The LNG Shock from the Iran War Is Spreading Across the Global Economy | Rick Rule

There has been a major disruption to the supply of liquefied natural gas coming out of the Strait of Hormuz, and some facilities have been damaged. Today we sit down with Rick Rule, who's a commodity expert. He's going to tell us the impact of these damages. He also will tell us about oil, copper, gold and silver, and other commodities that he's been studying. Attaris produce 20 percent of the world's LNG, but they produce more like 35 or 40 percent of the world's export LNG. So it's important to differentiate. What happened with regards to LNG is of very little importance to the United States, as an example. But to places like Japan, Taiwan, Korea, it's more like 75 or 80 percent of their LNG supplies. And so for them, and for the global economy that relies on the Asian export machine, this is important. I'm Siamak, and this is Market Insider. Rick, it's great to have you on. Welcome. Pleasure. I'm a fan of Epoch Times, so thank you for having me. Thank you. We want to talk to you about something really important that's happening across the globe with LNG. There is this Qatari LNG plant that got hit, and a lot of the world's LNG, about 20 percent, if I'm not wrong, is coming from the Strait of Hormuz. What's happening with LNG right now? For one thing, the Qataris produce 20 percent of the world's LNG, but they produce more like 35 or 40 percent of the world's export LNG. So it's important to differentiate. What happened with regards to LNG is of very little importance to the United States, as an example. But to places like Japan, Taiwan, Korea, it's more like 75 or 80 percent of their LNG supplies. And so for them, and for the global economy that relies on the Asian export machine, this is important. And the fact that it occurred in conjunction with the degradation of export oil supplies, the substitute in some cases for liquefied natural gas, means that the importance in the near term is very difficult to overstate. We had reasonable floating inventories, and in Japan, reasonable onshore inventories, supplies of both oil and LNG. Those supplies are rapidly running out. And to the extent that the circumstance in the Gulf doesn't get straightened out, there will be continued challenges. The second problem, as you wisely point out, is that with regards to LNG, it isn't merely a hiatus in shipment through the Persian Gulf, but rather the destruction of productive capacity, both on the Qatari side and on the Iranian side. So the implications of this will be longer term than we had hoped. It's also worth noting that in conjunction with producing this LNG, that Qatar produces about 30 percent of the world's supply of helium. And that's necessary in a whole range of technological applications, as an example, semiconductor manufacturing. So the implications here are very, very, very broad based, and I'm afraid very longstanding. You mentioned longstanding. How long do you think the impact would be? Is there any way to predict that? Assuming that you resolve the conflict tomorrow, I'm given to understand that the damage to the Qatari productive capacity, and by the way, damage to the Iranian productive capacity on Karg Island, would take as long as five years. I have no independent confirmation of that. I just go on the information released publicly by the government of Qatar. What about the U.S.? It seems like there is some capacity coming online in the U.S. of LNG, right? The United States has been very forward thinking with regards to LNG. We began 15 years ago as a be confronted with fat quantities of by-product gas, particularly in the Permian basin. And the United States, I think, has done a relatively good job in building out their natural gas infrastructure, building out gathering systems, the marginal gas fields, building out storage facilities, building out transmission facilities, and as you point out rightly, building out LNG export facilities. This will serve us well in the next five years. The difficulty was going to be a period of lower crude oil prices, which would reduce the amount of development drilling in the major shale basins of the United States, and as a consequence, depress the amount of surplus natural gas available. The current crude price, $85 to $90, has meant that in the United States, we're back to an environment of quote, drill, baby drill, which means that at least unless and until the oil price itself declines, the amount of by-product gas available to fill the U.S. infrastructure is increasing. The second circumstance that Americans look at is the fact that much of the world's gas consuming capacity is coming to the United States, which is to say German firms, as an example, that produce petrochemicals or nitrogen fertilizers, relying on Russian gas, rather than importing American gas to Germany, have chosen to relocate their productive facilities to the U.S. Gulf Coast and the U.S. East Coast. So the natural gas industry in the United States, I would suggest for the next 10 or 15 years, is in pretty good condition. What about the oil side of things? How do you see the oil market after this conflict? I was an oil bull before the conflict, not because I had any premonition that there was going to be a war. I certainly hoped there wasn't going to be. But the oil business is a hugely capital-intensive business. And on a global basis, including state-owned firms, the oil industry itself was under-investing in sustaining capital for the extent of about $1 billion U.S. per day. And this has an impact. If you don't invest sustaining capital and new project capital, it might not impact your producing capabilities in 2026 or even too severely in 2027. But beginning 2028, 2029, that deferral of sustaining capital really impacts your ability to produce. If you want to quantify that, look no further than the Venezuelan state-owned firm Penevesa and the Mexican state-owned firm Pimex, which for 20 years have deferred sustaining capital investments in favor of politically expedient domestic social spending programs. In both cases, despite wonderful reserve bases, that deferral of sustaining capital investment has reduced the productive capacity of those firms by 75%. The consequence of this global deferral of sustaining capital investments is that unless we act very quickly now, we will face systemically lower supplies of oil and gas two years out and three years out. There was a lot of discussion from the International Energy Agency about two things. First was that the IEA had for years suggested that peak oil demand on a global basis would occur in 2030 or at the very latest 2032. They suddenly decided that that would occur in 2060 or 2065, which tells us a lot about how much oil we're going to need in the early part of the next decade. The second thing is that the IEA for years talked about a surplus floating supply of a bunch of oil that presumably they know about or knew about, which turned out not to be real. As a consequence of the circumstance in the Persian Gulf, there was allegedly 4 million barrels a day in surplus capacity and an undetermined amount of above ground inventory floating that doesn't exist. We're facing that circumstance today. Arik, you mentioned that the supply, so there needs to be investment right now to keep up the supply in 2028. How much do you think the supply will go down in 2028 based on the information that you've got? You've been studying this, right? You've been studying how much investment is going in. What do you think roughly the supply, how much supply will come down? That's really a function of whether or not access to Russian hydrocarbons. The Russians are, of course, producing oil. They are, of course, producing gas. But Russia's ability to transship that gas as a consequence of the Nord pipeline and also the rump of US sanctions is causing a fairly substantial shortfall of Russian hydrocarbons reaching various markets. So if one assumed that you had peace between Russia and the Ukraine tomorrow and the world was able to reaccess Russian hydrocarbons in two years, there would be no necessary need for the oil price to escalate beyond 80 or 85 US dollars a barrel. At 60 dollars US a barrel, you begin to run into real problems. The Russians, at 60 dollars a barrel, have much less incentive to reinvest in the oil and gas industry. And the US shale producers and the Canadian shale producers, I would argue, have no incentive to do it all. So part of the answer to your question has to do with the price. Assuming peace between Russia and Ukraine, and I'm not saying that that's a good assumption or a bad assumption, you could have ample supplies of oil in 2029 at 85 to 90 US dollars a barrel. At 60 dollars US a barrel, you have real problems. What does that mean, real problems? People are not going to be Correct. And then the price will go up in a few years, right? The big swing producer for the last 15 years has been the US. And that has occurred because although we have mature basins, we have basins that is a consequence of a conjunction of technologies, horizontal drilling, pressure pumping, which is to say fracturing, three-dimensional seismic, among other things, that we have greatly increased our ability to produce oil and gas if we throw capital at it. The problem with this shale oil and shale gas is that these wells experience hyperbolic declines, which is to say approximately 85% of the net present value of the well is recaptured in two years. If you don't keep drilling replacement wells and if you don't keep retreating existing wells, the ability of these wells to produce falls off precipitously. At $80 or $85 oil, we're drilling replacement wells. We're recompleting these wells like mad. At $60 oil and say $2 natural gas, the industry's ability to make full cycle returns on capital employed falls fairly precipitously. So the question really is more a function of price than anything else. In other parts of the world, and probably increasingly in the United States too, there are also political constraints. The prior political constraints had to do with the fact that oil and gas were politically incorrect, which is to say the Greta Thornburg objection. It seems that higher prices have obviated the Greta Thornburg concern a bit, which is to say when people's green credentials are benchmarked against their willingness to drive or not drive, it turns out that people are more pragmatic than we had anticipated that they are. The other risk, though, that we need to take into account is the predilection for government to consume more and more of the economic surplus from oil and gas through royalties or through taxation. During periods of high oil prices, the politics of envy kick in. The citizenry, or at least the politicians, look at the amount of ostensibly free cash flowing to the oil and gas industry and they want more and more of it. That's a real cost. It reduces the amount of capital available to the oil and gas industry to attract capital, to service debt, and to invest in their businesses. The reduction in productive capacity in places like Venezuela and Mexico is all about the politics of envy. It's all about the fact that their citizenry decided to fry the goose that laid the golden egg. During this conflict, we had some serious movement in gold and silver, too. There was a significant price drop. What are your thoughts on that? You've been following gold and silver and other commodities as well, right? Many investors, I think, labor under the misperception that gold does well during times of political turmoil. History hasn't shown that to be the case. Or if it has shown to be the case, it's shown to be a byproduct. My reading of precious metals markets is that precious metals markets do well when people are concerned about the maintenance of their purchasing power in fiat-denominated savings. U.S. Treasuries is an example. The other thing that we learn is that gold prices in the near term are partly a function of liquidity. We have seen greatly reduced liquidity in financial markets in the last two months. Gold is a financial asset. When people need to raise liquidity, they sell what has a bid, and gold has had a bid. Separately, one of the consequences, the near-term consequences, of the dispute in the Gulf, if that's the right phrase, has been the ironic strength in the U.S. dollar. My friend Doug Casey has described the U.S. dollar as the worst currency in the world, with the sole exception of all of the others. During periods of crisis, what happens is that people disintermediate out of things like UAE, Durham, or yen, or yuan, or euros into the U.S. The DXY, which is the index of the U.S. dollar relative to other currencies, has been on a tear. Gold is denominated in U.S. dollars, so gold strength often equates to dollar weakness. The third cause, I would suggest, is that as a consequence, ironic consequence, of declining U.S. credit quality, the long-term interest rates in the U.S. have risen. The Fed has done a pretty good job manipulating rates in the near bond down, but it would appear that they've lost control of the long bond. Increasing 10-year rates, in particular, increase the attractiveness of the 10-year bond and increase the strength in the U.S. dollar. I happen to believe that that strength is temporary. I happen to believe that gold and silver prices, over time, reflect confidence in the credit quality of the U.S. dollar and also reflect real interest rates. Specifically, I believe that the stated rate of inflation in the United States, measured by the CPI, underestimates deterioration of the purchasing power of the U.S. dollar. The CPI stated rate of inflation right now is about 2.6%. Common sense would tell you, if you look at a basket of goods and services that your family consumes in the period 2020 to 2026, that the purchasing power of your U.S. dollars is declining by more like 8% or 10%. Look at the price of gasoline, look at taxes, look at groceries, look at rents, look at health insurance, look at healthcare costs. The idea that the real purchasing power of the U.S. dollar is decreasing, is compounded, is silly. And that's important. If you juxtapose the deterioration in the purchasing power of your savings relative to the interest rate that you get paid on your savings, we'll see why gold has risen 9% compounded since the year 2000. Specifically, if you're getting paid 4.6% on a U.S. 10-year treasury, in a currency that's declining by 8% compounded a year, you aren't making 4.6%. You're losing 3.4%. What could make you more concerned about the maintenance of the purchasing power of your savings than a guarantee that you'll lose 3.5% compounded for 10 years? That's the source of gold's strength, in my own opinion. My own opinion is that the weakness that we see right now is partly a function of liquidity, and partly, ironically, the near-term impact of higher interest rates, and hence, temporarily, a stronger U.S. dollar. I also think that in order to understand the future of the gold price, that one needs to take into account whether or not the current levels of government indebtedness in the United States represent credit risk. And to there, I need to bore your audience with a little bit of arithmetic. The Internal Revenue Service suggests that the aggregate private net worth of American citizens is about $170 trillion, a big number, a big, big, big number. Against that, we have- Does that include the natural resources as well, or is it just the household wealth? It doesn't include things like privatizing Yosemite National Park or anything like that. Their source of revenue is you and I. If you own a bond and they forget to pay you and you go to foreclose on Yosemite, you will learn that your creditor has nuclear arms, and that's not available to you. So you have to throw that out. It's a specious argument. Their source of revenue is their chattel, you and I. So their source is 170T. The on-balance sheet liabilities of the U.S. government, what they owe the bondholders is $39 trillion. And by the way, increasing at $2 trillion a year before the war. A much more troubling statistic, one which doesn't get quoted much in the mainstream media, is that the Congressional Budget Office estimates that the net present value, not the nominal value, but the net present value of unfunded entitlement promises now exceeds $120 trillion. That is Medicare, Medicaid, Social Security, military pensions, federal government pensions, $120 trillion. And that number, according to the Congressional Budget Office, is growing between $2 and $4 trillion per year. That's the invisible debt, right? The debt that we have, the obligations we have, they're not really realized yet. We're going to realize them over the next few years. Not so invisible, my friend. People who are watching this podcast could look at me, a 73-year-old. Medicare, Medicaid, Social Security, my generations, apologies to you, have voted ourselves all kinds of cool benefits, but we forgot to pay for them. And the bill is coming due. So if you combine those two debts, the $39 trillion and the $120 trillion, you get to a stunning number, $159 trillion. Now, just for fun, let's subtract the Fed's own balance sheet from that, right? Let's not double count. That takes the number down to $153 trillion. So we own $170 trillion and we own $153 trillion. There's a $17 trillion delta, which we are using up at between $4 and $7 trillion a year. If you believe that righteousness will return to the American political scene, that we'll control spending and live within our means, you aren't concerned about that. If rather than being a believer, you're a student of history, you have a real reason to be concerned. It seems to me that where we own $170 trillion and we owe $153 trillion, and what we owe is increasing by $5 trillion a year, that we ask ourselves whether we will have an honest default. In other words, whether we say to the bondholders, too bad, so sad, no payment, but whether we say to old folks like me, yeah, you've paid into Social Security for 60 years, but there's no money. You ain't getting it out. That's an honest default, difficult to do politically. I think the answer is a dishonest default. In the decade of the 1970s, the last time that we confronted this sort of dilemma, the purchasing power of the US dollar, according to the Office of Management and Budget, declined by 75%, which is to say a basket of goods and services that cost a consumer $1,000 in 1970, cost that consumer $4,000 in 1980. Not coincidentally, in that decade, where the purchasing power of the US dollar, according to the US government, not some cranky old libertarian, declined by 75%, the gold price went up 26-fold from $35 an ounce to $850 an ounce. Now, by the way, I'm not suggesting that from here, the gold price goes up 26-fold. What I am suggesting to you is it is more likely than not, looking at history, that gold maintains its purchasing power, real purchasing power, while the US dollar loses 75% of its purchasing power. If you believe that, and you don't believe that there will be a political accord which balances our budget, then I think thinking about a 10-year doubling or tripling or quadrupling of the nominal price of gold, the US dollar price of gold, seems like a very prudent precaution as a saver. If you're enjoying this discussion with Rick Rule, we have an exclusive segment that we've filmed with him on Epoch TV. We'll leave you a link below. You can just go there and watch it and let us know what you think. Now let's go back to the rest of this episode. Rick, you have been studying a lot of these different metals and commodities, and copper is one of them that is more of an industrial commodity. Can you tell us what are you seeing right now with copper? Several things you need to know about copper. The first is that the demand that you and I are familiar with, the copper for AI data centers, copper for electric cars, things like that, is growing extremely rapidly, extremely rapidly. The material lifestyle that you enjoy in the United States is an energy-intensive lifestyle, and we want to live better, which requires more copper. Listeners to the Epoch Times probably recognize that there are a billion people on Earth who have no access to primary electricity, none. We have done a wonderful job as humans in the last 30 years reducing abject poverty around the world. We have caused 2 billion people worldwide from going from desperate poverty to being merely poor. We've done a great job, and I think we're going to solve that problem in the next 25 years, which is to say I think we will solve for the electrification of the world, which is a wonderful achievement, and it's going to require a ton of copper, well, many tons of copper. It is estimated that we will need as much copper in the next 35 years as we have mined in all of recorded history. That's truly a challenge. Meanwhile, we have for 30 years under-invested in copper exploration, in copper development, and in copper construction. I was at Metals Week in London at the end of last year, and I heard a really, truly surprising paper there that suggested that the 10 largest private copper producers in the world require spending 250 billion constant 2025 dollars, which is to say non-inflated dollars, to maintain copper production at current levels. 250 billion to maintain what they're producing. To maintain what they're producing. And by the way, we are producing at a deficit, which is to say we aren't producing as much as we're consuming. So without increasing the deficit, we need to But demand is increasing by 2% compounded. There is no way, no arithmetic way, that the world doesn't experience copper shortages in the next 10 years absent a global depression. You can have supply shortfalls if you have a demand shortfall and not rationed by price. But to the extent that we avoid a global depression, which I certainly hope we do, the only way that we're going to balance supply and demand out 5 years and 10 years will be to ration by price. That's the only way. The biggest copper producers in the world have identified a 250 billion dollar need, constant dollar need, and they've identified about 150 billion dollars worth of capital, which is to say they're 100 billion dollars short. The problem with that is that they estimate that the input costs of building and mining copper are increasing between 8 and 10% a year. So that 250 billion dollar number, that 250 billion dollar need, increases by 8 or 10% a year compounded for 10 years. It's a real challenge in front of us. Paradoxically, for those old guys like me who've been in the mining business for 50 years, it's a real opportunity too. But for most of the rest of the world, it's a pure challenge. You see a big opportunity in copper mining, in a sense. Enormous. I see a range of opportunities. The first thing is that copper mines, great big copper mines, ones that will have strategic importance to the Americans, to the Chinese, to the Japanese, mines that will produce for 25 or 30 years or 35 years, are much more valuable than people think they are. Much more valuable because they don't need to get permitted by government. They don't need to be financed to be built because they're already built. And because when, as I believe is inevitable, the copper price goes up, there won't be any construction lead time before they can take advantage of it. If you are making pretty good money at $4.50 copper, you're going to be making a lot of money at $10 copper. A lot of money. And there's going to be no lag time between the time the copper price rises and the time that you have copper available for production. That's really important to note. The really high quality, long life mines, the Camoas of the world, the Tanque Fungurumis of the world, the Grasbergs of the world, Las Bambas, those mines are worth a lot more than people think they are. It is inevitable, however, that because there has been a hiatus of new discoveries, high quality new discoveries, which will be at the lower end of the cost curve, will enjoy a lower cost of capital and better access to capital. There will begin to be competition to finance these mines into production in return for secured output. The Japanese through the Sumitomo's and the Mitsui's of the world are already willing to offer concessionary capital, as are the Chinese, as will the Americans. It's important to note big opportunities ahead of us in copper in the very near term. In the very, very near term, I suspect, ironically, copper to be weak because I think we're headed into an economic slowdown as a possible consequence of this war. Rick Ruhl, co-founder of the Battle Bank. It was great to have you on Market Insider. A pleasure. I've enjoyed this conversation. What do you think about this discussion with Rick Ruhl? Do you agree with his projections on these commodities? Let us know your thoughts. You can always comment. I'm Siamak. This is Market Insider. We'll see you next time.