We've gone through probably the largest disruption of oil the world has ever known. If you are a country that relies on imports for your energy supply, you are going to over the next 12 months have a conversation around the energy stack that is going to power your country going forward and what you can do to build resilience into that.
Where do you feel we may be most vulnerable?
Power is being rewritten not just by armies, borders or diplomats, but by software, computing power, satellites, markets, and machines of war. This is Buffer State, a show about geopolitical power in the age of computation, hosted by Sasha Stern with co-host Reed Smith. Each episode examines how technology reshapes the instruments of trade, deterrence, and coercion, and what that means for America, its rivals, and the world order taking shape. Buffer State is for anyone trying to understand where power is moving next. For a generation, America talked about energy as an environmental problem, a market commodity, or a partisan fight. Ron Gusk sees energy as the physical foundation beneath everything else, prosperity, industry, national power, and even the computational economy. Ron grew up outside of Edmonton, Alberta on Acreage, where the work was practical, mechanical, and constant. Today, Ron is CEO of Liberty Energy, a major oil field services company best known for hydraulic fracturing, well completions, and energy technology. The next era of geopolitics will be shaped not only by chips, satellites, software, or AI models. It will also be shaped by the fuel behind them. And that's why this conversation matters. American re-industrialization does not happen on press releases. Supercomputers are not powered by vibes. Manufacturing, computation, and military power require abundant energy. Ron's argument is that energy poverty is poverty. That oil and gas are not relics of the past, but loadbearing pillars of the present. America's energy advantage is one of its great strategic assets. The country is willing to develop and transmit energy resources will shape the future.
Ron, welcome to the show.
Thanks very much for having me. Looking forward to the conversation today.
Ron, during our open, you expressed surprise for why oil prices are where they are. I think at the time of this recording they're below $70. I have never met an oil man who is satisfied with oil prices wherever they were. But I'm curious what you think oil prices ought to be right now.
I mean, look, there are often good reasons for why oil prices are where they are. But looking at oil prices today, I would confess to scratching my head a little bit about why they are so low. We've gone through probably the largest disruption of oil and arguably LNG supply the world has ever known, at least for sure, going back to the 70s. And yet here we are with anou for a piece accord between the United States and Iran. And we have a situation where WTI has fallen back below $70. We took more than a billion barrels of oil out of the global supply over the last four months. That's oil that did not get delivered to some place it was supposed to show up. Drawn down reserves as a result. Both strategic petroleum reserves in a number of countries, but also floating barrels that were sitting out there in the water. All of that oil is gone and the demand has not changed meaningfully. I would argue that the disruption was not long enough to really change the forward look for demand on oil. And yet here we are now with all of those barrels removed, reserves drawn down, refineries desperately short stock, and we've got WTI at $68, which I would argue is hardly a signal to put a rig back to work. And so I just feel there's a bit of a disconnect between what the physical realities are out in the world today and what a paper barrel of oil is trading for. And so I don't live my life in that world day-to-day, but from the outside looking in, it's a hard one to reconcile for me.
To me, that suggests that the data around how much oil wasn't sold is wrong. That perhaps there was more oil moving to refineries than government wishes to admit or multiple governments wish to admit. You could hypothesize that, but I think the reality on the ground suggests that that's not the case at all. If you looked at places like New Zealand or Australia or Japan or many countries in Southeast Asia that are importers of refined product, ultimately the end use of those barrels of oil, they were in dire straits. You look at places like New Zealand that got within maybe eight or nine days of running out of fuel on the island. Australia was in the very same position with diesel fuel. You have the poor countries in Southeast Asia that are absolutely without today. The great thing about being a wealthy country is that you can generally buy yourself out of a problem. And so in this case when refineries in Singapore or somewhere else along the Asian seaboard didn't get crude and ultimately couldn't deliver refined product to a place like Australia, they could put their hand up and try to buy that product from elsewhere, someplace like the United States, and they did, and so they managed to secure themselves the necessary supply to keep their economy running. But this is a zero-sum game. It wasn't that a bunch of refined product suddenly showed up. And so that means that somebody else who was maybe going to get that ship full of gasoline or diesel or jet fuel or whatever it might have been didn't get that. And so if you look at Southeast Asia today, I think what you would find there is that that supply chain has broken down and the implications are very real on the ground. I have read the news, I haven't seen this firsthand, but I have read in the news that farmers are not planting crops right now because they don't have diesel fuel to put in a tractor. That's a very real implication for them and that's evidence to me that those barrels were not out there. The refineries were not running. The refined product was not produced and ultimately somebody did without. The challenge, I think, is that we don't get to see who did without. The news here is not reporting those stories at all. The news in the United States is reporting how frustrated we are with $4 a gallon gasoline or something like that. That's a very different story I think than the poor countries who are the ones probably carrying the brunt of the load that resulted from this massive disruption.
Those same farmers may also be contending with decisions absent fertilizer that didn't reach market as well too given the straight closure. But I'm curious and yeah, there's a lot of known unknowns still inbound in terms of economic consequences of the recent flare up in the Gulf. You mentioned the United States drew down on reserves. Presumably other countries found themselves relying on strategic reserve as well too. Can you talk about perspective maybe say in Asia, China for instance or Europe?
That's definitely true and I unfortunately I can't name off the top of my head probably all the countries who ultimately contributed to the reserve draw down. China absolutely holds the largest petroleum reserve I think globally and frankly I think if you add it up it's equal to the reserves of the next I don't know 32 countries in the IEA or something like that. They had managed to build up maybe somewhat prognostically their reserves over the last year. They were importing a million barrels a day specifically to put in their SPR and they got to 1.3 or 1.4 billion barrels of oil in storage and then layered on top of that another 650 million barrels of refined product. So they're sitting on something of order 2 billion barrels of combination of crude oil and refined products to go along with that. That's a massive reserve and I think the numbers are still out on exactly whether or not how much they drew down on that, whether or not they did in any meaningful way or if they were able to destroy sufficient demand that they were not able to do that that the imports they were able to obtain over the course of the last 4 months were sufficient to meet those needs. Certainly from the outside looking in, we know that they stopped exporting refined product. I think that was about a million and a half barrels a day or thereabouts that absolutely disappeared and as a result they did not need to bring in crude oil for. We know for certain that they did make meaningful efforts to change demand profile inside the country that people were not driving as much that people were working from home but regardless with that disruption in supply we were forced to draw in reserves and so countries like the United States like Japan and certainly a number of European countries all contributed to that effort and I think really put us in a situation where we avoided the worst of the consequences of this. Arguably, absent those reserves, we'd have seen Brent and WTI, I think, well above $150 and maybe headed towards $200. But feels like we were able to save off the worst of that and now are back in a position where crude oil is moving again and as I said at the beginning, well, I think prices are a little too low and probably will inlect back upwards again. We're going to avoid the worst of the economic consequences that could have come.
Ron, is Chinese oil data like Chinese GDP data? Meaning, can you bank on this or is it verified? Where do you get your data?
There are a number of people who publish data on the situation in China. I think some of that is observable via satellite that they can see stock tanks. Subsurface storage gets a little more difficult of course to understand, but I think people feel like they have some reasonable amount of visibility into the picture there. I would say that's probably why I couch the comments around how much they actually drew down their inventory. My sense is it's relatively little given what I've read, but I don't know that we have absolute evidence around that. I don't know that those numbers that are out there are 100% verifiable.
In the group chat that Reed and I are part of, there's a little bit of a debate. One side says it's prudent for the American Navy to maintain a presence in waterways that move Chinese oil and that that presence of the American Navy serves as a deterrence meaning in the event say of a Chinese invasion of Taiwan that America has non-military means to exact a cost such as creating an oil shortage. The other side of that debate says that China is one of the wealthy countries. They will be the high bidder for oil and no matter what oil is blocked from the Middle East that's going to China, the Chinese will still procure oil. Where do you stand on that?
That's an interesting question. I would certainly say that the last four months have demonstrated that a supply chain choke point like the strait is a pretty meaningful card to be able to play. And of course, that's not the only potential supply chain constraint. When you think about seaborne product transit, there are probably six or seven potential places that you could leverage that sort of intervention and deliver some sort of consequences on a global basis. The Strait of Hormuz for sure, the Suez Canal, the Panama Canal, the Strait of Taiwan, the Strait of Malacca. So there's a handful of those. And I think there's probably more of a recognition today that having a presence in those straits, some ability to maybe intervene there can have significant consequences globally. Maybe you couldn't completely interrupt something like crude supply to China, but my guess is you could put a pretty good dent in it if you were looking at those waterways as places that you could intervene. If you think about the Strait of Hormuz that was 20% maybe going into the conflict now with the East West pipeline in Saudi with some with another workaround in Oman you have some other options there but it's still pretty meaningful and I would say the same for those other waterways. There's going to be not an insignificant amount of crude that might pass through some of those. The Suez Canal would be a big deal in terms of the East West pipeline in Saudi. I do think there is an opportunity to leverage that sort of intervention as a means of coercing an outcome that you might like to see. As a result, I remain of the opinion that a strong presence on the sea is critical as we think about the long term and I certainly think the US has to be cognizant of that in terms of the scale of our navy and our ability to demonstrate power in all of the seas.
Ron, I'd be curious to get your thoughts. We may have dodged a bullet over these past four or five months in terms of absorbing the most outrageous or extravagant rise in costs here in the US. But I wonder in terms of US and its security interests, where do you feel we may be most vulnerable in terms of energy supply chains? Whether with respect to oil, gas, critical minerals, or even refining capacity here at home or within partner states.
We're fortunately in a very fantastic position when it comes to crude and natural gas. We've put ourselves in a very strong spot there. The shale revolution onshore North America has moved us from being a meaningful importer of those products to now being a meaningful exporter of those products. Certainly the largest producer of crude oil anywhere in the world and largest producer of natural gas and a meaningful LNG exporter, largest exporter of propane. So you think about those things and I feel like we're in a pretty good spot there. We have not built meaningful refining capacity onshore North America in a long, long time. I think there's finally news that we're going to build a new refinery here in the United States in the coming years, which is exciting. I think that's important for us to continue to move forward on. But critical minerals, that's definitely a situation where we've got ourselves in a bit of a challenge. It's something we've not been out in front of. And if you look at where that supply chain is centered today, it's on the other side of the Pacific Ocean. China obviously has a meaningful amount of control, not only over the minerals themselves, but even more particularly the refining capacity for those. The ability to turn those into a useful product at the end of the day. You think about the rare earth magnets that we need for even specifically our military world, whether it's an F-35 or a submarine. They all contain rare earth magnets and the supply chain for those is not onshore North America today. So I think if you were to pick a spot that really is a concern looking forward, that is it. You've heard the administration talk about working hard to rectify that. We're trying to get some mining capacity opened up here and maybe work on some control of that supply chain with friends and allies. But we've got a long road in front of us to get that done and then ultimately build the refining capacity to go along with that. So certainly would be the concern I would highlight.
For some of our listeners, it might be a surprise to learn that we hadn't expanded refinery capacity here in the United States for decades at this point in time. Would you mind just giving a really brief history of why that's the case?
Well, that's a good question. It's certainly not a part of the world I'm directly familiar with, but I would say that we've probably been in an advantaged situation where we've had the necessary capacity to meet our needs here. And that combined with that, we've had some number of states that have ultimately chosen to import that product. If you look at California, they've gone from a situation where they had north of 10 refineries to today there might be six left running there and there's a few more that may be closing imminently. They import a meaningful amount of their refined product along the east coast today from offshore. Typically Asia would be the source of that. You think about the United States over the last 4 months being relatively insulated from the situation that was playing out globally. That was true, but not for every place in the United States. That certainly was not true for California. They rely on Singapore and South Korea for refined product and there was obviously interruptions there given those refineries were not receiving inbound crude. That puts their economy at risk. The rest of the country I think generally in pretty good shape. We have sufficient refining capacity here to navigate the needs of jet fuel, diesel and gasoline. We've seen prices elevate, of course, because of those are globally traded commodities. Those can just as easily be loaded on a ship and sent elsewhere in the world as compared to being consumed here in the United States. And so we've seen gasoline prices really crack spreads at the refineries push up to strong economic levels, maybe some of the strongest they've seen in quite some time. I don't know that that's been a tremendously high margin business over longer periods of time and so maybe there just hasn't been an economic incentive there to build more refining capacity but at least from my sense we haven't had a huge need for it anyway. We've had access to adequate capacity onshore the United States and so hasn't really been that economic signal to go ahead with that construction.
Part of the strategic rationale for military action in Venezuela was to kick the Chinese out so that they didn't have access or control of Venezuelan oil. Create another oil choke point for the Chinese. Do you buy that as a strategic argument?
That's an interesting one to me. I could certainly see some case being made for that. But I think as you've said, China's a relatively wealthy country and their ability to access crude oil. I think not hugely changed by the outcome in Venezuela. I think they find that crude elsewhere. Brazil has become a big supplier to China. Now I think we've seen that supply chain grow meaningfully over the last little while. So there are always other ways I think to get crude oil for those who have the economic wherewithal to do so. There's always going to be a willing seller for those barrels of oil as long as the person on the other end has got a checkbook. There is something to be said for locking up some additional heavy oil capacity for use here onshore the United States. Our refineries are definitely geared towards a slightly heavier blend than that which is produced in the Permian by default. We produce a lot of light sweet crude onshore the United States. California probably being the one exception to that. And certainly that state has not done anything to encourage growth in oil production there. And so when you think about a source for heavy barrels for our Gulf Coast refining capacity, Canada's definitely one of those places. They produce a fair bit of heavy oil there and I think as a strong trade partner to the US supply a meaningful amount of that crude but Venezuela definitely represents another option. I think the numbers show them as holding maybe the largest oil reserves in the world or if not it's up there. There was probably some consideration around access to that product over the long term. I think if you think about the two pathways, different pathways I guess that China and the United States are going down, they are diverging for sure. You've got here in the United States a drill baby drill mentality. We are self-reliant in natural gas and crude oil and so not unreasonable to have our economy based on that sort of energy supply for decades going forward. In China, you've gone from a situation where if you backed up to maybe 2000 or so, they produced 70% of the crude oil that they consumed in China. Fast forward to today, they're now importing 70% of the crude oil that they consume in China. And so I think what you're seeing over there is a drive to electrification with the goal of having control over their energy supply just like the United States does. We have for all intents and purposes control over the entirety of the energy stack that powers our economy on a daily basis. That is not true in China today. They import a meaningful amount of crude oil and even despite all the coal production they have there still import a meaningful amount of coal. I think largest importer of coal anywhere in the world today. That probably changes with time, but they are rapidly moving towards an electrified world as opposed to an energy economy that's powered by oil and natural gas.
Why didn't the shale revolution make its way to China?
That's an interesting question. I'm not terribly familiar with the geology across China. The Daqing oil field, which was kind of their big oil field, I don't know if there's an unconventional resource attached to that. I don't know if there is real shale potential there. I have a hard time believing that if there was, they wouldn't have worked hard to develop that by this point in time. Horizontal drilling and hydraulic fracturing technology are not things that they couldn't have accomplished or certainly found partners to help them accomplish. So that says to me, and I apologize for my lack of familiarity with that, but that says to me that that resource opportunity is probably not there at the same scale it was in the United States. And so they've had to pursue this other path.
When you and I met, I believe you mentioned that current oil fracking techniques extract less than 10% of the oil underground and that new technology could do a lot more. Can you educate us on this? Why is so little extracted today and what do you see down the road?
So as we move from a very conventional type reservoir meaning large pore space very easy for a molecule of oil to work its way through the rock and ultimately find its way to a wellbore to now these tighter unconventional resources that we work on. We're dealing with very different rock. If you could shrink yourself down to the small enough to find your way into a crack in the rock in the Bakken formation in North Dakota and you were to sit there and stare at a square foot of rock for 24 hours, about a tablespoon of oil would come out of that square foot of rock. And so as we've moved to developing these unconventional resources, we've moved to drilling horizontal wells. Now, a well that might be two or three or even four miles long underground, a horizontal pipe, and then creating this series of cracks parallel to that or perpendicular to that so that we expose ourselves to meaningful square footage of rock, millions of square feet of rock that ultimately turns that into a productive well. But at the end of the day, the oil is still bound up in these very tiny little pore spaces in that rock and its mobility, its ability to move through that rock to a fracture is really not that great. And so what that ultimately means is that if you were to look at a cubic foot of that rock after a period of time, we'd have recovered about 10% of the oil out of that. And the rest of that oil is just stuck there. The space in that rock is so small that there's just not enough energy there to push that molecule towards the fracture. There will be ways to enhance that recovery. There will ultimately be some technology developed that enables that oil to be a little more mobile. I think surfactant chemistry is probably a logical place for us to chase down. In fact, I think there's a meaningful amount of work going on there today that will have us find some sort of chemistry that we can introduce to the reservoir that makes that oil far more mobile. That means that we recover 20% instead of 10%. If that were to happen, the cost of energy in the United States is going to plummet overnight. We have access to so much additional resource sitting in the rock today that current technology just doesn't allow us to recover. The cost of producing a barrel of oil would drop pretty significantly. That would be huge for us. But that's a big problem and it's an expensive problem to tackle. So I think that's a problem the government is working on today. Certainly as you think about the national labs and their capabilities, these are the kinds of large problems that they can be focused on that could meaningfully change the cost of energy and ultimately the ability of the United States to reshore manufacturing and be highly competitive at things like that literally overnight. If we crack that nut.
