5 Comments

Hello Arjun,

Excellent material, in particular I think the point about investing during the bottom of the downcycle into companies with a high ROCE is crucial because this is in sharp contrast to the way many oil analysts and business invest - they try to time oil prices (which are much spikier and more difficult to predict).

Question for you, perhaps you could even devote a substack to this (?) because a lot of investors need clarity: given the $100+ Brent prices today, and the risk of demand destruction through a recession because of rising interest rates, rising fuel prices and rising political tension in Europe, some analysts think we may be nearing recession/demand destruction zone soon which will drop crude prices; do you still think we're at the early stages of the longer ROCE cycle even if crude prices drop over the next few years? Or does this 2020 to 2022 represent a very compressed bottom to top cycle for prices that also represents a very compressed ROCE cycle?

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Thank you very much your kind words and comments. Your question gets to the heart of the Super Vol (vs Super Cycle) mindset. Given the fragility of both supply/spare capacity but also demand along with energy transition policy volatility and usual geopolitics, there is absolutely no certainty on cycle duration. I don't believe we are currently at a demand destruction price, but the question is really when do we think recession kicks in. It is less about a specific oil price and more about an accumulation of weights on economic growth that drives that consideration. The oil price that "caused" demand destruction will be a backwards looking number in that it will be global economic weakness that triggers a collapse in crude (some chicken vs egg aspects).

I do think this is worthy of a stand alone clarification post...its a great suggestion.

As for duration of ROCE super cycle, I believe that when we reach 2030 and look back at average ROCE over the 2020s for top 2 quartiles of energy companies, ROCE will be double-digit to mid teens on average. For the median company, ROCE I expect will be 8%-10%, which is much improved than the 0%-4% of the 2010s.

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Incredibly, there are many parallels between the COVID discussion and Climate change. In both cases there is a level of intolerance that will make us all better off.

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Doubly support your comment on free speech. Not for anyone person or group to dictate to others, at least in this country. Worryingly, that is the path many now advocate.

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Thank you Humberto. As I mentioned, I was leery about bringing up a "non-energy" controversy. But I actually think it very much applies to what has been a pretty bad dialogue heretofore from just about everyone involved in energy & climate. We need to hear more voices. And silencing those we disagree with it can't possibly be the right way to go (obviously there are exceptions, but the bar should be high).

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