Ray Carbone - The Switch Interview

- Ray, where are we? - We are in a giant auction, that's what you're witnessing right now. You are witnessing people bidding and offering, and the simple way to explain it is an auction. We are in the energy complex, and we're trading primarily natural gas and crude oil. - So how does the price of oil get set down here, actually? - The supply and demand components really all come together here on the floor. All of what you're hearing in the geo-political arenas. All of what you're hearing in the demand side of gasoline, and heating oil, and the supply side of perhaps rigs shutting down, or more rigs coming online. All of that information gets really condensed into a settlement price at the end of the day, and that is what people use as a benchmark to set the price from crude oil to gasoline to heating oil to natural gas. - So everything that influences that supply and demand. It could be a store. - It could very well be a store. - It could be a fire. - It could be a catastrophe like an earthquake. - Right, and those can have big impacts. - They certainly have big impacts because they impact either supply, or demand, or both. - So oil and gasoline, I mean how are these things related? How does oil impact the price of gasoline? - Well we have the raw material, that is crude oil. It is basically useless to the normal consumer. It is the product that we're most interested in. Crude oil makes up about 55% of the gasoline price. So if crude oil is going up, well then you know gasoline price is going up as well because that's the raw material. There's always, "Where is my next supply coming from?" The price goes up on a little bit of fear, on a little bit of giving yourself enough of a cushion, and then when it comes down you have to be sure that there's a good reason for it to come down, and therefore that make take a little bit more time. - [Dr. Tinker] You see oil react to economy? Or the economy react to oil? Or both? - The answer is yes. When we have low gasoline prices we see demand pick up. We see people change their behavior. When gasoline was 99 cents a gallon just 10 years ago, wholesale. - Yeah. - You saw people buying SUVs, and adding gas guzzling type vehicles. Taking trips they normally might not take. All of a sudden when gasoline approached $4.50 last year we had a total behavioral change. Stop buying Hummers, start buying Prius's. Stop taking superfluous trips. Consolidating what they may do. We've had a boom and bust business. It has been that, it will always be that because people's behavioral patterns change, along with the price of anything. - Right. - Whether it be a house, whether it be a car, whether it be a gallon of gasoline. - [Dr. Tinker] It's a pretty tight margin business overall. It that a fair statement? - It's a very tight margin business. The guy that's selling you gasoline and me gasoline, there's not a lot of money being made there, and when you hear about oil company profits being x amount or very high don't forget they've got to pay a lot money for exploration costs, and what's going on right now, the easy oil, it's gone. The difficult oil is what people are going after, and that's much more expensive to get out of the ground. We hear about oil finds off the coast of Brazil. We hear about finds in the Gulf of Mexico. But we are breaking new ground, and literally breaking through the ocean floor to get that oil. That requires a lot of expenditure, a lot of investment, and that's what the oil industry is doing in order to extract the fossil fuel that's now, in harder to find places, and often in unstable regions, that people have to deal with political turmoil, geo-political turmoil as well as just the physical difficulty of extracting the oil that exists. It's a moment of truth for refiners and that because the demand is tepid right now there are not as many trucks out there. So diesel demand is low, there's a big overhang of supply in the diesel market. There's a overhang of supply in the heating oil market. It gets to the point where they may have to cut back. They may have to operate at 80%. Maybe over the long term 75% of capacity at the moment where demand is so that they can gradually draw down some of those big inventories that are hanging over the market. I was just in Europe and I think we paid about eight dollars and 50 cents a gallon for gasoline. - Four times what we pay in the U.S. - That's right, and that is an energy policy. That's a political decision made in various governments of Europe or in the EU. As opposed to decisions made in the U.S., and obviously taxes are not a popular thing. Europe chooses to tax to really moderate consumption, and control supply. We on the other hand are a country built on the automobile. We're a vaster space than Europe. - You've been doing this a long time. With some extra tax, a little higher price, we start at least conserving a little bit, or changing our behavior. Does it make sense for the U.S.? - It makes sense to me, but I am, I'm not privy to some of the other components that may go into a decision like that. But I think that what this country has to establish is a coherent energy policy, and we can look back to an occurrence if you will. Let's look back to Three Mile Island. That occurrence in Three Mile Island probably dramatically altered this countries energy policy. Creating a fear of nuclear power, which is quite popular in France for example. But we do not have a big nuclear industry in this country. So we've become a lot more reliant on foreign energy imports, and we hear this all the time in the political debate, and I think there's a lot more to go into formulating the energy policy in years to come. - In the aggregate as we look out over the next five, 10 to 15 years, energy prices, oil as a representative of that, are they going to rise? - Global demand, global supply, global geo-politics, if all of those stabilize, well then we're gonna have stable prices. But it's very, very rare that any price is stable for a long period of time, in anything. - [Dr. Tinker] Yeah. - And I think we're in the same boat when it comes to commodities. As we are in real estate. Again timeframe is very important, but if we're looking in the next 50 years, if we're looking in our lifetime. I think energy prices are going to go up over time. I think we have a finite commodity. I think we have infinite growth possibilities as far as demand goes. We've just seen India and China come online. Those populations are probably not going down, and as people filter in into the car buying process, which is happening in China, and happening in India, and happening in places that it wasn't happening maybe as short as five or 10 years ago. - [Dr. Tinker] Two and a half billion new consumers. - Exactly, so in my opinion we're looking at fluctuations, great fluctuations in prices, but in the end I think we're going to be looking at higher prices to come."