In this special episode of Industry Focus: Energy, former host Tyler Crowe calls in from Malawi to talk with Sean O'Reilly about the current state of energy, materials, and industrials.

Find out why oil prices have been falling so sharply in the past few days, why American oil data numbers seem to affect the global oil markets a disproportionately huge amount, why it's not so crazy that both BP and ExxonMobil (NYSE:XOM) project solid (if not increasing) demand for oil for decades to come, what Exxon is probably thinking in spending $6.5 billion worth of shale assets recently, what to make of Shell's (NYSE:RDS-A) (NYSE:RDS-B) big oil sands sell-off, and much more.

A full transcript follows the video.

This podcast was recorded on March 9, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, March 9th, 2017, so we're talking about energy, materials, and industrials. I am your host, Sean O'Reilly, and in today's very special episode, I'm going to have our old podcasting partner in crime via Skype all the way from Malawi, Africa, Mr. Tyler Crowe. Tyler, how's it going?

Tyler Crowe: Muli bwanji. How are you doing?

O'Reilly: Very well! Good evening, I think? You have six, seven hours on us. Something like that?

Crowe: Yeah, I'm seven hours ahead, actually.

O'Reilly: Before we started doing the podcast here, you were telling me about your lovely home there. It's actually larger than your former home in Washington, D.C.

Crowe: Yeah. One of the benefits of the wife being a contractor for the U.S. government, we get sent overseas from time to time, and you can have some pretty good digs when you live overseas.

O'Reilly: Wow. Do you have several hundred acres and farm and cattle? I'm kidding. 

Crowe: No, no. Certainly not that. We haven't turned into the farmers of Africa or anything like that. We just have a decent little pad right in the capital. It's a good place to be.

O'Reilly: It's good to have land. One of the downsides, though, you were telling me, we're recording this at an odd time, and it's because everybody there uses the cell towers for the internet to check Facebook after they get off of work.

Crowe: Yeah. It just happens. Infrastructure here is being built out. It's not quite up to standards that you would see in the United States. We run on mostly a 3G cellular network for internet and phone. Think Uber, when you have surge pricing -- we have surge times, where you know everybody is going to be using the internet at a certain time.

O'Reilly: Got it. Well, since I know you've been listening to the podcast since leaving us a number of months ago, I have been desperate to get your thoughts on what's been going on, because OPEC cut production -- you had guys selling assets. I can't wait to hear your thoughts on Exxon's $6.5 billion shale purchase from the Bass family. All kinds of good stuff.

Crowe: I have been vacillating between irrational exuberance and irrational fear on every given day. If you watch today or the last couple days, it was irrational fear because prices are dropping again. Everybody, freak out.

O'Reilly: It's the 9th today, I think yesterday oil fell 5%. Today, it was 2%, and it's just because of the just under $9 million inventory build here in the United States. Everybody was talking about $60-$70 a couple months ago this year with the OPEC cut. What's up with the shifting mood? Are you rolling your eyes because you're an ocean away now? How are you viewing this?

Crowe: I'm kind of viewing this as, just like declines aren't 100% linear, nor are recoveries. And one of the things that makes this particular time in oil so special in terms of recoveries and things like that is we do have this... we can't call it new anymore, but shale is a relatively new concept in the oil industry. And when you have things that are able to turn on and turn off so quickly in comparison to what we have known previously, it's going to give us those times where we think we've seen production decline, and we're going to start seeing price recovery. But when you have these assets that can get turned on so quickly, it's going to make these things happen in fits and starts.

We saw in rig counts in the United States... they more than doubled from May to December 2016. There was this time here from November to January where everybody was like, "Yeah, we're going to drill. It's going to be great. We're going to put some assets out there because we can make some money now." And it didn't take that long before people started realizing, you bring that much additional capacity on in a short time and you're going to get some inventory builds. These things are going to happen. And it's just, I think, part of the natural fits and starts that we're going to see in this cycle. But, at the same time, it's a very uniquely American aspect of the global oil market, and if there's anything I have learned from moving here a little less than a year ago, and other travels in my life, is that the global oil market is much bigger than the United States, and we can't just look at what happens on inventory data and a couple month procedures in the United States and say, "This is what's going to happen, projected for the next two years."

O'Reilly: That's what I wanted to get your thoughts on briefly. I saw oil drop yesterday, like a 5% drop, from $53 or so and now it's below $50. When I say that, I mean, WTI [the West Texas Intermediate benchmark], obviously Brent is a little bit higher. And I was like, "Oh my gosh, what happened? The Saudis must have said something like, 'We're tired of cutting already.'" I just assumed it was something like that. And all the headlines I'm seeing, near as I can tell, it was just because of this inventory build at Cushing. And it's unsatisfying to me as a reason because, to your point that you just said, the United States, God love us, we consume 15-16 million barrels of oil per day, but the world market is 95-96 million. So, when you see that the United States is 16-17% of global oil consumption, I don't see why a build at our largest refining storage facilities would necessitate a 5% drop in the price of crude oil on planet Earth. It's just unsatisfying to me.

Crowe: Yeah, and it's one of those things where, we're at this point now where you have these short-, mid-, and long-cycle developments in the world of oil. And if you look outside of the United States, that's where you start to see a lot more of those mid- and longer-cycle Investments that aren't happening, and we're still seeing production declines. Take -- the easiest one is the punching bag of Venezuela right now. There's not a lot of good things going on right there with the oil market and the political environment in general. Maybe a product of the oil. You have that, you have production declines in Nigeria, and a lot of other higher-cost, longer-tail investments are seeing declines, and those declines are likely going to keep happening, especially as there is this pressure from shale in the United States, and you're starting to see some other places start to fiddle with the idea of shale, like Argentina, it hasn't really brought oil to the world yet. But these things are going to keep that long-tail rise happening, delay it for a little while longer, and that's going to cause these production declines elsewhere to really bite hard. And those will be the longer thing that will bring back a recovery. It just seems like this one is going to be a little bumpy, and it might take a little longer.

O'Reilly: Got it. Really quick, before we move on, why does everybody focus on the United States so much with this data? Why isn't anybody saying, "This is 17% of the oil market. There's other consumers here."?

Crowe: Well, one of the things that the United States has that few other countries have is we have some of the most accurate, reliable, and consistent data when it comes out on this sort of stuff. You can look at what Saudi oil ministers say or what OPEC is saying, but we don't necessarily know if that's exactly what's going on in the ground. We don't know exactly what is happening at the Saudi Aramco's Ghawar Field, for example, what kind of decline rates are we seeing there. And we don't have an accurate picture across other nations as to how to assess the data. There is such a large focus on American data because it's there, it's available, it's how we digest it. I'm trying to think of a comparable example.

O'Reilly: It's like guess the animal, and you're looking at a photo of the leg, and you're wondering is that a horse, is that an elephant? You have this one photo and you're guessing off of it, but it doesn't look like the whole animal.

Crowe: Right. I was going to say, like, in baseball or basketball, if you're always watching those games, they always give those things like points, rebounds, and assists. But when you're watching the games, everybody gets fixated on that data. But if somebody who's a really big follower of the game, you're going to look at metrics like points per 100 possessions, and things like that that are a little bit more advanced and give a little bit more of a picture that's accurate, but it's harder to get that data compared to what is just thrown at you all the time.

O'Reilly: Awesome. Moving on here, what do you think of what's been going on in big oil? I know your favorite, Total, hasn't been too active. What did you think of Exxon's big shale buy?

Crowe: The shale buy, or the announcement of the $20 billion that it said it was going to invest four years ago?

O'Reilly: Either way. Obviously, I mentioned earlier in the episode, they made a surprising buy of $6.5 billion worth of assets in shale, and I was like, "Wow, playing catch-up here, guys? Jeez."

Crowe: It is, in a way, you could say, catching up. But actually there was a very interesting article in The Wall Street Journal today that did a discussion on it. One of the things that big oil had for so long was the ability to go out and spend big money on a deep offshore well, or something like that, because it was a little riskier, but the rate of return was higher if you could actually find something the right way.

Shale is a little bit safer. You're basically acknowledging that you're going to get a slightly lower rate of return, because there's so many players that can do it. If you look in the Permian right now, you can't throw a rock and not hit five producers in that area at any given moment. So, the rates of return aren't quite as high versus something like, if I invest a billion dollars in an offshore well that can last me 30 years at more than 100,000 barrels per day, those are the sort of investments they used to be able to make. And in this Wall Street Journal article, they're basically saying that Exxon is playing a little bit safer route here, where they're making large investments in the Permian Basin for shale as well as petrochemical refining, that midstream/downstream aspect in the Gulf of Mexico.

Those sorts of things, you're never goin g to see the 30%-40% rate of returns that you might get on that perfect play in the offshore. You're going to get the 20%-25% rate of return, and you can cash that check. So, with Exxon going that route, it's a little bit safer play, pretty conservative. And it makes sense in the short term, certainly in the industry right now if you have a three- or four-year time horizon where you think things are going to be a little bit slower, you can make a big focus here. You can get a quick, easy, reliable payout, and then start building your coffers again in anticipation of something further down the road.

O'Reilly: Awesome. What did you think of Shell's oil sands sale? Firstly, I'm surprised they still own that. I actually thought they were out. But, what's your take?

Crowe: I think it's basically the opposite of what ExxonMobil is doing here. Shell is unique in the sense where they knew that they had to sell some assets, because after the acquisition of BG, $50 billion at least on that, they acknowledged, "We need to sell about $35 billion in assets from the combined portfolio to reset our balance sheet, get things where we want them to actually go forward." So, when you look at the overlap of the portfolio between BG and Shell, the two things that they're going to do well more than anything else is offshore drilling and LNG. Oil sands didn't really fit into that as much. If you look at Shell's footprint not just in the upstream but in the midstream and downstream sectors, there wasn't a lot of integration along that route of being in oil sands. That was something that, back when oil was $100 a barrel in 2011-2012, in that range, it looked attractive because, at $100, I think I could make money here digging with a shovel.

So, when you have that, and today with $50 a barrel, and you know that maybe three to five years down the road, we're maybe not going to be back to $100, but we're going to have this protracted time where everybody's going to be looking at shorter things, it made sense for them to cut bait with this one. They got a decent payout on it. Then, they can use that money elsewhere to right-size their portfolio and focus them on the things they want to do.

O'Reilly: Do you think that 7% dividend yield over at Shell is sustainable?

Crowe: That's such a tough one to answer. If the plan that they have laid out can be done to the letter and executed, I think it can be done. If you look at their investor presentations, the things that they're projecting in terms of free cash flow, it can be done. But it's also predicated on things going right, one or two things swinging the right way. One of the things that Shell has done to make that dividend a little bit more palatable for them in the time being is using a scrip dividend where they're paying out shares of the company in exchange for cash, so they can certainly keep it going for a while using that, since there was actually a high uptake on the scrip dividend when they issued it. So, that gives them some breathing room for a few years. They're kind of in this phase of "We're trying to reshape our entire business, and it's going to take us a couple years to do it." And I think it's a little too soon to say whether or not it is sustainable over the long term or not.

O'Reilly: Got it. I don't know if you caught the show, but a couple weeks ago, Taylor and I did an entire episode, basically, on this oil in the 21st century report put out by BP.

Crowe: I still listen to you guys once a week when I'm over here. Sometimes I'm shouting into my phone, but that's just me.

O'Reilly: "No, no, you're saying it wrong!" [laughs] So, you heard the show. BP made some bold claims, as I'm sure you saw. Basically, that fossil fuels are fine into the 2040s, etc. When you listened to the show, what did you shout into your phone about?

Crowe: Well, there was a couple things that were interesting, and one of the things that it really reflected on was not just BP's, but also ExxonMobil's presentations on their outlooks. Both of them are rather ambitious, a little bullish, on oil. If you look at their projections, their growth rates for renewables is surprisingly low, and I think that's just more of a reflection of the oil industry still trying to put their best foot forward in that regard. I have a new perspective living here in sub-Saharan Africa. This, I guess, you could call the view from the other side. I don't want to disparage it too much, but as of right now, Malawi is considered the poorest country in the world. It's a stark contrast to what we have in the United States. And what I see here in some of the travels that I've done since I've been here, is, we can get caught up in the day-to-day challenges of a place like this.

But at the same time, I see an immense amount of opportunity. And that opportunity is going to have to be fueled by energy some way or another. And when I see that, I see, over the next 20-30 years, places like sub-Saharan Africa, places like the Middle East, Southeast Asia, South Asia, like India, they are going to use more oil. And no matter how much we have in the developed world, like the United States and Europe, that Western-centric view, no matter how much we can decline our use over the next 20-30 years -- it's hard to see these places that are coming up, bringing people into the middle class using oil. It's going to have a profound impact on the amount of oil that we need to use. To give a great example of this, I was looking at some numbers, let's use the stark contrast of Nigeria and the United States. Nigeria and the United States are relatively close in terms of population. But barrels-per-day consumption of oil per 1,000 people in the United States is about 62 barrels. In Nigeria, it's two. 

That gives you an idea of the scope of how much countries around here are going to increase their consumption over the next 20-30 years as they develop. When you hear numbers like that, it really makes you think that, as much as the United States thinks they can reduce their oil footprint, there's a lot of people waiting in line to use it.

O'Reilly: Before we head out of here, one of the things the report talked about to be bullish on was solar usage, particularly in places that get lots of sunshine. I have to assume you have a lot of sunny days there.

Crowe: I have so many sunny days here. It's crazy.

O'Reilly: Are there a lot of solar panels, basically?

Crowe: Not yet. I have one, and a couple of my neighbors have one. Just like you will see in any country, on the aggregate -- it's a relatively poor country, but wherever you go in any country, there's going to be an upper class and an upper-middle class. And you find that some of the more well-off people have solar panels here as a supplement to the electricity infrastructure here, which is a little shaky, which is pretty common across sub-Saharan Africa, because transmission distribution is still a work in progress. It's certainly not the booming industry that you'll see where we're doing these utility-scale operations. It's a little bit more on the smaller, residential scale. So, as promising as that sounds, it actually makes it a little bit more cost prohibitive, because as we've seen in the United States, that scale of utility-size solar installations makes it a little bit easier, a little bit more cost-effective, versus where you're doing one-, two-, or three-panel installations on a residential area. It becomes a little bit more expensive. So, one of the challenges here on bringing something like solar or wind power into the fold isn't the actual stuff itself, like the panels or the turbines. I think one of the biggest challenges is going to be the distribution transmission networks that are going to make it cost-effective.

O'Reilly: Awesome. Tyler, I can't thank you enough for calling in. Before we head out, I have to know, how was your basketball team doing?

Crowe: We're in the off-season now. It's the rainy season. So, with the all-outdoor courts, we have to wait for the seasons to dry up. So, right now, we're in ... three or four days of --

O'Reilly: You're in the off-season. It's fine.

Crowe: Yeah.

O'Reilly: And we'll see you in the Olympics in the next couple years, I'll assume.

Crowe: Oh, not even close. Here's my theory on me playing basketball here in Malawi: Every team, no matter where it meets, it needs some guy at the end of the bench waving a towel.

O'Reilly: And that's you?

Crowe: That's me.

O'Reilly: Well, we can't wait for you to return to the United States and get back on the podcasting bench. Thanks again for calling in.

Crowe: Thanks, and feel free to call me anytime. I can fill in if you need to.

O'Reilly: As long as it's not between the hours of 4-6 p.m. Malawi time? [laughs] 

Crowe: Basically.

O'Reilly: Awesome. Well, have a great one, Tyler! I'll talk to you soon.

Crowe: Thanks, Sean!

O'Reilly: That's it for us, folks. Be sure and tune in tomorrow for the Technology show with Dylan Lewis. Also, we want to give a special shout-out to our irreplaceable producer, Austin Morgan. And, if you are a loyal listener and have questions or comments, we would love to hear from you, just email us at industryfocus@fool.com. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe, I am Sean O'Reilly. Thanks for listening and Fool on! 

Sean O'Reilly has no position in any stocks mentioned. Tyler Crowe owns shares of ExxonMobil and Total. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Total. The Motley Fool has a disclosure policy.