Surveillance: Peak Oil Demand Coming, Morse Says

is a joy, particularly for September. Edward Morris is its city group working with a team of very smart people and they're working on the definitive deck for petroleum that will become widely tweaked and available into September. Ed Morris, your deck, which we've taken a glance at, is a bombshell document. You say there's going to be over supply, that there will be many regime changes. What's the regime

change in oil? I need to focus on. Well, I think there are three bits of of a fundamental change. The first one is still just look at home at the US, where for the last decade of the US production was growing at a remarkable rate. In fact, the US in that ten year period supplied seventy of the total world energy incremental supply, and that's just not going to happen again. I'm tempted to say ever again, but really not again. Um, and that's going to change things

a bit. The US has had a really significant impact on the world. Uh. It put OPEC plus into a defensive mode. Uh. They are still in a defensive mode, and I think they'll remain in a defensive mode. And there's a second issue that I think is a bit of a regime change, namely that OPEC was really flourishing because of the ability of the OPEC producers to say, we don't have to worry about today so much. It's tomorrow that we will have our day because demand is going to be rising for a and uh and the

supply will be our. So now both on the supply side and on the demand side that's being challenged. And on this day of U N Action on climate three thousand plus plages is well, we've observed that China has coal that's got to get fixed. But also the US needs to step up some form of cogent policy. What is the morse efficacious policy for the United States on climate change in linking it into your world? Well, I think we're getting a head start on it. I think

we need the government there to create a framework. Governments didn't have any framework before the Paris Agreement UH, and they got a framework and the bond market simply skyrocketed for sustainability. Right after that, the Paris Agreement said hey, we need three to five trillion dollars of investment. UH in the bond market only gave two hundred and fifty billion dollars worth of issuance of sustainability bonds. Twenty twenty was a half a trillion, and this year we're on

our way to a trillion. We need more government framework to get the infrastructure build that we need. We need infrastructure build to see quest of carbon dioxide. We need the infrastructure build to get hydrogen from where it's produced to where it's needed. And I think that's the challenge to decarbonize in the country. Do devetail this at into your call on oil? Have we seen peak oil demand already or do you foresee that upcoming in the next few years. We don't think that there's a peak oil

demand yet, but we think it's coming. There's a bit

of a debate on it. The question to us is really a question of when we were on a track to hit a hundred and ten million barrels a day of demand all else sequels by UM and because of policy is already put in place, not because of the pandemic, but because really off the policy is put in place by China, the US, and Europe that will be at at the most probably a hundred and seven million a day, and we think that the policies that are unfolding, we'll get it to a hundred and war So the pace

of growth of oil demand, the elasticity of demand for oil to GDP is really falling much more rapidly than people thought, which puts us really into getting to that peak oil demand period UH into the early part of the next decade. This is part of the confusing backdrop, the list of unknowns that you lay out as we look at oil prices currently w W T I sixty five dollars and sixty one sends the path of change. People were talking just two months ago of hundred dollars

a barrel of oil foreseeable the next few months. Could we still be there or has the scenario changed now? I think the scenario has not changed. What we're seeing is a lumpy reaction to UH. Two things that might happen UH we just look at the supply and demand balances. Inventories are drawing at a record rate, uh that, And and they're drawing at a higher rate this month than they were last month, and we think that next month it will still be at a higher rate. So inventories

are really tight. They're tighter than where the price of oil is today. And that's because financial flows have gotten a little bit short, a little bit prematurely, partly because of the discussion you were having a little earlier, partly on the basis of an assumption that rates are going to go up and growth is going to go down. But really the market, if you look at a snapshot of the here and now, is a very tight market.

So we think prices are going to go up again to the to the mid to high seventies before before we have the regime he was talking about coming in. At eight years ago, you and Anthony u and wrote a really important, widely acclaimed document on China and coal, and you said, look, at some point this ends, give us an update right now on what to me seems to be the global elephant in the room in commodities, China and coal. What's two thousand twenty five look like. Well,

we still think that it's gonna look better. I mean, the China issue has never been of climate change. It's been one of pollution, and under social policies, the government has to deliver clean air and clean water UM and they're going about as fast as you can go to use every means possible to electrify the country to move off the fossil fuels. But they just can't do it fast enough. And that's given rise to UH to more coal demand. That coal demand vote recognize as higher BTU content,

lower sulfur emission content UH coal. So it's not not all that bad. But yes, the China push in the post pandemic revival has put a great stress on the growth of power generation and you can see it not only in coal but in UH but in other fossil fuels and natural gas in particular that will slow down as the economy changes and more exchanges. So much greatly,

greatly appreciate it. Really look forward to an important definitive deck from City Group on commodities UH in oil here in September Israel, let's turn out to Bill Lee Milkins, the chief chief economist. Bill, let's stand right here, how much progress. Have we just made towards substantial progress at the Federal Reserve. Everyone's trying to figure out how much pressure there is in that labor market, and those good numbers on Priday really went a long way to giving

a positive picture. One thing that I should point out, and maybe Leasa has already pointed out, is that most of the wage gains that we're worried about really go into the low wage workers. The Atlanta Wage Tracker has shown that the first quartile is getting all the wage gains, but the fourth quartile, the higher paid workers, are actually

having a very steady uh set of wage increases. And the job gains are really in those entry level jobs where they're missing people because people have actually upgraded themselves. So when you actually look at how much prgress we've made in the land market, we've done a lot to restore the hospitality and leisure industry, yes, but those are the low wage sectors and they should be getting higher wages.

That a lot of productivity gains, though, have come about where companies have really eliminated a lot of these jobs, and we're gonna find a lot of people not getting jobs. And the FED is really concerned with not maximum employment, but the maximum extent of employment. And that's where we're

going to see the tension at the FED. The hawks are gonna say a lot of progres has been made, but I think the chair and law brainer, the possible next chair is going to be saying, you know, we still have a lot way to go to maximize the extent of employment gains. You nail the zeitgeist right now. Greg Valier writes it up in This Morning No where nothing else matters but perceived or future wage inflation. And then you go to productivity. Could we observe productivity in

real time? Don't we have to wait to see if it happened? Well, tom As you know, it's the hardest thing to measure, especially in the service sector, which the largest sectors in our economy. But one thing to keep in mind is that the federal government has decided to balance is budget or or come raised revenues by corporate taxes. What's that gonna do. Cut back on investment and cut back on these prouctivity enhancing investments. We need to keep

inflation in check. So I think the real danger is that we'll look at where prices are going and we see these low wage, low proctivity jobs dominate the wage increases, and we don't have the offset coming in from the high prouctivity kind of investments that that balance off the the the high pressure from wages. So what does this mean in terms of FED policy and what you think it will be in the months ahead versus what you

think it should be. I think Chair poll And and most of the fom C is still concerned that once we get past these bottleneck price increases, where to come back to the world Where is deflationary pressure? If we have the kind of productivity games we've seen in the last two or three years, but if the corporate tax increases that being put in place, not just the US but around the world start to cut into the kind of investments we need to keep productivity up, then we're

going to have a serious inflation problem. And as you mentioned, a stagflation problem where growth it starts to to to hit that that uproad bound of it maybe half a percent to one percent, and we start to see price continue to rise. But we got to talk about China then, how big is China and what's got gone right now effect and what you're discussing. I think that's absolutely critical because everyone is looking at China as leading indicator for

where we're going. China came out of COVID fairly early, but right now they're suffering the consequences of their policies, which is, every time they see a rise in cases, they shut down the economy, and that kills any kind of growth. And right now the fear is that the delta variant is going to cause China to shut down yet again and and cause growth to fall away below

where their plan targets are. You see the Central Bank and the fiscal authorities putting in place a lot of insurance policies to bolster any kind of fault fallback in consumption, which is really the weakest sector in China right now. Is there a track record that shows they can do that. Can they succeed in policy to boost and sustain consumption.

One advantage of a command economy is they'll be able to boost public consumption, But the disadvantage is that people don't have the contents that it's really safe to go back to work, and people will not be going out to the restaurants. The people in the cities of Shanghai, Kwandong, and shen jen are going to say at home and

say it's not safe to go out. So so we have a split in China where public consumption public investment is pushing like crazy there they're financing with a lot of debt, but the private sector really isn't following through. Belt gret ahead from you as always William Lea, There Milk and Institute chief Economists. Let's bringing Brian Levitt, invest Go Global Market strategist. Brian. I'll characterize your view for you just briefly, and then you can give me the latest.

I understand you're looking for that return to trend growth through next year, we'll make that progress towards trend, and you're looking for growth to take over in terms of leadership. Any challenge to that from the data over the past Wait, Brian, I think maybe over some weeks, but not necessarily over

some years. So, Jonathan, when you think of where the tenure was at one twelve, that and a move back up to I wouldn't be surprised to see further improvements in this economy as we get more American adults vaccinated and so should rates be at probably not um could they be somewhat higher than here? Yeah? And in that environment than cyclicals and value oriented parts of the market will do well. My point is to say that we're ultimately going to stabilize to a more modest growth rate.

It's nothing structural change. We had a disastrous coronavirus driven recession, we recovered from it, and we're navigating around getting back to a more stable level of growth. So my view is, as you're looking out beyond the next week, so the next couple of quarters, start to contemplate what the structural picture looks like, and it should continue to be a modest growth environment. Okay, fine, it's a modest growth environment. Michael Darter agrees with your A M Camp partners in

this morning. Note great, Brian, what's it mean for corporations? I mean life goes on state where the gloom crew has it wrong. So what it means is that grow very similar Tom to what you saw from the middle of eleven through the end of is that growth is strong enough to be supportive of corporate earnings, but it's not so strong that it leads to big excess significant inflation, you know, meaningful fed tightening. So it creates a cycle that could go on for some time now, some corporations

will be better position for this than others. If you're a structurally advantage growth business in order what we saw in the last cycle, you're likely to benefit from it. If you're the type of business that requires higher sustained economic activity, then you're unlikely to receive a fancy multiple on the type of earnings that you're able to generate.

As an investor. Do you like this kind of chart that liz Ane Saunders of Charles Schwab put out this morning showing that share buybacks in the United States, if the SMP five hundred are running it near the fastest pace ever, almost eclipsing two thousand and eighteen. Is that a good thing from your perspective? Well, it certainly tells us that businesses are flushed with cash, and it it certainly tells us that, um, you know, it's certainly a

tail wind to markets. Now would I would I rather see you know, more businesses use that money to put into productive use. Sure, but it's indicative of a corporate environment that's probably thinking similarly along the same lines that I'm thinking. Is that you know, there's we're not going into a robust growth environment and and they're deploying cash

in a way that they think is appropriate. As a result of that, I do want to rosa brant to what degree those bond backs were delayed from last year into this year. Trip Absolutely, I agree with that that's going to be initially, Lisa. Going forward from here, how can we really take this year's dated for things like buy backs and capital returns after the year that we've just had. Yeah, but why do they have money now

from after a year like last year? They have it because they borrowed all this money and they're using some of that borrowed money to do the shared buyback. So

I agree with you it is deferred. However, the fact that we can just go right back to our old plans for a huge gap in the middle of what we missed, you know a better the most that a lot of the money that's been raised in the market has been for refinancing in credit, that the debt pounds of some of these companies they've pushed the maturities out, the lower rates and leverage ratios aren't moving in the wrong direction. They're moving in the right direction, all right.

So Brian, can you weigh in on that, because right now we're seeing that. Certainly in the investment rate universe. It's a little bit different though in the hig yield universe, isn't it. Well Yeah, but again, for the most part, these businesses are borrowing this money at very low interest rates. And the Jonathan's point, they've pushed these maturities out, so you're not looking at a wall of maturity. Um, you're not looking at a very onerous interest burden for a

lot of these businesses. I mean, it's pretty similar to households for those of us that refinanced. Um. You know, you you take advantage of these opportunities when they come to you. Brian the f A mode I'm Bloomberg tells you a lot about use of cash, about or buy back just as one example. And I don't mean to pick on Amazon other than that their capex is. You know, nobody can get a handle on the amount of money

Amazon is spending to grow, grow, grow. But from two thousand nineteen is the last normal year, there's something on the order of published free cash flow of twenty two billion growing out to twenty five billion, and then you skip eighteen months or whatever because of the pandemic and the new working number. In the future is forty five billion and now Amazon's Amazon. But that permeates through the

invest system, doesn't it. It does, And again it's back to talking about these advantage businesses and these businesses that can generate cash flow and these types of an environment. And and if you think about where we are, Yeah, corporations have used the low um interest rate environment to borrow money. But also think about what's going on in the earnings picture. It's not as if this hasn't been

a good fundamental story for businesses. We're coming through a very robust earnings quarter um as pent up, the man came back into the economy. I don't think that we don't continue to see earnings and grow at these at these levels. But you know, back to my original point, a more stable growth environment can still be very supportive of corporate earnings. It can still be very supportive of those businesses that can generate cash flo Brian gotta cash

out with you as Oise. Brian left invest Global Markets Stratagistic Claudia sam joins us now at Jane Family Institute. With exceptionally important Twitter flow, you can really learn a lot, a lot, particularly on the micro economic foundations of all this blather we talk about each and every day, Claudia, I want to go to the heart of the matter right now, shock and awe. If you raise wages, good things happen, like consumption sustains. Tell us where we are

now in the to raise wages. Yeah, So I think we've seen a lot of encouraging progress, frankly surprising. I mean, after years and years of low wage growth and really tough conduct like, we're seeing it so we know it is possible. What I want to underscore is we do not have the headwinds to keep this going. Right. We've had reopening, the vaccination starting, we had people wanting to get back outside and see family. Government put money in

people's pockets like that. Relief is running out. That low hanging fruit of opening up is running out, so or at least soften right, So then it's a big question do we keep these wage gains? How do we do it from a policy basis? I mean, you know, we're we're warning the death of Richard Trump at E. J. Dione with that wonderful essay today in the Washington Post, and there's talk about labor share finally regrabbing something from the era from Ronald Reagan forward. Do you buy a

policy shift or not? So I've argued that we are seeing a sea change in monetary and fiscal policy. I really do feel the Fed as well, on its way to its new framework, thinking harder about its dual mandate jobs too. I am more concerned about what's happening on the hill right We're seeing an infrastructure packet, which is amazing. We've had years of waiting for infrastructure week. It's really happening.

And yet that's not We have an over twenty trillion dollar economy, one trillion dollars over ten years in our like productive capacity. That's not much. And what I really want to see, and what we learn from putting money in people's pockets is if we extend the child allowance, if we invest in our next generation, that's where the payoffs will come. And it's really not guaranteed that we're

going to see that. Well, that's what we need for long term growth and long term support of workers, Claudia. In the meantime, it is countdown to Wednesday, where we get the latest Consumer price index, the read on how much prices for the average consumer are going up, and they are going up, and staples and aspects and things that people buy every day. Can you give us a sense of what you think the Fed's response should be of this, because frankly, it is the most onerous for

the lowest income Americans, right. So I think the FED has been right about this from the start. I think the data is coming in in terms of team transitory is winning here. We know that the factors if you look under the hood, the factors of this extraordinary jump in prices, like I don't want to underscore the pain that this cost, but these are not things that are

staying with us. I mean, just the use motor vehicles, Like those prices are coming back down, right, we should not change course and abandon the millions of workers who are not back to work just because we're going to have six months of prices that moved up faster than

we expected. So I think it's just it would be so wrong to change course on some CPI numbers, and a lot of people would agree with you, Claudia, But then they pair that with this increase, this divergence between UH the wealthiest individuals and the lowest income individuals, especially because asset prices have been one of the most inflated areas of the economy, and so frankly, a lot of people say the Fed's policies have only widened this divide. How can you say, Okay, well maybe so, but it's

worth it. Yeah, I am extremely frustrated with how much focus the FED is getting right now. We need Congress to act. There are ways to address wealth inequality and the FED does not have them right. And there there's taxes, there are transfers. The FED cannot go this alone. And the idea that raising interest rates a couple you know, basis points quarter basis points is going to fix a

longstanding problem in the US economy. It's ludicrous, right, Like we're just to think that could really move the ball. It's frightening to me that we've put that much power in the FED. Clad you've always been equal opportunity. You go after conservatives, and frankly, folks, Claudio pam is fearless about going after liberals. Is claudiusan. There's a conservative angst out there. They're worried about the debt, they're worried about

the deficit. You know, there's an institutional conservative thrust that says, wait a minute, how do you respond to an inbred American conservative ethos. They're really worried about the size of government. I mean, we saw really massive tax cuts under Trump that had incredible increases in the deficit, and now to be saying we can't, we can't raise taxes. This is not about the deficit, which I mean we should be

concerned about, right like you should watch these numbers. That debate right now is do we want to set up social programs that are going to be wildly popular, like the child benefit when it gets working. That's putting government more in a role whereas conservatives have really looked to the private sector, look to individuals, and it's just not enough. God,

this is just incredibly important to me. If we have a natural disaster do like a pandemic, we can't get any kind of shift in our childcare policy relative to other equivalent nations. I think a lot of people are questioning this, which goes to the fierce debate that's happening in Washington and the reason why, frankly, there's this agreement even among the Democrats about how big that that infrastructure plan, the human infrastructure plan, should be. Uh. And then the

pushback that you were talking about from the conservative stance. Claudia, you did raise a really important point that you are frustrated with how much power people have seemed to have given the FED. The question is going forward, do they take that power or do they actively fight against it?

Because right now, especially with a balance sheet that's eight trillion dollars and poised to expand further, a lot of people say, well, look, you might say you don't hold a lot of power, but for all intents and purposes, you're subsidizing the US debtload. That is a political act, right, it is they are taking a rip esk, right, But what they are trying to do is stay out of

the way of Congress. Right. We know after the Great Recession, too much weight was I mean really responsibility was put on the FED to do it alone and get us back to full employment. And the FED doesn't have the tools to do it alone. It knows that it can play a supporting role, it can play an important one, and it has during the pandemic. J pals at over and over again. Congress do more, and they have not backed off on that narrative. So I think that's what

the FED understands. And as long as we get both pieces that's good, but without Congress and long term investments, we're not going to see this sustained in a way that we so could. Right, we're in this moment we could do this. Let's broaden out. One thing that we talk about every week is the as we get the inditial jobless claims, is this worker mismatch? And about ten am Eastern time, we're gonna be getting the job openings,

the JOLTS data for the month of June. And there is this question of why there are so many people who are out of work, and then you have all of these employers saying we can't find any workers. What is the why behind this? What are we missing? Right? I think we really have to keep our eye on who is in the labor force, who is coming back. What was really unprecedented in this labor market was the fact that we had millions of workers just leave jobs,

right and what was a very severe recession. So a lot of this our parents who needed to help stay home with their kids for homeschooling. But if it was older workers who are afraid of dying, right, so we need to bring them back. And on Friday, there was a lot of good news in a million jobs like that is great news. A lot of that were people being recalled from temporary layoff. We didn't see the needle move enough on the out of the labor force and

the long term unemployed. And we know historically long term unemployed or tough to get back because that it's the longer you're out, the harder it is to match you back up. So I think that's what we're seeing and the last mile is going to be the hardest. Here, Claudie, we gotta leave it there, Claudia Son, Thank you so much. Jaye Family Institute and just always interesting, uh, linking in our actual market economics into academics in the policy. This

is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am 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