July 2022 Newsletter

Oil. Oil. Oil.


Sometimes I write articles to you about the immediacy of current and future trends in the stock and bond market. However, sometimes, adding broader context is helpful. In this case I choose oil.

Oil is a leading cause of war.  It shows up in inflation. It fuels resource wars. It can be used for petrol-aggression. It motivates risky foreign policy adventurism. It can trigger conflicts by the prospect of market domination. It finances insurgencies. The price of it can topple governments as it is the base material for fertilizer, the lack of which causes food shortages and riots worldwide.  Oil-related grievances contribute to extremist groups. The linkage between oil and both domestic and international conflict is growing.

Last week U.S. Energy Secretary, Jennifer Granholm, met with executives from Exxon Mobil, Chevron, Shell, and Marathon Petroleum to iron out a strategy in response to elevated prices at the pump. Fortunately, earlier this year President Biden said there would be “no more coal plants.” That statement was akin to calling the visiting football team a bunch of losers.  Such talk reminded Senator Joe Manchin of West Virginia, a coal-country senator, that he was still considered a loser to the man who would be king as the first Environmental President. Sierra Magazine, the magazine of the Sierra Club, acknowledged President Biden’s first acts as President, (1) rejoining the Paris Climate Accords, (2) revoking federal permits allowing completion of the Keystone XL Pipeline, (3) establishing a temporary moratorium on all drilling activity in the Artic Refuge, and (4) effectively freezing all new and pending Trump regulations dealing with clean water, clean air, and oil and gas development.  This final act falls into the category of not understanding the implications of the decisions being made.

Recall that Senator Joe Manchin and two other Democratic senators were the only Democrats to oppose the Green New Deal legislation in 2019. In 2019 then presidential candidate, Joe Biden, explained that we need to hold fossil fuel executives accountable, “liable” and “put them in jail.”  In January of 2021 President Biden signed an executive order called by heading, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” In this executive order he stated, “It is essential that agencies capture the full costs of greenhouse gas emissions as accurately as possible, including by taking global damages into account.”  This executive order also gave the Attorney General of the United States full discretion to request a court stay on any litigation relating to the oil and gas industry.  To further tighten the federal government’s capacity to act against fossil-fuel companies, President Biden’s executive order included the establishment of a new interagency organization called the Interagency Working Group. Members of the Working Group include the following other officers, or their designees:  the Secretary of the Treasury, the Secretary of the Interior, the Secretary of Agriculture, the Secretary of Commerce, the Secretary of Health and Human Services, the Secretary of Transportation, the Secretary of Energy, the Chair of the Council on Environmental Quality, the Administrator of the Environmental Protection Agency, the Assistant to the President and National Climate Advisor, and the Assistant to the President for Economic Policy and Director of the National Economic Council. The Working Group is to consider the cost of carbon dioxide for legal actions against fossil-fuel companies. This is a mere fraction of their requirements.

So now with the high price of gasoline fueling inflation, voters see the economy as the central issue heading into the November mid-term elections. Of the top three issues Americans are concerned about, the economy is tops, followed by crime and immigration. The environment comes in fourth, tied with inequality and just above morality. Only 18% of Americans think the country is headed in the right direction. Political polls now put the president’s disapproval rating at 58%. As of June 23, 2022, President Biden’s approval rating stood at 38%.

Last week President Biden sent a letter to oil executives asking for greater cooperation to increase oil and gas production. To support Ukraine in its war for survival against Russia, European nations have committed to negating all oil and gas transactions with Russia. Russia’s Gazprom, Russia’s oil and gas giant, may be preparing to cut natural gas supply lines to Europe this winter. The European gas market is fragile. Without domestic natural gas supplies from the United States, German industrial output may collapse. Rationing is being considered already even before help for the poor is considered. While domestic natural gas is priced at some $6 per million BTUs (British Thermal Units), the price in Germany has soared to some $40 per million BTUs of natural gas energy.

The Europeans have just two months now to set aside supplies for the winter. Russian gas flows to Europe continue to fall short of demand. The Kremlin is using natural gas supply restrictions to fight its war against Ukraine and its European allies. France recently reported it had received no Russian gas from Germany since June 15. To make things worse, China shutdowns are largely over, causing demand for natural gas to grow even faster. It’s the Russians and Chinese against Europe and the West. For this reason, Paris Climate Accords or not, the Europeans are already retooling their utility companies for…wait for it… coal. The Paris Climate Accords promised, “a world that is safer and more secure, more prosperous, and more free.”

In December 2015, that was the world then President Barack Obama envisioned we would leave today’s children when he announced that the United States, along with nearly 200 other countries, had committed to the Paris Climate Accords, an ambitious global action plan to fight climate change. So, this is the context that brought new President Joe Biden to boldly say on day one of his presidency that the United States was rejoining the Paris agreement on February 19, 2021. Russia’s War against Ukraine and the NATO allies now puts America’s pledge to restrict fossil fuels in jeopardy. In the recent letter to oil executives President Biden wrote, “Companies must take immediate actions to increase the supply of gasoline, diesel and other refined product.” The nation and the world have too few refiners to convert oil into gasoline. Yet according to a June 15, 2022, CNBC report, the Biden administration continues to push the conversion of some U.S. refineries to produce bio-fuels at substantially lower output levels. Moreover, after talking to oil executives, the Biden administration appears to be willing to forgo a windfall profits tax as long as the oil companies use this revenue to expand supply and build new refineries. As a result, on Tuesday, Exxon Mobil announced that it had signed an agreement with Qatar Energy to further develop Qatar’s 29-billion-dollar North Field expansion, increasing Qatar’s LNG (liquified natural gas capacity). Exxon also announced this week that it will also upgrade a Singapore-based operation. The upgrade will show added capacity by the year 2025. With investors rushing into the last sure thing, the energy sector, one report surfaced that “sovereign” hedging was underway. Any strategy to cut the price of oil is underway. So, the international fix to do so includes heavy sell-side activity. This has caused the oil stocks to correct. Nevertheless, Warren Buffett bought more shares in Occidental Petroleum this week, a signal the war in Ukraine isn’t going away and neither are high gasoline prices at the pump.

In response to President Biden’s letter to oil executives, an oil industry group responded on Tuesday outlining 10 steps the administration and Congress should take to tackle the energy crisis, including lifting development restrictions on federal lands and waters and accelerating LNG exports.

It has been argued that the initial surge in oil pricing was the result of the crash of oil supplies in May 2020, and then the subsequent recovery of demand over the next two years. The production crash took place under former President Trump’s term in office. So did the early recovery.  But the demand increase kept going into Biden’s term, while supplies struggled to catch up. The resulting post-lockdown surge in demand drove oil prices. Some say Biden just happened to be president when it happened.

Angered by his dropping approval rating in the wake of higher gasoline and diesel prices, earlier this month the President was quoted as saying, the oil companies are making “more money that God.” This contextual construction of greed did not set well with oil executives being pressed by the president to find, produce, and refine more oil now. Attitudes calmed down, however, after U.S. Energy Secretary, Jennifer Granholm, met with oil executives.

The growing consensus is that finger-pointing doesn’t solve immediate problems. The main bottleneck driving gas prices higher is not greed so much as a lack of refining capacity.  Refining capacity in the United States has fallen each of the last two years. During the pandemic some refineries shut down for lack of demand. They haven’t come back. Some refineries in Texas were knocked out in last year’s Texas freeze.  The United States will use 95% of its refining capacity in June. There is no motivation for oil and gas companies to build new refineries.  They take years to build, cost billions of dollars and in the present political climate, investors want a quicker return on their investment.

“At the end of the day, the problem is this: the electric vehicle environment is on the horizon. It’s out there somewhere, 10 years from now, 15 years from now, 20 years from now, it’s going to happen,” said Bob Yawger, Executive Director of energy future strategies at Mizuho Bank. “And so, you’re trying to tell these guys that they need to crank it up as they’re drifting into that eventuality? That’s a tough sale, and they’re making money right now for the first time in years.”

At the conclusion of the G-7 meeting in Germany this week, world leaders from Canada, France, Germany, Italy, Japan, the United Kingdom and the United States put forward the idea of price caps on oil and gas. President Biden sounded like President Trump in calling for greater production of fossil fuels, increased spending on military weapons to fight the Russians in Ukraine and calling China a systemic threat to G-7 nations. Nevertheless, some reporters sense the elegance with which President Biden’s team communicated his message was much appreciated. The aggregate gross domestic product from G-7 members is about 45% of the global economy, down from nearly 70% three decades ago.

In conclusion, when it comes to the economics of supply and demand it is oil that makes the world go around.  Today some 95% of the world’s engines still run on oil. Oil can turn a U.S. president bent on being acknowledged as the Environmental President into a drill-baby-drill pragmatist. After decades of global warming warnings, it can motivate the world’s richest man, Elon Musk, into saying ESG (Environmental, Social and Governance) is a scam that has been “weaponized by phony social-justice warriors.” By now can we all agree the death of the oil and gas industry is greatly exaggerated?  Fossil-fuel energy helps to create, manufacture, grow and transport.

I leave you with just a few quotes from the original Earth Day in 1970:

  1. “The world has been chilling sharply for about twenty years. If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age.” — Kenneth Watt
  2. “It is already too late to avoid mass starvation,”— Denis Hayes, Chief organizer for Earth Day
  3. “Population will inevitably and completely outstrip whatever small increases in food supplies we make. The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years.”— Stanford University biologist Paul Ehrlich
  4. “Civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind.”— Harvard biologist George Wald
  5. “At the present rate of nitrogen buildup, it’s only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable.”— Ecologist Kenneth Watt




Vaughn L. Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037




Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0274.