Verdict with Ted Cruz - Running On Empty ft. Wil VanLoh

00:00:00.000 This is an iHeart Podcast.

00:00:02.320 Guaranteed human.

00:00:04.640 A global pandemic.

00:00:06.580 Over 16,000 Americans dead.

00:00:09.820 And over 17 million Americans have lost their job.

00:00:13.600 And global energy markets crushed by collapsing oil prices.

00:00:18.940 These are extraordinary times in which we live.

00:00:21.880 This is Verdict with Ted Cruz.

00:00:30.000 Welcome back to Verdict with Ted Cruz.

00:00:33.460 I'm Michael Knowles, Senator.

00:00:34.940 You're starting us off on a little bit of a downer there.

00:00:37.460 But I guess we're living in fairly down times.

00:00:40.480 I want to focus in on something you said there about the energy markets.

00:00:44.440 Because last I checked, oil was trading at something like $22 a barrel.

00:00:48.800 It was very, very low.

00:00:50.220 And I think for most people, the interaction we have with the oil industry is when we fill up our gas tanks.

00:00:55.780 So low oil prices are not necessarily a bad thing when we look at it.

00:01:00.320 What are we missing here?

00:01:01.320 Well, I think right now we're facing three different crises all at the same time.

00:01:05.360 We've got a global pandemic, the coronavirus crisis.

00:01:08.200 We're all familiar with the cases, the deaths.

00:01:10.720 And we're taking extraordinary steps to try to stop the spread of that virus.

00:01:15.460 There's an economic crisis.

00:01:17.100 A disaster, 17 million people in the last three weeks have filed for unemployment.

00:01:21.400 We've seen entire industries decimated, and that's producing enormous damage.

00:01:26.480 But at the same time, you've got energy markets.

00:01:29.200 And in particular, the global price of oil has dropped more than in half.

00:01:34.920 And the consequence of that is it potentially risks bankrupting most, if not every, American energy producer.

00:01:42.520 And particularly in my home state of Texas, that's devastating.

00:01:45.860 But if you end up seeing American energy producers driven out of business, that also has massive implications in terms of you and me paying higher prices at the pump in years to come.

00:01:57.320 And also geopolitically, making us dependent on foreign countries in a way that we just now managed to get free and independent from.

00:02:05.760 So what you're saying is we shouldn't be celebrating maybe a little dip in the gas prices right now because in the long term financially, that could really hurt us.

00:02:13.700 And also it has these national security implications that look pretty bad down the road.

00:02:18.440 I just want to point out something you said, Senator.

00:02:20.260 You said you flew out and met with the president.

00:02:22.300 You met with the president specifically because of this energy crisis.

00:02:26.260 That's how bad it's gotten.

00:02:27.840 No, that's exactly right.

00:02:29.120 On Friday, I got on a plane on a United commercial flight that was practically empty.

00:02:34.080 There were only maybe 10, 15 of us on it.

00:02:36.520 Flew up to D.C., went to the White House, had a two-hour meeting.

00:02:40.540 And we're all from states that are big energy producers.

00:02:43.420 And we started by writing a letter to the Saudi ambassador.

00:02:47.160 Then a couple of weeks ago, we did a conference call with the Saudi ambassador, nine of us.

00:02:51.280 I got to tell you, it was the most bare-knuckled, candid conversation.

00:02:55.440 Really?

00:02:55.820 I've ever had with a foreign leader in eight years in the Senate.

00:02:59.200 Can you give us a little behind the curtains here?

00:03:01.600 I can.

00:03:02.320 And so we're on a conference call with the ambassador.

00:03:04.820 Here's what I said.

00:03:05.660 I said, listen, no state in the union does more business with Saudi Arabia than Texas.

00:03:10.140 And right now, you're taking advantage of a global health pandemic to try to screw and

00:03:16.500 bankrupt people across Texas.

00:03:19.320 And it is devastating.

00:03:21.740 And the 13 of us who signed on to the letter, as a matter of national security, have consistently

00:03:27.960 been allies of the Saudis.

00:03:29.680 Saudi is an important counterpart to Iran.

00:03:32.300 Iran and the Ayatollah are really dangerous for national security. 1.00

00:03:35.460 But I said, listen, you know, we've been with you, but you're now trying to bankrupt people

00:03:41.200 in my state.

00:03:42.140 And that is not going to stand.

00:03:43.860 Now, here's the Saudi ambassador's defense.

00:03:47.040 But Russia, but Russia. 0.74

00:03:49.340 They sound like the mainstream media for the last three years.

00:03:52.580 Well, they do.

00:03:54.320 And I said, listen, Russia's our enemy. 0.99

00:03:57.840 We know that.

00:03:59.080 They behave like our enemy.

00:04:00.340 We treat them as our enemy.

00:04:02.340 You're supposed to be our friend.

00:04:04.180 You want us to treat you like Russia? 0.98

00:04:05.740 Fine.

00:04:06.220 You want to be our enemy?

00:04:07.340 How about we pull up all our soldiers out of Saudi Arabia?

00:04:10.840 We pull our Patriot missiles out there because every time someone screws with you in the Middle 0.99

00:04:14.580 East, you pick up the phone to call the American military and say, save our asses. 0.77

00:04:20.000 Well, then don't bankrupt people in my state. 0.99

00:04:22.420 And I was pissed.

00:04:23.740 Yeah.

00:04:23.920 And I got to tell you, it was interesting that call.

00:04:28.020 I think it got there.

00:04:29.260 In fact, I know it got their attention.

00:04:31.100 So you and I, we've invited a guest.

00:04:32.940 It's a longtime friend of mine, Will Van Lowe.

00:04:35.060 Will is the CEO of Quantum Energy Partners.

00:04:38.820 Now, that is an $18 billion private equity energy fund.

00:04:43.820 Quantum is the third largest driller in North America.

00:04:47.860 And I got to tell you, Will is someone who knows the energy markets as well, if not better

00:04:53.080 than anyone I know.

00:04:54.080 And so in the last couple of weeks, as I went up to meet with the president and major energy

00:04:58.520 CEOs last week, Will was someone we literally spent probably six, seven hours on the phone

00:05:03.620 trying to understand what's happening here and the real threat to jobs and to energy security

00:05:10.120 in our country.

00:05:10.720 And so, Will, welcome to Burning.

00:05:11.820 Will, for so many years, we complained about how we're dependent on the Middle East for energy.

00:05:16.000 We are totally trapped for energy.

00:05:19.200 And yet this technology helped to lead us away from that and get us to what I guess we'd call

00:05:24.580 energy independence until maybe five minutes ago.

00:05:26.860 And that's right.

00:05:28.360 And I think that is a huge, when you think about, the United States has had more wells

00:05:33.640 drilled in it than the rest of the world combined.

00:05:35.840 That's a pretty amazing statistic to think about.

00:05:38.320 And when it comes to shale, do we have a lot of it here?

00:05:40.500 Yeah.

00:05:40.800 Oh, for sure.

00:05:42.400 Probably 95% of all shale production in the world is in the United States.

00:05:47.760 Part of that's due to our geology, right?

00:05:50.600 So they've tried it, for example, in Europe.

00:05:52.820 They don't have the same rocks over there.

00:05:54.460 Now, there's other parts of the world where there's a lot of shale, but those are parts

00:05:58.280 of the world that typically have a lot of conventional oil and gas as well.

00:06:02.600 And if you don't need to drill, it costs more money to drill wells unconventionally, horizontally,

00:06:07.620 and put the big fracks on them.

00:06:08.900 So places like in the Middle East, where they have a lot of conventional production, they

00:06:12.960 don't need to drill horizontal wells.

00:06:15.280 So the last 10 years, we have this technological innovation.

00:06:19.600 We discover how to access massive reserves that were there, but we didn't know how to get

00:06:25.180 to it.

00:06:26.280 And suddenly, America passes everybody.

00:06:29.080 We pass Saudi Arabia.

00:06:30.140 We pass Russia. 0.91

00:06:30.960 We become the top producer in the world.

00:06:34.480 Who is it that drove that?

00:06:36.200 And is the energy industry...

00:06:38.780 Look, I think a lot of people think of energy, and they think of big oil.

00:06:41.660 They think of a couple of giant companies, Exxon and Shell, and these giant companies.

00:06:46.160 Is that who did this innovation?

00:06:48.220 No, and that's the interesting thing, because so much of the dialogue right now in Washington

00:06:52.340 is involving the Exxons and the Chevrons of the world. 0.94

00:06:56.240 And there are certainly big players in Shell today, but they didn't drive the innovation.

00:07:00.420 It was actually the independents that drove that innovation in the United States.

00:07:03.680 So what's an independent?

00:07:05.080 Well, an independent is basically an oil and gas company that's not a major.

00:07:09.200 So the majors are typically integrated companies.

00:07:12.160 They're the largest companies in the world in terms of publicly or privately owned, outside

00:07:18.700 of government-owned oil companies.

00:07:20.900 And these majors, I mean, they're massive.

00:07:23.160 I mean, some of them, they have GDPs that rival companies.

00:07:25.920 Well, they do.

00:07:26.480 Like Exxon, for example, they produce over 4 million barrels a day, right?

00:07:30.160 There's only a handful of countries in the world that produce over 4 million barrels a

00:07:34.960 day.

00:07:35.120 But the shale revolution was started and driven by independents.

00:07:40.980 And independents, you're talking, you and I both spent a lot of time out in Midland, Texas.

00:07:44.760 You're talking sometimes 5, 10, 20 guys in a little office who were raising some money

00:07:52.460 and going out and drilling holes and innovating.

00:07:56.440 That's what drove this entire revolution and changed the entire geopolitics?

00:08:01.300 It did.

00:08:01.840 And to be fair, the technology was probably driven more by the larger public independents.

00:08:07.700 Companies like Chesapeake, companies like Pioneer, those types, they drove the technology.

00:08:13.600 But the smaller independents were very quick to get in and really take that.

00:08:19.920 And they're much more nimble than the public companies.

00:08:22.260 So they take the big technology revolutions and then they do a lot of evolutionary changes

00:08:29.620 in that technology.

00:08:31.080 And they get it out there very quick and they're able to access large amounts of land.

00:08:36.140 And so the independents, both the public, the larger public independents, as well as

00:08:39.900 the thousands of smaller kind of mom and pop independents, they're really the ones that

00:08:44.680 have made this independence of energy possible in this country.

00:08:49.180 Bill, I don't want to rain on your parade here, but this sounds too good.

00:08:53.500 This sounds too good to be true right now because you've got this great energy revolution

00:08:58.920 here.

00:08:59.400 You're empowering so many people, American ingenuity, and then the prices all plummet.

00:09:05.180 So I understand how it worked out so well.

00:09:09.320 What went wrong?

00:09:10.880 Well, let's back up a little bit.

00:09:13.580 And you think about prices plummeting.

00:09:15.060 Prices plummeted from about $60 a barrel at the beginning of the year down to about $20

00:09:19.980 a barrel a few weeks ago.

00:09:21.280 Now they're up in the mid to high 20s now.

00:09:23.900 But let's not forget before the shale revolution started in 2008, oil was $147 a barrel.

00:09:31.000 Okay.

00:09:31.140 Wow.

00:09:31.760 Hold on a second.

00:09:33.440 $147 a barrel.

00:09:35.120 And then it came down to $50, $60 a barrel.

00:09:38.120 And now it's plummeted to the 20s.

00:09:40.260 Right.

00:09:40.460 And through American innovation and ingenuity, we were able to get the cost.

00:09:46.160 Initially, these shale wells were very expensive, and you didn't recover a lot of hydrocarbon.

00:09:50.660 And through a lot of science, through a lot of just innovation and trial and error, we were

00:09:55.060 able to meaningfully perfect, if you will, the way we drilled and completed these wells.

00:09:59.600 And we got the cost down to a level where at $50 to $60, the U.S. oil and gas companies

00:10:06.180 can make a respectable profit.

00:10:09.960 And the industry for the last four or five years has been chugging along.

00:10:13.620 And $50 to $60.

00:10:15.060 Look, most of us don't buy a barrel of oil.

00:10:16.980 So that number doesn't mean anything to us.

00:10:19.440 What does that mean, $50, $60 oil?

00:10:22.200 What does that mean in terms of a gallon of gas, a gas pump?

00:10:25.560 And understanding a lot of the cost of gas is actually taxes, right?

00:10:29.600 And those don't change.

00:10:31.740 So $3 to $4, depending on the state and city you live in, is what $50 to $60 oil transit is.

00:10:37.900 So Michael will pay a lot more in California than we will in Texas.

00:10:40.320 He will absolutely pay more.

00:10:43.400 Although I don't know that you need to fill your electric scooter, Michael, so that may help.

00:10:46.760 That's the thing.

00:10:47.320 We actually just run on moonbeams out here, so we don't need any sort of energy.

00:10:51.720 So what I'm hearing, though, is you don't want the price of oil to be so expensive that

00:10:55.980 it's going to kill us all at the pump.

00:10:57.440 But you also don't want the price of oil to be so low that you put all of these companies

00:11:01.600 out of business.

00:11:02.440 You want there to be some medium in there.

00:11:05.660 What are the odds that we're going to be able to get back to that before the American 0.99

00:11:08.780 energy industry is just destroyed?

00:11:11.900 Yeah.

00:11:12.420 You know, right now, it's not looking good.

00:11:14.360 It's not looking good for two reasons.

00:11:16.000 One was Saudi and Russia have decided they were going to basically launch a market share

00:11:21.880 war on the U.S.

00:11:23.000 And as Senator Cruz said a minute ago, you know, the U.S. went from being a huge energy

00:11:27.860 importer.

00:11:28.720 You know, we imported more than 12 million barrels a day less than a decade ago to literally

00:11:34.000 over the last six months or so, we given on any given week, we will export or import

00:11:40.080 a few hundred thousand.

00:11:41.120 So we'll be a net exporter or a net importer of maybe 100 or 200,000 barrels, right?

00:11:45.620 And so that, if you think about that and you think about the impact on our economy, that's

00:11:50.240 depending on the price of oil, but say at $50 oil, that's about $250 billion a year that

00:11:56.860 stays here in the U.S.

00:11:58.320 That U.S. 0.96

00:11:59.320 oil and gas industry has created additional revenue, the taxes that come off of that,

00:12:03.280 the millions of jobs that were created out of that.

00:12:05.540 What does that mean for jobs?

00:12:06.660 How does that, whose jobs are we talking about here?

00:12:09.860 Well, we're talking about very high paying middle and upper middle class jobs.

00:12:15.800 We're talking about engineers, geologists, geophysicists, production engineers.

00:12:20.780 We're talking about a lot of jobs out in the field.

00:12:23.540 So for both lots of blue collar jobs, but also a lot of white collar jobs.

00:12:29.080 So if we lose American energy production, if these companies go bankrupt, we're still

00:12:38.420 going to need energy.

00:12:39.220 When the economy comes back, we're still going to drive our cars, we're going to fly airplanes.

00:12:43.720 And so if the American companies are bankrupt, where are we going to get our energy?

00:12:49.040 We're going to get it where we used to get it.

00:12:50.760 And that's from foreign sources like the Middle East, like Russia.

00:12:54.340 And that's really, to me, Senator, that the key question the U.S. has to ask itself is,

00:13:00.540 do we want to be energy independent or not?

00:13:03.720 And the answer to that question, all policy will flow from whether the answer is yes or no.

00:13:09.580 Sorry to interrupt, Will, because most people, I think, want that energy independence.

00:13:13.580 That's what we always hear our politicians talking about.

00:13:15.780 Certainly what I want for us.

00:13:17.200 But what you're describing is the problem here.

00:13:19.280 I just assumed it was all the coronavirus that's upsetting all the global markets.

00:13:23.020 You're saying there's something else in play, which is this price war between Russia and

00:13:28.840 Saudi Arabia going after the United States.

00:13:31.480 What does that mean?

00:13:32.480 I mean, is that related to the virus or is that a totally separate issue?

00:13:35.740 Totally separate.

00:13:36.720 And to be fair, the demand destruction that's associated with coronavirus is a much bigger

00:13:42.440 issue today in the near term.

00:13:44.660 If I understand it globally, the demand for oil in normal times four months ago was between

00:13:51.160 95 and 100 million barrels a day.

00:13:53.480 About 100 million barrels a day.

00:13:55.740 As a result of the economy slowing down and grinding to a halt in the U.S. and globally,

00:14:02.920 it's dropped to about, what, about 70 million barrels a day?

00:14:06.180 There's a lot of different estimates out there, but I'd say they range anywhere from a 20 to as

00:14:10.900 much as probably 35 million barrel a day demand destruction.

00:14:13.680 So that would say somewhere between 65 and 80 million barrels a day is currently what

00:14:18.440 the globe is using today.

00:14:20.180 So that had a big negative impact on price.

00:14:22.920 When a third or more of the demand disappears.

00:14:26.400 Right.

00:14:27.880 It's never happened.

00:14:29.920 It's beyond without precedent.

00:14:32.260 Well, that's everybody's car sitting in their driveways and everyone's airplanes staying parked

00:14:36.200 at the hangar and nobody flying and very few people driving.

00:14:39.820 And to put that into context, during the great financial crisis, total global demand dropped

00:14:44.720 by only about two and a half to three million barrels a day.

00:14:47.320 Wow.

00:14:47.760 So we're looking at 10 times as much reduction in demand now as during the financial meltdown.

00:14:55.320 That's exactly right.

00:14:56.560 But then you've got a second component, which is you have the Saudis and the Russians, right

00:15:01.040 as coronavirus is breaking.

00:15:03.040 Yes.

00:15:03.300 It's deciding this is a great opportunity to screw the Americans, to bankrupt the American 0.80

00:15:11.380 energy business.

00:15:12.360 And listen, what you're doing, drilling in West Texas shale, the Saudis and Russians have 0.99

00:15:17.980 hated it because you pass them up with America as the top producer.

00:15:22.580 And so they're sitting there, if I understand this right, they're taking this as an opportunity.

00:15:26.120 All right, we've got a crisis.

00:15:28.040 Let's put these guys out of business.

00:15:29.460 Let's bankrupt them so that when all is said and done, we're the only players left in the

00:15:34.620 game.

00:15:35.020 Senator, if you think back to when the oil shell revolution started and you look at total

00:15:40.400 global supply growth since then, so about eight or nine years ago, 80% of total global

00:15:46.960 supply growth has come from the United States of America.

00:15:49.740 Okay.

00:15:50.040 That's a country that today produces about 13, 14%, maybe 15 if you add in all the NGLs and

00:15:56.740 other liquids.

00:15:57.620 What's an NGL?

00:15:58.160 I'm sorry, natural gas liquids.

00:16:00.260 But let's see, the U.S. today produces about 15% of global liquid supply, yet we've accounted

00:16:06.560 for 80% of total global liquids growth over the last decade.

00:16:11.980 That's extraordinary.

00:16:13.240 And that challenged OPEC supremacy and it challenged Russia supremacy.

00:16:18.580 And it also helped, if I understand right, drive the price down quite a bit.

00:16:23.120 By two thirds.

00:16:24.140 It drove prices.

00:16:25.000 If, had the U.S. share revolution not happened, think about we were at $147 a barrel and that

00:16:31.240 was pre-oil shales.

00:16:33.400 Prices probably would have gone a lot higher from there.

00:16:35.980 And so that huge drop in what Russia and Saudi, I actually think that they may not have chosen 0.77

00:16:43.480 to launch this price war had it not been for coronavirus.

00:16:45.640 Because both countries, if you look at their ability to, how long can they go with low oil

00:16:52.500 prices?

00:16:53.360 You know, Saudi today is much worse equipped for a long price war than they were back in 1.00

00:16:59.640 2014 during the last big collapse in prices, right?

00:17:03.160 Because they've depleted a lot of their sovereign wealth funds.

00:17:05.820 And their break-even cost today is probably $80 a barrel.

00:17:11.580 And what I mean by that is they fund their entire government out of their oil revenues.

00:17:15.140 Whereas Russia's is only about $40 to $45 a barrel.

00:17:19.120 So Russia... 0.78

00:17:19.680 What they're doing used to be what we would call an antitrust law, predatory pricing.

00:17:24.460 Right.

00:17:24.600 In that they're, when they flooded the market with oil and they announced they were going

00:17:29.340 to do that and drove the prices way down, they were taking a big hit themselves, but

00:17:34.460 they were doing it to bankrupt their competitors and then sweep in and dominate the market.

00:17:39.240 That's right.

00:17:41.180 Let me pause for a second and kind of play devil's advocate.

00:17:44.240 You mentioned two technological innovations that helped us access all these massive shale

00:17:50.100 reserves.

00:17:50.440 One was horizontal drilling, but it was combining that with hydraulic fracturing, fracking.

00:17:56.520 Look, fracking, I've heard a lot of scary things on the internet about that.

00:17:59.840 I've heard it messes with the water table.

00:18:02.440 You can light the water on fire, that's what they say.

00:18:05.100 So is that for real?

00:18:07.280 Should I be worried that fracking makes it dangerous to drink the water?

00:18:12.380 No.

00:18:12.940 You know, there's probably not a bigger set of environmentalists in terms of people that

00:18:17.400 like the outdoors, that like the water, that are, you know, really love the earth than

00:18:21.720 people, the good people you'll find in the oil and gas business, right?

00:18:24.740 And I think there is, you got to remember when we frack a well, these wells are anywhere

00:18:30.440 between eight and 15,000 feet below the earth's surface.

00:18:34.040 The surface water that people drink is anywhere from 50 feet to maybe three or 400 feet below

00:18:39.800 the surface.

00:18:40.100 So let me make sure I understand that.

00:18:41.440 You got the surface 50 to 300 feet down.

00:18:44.320 Now that's not that far down, that's the water table.

00:18:47.200 That's where the water is that we get our drinking water.

00:18:49.220 That's correct.

00:18:49.900 So that's not where you're fracking.

00:18:51.340 No.

00:18:52.140 You're fracking.

00:18:53.340 10,000 feet below that.

00:18:54.560 And 10,000 feet, if my math is right, that's two miles.

00:18:57.100 About two miles.

00:18:58.100 Two miles of rock down low.

00:18:59.740 So where you're doing this is two miles away from the water.

00:19:03.620 Right.

00:19:05.400 All right, let me ask a different question.

00:19:06.660 So my daughter, Caroline, you know, Caroline, she's 11.

00:19:08.860 And she actually said to me last night, she said, you know, everything that's happened

00:19:13.520 in this crisis has been really good for the environment.

00:19:15.700 The environment is cleaning up.

00:19:17.620 That's right.

00:19:17.980 And listen, it is true.

00:19:19.120 If we have no production, if all human activity stops, that would be good for the environment.

00:19:26.120 It's just not very good for people.

00:19:27.640 That's right.

00:19:28.440 Let me ask you something.

00:19:29.360 What happens if all these independent energy producers go out of business, the economy

00:19:39.100 gets going again after the crisis, and we're dependent once again on the Middle East for 0.94

00:19:45.840 oil?

00:19:46.200 Is that good or bad for the environment?

00:19:48.080 You know, it's a great question because I think so many people think, you know, hey,

00:19:52.400 let's put the U.S. oil and gas producer out of business because oil and gas is bad for

00:19:57.460 the environment.

00:19:57.900 But that doesn't mean people are going to stop driving their cars.

00:20:00.940 It doesn't mean people are going to stop flying in airplanes.

00:20:03.100 It doesn't mean people are going to stop buying iPhones, which, by the way, take hydrocarbon

00:20:07.340 energy and the plastics, a lot of the parts.

00:20:10.300 Everything we have in our modern life, Senator, revolves around hydrocarbons in some form or

00:20:15.520 fashion.

00:20:16.320 So the need for them is not going to go away.

00:20:19.440 We will just shift the source of where we secure those from, and we'll go back to where we were

00:20:23.560 a decade ago, which is sending hundreds of billions of dollars overseas to people that,

00:20:29.020 quite frankly, don't like us very much.

00:20:31.220 We will lose significant geopolitical influence.

00:20:33.880 And if I remember right, an awful lot of the 9-11 terrorists who attacked us were from

00:20:38.840 Saudi Arabia.

00:20:39.600 They were.

00:20:39.800 They had their funding stores from there.

00:20:41.200 And so fueling the Middle East with billions of American dollars is not good for keeping

00:20:47.180 America safe.

00:20:47.860 It's not.

00:20:48.420 And it'll also cause the loss.

00:20:49.840 If you think about the biggest growth engine in U.S. jobs coming out of the great financial

00:20:54.320 crisis was the energy industry.

00:20:56.120 And the tens, if not hundreds of billions of dollars in taxes that the energy industry

00:21:01.980 pays every year to school districts, to other municipalities, hospitals, building roads,

00:21:09.180 bridges, infrastructure.

00:21:11.360 Right.

00:21:11.720 But this is just Texas, right?

00:21:13.420 I mean, we're only talking Texas jobs.

00:21:14.880 There's none anywhere else in the country.

00:21:16.460 No, there's a number of other places throughout the United States, both.

00:21:20.040 Like where?

00:21:21.020 Well, you've got the Bakken.

00:21:22.620 It's in North Dakota.

00:21:24.160 You've got the DJ that's in Colorado, the powder that's in Wyoming.

00:21:28.820 You've got the Permian, which is New Mexico.

00:21:31.520 You've got several plays in the scoop stack in Oklahoma.

00:21:35.340 That's just on the oil side.

00:21:36.900 Pennsylvania.

00:21:37.320 Well, as I say, on the gas side, the largest gas field in the United States, really one

00:21:41.440 of the largest, maybe the largest in the world, sits under Pennsylvania, West Virginia,

00:21:46.280 Ohio, and New York.

00:21:47.620 You've also got California.

00:21:48.880 California is a huge producer, right?

00:21:50.600 They are a huge producer.

00:21:51.500 In many ways, I can speak to California.

00:21:53.720 It's a completely lost cause.

00:21:55.580 But of course, we don't want the industry to go out here.

00:21:58.280 I just, I see, Will, your point that this is all over the United States, that we're talking

00:22:03.040 about a lot of jobs and a lot of industry all over the place.

00:22:05.540 So what do we do now?

00:22:07.200 I mean, looking down at this crisis, you've got the markets collapsing, rather.

00:22:12.160 How do we fix it?

00:22:13.500 What are our options before it's too late?

00:22:15.320 Well, you know, I think we have, again, we have to start with, we got to decide we want

00:22:20.200 to fix it, because that is, part of the issue is obviously the Saudi and Russian, what they've

00:22:25.580 done in trying to flood the market with additional barrels to drive down prices.

00:22:30.220 But the other, but the much bigger issue in the short term is obviously demand destruction

00:22:34.680 associated with coronavirus.

00:22:36.660 And so, you know, at these prices, the U.S.

00:22:40.120 independent cannot make money.

00:22:41.420 Okay, they just flat can't make money.

00:22:43.540 So there's, there is, there is that fact.

00:22:45.440 They're just revenues will not exceed their, their expenses.

00:22:49.100 But the other thing we have to also look at as an industry is.

00:22:52.680 And that's just simple math that, that, that, that it costs a U.S.

00:22:56.220 producer, what, about $40 a barrel to produce.

00:22:59.080 And so $20 a barrel, it doesn't work if it costs twice as much as the price to produce,

00:23:03.960 you're out of business.

00:23:04.680 At these prices, there's not probably, you know, less than 5% of all locations in the United

00:23:10.600 States are economic at these prices.

00:23:13.660 Okay.

00:23:14.940 That's, well, Michael, you know, one of the things, I mean, you asked, what do we do about

00:23:18.860 it?

00:23:19.120 Yeah.

00:23:19.920 There's, there's both a component of it.

00:23:23.020 We get our economy going again, but there's also a component of it, the foreign policy component.

00:23:28.020 I'll tell you, and you and I have talked about this.

00:23:30.740 That's something I've been really active in is taking on the Saudis. 1.00

00:23:33.820 In my office, I brought my national security team in.

00:23:36.840 I said, all right, I want a list of steps we can take to ratchet up heat on the Saudis 1.00

00:23:41.840 to make it more and more painful.

00:23:43.240 We looked at things like sanctions on individual, uh, officials in, in the Saudi government that

00:23:49.980 had directly targeted American businesses and said, if you're going to wage economic

00:23:53.460 warfare on us, well, well, welcome to the game.

00:23:56.420 And, and you better be prepared for the consequences.

00:23:58.680 Rewind to last week, Friday in the Oval Office meeting with the president, the president had

00:24:04.780 spoken in the, in the preceding week, both to Putin and MBS, the head of Saudis.

00:24:09.360 He had leaned in hard.

00:24:11.800 And it's interesting.

00:24:12.700 The president didn't start out that way.

00:24:14.140 I talked to the president a couple of weeks ago and his instinct is actually where you

00:24:17.960 started this show, Michael.

00:24:19.000 He was like, well, you know, aren't low, low oil prices good.

00:24:22.180 Isn't that a good thing?

00:24:22.700 He was thinking of it.

00:24:23.440 He's a real estate guy from a consumer's perspective until I and others started exploring.

00:24:28.680 Listen, we're looking at millions of jobs that go away.

00:24:32.120 And if we destroy America's producing capability, it makes the bad guys who hate us more powerful

00:24:38.180 and it makes America weaker.

00:24:40.140 That's a bad outcome.

00:24:41.820 Well, what the president said is, is that MBS and Putin had agreed to, to, to stop flooding

00:24:48.800 the market, to reduce their production.

00:24:51.540 He tweeted out two weeks ago, they were reducing their production 10 million barrels a day.

00:24:56.520 That resulted in oil, just that announcement going from 20 bucks a barrel to 27.

00:25:03.060 In the white house meeting, what he told us is he said, it's actually going to be more

00:25:07.140 than more than 10.

00:25:08.220 It's going to be more like 15 million.

00:25:10.540 And just today, the news broke that they're talking about 20 million.

00:25:15.180 Now the proof is in the pudding and we'll see if they actually do it.

00:25:18.700 Yeah.

00:25:19.220 But if they stop flooding the market, if they pull back, that will help.

00:25:23.380 It won't solve the problem.

00:25:24.500 Problem won't get solved until the economy comes back and people are able to drive their

00:25:29.180 cars and fly airplanes.

00:25:30.960 But, but, but if Russia and, and the Saudis follow through and, and, and stop flooding

00:25:35.840 the market, stop taking advantage.

00:25:37.920 In the meantime, before the economy comes back, if they're talking about cutting daily production

00:25:42.480 by, by 20 million barrels, okay, that's great.

00:25:45.640 How much do we need to actually see an impact on the American energy sector?

00:25:51.040 Right.

00:25:51.320 So, you know, going back again, I think there's somewhere between 25 and 40 million barrels

00:25:56.500 of demand destruction right now.

00:25:58.520 And, and so look, is 10 or 15 or 20 million barrels a lot?

00:26:03.540 It is.

00:26:04.440 It's nowhere close to what we need to really balance supply and demand.

00:26:08.820 And the fact is, is prices were cratering long before this, you know, it became apparent

00:26:15.640 of how bad, because most of the price drop happened when people were thinking demand destruction

00:26:20.460 was three to five million barrels a day.

00:26:22.780 Historically, if a producer, like if OPEC were to flood the market, even with a couple

00:26:27.340 million barrels a day of excess supply, meaning only a million or two million barrels difference

00:26:31.360 in supply and demand, prices would drop in half.

00:26:34.080 Okay.

00:26:34.920 So what we're talking about here is it's, it's a number that's really irrelevant.

00:26:39.680 Number one, number two, there's a conditionality on everything Saudi and Russia, Saudi and Russia

00:26:45.380 both have said in order to enact these cuts.

00:26:48.380 So for the econ wonks out there, there's, there's high price elasticity.

00:26:52.280 There's very high price elasticity.

00:26:54.680 And, and if you, and Saudi and Russia both said, if, if we're going to do these cuts, we

00:27:00.020 want contributions from all the major exporting countries in the world.

00:27:04.420 Including the U S including Norway, including Mexico.

00:27:08.260 So there's all these other countries that they want to participate in this.

00:27:11.520 And I think the president's been very clear.

00:27:13.500 The U S is not going to deliver a production cut.

00:27:16.360 Now he has talked about, there's going to be natural shut-ins and declines, and that is

00:27:21.200 going to be the case.

00:27:21.940 The question is, is that going to be good enough for the Saudis and for the Russians?

00:27:25.900 The other thing though, to keep in mind is every time OPEC or OPEC plus has said, we're

00:27:30.880 going to make a cut.

00:27:32.100 There's generally speaking, not great adherence to those cuts.

00:27:35.600 So they may say they're going to make a cut, but the actual cuts usually are much less.

00:27:40.120 So trust, but verify, and maybe even don't trust.

00:27:42.760 Let me bring out one other issue.

00:27:44.440 Because it's an important issue to, to, to understand.

00:27:47.500 And, and this is something you and I have talked a lot about, and it was the one deliverable

00:27:51.100 that came out of the white house meeting last week.

00:27:53.240 So we spent two hours talking about energy.

00:27:55.280 We talked about pressuring the Saudis and Russians. 0.99

00:27:57.840 That seems to have produced some results, but we also talked about access to capital.

00:28:01.900 And, and, and this is a piece where, where I think a lot of people don't understand

00:28:05.280 what's going on, but it's really important.

00:28:07.520 Wall street, the last couple of years has been cutting off more and more capital to

00:28:12.840 energy.

00:28:13.400 There, there, there's, there's a movement called the ESG movement, which is putting pressure

00:28:16.700 on wall street to say, we're not going to fund American energy producers.

00:28:21.900 And the consequence of that has, has, has been really significant.

00:28:26.080 So, so, well, I, I want us to understand it.

00:28:29.180 Let's say you're a small independent producer.

00:28:32.160 You're in West Texas, you're in New Mexico, you're in Colorado and you're in Pennsylvania

00:28:38.180 and the banks decide to cut off your capital.

00:28:43.620 How does that happen?

00:28:44.380 How does that work?

00:28:45.200 Why, why does capital matter?

00:28:46.600 And what would that, how would that impact you?

00:28:49.120 So in any oil and gas business, uh, companies obtain capital from banks and what's called RBLs

00:28:55.680 reserve, reserve based loans.

00:28:57.160 And those RBLs are redetermined every six months.

00:29:00.240 Okay.

00:29:00.580 So think about public companies.

00:29:03.200 They go issue debt and it's seven, 10, 15, 20 year debt.

00:29:06.200 They don't have to think about refinancing or having that debt called for a very long

00:29:10.220 time.

00:29:11.180 The independent producers in this country, the vast majority of them can't access that

00:29:15.420 kind of public capital to term out their debt.

00:29:17.920 And so they go to banks and the bank loans, if they get redetermined every six months.

00:29:22.060 So historically it's been a very symbiotic system and the banks understand the importance

00:29:26.380 of the business and they understand, you know, they, they loan companies money and they're

00:29:29.680 not going to change it a lot quickly in terms of the amount they're loaning them.

00:29:32.900 Well, what's happening now because prices have dropped so much and the banks have, have

00:29:38.140 actually had some significant losses on those RBLs.

00:29:41.660 They've made a decision that are going to significantly tighten the amount of credit to the sector,

00:29:46.040 but they had made that decision really before this price drop.

00:29:49.080 They'd made that to your point.

00:29:50.240 They've been getting a lot of pressure from, you know, ESG centric groups.

00:29:54.540 So the pressure is energy's bad.

00:29:57.440 It's, you know, killing the, killing the climate.

00:30:00.160 And so don't invest in energy companies.

00:30:03.000 Here's the fallacy of that Senator is, as we said earlier, unless people are going to

00:30:07.840 quit driving cars and flying in airplanes and buying products, they're going to keep

00:30:12.600 consuming the energy.

00:30:13.880 You were talking about reserve based lending.

00:30:16.340 And I want to make an analogy to, to, to say a home mortgage, uh, let's say you've got

00:30:21.660 a home that that's valued at $400,000.

00:30:24.840 So, so you get a mortgage, let's say for $350,000, you're paying your mortgage and it's based

00:30:31.020 on the value of the home.

00:30:32.460 Now, now drawing that analogy to, if you've got an energy producer, they get a loan based

00:30:37.560 on the value of their reserves, the reserves that they're, they're producing and going to

00:30:41.780 produce.

00:30:42.160 But you said in the energy business, every six months they come redeterminate.

00:30:47.200 So what that would mean, if you think about your home mortgage, you got a $350,000 mortgage

00:30:52.300 on what you think is a $400,000 house.

00:30:55.840 Suddenly the bank comes to you six months later and says, Michael, your $400,000 house, we

00:31:00.820 now think is a $200,000 house.

00:31:03.860 You borrowed $350,000.

00:31:05.840 So write me a check for $150,000 now.

00:31:08.300 And that's what's happening, Senator.

00:31:09.660 That is literally, we're hearing stories every single day about banks going to companies

00:31:16.020 and saying, you need to put equity in and pay down this loan, or we're going to throw your

00:31:21.060 loan over to the workout group.

00:31:22.520 And, and so in terms of deliverables from the white house meeting, what, what I suggested

00:31:26.440 to the president on Friday, I said, Mr. President, there is a real problem with the banks cutting

00:31:31.900 off capital to these American energy producers and ending American energy production.

00:31:36.280 And, and we need to make sure that, that energy is not discriminated against.

00:31:41.540 And, and so I suggested to him, Mr. President, you should ask the energy secretary, Dan Bruyette,

00:31:47.080 who is a Texan and a good friend, ask him to work with Steven Mnuchin, the treasury secretary,

00:31:52.220 to work with the bank regulators, to make sure that the banks are not discriminating and

00:31:59.080 bankrupting these energy companies in America and causing millions of people to lose their

00:32:03.660 jobs.

00:32:03.960 And the president said, I'll do it.

00:32:05.980 He directed Dan, Dan was sitting in the meeting, make it happen.

00:32:09.340 I can tell you, I've spoken with Dan almost every single day since then, uh, in order to

00:32:16.060 make sure that we just have the capital so these guys can survive. 0.92

00:32:19.760 Well, that's great news because it does seem from what I'm hearing, like it's one damn thing 0.65

00:32:24.340 after another that the American energy industry has to face.

00:32:28.040 And this leads to my last question.

00:32:30.260 We're running out of time here, but I suspect we're running out of time to solve this problem.

00:32:35.180 Will, do you have any sense of the timeline here before we reach a point at which we can't

00:32:39.880 turn this around anymore?

00:32:41.140 Well, if you think about the amount of capital that it took to, to basically get the shell

00:32:46.520 revolution to where it is today, it's about a trillion and a half dollars.

00:32:49.940 Okay.

00:32:51.040 And that capital, a lot of it was not spent very efficiently and public investors lost

00:32:58.340 a lot of money over the last decade on their investments in the energy space.

00:33:01.980 The problem is today is that magnitude of capital will never come back to our sector again.

00:33:07.720 And so if we lose the momentum, the problem with shell wells is they come on at prolific rates,

00:33:14.080 but they decline very rapidly.

00:33:16.020 And so what's going to happen over the next 12 to 18 months is U.S. production will decline

00:33:22.160 probably two to two and a half million barrels a day.

00:33:26.380 Okay.

00:33:26.600 That's off a base of 13 million barrels.

00:33:28.520 That's very significant.

00:33:30.020 And we'll never be able to recover that.

00:33:31.860 And if you shut in those wells, we don't know if you could open up again.

00:33:34.680 Well, you'll open them up, but there's a big chance you've damaged the reservoirs.

00:33:38.780 Okay.

00:33:39.160 So they'll come back on less productive.

00:33:41.140 But the bigger problem is that shale is very expensive to develop.

00:33:46.880 It's like a treadmill.

00:33:49.040 And the more you produce, the faster the treadmill goes.

00:33:52.360 And you've got to keep reinvesting and reinvesting and reinvesting.

00:33:55.600 And as soon as you break that cycle of reinvestment, you can never get back up unless you put

00:34:00.600 a lot of outside capital back into the system again.

00:34:03.980 So for every dollar that came in the door, the energy industry was spending about $1.50.

00:34:08.980 Okay.

00:34:09.560 That's how we grew production from 5 million barrels a day in 2010 to 13 million barrels

00:34:15.820 a day this month.

00:34:18.180 And, but, but now that that cycle has been broken.

00:34:20.760 5 million to 13 million in 10 years.

00:34:23.080 10 years.

00:34:23.820 But now that cycle has been broken.

00:34:25.320 So you ask the question, how much time do we have?

00:34:27.280 Not much.

00:34:27.800 And that's, that really is the critical, critical question.

00:34:30.840 In terms of this crisis that's hitting the energy sector and the American energy producers,

00:34:35.160 I got to tell you, for me, this is very personal and real.

00:34:41.500 As you know, I grew up in Houston.

00:34:42.940 Houston's my hometown.

00:34:44.980 When I was a kid, my parents owned a small business and it was in the oil services world.

00:34:50.640 It was a seismic data processing company.

00:34:52.540 So my parents are both mathematicians, computer programmers.

00:34:55.760 And in 1986, oil collapsed.

00:34:59.480 It dropped to $7 a barrel.

00:35:01.960 Texas went into a full on depression.

00:35:04.060 I was in high school at the time.

00:35:05.540 And, and I still remember my dad.

00:35:07.700 It was one Monday.

00:35:08.580 Now this was, his was a small, small business.

00:35:10.400 He had 25 employees.

00:35:12.320 I still remember the Monday where he had to lay off 19 of the 25 employees.

00:35:17.360 He came home, I, it, it, he, I've never seen my father look as unhappy.

00:35:23.740 He looked like he'd been beaten with a stick and he had employees arguing with him going,

00:35:27.120 Raphael, I'm not going to leave.

00:35:28.880 No, I'm going to stay.

00:35:29.940 This, this, this company is my home.

00:35:32.280 And he said, look, I don't have the money to pay you.

00:35:35.160 You have a family.

00:35:36.960 And so my parents went bankrupt.

00:35:40.400 We lost the company.

00:35:42.100 We lost our home, the home I grew up in.

00:35:44.500 And it's, uh, look, I, I've lived through that firsthand.

00:35:47.820 Well, you know, it, it really shows you that in the price of oil, there is a whole lot

00:35:52.900 more going on.

00:35:54.080 There are a lot of jobs.

00:35:55.200 There are a lot of families.

00:35:56.420 There's an entire sector of the American economy that's being destroyed.

00:35:59.860 It has implications for national security.

00:36:01.940 There's so much more to talk about.

00:36:03.120 Unfortunately, we are out of time, but thank you, Will.

00:36:05.540 Thank you so much for giving your insight.

00:36:07.700 And Senator, I had never heard that story.

00:36:09.760 I mean, it really brings it home on a personal level and we'll see.

00:36:13.040 Thank you, by the way, for your leadership and going to the president, trying to turn

00:36:16.460 this around.

00:36:17.340 We will just have to wait and see in the coming days.

00:36:19.680 Hopefully we turn it around before it's too late.

00:36:21.940 In the meantime, I'm Michael Knowles.

00:36:23.700 This is Verdict with Ted Cruz.

00:36:43.040 This is an iHeart Podcast.

00:36:56.600 Guaranteed Human.

Verdict with Ted Cruz - April 11, 2020

Running On Empty ft. Wil VanLoh

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