Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa A. Brownwitz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment and
Speaker 1: international relations. Find Bloomberg Surveillance on Ample podcast, SoundCloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg Terminal. We've
Speaker 1: been talking all week about the pound and how weak
Speaker 1: it is and how it really is between a rocket
Speaker 1: and hard place for the Bank of England. And then
Speaker 1: someone comes out after writing a book with incredible expertise
Speaker 1: on the history of crises in England, and that is
Speaker 1: no one other than Sir Howard Davies, who has chair
Speaker 1: at NatWest Group, an author of this book The Chancellors.
Speaker 1: Sir Howard, what did you start writing this? I mean, honestly,
Speaker 1: it comes to such an amazing time of crisis where
Speaker 1: people are looking for history and anything as a guide. Yeah.
Speaker 1: Well it was a lockdown project, you know. I felt
Speaker 1: guilty in the lockdown, had to use somehow the time
Speaker 1: that I was saving, so I thought, well, maybe it
Speaker 1: would be a good point at which to reflect on
Speaker 1: the history of the last twenty five years, which has
Speaker 1: been pretty pretty exciting in the UK, and that we
Speaker 1: had the great financial crisis, Bank of England independence, We've
Speaker 1: had Brexit referendum, Scottish referendum, and I asked the various
Speaker 1: chancellors who'd served in this period if they were prepared
Speaker 1: to reflect on it, and of course they had time
Speaker 1: on their hands as well, so in fact they were
Speaker 1: very happy to talk to me about it, as indeed
Speaker 1: were quite a lot of officials. So what I've tried
Speaker 1: to do is to tell the story of the last
Speaker 1: twenty five years as seen from the Treasury, which turns
Speaker 1: out now to be quite a relevant thing. I think,
Speaker 1: Sir Howard, we were talking earlier this week about how
Speaker 1: the Bank of England raised rates because they were concerned.
Speaker 1: The raised rates only twenty five basis points, because they
Speaker 1: were more concerned about the labor markets softening or perhaps
Speaker 1: at consumer demand getting crimped and discretionary spell ending. Then
Speaker 1: they were about the inflationary inputs that continue to create
Speaker 1: huge pressures on the economy. Was that the right move
Speaker 1: based on all of those conversations you had, well, I
Speaker 1: think I was with the three in the minority. I
Speaker 1: mean it was a six three vote on the monitor
Speaker 1: policy committee. Interestingly, of the four external economists, three voted
Speaker 1: for a fifty basis point rise and one voted with
Speaker 1: the Bank of England insiders and for the rise. And
Speaker 1: I was with the three out of the four externals.
Speaker 1: I have to say because I think one of the
Speaker 1: problems that we have, and you just referred to it,
Speaker 1: is that the weakness of sterling is contributing to inflationary
Speaker 1: pressures as well. And if you look back at you
Speaker 1: know the experience of oil prices, and one reason why
Speaker 1: we're now facing a two pound alter diesel price is
Speaker 1: because the pound has slipped down to one twenty something,
Speaker 1: and you know so long ago that we were at
Speaker 1: one forty. So we are making our problem more serious
Speaker 1: by the fact that Sterling is weak. And I think
Speaker 1: in part that is weak because of the perception that
Speaker 1: rates will not rise as much here as they're going
Speaker 1: to rise in the US. Sir, how are you rightly
Speaker 1: call out central banks for openly claiming that they can't
Speaker 1: tame inflation but in reality they can. I mean, they
Speaker 1: have a blunt tool they can raise rates choke demanded
Speaker 1: drive an economy in through recession. By question for you
Speaker 1: is is there any way that central banks can do
Speaker 1: that with out driving an economy into recession, or there
Speaker 1: are the policy tools at their disposal, or perhaps it's
Speaker 1: not providing as much forward transparency. I'm curious to hear
Speaker 1: your thoughts on that. Yeah, I think what's one got
Speaker 1: to look at is the time dimension here. And obviously,
Speaker 1: if you get a very sharp exogenous shock, like an
Speaker 1: increase on the sort we've had and the war, then
Speaker 1: you can't expect central bank to deal with that instantly.
Speaker 1: But in fact, the inflation target formula explicitly recognizes that,
Speaker 1: and inflation targeting is meant to target an inflation rate
Speaker 1: at eighteen months two years ahead. So I think whereas
Speaker 1: I can accept the central bank saying, look, we can't
Speaker 1: respond to this immediate spike, that's fine, that's understood, but
Speaker 1: what they must do is present a plausible path of
Speaker 1: interest rates which is going to deliver them back to
Speaker 1: the inflation target in eighteen months or two years time.
Speaker 1: And that's why I think you need a higher rate
Speaker 1: at the moment in order to give credibility to this
Speaker 1: medium term inflation outlook. And I don't think that's where
Speaker 1: we are at the moment. Unfortunately, in the UK. So Howard,
Speaker 1: Let's character script the bit. You've been a member of
Speaker 1: the International Advisory Council for the China Securities Regulatory Commission
Speaker 1: since two thousand three. UM there's about two hundred China
Speaker 1: liftings on US exchanges, I think roughly one point seven
Speaker 1: trillion in assets. But all that's going on with the
Speaker 1: lack of transparency with the p C A O B.
Speaker 1: I'm just curious to hear thoughts on that. I mean,
Speaker 1: what is China's approach to all this? Do you think
Speaker 1: companies like buy do j D? I mean, are they
Speaker 1: going to avoid having to delist? In your term? Well,
Speaker 1: the Chinese approaches evidently changing. Up to now, the c
Speaker 1: s r C, the Chinese equivalent of the SEC, if
Speaker 1: you like, has had a general policy orientation towards opening
Speaker 1: up Chinese markets. They established a link between Shanghai and
Speaker 1: Hong Kong, link between Shanghai and London, and that's been
Speaker 1: the direction of travel. Now. There are, however, signs recently,
Speaker 1: as you say, of the Chinese wishing to pull back
Speaker 1: because they're unhappy about the influence that external regulators have
Speaker 1: via a Chinese company listing in other markets. I think
Speaker 1: it's very difficult to say at the moment where the
Speaker 1: where this is going to go, And of course for
Speaker 1: the last two years COVID has got in the way
Speaker 1: of direct connections. You know, I remain on that Advisory
Speaker 1: Council that time chair of it, but we haven't actually
Speaker 1: had a physical face to face meeting, and it's in
Speaker 1: the face to face meetings where you really understand what's
Speaker 1: going on. So I'm not trying to avoid your question,
Speaker 1: but it's honestly quite difficult to answer in circumstances where
Speaker 1: you haven't actually met people for well over two years now,
Speaker 1: Sir Howard, before we let you go, do you think
Speaker 1: that the pound is ever going to get above that
Speaker 1: one mark versus the dollar that we saw pre Brexit?
Speaker 1: Unlikely would be my guess. I can't quite see why.
Speaker 1: There are the short term issues I've been talking about
Speaker 1: involving interest rates, but also in the longer term. You know,
Speaker 1: we do have a structural trade deficit and that's been
Speaker 1: offset by capital flows for a long period of time.
Speaker 1: But you know, you can only sell the London property
Speaker 1: market once externally um net if you see what I mean,
Speaker 1: they can traded amongst themselves. You any sided ones so
Speaker 1: I don't see quite what is going to push the
Speaker 1: pound up. Sir Howard Davies, thank you so much for
Speaker 1: taking this time in congratulations on writing this book. Jonathan
Speaker 1: Gollup joins US now the chief US Equity Strategistic Credit
Speaker 1: Sweets John. Great to catch up this so and thanks
Speaker 1: for coming into the studio too. You've been constructive on
Speaker 1: this equity market. It's been difficult. You can't get them
Speaker 1: right all the time. Walk me through what you're learning
Speaker 1: is this year progresses and how you're thinking about the future. Now, Well,
Speaker 1: I think you guys are actually like right on points.
Speaker 1: So let's let's start with with Damien's comments. Um, credit
Speaker 1: spreads have blown out, but there's not a credit performance problem.
Speaker 1: And what I what I mean by that is you
Speaker 1: know people are paying there, you know are making their
Speaker 1: interest payments and and people aren't going bankrupts. And companies
Speaker 1: have lots of cash and they've turned out, they've turned
Speaker 1: out their liabilities so they don't have this rollover risk.
Speaker 1: So the credit is performing as if we have this
Speaker 1: incredibly healthy economy, and yet you have credit spreads really wide.
Speaker 1: And I think one of the things that are going
Speaker 1: to drive equities higher between now and your end is
Speaker 1: if we don't have a recession between now and the
Speaker 1: end of the year, which I think is unlikely. Um,
Speaker 1: then I think that the credit spreads actually come down
Speaker 1: because there's not a credit problem, and yet the market
Speaker 1: is pricing one. Now there's a second issue, John, which
Speaker 1: you raise, which is so far you're to date, the
Speaker 1: market is really discounted a higher cost of capital, not
Speaker 1: a recession. And people who are saying is a market
Speaker 1: discounting and earning this problem? This is that not really?
Speaker 1: I would say though the last week the market is
Speaker 1: starting to say it's not just a higher cost of
Speaker 1: capital or higher discount rate, it's actually the damage that
Speaker 1: the Fed is gonna do. And are we getting a
Speaker 1: recession sooner? And there? I think the debate is mean,
Speaker 1: it's a simple debate. It's hard to figure it out.
Speaker 1: Is when does the recession start? If you think that
Speaker 1: we have a recession in six to nine months, the
Speaker 1: downside from here is substantial. If you believe that the
Speaker 1: recession is in the latter half of twenty three or
Speaker 1: further out, then you've got to buy stocks right here
Speaker 1: because the earnings will come through and there won't be
Speaker 1: an earnings problem. Jonathan I wanted to go there, the range,
Speaker 1: the range of outcomes and just how big the extremes
Speaker 1: are actually go back to what Andrew Holland Horse said,
Speaker 1: volatility may prevail now that the market will were price
Speaker 1: fed policy based on each monthly inflation reading. How wide
Speaker 1: is your bear case scenario and your bookcase scenario, you know, Lisa,
Speaker 1: So we we actually we put out a report yesterday
Speaker 1: which was like like it was kind of like a
Speaker 1: wonky report for guys who kind of love like marketing journals,
Speaker 1: and and it got a lot of attention. We looked
Speaker 1: at the dispersion of analysts estimates. So let's say you're
Speaker 1: covering you pick the stock Microsoft, and are all the
Speaker 1: analysts you know clustered at a very similar outlook or
Speaker 1: are they all over the map. The more that the
Speaker 1: estimates are all over the map, the more it tells
Speaker 1: you that people are concerned about recessionary outcomes in the
Speaker 1: direction of economy. And we're seeing that in nine of
Speaker 1: eleven sectors you are below average in dispersion, meaning that
Speaker 1: there's very little doubt from analysts on the direction of profits. Now,
Speaker 1: where where did the analysts come from this. It's not
Speaker 1: like they're pulling it out of their head. They're talking
Speaker 1: to company management, and company management is saying is we
Speaker 1: actually have a surprising amount of clarity. Things seem okay,
Speaker 1: we're not seeing stress with our clients. Margins are under pressure,
Speaker 1: but a little, not a lot. So it was it
Speaker 1: was actually pretty surprising to me when we looked at
Speaker 1: the data, how clean the earning story looks, not only
Speaker 1: in terms of the earnings being good, but how there's
Speaker 1: there's lack you know, there's this pretty high level of
Speaker 1: conviction on both the part of company management of Wall
Speaker 1: Street analysts. Jonathan, I think, you know, we've seen the
Speaker 1: two main factors that are driving um, you know, equity
Speaker 1: earnings expectations, I think a rise in bond yields at
Speaker 1: higher commodity prices. So my question for you is the
Speaker 1: pace d v v V. Are you comfortable with the
Speaker 1: pace of downward revisions going forward? Do you think it's
Speaker 1: gonna be accelerate or I mean, are we there yet?
Speaker 1: So if you look yere to date, the earnings revisions
Speaker 1: have been have been solidly positive. So let's say at
Speaker 1: the beginning of this year, if you look at the
Speaker 1: twelvemonth outlook for earnings and then you do the same thing.
Speaker 1: Today we're seven and a half percent higher than we are.
Speaker 1: So the markets, you know, the markets down or something
Speaker 1: like that, but you have a positive seven and a
Speaker 1: half on the earnings and a negative thirty one percent
Speaker 1: on the stock multiple. So it really says, is we
Speaker 1: have a problem. Listen, you have you have cash flows,
Speaker 1: you discount im at a higher discount rate. They're worth
Speaker 1: They're worth less money, um. And it's so it makes
Speaker 1: sense to people would say, yeah, but maybe the markets
Speaker 1: really telling you the earnings aren't good. I don't think
Speaker 1: that's the case. I think that what you have is
Speaker 1: a real downgrade to what you're willing to pay for
Speaker 1: a dollar earnings, not the other way around. We go
Speaker 1: to finish on this everything you've said, is it enough
Speaker 1: to get us back towards five kg on the SMP?
Speaker 1: You know? You know, I think the answer is directionally yes.
Speaker 1: You know, I think that right now the market is
Speaker 1: really oversold if you look at the way that you know,
Speaker 1: how how intense the daily moves are and how much
Speaker 1: volatility there is. The key is that we have to
Speaker 1: be confident that we're not that the FEDS not driving
Speaker 1: us into recession. If if if we start to see,
Speaker 1: for example, the next couple of job reports, if we see,
Speaker 1: you know, god forbid a negative print where you actually
Speaker 1: have a loss of jobs or something, well, then the
Speaker 1: market's going to freak out and you and you're looking
Speaker 1: much lower numbers. But look at what we've had. The
Speaker 1: I s M, which is an indication of industrial activity
Speaker 1: well above normal. UM. The last job report very strong
Speaker 1: in terms of jobs earning season, really big beats so UM.
Speaker 1: I think that ultimately the fundamentals went out up. But
Speaker 1: I but I will tell you that the last you know,
Speaker 1: week or so shakes everybody's confidence in a big way. John,
Speaker 1: I'm just going through the numbers, and I don't want
Speaker 1: to beat up on you. You're not alone. I've got
Speaker 1: Oppenheimer at fifty three thirty year end, you're at forty
Speaker 1: nine hundred, got Bowski over a Beama at forty eight hundred,
Speaker 1: got others, Bank of America, Ceveta, who hasn't been constructive,
Speaker 1: cebsa su Mamonium at the best of times, and she's
Speaker 1: at four hundred. I just wonder as an analyst, as
Speaker 1: a strategist John, and you look at this market run
Speaker 1: away in the other direction. What do you have to do?
Speaker 1: What should you do? Well? I mean, so you know,
Speaker 1: we we actually lowered our our numbers. Um, I don't know,
Speaker 1: about eight weeks ago a little bit. And when we
Speaker 1: went back to the you know, to the to the pieces,
Speaker 1: we're not. The right thing to do is not to
Speaker 1: forecast the market. It's to say, okay, let's start with
Speaker 1: the earnings. My earnings, right, are they too hired? Too low?
Speaker 1: When we went back and tested them, and the earnings
Speaker 1: if if you know, looked incredibly solid. I mean, we
Speaker 1: looked at and numbers said if we're gonna make a change,
Speaker 1: maybe we should move higher. I mean, the earnings were
Speaker 1: looking pristine. Some of that is more coming from energy,
Speaker 1: but but nonetheless, and then we look at the multiple
Speaker 1: and we and this is why we actually lowered our estimates. Um,
Speaker 1: is it No? I mean, you have to lower your
Speaker 1: expectations for stock multiples, for pe s when the cost
Speaker 1: of capital goes up. Now, if we were to downgrade
Speaker 1: our number, it wouldn't be because we think that our
Speaker 1: earnings are off. It would be because we say, listen,
Speaker 1: these are these you know that those credit spreads that
Speaker 1: Damien was talking about before, if they stay wide, then
Speaker 1: then stocks can't rebound. They have to come in. I
Speaker 1: had to squeeze that inch on. It's gonna get your perspective. Johnath,
Speaker 1: thank all of the credit sweez This inflationary bank drop
Speaker 1: is a big challenge to everyone in this country. It's
Speaker 1: a big challenge to this White House too, And I'm
Speaker 1: pleased to say that joining us now is how to bouchet.
Speaker 1: The member of the White House Council of Economic Advisors
Speaker 1: had the fantastic to catch up with you. You guys
Speaker 1: have taken this very seriously. The Washington Post is out
Speaker 1: with a story this morning on a range of issues
Speaker 1: for Postles that you're putting forward at the moment. One
Speaker 1: of them is imposing price controls and fanning exports of
Speaker 1: US energy. And I'd just like to know first up
Speaker 1: how seriously we should be taking that reporting this morning. Well, certainly,
Speaker 1: as the President made clear over the course of this week,
Speaker 1: all options are on the table in terms of energy. Um.
Speaker 1: You know, he sent a letter this week to oil
Speaker 1: refiners to say, hey, you all need to do your part,
Speaker 1: and that was part of showing just how important this
Speaker 1: issue of inflation and gas prices is to the president.
Speaker 1: He understands that this affects the pocketbooks of American families
Speaker 1: all over the country and is doing what he can
Speaker 1: to make sure that the prices that people pay at
Speaker 1: the pump are fair. Um even given you know the
Speaker 1: fact that we are in the midst of this unprovoked
Speaker 1: war by Putin in the Ukraine, that his up ended
Speaker 1: oil markets, leading to shorter supplies and increases in prices.
Speaker 1: But one of the things we also know is that
Speaker 1: refiners are you know that there's a gap, but now
Speaker 1: a growing gap between how much they are paying for
Speaker 1: the oil that they bring in and how much they
Speaker 1: are charging at the other end. That gap used to
Speaker 1: be about fifty cents. It's now over a dollar. And
Speaker 1: so that is one of the things that the presidents
Speaker 1: focused on this week. And then, as he said in
Speaker 1: the letter to them, he is willing to use all
Speaker 1: of his powers that he is available to him to
Speaker 1: take next steps, but he wants to talk to them first,
Speaker 1: figure out what they can do together and the less
Speaker 1: flesh some of this out, and give me some time
Speaker 1: to do so. If you can, I'll go through it.
Speaker 1: This is what the President said. Xon made more money
Speaker 1: than God this year, buying back their stock and making
Speaker 1: no new investments. A quote from the President. This is
Speaker 1: what Excen said. Globally, we've invested double what we've earned
Speaker 1: over the past five years, a hundred and eighteen billion
Speaker 1: on New Orleans gas supplies compared to net income of
Speaker 1: fifty five. This is what the President said at a
Speaker 1: time of war, historically high refinery profit march is being
Speaker 1: passed directly onto American families are not acceptable. He's alluding
Speaker 1: to them deliberately holding back capacity, alluding to price gouging.
Speaker 1: You've done the same. Your own Energy Information Administration has
Speaker 1: reported only recently that the industry was an incredible levels
Speaker 1: of capacity utilization of over your own Treasury Secretary has said,
Speaker 1: it's not price couching, it's demanded supply that's largely driving inflation.
Speaker 1: So have my question to you, and thank you for
Speaker 1: allowing me to flesh that out, is who's given the
Speaker 1: president these talking points because they do not add up. Well,
Speaker 1: here's the thing. One of the things that we have
Speaker 1: seen again in large part due to both the pandemic
Speaker 1: and the war in Ukraine, that putin has been waging
Speaker 1: has been there have been a capacity at refiners globally
Speaker 1: has been taken offline. So over the course of the
Speaker 1: pandemic um here in the United States about eight eight
Speaker 1: hundred thousand barrels per day we're taken offline. And so
Speaker 1: the President is saying, hey, can we work together to
Speaker 1: figure out how to get that back online as quickly
Speaker 1: as possible. Is not just doing that, He's suggesting something
Speaker 1: nefarious is going gone here at the same time. That's
Speaker 1: that's the politics of it. I hear it. He's alluding
Speaker 1: to price couching. He's saying, they made more money than God.
Speaker 1: They're buying back their own stock. They're making no new investments. Yes,
Speaker 1: they are buying back their stock. Yes, they are also
Speaker 1: making investments as well. As I said earlier, your own
Speaker 1: tracery secretary says, this is supply and demand. We're having
Speaker 1: a policy conversation. The president isn't He's speaking just about politics.
Speaker 1: He's trying to make out something that faris is happening
Speaker 1: in Texas. I've just read all the quotes, direct quotes,
Speaker 1: which bit of it isn't true. It is not true
Speaker 1: that the president is having a policy conversation. He is
Speaker 1: looking at the data and the evidence in front of
Speaker 1: him about what is happening in this industry. And what
Speaker 1: you cannot deny is that the last time that oil
Speaker 1: barrels were priced at a y barrels hundred twenty per barrel,
Speaker 1: gas prices of the pump were about now at this
Speaker 1: same price level. Of course, it fluctuates every day, but
Speaker 1: now at this price level, you're seeing prices at the
Speaker 1: pump it over five dollars. There there is a gap there,
Speaker 1: and this is what the President is focused on. That doesn't,
Speaker 1: you know, obliterate anything that has happened in between, and
Speaker 1: certainly investments have been made, but the President is saying,
Speaker 1: what more can we do because we need to get
Speaker 1: this oil supply to consumers at this moment, you know,
Speaker 1: people can't very quickly change their demand for gas. People
Speaker 1: need drive their cars to get to work. So he
Speaker 1: is focused on what else the refiners can do. And
Speaker 1: there is evidence that that they are bringing in exceptionally
Speaker 1: high profits and that there is this gap between the
Speaker 1: prices that they are paying and the prices that they
Speaker 1: are charging that is larger than before. So that there's
Speaker 1: all evidence and that is still about supplying demand. Well,
Speaker 1: but Heather, let's say you cannot get that supply on
Speaker 1: in the way that the President would like in the
Speaker 1: short term. How worried are you about essentially going against
Speaker 1: what the FETE is trying to do with dampening demand
Speaker 1: by things like rebake cards are subsidizing the prices of
Speaker 1: gas and other goods at a time when the Fed
Speaker 1: ultimately is trying to get demand to come down. So
Speaker 1: that is such a great question. You've elevated how this
Speaker 1: particular economic moment is very tricky because we have so
Speaker 1: many supply side challenges um as the as J. Powell
Speaker 1: himself noted, you know, the Fed's tools are blunt and
Speaker 1: they are essentially on the demand side. But we have
Speaker 1: these and we've seen them over the past few years,
Speaker 1: these incredible supply chain snarls. We're seeing these challenges in
Speaker 1: large part because of the pandemic, and so that is
Speaker 1: why the President is that a multi pronged approach to
Speaker 1: figure out all of the different ways we can attact
Speaker 1: where prices are too high consumers. We don't have a
Speaker 1: lot of time left, but just quickly. The point is
Speaker 1: it's very hard to deal with the supply chain disruptions
Speaker 1: and it takes time. So without that really getting remedied
Speaker 1: in the short term, why is it good not to
Speaker 1: seek demand come down a little bit. Well, certainly that
Speaker 1: the President is letting the Fed do their job. But
Speaker 1: you know, so yesterday the President signed new legislation on
Speaker 1: ocean shipping. Here's a place where that legislation and the
Speaker 1: work that the Federal Maritime Commission is doing right now
Speaker 1: could have an impact on prices that consumers pay for
Speaker 1: goods that are being shipped from overseas. So the President
Speaker 1: is doing everything he can to lower prices, using all
Speaker 1: the tools at his disposal, and trying to work with
Speaker 1: Congress to do so. Have I promise to let you
Speaker 1: go at five seconds left, So I'm going to do
Speaker 1: exactly as we promised. Thank you for catching up with
Speaker 1: us today. How do we share that of the Council
Speaker 1: of Economic Advisors. Stephen Shaw joins US now principal and
Speaker 1: co founder of the Show Group. Stephen, let's start here.
Speaker 1: If I could be a fly on the wall of
Speaker 1: a meeting between the Energy Secretary and oil executives that's
Speaker 1: set to happen in amazing Stephen, what you expect will
Speaker 1: happen in that room. Yeah, I would expect a lot
Speaker 1: of pushback right now. It does appear that both the
Speaker 1: industry and the White House are talking past one another.
Speaker 1: The White House is has refused. This is the first
Speaker 1: real outreach that they've made to uh to the industry,
Speaker 1: and uh, you know, and they've gone to uh some
Speaker 1: nefarious characters prior to this, and yet they're going to
Speaker 1: continue to double down and tell us we don't need
Speaker 1: to drill. We don't you don't need to drill. You
Speaker 1: just have to raise capacity. UH tell you what capacity
Speaker 1: is already there at this time of the year. Refinery
Speaker 1: capacity is that that is extremely high for this early
Speaker 1: in the season. So the industry, it has responded. Guest
Speaker 1: line production is over ten million barrels a day for
Speaker 1: two consecutive weeks. Crudal production has risen. Unfortunately, at the
Speaker 1: heart of this is the lack of refinery capacity, and
Speaker 1: there's nothing anyone can do about that. Here in Philadelphia,
Speaker 1: we had, uh, the South Gerard refinery that was producing
Speaker 1: three thirty thousand barrels of crude all a day. Forty
Speaker 1: percent of that was gasoline. We no longer have that.
Speaker 1: You go to South Philly. That is no like refineries
Speaker 1: no longer there. It's a brown field, so you're not
Speaker 1: bringing that back. So we've slashed capacity over the last
Speaker 1: five years. We don't have the same ability. So now
Speaker 1: we're more reliant on for foreign production coming from Europe
Speaker 1: and from Houston, and there are guys. Is the real problem,
Speaker 1: and that's the one thing the administration and I do know.
Speaker 1: This is what part of what the executives are telling
Speaker 1: the Secretary of Energy. We evoke the Jones Act. Now,
Speaker 1: for those not familiar, the Jones Act is a maritime
Speaker 1: law passed about a thousand years ago meant to protect
Speaker 1: the merchant marine industry, domestic merchant marine industry. The problem
Speaker 1: now here is, since we don't have enough pipeline capacity,
Speaker 1: we don't have enough refinery capacity here on the East Coast.
Speaker 1: We need to ship that guest line diesel fuel out
Speaker 1: of Houston and into New York Harbor. But the Jones
Speaker 1: Act says that commerce interstate has to be transacted on
Speaker 1: a foreign excuse me an American flagged vessel. We simply
Speaker 1: don't have enough American flag vessels. Stephen barring some sort
Speaker 1: of change to the Jones Act and frankly some sort
Speaker 1: of wholesale shift that we're not going to see in time.
Speaker 1: The tightness of the market has raised concerns the likes
Speaker 1: of Goldman's Access. Jeff Curry, how much are we looking
Speaker 1: at gas prices that will continue to climb? They have
Speaker 1: been plateauing recently, but will continue to climb throughout the summer.
Speaker 1: Two levels that we can't really imagine right now. Yeah, absolutely,
Speaker 1: A hundred twenty dollar barrel oil. Crude oil both in Brenton,
Speaker 1: w Tah, which is pretty much where the market has
Speaker 1: been holding to your point, has stated out around there,
Speaker 1: but as demand continues to pick up. As we approached
Speaker 1: the fourth of July holiday, the triple A national average
Speaker 1: is slightly right around five dollars a gallon at the pump.
Speaker 1: Right now, fourth of July, we are forecasting five dollars
Speaker 1: and forty cents on a national average, So there's still
Speaker 1: more pain at the pump to come. And this is
Speaker 1: contingent upon oil holding at hundred twenty dollars a barrel.
Speaker 1: Every dollar oil goes higher, you're gonna look at another
Speaker 1: to two and a half sent rise at the pump.
Speaker 1: Stephen Forward curves are pricing in a sharper price decline
Speaker 1: in that guest in oil. You know. For me, I'm wondering,
Speaker 1: do you think that the price rise in oil is
Speaker 1: stickier than that of that gas and if so, what
Speaker 1: are the implications for for example, integrated oil companies out
Speaker 1: of lad Am or the Canadian oil sands companies, all
Speaker 1: of which are more focused on oil. Yeah, absolutely, natural gas.
Speaker 1: It is a more seasonal market. You have two distinct markets.
Speaker 1: You have the winter in the summer in the shoulder months,
Speaker 1: you have uh the refill seasons. So at this point,
Speaker 1: that backudation is telling us that there is not enough
Speaker 1: supply right now. The month of main June is when
Speaker 1: we store the most natural gas, getting ready for next winter. Now,
Speaker 1: this year it has been hampered of course by uh
Speaker 1: L en G exports of European demand for exports because
Speaker 1: they too have have to build natural gas. So that's
Speaker 1: steep backudation. Priceton is telling us the market is clamoring
Speaker 1: to get gas into the ground for next winter. Now
Speaker 1: lest we we had an explosion and a fire at
Speaker 1: an L and G export facility down in Texas. Now
Speaker 1: that export facility accounted for about one five of US
Speaker 1: leg exports. So that excuse me that l G plant
Speaker 1: is going to be closed now to probably at least October,
Speaker 1: if not November. So that's a lot more gas that's
Speaker 1: not leaving the United States that's gonna be set for
Speaker 1: domestic consumption and storage. So with that added gas coming
Speaker 1: to the market, at this point, you're looking at a
Speaker 1: correction in the yield curve and the backwardation that is,
Speaker 1: the front month prices have an extremely high relative to
Speaker 1: back end, but that's starting the correct lower because we've
Speaker 1: have all this found natural gas. Now, as far as
Speaker 1: the integrated oil companies go, uh, look, natural gas is
Speaker 1: a fossil fuel as well, so it's in the same
Speaker 1: sites as oil with regard to policy and the lack
Speaker 1: of policy with regard to promoting of both natural gas
Speaker 1: production and crude oil production, and therefore it does set
Speaker 1: the table for continued higher prices and a squeeze on
Speaker 1: margins for the companies. Stephen, I've got thirty seconds left.
Speaker 1: I want you to throw a number on it. We're
Speaker 1: have five got a gas right now. Gasoline prices on
Speaker 1: average in American right now by the end of the summer,
Speaker 1: do you share the JP mulgan view that this is
Speaker 1: going to have a six handle. Yeah, we're about it.
Speaker 1: A four tr modeling is at a fourteen percent probability.
Speaker 1: We see that. The problem now is it's a race.
Speaker 1: Uh do we see at six dollars which I said
Speaker 1: is a fourteen percent probability, or do we see such
Speaker 1: a severe economic down to receive demands, destruction and prices fall,
Speaker 1: because that's where we're headed. We're headed for recession if
Speaker 1: we're not already in it at these high food and
Speaker 1: energy prices. So yeah, I'll give a four teen percent.
Speaker 1: I'm on board fourteen percent of the time with JP
Speaker 1: Morgan and I productive just just four Saint Stephen stay
Speaker 1: show at the show a crew. If I light JP Mulgan,
Speaker 1: just on board with them fourteen percent at the time.
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