1 00:00:10,680 --> 00:00:14,760 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,880 --> 00:00:18,239 Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, I don't 3 00:00:18,280 --> 00:00:22,040 Speaker 1: think we can talk about oil enough right now. No, No, 4 00:00:22,239 --> 00:00:24,279 Speaker 1: it feels like oil is the I don't want to 5 00:00:24,280 --> 00:00:27,720 Speaker 1: say missing link, but the link around which everything is 6 00:00:27,760 --> 00:00:31,000 Speaker 1: revolving at the moment. In particular, I mean, the Federal 7 00:00:31,040 --> 00:00:35,040 Speaker 1: Reserve basically seems to have pegged it's monetary policy to 8 00:00:35,240 --> 00:00:38,760 Speaker 1: gas pretices. Right, not explicitly, but it certainly seems that 9 00:00:38,800 --> 00:00:42,360 Speaker 1: way implicitly, right, I I totally agree. It feels like 10 00:00:42,400 --> 00:00:46,440 Speaker 1: the FED has really raised the steaks on oil because obviously, look, 11 00:00:46,720 --> 00:00:49,400 Speaker 1: high oil creates all kinds of problems, it's very difficult 12 00:00:49,479 --> 00:00:53,760 Speaker 1: for consumers, creates all kinds of challenges. But at the 13 00:00:53,800 --> 00:00:58,200 Speaker 1: recent FED meeting, you know you heard Sherman J. Powell say, look, consumers, 14 00:00:58,280 --> 00:01:01,000 Speaker 1: don't think about core vers headline plation. Just think about 15 00:01:01,000 --> 00:01:04,920 Speaker 1: headline inflation. And if inflation stays high or gasoline prices 16 00:01:04,959 --> 00:01:08,280 Speaker 1: stay high, then that could lead to increased expectations. The 17 00:01:08,360 --> 00:01:11,920 Speaker 1: FED does not want inflation expectations to get out of hand, 18 00:01:12,280 --> 00:01:15,200 Speaker 1: and so the FED will tighten in response to high 19 00:01:15,200 --> 00:01:19,600 Speaker 1: oil prices, Defended implicitly said, I think it is willing 20 00:01:19,600 --> 00:01:22,119 Speaker 1: to pay the price of recession to get the price 21 00:01:22,120 --> 00:01:24,760 Speaker 1: of oil down. Yeah, and I've been thinking about this 22 00:01:24,800 --> 00:01:28,000 Speaker 1: a lot. But it's also like gas prices just loom 23 00:01:28,120 --> 00:01:32,120 Speaker 1: large in the American consciousness and I guess politically as well. 24 00:01:32,160 --> 00:01:34,279 Speaker 1: And I got to say, I was at my dad's 25 00:01:34,280 --> 00:01:38,160 Speaker 1: house over the weekend and all I heard was grumbling 26 00:01:38,319 --> 00:01:42,000 Speaker 1: about gas prices and the Biden administration for three days. 27 00:01:42,920 --> 00:01:46,160 Speaker 1: Well there, So anyway, it is, it is permeated the public. 28 00:01:46,240 --> 00:01:49,360 Speaker 1: It is everything Defend has made at everything. On our 29 00:01:49,400 --> 00:01:52,160 Speaker 1: recent episode, the one that we out released on Monday 30 00:01:52,200 --> 00:01:55,280 Speaker 1: with Peter to Second, we talked about the challenges of 31 00:01:55,280 --> 00:01:58,520 Speaker 1: eliciting a supply response and getting more oil out of 32 00:01:58,520 --> 00:02:02,440 Speaker 1: the ground rapidly. But the stakes are very high. Clearly 33 00:02:02,520 --> 00:02:05,120 Speaker 1: the White House is extremely stressed about that is having 34 00:02:05,160 --> 00:02:09,040 Speaker 1: recently sent a letter to oil companies basically, you know, 35 00:02:09,160 --> 00:02:11,680 Speaker 1: encouraging them to do more. So the question we have 36 00:02:11,720 --> 00:02:14,520 Speaker 1: to ask is what if anything can be done in 37 00:02:14,600 --> 00:02:17,960 Speaker 1: the short term, right, And I think this is the 38 00:02:18,000 --> 00:02:21,720 Speaker 1: crux of the matter, because we've had many discussions about 39 00:02:21,720 --> 00:02:24,280 Speaker 1: this at this point, but this is a problem that 40 00:02:24,400 --> 00:02:28,080 Speaker 1: was many, many years in the making, so structural under 41 00:02:28,160 --> 00:02:32,600 Speaker 1: investment in certain types of energy i e. Fossil fuels, 42 00:02:32,680 --> 00:02:34,880 Speaker 1: and now everyone seems to be trying to figure out 43 00:02:34,960 --> 00:02:39,200 Speaker 1: short term ways to alleviate that bottleneck or that choke point. 44 00:02:39,360 --> 00:02:42,440 Speaker 1: Absolutely huge economic and of course political stakes. All right, 45 00:02:42,520 --> 00:02:44,840 Speaker 1: let's jump right into it. We're gonna be speaking with 46 00:02:45,040 --> 00:02:47,640 Speaker 1: two guests who we've had in the past who know 47 00:02:47,840 --> 00:02:50,520 Speaker 1: a lot about this space, both of the terms of 48 00:02:50,600 --> 00:02:54,400 Speaker 1: oil specifically, as well as various tools that the government 49 00:02:54,520 --> 00:02:59,760 Speaker 1: might have to improve the supply, uh, the supply. So 50 00:03:00,000 --> 00:03:02,320 Speaker 1: I had a little bit. We're going to be speaking 51 00:03:02,360 --> 00:03:05,000 Speaker 1: with Rory Johnson. He is the editor of the Commodity 52 00:03:05,080 --> 00:03:09,360 Speaker 1: Context newsletter of Fantastic read. He's also market economists and 53 00:03:09,480 --> 00:03:12,760 Speaker 1: managing director at Price Street in Toronto. And we're also 54 00:03:12,840 --> 00:03:15,080 Speaker 1: gonna be speaking with Sconda Amardath. He has the direct 55 00:03:15,240 --> 00:03:20,000 Speaker 1: executive director at Employee America, a think tank which promotes 56 00:03:20,120 --> 00:03:23,240 Speaker 1: tight labor markets. So Rory and Scanda, thank you so 57 00:03:23,360 --> 00:03:25,760 Speaker 1: much for coming on odd lots, thanks for having us 58 00:03:25,760 --> 00:03:28,760 Speaker 1: back on, thanks for having me on. Absolutely all right. Sconda, 59 00:03:28,800 --> 00:03:31,880 Speaker 1: I actually just want to immediately started with you because 60 00:03:32,240 --> 00:03:35,640 Speaker 1: you've been writing for several months. Now that you think 61 00:03:35,680 --> 00:03:39,760 Speaker 1: the White House has tools at his disposal right now 62 00:03:39,880 --> 00:03:42,960 Speaker 1: to increase oil production, they haven't been used. We'll get 63 00:03:42,960 --> 00:03:44,880 Speaker 1: into the details, but why don't you just give us 64 00:03:44,920 --> 00:03:48,880 Speaker 1: the very high level idea here of how the White 65 00:03:48,880 --> 00:03:53,720 Speaker 1: House can use the Strategic Petroleum Way Reserve strategically to 66 00:03:54,280 --> 00:03:58,200 Speaker 1: ease oil markets right now. The tools we've laid out 67 00:03:58,360 --> 00:04:01,120 Speaker 1: are really about addressing what i'd call the most proximate 68 00:04:01,400 --> 00:04:05,320 Speaker 1: binding constraint on u S domestic industry, and that's one 69 00:04:05,520 --> 00:04:10,880 Speaker 1: of a high propensity for low investment capital discipline um 70 00:04:10,960 --> 00:04:14,440 Speaker 1: for some pretty understandable and rational reasons that have to 71 00:04:14,480 --> 00:04:17,560 Speaker 1: do with what i'd call uncertainty on in terms of 72 00:04:17,600 --> 00:04:21,200 Speaker 1: price risk, demand uncertainty, and it's called to something and 73 00:04:21,279 --> 00:04:24,080 Speaker 1: also financing uncertainty depending on where you are in the industry. 74 00:04:24,240 --> 00:04:27,599 Speaker 1: And so there are tools available within the federal government 75 00:04:28,040 --> 00:04:30,760 Speaker 1: that can if you work with industry, you can actually 76 00:04:30,800 --> 00:04:34,479 Speaker 1: provide that kind of certainty because the government has a 77 00:04:34,520 --> 00:04:38,200 Speaker 1: lot of long term storage capacity to the Strategic Controlling Reserve, 78 00:04:38,320 --> 00:04:40,000 Speaker 1: which is not trivial by the way, right they have 79 00:04:40,000 --> 00:04:43,440 Speaker 1: physical storage capacity in commodities is important if you're actually 80 00:04:43,440 --> 00:04:46,520 Speaker 1: going to be able to fund more production but also 81 00:04:46,680 --> 00:04:49,480 Speaker 1: to provide the kind of price insurance. And so the 82 00:04:49,600 --> 00:04:54,000 Speaker 1: Department of Energy has the authorities to replenish their reserve 83 00:04:54,040 --> 00:04:56,760 Speaker 1: they're currently releasing, which is good, but just don't be 84 00:04:56,839 --> 00:04:59,679 Speaker 1: under any illusion about how much it's really helping. It 85 00:04:59,680 --> 00:05:01,440 Speaker 1: helps a little bit of the margin, but it's not 86 00:05:01,480 --> 00:05:03,880 Speaker 1: going to be uh, sort of the all powerful solution. 87 00:05:04,240 --> 00:05:06,360 Speaker 1: But what would be valuable is actually to signal to 88 00:05:06,560 --> 00:05:09,520 Speaker 1: producers who have been burnt by cycle after cycle in 89 00:05:09,560 --> 00:05:12,839 Speaker 1: the last eight years or so by price crashes that 90 00:05:12,920 --> 00:05:17,240 Speaker 1: have effectively led to really poor shareholder returns. And now 91 00:05:17,520 --> 00:05:21,680 Speaker 1: the response has been let's invest really slowly, let's be 92 00:05:22,000 --> 00:05:25,200 Speaker 1: pretty in elastic in our investment response to high prices, 93 00:05:25,760 --> 00:05:29,080 Speaker 1: unlike what we saw in previous episodes of oil prices 94 00:05:29,120 --> 00:05:31,400 Speaker 1: running up. And so what we're trying to get at 95 00:05:31,560 --> 00:05:34,920 Speaker 1: is through what's called an insurance mechanism. It's it's a 96 00:05:34,960 --> 00:05:39,040 Speaker 1: sale of physical put options and through financing mechanisms offering 97 00:05:39,120 --> 00:05:42,560 Speaker 1: leverage changing that shareholder proposition. And those tools have been 98 00:05:42,560 --> 00:05:45,200 Speaker 1: on the table that the administration has had notice and 99 00:05:45,240 --> 00:05:48,240 Speaker 1: knowledge of these tools, they've thus far been much more 100 00:05:48,279 --> 00:05:51,359 Speaker 1: reluctant to really latch onto them. They've done some marginal 101 00:05:51,360 --> 00:05:54,240 Speaker 1: things that have been helpful around strategic patrolling reserve regarding 102 00:05:54,600 --> 00:05:59,400 Speaker 1: the willingness to maybe explore forward contracts to replenish the reserve. 103 00:05:59,800 --> 00:06:03,520 Speaker 1: But the kind of insurance plus financing pairing those two 104 00:06:03,600 --> 00:06:06,240 Speaker 1: things together would be very I think helpful and powerful. 105 00:06:06,240 --> 00:06:08,559 Speaker 1: It doesn't solve every issue in the industry, but capital 106 00:06:08,600 --> 00:06:10,960 Speaker 1: discipline is a big reason why we're not seeing the 107 00:06:10,960 --> 00:06:13,960 Speaker 1: big capex ramp up in US industry. And look, US 108 00:06:14,040 --> 00:06:15,680 Speaker 1: is the biggest producer, so it's not as if US 109 00:06:15,760 --> 00:06:19,040 Speaker 1: is some small fi producer relative to the global economy. 110 00:06:19,080 --> 00:06:22,760 Speaker 1: It is the biggest country. So Rory, maybe I could 111 00:06:22,800 --> 00:06:25,080 Speaker 1: bring you in here. You know, when Sconda talks about 112 00:06:25,080 --> 00:06:28,120 Speaker 1: the need for price insurance for the oil industry, what 113 00:06:28,240 --> 00:06:32,200 Speaker 1: exactly is the problem that we're trying to solve here, 114 00:06:32,200 --> 00:06:34,520 Speaker 1: Because I'm sure a lot of people will look at 115 00:06:34,560 --> 00:06:37,200 Speaker 1: oil above a hundred dollars a barrel. A lot of 116 00:06:37,200 --> 00:06:41,159 Speaker 1: the big oil majors or energy majors are posting record 117 00:06:41,240 --> 00:06:43,560 Speaker 1: profits and they're going to see that and think, well, 118 00:06:43,560 --> 00:06:48,240 Speaker 1: why in the world would you need to underpin it further? Yeah, 119 00:06:48,279 --> 00:06:49,920 Speaker 1: And I think one thing that's really interesting is to 120 00:06:49,960 --> 00:06:53,040 Speaker 1: think about the way in which the SPR can be 121 00:06:53,160 --> 00:06:57,520 Speaker 1: used to to really kind of ameliorate this challenge we're facing. 122 00:06:57,520 --> 00:06:59,839 Speaker 1: And one of the things we've often heard as a 123 00:07:00,040 --> 00:07:03,640 Speaker 1: reason for lackluster interest in investment is, sure, the price 124 00:07:03,720 --> 00:07:07,760 Speaker 1: of oil is very high, but backwardation is extreme, right, 125 00:07:07,839 --> 00:07:11,360 Speaker 1: So the you know, full word price of oil you know, 126 00:07:11,480 --> 00:07:15,400 Speaker 1: twelve eighteen months out is considerably lower. Uh, And that's 127 00:07:15,440 --> 00:07:17,640 Speaker 1: where they would effectively be hedging in their production. So 128 00:07:17,720 --> 00:07:19,840 Speaker 1: that's really, in some ways the price that matters more 129 00:07:19,880 --> 00:07:22,560 Speaker 1: than the spot price. So it's interesting here, particularly when 130 00:07:22,600 --> 00:07:25,720 Speaker 1: relating it to you know, discussions of you know, Chairman 131 00:07:25,760 --> 00:07:29,840 Speaker 1: Powell's worries about an unmooring of inflation expectations. Consumers care 132 00:07:29,840 --> 00:07:33,200 Speaker 1: about the spot price, whereas producers probably care about a 133 00:07:33,240 --> 00:07:35,520 Speaker 1: price you know, twelve to eighteen months down the line. 134 00:07:35,720 --> 00:07:38,600 Speaker 1: So the question is how can the SPR be used 135 00:07:38,640 --> 00:07:41,800 Speaker 1: to kind of you know, achieve some of that goal. Um. 136 00:07:41,840 --> 00:07:43,920 Speaker 1: A lot of the criticisms of the SPR I think 137 00:07:43,960 --> 00:07:48,240 Speaker 1: are warranted in that, you know, for instance, the release 138 00:07:48,280 --> 00:07:51,680 Speaker 1: at the end of one by the by administration was 139 00:07:51,800 --> 00:07:54,720 Speaker 1: very much just a oil prices are high, so let's 140 00:07:54,720 --> 00:07:56,840 Speaker 1: open the taps. Let the oil out and you know, 141 00:07:56,880 --> 00:07:59,240 Speaker 1: hopefully bring down the price of oil. That's a bad 142 00:07:59,400 --> 00:08:01,960 Speaker 1: use of the s PR because it's you know, using 143 00:08:02,000 --> 00:08:04,239 Speaker 1: a finite resource. It's you know, it's it's a stock 144 00:08:04,320 --> 00:08:08,160 Speaker 1: of oil. To bring down the prompt price without really 145 00:08:08,200 --> 00:08:10,280 Speaker 1: anything else and all was equal, that should you know, 146 00:08:10,400 --> 00:08:14,239 Speaker 1: reduce the investment incentive or investment signal to the patch. 147 00:08:14,560 --> 00:08:16,920 Speaker 1: But what if you you know, for every barrel you 148 00:08:17,200 --> 00:08:21,080 Speaker 1: sold today, you bought another barrel like Sconda was saying 149 00:08:21,160 --> 00:08:23,320 Speaker 1: in the in the in the futures market, you know, 150 00:08:23,320 --> 00:08:25,080 Speaker 1: twelve to eighteen months down the line. So then what 151 00:08:25,160 --> 00:08:27,720 Speaker 1: you're doing is you're both bringing down the spot price 152 00:08:27,920 --> 00:08:29,880 Speaker 1: and you're lifting up the back of the curves. You're 153 00:08:29,920 --> 00:08:33,839 Speaker 1: flattening the curve, which both reduces that kind of inflationary 154 00:08:33,880 --> 00:08:37,599 Speaker 1: pressure on consumers well also increasing the signal to producers 155 00:08:37,600 --> 00:08:39,800 Speaker 1: to produce more. So I think that is that is 156 00:08:39,840 --> 00:08:41,920 Speaker 1: the way the SPR should be used, and it hasn't 157 00:08:41,960 --> 00:08:44,200 Speaker 1: been used historically cause it's a bit more you know, 158 00:08:44,640 --> 00:08:47,960 Speaker 1: you know, technical, a bit more kind of uh, you know, 159 00:08:48,080 --> 00:08:51,160 Speaker 1: seems very Wall Street, and I know that Washington doesn't 160 00:08:51,160 --> 00:08:52,959 Speaker 1: always like to go down that road, but I think 161 00:08:52,960 --> 00:08:55,880 Speaker 1: it's a much more effective way of using that capacity 162 00:08:55,920 --> 00:09:00,199 Speaker 1: resource effectively as a buffer battery, rather than just as 163 00:09:00,440 --> 00:09:04,080 Speaker 1: viewing it as like an emergency stock. So oil might 164 00:09:04,120 --> 00:09:07,280 Speaker 1: be at a hundred and fifteen dollars per barrel or 165 00:09:07,320 --> 00:09:09,720 Speaker 1: whatever right now, but if you look at the futures 166 00:09:09,760 --> 00:09:13,840 Speaker 1: curve or the curve of all the various oil prices 167 00:09:13,880 --> 00:09:16,960 Speaker 1: out in time, you'll see that it's in backwardation, which 168 00:09:16,960 --> 00:09:20,360 Speaker 1: means that people expect prices to come down over the 169 00:09:20,440 --> 00:09:22,480 Speaker 1: long term, which is exactly the kind of thing that 170 00:09:22,640 --> 00:09:26,280 Speaker 1: doesn't incentivize people to ramp up production because they're thinking 171 00:09:26,280 --> 00:09:29,360 Speaker 1: they can't forward sell future barrels at a higher price. 172 00:09:29,760 --> 00:09:32,000 Speaker 1: Is that right, Yeah, exactly. And I would just quibble 173 00:09:32,000 --> 00:09:34,200 Speaker 1: a little bit about the expectation comment, and I think 174 00:09:34,200 --> 00:09:37,480 Speaker 1: it's not necessarily the market's expecting the price to fall. 175 00:09:37,679 --> 00:09:40,240 Speaker 1: It's that right now the market is willing to pay 176 00:09:40,880 --> 00:09:43,079 Speaker 1: X amount for a for a barrel of w T 177 00:09:43,200 --> 00:09:45,760 Speaker 1: I in eighteen months um, which is slightly different than 178 00:09:45,800 --> 00:09:48,439 Speaker 1: like let's say a market forecast. But just as an example, 179 00:09:48,480 --> 00:09:50,520 Speaker 1: so w T I right now is trading you know, 180 00:09:50,800 --> 00:09:52,800 Speaker 1: above a hundred and ten, around a hundred and twenty 181 00:09:52,880 --> 00:09:55,920 Speaker 1: or whatever, whereas eighteen months out it's it's it's decently 182 00:09:55,960 --> 00:09:58,480 Speaker 1: below a hundred. So I think that's the price signal 183 00:09:58,520 --> 00:10:01,080 Speaker 1: that I think producers are really looking at. And so 184 00:10:01,120 --> 00:10:02,840 Speaker 1: the question is how can you kind of achieve both 185 00:10:02,840 --> 00:10:05,800 Speaker 1: those goals? And I think the spr and again Employe 186 00:10:05,800 --> 00:10:08,760 Speaker 1: America has a tremendous amount of I think, really creative 187 00:10:08,800 --> 00:10:11,040 Speaker 1: policy work around this space to kind of change up 188 00:10:11,080 --> 00:10:13,040 Speaker 1: the playbook a little bit, because it's not you know, 189 00:10:13,160 --> 00:10:15,640 Speaker 1: this is a new kind of crisis we're facing, uh, 190 00:10:15,720 --> 00:10:17,360 Speaker 1: and I think it's going to take new ways of 191 00:10:17,360 --> 00:10:20,319 Speaker 1: trying to solve it. So the idea here, the core idea, 192 00:10:20,400 --> 00:10:23,959 Speaker 1: is to really bring markets into balance and elicit an 193 00:10:24,000 --> 00:10:27,400 Speaker 1: increase supplayer response, so they're just more gallant. So far, 194 00:10:28,480 --> 00:10:30,960 Speaker 1: the idea we know this is creating a tremendous amount 195 00:10:31,000 --> 00:10:34,440 Speaker 1: of political pressure and stress for the White House, and 196 00:10:34,520 --> 00:10:39,120 Speaker 1: I assume in Canada for Trudeau's administration as well, although 197 00:10:39,120 --> 00:10:42,000 Speaker 1: I haven't followed the politics as closely. So far, most 198 00:10:42,000 --> 00:10:45,600 Speaker 1: of the ideas they get bandied about don't actually seem 199 00:10:45,640 --> 00:10:47,920 Speaker 1: to address this. So let's talk about some of the 200 00:10:48,040 --> 00:10:52,720 Speaker 1: other ideas and their drawbacks. So what's wrong Scanda with 201 00:10:52,840 --> 00:10:56,520 Speaker 1: cutting the gas tax? So again, cutting the gas tax. Right, 202 00:10:56,559 --> 00:10:59,640 Speaker 1: when we think about gasoline, it is scarce in the 203 00:10:59,679 --> 00:11:01,880 Speaker 1: sense that, um, you can look the inventory at it 204 00:11:01,960 --> 00:11:04,080 Speaker 1: to say it's scarce. You can say that the supply 205 00:11:04,160 --> 00:11:07,559 Speaker 1: picture for crude oil and the terms of global refining capacity, 206 00:11:07,760 --> 00:11:10,520 Speaker 1: there's a clear crunch that is tied to the Russian 207 00:11:10,720 --> 00:11:13,440 Speaker 1: invasion of Ukraine. So we're dealing with real scarcity here. 208 00:11:13,880 --> 00:11:16,800 Speaker 1: And if we think about what the gas X as 209 00:11:16,880 --> 00:11:21,240 Speaker 1: a prop for making it easier to consume gasoline, and 210 00:11:21,280 --> 00:11:24,320 Speaker 1: when it's scarce, when it's a subsidy for demand at 211 00:11:24,360 --> 00:11:26,800 Speaker 1: a time when it's scarce, that typically doesn't check out. 212 00:11:27,160 --> 00:11:30,080 Speaker 1: It may sort of cross subsidize in some through a 213 00:11:30,120 --> 00:11:33,839 Speaker 1: bunch of intermediating mechanisms the supply side, but it's pretty 214 00:11:33,880 --> 00:11:36,360 Speaker 1: inefficient if it's going to do that, and it actually 215 00:11:36,840 --> 00:11:40,240 Speaker 1: it creates a disincentive for actually adjusting your consumption for 216 00:11:40,280 --> 00:11:42,720 Speaker 1: those people who can adjust their consumption. I think obviously 217 00:11:42,760 --> 00:11:44,640 Speaker 1: in the United States especially, there are a lot of 218 00:11:44,679 --> 00:11:47,160 Speaker 1: people who just can't adjust their consumption very easily because 219 00:11:47,200 --> 00:11:51,480 Speaker 1: there are dependent on an internal combustion vehicle for their livelihood. Um, 220 00:11:51,559 --> 00:11:54,400 Speaker 1: there are people probably in Westchester County. He could probably 221 00:11:54,400 --> 00:11:56,760 Speaker 1: take the train a little more. Um So there are 222 00:11:56,960 --> 00:12:01,520 Speaker 1: Western County in New York. So there's clearly um ability 223 00:12:01,600 --> 00:12:03,760 Speaker 1: to adjust consumption that you're taking off the table when 224 00:12:03,760 --> 00:12:06,920 Speaker 1: you sort of take these sort of blunt measures too. 225 00:12:07,760 --> 00:12:09,880 Speaker 1: All the all alse equal, it's a subsidy for consumption 226 00:12:10,040 --> 00:12:12,640 Speaker 1: and subsidy for demand when the root cause that we 227 00:12:12,679 --> 00:12:15,400 Speaker 1: really want to attack is on the supply side. If 228 00:12:15,400 --> 00:12:18,280 Speaker 1: you want to raise um to the said, you want 229 00:12:18,280 --> 00:12:20,080 Speaker 1: to bring supply and demand into balance. You don't want 230 00:12:20,080 --> 00:12:23,120 Speaker 1: some adjustment on the demand side and some increase in 231 00:12:23,280 --> 00:12:25,360 Speaker 1: terms of on the supply side. So all right, here's 232 00:12:25,360 --> 00:12:28,920 Speaker 1: another one that people talk about. What about and Rory 233 00:12:29,000 --> 00:12:33,560 Speaker 1: or Scanderble what happened? What about banning exports of energy? 234 00:12:33,600 --> 00:12:35,720 Speaker 1: You hear that too. It's like, Okay, the world demands 235 00:12:35,720 --> 00:12:37,080 Speaker 1: a lot, but we have plenty here, and we have 236 00:12:37,120 --> 00:12:40,080 Speaker 1: plenty of capacity. Why not just keep it all here 237 00:12:40,600 --> 00:12:44,360 Speaker 1: so that US consumers aren't fighting with global consumers. I 238 00:12:44,360 --> 00:12:46,280 Speaker 1: think there's two ways you could think about it. One, 239 00:12:46,400 --> 00:12:48,520 Speaker 1: the US had a crude oil export band for a 240 00:12:48,600 --> 00:12:51,000 Speaker 1: very very long time and and repealed that about a 241 00:12:51,000 --> 00:12:54,160 Speaker 1: half decade ago. Um that actually in some ways has 242 00:12:54,160 --> 00:12:57,240 Speaker 1: actually been pointed to that repeal, ironically is actually appointed 243 00:12:57,280 --> 00:12:59,160 Speaker 1: to as one of the reasons that the US refining 244 00:12:59,200 --> 00:13:01,480 Speaker 1: sector has had its kind of waned a little bit 245 00:13:01,559 --> 00:13:03,880 Speaker 1: over the past you know, five to seven years, because 246 00:13:04,000 --> 00:13:08,480 Speaker 1: the band had actually artificially kept the price of western 247 00:13:08,640 --> 00:13:12,280 Speaker 1: you know, West Texas intermediate or domestic US feedstock at 248 00:13:12,280 --> 00:13:14,400 Speaker 1: a lower price than global So it's actually effectively a 249 00:13:14,440 --> 00:13:17,960 Speaker 1: subsidies to two refiners. Now, now, what they're discussing and 250 00:13:18,000 --> 00:13:20,400 Speaker 1: what's been kind of floated around from some of the 251 00:13:20,480 --> 00:13:23,280 Speaker 1: you know leaks out of the out of the White 252 00:13:23,320 --> 00:13:27,000 Speaker 1: House and elsewhere, is a potential ban or at least 253 00:13:27,080 --> 00:13:30,640 Speaker 1: um limiting and cap on the export of refined products. 254 00:13:30,679 --> 00:13:34,120 Speaker 1: Because while the US you know, does you know, have 255 00:13:34,320 --> 00:13:36,559 Speaker 1: all of these kind of you know, imports and exports, 256 00:13:36,600 --> 00:13:40,880 Speaker 1: it is actually a net exporter of gasoline, diesel, etcetera. Uh, 257 00:13:40,920 --> 00:13:42,679 Speaker 1: and that is you know, and a lot of that 258 00:13:42,720 --> 00:13:46,640 Speaker 1: goes to Latin America in particular and elsewhere, and banning 259 00:13:46,760 --> 00:13:49,160 Speaker 1: that in particular would be you know, rescipe for a 260 00:13:49,200 --> 00:13:52,240 Speaker 1: diplomatic crisis. Um, A lot of allies depend on that, 261 00:13:52,360 --> 00:13:54,520 Speaker 1: and it would just kind of, you know, it would 262 00:13:54,520 --> 00:13:57,520 Speaker 1: further punish US refiners because right now, sure now they 263 00:13:57,559 --> 00:14:00,160 Speaker 1: don't have a dis kind of feast stock, but now 264 00:14:00,160 --> 00:14:03,600 Speaker 1: they actually have really you know, high value export markets 265 00:14:03,600 --> 00:14:05,240 Speaker 1: that they're exporting to. If you take that away, then 266 00:14:05,280 --> 00:14:07,320 Speaker 1: it's really going to be you know, you know, a 267 00:14:07,360 --> 00:14:11,680 Speaker 1: one to punch for for domestic US refining. So could 268 00:14:11,720 --> 00:14:14,679 Speaker 1: you talk a little bit more about the mechanism for 269 00:14:14,800 --> 00:14:18,439 Speaker 1: making this happen. So if someone says e s F 270 00:14:18,600 --> 00:14:22,160 Speaker 1: for the Exchange Stabilization Fund, I mean I have a 271 00:14:22,280 --> 00:14:25,640 Speaker 1: very very vague memory of it during the financial crisis, 272 00:14:25,680 --> 00:14:28,400 Speaker 1: But what exactly is it and what has it been 273 00:14:28,560 --> 00:14:33,960 Speaker 1: used for before? So the Exchange Stabilization Fund exists within 274 00:14:34,000 --> 00:14:37,960 Speaker 1: the Treasury Department. It has been used for a variety 275 00:14:37,960 --> 00:14:43,040 Speaker 1: of crises. But the statutory purposes around UM sort of 276 00:14:43,080 --> 00:14:44,640 Speaker 1: the commitments of the U S S of the I 277 00:14:44,800 --> 00:14:49,000 Speaker 1: m F that promote UM stable exchange rates. So it 278 00:14:49,000 --> 00:14:52,080 Speaker 1: could be in some cases very direct UM and even 279 00:14:52,120 --> 00:14:54,880 Speaker 1: still with some controversy, say the Mexican Paso crisis, of 280 00:14:56,920 --> 00:14:59,480 Speaker 1: the Treasury got involved made some short term loans through 281 00:14:59,480 --> 00:15:01,760 Speaker 1: the Exchange to Abalization Fund. It kind of got the 282 00:15:01,760 --> 00:15:05,760 Speaker 1: moniker of being some uh a high discretion um instrument, 283 00:15:06,000 --> 00:15:09,000 Speaker 1: but to support stable exchange rates In two thousand and eight, 284 00:15:09,280 --> 00:15:13,360 Speaker 1: Hank Paulson, than Treasury secretary, used it to guarantee money 285 00:15:13,440 --> 00:15:16,880 Speaker 1: market funds under the guys that stable money market funds 286 00:15:17,000 --> 00:15:20,080 Speaker 1: would be better for exchange rates stability. I think that's 287 00:15:20,080 --> 00:15:23,080 Speaker 1: a pretty legitimate argument, but it is attenuated, right. You 288 00:15:23,120 --> 00:15:25,360 Speaker 1: have to acknowledge that, like you're trying to like keep 289 00:15:25,440 --> 00:15:29,160 Speaker 1: money markets and keep what was a brewing and actually 290 00:15:29,520 --> 00:15:33,480 Speaker 1: spiraling financial crisis at the time um in place. Keep 291 00:15:33,520 --> 00:15:36,280 Speaker 1: that in check. Yes, that did create exchange rate volatility. 292 00:15:36,480 --> 00:15:38,280 Speaker 1: Something between the two is what we're calling for in 293 00:15:38,360 --> 00:15:40,840 Speaker 1: terms of it's well, it may not be uh directly 294 00:15:40,840 --> 00:15:43,440 Speaker 1: in exchange rate intervention, the exchange rate and balance of 295 00:15:43,480 --> 00:15:47,080 Speaker 1: payments struggles that are again right now brewing and growing. 296 00:15:47,240 --> 00:15:50,360 Speaker 1: In terms of developing and underdeveloped countries, and in terms 297 00:15:50,360 --> 00:15:53,080 Speaker 1: of sources for exchange rate volatility, commodities played a pretty 298 00:15:53,080 --> 00:15:55,560 Speaker 1: big role, specifically oil and food. That's what really matters 299 00:15:55,560 --> 00:15:57,680 Speaker 1: for import bills for a number of countries, and it's 300 00:15:57,680 --> 00:16:00,880 Speaker 1: where oil price spikes especially. We haven't really seen the 301 00:16:01,600 --> 00:16:05,440 Speaker 1: big declines yet, but in terms of the supply risk 302 00:16:05,480 --> 00:16:08,360 Speaker 1: from Russia and what the implications are like if you 303 00:16:08,360 --> 00:16:11,920 Speaker 1: want to attack those root causes. There's a pretty strong case. 304 00:16:12,000 --> 00:16:14,360 Speaker 1: It's a stronger case than the money Market Fund usage. 305 00:16:14,400 --> 00:16:17,160 Speaker 1: And I should also mention Steve Minuchen did pretty much 306 00:16:17,160 --> 00:16:19,800 Speaker 1: the same thing, probably through slightly through sort of FED 307 00:16:19,840 --> 00:16:23,840 Speaker 1: facilities using the Exchange Tabilization Fund before the CARES Act 308 00:16:23,880 --> 00:16:28,400 Speaker 1: passed two to effectively backstop money markets through FED facilities 309 00:16:28,480 --> 00:16:30,480 Speaker 1: using the Exchange Stabilization Fund. So we've used it for 310 00:16:30,480 --> 00:16:32,840 Speaker 1: those three purposes. This is a little yeah, I said, 311 00:16:32,880 --> 00:16:35,960 Speaker 1: less attenuated than that. It's within the discretion of the statute. 312 00:16:36,080 --> 00:16:37,680 Speaker 1: And I would say you can make a very strong 313 00:16:37,720 --> 00:16:42,200 Speaker 1: case that supporting stability and supply demand balances and reduced 314 00:16:42,240 --> 00:16:46,800 Speaker 1: likelihood of price bikes in key commodities can be very 315 00:16:46,840 --> 00:16:50,120 Speaker 1: justified and legitimate. And at this point the Treasury has 316 00:16:50,360 --> 00:16:52,720 Speaker 1: two or twenty one billion in that account with the 317 00:16:52,720 --> 00:16:54,920 Speaker 1: ability to actually use it pretty flexibly. I think there 318 00:16:54,920 --> 00:16:56,520 Speaker 1: are a lot of people who will shutter at the 319 00:16:56,560 --> 00:16:58,880 Speaker 1: notion of using it for this purpose, but I think 320 00:16:58,920 --> 00:17:01,440 Speaker 1: it's also time when we really need to think seriously 321 00:17:01,440 --> 00:17:04,240 Speaker 1: about what the supply implications of supply risks are on 322 00:17:04,359 --> 00:17:07,040 Speaker 1: exchange rates and financial stability. Let me ask you another 323 00:17:07,119 --> 00:17:11,040 Speaker 1: technical question about your plans so the implicit is you 324 00:17:11,240 --> 00:17:15,000 Speaker 1: how do you de risk production now, because as Rory 325 00:17:15,080 --> 00:17:17,760 Speaker 1: pointed out, the shape of the futures curve can tell 326 00:17:18,200 --> 00:17:20,760 Speaker 1: investors where they can hedge in or what what the 327 00:17:20,760 --> 00:17:23,399 Speaker 1: market is paying for eighteen months out, and it's not 328 00:17:23,480 --> 00:17:26,280 Speaker 1: as attractive as spots. So the price that we see 329 00:17:26,280 --> 00:17:29,240 Speaker 1: on the screen hundred and ten West Texas isn't necessarily 330 00:17:29,280 --> 00:17:33,040 Speaker 1: the price that investors could get. And so, okay, you 331 00:17:33,080 --> 00:17:35,320 Speaker 1: want to raise that. You want to lower the short end, 332 00:17:35,400 --> 00:17:37,840 Speaker 1: which is what retail pays the pump, and you want 333 00:17:37,840 --> 00:17:40,760 Speaker 1: to put some put a floor under the long end 334 00:17:40,960 --> 00:17:43,920 Speaker 1: so that investors so that companies will produce more. And 335 00:17:43,960 --> 00:17:47,000 Speaker 1: that creates that sort of like you get that supply response, 336 00:17:47,359 --> 00:17:49,240 Speaker 1: Where do you price that long end? So you're talking 337 00:17:49,280 --> 00:17:52,520 Speaker 1: about the idea of like you're the government can give 338 00:17:52,560 --> 00:17:55,719 Speaker 1: a put and so de risk production. How do you 339 00:17:55,880 --> 00:17:59,199 Speaker 1: price that? And what kind of like what is guaranteed 340 00:17:59,240 --> 00:18:01,560 Speaker 1: If I'm an oil company and I'm looking at this plan, 341 00:18:02,040 --> 00:18:05,359 Speaker 1: what is like the sort of like exact economics that 342 00:18:05,440 --> 00:18:08,119 Speaker 1: the government is potentially offering me here in order to 343 00:18:08,200 --> 00:18:11,880 Speaker 1: drill more and produce more. There are advantages to sort 344 00:18:11,880 --> 00:18:13,840 Speaker 1: of doing a forward contract that are made in terms 345 00:18:13,880 --> 00:18:16,560 Speaker 1: of simplicity, right, it's just look at the forward curve 346 00:18:16,600 --> 00:18:18,440 Speaker 1: and try to use that to price. And I think 347 00:18:18,480 --> 00:18:21,120 Speaker 1: that's that's a pretty helpful and legitimate way, as Rory 348 00:18:21,200 --> 00:18:23,360 Speaker 1: laid out, and we laid that under an original proposal 349 00:18:23,640 --> 00:18:25,760 Speaker 1: that this is something that it comes with at a 350 00:18:26,080 --> 00:18:29,000 Speaker 1: you take a smaller profit margin effectively right when you 351 00:18:29,280 --> 00:18:33,320 Speaker 1: lock in as a producer forward prices, but it's certainty 352 00:18:33,359 --> 00:18:35,800 Speaker 1: and if you can leverage that up, that's still pretty valuable. 353 00:18:35,960 --> 00:18:37,639 Speaker 1: But as you've see, if you've seen the oil and 354 00:18:37,880 --> 00:18:41,000 Speaker 1: the number of EMPs that have talked about lifting their 355 00:18:41,000 --> 00:18:44,080 Speaker 1: hedges specifically they don't want the burden of locking in 356 00:18:44,160 --> 00:18:47,320 Speaker 1: lower forward prices when they could ride high right now 357 00:18:47,440 --> 00:18:49,920 Speaker 1: on current spot prices. And so for those that are 358 00:18:50,000 --> 00:18:53,320 Speaker 1: have free cash flow and um are not capital constrained, 359 00:18:53,320 --> 00:18:55,760 Speaker 1: so they don't really have a need for financing and 360 00:18:55,760 --> 00:18:58,320 Speaker 1: they have enough for pain earnings to accelerate investment as 361 00:18:58,320 --> 00:19:01,240 Speaker 1: they so wish, they may not be as interested in that. 362 00:19:01,320 --> 00:19:03,879 Speaker 1: I think they would still be interested in sort of 363 00:19:04,160 --> 00:19:07,560 Speaker 1: downside price protections that they have the option, Like, optionality 364 00:19:07,600 --> 00:19:10,800 Speaker 1: is valuable even if you are so let's say we 365 00:19:10,880 --> 00:19:14,000 Speaker 1: actually don't know how long oil crude oil markets are 366 00:19:14,000 --> 00:19:15,840 Speaker 1: gonna stay tight, if they're gonna get tighter for how 367 00:19:15,880 --> 00:19:18,280 Speaker 1: long they're gonna get tighter like it maybe a year 368 00:19:18,359 --> 00:19:22,359 Speaker 1: and maybe a few months, Maybe it's um it's multiple years. 369 00:19:22,480 --> 00:19:25,439 Speaker 1: And in that environment, if spot prices are high, you 370 00:19:25,480 --> 00:19:28,440 Speaker 1: can still sell at high prices. But if prices crash, 371 00:19:28,640 --> 00:19:31,080 Speaker 1: and that could happen because of recession, that could happened 372 00:19:31,119 --> 00:19:34,800 Speaker 1: because of OPEC, that could happen because of maybe an 373 00:19:34,840 --> 00:19:37,480 Speaker 1: electric vehicle adoption. Right, there's all those certainties that are 374 00:19:37,560 --> 00:19:40,600 Speaker 1: very real, and I think all the major CEOs are 375 00:19:40,640 --> 00:19:43,439 Speaker 1: getting those questions from their shareholders and internal management of 376 00:19:43,440 --> 00:19:45,199 Speaker 1: what do we do in those environments. Well, if you 377 00:19:45,240 --> 00:19:48,480 Speaker 1: have if you have actual um downside price protection and 378 00:19:48,560 --> 00:19:51,600 Speaker 1: price risk is my farther the biggest risk to really 379 00:19:51,600 --> 00:19:54,520 Speaker 1: think about in this industry, then I think it's it's 380 00:19:54,560 --> 00:19:56,480 Speaker 1: a pretty valuable thing to have and say, Okay, we 381 00:19:56,480 --> 00:19:59,520 Speaker 1: can actually accelerate some investment in exchange for having the 382 00:20:00,040 --> 00:20:03,200 Speaker 1: side assurance that you need so to me to actually 383 00:20:03,240 --> 00:20:06,359 Speaker 1: make that financially viable. So the optionality is kind of critical, 384 00:20:06,400 --> 00:20:08,800 Speaker 1: and I think I've talked at least a few people 385 00:20:08,800 --> 00:20:10,960 Speaker 1: who work at MPs and kind of understand called the 386 00:20:11,000 --> 00:20:13,600 Speaker 1: financial map here to a degree that's suggest Yeah, the 387 00:20:13,640 --> 00:20:16,920 Speaker 1: optionality is valuable, even if I'm not someone who hedges 388 00:20:17,160 --> 00:20:19,640 Speaker 1: in terms of forward contracts. Um it doesn't solve every 389 00:20:19,640 --> 00:20:21,720 Speaker 1: problem in the industry. There's obviously other things that matter, 390 00:20:21,840 --> 00:20:24,280 Speaker 1: but I think this is getting out a pretty key 391 00:20:24,440 --> 00:20:39,560 Speaker 1: source of uncertainty and risk. I have a non technical question. 392 00:20:39,760 --> 00:20:43,880 Speaker 1: I guess it's a question about optics, which I've increasingly 393 00:20:43,960 --> 00:20:47,080 Speaker 1: come to realize are very, very important for the way 394 00:20:47,160 --> 00:20:51,400 Speaker 1: policy is actually made. But when we talk about the 395 00:20:51,440 --> 00:20:55,320 Speaker 1: Biden administration essentially providing a backstop or a way of 396 00:20:55,400 --> 00:20:59,800 Speaker 1: incentivizing further oil production, that just seems to be such 397 00:20:59,840 --> 00:21:03,919 Speaker 1: a massively different position to the way Biden came in, 398 00:21:04,520 --> 00:21:06,840 Speaker 1: where he was basically saying we're going to really crack 399 00:21:06,880 --> 00:21:10,120 Speaker 1: down on the fossil fuel industry, We're going to encourage 400 00:21:10,119 --> 00:21:13,640 Speaker 1: renewable energy, UH, turned down emissions and all of that. 401 00:21:14,200 --> 00:21:18,320 Speaker 1: How do you how how do you manage the optics 402 00:21:18,560 --> 00:21:23,120 Speaker 1: of moving from a clean energy policy to a policy 403 00:21:23,160 --> 00:21:28,520 Speaker 1: where you're essentially incentivizing or trying to incentivize more production 404 00:21:28,760 --> 00:21:31,639 Speaker 1: of fossil fuels, like the principle of resilience is an 405 00:21:31,640 --> 00:21:33,920 Speaker 1: important one to keep in mind that actually we need 406 00:21:34,000 --> 00:21:36,480 Speaker 1: to walk into gum here because we did have a 407 00:21:36,600 --> 00:21:39,760 Speaker 1: huge geopolitical shock. Um. I think there are certain stances 408 00:21:39,800 --> 00:21:43,000 Speaker 1: that were likely taken because it was politically convenient during 409 00:21:43,119 --> 00:21:48,919 Speaker 1: sort of primary election season. But the world has changed, 410 00:21:48,960 --> 00:21:51,679 Speaker 1: and their stances should be willing to adapt to the 411 00:21:51,680 --> 00:21:55,359 Speaker 1: current moment. Especially Uh, it probably was too far to 412 00:21:55,359 --> 00:21:57,760 Speaker 1: begin with to say that, Okay, we're going to sort 413 00:21:57,760 --> 00:22:00,840 Speaker 1: of block leasing and block sort of need certain try 414 00:22:00,880 --> 00:22:04,440 Speaker 1: to keep investment down in the oil industry in the US. 415 00:22:04,680 --> 00:22:06,560 Speaker 1: And at the same time, it's also what it's saying, 416 00:22:06,600 --> 00:22:08,200 Speaker 1: like you can just say the world has changed. I 417 00:22:08,200 --> 00:22:11,880 Speaker 1: think that's that's okay, and that's like, why is it okay? Well, one, 418 00:22:12,280 --> 00:22:14,560 Speaker 1: this kind of oil price futility is not actually very 419 00:22:14,640 --> 00:22:16,800 Speaker 1: helpful for a lot of reasons. But it's social stability, 420 00:22:16,800 --> 00:22:19,159 Speaker 1: whether it's even stability for the energy transition, because in 421 00:22:19,200 --> 00:22:22,080 Speaker 1: the end, metrochemical products are also relevant for that purpose. 422 00:22:22,160 --> 00:22:25,679 Speaker 1: And so if oil prices spike because Russian supply rapidly 423 00:22:25,720 --> 00:22:28,680 Speaker 1: comes offline, that's gonna have a lot more economical locations 424 00:22:28,680 --> 00:22:31,200 Speaker 1: and just about the price at the pump. So stability 425 00:22:31,280 --> 00:22:33,639 Speaker 1: is good, and in stability in a way that's actually 426 00:22:33,680 --> 00:22:36,960 Speaker 1: preventing price crashes is actually i'd say more in the 427 00:22:37,040 --> 00:22:40,240 Speaker 1: spirit of trying to adjust consumption patterns for the better. 428 00:22:40,400 --> 00:22:42,320 Speaker 1: So if you're providing the kind of price insurance I'm 429 00:22:42,359 --> 00:22:44,760 Speaker 1: talking about that prevents the sort of price crash scenario 430 00:22:44,800 --> 00:22:48,240 Speaker 1: in which we see gratuitous oil consumption and also one 431 00:22:48,280 --> 00:22:51,480 Speaker 1: in which industry kind of gets financially cleaned out, So 432 00:22:52,160 --> 00:22:53,960 Speaker 1: we should those are the kinds of things that I 433 00:22:53,960 --> 00:22:57,000 Speaker 1: think admission should see clearer eyes and try to be 434 00:22:57,040 --> 00:22:59,399 Speaker 1: able to bridge that gap. But it does like we 435 00:22:59,440 --> 00:23:01,040 Speaker 1: have to walk into gun here, and I think that's 436 00:23:01,040 --> 00:23:03,160 Speaker 1: something that if we don't, we're gonna have these really 437 00:23:03,200 --> 00:23:07,720 Speaker 1: messy handoffs between oil and gas to whatever the future 438 00:23:07,840 --> 00:23:10,800 Speaker 1: of sort of clean energy ends up being. And you 439 00:23:10,840 --> 00:23:13,639 Speaker 1: can make those investments just but those latter investments in 440 00:23:13,960 --> 00:23:16,840 Speaker 1: clean energy do take time. The technology is still in 441 00:23:16,920 --> 00:23:20,359 Speaker 1: certain and certain dimensions, and so those things we should 442 00:23:20,359 --> 00:23:23,000 Speaker 1: not expect those things to come online and somehow displace 443 00:23:23,600 --> 00:23:27,480 Speaker 1: oil and gas instantaneously. The technology and the production structure 444 00:23:27,520 --> 00:23:29,679 Speaker 1: is just not there yet compared to the timeline it 445 00:23:29,720 --> 00:23:32,480 Speaker 1: takes to be able to ramp up and ramp down 446 00:23:32,880 --> 00:23:36,080 Speaker 1: US oil production, which is like uniquely, it's such a 447 00:23:36,119 --> 00:23:39,240 Speaker 1: unique phenomenon in terms of geology and technology coming together 448 00:23:39,800 --> 00:23:42,479 Speaker 1: to turn what was once long dated investments that had 449 00:23:42,520 --> 00:23:45,080 Speaker 1: to happen. Are now on a much shorter cycle in 450 00:23:45,160 --> 00:23:47,639 Speaker 1: terms of it takes about i'd say nine to twelve 451 00:23:47,680 --> 00:23:49,760 Speaker 1: months before when you see the rig counts going up 452 00:23:49,760 --> 00:23:53,000 Speaker 1: to when you see production going up um up, And 453 00:23:53,160 --> 00:23:56,359 Speaker 1: if you think about the decline rates itself also are lower, 454 00:23:57,040 --> 00:23:59,800 Speaker 1: higher in shale as opposed to the past. So these 455 00:23:59,800 --> 00:24:01,879 Speaker 1: are sort of unique opportunities to really thread that needle. 456 00:24:02,040 --> 00:24:03,960 Speaker 1: I unfortunately don't think that there's really been a lot 457 00:24:04,000 --> 00:24:21,520 Speaker 1: of serious movement administration towards making threading me needle. Let's 458 00:24:21,520 --> 00:24:25,040 Speaker 1: bring in another dimension, rory of some of the condistrants 459 00:24:25,080 --> 00:24:27,080 Speaker 1: that's getting a lot of attention. And you already hinted 460 00:24:27,160 --> 00:24:31,800 Speaker 1: at this refining capacity. What's the problem? What where did 461 00:24:31,840 --> 00:24:33,840 Speaker 1: it go? And can you just sort of give us 462 00:24:33,880 --> 00:24:37,359 Speaker 1: the sketch stress of like why the refining aspect is 463 00:24:37,359 --> 00:24:40,920 Speaker 1: difficult right now? Yeah, So I've been in the industry 464 00:24:40,920 --> 00:24:44,679 Speaker 1: over a decade now, and the entire time prior to 465 00:24:45,000 --> 00:24:49,400 Speaker 1: this year, refining has more or less been a boring 466 00:24:49,520 --> 00:24:52,800 Speaker 1: kind of backwater of the overall oil industry in that 467 00:24:52,920 --> 00:24:57,240 Speaker 1: it has been chronically oversupplied, over capacity and margins have 468 00:24:57,359 --> 00:25:01,000 Speaker 1: been kind of generally bad. Um. Mix that with the 469 00:25:01,040 --> 00:25:04,520 Speaker 1: fact that you know, having a refinery is it's a 470 00:25:04,640 --> 00:25:09,600 Speaker 1: very highly polluting, emitting facility. A lot of communities don't 471 00:25:09,640 --> 00:25:13,639 Speaker 1: want them around there, you know, typically very old. You know, 472 00:25:13,680 --> 00:25:16,800 Speaker 1: the classic refrain is that is that there hasn't been 473 00:25:16,840 --> 00:25:20,440 Speaker 1: a new, major green field refinery built in the United 474 00:25:20,440 --> 00:25:23,440 Speaker 1: States since nineteen seven, which is a very very long 475 00:25:23,480 --> 00:25:25,920 Speaker 1: time to go without kind of new facilities. All all 476 00:25:25,960 --> 00:25:28,400 Speaker 1: of the capacity growth we've seen has basically been bolted 477 00:25:28,480 --> 00:25:31,919 Speaker 1: onto existing facilities. So and just to put in perspective 478 00:25:32,160 --> 00:25:36,200 Speaker 1: the extent of the crisis we're currently facing. Normally, crack 479 00:25:36,280 --> 00:25:39,719 Speaker 1: spreads or what we'd or refining margins the difference between 480 00:25:40,400 --> 00:25:43,800 Speaker 1: the price of crude oil and the value of the 481 00:25:43,840 --> 00:25:47,600 Speaker 1: refined products themselves. Normally that's you know, gy rates between 482 00:25:47,680 --> 00:25:49,960 Speaker 1: you know, ten and twenty dollars a barrel, So on 483 00:25:50,080 --> 00:25:52,320 Speaker 1: top of the price of oil, consumers are paying that 484 00:25:52,320 --> 00:25:55,680 Speaker 1: ten to twenty dollars a barrel of refining cost essentially 485 00:25:55,800 --> 00:25:58,320 Speaker 1: at the pump that is currently at you know, in 486 00:25:58,359 --> 00:26:01,679 Speaker 1: the United States between five dan seventy dollars a barrel, 487 00:26:02,000 --> 00:26:05,560 Speaker 1: so you know, three three and a half times normal. Uh. 488 00:26:05,600 --> 00:26:09,160 Speaker 1: And that's why while oil prices are are very high, 489 00:26:09,240 --> 00:26:13,080 Speaker 1: consumer pump prices are exceptionally high. Uh, you know, highest 490 00:26:13,160 --> 00:26:15,600 Speaker 1: by a long shot through history. And that's a big 491 00:26:15,640 --> 00:26:18,679 Speaker 1: part of the reason why. So there was this It 492 00:26:18,720 --> 00:26:21,880 Speaker 1: was it was generally undesirable to invest in new refining 493 00:26:21,880 --> 00:26:25,120 Speaker 1: capacity for a whole bunch of reasons, particularly in the West, uh, 494 00:26:25,240 --> 00:26:28,119 Speaker 1: North America, Western Europe, et cetera. At the same time, 495 00:26:28,240 --> 00:26:31,360 Speaker 1: you you had this capacity pressure from a lot of 496 00:26:31,480 --> 00:26:35,840 Speaker 1: particularly emerging markets. Um. You know, areas in Africa. There's 497 00:26:35,840 --> 00:26:38,320 Speaker 1: a major refinery that's been coming online for a while 498 00:26:38,359 --> 00:26:40,639 Speaker 1: now in Nigeria. And the other areas that you have 499 00:26:40,680 --> 00:26:43,479 Speaker 1: a lot of capacity coming online are China and India, 500 00:26:43,520 --> 00:26:46,399 Speaker 1: where you know, a lot of the incremental demand growth 501 00:26:46,440 --> 00:26:50,439 Speaker 1: is expected and they're gonna be very new, highly sophisticated refineries. 502 00:26:50,520 --> 00:26:52,600 Speaker 1: So they have been putting this pressure, and you saw 503 00:26:52,680 --> 00:26:55,720 Speaker 1: this kind of tidal wave of capacity coming online. So 504 00:26:55,840 --> 00:26:58,720 Speaker 1: everyone was slowly winding down or at least you know, 505 00:26:58,840 --> 00:27:02,760 Speaker 1: disinvesting from the refining assets in the West. Um, and 506 00:27:02,760 --> 00:27:06,160 Speaker 1: then that you know, uh, that trend was pushed into 507 00:27:06,240 --> 00:27:10,040 Speaker 1: overdrive during the initial bout of COVID, when obviously demand 508 00:27:10,080 --> 00:27:13,240 Speaker 1: completely collapsed and everyone was like, Okay, well maybe we're 509 00:27:13,240 --> 00:27:16,080 Speaker 1: planning on, you know, retiring this facility in a year 510 00:27:16,160 --> 00:27:18,439 Speaker 1: or two, let's just do it now, because this seems 511 00:27:18,440 --> 00:27:20,600 Speaker 1: like a terrible time to kind of try and hold 512 00:27:20,600 --> 00:27:22,879 Speaker 1: on when we're so close to the end. So I 513 00:27:22,880 --> 00:27:26,399 Speaker 1: think what's really happened, unfortunately, is we have this capacity 514 00:27:26,440 --> 00:27:29,320 Speaker 1: coming down the line globally, and then we had this 515 00:27:29,440 --> 00:27:32,600 Speaker 1: bridge of these kind of old facilities that we're going 516 00:27:32,640 --> 00:27:34,800 Speaker 1: to kind of get us across the finish line, and 517 00:27:34,840 --> 00:27:36,959 Speaker 1: that bridge is more or less been collapsed by COVID, 518 00:27:37,880 --> 00:27:40,840 Speaker 1: And now we're in this period of exceptionally high and 519 00:27:40,840 --> 00:27:45,240 Speaker 1: exceptionally volatile refining capacity constraints that have been pushed into 520 00:27:45,440 --> 00:27:49,480 Speaker 1: further overdrive by things like the Russia shock, because in 521 00:27:49,520 --> 00:27:52,680 Speaker 1: addition to being a major export of crude oil, Russia 522 00:27:52,760 --> 00:27:56,320 Speaker 1: is also a major exporter of refined products, mostly kind 523 00:27:56,320 --> 00:27:59,720 Speaker 1: of um, you know, partially refined feedstock, but also diesel. 524 00:28:00,200 --> 00:28:02,480 Speaker 1: And finally, the other thing that's kind of come all 525 00:28:02,520 --> 00:28:05,399 Speaker 1: together at the same time here is that China is 526 00:28:05,520 --> 00:28:09,240 Speaker 1: also normally a fairly large export or refined products, but 527 00:28:09,359 --> 00:28:13,120 Speaker 1: for a variety of domestic reasons, one of the most 528 00:28:13,160 --> 00:28:16,399 Speaker 1: notable ones being a stated intention to reduce the emissions 529 00:28:16,440 --> 00:28:20,240 Speaker 1: in China, they've actually been running their refineries less hot 530 00:28:20,320 --> 00:28:24,000 Speaker 1: and basically banning exports, not not fully banning, but drastically 531 00:28:24,160 --> 00:28:27,680 Speaker 1: restricting exports. So I think we're looking at what can 532 00:28:27,720 --> 00:28:30,320 Speaker 1: be done. One of the easiest things is to try 533 00:28:30,400 --> 00:28:33,320 Speaker 1: or one of the simplest things, theoretically would be to 534 00:28:33,320 --> 00:28:39,280 Speaker 1: try and press Beijing to loosen those refined product export restrictions. Alternatively, 535 00:28:39,360 --> 00:28:41,960 Speaker 1: the other thing, and we've been talking about policy options here. 536 00:28:42,360 --> 00:28:45,200 Speaker 1: One of the policy options that has been generally been 537 00:28:45,320 --> 00:28:47,360 Speaker 1: kind of derided, I think by the industry, but I 538 00:28:47,400 --> 00:28:51,920 Speaker 1: think is actually pretty interesting is this idea floated normally 539 00:28:51,960 --> 00:28:56,480 Speaker 1: associated with with Secretary Yellen um of a buyer's cartel 540 00:28:56,600 --> 00:28:59,360 Speaker 1: or a price cap on Russian exports. And this would 541 00:28:59,360 --> 00:29:02,240 Speaker 1: be effective a way of saying, okay, instead of having 542 00:29:02,320 --> 00:29:06,280 Speaker 1: full blown kind of Iran style secondary sanctions on anyone 543 00:29:06,320 --> 00:29:09,640 Speaker 1: purchasing Russian exports, you will only sanction barrels that are 544 00:29:09,640 --> 00:29:13,280 Speaker 1: purchased above a certain price threshold so that you can 545 00:29:13,320 --> 00:29:16,000 Speaker 1: still reduce pressure, or you can kind of reduce pressure 546 00:29:16,040 --> 00:29:19,080 Speaker 1: on the overall global price system, will also still depriving 547 00:29:19,120 --> 00:29:21,720 Speaker 1: mos Cow of you know, war revenue. So I think 548 00:29:21,720 --> 00:29:23,520 Speaker 1: this is this, you know, we're trying to find all 549 00:29:23,600 --> 00:29:26,960 Speaker 1: these different ways to address this situation. I think the 550 00:29:27,040 --> 00:29:30,120 Speaker 1: same general philosophy could be applied to refined exports from 551 00:29:30,160 --> 00:29:34,000 Speaker 1: Russia as well. So one of the criticisms of government 552 00:29:34,080 --> 00:29:36,920 Speaker 1: intervention in the market has always been that it might 553 00:29:37,200 --> 00:29:42,600 Speaker 1: inadvertently end up exacerbating booms and bus versus actually smoothing them. 554 00:29:42,680 --> 00:29:46,240 Speaker 1: And we've seen this dynamic a number of times um 555 00:29:46,320 --> 00:29:48,800 Speaker 1: in places where there is a lot of government intervention, 556 00:29:48,880 --> 00:29:51,440 Speaker 1: and I'm thinking mostly of China, and one of my 557 00:29:51,480 --> 00:29:54,959 Speaker 1: favorite examples there is the government trying to smooth out 558 00:29:55,040 --> 00:30:00,440 Speaker 1: the pig price cycle post African swine fee verse. So, 559 00:30:00,600 --> 00:30:02,560 Speaker 1: you know, prices went up because there was a shortage 560 00:30:02,600 --> 00:30:05,320 Speaker 1: of pigs, and then the government tried to ramp up 561 00:30:05,360 --> 00:30:08,479 Speaker 1: pig production and prices collapsed, and everyone who had decided 562 00:30:08,480 --> 00:30:10,840 Speaker 1: they were going to become a pig farmer and expand 563 00:30:10,880 --> 00:30:15,080 Speaker 1: their pig production facilities suddenly was losing money. So I 564 00:30:15,080 --> 00:30:17,600 Speaker 1: guess my question is, how do you actually how do 565 00:30:17,640 --> 00:30:21,560 Speaker 1: you ensure that these types of support measures smooth the 566 00:30:21,640 --> 00:30:25,840 Speaker 1: cycle rather than exacerbate them on the way up as 567 00:30:25,840 --> 00:30:27,520 Speaker 1: well as on the way down. I think there's a 568 00:30:27,520 --> 00:30:30,120 Speaker 1: way that you can. I mean, the issue here is 569 00:30:30,120 --> 00:30:32,720 Speaker 1: that we're in an acute crisis today, So I think 570 00:30:32,720 --> 00:30:35,240 Speaker 1: there's this question, Like there's an example, for instance, of 571 00:30:35,360 --> 00:30:39,760 Speaker 1: a over a hundred year old refinery in Texas that 572 00:30:39,880 --> 00:30:43,600 Speaker 1: is slated for retirement next year, and the kind of 573 00:30:43,680 --> 00:30:45,840 Speaker 1: estimates I've seen or that it would cost three billion 574 00:30:45,880 --> 00:30:48,160 Speaker 1: dollars to get it up to kind of get it 575 00:30:48,200 --> 00:30:52,040 Speaker 1: back to some kind of you know, reasonable state for operation. 576 00:30:52,480 --> 00:30:55,160 Speaker 1: And while three billion dollars is obviously a tremendous amount 577 00:30:55,160 --> 00:30:59,840 Speaker 1: of money, when the overall kind of consumption base globally 578 00:30:59,840 --> 00:31:02,680 Speaker 1: and particularly the United States is paying like I was saying, 579 00:31:02,760 --> 00:31:04,960 Speaker 1: kind of three to five, you know, three to four 580 00:31:05,040 --> 00:31:09,120 Speaker 1: times the refining margins, it's very easy to cover, you know, 581 00:31:09,160 --> 00:31:11,840 Speaker 1: the economic impact of of three billion dollars on that 582 00:31:11,880 --> 00:31:15,000 Speaker 1: scale very quickly. So I think I think the hope 583 00:31:15,080 --> 00:31:16,640 Speaker 1: is that you can you can kind of get a 584 00:31:16,680 --> 00:31:19,800 Speaker 1: short term stop gap solution that then you can kind 585 00:31:19,840 --> 00:31:23,680 Speaker 1: of let the market take back over, because again we're 586 00:31:23,680 --> 00:31:28,920 Speaker 1: mostly trying to uh combat the effects of this you know, 587 00:31:28,960 --> 00:31:32,320 Speaker 1: exholginous shock of COVID that pushed all of and this 588 00:31:32,360 --> 00:31:36,320 Speaker 1: is a classic theme on your podcast, especially of accelerating 589 00:31:36,360 --> 00:31:40,280 Speaker 1: these pre existing trends and that had happened for you know, 590 00:31:40,520 --> 00:31:42,200 Speaker 1: in the bad ways of kind of a wind down 591 00:31:42,200 --> 00:31:44,080 Speaker 1: in the industry. So I think the hope would be 592 00:31:44,400 --> 00:31:47,960 Speaker 1: to kind of do something temporary as a stop gap. 593 00:31:48,000 --> 00:31:50,080 Speaker 1: And then also I think when we can start to 594 00:31:50,120 --> 00:31:53,920 Speaker 1: think about things like a Sconda's proposal around the SPR, 595 00:31:54,320 --> 00:31:56,800 Speaker 1: I think that is a way that you can kind 596 00:31:56,800 --> 00:32:00,800 Speaker 1: of change the kind of operational concept of an asset 597 00:32:00,840 --> 00:32:03,200 Speaker 1: like the SPR to be more flexible and more useful 598 00:32:03,200 --> 00:32:05,840 Speaker 1: in all of these instances, because you're not if you're 599 00:32:05,840 --> 00:32:08,920 Speaker 1: just shifting the shape of the curve, that's by definition 600 00:32:08,960 --> 00:32:11,360 Speaker 1: not going to exacerbate booms and bus you are flattening 601 00:32:11,360 --> 00:32:14,600 Speaker 1: that booming bus. Just to be clear, Scanda, or is 602 00:32:14,640 --> 00:32:18,480 Speaker 1: there anything the government could do right now to expand 603 00:32:18,800 --> 00:32:22,880 Speaker 1: domestic refining capacity? Is other facilities that were recently closed 604 00:32:22,920 --> 00:32:25,959 Speaker 1: that could be reopened? Uh? Is there are other facilities 605 00:32:26,000 --> 00:32:30,160 Speaker 1: that could be expanded? Like is that what? What can 606 00:32:30,200 --> 00:32:33,840 Speaker 1: be done there. So I think that because of the 607 00:32:34,680 --> 00:32:36,880 Speaker 1: or finding as an industry, is very hard to sort 608 00:32:36,880 --> 00:32:39,240 Speaker 1: of make a buck over time, even though and you 609 00:32:39,360 --> 00:32:41,880 Speaker 1: typically have one or two years in which the bulk 610 00:32:41,880 --> 00:32:45,200 Speaker 1: of the payout really materializes. And so when you think 611 00:32:45,240 --> 00:32:47,120 Speaker 1: about like the amount of duration in your capital structure, 612 00:32:47,160 --> 00:32:48,920 Speaker 1: you need to be able to actually manage that. It's 613 00:32:48,920 --> 00:32:50,840 Speaker 1: sort of you do need to I don't know, it's 614 00:32:50,840 --> 00:32:53,080 Speaker 1: not gonna be something that's solved through uh sort of 615 00:32:53,120 --> 00:32:55,080 Speaker 1: any kind of short term financing or anything like that. 616 00:32:55,120 --> 00:32:57,240 Speaker 1: It's something that you do need to sort of directly 617 00:32:57,280 --> 00:32:59,160 Speaker 1: fund that. Some people may not like that, but that 618 00:32:59,280 --> 00:33:02,239 Speaker 1: is something that if it costs three billion dollars, like, 619 00:33:02,280 --> 00:33:04,600 Speaker 1: that's something that's, uh, that's got to be considered if 620 00:33:04,640 --> 00:33:07,680 Speaker 1: you really want to kind of keep existing capacity online. 621 00:33:07,760 --> 00:33:10,080 Speaker 1: There's there were a number of refineries that were closed 622 00:33:10,080 --> 00:33:11,959 Speaker 1: in the last five years. So this has been a 623 00:33:12,000 --> 00:33:14,280 Speaker 1: sort of secular phenomenon and not nothing really related to 624 00:33:14,360 --> 00:33:17,000 Speaker 1: the political cycle to the extent you can. It's it's 625 00:33:17,040 --> 00:33:19,640 Speaker 1: not easy to be able to turn on an existing refinery. 626 00:33:19,640 --> 00:33:21,320 Speaker 1: You should really have an engineer on to talk about 627 00:33:21,480 --> 00:33:23,240 Speaker 1: what it would take. I've talked to a couple of 628 00:33:23,240 --> 00:33:27,040 Speaker 1: them who have talked about effectively restarting a refinery in 629 00:33:27,040 --> 00:33:30,480 Speaker 1: certain countries, and it does take time, it's not impossible. 630 00:33:30,560 --> 00:33:32,520 Speaker 1: It could be on a timeline that's stills relevant for 631 00:33:32,560 --> 00:33:35,480 Speaker 1: sort of bridging the gap between where refining capacity is 632 00:33:35,520 --> 00:33:37,600 Speaker 1: now and where it likely will be in a few 633 00:33:37,640 --> 00:33:42,320 Speaker 1: years when, especially in emerging markets, we see refining capacity emerge, 634 00:33:42,680 --> 00:33:45,280 Speaker 1: and so in that time there's probably something useful to 635 00:33:45,280 --> 00:33:47,200 Speaker 1: be done. It's just important to be a little bit 636 00:33:47,280 --> 00:33:49,640 Speaker 1: humble about it, and that there is a refining bottleneck, 637 00:33:49,680 --> 00:33:51,640 Speaker 1: there's only so much you can do. There is uh 638 00:33:52,280 --> 00:33:55,120 Speaker 1: you can try to fund um some of the existing 639 00:33:55,120 --> 00:33:57,400 Speaker 1: capacity and make sure it doesn't get shelved too quickly. 640 00:33:57,760 --> 00:34:01,239 Speaker 1: And probably there's stuff on the trades side where if 641 00:34:01,320 --> 00:34:04,239 Speaker 1: China is sort of I don't know, I don't want 642 00:34:04,280 --> 00:34:06,000 Speaker 1: to go too much into the motivations, but the fact 643 00:34:06,000 --> 00:34:08,800 Speaker 1: that we're finding in a global refining capacity crunch and 644 00:34:09,040 --> 00:34:12,279 Speaker 1: they've kind of intentionally decided to not run their refineries 645 00:34:12,280 --> 00:34:15,240 Speaker 1: at quite the same pace that we're seeing in the US, 646 00:34:15,400 --> 00:34:16,840 Speaker 1: it may be something to do there in terms of 647 00:34:16,840 --> 00:34:19,359 Speaker 1: diplomatic and trade channels. So Joe and I were talking 648 00:34:19,400 --> 00:34:21,560 Speaker 1: about this a little bit in the intro. But the 649 00:34:21,600 --> 00:34:25,319 Speaker 1: FED is raising rates until inflation comes down. Energy and 650 00:34:25,400 --> 00:34:29,400 Speaker 1: gas prices seem to be a big part of rising inflation. 651 00:34:29,920 --> 00:34:34,160 Speaker 1: What exactly is the impact of raising interest rates on 652 00:34:34,440 --> 00:34:38,360 Speaker 1: oil and gas prices? Because on the one hand, you 653 00:34:38,400 --> 00:34:43,120 Speaker 1: would expect raising interest rates to bring down consumption and 654 00:34:43,320 --> 00:34:46,319 Speaker 1: reduce prices that way, and at the same time you 655 00:34:46,320 --> 00:34:50,880 Speaker 1: would expect lower prices via demand destruction not to be 656 00:34:51,600 --> 00:34:57,200 Speaker 1: necessarily a good thing for encouraging future production increases. So 657 00:34:57,680 --> 00:35:00,000 Speaker 1: how do you square the sort of the overall impact 658 00:35:00,000 --> 00:35:04,400 Speaker 1: active rate increases on on prices here? Well, what's it 659 00:35:04,440 --> 00:35:07,279 Speaker 1: really interesting here in particular is you know, even in 660 00:35:07,640 --> 00:35:10,880 Speaker 1: years where we've had very serious recessions, like back in 661 00:35:10,920 --> 00:35:14,040 Speaker 1: the you know, two eight nine financial crisis, you didn't 662 00:35:14,080 --> 00:35:17,239 Speaker 1: actually see that much of an outright contraction in global 663 00:35:17,800 --> 00:35:20,760 Speaker 1: oil demand. It's it's really more of a flattening typically. 664 00:35:20,880 --> 00:35:22,840 Speaker 1: Obviously in the beginning of COVID you did, but that 665 00:35:22,880 --> 00:35:26,480 Speaker 1: was a very particular kind of recession and crisis. So 666 00:35:26,680 --> 00:35:29,279 Speaker 1: I think theoretically what you would do is you would 667 00:35:29,320 --> 00:35:32,440 Speaker 1: more or less buy time for supply to catch up, 668 00:35:32,560 --> 00:35:36,799 Speaker 1: rather than bringing outright demand back down to the supply level. 669 00:35:37,000 --> 00:35:38,680 Speaker 1: So it would help, but it would help in a 670 00:35:38,800 --> 00:35:43,359 Speaker 1: very disruptive and kind of economic and socially deliterious way. 671 00:35:43,600 --> 00:35:46,360 Speaker 1: The other irony here, like you were saying, not only 672 00:35:46,840 --> 00:35:50,240 Speaker 1: are it would you theoretically, by bringing prices down, reduce 673 00:35:50,320 --> 00:35:53,960 Speaker 1: the incentive to invest more in new supply. But I 674 00:35:54,000 --> 00:35:55,719 Speaker 1: think one of the things I was saying last time 675 00:35:55,760 --> 00:35:57,279 Speaker 1: I was on the podcast was one of one of 676 00:35:57,280 --> 00:36:00,400 Speaker 1: the things I think will drive eventual E n P 677 00:36:00,600 --> 00:36:04,480 Speaker 1: reinvestment will be the performance of their of their equities. 678 00:36:04,840 --> 00:36:08,120 Speaker 1: Um And what we've seen by this aggressive move by 679 00:36:08,120 --> 00:36:11,279 Speaker 1: the FED has obviously taken a tremendous amount of air 680 00:36:11,320 --> 00:36:13,920 Speaker 1: out of the overall market, but that includes oil and 681 00:36:13,960 --> 00:36:17,320 Speaker 1: gas equities, which, while still performing very well, have actually 682 00:36:17,320 --> 00:36:20,200 Speaker 1: fallen back considerably over the past week or so. Um 683 00:36:20,320 --> 00:36:24,760 Speaker 1: So that again, I think, pulls back in the wrong way. 684 00:36:25,320 --> 00:36:27,400 Speaker 1: UM So, yeah, you could. It's one of the things 685 00:36:27,440 --> 00:36:31,000 Speaker 1: that you could theoretically get to that goal, but in 686 00:36:31,080 --> 00:36:33,879 Speaker 1: a in the kind of a roundabout and kind of 687 00:36:34,239 --> 00:36:38,600 Speaker 1: deeply ineffective or inefficient manner. Yeah. I'll just talk on 688 00:36:38,800 --> 00:36:41,279 Speaker 1: two key mechanisms to I think about here. One is, 689 00:36:41,600 --> 00:36:43,520 Speaker 1: even though the price of oil in the US has 690 00:36:43,520 --> 00:36:46,440 Speaker 1: obviously gone up quite considerably. It's actually much higher for 691 00:36:46,640 --> 00:36:48,920 Speaker 1: countries they're not going to back to the dollar, right 692 00:36:48,960 --> 00:36:51,759 Speaker 1: so that they actually the dollar effect, so we dollar 693 00:36:51,760 --> 00:36:55,440 Speaker 1: appreciation that is effective. The oil is much more expensive, 694 00:36:55,440 --> 00:36:58,640 Speaker 1: has actually increased even more in a number of developed 695 00:36:58,640 --> 00:37:01,600 Speaker 1: and developing countries. And so that's one part of demand 696 00:37:01,640 --> 00:37:04,719 Speaker 1: destruction where it's actually the burden for other countries and 697 00:37:04,800 --> 00:37:07,319 Speaker 1: not the US through some of the fed's actions and 698 00:37:07,360 --> 00:37:09,920 Speaker 1: the FEDS forcefulness right now. And so that's that's one 699 00:37:09,960 --> 00:37:11,480 Speaker 1: part of it. The other part that I would just 700 00:37:11,560 --> 00:37:15,840 Speaker 1: highlight is, yes, maybe the FED tightening at the margin 701 00:37:15,920 --> 00:37:19,120 Speaker 1: leads to lower inflation and lower prices through some sort 702 00:37:19,120 --> 00:37:21,160 Speaker 1: of demand channels, but it is going to cram the 703 00:37:21,160 --> 00:37:24,440 Speaker 1: supply side to in the process. Because every single E 704 00:37:24,520 --> 00:37:27,279 Speaker 1: n P is probably getting the question, now, are you 705 00:37:27,320 --> 00:37:30,839 Speaker 1: sure that your capital plans can withstand recession, especially since 706 00:37:30,880 --> 00:37:32,840 Speaker 1: like the return performance has been so poor. And I 707 00:37:32,840 --> 00:37:35,160 Speaker 1: think that's a very rational question, and it's one that 708 00:37:35,280 --> 00:37:37,560 Speaker 1: I always say. The Fed's pretty much encouraging them to 709 00:37:37,600 --> 00:37:41,200 Speaker 1: ask this question, which it's I guess maybe it's solved 710 00:37:41,200 --> 00:37:44,520 Speaker 1: some sort of big macroeconomic inflation challenge if you push 711 00:37:44,520 --> 00:37:47,360 Speaker 1: it hard enough, like Vulker, but it's actually not good 712 00:37:47,400 --> 00:37:50,359 Speaker 1: for the supply side responses that they claim to be 713 00:37:50,360 --> 00:37:53,440 Speaker 1: hoping for because at least to greater reluctance to invest. 714 00:37:53,680 --> 00:37:55,680 Speaker 1: So this is where I was gonna go, Scander, I mean, 715 00:37:55,760 --> 00:37:59,239 Speaker 1: big picture, You've been really sounding the alarm pretty intensely 716 00:37:59,440 --> 00:38:03,759 Speaker 1: on this topic for a while. Why the urgency? And 717 00:38:03,800 --> 00:38:05,759 Speaker 1: I just wanted like, like, how big of a deal 718 00:38:05,800 --> 00:38:08,040 Speaker 1: is it? What are the stakes that we're talking about 719 00:38:08,480 --> 00:38:11,320 Speaker 1: if this sort of if there isn't a way either 720 00:38:11,360 --> 00:38:14,600 Speaker 1: through industry or public private relations to get the oil 721 00:38:14,600 --> 00:38:16,480 Speaker 1: price down, like just sort of lay it out. Why 722 00:38:16,560 --> 00:38:18,319 Speaker 1: this is so urgent in your view? I think it's 723 00:38:18,320 --> 00:38:20,520 Speaker 1: so urgent. And obviously we are a think tank focus 724 00:38:20,520 --> 00:38:22,279 Speaker 1: on full employment and yet we're start of talking about 725 00:38:22,280 --> 00:38:25,560 Speaker 1: oil and policy. It's that oil price shocks are macro 726 00:38:25,680 --> 00:38:29,319 Speaker 1: economically relevant. Commodity price shocks are macroeconomically relevant, and they 727 00:38:29,320 --> 00:38:32,040 Speaker 1: can actually lead to greater business cycle in stability and 728 00:38:32,239 --> 00:38:35,920 Speaker 1: over time, if that instability is not managed, leads to recession, 729 00:38:35,960 --> 00:38:39,359 Speaker 1: higher unemployment, slack labor markets that are bad for everyone. Look, 730 00:38:39,360 --> 00:38:41,239 Speaker 1: there's a lot of there's there's two channels I think 731 00:38:41,280 --> 00:38:44,280 Speaker 1: are really important to think about. They're both very highly 732 00:38:44,280 --> 00:38:47,480 Speaker 1: salient to this current moment. One is even like, let's 733 00:38:47,520 --> 00:38:49,640 Speaker 1: leave aside the FED for a second, oil prices going 734 00:38:49,680 --> 00:38:52,120 Speaker 1: up if oil prices spike further from here, which I 735 00:38:52,120 --> 00:38:55,799 Speaker 1: think there's clearly a scenario with second materialized. That is 736 00:38:55,840 --> 00:38:58,680 Speaker 1: one in which you will see more consumer spending be 737 00:38:58,760 --> 00:39:02,040 Speaker 1: dedicated towards price at the pump food. These are the 738 00:39:02,040 --> 00:39:05,040 Speaker 1: areas where we've seen like if you say commodity price 739 00:39:05,080 --> 00:39:07,880 Speaker 1: pikes in general, but I'd say the elastic sectors and 740 00:39:07,880 --> 00:39:11,560 Speaker 1: so nondiscretionary that takes away demand from discretionary sectors. All 741 00:39:11,560 --> 00:39:14,000 Speaker 1: else equal, consumer discretionary sectors is where there's actually a 742 00:39:14,000 --> 00:39:15,600 Speaker 1: lot of labor that's also tied to it, so we'll 743 00:39:15,600 --> 00:39:18,680 Speaker 1: see employment demand at risk of attorney the other way 744 00:39:18,719 --> 00:39:21,200 Speaker 1: where we actually see that um there are layoffs potentially 745 00:39:21,200 --> 00:39:24,200 Speaker 1: in those sectors, and that itself is important and it's 746 00:39:24,239 --> 00:39:25,640 Speaker 1: something that I think a lot of people say, well, 747 00:39:25,680 --> 00:39:28,120 Speaker 1: the U S is a net oil exporter now or 748 00:39:28,160 --> 00:39:31,520 Speaker 1: a net were energy independent, and yet it kind of 749 00:39:31,560 --> 00:39:35,480 Speaker 1: misses the fact that the elasticity of investment in the 750 00:39:35,560 --> 00:39:39,800 Speaker 1: energy sector has really changed. Again. I remember in sixteen 751 00:39:39,880 --> 00:39:41,600 Speaker 1: everyone was very bullish on There are a lot of 752 00:39:41,600 --> 00:39:44,359 Speaker 1: people who are in the economic space who are very 753 00:39:44,360 --> 00:39:46,600 Speaker 1: bullish about the economies, like low oil prices is good 754 00:39:46,600 --> 00:39:49,759 Speaker 1: for the consumer, while missing the fact that actually it 755 00:39:49,880 --> 00:39:54,440 Speaker 1: was fixed investment that was um rapidly declining because of 756 00:39:54,440 --> 00:39:57,879 Speaker 1: oil prices declining, and there's a high elasticity at that time, 757 00:39:57,880 --> 00:40:01,359 Speaker 1: so the elasticity of capit capital spendatures to the price 758 00:40:01,360 --> 00:40:05,920 Speaker 1: of oil was exceptionally high sixteen and those macro implications 759 00:40:06,080 --> 00:40:08,719 Speaker 1: almost led to a recession. The FED ultimately backed off 760 00:40:08,960 --> 00:40:10,480 Speaker 1: their sort of hiking plans, and I think that was 761 00:40:10,520 --> 00:40:13,840 Speaker 1: actually pretty critical to keeping the expansion alive, but it 762 00:40:13,880 --> 00:40:16,200 Speaker 1: was largely missed by the FED by most I would 763 00:40:16,200 --> 00:40:19,759 Speaker 1: call it. I'd say the Bomb administration and most of 764 00:40:19,840 --> 00:40:21,680 Speaker 1: sort of the main economists at the time who are 765 00:40:21,680 --> 00:40:23,200 Speaker 1: focused on this. I thought it was going to be 766 00:40:23,200 --> 00:40:25,520 Speaker 1: actually a big consumer benefit and a big win, but 767 00:40:25,560 --> 00:40:27,320 Speaker 1: it really acquired the FED to back off their hiking 768 00:40:27,360 --> 00:40:30,760 Speaker 1: plans for business cycle stability to materialize. Now you're seeing 769 00:40:30,800 --> 00:40:34,000 Speaker 1: the opposite where actually the elastic city has gone down. 770 00:40:34,160 --> 00:40:37,440 Speaker 1: So expecting a big capex boom in the energy sector 771 00:40:37,680 --> 00:40:40,880 Speaker 1: to offset whatever is happening in the consumer discussionary sector 772 00:40:40,960 --> 00:40:43,440 Speaker 1: may not happen, especially because yeah, we've seen that rig 773 00:40:43,520 --> 00:40:45,320 Speaker 1: counts have not increased at the same pace as you 774 00:40:45,360 --> 00:40:47,960 Speaker 1: would expect an oil prices, You're not going to see 775 00:40:47,960 --> 00:40:50,560 Speaker 1: the same fixed investment boom that you might have otherwise 776 00:40:50,600 --> 00:40:54,520 Speaker 1: expected or seen in prior oil price increases, and so 777 00:40:54,640 --> 00:40:57,399 Speaker 1: that is a self resource of instability. The second part 778 00:40:57,480 --> 00:41:00,760 Speaker 1: is what the Jaypal effectively admitted, which was that oil 779 00:41:00,800 --> 00:41:03,319 Speaker 1: prices do wait on their thinking now that they are 780 00:41:03,320 --> 00:41:05,960 Speaker 1: thinking about energy inflation and whether that actually takes them 781 00:41:05,960 --> 00:41:09,160 Speaker 1: away from their target for longer. And that kind of 782 00:41:09,320 --> 00:41:11,279 Speaker 1: plays out through just oil prices going up and then 783 00:41:11,280 --> 00:41:13,719 Speaker 1: the FED just responds, but also like there are going 784 00:41:13,760 --> 00:41:15,759 Speaker 1: to be growing pass through issues that we need to 785 00:41:16,000 --> 00:41:19,279 Speaker 1: take seriously. Passed through from the price of diesel to 786 00:41:19,320 --> 00:41:22,680 Speaker 1: the price of retailed goods is a tricky thing to model. 787 00:41:22,880 --> 00:41:25,440 Speaker 1: It's sort of sometimes it shows up and sometimes it doesn't. 788 00:41:25,440 --> 00:41:27,719 Speaker 1: But typically the bigger the price pike, the more non 789 00:41:27,840 --> 00:41:30,680 Speaker 1: linear the response um, and the more likely you see 790 00:41:30,719 --> 00:41:34,600 Speaker 1: passed through materialized. So we're kind of flirting with a 791 00:41:34,640 --> 00:41:38,160 Speaker 1: lot of risks in this direction, and the FED re 792 00:41:38,160 --> 00:41:41,439 Speaker 1: responding to those risks with tighter policy is more likely 793 00:41:41,480 --> 00:41:46,440 Speaker 1: to translate into sort of recessionary financial conditions. Rory and Sconda, 794 00:41:46,719 --> 00:41:50,120 Speaker 1: so great to have you both, huge topic, great conversation. 795 00:41:50,400 --> 00:41:53,600 Speaker 1: Thank you for coming on odline. Thanks so much. Thanks 796 00:41:53,600 --> 00:42:10,400 Speaker 1: for traving that great Tracy. I thought Scanda's answer there, 797 00:42:10,440 --> 00:42:13,560 Speaker 1: you know, setting aside how you elicit the price, the 798 00:42:13,640 --> 00:42:18,000 Speaker 1: supply response, the steaks are really hot, totally. You know what. 799 00:42:18,080 --> 00:42:20,920 Speaker 1: I had an epiphany over the weekend which was basically 800 00:42:21,600 --> 00:42:25,840 Speaker 1: that everything everything comes down to cycles, right, and booms 801 00:42:25,840 --> 00:42:29,239 Speaker 1: and bus and we always overshoot going down and then 802 00:42:29,320 --> 00:42:32,640 Speaker 1: undershoot going up. And it just feels like people especially 803 00:42:32,760 --> 00:42:37,160 Speaker 1: have a tendency of internalizing whatever their last experiences, which 804 00:42:37,200 --> 00:42:41,920 Speaker 1: means that everyone reacts very slowly to a changing environment, 805 00:42:42,000 --> 00:42:44,960 Speaker 1: which is why I think it's hard to incentivize more 806 00:42:44,960 --> 00:42:47,680 Speaker 1: production than things like oil and gas or lumber, which 807 00:42:47,680 --> 00:42:51,279 Speaker 1: we've spoken about before, infrastructure everything like that. Well, I 808 00:42:51,320 --> 00:42:53,799 Speaker 1: was thinking about this after our last episode with Peter 809 00:42:53,920 --> 00:42:56,840 Speaker 1: church Second, which is like, okay, like we had this 810 00:42:56,960 --> 00:42:58,720 Speaker 1: sort of like if you think about like a game 811 00:42:58,760 --> 00:43:04,480 Speaker 1: theory matrix in we had this like really like good 812 00:43:04,480 --> 00:43:06,840 Speaker 1: one for consumers where there was a lot of incentive, 813 00:43:06,920 --> 00:43:10,960 Speaker 1: especially after to pump more even though it wasn't that profitable. 814 00:43:11,320 --> 00:43:13,759 Speaker 1: And you know, I was thinking also like that was 815 00:43:13,800 --> 00:43:16,000 Speaker 1: like you could say that was the state of housing 816 00:43:16,480 --> 00:43:19,000 Speaker 1: pre Great Financial Crisis, Like that's what we had like 817 00:43:19,040 --> 00:43:22,000 Speaker 1: two thousand three to two thousand seven hre just like 818 00:43:22,040 --> 00:43:25,319 Speaker 1: this massive increase in like home building, etcetera. And we've 819 00:43:25,360 --> 00:43:27,359 Speaker 1: never been able to get that back. We've never had 820 00:43:27,400 --> 00:43:30,800 Speaker 1: like a big home building boom outside of those years. 821 00:43:31,160 --> 00:43:34,160 Speaker 1: And so you know, we had this like huge costly 822 00:43:34,680 --> 00:43:39,520 Speaker 1: oil and gas boom from through It's gonna be really 823 00:43:39,560 --> 00:43:43,120 Speaker 1: hard to get that back with respect to oil and gasoline. 824 00:43:43,160 --> 00:43:45,319 Speaker 1: But in the meantime, the costs are very high, the 825 00:43:45,400 --> 00:43:48,600 Speaker 1: risks are very high owing to the effect on monetary 826 00:43:48,680 --> 00:43:52,160 Speaker 1: policy or you know, just consumer buying power. Right, So 827 00:43:52,280 --> 00:43:55,080 Speaker 1: you could see why you might want the government to 828 00:43:55,120 --> 00:43:58,160 Speaker 1: come in and try to smooth these boom bus cycles 829 00:43:58,200 --> 00:44:01,239 Speaker 1: a little bit. But on the other her hand, you know, 830 00:44:01,280 --> 00:44:03,840 Speaker 1: I asked that question about optics. You know, it comes 831 00:44:03,880 --> 00:44:05,680 Speaker 1: down to that, and I think it's going to be 832 00:44:05,760 --> 00:44:08,879 Speaker 1: very very hard for the administration to sell something that's 833 00:44:08,880 --> 00:44:12,880 Speaker 1: basically you know, we're going to subsidize or incentivize oil 834 00:44:12,920 --> 00:44:16,480 Speaker 1: and gas versus something like a tax holiday on gas, 835 00:44:16,520 --> 00:44:19,439 Speaker 1: which is much more i think politically pleasing because you're 836 00:44:19,480 --> 00:44:22,919 Speaker 1: aiming that at consumers, right, I mean, it's that's still 837 00:44:23,000 --> 00:44:26,399 Speaker 1: unclear to me whether there is a significant force within 838 00:44:26,440 --> 00:44:30,600 Speaker 1: the administration that actually like wants increased production. It's I 839 00:44:30,640 --> 00:44:33,000 Speaker 1: think at this point there is, but it's tricky. I 840 00:44:33,000 --> 00:44:35,120 Speaker 1: think there are other things that maybe don't move the 841 00:44:35,160 --> 00:44:38,440 Speaker 1: needle as much that are more politically popular, like the 842 00:44:38,480 --> 00:44:41,560 Speaker 1: idea of a gas holiday, but in terms of like 843 00:44:41,800 --> 00:44:48,040 Speaker 1: will we use public money to subsidize in backstop energy producers, 844 00:44:48,520 --> 00:44:51,600 Speaker 1: still seems like politically a tough sell. But again, steaks 845 00:44:51,600 --> 00:44:54,279 Speaker 1: seem pretty high. Yeah, alright, shall we leave it there. 846 00:44:54,360 --> 00:44:56,880 Speaker 1: Let's leave it there. This has been another episode of 847 00:44:56,920 --> 00:44:59,560 Speaker 1: the All Thoughts Podcast. I'm Tracy Alloway. You can follow 848 00:44:59,560 --> 00:45:02,080 Speaker 1: me on Twitter at Tracy Hallaway and I'm Joe wi 849 00:45:02,160 --> 00:45:05,240 Speaker 1: Isn't All. You could follow me on Twitter at the Stalwart. 850 00:45:05,520 --> 00:45:08,880 Speaker 1: Follow our guests on Twitter. Rory Johnston, He's at Rory 851 00:45:09,040 --> 00:45:14,000 Speaker 1: Underscore Johnston, Sconda, Amerdath at Irving Swisher, follow our producer 852 00:45:14,080 --> 00:45:17,520 Speaker 1: Carmen Rodriguez at Carmen armand followed the Bloomberg head of 853 00:45:17,560 --> 00:45:21,799 Speaker 1: podcast Francesca Levy at Francesco Today and check out all 854 00:45:21,800 --> 00:45:25,480 Speaker 1: of our podcasts at Bloomberg under the handle at podcast 855 00:45:26,000 --> 00:45:26,760 Speaker 1: Thanks for listening.