And we're joined now by Chevron chairman and CEO Mike Worth. Welcome to Face the Nation.
It's good to have you here, particularly in this moment in time, because it feels like we're in this global energy shock. What we heard from the head of the International Energy Agency, he said, 'If you combine the 1973 Arab oil embargo, the 1979 Iranian oil crisis and what happened around 2022 when Russia invaded Ukraine, if you combine all those things, that still isn't the scope of what we are experiencing.' Is that how you put it?
Well, the way I would frame it is the energy system has lost an incredible amount of flexibility. The global economy consumes about 100 million barrels of oil every day. A barrel is 42 gallons. About 20% of that moves through the Strait of Hormuz. So that's been significantly disrupted. Normally the energy system has shock absorbers in it. So we have inventory in tanks at facilities. We've got inventory on the water in ships. We've got inventory in strategic reserves. All of those have been pulled down over the last couple of months as these events have unfolded. And what it's done is it's taken those shock absorbers and made them much less effective in the system. And so disruptions normally are met by moving these inventories around and price response can be muted. As the shock absorbers are withdrawn, the shocks translate a little bit more directly. And so I think what he's referring to is we're in a period where there's been significant supply taken out of the system and we are facing this upward pressure on prices and volatility that has manifested itself thus far and likely to continue.
Likely to continue because it's unclear if we have a ceasefire or an end to the war. I mean, if there is an actual negotiated end to the war, do prices come down or is just a truce enough to give relief?
Well, what's really needed is for flow to resume through the Strait of Hormuz. You can't take 20% of the energy out of the system and some of it's finding its way around to the Red Sea, but there's still a substantial amount of world energy supply that is not able to flow. And so that's the key thing is to restore that flow. It allows markets to begin to rebuild these inventories. It allows us to get products to where they're needed and to alleviate some of the pressure. But that all will take time. It's a world where we get logistics of ships and pipelines and moving things around to markets around the world. And so that's why I say I think it's going to be with us for some time because even if the strait were to open today, getting supplies to where they're needed and resuming the normal functioning of the system is going to take some time.
So how heavily mined is the Strait of Hormuz because you have intelligence analysts giving you data. How much risk is there to go through that point?
Yeah, I don't know I could quantify how heavily mined the strait is, but clearly Iran has the capability to hit vessels as they move through the strait. We've seen that happen maybe not daily, but certainly with some degree of frequency and it's not just mines that they have. There's other means that have been used. And we've been moving ships through that part of the world for years and years and have seen some of these capabilities. And so, I think it's very difficult militarily to deal with that because they've prepared these capabilities and I think they've shown the ability to exercise them. And so, the president and the administration are focused on that as part of the negotiations and we certainly hope that they're successful with that.
If they can figure out who to negotiate with. The president says that's part of the problem right now, not knowing who's actually the decision maker in Iran. But we did see the Washington Post report that the Pentagon informed members of Congress that it would take approximately six months to clear out the strait and that's in a post-combat situation. As a CEO, what do you need to see to feel confident to put a ship through the Strait of Hormuz?
Well, we'd have to believe that our people on the ship will be safe, the cargo will be safe, and that it can be transited with a high degree of confidence. We'll work with the military authorities, the US Navy to make that assessment and certainly many other shippers and ship owners are faced with the same questions. I haven't seen the report you referenced, but we work closely with the US Navy and other military organizations around the world to ensure safe transit of ships all over the world. And so it's a decision we would make in collaboration with those kinds of experts.
At one point the energy secretary was on this program and he said the first few ships would likely have a naval escort. Is that something you would want, like warships escorting through?
Certainly seen naval escorts used in the past when there have been conflicts in that part of the world. We've had ships that have been escorted through the strait. I think in the early days it's very likely that you could see naval escorts because I think some of the risks are not just mines that could be placed in the strait, but they could be also risks that could come from the land in other forms. And so I think having the navy with those ships that make the first transit would provide a higher degree of confidence that if there were to be something happen that you'd have some measure of defense.
You just need to know with confidence that you are able to go through without getting hit and that you can kind of adequately price that risk.
Yeah. For us though, pricing the risk... the risk has always existed. So pricing the risk is not the issue for us. It's the safety of our people. Our highest priority is the safety of our people, the security of our assets, protecting the environment. So, the risk that you could have someone injured or worse, that you could have a ship damaged or you could have an oil spill, those are the things that we really concern about. The pricing of the risk, the insurance, those things are all manageable. It's really the safety of people and the protection of the assets and the environment that will govern our decision.
When we talk about pricing though and sort of going back to pre-start of the war. It's not just the strait. 12 refiners in the Middle East were hit by a missile or a drone attack according to ClearView Energy. So, the infrastructure itself has been damaged. How long does it take to get production back as well?
Well, it's going to take in some cases weeks and months, in some cases years. There have been oil fields that have been just shut in because there's no place to store the oil. Sometimes these fields, it's not like turning the tap on your faucet. These are complex reservoirs with a lot of subsurface dynamics. So those have to be brought back carefully. There's been damage to upstream, midstream and downstream infrastructure like refineries. I think people are working to repair that to the extent that they can. Some of these are easier fixes than others. Some will be years. Some of the LNG facilities that have been damaged. The type of equipment that needs to be replaced has a supply chain that will require years to replace it. And so I think it'll come on gradually and depending upon how quickly some of the damage can be addressed.
Why do you think this was such a surprise? We're not anticipating in that region that the drones would be as effective as they were or that the Iranians will be as successful in shutting down the Strait of Hormuz.
Yeah, that's a question that is probably best answered by others. I don't know what was expected and how that would compare to the reality. Certainly most reports would suggest that Iran had been preparing for something like this. I think the other states in the region had their defensive capabilities. But when conflict begins it can be very unpredictable how it unfolds.
Clearly. And when it comes to the price, when we look at what's happening out there on the markets, that's one thing that's traders placing bets. The American people are looking at the cost when they, you know, gas up their car. When will things return to pre-February 28th and the start of this conflict?
Yeah, it's one of the things I've learned in over 40 years in this industry is predicting price is extremely difficult. Even in normal times, markets can surprise you. This is not a normal time. The dynamics that are affecting supply are quite unusual. The potential for that to flow through into the economy and maybe slow demand is I think increasing and so...
People use less gas you're saying because...
Certain parts of the world, it's not just gas, it's LPG for cooking in South Asia, it is jet fuel in Europe. A number of products are becoming very short in supply. Behavior changes in a couple of ways. One, people will use less energy. Second one is people will hoard energy. Back in the 70s I recall during the embargo of the US, in my family we would drive around with a car as full as we possibly could. Normally people drive around they're comfortable with a half a tank or a quarter tank of gas. And so you'll see people will hold on to supplies that otherwise they might not. They may use less. And so predicting both demand and supply in a market that's this dynamic is very difficult. I think the key thing is as I said before the shock absorbers being drained out of the system which means there's this upward pressure on price because supply is getting tighter and the ability to resupply is getting more difficult and that increases the likelihood of volatility as well.
So we can't say that gas prices have peaked for example.
I think it's very hard to say that because you have to make a bunch of assumptions about that and it depends on what you assume.
You mentioned jet fuel that doesn't have as long of a life, right? You have to refresh and replenish storage pretty quickly. We're reading about airports running out of jet fuel. What's the reality there? What is the supply and what does that mean for Americans who might want to travel?
Yeah, inventories of jet fuel in certain parts of the world were at seasonally relatively low levels before the conflict began. The Middle East refiners are significant exporters of jet fuel. Particularly to Europe where 75% of Europe's imported jet fuel tends to come from those refineries. It's not flowing today. So we are seeing jet fuel tighten very quickly in Europe and Asia. And we're seeing airlines announce adjustments in their flight schedules. We're seeing it flow through into fares. I think that's one of the first places it'll be felt most broadly. I mean, we've seen some upward pressure on gasoline prices. Now, I think aviation is clearly an area where it's going to probably get worse over the next few weeks.
Get worse over the next few weeks, but that still that has a lag effect. I mean, what you're saying is if you're buying a trip to Europe, expect to pay a heck of a lot more even if it's months from now.
Yeah. Again, I can't predict how the airlines are going to price their product, but I think the upward pressure that they're seeing on prices and the tightness in the market is likely to lead to further route optimization and so flights may not be as abundant as they otherwise would have been. I think planes will probably be more full than they would have been and yes, fares could be higher.
So when you hear the Treasury Secretary or the Energy Secretary say $3 a gallon and oh it'll come down again in the next few months. You're saying we don't know enough to actually make hard predictions. That's what I hear you saying.
Yeah. It's, you know, there's a kind of an old axiom that, you know, I can tell you the price I just can't tell you when. It's just very difficult to predict these things because markets are dynamic. They can respond to things that we don't anticipate. And the one reality is that these shock absorbers are not as effective as you get down to lower levels of inventory. And so I think that's going to be with us for a period of time.
So the longer the conflict or this period wherein without resolution, it's going to continue to...
I think it can extend these market effects.
So the president issued five different memos this past week applying the Defense Production Act to oil, natural gas, and other energy infrastructure. This is going to in theory allow him to increase production. Can you just turn on production at a moment's notice? What difference does this make to you?
Yeah, you can't turn on production at a moment's notice. It takes engineering, it takes supply chains, it takes contracts and workers moving and being mobilized. So, it takes time to bring new production into the market. Our company had record production in the US last year, 2 million barrels a day, a million barrels a day in the Permian. We're going to grow 7 to 10% again this year. So, we do have plans underway to deliver more oil to the market.
That's out in North Dakota and other parts of this country.
North Dakota, outside of the country, some other locations as well. So, we're investing to grow, but that has a lead time and it has planning and then execution time involved. The intentions of the government I believe are aligned with some of their broader and pre-existing objectives to encourage investment in power generation for AI for instance and so I'm not sure that it is solely intended to respond to the current situation in the Middle East as much as it may be part of the broader goal to encourage more investment into energy infrastructure in this country.
But the White House is urging energy companies to bump up production, right? To help alleviate costs. How much pressure are you getting?
