A Concrete Plan to Bring the Price of Oil Down Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, I don't think we can talk about oil enough right now.

Tracy Alloway (0:21)

No, no, it feels like oil is the, I don't want to say missing link, but the link around which everything is revolving at the moment. And in particular, I mean, the Federal Reserve basically seems to have pegged its monetary policy to gas prices, right? Not explicitly, but it certainly seems that way implicitly.

Joe Weisenthal (0:39)

Right, I totally agree. It feels like the Fed has really raised the stakes on oil because obviously, look, high oil creates all kinds of problems. It's very difficult for consumers, creates all kinds of challenges. But at the recent Fed meeting, you heard Chairman Jay Powell say, look, consumers don't think about core versus headline inflation. They just think about headline inflation. And if inflation stays high or gasoline prices stay high, then that could lead to increased expectations. The Fed does not want inflation expectations to get out of hand.

And so the Fed will tighten in response to high oil prices.

The Fed implicitly said, I think it is willing to pay the price of recession to get the price of oil down.

Tracy Alloway (1:22)

Yeah. And I've been thinking about this a lot, but it's also like gas prices just loom large in the American consciousness and I guess politically as well. And I got to say, I was at my dad's house over the weekend, and all I heard was grumbling about gas prices and the Biden administration for three days.

Joe Weisenthal (1:42)

Well, so anyway, it has permeated the public. It is everything. The Fed has made it everything. On a recent episode, the one that we released on Monday with Peter Tertsekian, we talked about the challenges of eliciting a supply response and getting more oil out of the ground rapidly.

But the stakes are very high. Clearly, the White House is extremely stressed about this, having recently sent a letter to oil companies, basically encouraging them to do more. So the question we have to ask is, what, if anything, can be done in the short term to bring up the price?

Tracy Alloway (2:16)

Right. And I think this is the crux of the matter because we've had many discussions about this at this point. But this is a problem that was many, many years in the making. So structural underinvestment in certain types of energy, i.e. fossil fuels.

And now everyone seems to be trying to figure out short term ways to alleviate that bottleneck or that choke point.

Joe Weisenthal (2:39)

Absolutely. Huge economic and of course political stakes. All right, let's jump right into it. We're going to be speaking with two guests who we've had on in the past who know a lot about this space, both in terms of oil specifically, as well as various tools that the government might have to improve the supply side a little bit.

We're going to be speaking with Rory Johnston. He is the editor of the Commodity Context newsletter, a fantastic read. He's also a market economist and managing director at Price Street in Toronto.

We're also going to be speaking with Skanda Amarnath. He is the executive director at Employ America, a think tank which promotes tight labor markets. So Rory and Skanda, thank you so much for coming on Odd Lots.

Rory Johnston (3:25)

Thanks for having us back on.

Skanda Amarnath (3:26)

Thanks for having me on.

Joe Weisenthal (3:27)

Absolutely. All right, Skanda, I actually just want to immediately start it with you because you've been writing for several months now that you think the White House has tools at its disposal right now to increase oil production. They haven't been used. We'll get into the details, but why don't you just give us the very high level idea here of how the White House can use the strategic petroleum way, reserve strategically to ease oil markets right now.

Skanda Amarnath (3:56)

The tools we've laid out are really about addressing what I'd call the most proximate and binding constraint on US domestic industry. And that's one of a high propensity for low investment, capital discipline, for some pretty understandable and rational reasons that have to do with what I'd call uncertainty in terms of price risk, demand uncertainty, and to some extent, also financing uncertainty, depending on where you are in the industry.

And so there are tools available within the federal government that can, if you work with industry, you can actually provide that kind of certainty because the government has a lot of long-term storage capacity through the Strategic Petroleum Reserve, which is not trivial, by the way, right? They have physical storage capacity in commodities is important if you're actually going to be able to fund more production, but also to provide the kind of price insurance. And so the Department of Energy has the authorities to replenish their reserve they're currently releasing, which is good, but just don't be under any illusion about how much it's really helping. It helps a little bit at the margin, but it's not going to be sort of the all-powerful solution. But what would be valuable is actually to signal to producers who have been burnt by cycle after cycle in the last eight years or so by price crashes that have effectively led to really poor shareholder returns.