian wants to wreak you know, havoc, death and destruction throughout much of eastern Europe.

Alex Wise  24:00  When I hear Americans complaining about gas prices, I like to remind them that we’ve been paying subsidized very cheap rates for so many decades, a lot. A lot of this is because of the politicization of gas prices in the body politic. But surely you can go to some of the more densely populated parts of Europe and they have public transport and other alternatives for people when they’re charging eight $9 A gallon for gas that seems like people have options but Canada is a very big oil producer. They pay $8 a gallon and it’s a pretty big country with and rural as well. I’m sure Canadians are just they’ve already kind of built that in to their calculus, Americans have not realized that gas should cost something. What can we do to reach the American consumers mindset more effectively, Dan?

Dan Dicker  24:56  There you know, look, this has been a long standing issue. with me for 20 years, where, you know,  mostly from the right, touted the idea of us being energy independent at somehow, if we could just pump enough oil, you know, we’d have to dollar gasoline in unlimited quantity forever,

Alex Wise  25:25  (laughing) They just need to open up more Arctic wilderness for drilling, you always see that coming out, right?

Dan Dicker  25:31  It’s always been nonsense every time oil prices spike, I hear this crap from the right, they generally bring up Keystone XL, which has been a dead project since 2009. It’s a project that nobody cares about, nobody in Canada would even want if they could have it now, it’s like one pipeline is going to make the difference in terms of supply. You cannot you cannot isolate this country, from the global energy markets, okay, you just cannot do it, I don’t care how much you pump. Oil is gonna find its way like in the bazaar, to the guy who’s willing to pay the most for all right. And if your guys in the United States, unless you want, you know, a purely state run energy business, which you can do, but that’s really communist, I mean, talk to the right about that you really want to dollar gas forever, now you’re really talking communism, okay. And it’s been the same story from them. For 25 years, every time gas prices spiked with a Democrat in office is because, you know, the left is, is is, you know, at war with fossil fuel producers. And I keep telling them, you know, it’s the markets of the markets. And whoever’s in office at the time is either the lucky guy or the unlucky guy. And Biden just happened to be the unlucky guy. You know, Trump was no fan of oil companies either. Under his watch 600 oil companies went broke, literally 600 went broke. So he was no big fan of oil companies, or at least he wasn’t an advocate, he didn’t help them from from going bankrupt. All of these very short quick kind of discussions from the right and from the left, I you know, as often as loud as I can I tell this country, you really should grow up, you guys should really grow up. You are not entitled as a birthright to to dollar gas forever. And in fact, that kind of attitude is helping to destroy the planet slow down the transition. And really take take it out of the environment. It’s time for us to take our responsibility seriously, in a global energy market. And as you say, like in Canada and Europe and the rest of the world that isn’t you know, controlled by state run oil companies pay a reasonable price for a gallon of gas.

Alex Wise  27:56  Dan Dicker, thanks so much for being my guest on Sea Change Radio.

Dan Dicker 27:59  Always a pleasure, Alex, thank you.

Narrator  28:16  You’ve been listening to Sea Change Radio. Our intro music is by Sanford Lewis and our outro music is by Alex Wise. Additional music by Lee Johnson, David Bowie and Steely Dan, check out our website at Sea Change Radio.com to stream or download the show or subscribe to our podcasts. Visit our archives there to hear from Bill McKibben, Van Jones, Paul Hawken and many others. And tune in to Sea Change Radio next week as we continue making connections for sustainability. For Sea Change Radio. I’m Alex Wise.