Surveillance: Gas Prices with Hochstein (Podcast)

back to eighty dollars a barrel. Amos, I'm gonna cut to the chase. You've read the Washington Post, Anny Hoyer and others. Uh lukewarm here on the microeconomics of price theory of an eighteen cents tax on a galon of gas. What's the plan to get oil back to eighty dollars a barrel? Well, good morning, Tom for a little thank

you for having me. Uh. Look, since the since the late fall when Putin had a massive troops around Ukraine and ultimately the invasion followed by global sanctions, uh, the price of gasoline at the pump of Americans has gone up about two dollars UH, and diesel probably a little

bit more than that. So what we are looking at is this historic increase in price as a result not of normal economic times, but under a time of war, at a time of of global security instability that is affecting the market and as a result, as we go into the into the driving season the summer, the President really wants to give a break to American families during these three months of the summer, and that's why he's asked Congress to suspend uh the eighteen cent gas tacks

and he's called on governors to do that the same. So if the governor's match that, uh, that we're talking about fifty cents a gallon less. But I want to answer your question Tom directly. Look, we have done everything that we can to encourage the industry to increase production, which they have, which they are going to this year record. We're gonna get to record oil production at the end by the end of this year or the next next

year's first quarter. Uh. We've released the President's ordered the release of a million barrels a day from the strategic petroleumers, and he led the effort to do two million barrels. Here's the problem, and I know you're sitting in the Oval, Uh, the Oval Office with a Bloomberg terminal next to you as you talk to the President, and you can bring up log West Texas Intermediate quarterly like I can't. Anybody can do this, bologny. It's about distillates, and it's about

not in my backyard. How is a centrist Democrat going to explain to left Democrats they need to come up with a nod in my backyard policy to advocate greater distillate capacities in America? How do you do that? So time, you raise an excellent point that people tend to focus a lot on the oil production, but in reality, Uh, it's that's not the issue alone, right. Uh. During the pandemic, just during the years of the pandemic, we lost a

remarkable amount of refining capacity in the United States. And those refineries that went out, some of them are gone and they're not coming back. We know that they're you know, one of them has turned into a terminal. Uh. The others, though, are there, and we can invest before we start talking

about building new refineries. Uh, we can bring back potentially the old refineries that have been taken out of commission that are still there and what we've with the President has asked is for the industry to come to Washington to meet with Secretary Grant Holme UH and to bring ideas. As he said in his letter, look, he has taken extraordinary measures over the last several months in a number of areas, both in energy and beyond UH, he is

willing to take those measures again. We're asking the industry to come and to give us their ideas. What do you need from the federal government from from us that we can be weak to work with you to increase the capacity or finding capacity and distill it's in order to get gasoline not only produced, but then ultimately get gasoline and diesel to the right places around the country. I mean, at least, what's so important and what almost is talking about is what are we going to do

to politically shift the distillate debate? To me, that's the heart of the matter. The other heart of the matter, almost is this idea that the response to that letter that we're talking about from the President, from X and from Phillip sixty six, from a whole host of other companies was that the current administration has had obstructionist policies when it comes to the oil and gas industries, and

that they have not been very clear. What is your response at a time when they have been increasing production and they invested more than they brought in during the heart of the pandemic. So look, that's that's the difficulty here. People say that we are standing in the way of increased production, but look at the numbers, look at the increase in production under the Biden administration. It's hard to argue that we have done anything to stand in the

way of increased production. Uh, there's been an rise in oil production. We know that by the end of the year, at the beginning of next year, we're gonna hit record production. So on average, the old production in the United States in this last year and a half has been higher than the one under our predecessor. Excuse me those records, Lisa. Have you met with the CEOs of the big oil companies to talk about this and to talk about how

things can be clear for them to produce more? You have, and are there going to be certain well, sorry, go ahead, let me know. I mean they're going to be scheduled changes in terms of more specific policies that you'll put out there that you think will allow them to refine more or create more production in the near term. Well, I think that they have. My point is that they

have the tools they need. When I meet with the oil company executives and the c e o s, and I've asked them over the last several months, do what do you need from US? And and beyond what we've talked about the last several days and the press about the tone, what do you need? They don't need anything. They all say they have what they need. There are some labor shortages, there are some spare parts and so on, but they don't need policy changes from the from the

US administration. They have what they need. In fact, when it comes to federal land, they have more than what they need. But as you and I both know, federal lands where government leases are are less than ten percent of the overall US production. So the companies actually don't

need anything. What they do need is bankers in New York and and their funds funders to send their investors to say, use the profits that you're having under these record prices for the last level of months and invest them back into the into production, investment, back into refinery, investment, back into equipment, where that's where the rubbeats. It's not just about the availability of the crude, it's about the ability to turn that into product to refine it. Refining

capacity is really a critical issue here. And when you speak to an oil executive, they say, why would I invest in a new refinery, which is a long term investment, when it is known that there is an intention to get to net zero, albeit in a few decades from now. They want they want to pivot to clean energy. So what is your messaging to c e O S when you're asking them to pump more also knowing that eventually there wants to be you want to wean off of fossil fuels. So two points one right, it is not

just about the crude oil production. It is about refining. And as I said before, we lost a lot of refining over the last several years, specifically during the pandemic UH and we'd like to see that come back. But you raise it a fair question, why why do you make those investments and that and that's what we have to talk about. We need to make sure that we have enough oil and gas in the economy now over the next several years to meet the demand that we

have in the economy. And you're right, we're not shying away from our climate goals, and they're aggressive, and we want to accelerate. We want to see the accelerate the movement to electric vehicles. UH the goals of I know the goal is about new car sales. You have several American companies and global car companies saying that their vehicles will be electric, so and that that's just new car sales. So we'll have a tail on that as the rest

of the industry catches catches up. So the argument that we're we don't want to invest in refining or invest in oil production now because of these policies, I don't know that that really follows through UM and and meets

the fact. We know we have the demand. So I think that we'd like to work together with the IT with the with the industry, tell us, tell us what you need, and tell us how you plan to use your record profits investing back into UH, into the industry, into production, into refining so that Americans can pay a little bit less at the pump and have the products that they need during this time almost we just have

a little bit of time left. Has there been any discussion about reducing demand or possibly putting out some sort of guideline to pull back in terms of how much people use, akin to what we're seeing in the gas base over in Germany. Well, first, I think on natural gas, Europe and the United States are are vastly different UH in our systems. Our price here is about six dollars.

There's about forty dollars on natural glass. But look, the we're we have provided record investment through the infrastructure legislation that passed UH into mass transit UH and into into rail UH that these are the things to convert people from. If we had a better rail and mass transit system that was efficient and fast, then people All studies show people would move from using vehicles to moving mass transit to using mass transit. So yes, we we'd like to

put the investments to work. That's what President Biden has been offering all along. How can we move people away from driving their cars to mass transit UH and to rail, and how do we move from gasoline cars to electric vehicles which will also reduce the demand for gasoline. But we have to also be realistic that we need that supply today as we get towards that better future that you're talking about. Thank you for the brief. Almost Axtein is with the White House and with President Biden with

energy policy. Maria today, oh in Brussels, and now is the Baltic States consider Ukraine as they consider Russia a convert station with the President of Lithuania, Maria, good morning, Thanks Toma. Let's go straight of course, with the President of Lithuania, Mr. And Alzeta. From day one you've said Russia is a threat to European security. Ukraine has to win and we need to see native troops deployed in

big numbers on the eastern flank. But I want to ask you about a very delicate situation for you, a so I appreciate you taking the time today on Kleinigrad. When you look at it on a map, it's between your country Lithuania Poland, but it belongs to the Russian Federation, and the Russian Federation now openly accuses you your country a blocking transport from the Russian Federation to Klenigrat. They

say there could be real repercussions. Are you concerned. We got used to that kind of manipulation, this information and threatening it comes very often, and you've got used to have this very dangerous neighbor very near to and this is nothing special. I just want to say that this issue we are talking this is not bilateral issue between

Lithuenia and Russia. I would like to remind you that in March, the European Council decided on the fourth package of sanctions, which include some ferous metals iron steel and also some luxury goods. And what is Luthenia is doing. Luthenia is just implementing those sanctions according to the rules and prescriptions of European Commission. Now we are in the situation they where we have to apply those sanctions in post and this creates, of course some tension between Lithenia

and Russia. But I think that Russia is just acting this proportionally and they are trying to use the supportunity the just to blow the propaganda bubble. I would name this like this, but when you say it's the propaganda bubble, was specifically because the Russians what they say is that you're preventing the Russian Federation from supplying a territory of the Russian Federation, that is kelen Grad. What's the propaganda

no blockade? If we are talking about passengers, because you're talking in action blocade could be seen by Russia's knowledge located, because if we are talking about non sanctioned goods, we are talking about passengers, there's not locate. There's absolutely free movement between the territory of Russian mainland and region rout

the territory of Luthenia. Now we are talking about this concrete group, and of course we need precise setting of just specifical features and tragulement how we can apply these this fourth package of sanctions, and we are waiting for European Commission's explanation to give that guidance. I wonder ever since the ward started, is Vladimir Putting always on your mind the idea that for Lithuania the Baltics, this is

almost an existential threat potentially too. No, we are concentrated on our economic progress, prosperity of our people, and you know, we don't have the time to think all the time about Vladimir Puttin. Of course, we understand that situation in the eastern part of Europe is really dangerous and we strongly condemned this war against Ukraine. We are a very keen support of Ukraine trying to help to assist down by all means, by military mean, economically, homanitarian means, and

of course political component is very important too. So this is a reason why I in his very enthusiastic supporter of candidate granting candidate status to Ukraine, and I hope very much, I am. I am looking forward that it it will happen this this evening. And of course you've said Ukraine has to win because it's the right thing. But if it doesn't and it gets defeated by Russia, the repercussions of that could be enormous for the rest of Europe. What do you mean by that and what

does victory Ukraine mean for you? The victory of Ukraine means a victory of just historic truth, because they are fighting for their freedom, for the right of the country, of the people of the country to decide about the future, about their destiny, and nobody else and especially external forces cannot decide where Ukraine have to do, what Ukraine have

to do, and we have it should go. Ukraine is according to to to I am fully convinced that Ukraine is European nation because they prove every day by fighting against the aggressor that they defend European values, they defend democratic values, and so they are fighting not only for the freedom, they are fighting for our freedom from the freedom of European Union too. And certain next week there's a NATO meeting, of course President Biden will be there.

The Boltics your country. You've said, we need more troops here, stations. The eastern flank needs to be a priority. This is not just about China. Russia's an equal threat. What are you going to tell the President of the States. This is very important to have very adequate evaluation of the situation. What is happening in the eastern flank of Natal And we see the security issue is becoming more and more important.

The threats are becoming char lines very fast. I don't want to to to to talk about some some some threats which are theoretical, but we first of all, we have to spend much more attention to the security of feast and flank in order to make deterrence factors as

most effective if it is possible. And this is very important, not to show our willingness in case of aggression, but to show that we are ready to increase a number of troops, to increase military equipment, in our countries, and of course very important is to switch to the current ear policy regime in Bolti countries to air defense regime.

It is very important too, and I'm looking forward that conclusion text of NATO will be suitable to cooperate who work with the leading country of our e FB troops in Lithuenia, namely Germany. I signed the communic with the German Chancellor all of Charles two weeks ago and according to this communic, Germany is committed to send additional troops up to brigade level so that scale up for a

military presence in Lithenia. And I think this is very important to increase ort to scale up the military presence of other countries in Baltic, other Baltic countries too in Latin Estonian. Namely, Well, President, thank you so much for your time. We appreciate it, of course, and Bloomberg has always and your message is clear a peacement is not gonna work with Russia. Thanks so much, Tom, Thank you so much Maria. Today in a conversation, folks, I honestly

never framed in my lifetime. I never thought we would hear a kind of tone those statements from a member of the Baltic States, and Rita soon joins us here with energy aspects, and I do want to note we protect the copyright of all of our guests. I can't say enough about the acuity of energy aspects. Uh notes you can get them from their people as you can. And Dr Son, I want to speak here about demand,

which the fears are premature. And what I love about the energy aspects note is our geographic it is the elosticities are responsiveness of demand. It's different on the Pacific RIM than it is in Europe, etcetera, etcetera. What part of your oil demands study now is the most important

for our listeners and viewers. I would say, first of all, thank you Tom, very kind words indeed, but I would say have to we have to focus on Asia because all the focus right now is on the US in terms of the market right and obviously with the US federising interest rates, everybody is now expect geting a recession. The questions have moved from oh are we going to be in a recession to how deep is it going to be? To how does it compare to pass recessions?

Whereas nobody is actually looking at emerging markets Asia is eighteen months behind us in the reopening cycle. They have just started to reopen from COVID and by the way, China hasn't even started to reopen, So there's quite a lot of upside to those demands. Even our own demount numbers depending on that cadence of the Chinese reopening at least,

so this is absolutely critical. The hyper analysis of microeconomics of Emerita send different from what we see at JP Morgan, but both of them are completely focused on demand responsiveness on the Pacific RIM. That's the common feature of two different houses, and sure there's a lot of distinction in each region. The overall picture, though, is a tight oil market,

and I'm rita you highlight that as well. How much is what we're seeing right now a brief cooling in some of the fears of the tightness of the market before we reassert price up for there for a barrel of crude, especially as some people think that there already is a recession and our word baked into the price of oil. Yeah, I mean, look, have the balances necessarily turned out to be exactly what we had forecast after

the Russian invasion? No, Russian supplies are still hitting the market probably about a million barrels per day or more more or less more than what we had expected. But they are still down about a million barrels per day. But equally we've had the SPR at the same time, demand is still coming in higher. So to your point, the market is incredibly tight despite some of those moving parts. I think the bottom line is underlying infantries are so low.

Spec capacity is so low that you only need a little bit of movement, like such as Libya going offline for a couple of days. You can really swing balances from being solvable to unsolvable in the matter of hours. So what we're seeing right now is again this fear of a recession turning people to kind of doubt the demand recovery and say, Okay, you know, we've got all these SPR barrels, but if demand doesn't keep up, prices are going to come down. But I will also highlight

a couple of other things, more technical factors. We tend to get sovereign producer hedging at this time, large producers in North America, even in Asia, and that has started. And it's a low liquidity environment, which means that even take away all the fundamentals, there will be some downward pressure on prices in the near term, but ultimately, especially going into the winter, we think prices are going to

get head back higher. And so I'm reading maybe the best way to characterize this is a head fake if you believe that this is hedging by sovereign entities. How much of a head fake could it be? How much do you still see energy prices rising heading into the winter months. I mean, do we think prices are going to go back to a hundred forty dollar range for crude? Yes? Absolutely, But does that mean that we don't fall ten dollars first?

I think we could definitely go down first, and I think for traders that matters a lot, right, it's always about the entry point, But I think more in terms of consumers and refiners, ultimately the trajectory is higher. And again, forget crew prices for a second. Think about diesel gasoline. Those prices are barely moved because the underlying fundamentals are so strong right now. Crew tends to move a lot more with these macro headlines. Product prices don't, and I

think that really tells you where the fundamentals are. And I think going into the winter, the risk of a diesel price bike is much much higher. Okay, Well in Rita. As we talk about going into the winter, let's talk about whether or not Europe is going to be adequately prepared for the cold weather. You are Germany today triggering phase two of its emergency gas plan, the alarm phase. I believe it's called what happens if we start to see actual gas rationing in Europe. I think there's a

real risk of that. I mean, we believe that our team absolutely believes that we've already put together a list of which industry is going to be hurt, so steel, cement, fertilizer, and so on. But I would say that we are starting to see countries restart cold plants. So I think the choice has been made again. It was always about

kind of green energy versus energy security. I do think we're starting to see the move towards guaranteeing let's keep the lights on, UH and as long as whoever has coal capacity decides to bring cold capacity back, then I don't think the downturn in industry is going to be as severe as we are expecting right now, just assuming that gas gets turned off and recent thank you so much just a brilliant note from Energy Aspects this morning

out of Houston and London. Let's go right there now with Andrew Lenoor's chief US economist, City Bank, of course, with an important call for a much higher rate of terminal value and all the other mathematical mambo. JOm do am do I want to go to ten am tomorrow morning, which you and I agree in my McKee agrees, I think all agree. Inflation expectations are important. They have spiked up. Are we unanchored in our expectations? Yeah? Critically important time.

I think that was kind of the last data point that the FED could still point to and say there was some notion that we weren't on a more inflationary journey. And as that University of Michigan five to tenure expectation lifts above three percent UM and we'll see where it comes in tomorrow. Uh, that that just increases the concern that there really is an embedded sense to this inflation.

I think we already saw it in in the labor market, like you were just talking about where we have wage growth by various different measures, you know, four to six percent wage growth. Chare Powell was talking about that yesterday. Um. And then you have price growth that is, you know, six percent plus depending on the measure that that you look at. Um. So, so I think there's a notion of a wage price firal here. Um. I think a little bit of what we're seeing. University of Michigan is

can firming that also. Um. Just like Mike McKie was saying, it's it's not that the five to tenure expectation is a correct expectation, but it just tells you something about how inflation is becoming a structural factor in the economy. Yeah, but just as quickly as people get used to that, Andrew, how much is a labor market shifting already? And we're not necessarily seeing that and claims going up although you know they picked up a little bit, but really it's

not that significant. How much are we seeing just job listings being taken down or not filled or companies pairing back some of their business ambitions. Yeah. I think that's what's difficult here is as an consists, you're always looking at two things. You're looking at the level of activity and the level of strength, but then you're also looking at the direction of travel and really what you want to get right, is the direction of travel, because that's

going to determine where you're going. And we know a lot of things are very strong. You know, the labor market has been very strong, continues to be very strong, lots of job openings, relatively few unemployed individuals. UM. But you know that that kind of leading edge of the direction of travel, the weekly initial job bubless claims data, that's giving me a lot more of a real time signal of the labor market, and something like job openings

which has lagged a couple of months. UM. So if you look at those initial claims again, the levels still very low. Hard to think that. Um, it's a difficult time to find a job in most sectors at least because the vacancies are so high. So it's not so much of a concern about the labor market being soft today. Everybody would agree it's strong today. UM. But I'm watching those claims. I think that what we're seeing now is you know, kind of some seasonal noise. Nothing to get

too concerned about. Um, But it's definitely the case if you bring economists like me back on this show, UM, a month from now, two months from now, when we've seen these initial jobless clams that have continued to trend up, we'll have a lot more pessimistic view. Well, Thomas on a really good job today, not just talking about their domestic labor market, but looking internationally and what the ramifications from some of the global downdraft has been. And that

has been in the stronger dollar. And in addition to jobless claims, we also got the current account balance out for the United States, which is surprised to the downside. We have a record trade deficit once again as the strong dollar allows the US to import more goods. How does this factor into your view on the GDP level, considering the prowess of the dollar and the ongoing sort of disinflationary object of that, but not the money coming

back into the U S economy. Yeah, so the tree balance has really been kind of swinging around wildly, which is kind of a combination of the post COVID reopening phase of the economy as as trade kind of gotten more fully restarted, um as the economy is reopened globally, and then this kind of pattern of well, you had renewed waves of COVID which are disrupting goods, and then

you have supply chain issues right on top of that. UM. So I'm really being very careful with that trade data right now in terms of interpreting it as any kind of longer term trend UM and where the economy is going. UM. If I look at the effect of the stronger dollar, UM, I think, what one thing that's maybe surprising, maybe even a little bit surprising to to me, and how this has played out. UM. You know, like Tom was saying, we have revised up our terminal Fed funds policy rate

forecast to above four percent. Now I've been getting there in the first quarter of three UM. So you know, we're really getting rates to quite high levels in the US. UM. That's not an out their view anymore that your market has been pricing something not too far off from that, and when we were at higher yield levels. UM. And the dollar, yes, his strengthen, UM. But you know, if you had just told me six months ago, you know, we're all going to kind of think that Fed funds

effective is getting above three and a half percent. UM, where's the US dollar? I would have thought a lot stronger than where it is now. So I think relative to that counter factual, it's you know, maybe not as much of a slowing factor for the economy. Andrew I

mentioned this earlier in the show. But when Powell was testifying on Capitol Hill yesterday and Elizabeth Warren was asking him if a rate high would solve higher grocery prices or higher prices at the pump, his answer obviously was no. The FED isn't equipped to deal with some of those more supply side driven challenges. What is your confidence that the Fed actually can get demand down enough to the

extent that it actually will offset persistent tight supply. Yeah, it's a really important question, and you know those questions that share powell answering UM yesterday and you know again today, just to show how difficult this moment is for monetary policy and for policy makers. UM, when there's a supply side constraint and it's persistent, the only thing you can do is gamp demand to try to bring the economy

back into equilibrium and bring inflationary pressure down. UM. I'm very confident to answer your question that the Fed will be able to slow demands sufficiently UM to bring demand down. UM. The issue is how much slowing is that going to be? How much of an output gap does the FED need to create, um, how much weakness in the labor market. If you look at the FED Summary of Economic Projections, they have the unemployment rate that just moves up by

a few tents of a percentage point um. So if you keep moving interest rates higher in financial conditions, it will slow down the economy. Um. The real issue for the petistant whether or not they can slow it down. It's can they slow it down and have it be a relative moderate slow down and still get inflationary pressure down? And thank you so much Andrew Holland Horst for City Group here with that shocking terminal rights statistic about four percent. I'm going to call that on the edge of outlier

on Wall Street. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg