Speaker 1: Welcome to Bloomberg Opinion. I'm Vonnie Quinn this week. It's
Speaker 1: kind of the scariest call that you ever make as
Speaker 1: someone who writes about energy. That's David Fickling there, and
Speaker 1: we'll hear that prediction a little later. Also, people are
Speaker 1: just opting not to buy this thing. Still a lot
Speaker 1: of trading down as well, but some people are just
Speaker 1: turning around, doing one and walking out the door. Jonathan
Speaker 1: Levin and what might be the first signs the US
Speaker 1: consumer is starting to think before they shop first? Though
Speaker 1: to the markets and Bloomberg opinions, John Authors, John ys
Speaker 1: me have hundreds down more than on the year, the
Speaker 1: nazack down more, and yet we still don't feel like
Speaker 1: we've capitulated. Yes, and that's because I don't think we
Speaker 1: have capitulated, at least when it comes to equities. Bank
Speaker 1: of America's regular monthly survey of global fund managers, which
Speaker 1: has been going on over twenty years, finds that the
Speaker 1: number who are bearish on equities or who say they
Speaker 1: are getting more underweight is now the highest since they've
Speaker 1: been doing it, which is quite something because that includes
Speaker 1: two eight Now, how do we read that survey? Because
Speaker 1: the a AII survey, for example, is sort of counterintuitive exactly.
Speaker 1: That's what should be positive about the b of A survey,
Speaker 1: which accounts for people who are controlling very much more
Speaker 1: money than the AII. And generally speaking, what you want
Speaker 1: is capitulation. You want all the bad news to get
Speaker 1: into the price, or even more bad news than there
Speaker 1: actually is. You want all hope to be abandoned. And
Speaker 1: this report certainly does suggest that we're getting close. The
Speaker 1: problem is if you actually look at money flows into equities,
Speaker 1: they are still flows in much lower than they used
Speaker 1: to be. But you can't exactly say this is a
Speaker 1: capitulation when money is still flowing in. Where is it
Speaker 1: coming from? Is it just that there's so much cash
Speaker 1: out there and people are desperate to deploy, and we're
Speaker 1: coming into the fourth quarter and we're going to need
Speaker 1: to see returns at the end of the year somehow,
Speaker 1: and there's just denial going on. Well, that's a that's
Speaker 1: quite a good list of the things that might be moving.
Speaker 1: I think the other thing you have to bear in
Speaker 1: mind is that the Tina narrative is much weaker than
Speaker 1: it was. But it's not as though anybody wildly wants
Speaker 1: to own bonds at this point, and if you have rebalancing,
Speaker 1: you would be accustomed over the years for rebalancing every
Speaker 1: quarter to involve buying some bonds because stocks have gone
Speaker 1: up more, and you sell some stocks to rebalance into bonds.
Speaker 1: In the third quarter, stocks and bonds, by most measures
Speaker 1: fell almost exactly the same amount. That's part of the problems.
Speaker 1: Everything is correlated, yes, and at the margin that means
Speaker 1: that there isn't the money leaving the stock market that
Speaker 1: you would expect. I guess. The other point you can
Speaker 1: make is that volatility, or at least the vixed measure
Speaker 1: of volatility, how much people are used ing options to
Speaker 1: guard against falls in the market in the future. The
Speaker 1: VIX index has been very oddly calm, given it is
Speaker 1: around thirty these days, which is high. It got over
Speaker 1: a hundred on that Wednesday, and it got near to
Speaker 1: our hundred during two thousand and eight. Those are capitulations, right,
Speaker 1: All these measures seem to be teaching us. But right there,
Speaker 1: fix at its current level is elevated and shows concerned,
Speaker 1: which you know that we knew that anyway, it's certainly
Speaker 1: not giving the kind of signal that you would expect
Speaker 1: if we really reached a capitulative bottom. We had another
Speaker 1: small eas board of FED speakers this week. Timballeran, though,
Speaker 1: talked a little bit about equity markets and how he
Speaker 1: didn't see financial conditions as being particularly tight or tight
Speaker 1: at all. In fact, I guess would that commas news
Speaker 1: to some people. It's interesting if you look at our
Speaker 1: own Bloomberg's Financial Conditions Index, we still have it within
Speaker 1: one standard deviation of the north for the last five years.
Speaker 1: One standard deviation tighter than the norm is reasonable. It's
Speaker 1: not the kind of thing that is really going to
Speaker 1: reign in a major burst in inflation. There are lots
Speaker 1: of things that go into that. The dollar obviously is
Speaker 1: exceptionally strong, and that does have the effect of tightening
Speaker 1: conditions for Americans. The stock market, part of valuations and
Speaker 1: the ability to to raise I p os, the ability
Speaker 1: to to a secondary offerings are a big part of
Speaker 1: financial conditions, and the stock market is still anything remotely
Speaker 1: like cheap. So I think what Jimmy Bullard wants to
Speaker 1: see is enough negativity in financial conditions that it really
Speaker 1: does have an effect on people's behaviors. I don't want
Speaker 1: to read too much into what jim Buller had said,
Speaker 1: but it did sound like he was pressing the idea
Speaker 1: that they absolutely were not interested in equity markets and
Speaker 1: how much they dive. Was it almost expressing a wish
Speaker 1: that they would dive. I think it was. Uh. The
Speaker 1: other thing, obviously, is he's he's disavowing any interest in pivoting,
Speaker 1: or at least pivoting for the sake of equities. If
Speaker 1: you have something like what happens to Britain's guilts market
Speaker 1: a couple of weeks ago, they're probably not going to
Speaker 1: have any choice but to pivot or intervene. And because
Speaker 1: because central banks are also lenders of last resorts, that
Speaker 1: I think is where the chance of a pivot is greatest.
Speaker 1: You see lots of concerns about liquidity um and this
Speaker 1: has obviously gained a lot of steam since you know,
Speaker 1: the British implotion, and that's where you could probably see
Speaker 1: if we're going to have a change in direction from
Speaker 1: what it looks like we're having at the moment, which
Speaker 1: is a stock market enjoy enduring a bear market that
Speaker 1: grinds on for a while and rates that rise for
Speaker 1: a few more months yet and stay pretty high, you know,
Speaker 1: through to the end. Of next year. If we're going
Speaker 1: to get a change to that, I think it's because
Speaker 1: of some British style financial accident, rather than because inflation
Speaker 1: comes down a little bit faster than expected or because
Speaker 1: the FED is worried about the stock market. We're not
Speaker 1: going to talk about Britain because things will change inevitably
Speaker 1: in the next ten minutes on Britain, so we're going
Speaker 1: to leave that there. But I do feel like we
Speaker 1: needed a new era called the British implosion as opposed
Speaker 1: to the old British invasions. I have whatever. Yes, it's
Speaker 1: it's a it's hard to find the language to express
Speaker 1: quite what is going on. It's all basically an unforced
Speaker 1: error and yes words fail. John authors there. The US
Speaker 1: consumer has been pretty resilient for the most part post pandemic.
Speaker 1: As inflationary pressure is persist and persist, consumer facing companies
Speaker 1: are reporting pretty solid earnings, even if there's a little
Speaker 1: trepidation about how long this can last. Here's Bank of
Speaker 1: America's CEO Brian moynihan giving a broadly positive outlook. If
Speaker 1: you look at the consumers, there's there's not the signs
Speaker 1: that we see in our numbers or other people's numbers.
Speaker 1: Quite frankly, it says they're slowing down yet, or they're
Speaker 1: in stress yet, and that will have to be part
Speaker 1: of what happens in order for there to be a
Speaker 1: deep procession, because if the consumers have money in this
Speaker 1: big consumer driven economy, you know, that's that's what keeps
Speaker 1: America strong. So the consumer isn't in stress, but is
Speaker 1: the consumer beginning just beginning to alter spending patterns. Here's
Speaker 1: Moynahan again. What we told people is you're seeing it
Speaker 1: slow just a hair So it was very early in
Speaker 1: the year twelve and now ten, which is frankly, what
Speaker 1: people are trying to do is get the spending down
Speaker 1: a little bit, get the inflationary pressures down in the
Speaker 1: in the drag of the interest rates, but it's still strong.
Speaker 1: I spoke with Bloomer Opinions Jonathan Levin, who has been
Speaker 1: examining data that also suggests consumers are beginning to make
Speaker 1: some changes. So, Jonathan, what consumers say they'll do and
Speaker 1: what they actually do are often very different. That's an
Speaker 1: established behavior, but now it seems like we're seeing what
Speaker 1: they're doing shift. You've been examining the data. What is
Speaker 1: it telling you. I looked at a fascinating series that
Speaker 1: Morning Console does and every month they interview hundred US
Speaker 1: adults and one of the things that they've been asking
Speaker 1: them for the past six months is like, when you
Speaker 1: go to the store, do you experience sticker shock? And
Speaker 1: when people say you say, yes, I'm experiencing sticker shock,
Speaker 1: Morning Console then ask them, Okay, so how do you
Speaker 1: deal with sticker shock? Do you just walk out the
Speaker 1: door and go home empty handed? Or are you trading
Speaker 1: down or are you just sort of sucking it up
Speaker 1: and paying those higher prices? And what Morning Console is
Speaker 1: increasingly seeing, especially for their very latest round of this data,
Speaker 1: is that people are just opting not to buy the thing.
Speaker 1: Still a lot of trading down as well, but some
Speaker 1: people are just turning around, doing a one A D
Speaker 1: and walking out the door. And it had been kind
Speaker 1: of a mystery, right how the consumer was being so
Speaker 1: resilient in the face of so much inflation. I guess
Speaker 1: the mystery is now being solved. The consumer is starting
Speaker 1: to not be so resilient. Yeah, exactly. And to be clear,
Speaker 1: you know, I see these developments with the U S.
Speaker 1: Consumer is a very very slow burn, right, so what
Speaker 1: the morning consule data seems to be predicting. If you
Speaker 1: sort of run the time series against real personal consumption
Speaker 1: and real retail sales and things like that seems to
Speaker 1: be suggesting that we are going to see real declines
Speaker 1: in spending in the months ahead. Of course, in nominal terms,
Speaker 1: you might interpret that as continued resiliency. That does not
Speaker 1: mean like a crash in corporate earnings. That doesn't mean
Speaker 1: that retail sales automatically fall off the cliff, But it
Speaker 1: does put the U s consumer in sort of a
Speaker 1: precarious position, whereby if we are hit by another shock,
Speaker 1: and there's a lot of scary stuff out there that
Speaker 1: could deliver such a shock, the US consumer is in
Speaker 1: a very perilous position. Sticker shock, Jonathan, define it for
Speaker 1: us a little more. Is it about actual spending power
Speaker 1: or more like elevated inflation expectations or fear of recession? Yeah,
Speaker 1: I think it's mostly just the consumer's response to inflation.
Speaker 1: In other words, sticker shock is defined here is you know,
Speaker 1: you go to the store, You're expecting to pay one
Speaker 1: thing and the store is charging something else. Of course,
Speaker 1: you combine that with the fact that in real terms,
Speaker 1: people's purchasing power has been going down for the better
Speaker 1: part of two Wages have indeed been increasing at a
Speaker 1: meaningful clip, but they're losing their purchasing power after adjusting
Speaker 1: for inflation. So that's another thing I want to ask.
Speaker 1: When consumers retrench and it looks like they're beginning to
Speaker 1: just start retrenching, do they start sticking more closely to
Speaker 1: their jobs? Will we see it in the quits rate,
Speaker 1: for example, or the Jewels survey. Yeah, that's a very
Speaker 1: interesting point, you know, and when you think about how
Speaker 1: all these dynamics work together, is potentially going to be
Speaker 1: as weird as it sounds, maybe even a net positive
Speaker 1: in the short run as far as monetary policy goes.
Speaker 1: You know, there's some interesting tradeoffs there. The FED, of course,
Speaker 1: would love to see people quitting at lower rates and
Speaker 1: be able to get the trend rate of wage increases
Speaker 1: down from somewhere in the five percent range to something
Speaker 1: that they think is more sustainable, like a three point
Speaker 1: five Now. Bank of American CEO Bin moynahan told us
Speaker 1: that consumers are showing resilience. Are we talking about the
Speaker 1: same consumers or does it just take longer If we're
Speaker 1: to percolate through the banking system. I think what moynihan
Speaker 1: is saying is very much consistent with what we have
Speaker 1: seen in the data. Essentially, you know, three Q was
Speaker 1: a pretty decent quarter, and that's consistent with this sort
Speaker 1: of slow burn thesis. Right. We have to remember that
Speaker 1: the consumer went into two with an extraordinarily strong balance sheet,
Speaker 1: large cash balances, and a tremendous capacity to borrow more.
Speaker 1: They paid down a lot of their deaths during the pandemic,
Speaker 1: they re finance their mortgages at very attractive rate, and
Speaker 1: so they had a long, long runway. Then as much
Speaker 1: as the psychology, you know, starts to weigh on them,
Speaker 1: and I think that the psychology started to weigh on
Speaker 1: the months and months ago, you know, even when we
Speaker 1: first got hit with the gasoline shock. But they were
Speaker 1: able to take a step back and say, well, you know,
Speaker 1: this is tough, but I can deal with this for
Speaker 1: a few months, six months, and twelve months because my
Speaker 1: bank account is flushed. So I'm going to suck it
Speaker 1: up and I'm not going to change the way that
Speaker 1: I live. What the Morning Console data is flagging for
Speaker 1: us is that that runway is getting a little bit shorter, right,
Speaker 1: and people are finally starting to say, you know what,
Speaker 1: this is maybe not crisis mode for me yet, but
Speaker 1: I really need to start to make some lifestyle adjustments
Speaker 1: to make sure that I'm going to be okay if
Speaker 1: things get dicey going forward. So it's a little chilling
Speaker 1: when you see how Row saying that people are buying
Speaker 1: fewer toys, because the last people you want to punished
Speaker 1: in an environment where you're experiencing a little bit of
Speaker 1: tightening our children, right, the people you buy toys for. Yeah,
Speaker 1: and you know you bring up toys. I think the
Speaker 1: holiday season is another important part of this. If you want,
Speaker 1: you know, a little bit of a bull case to
Speaker 1: temper some of my my personal negativity on this. My
Speaker 1: my colleague Andrew Felsted wrote a great column recently where
Speaker 1: she really focuses on this is going to be the
Speaker 1: first holiday see is in without really any sort of
Speaker 1: restrictions on movement from COVID. So, you know, as much
Speaker 1: as some of these factors are starting to weigh, it
Speaker 1: could be that consumers, at least in many parts of
Speaker 1: the world reach for one last hurrah in this fourth quarter,
Speaker 1: and that you know, the slover and that I keep
Speaker 1: talking about gets pushed back yet another quarter here. But
Speaker 1: it is so fascinating just talking about inflation, isn't it,
Speaker 1: Because as you point out, at the beginning, it was
Speaker 1: gasoline used car price is then most of the inflation
Speaker 1: was being blamed on commodity cars after the invasion of Ukraine.
Speaker 1: But now it seems to be not just about things
Speaker 1: like shelter or used cars. It's broad and deep, as
Speaker 1: you point out. Yeah, absolutely, I think it's been pretty
Speaker 1: clear to anybody who has come to this debate with
Speaker 1: an open mind that inflation has been everywhere for at
Speaker 1: least the past six to nine months. It's a broad
Speaker 1: based adjustment in the price level. It's not about idiosyncratic factors.
Speaker 1: And you know, frankly, it began to six six to
Speaker 1: nine months ago. The team Transitory just kept on looking
Speaker 1: for new excuses for this thing. To the latest excuse
Speaker 1: seems to be, well, you know, let's focus on the
Speaker 1: lags in the housing data. And what I've been trying
Speaker 1: to say is just yes, of course, there are major
Speaker 1: lags in the housing data. Everybody is aware of that
Speaker 1: at this point. There have been many, many economist papers
Speaker 1: written about this. The Fed absolutely accounts for that when
Speaker 1: they conduct monetary policy. But you have, you know, plenty
Speaker 1: of market participants and commentators out there saying, well, look,
Speaker 1: inflation is actually not that bad. Look how much of
Speaker 1: an influence housing is having right now? And actually no,
Speaker 1: you know, every month, I do the exercise of let's
Speaker 1: strip housing out of this completely, because yeah, they're right,
Speaker 1: it could distort your ability to see an inflection point.
Speaker 1: But that inflection point is just not there period. You
Speaker 1: you do the exercise, you strip it out, uh, and
Speaker 1: core inflation is still very high. It's in many categories
Speaker 1: that have absolutely nothing to do with housing. Big gainers
Speaker 1: in the past month, including pet services. I'm not sure
Speaker 1: where they are impacted by mortgages, you know, automobile insurance. Right,
Speaker 1: it's just sort of pick your poison. And the problem
Speaker 1: here is broad based structural inflation and you just can't
Speaker 1: make excuses for it. And you point out that it
Speaker 1: could actually make a resurgence, that it doesn't mean that
Speaker 1: it's plateaued at this point. How long does it take
Speaker 1: for consumers slowdown? And I know you're calling it a
Speaker 1: slow burn, but how long does it take for it
Speaker 1: to eventually be reflected in prices, in other words, to
Speaker 1: shift to the supply side of the economy. And how
Speaker 1: does that even happen our companies forced in our their
Speaker 1: margins eventually, or how does it work? That's what you
Speaker 1: would expect, right, you know, it depends on what industry
Speaker 1: you're talking about. Right, So, if you're talking about a
Speaker 1: services industry where they're facing very sticky wage pressure, for instance,
Speaker 1: from that tight labor market, but all of a sudden
Speaker 1: they're waking up to the fact that they can no
Speaker 1: longer pass on their higher input costs to the folks
Speaker 1: that are dining at their establishments, you might start to
Speaker 1: see if those margin pressures come up as soon as now. Um,
Speaker 1: you know, I think the consumer sector is an important
Speaker 1: place to remember the famous long and variable lags, and
Speaker 1: they are variously estimated to be in the twelve to
Speaker 1: eighteen months range. But basically, like I say, it's going
Speaker 1: to take some time for this to show up in
Speaker 1: the corporate numbers. You know, it seems reasonable to say,
Speaker 1: you know, maybe Q four is is the inflection point.
Speaker 1: But if things keep going the way they have been going,
Speaker 1: which is to say, little by little the consumer adjust
Speaker 1: their behavior each month, you're still not going to see
Speaker 1: any shocking shifts in the nominal numbers, maybe for many
Speaker 1: quarters to come well, which means it's on for the FED.
Speaker 1: Right another seven five basis point hike in November most
Speaker 1: likely does that punish the consumer instantaneously or even quicker
Speaker 1: than six to eighteen months. You know, it really doesn't
Speaker 1: seem like it. Until now, the consumer sector has really
Speaker 1: been able to take these hikes. I think everybody is
Speaker 1: concerned that, you know, one day we're going to wake
Speaker 1: up to the true impact of these long and very
Speaker 1: of ole legs. And I think the Deves would say
Speaker 1: that the FED maybe has no idea what it's getting into,
Speaker 1: that it could be ugly when we finally get there.
Speaker 1: But you know, the real question just comes down to
Speaker 1: are you going to see an outside shock? You know,
Speaker 1: are we going to wake up one day and see
Speaker 1: that the housing market is crashing and suddenly people are
Speaker 1: looking at their home equity and they're saying, oh my goodness,
Speaker 1: I need to dramatically change my consumer behaviors. That would
Speaker 1: certainly be a breaking point. Any number of things that
Speaker 1: could happen with the war and the energy market could
Speaker 1: be a breaking point. Any number of things that could
Speaker 1: happen with European and Asian economies could do the trick.
Speaker 1: So it's impossible and probably imprudent to guess what such
Speaker 1: a shock could actually be. But there are so many
Speaker 1: things out there, Jonathan. How much is the bond market
Speaker 1: reflecting this as opposed to say, you know, a whole
Speaker 1: bunch of things, including expectations for Fed policy. Yeah, I
Speaker 1: think the bond market seems to be in a fairly
Speaker 1: rational place, right. You've got the two year treading essentially
Speaker 1: call it thirty five forty basis points below where the
Speaker 1: FED funds futures would imply. You know, we think the
Speaker 1: terminal rate is headache. That makes a degree of sense, right,
Speaker 1: because the bontom market is pricing in this possibility that
Speaker 1: they may well not get there, that they may have
Speaker 1: to stop short because one of this series of unfortunate
Speaker 1: events could play out and they'll have to stop sooner. Jonathan,
Speaker 1: live in there. You're listening to Bloomberg Opinion. I'm Valley Quinn. Well,
Speaker 1: it's a call that's been made before once or twice
Speaker 1: over the past one years Bloomberg Opinions. David Fickling, though,
Speaker 1: is making it now. For the first time I had
Speaker 1: a conversation with him where all was revealed. David, you
Speaker 1: made a bold call in a recent column, and you
Speaker 1: say it's mostly your own power's fault. I guess what
Speaker 1: isn't these days. But we'll get to his fault in
Speaker 1: a moment. Talk to us about this bold call. It's
Speaker 1: kind of the scariest call that you ever make as
Speaker 1: someone who writes about energy, because it's a call about
Speaker 1: peak oil, and it's a phrase that you hear from
Speaker 1: time to time, and almost always when you have suggested
Speaker 1: it's wrong. In fact, I was tracing back one historical
Speaker 1: call of a peaking in oil production made in nineteen
Speaker 1: nineteen by the chief geology of the U S Geological Survey.
Speaker 1: He said, peaking our production in the US was going
Speaker 1: to be in nineteen twenty one UM. And so here
Speaker 1: we are a century or later, and we are very,
Speaker 1: very very far above that peak. And of course, about
Speaker 1: fifteen years ago there was a lot of talk about
Speaker 1: a sort of peaking conventional oil production. And then of
Speaker 1: course we had the shale oil boom and that was
Speaker 1: the end of that. But back then a lot of
Speaker 1: people thought that essentially the world was running out of
Speaker 1: oil and that prices were going to go ridiculously high.
Speaker 1: We did in two thousand and eight see oil at
Speaker 1: nearly hundred and fifty dollars a barrel. Because so obviously
Speaker 1: I've got a little bit of trepidation about making this claim,
Speaker 1: but I think there is reason to think that things
Speaker 1: are actually changing quite substantially, because I think the key
Speaker 1: is not a peak in oil production and geological shortage
Speaker 1: of it. I don't think we'll ever see that, but
Speaker 1: rather is a peak in demand, which is a thing
Speaker 1: we do see in commodity market where essentially people starts
Speaker 1: obstituting other products and the products are no longer as
Speaker 1: much in demand as they were. And I think we
Speaker 1: are close to or I think we've probably passed that point.
Speaker 1: And I think we're already fairly close to that point.
Speaker 1: But the crucial factories, as you said, what's happening with
Speaker 1: the Federal Reserve, what makes you say that we're past
Speaker 1: peake demand even though I know all the workouts out
Speaker 1: there are that demand is going to be less next year.
Speaker 1: I think the crucial factor is half of all of
Speaker 1: demand goes into road transport fuel essentially, and that is plastics,
Speaker 1: and everything else. But it's crucial to think about what
Speaker 1: has been happening with road transport fuel efficiency over the
Speaker 1: last fifteen years. After that last hundred and fifty dollar
Speaker 1: barrel oil period in two thousand and eight, and obviously
Speaker 1: with people more focused on the issues of climate change,
Speaker 1: there was some pretty dramatic improvements in energy efficiency that
Speaker 1: were passed file fuel economy in the US Europe. We
Speaker 1: see the same also in China and India. Every major
Speaker 1: car market. The cars are required now to be much
Speaker 1: much more efficient than they were fifteen years ago. How
Speaker 1: the life of a car is about twelve years, so
Speaker 1: we're sort of twelve years on from these regulations passing,
Speaker 1: and so what you're seeing is quite rapid improvement in
Speaker 1: the average fuel efficiency of the fleet, which is only
Speaker 1: going to increase with each passing year. Add to that,
Speaker 1: of course, the growth of electric vehicles. A third of
Speaker 1: the cars sold in China last month were electric vehicles,
Speaker 1: twenty percent of both sold in the European Union or
Speaker 1: electric vehicles, So that is a really dramatic shift in
Speaker 1: the sort of roughly five percent of the global car
Speaker 1: fleet new cars each year. The turnover of new cars
Speaker 1: adds about five percent and five percent straps on the fleet,
Speaker 1: so that's very significant, but of course, actually more significant
Speaker 1: at the moment than that is the sort of the
Speaker 1: other ninety five percent of the fleet, which is not
Speaker 1: new cars, but they are being affected by these fuel
Speaker 1: efficiency regulations that have been in place for twelve fifteen
Speaker 1: years but are only really starting to buy. So most
Speaker 1: mainstream forecasts look at a peak in oil demand around them,
Speaker 1: the sort of hundred and three million barrels a day
Speaker 1: mark VP that have the same numbers total energies. We're
Speaker 1: not very far below that market at this stage. And
Speaker 1: so if you then add in the effect of a
Speaker 1: major recession, which always causes the slumping old the month,
Speaker 1: then really that peak we sort of never get there,
Speaker 1: essentially because the sort of long term secular decline and
Speaker 1: transport fuel intervenes with the sort of economic crash of
Speaker 1: a recession and means we sort of really never get
Speaker 1: above the point we're at now. And this is where
Speaker 1: your own power comes in a way. It's his hold, absolutely,
Speaker 1: and I think that's worth bearing in mind as well,
Speaker 1: is that a large slight of inflation is being caused
Speaker 1: by energy prices, and if you think about what happens
Speaker 1: when a central bank raises interest rate to reigin in inflation.
Speaker 1: It's essentially saying that the demand in the economy is
Speaker 1: too great for the supply that we have, so we
Speaker 1: must slow the economy, we must cut it back until
Speaker 1: it is weak enough to cope with the weaken supply
Speaker 1: side that we have. And though in that sense we
Speaker 1: see this from the Federal reservant, we see it in
Speaker 1: a way or so from OPEC. The Federal Reserve is
Speaker 1: weakening the economy to the point where the st weakened
Speaker 1: theup fly of oil and energy generally that we have
Speaker 1: is sufficient to meet demand in the economy. Likewise, obviously
Speaker 1: we've seen opeque cut of production. We are not seeing
Speaker 1: significant boosts of productions from anywhere. So there is no constituency,
Speaker 1: either monetary or on the oil production side, that is
Speaker 1: actually trying to meet levels of demands above what those
Speaker 1: fairly arish forecasts of sort of a hundred and three
Speaker 1: million dos a day arraiming at. You know, if you
Speaker 1: if you go to OPEC or exomobile, they have some
Speaker 1: more bullish projections to the demand, but no one is
Speaker 1: actually investing in the production to meet that demand and
Speaker 1: if you don't invest in the production, but it doesn't happen, right,
Speaker 1: And I guess the whole point is that it won't
Speaker 1: be economically viable at some point to invest in the production.
Speaker 1: That's why they're not doing it. But so what happened?
Speaker 1: Does oil stay in the ground, then eventually it's not
Speaker 1: that we'll run out of oil? And what do countries
Speaker 1: like Saudi Arabia think about that? And the interesting thing
Speaker 1: is that a lot of the large producers, they have
Speaker 1: done very well from the current circumstance. At a time
Speaker 1: when oil prices are high and you're producing pectime, you know,
Speaker 1: producings for us we tend to twelve millim barrels a day.
Speaker 1: If you cut your production by one million brels a
Speaker 1: day and it increases prices by you are making a
Speaker 1: lot more money than you would have been if prices
Speaker 1: were thirty percent lower. In production was one win in
Speaker 1: barrels higher. And Saudi Arabia doesn't actually care about the
Speaker 1: volume of bolts produced. It cares about the amount of
Speaker 1: revenue that goes into its treasury. And that is the
Speaker 1: case that every one of the OPEC countries. So from
Speaker 1: their perspective, a tighter supply side that results in higher
Speaker 1: prices is a good thing for them. Now. Of course,
Speaker 1: the danger of that is always that enough tightness is
Speaker 1: going to induce more production from non opex sources, and
Speaker 1: then they will lose market share. But as we've seen
Speaker 1: that non ope production has really not gone up very much,
Speaker 1: and particularly with rusher in the solders, OPEC plus the
Speaker 1: only real source of incremental production in the last twenty
Speaker 1: years in the world economy. You've had a little bit
Speaker 1: from Brazil and other parts of South America, but really
Speaker 1: the only player in town is the US shale sector,
Speaker 1: and that has picked up, but not sufficiently to offset
Speaker 1: what's going on with an OPEC. But David explained to
Speaker 1: us that demand is peaking and we could see big
Speaker 1: oil demand in the next few years according to your diseases,
Speaker 1: and it seems very very plausible. Why doesn't that mean
Speaker 1: oil prices are also peaking? Well, I think we have
Speaker 1: a tendency to sort of think about commodity prices the
Speaker 1: way we think about equity prices in a way, and
Speaker 1: so if demand is going up, then prices should be high,
Speaker 1: and if demand is going down, then prices should be low.
Speaker 1: But if you go back to your sort of economics
Speaker 1: one or one classes, this is not necessarily the case
Speaker 1: that the price is a result of the intersection between
Speaker 1: supply and demand. We see these cycles in commodity markets
Speaker 1: and have done since since tording time. Pretty much. If
Speaker 1: supply is falling and demand is falling, but supplies falling
Speaker 1: fast and demand, then you will have high prices. And
Speaker 1: if supplies rising and demand is rising, that supplies rising
Speaker 1: fast and demand, you will have low prices. The prices
Speaker 1: that the prices are to do with the extent that
Speaker 1: supplying demand are out of whack, they're not really to
Speaker 1: do with this direction of overall output essentially. So so
Speaker 1: I think that's what we will see, and I think
Speaker 1: we'll see that for a decade in the twenty forties
Speaker 1: and twenty fifties, we will see periods of high oil
Speaker 1: prices because the supplied demands will still often go out
Speaker 1: of wax. But it may not matter as much as
Speaker 1: the world economy. David, what about countries like China and India?
Speaker 1: Countries are a billion plus people still developing. Will there
Speaker 1: be major differences in demand and refining needs across regions?
Speaker 1: I think you almost need to put them in two
Speaker 1: separate categories because of course India is one of the
Speaker 1: biggest incremental holding on from here, but it's quite a
Speaker 1: small consumer of ole now, sort of four or five
Speaker 1: million barrels a day compared to China, I think off
Speaker 1: top of my head on about twelve million and the
Speaker 1: US on about eighteen million. So these are you know,
Speaker 1: injuries in somewhat of a separate category there. India also
Speaker 1: has almost no domestic production so is much more dependent
Speaker 1: on imports, whereas China is one of the world's biggest
Speaker 1: stile producers. China produces about five or six million barrels
Speaker 1: a day of oil itself. Comparing all of those countries,
Speaker 1: I think with China, China has as I said earlier,
Speaker 1: you know, a third of the vehicles sold that last
Speaker 1: month in China or electric vehicles. China is strategically, very
Speaker 1: heavily pivoting away from import demand. It's going to have
Speaker 1: import demand for oil in a foreseeable future, but it
Speaker 1: is very concerned about that as a strategic weakness. The
Speaker 1: supply lines from China to its mayor supplies of oil
Speaker 1: tends to be very long, so China, I think the
Speaker 1: speed of electric vehicle uptake is going to mean that certainly,
Speaker 1: transport fuel we see that sort of moved out of
Speaker 1: the economy fairly rapidly, possibly more rapidly than cold consumption
Speaker 1: over India, I think is a bit of a different story.
Speaker 1: But of course India's at a much lower level of
Speaker 1: dual element. When you talk about the road transport fuel,
Speaker 1: you're mainly not talking about cards. You're talking about two
Speaker 1: wheelers and three wheelers, which are also actually very quickly
Speaker 1: being substituted by electric vehicles because the sort of value
Speaker 1: proposition for electrification is a lot stronger for two and
Speaker 1: three four wheelers. Yeah, and I mean, you know, I
Speaker 1: think in a way, because there's not the sort of
Speaker 1: strict Egypt value that China places on it, I think
Speaker 1: probably the demand from India, you know, will be more
Speaker 1: incrementally substantial than from China over the course of becoming decades.
Speaker 1: But the thing to bear in mind is, of course
Speaker 1: the O E c D still consumes half the worlds oil,
Speaker 1: and so fifty million barrels a day is going into
Speaker 1: the O E c D. So if the Indian old
Speaker 1: demand doubled, you only need a temper center client from
Speaker 1: the O E c D to eat up all of that, David,
Speaker 1: with the Russia War ongoing, do supply chains in terms
Speaker 1: of oils stay changed forever or at least for a
Speaker 1: very very long time. I mean, I think that is
Speaker 1: clearly another factor here. And you know, when I talk
Speaker 1: about demand, you demand and supplier obviously intertwined. A lot
Speaker 1: of supply has been held back from the market or
Speaker 1: is struggling to get to the market. You know, even
Speaker 1: though obviously there's been a lot of exemptions around energy
Speaker 1: in terms of Russian sanctions, in practice, we've seeing what's
Speaker 1: happened to the North Stream pipeline. We've seen some of
Speaker 1: the sort of chaos around like you know, shipping arrangements
Speaker 1: and things like that, the rerouting of all that supply,
Speaker 1: it will lead to sort of ongoing shortfalls. And of
Speaker 1: course the other factor is that the sanctions that really
Speaker 1: that are actually have sanctions that affect oil services and
Speaker 1: upstream services from the most pieces of European and American
Speaker 1: companies that provide those oil field services. Russia will much
Speaker 1: like Iran, you know, I mean, the worst case snary
Speaker 1: obviously it's something like Venezuela. It will struggle to produce
Speaker 1: oil in the volumes, but it's been still producing is
Speaker 1: in the past because the Russian oil industry is highly
Speaker 1: technologically advanced, and the technology is just not going to
Speaker 1: be there in future, so that is an issue on
Speaker 1: the supply side as well. Bloomberg Opinions David Fickling. Do
Speaker 1: get in touch with your comments and questions at Monty
Speaker 1: Quinn on Twitter or email Vequen at Bloomberg dot net.
Speaker 1: We're produced by Eric Mullow. That does it for this
Speaker 1: week's Bloomberg Opinion