Moody's Talks - Inside Economics - Cochrane on China, Chris on Crude

Episode Date: June 20, 2025

Colleagues Chris Lafakis and Steve Cochrane join Inside Economics to discuss how geopolitics is shaping the outlook and the risks to the U.S. and global economies. But first, the team reminisces about Steve’s 32 years as “employee 007” at the company and his upcoming retirement. Steve reveals his secrets for “managing up,” and Mark finds out he’s been managed all these years. The conversation then turns to U.S.-China relations and the risk of an oil price shock stemming from Israel’s attack on Iran last week.  Guest: Chris Lafakis, Director of Climate and Energy Economics, Moody's Analytics, Steve Cochrane, Director, Chief APAC EconomistHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, Chief Economist of Moody's Analytics, and this is going to be a great podcast. They're a lot of fun because it's going to be just colleagues, my two trusty co-host, Chris DeRides and Marissa DeNatle. Hi, guys. Hi, Mark. We, you know, we were waiting a long time to start this podcast because of our colleague, Dr. Cochran, Steve Cochran, Steve is joining us. Hey, Steve. Hey, Mark. You know, some of us are slow learners here. So anyway. That's not you, Steve. Steve. Okay, I'll take it. That may be Chris DeReedys, but that's definitely not you.

Maybe technology. Anyway, I'm going to be on my best behavior. And we got Chris Lafacchus, too. Hey, Chris. Hey, Mark, how are you? Thanks for having it. I'm a little punchy, as you can tell. It's all in good fun. Not really. It hasn't been good fun.

But it's all good now because I'm on with you guys. And this is a special podcast, in part because we've got, the two of you on. And Chris, you're going to be, we're going to be talking with you about what's going on in the Middle East and the effect on oil prices and kind of do a primer on what it all means for the U.S. economy. And then, Steve, you know, is so good to have you on, you know, this is a, I guess your swan song, right? You're retiring in a couple weeks. Pretty much, yeah. And in June, I'll be on my way to other things. Yeah. And I think your first stop is going to be some like some lake in Slovenia or something,

right? You know me very well. I'm always going to find a place to swim. And Lake Bled, there's no place better in the entire world, I'll tell you. Is that right? Really, really. You swim from the edge of the lake to an island, then hike up to the castle that's on the island, get a great view, go back down to the bottom of the castle, back to the lake, swim back to the lake's edge. It's fantastic. Is it water warm or do you wear a water suit? No, no, no, no, no wetsuits required. I'm hoping next month. Right.

Well, it's so good to have you on. We'll come back in the second, but we do want to talk about, because, you know, you've been, you've been with, you're 007, as I understand it. The seventh employee of regional financial associates, the precursor to economy.com to the precursor to Moody's analytics, the precursor to Moody's. and you were the seventh person to join the firm that Carl I and Paul Gettman started many years ago. And you've been with us for 35 years, 34 years. Now you're adding some age. 33 years. 32 years.

32 years. Right. And you ran the regional group for many, many years, which was kind of our bread and butter for a long time. Yeah. And then you went off to Asia and really established our. business out in Asia. And thank you for all of that. I really appreciate that. So a couple questions for me and then maybe from the other guys too. Do you have any advice for me, you know, the old guy in the room? What would you say to me? Oh, advice for you.

Yeah, just me personally. It's all about me, you know, Steve. All right. Well, actually, so I was thinking about the advice that I give everyone. Okay. that comes on board. And it's all about you'll do fine as long as you know how to manage up. And that took me a while to figure out how to do that with you. What does that mean? What does that mean? Manning up, well, you, Mark, you don't know what managing up means. Then we have to teach you a little bit here. So managing up is learning how to manage your boss. Oh, okay. Yeah. So you've been managed me for 32 years and I don't even know it. That's masterful. Pretty good, huh?

That's next to me. I didn't even know I was being managed. So cool. I always tell the story. In fact, you talk about having, you mentioned earlier, you're going to have dinner with your son tonight. I went backpacking this weekend with my son for Father's Day. He had a great time. And he gave up a lot of time to chat. And he was talking about work and kind of the difficulties one could face sometimes, including working with his boss. And I said, Mark, I learned something a lot. long, long time ago. In fact, if I remember right, it was in week three of my employment at regional financial associates. Oh, wow. And I can remember having a list, a to-do list that was a mile long and thinking, I'm never going to make it here. This is just not.

That sounds familiar. Yeah, right. So I went to you, brought to my list, and I said, and I was really, I was ready to just, you know, tell you all the difficulties I was having. And you didn't even let me talk. You just looked at my list and said, oh, do, you know, this, this, this, forget about the rest. When you get those done, come back and talk to me again, we'll figure out the rest of it. Oh, wow. And it was like, holy cow, what a weight off my shoulders. And that's when I learned about managing up that what there's issues, just don't, don't do about it. Don't hide. Don't, you know, just go talk to your manager.

And they will almost always, I would say, be understanding and help you through it. And that was certainly the case. And I think that event, three weeks in and my employment, was key to my 32 years at Moody's. Oh, wow. That's a great story. So, Marissa, have you tried that on me, too, that same thing with your list thing? I don't remember that. I'm sure at some point I have.

I also remember the day that I started 20 years ago, having all these things that were already overdue. Actually, I should say Steve was my boss. So Steve was my first boss when I started 20 years ago. And I remember having a list of like Pracey and Florida to write. And it was like, oh, these were due like two weeks ago. And I did the same thing. I kind of said, okay, you have to tell me like, What do I actually need to do in the next week, right?

Because everything's high priority, right? So you really need that guidance. You went through the list and said, prioritized. I'm sure that he did. Yeah, I'm sure because I think I looked at that and was like, what? So I learned from Mark. Mark was there you go. Somehow it all works out, you know?

It's up. Yeah. You've been with us 32 years, mercy, 20-something years, Mr. Lafacchis, how many years? 19 years 19 years And Marissa was my first boss No Did she do the listening with her

No I didn't do the listening with her She said You're two weeks overdue On all your crazy You gotta do it all man Get it down and get working I'll buy fire baby And Chris Deerey

You've been with us How many years now 16? 16 17 years 16 17 yeah Yeah. And do you do the list thing as well? Would people come to you with their list and you prioritize? Yeah, but I'm taking notes because I don't, I haven't learned this lesson.

I don't think I ever came to you with my list. Yeah, you know what? It feels like you get everything done. How does that, what is that all about? That's real management there, Steve. Yeah. I don't even know what's on his list. Yeah, exactly.

Just don't bother you. That's the secret. Don't disclose the list. Well, it's good to have you guys. So one more thing, Steve, before we get into the media of the matter, and hopefully the listener is enjoying this conversation. I'm not sure. I mean, we're going down memory lane here.

But what is the forecast you're most proud of and the forecast you're least proud of? That's a hard question, but do you have that in mind? If you don't, no worries. I just was curious. I think I can relate it all to our forecasts when COVID first came out. Of course, we were all in the dark, right? What's COVID, right? But one thing we learned, this is when I was in Singapore,

so I was focusing on Asia, focusing on the forecast out there. And we learned very, very quickly that the government policymakers out there were ready for COVID, ready because they'd gone through the SARS epidemic back in 2003, 2004, right? So there were stockpiles of antivirus medication. They had plans to put together, you know, emergency hospital units to care for the sick. And moreover, most of the countries in Asia gave very clear guidance to what was going on. So we felt like, oh, we've got this. I mean, as long as the governments do what they say they're going to do,

It's going to be tough. It's going to be, you know, six months of, you know, maybe recession, very, very weak economic activity. But they're going to come back. And I think we got that pretty well, and our forecasts were pretty accurate. We missed it in a few countries like the Philippines that just shut down forever. It seemed that didn't come back. But everywhere else, I think we nailed the timing and even the amplitude of the cycle pretty well. So I'm pretty, I'm actually pretty proud of that.

Now, we were lucky, of course, you know, we had some guidance from policymakers in the region, and they were, again, expressing that policy pretty well, and they executed quite well, particularly, you know, Japan, even China in the beginning, Taiwan, Korea, Singapore, and such. Now, the worst forecast, you know, was related. And it was China. Not that China, not that we didn't get the quick turnaround in China. Of course, China turned around quicker than anybody. They were really refocused about the COVID in Wuhan province or in Wuhan. And once they came out of that, the economy opened up and they were doing fine. But what we didn't realize was how China was going to mismanage the rebound of COVID and do that hard shutdown across all the major metropolitan areas in China. to keep everybody in their housing units forever, it seemed, until they finally had the blank paper revolution. Do you remember that, Mark?

I do. And, you know, finally, the policymakers said, okay, time to open up. So we had about a year where we were missing it because we just didn't know what was going to happen in China, and the rules and regulations were just so vague and uncertain. So that was probably our most difficult time where we missed the forecast, but in the rest of Asia, I think we got it pretty well. And so all, I'm pretty pleased with how we got through that period of time in our forecasting. It's interesting. You know, forecast errors, it feels like now that you say it in the context of China and the pandemic, it feels like our forecast errors are mostly around.

around just misjudging policymakers and what they're going to do, certainly in the current context. Yeah. You know, it's like, because sometimes they do things that you go, really, you're doing what exactly? You know, why are you doing that? And, you know, as economists, you kind of think that it's all about the economy. They're going to do that, whatever they do is going to be through that prism. And often it's not. And when it's not, that's when the forecasts are wrong.

It feels like there's a common source of error. I wonder if AI could pick that up. What do you think, guys? AI can solve that problem? I don't think so. It could be a while. Could be a while, yeah. Yeah, yeah. Well, as I said earlier, we're going to get back to Crystal Fackas here in just a few minutes to talk about oil and what's going on in the Middle East. But since we have you, you know, this trade war, particularly between China and the U.S., you know, how are you thinking about this? I mean, it feels like the Chinese have gone tit for tat here. Whatever the U.S. does, they follow in some form or another. They're not, they've not given an inch, and it doesn't feel like they're going to give an inch. But is that how you see it? Is that how things are playing

out here? Is that how it's going to continue to play out? I do think that's going to be how it plays out as long as they can manage it. Of course, there's some weaknesses in the economy in China. But I think they are going to play hardball with the U.S. And I think it's going to be a long, long haul. I don't think we're getting through this. You know, the 90-day cooling period ends in mid-August. And I'm sure it's going to go way past then. You know, it's interesting.

When the London talks ended, and I'm forgetting now, it's about a week ago, right? And I get up Monday morning to scour the press to see what's going on. And the closest I could get to any real information, Commerce Secretary Howard Lutnik, he's mentioned to the press. He said, oh, the two largest economies have reached a handshake for a framework. And I'm thinking, handshake for a framework.

That's what they got out of, what, 48, almost solid hours in negotiation? This is not going well. And indeed, you know, the press in China, they quoted vice premier Huli Feng, who said, the U.S. and China should strengthen consensus and maintain communication. That was the word coming out of China. So that tells me that we've got a long, long way to go. You know, coming out of those negotiations,

they pulled back on some of the retaliation, right? China's going to export rare earth's materials to a certain extent. the U.S. is going to continue exporting AI-related software, jet engines, things like that. But no one's even begun talking about tariffs yet. And, you know, we're halfway through this negotiating period. And so I think it's going to be a long road ahead of us, a lot of uncertainty still to come. I think the effective tariffs the U.S. has on Chinese goods now is around 40%. There's a 55% number of people are basing.

about, but that's... That's too high. Yeah. It's not the effective price after you consider all the carve-outs and everything else. So it's about 40%, which is high. That's exactly right and very high, right. Yeah. It feels like that's where it's going to settle. Is that right?

Or you think it's going to come in at all? Actually, I think it'll come here because... You do? Yeah, I do think so, because I think the U.S. certainly wants to get a few things out of China. I think most importantly, is getting a little more strict on the export of the components that are used to make fentanyl. That this is still a huge problem in the U.S., the drug crisis. And if China could effectively govern, which is difficult because the export is often through crime syndicates as such, but if somehow they can monitor this and reduce the amount of fentanyl coming into the U.S.,

then the U.S. might say, okay, will we do some of these? Well, actually, there's a, I believe it's a 20% tariff that's related just to fentanyl. And that's one place that they could pull it in. And now that would still leave China with 20% tariffs, which is 10 percentage points higher than the sort of baseline 10% that the Trump administration is talking about around the world. I think one way or another, I do expect that China will come out of this with a higher tariff rate on China than on just about every other country in the world. I can't even remember coming into all this, what was the tariff rate?

Was it 10? It was about 10%. That's right. And right now it's 40. In your sense is when things kind of settle down the road here, it'll settle in around 20. That's kind of yours. I think so if indeed they settle at 10 for the rest of the world, and that's uncertain as well. Right.

Right. But then what that means in the future, that if China's 20 and the rest of the world is 10, and probably this whole business of a China plus one strategy of trying to, you know, still produce in China, but have your supply chains also go through other countries may well be what's in the future for us. Which, again, is nothing new, right? I mean, this is no change from where we were back in Trump 1.0 when Vietnam became a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a. a production base for so many companies out of China and also other places like Korea and such. So we may see more of that going forward as well. Yeah. And of course, the decoupling between China and U.S. is more than just trade.

It feels like we're decoupling on every dimension, you know, on student visas, on investment, on immigration on capital flows. You know, everything feels like it's kind of breaking apart here. Is that a fair characterization? Is that going to continue? I think it's fair, although there are words, again, coming out from the administration that, oh, no, no, we'd love to have Chinese students still come to the U.S., but that's not with, I mean, the rhetoric is going both ways right now on that.

I don't know where that's going to land. But I do think this idea of decoupling, particularly on investment, is really going to happen unless there is, again, a change in U.S. policy. You know, the U.S. wants everyone to invest in the U.S. and put in manufacturing in the U.S. and supply the U.S. economy and even others from the U.S. except when it comes to China, you know. And in a way, I think China would be willing to invest in the U.S.

if they didn't face all sorts of roadblocks from U.S. policy. And in a sense, it follows the Japanese model of 34 years ago when Japan was the feared economy that was going to take over the world. And then Japan began investing in the U.S. economy, of course, there's manufacturing particularly in the automobile industry, but they just invested in U.S. deal in western Pennsylvania. And I think China would be very, very happy to follow some of that pattern that the Japanese set in place. But the U.S., I don't think U.S. policymakers are in any mood to have that happen at all. It's very odd.

So then, you know, you ask yourself, well, what's the purpose? What does the U.S. really want out of this U.S. China negotiation? It's hard to say. Yeah, just rare earth. And I think that's not much more than that. So that then leads to kind of one other question, and that is China, Taiwan. You know, if we're decoupling in our interests are diverging, it just feels like the odds of something going off the rails,

including China being more militant with respect to Taiwan, just feels like a higher probability scenario. Is that, I mean, do you, how high a probability is it? I mean, is it still a tail, completely a tail risk, or do you think it's even on the radar screen? Well, I'd have to say it's on the radar screen. It's not a complete tail risk. Certainly the Chinese military is preparing for that. There are all sorts of military exercises all around Taiwan, all around the South China Sea that, you know, are set up to be, to make the military ready.

for that. And there is a lot of talk that, you know, the end of President Xi's term is in 2027, of course, it's not going to be the end of his presidency, but it's the end of his five-year term. And that that would be a goal for him before, you know, and when he's up for renomination, if you will, for another term that he could proudly say, well, I was the unifier. I did with no other leader, what no other post-war leader could do. So I worry a lot about that. I think if there is going to be any way of voiding it, it comes from constant communication between the U.S. and China, particularly, but even all of the other economies around the region. I think if the U.S. and China stop talking to each other, then we may very well have trouble.

from that point of view, I think the London talks, even though they were just about trade and a very, very small piece of the whole issue of trade, it didn't, again, it didn't even cover tariffs. But if this is the beginning of high-level talks where we had, you know, cabinet secretaries here and high-level policymakers from China talking to each other, and that can continue, well, that's probably the best way to avoid that. happen? I don't know. I don't know if anybody wants to predict. But I would say that would be the highest priority from a security point of view is just keep talking between the two powers. Good luck with that. Yeah, we'll see. It doesn't feel like that's going to happen. Okay. Well, thanks, Steve. And it's been a great 32 years. I want to really thank you for everything you've done and all the hard work and, you know, our success is really at your feet. So thank you very much. You're very welcome. It's been a dream job. I can't think of, you know, any other career that would have

given me as much as this has. And this team that I worked with and working with you, I mean, and I retire, you know, I'm leaving my family, sort of. Hopefully we won't leave everything behind. But, you know, this is like my family away from my family. It's great. Yeah. Well, happy swimming. So let's go across the world and let's turn to the Middle East. And we've got, we're fortunate to have Chris Lafacchus who focuses on, you know, energy markets and particularly oil market. And Chris, it feels a little, this is now Monday, this, what is it, June the 16th, kind of late in the afternoon. And, you know, things are happening pretty quickly here. But it feels like we're kind of in a better place than we were last Friday.

Does that sound right to you? I think we are in a better place because we have more information. And we also have a potential olive branch or desire for de-escalation. That's one thing that sent oil prices lower on this Monday is news that Iran had communicated through intermediaries that it is seeking a ceasefire. with Israel. And oil prices have fallen a little bit on the count of that. I think in the immediate aftermath of, you know, the Israeli strikes, and this was on Thursday evening when I sat down to write my first take economic analysis,

it was very, there were three major risks to the oil market. The first was that the Strait of Hormuz would be close. by Iranian naval vessels or ships would be harassed. And that's the lowest probability, but the most damaging. The second would be sanctions levied against Iran to deny it export revenue. And the third was that there would be, in fact, strikes, Israeli air strikes on Iranian oil and gas infrastructure itself. and we have some answers on all three accounts. The U.S. is still seeking a negotiated solution,

although the incentives remain varying for both Iran and Israel. I think that the Strait of Hormuz possibility has declined even more because Iran is having trouble controlling its own airspace. And so it would be difficult to kind of enforce an embargo, not to mention the USS Nimitz aircraft carriers moving into the Persian Gulf from the South China Sea. And you would think that U.S. carriers and destroyers would ensure that shipping lands remain open. And then in terms of the sanctions, I mean, the U.S. is still, hoping that it can negotiate a deal. That's what the White House is saying right now. And so with the U.S.

kind of wanting a deal and Iran kind of wanting a deal, that's taken a little bit of an edge off of oil prices. They've risen by 9% in the immediate hours after the attacks. And now we're only up 5% from where we were prior to the attacks. Yeah. So it looks like oil prices are up, West Texas intermediate Brent, by about 10 bucks a barrel. We were kind of sitting around around 60 bucks a barrel before this all got going. And now, even with today's actions on Monday, the 16th, where it feels like it's around 70, that's WTI, 10 bucks a barrel. Is that about right?

Well, I guess it depends on kind of when do you start measuring. So if, you know, it's five bucks if you say, well, the day before the attack. Okay. Oh, so it's only five bucks have been put into the price. Yeah. Because price is falling. But it's about five bucks that's been added to the price of oil. Right.

Okay. All right. So right now it's not that, I mean, five bucks. It moves five bucks in normal times in a week. So right now it doesn't feel like it's a big deal. No, five bucks is certainly something that we can handle. Where you get into the really, really bad scenarios is if you lose the entirety of Iranian exports overnight. or if you get the straight of Hormuz close,

which just feels like such a low probability because it would be very, very difficult for Iran to enforce. It would be blockading a lot of oil exports from OPEC countries within OPEC that it's a part of. And then also, you know, the U.S. Navy is quite strong. And you would think that they would, because of their actions against Houthis, they were harassing merchant vessels, you would think that they would ensure the free flow of cargo and the Strait of Firmuz as well. So that's the most damaging possibility, but I would put that at a sub-5% probability.

And just for context, my understanding is that the Iranians, they export, what, a million and a half, two million barrels a day, something like that. That's right. And the world consumes, produces just over 100 million barrels per day. and the Saudis alone have extra capacity to produce oil that's 4 million barrels a day, you know, roughly. Is that those numbers all sound right to you? So if all of Iranian oil were curtailed, which is not going to happen, but let's say it did,

that's one and a half, two percent at most of global output. And the Saudis could, you know, if prices really started to rise, the Saudis could step into the void here pretty quickly. Is that fair? Very fair. very fair yes so excess capacity we're not going to play the game today but if we were going to play the game my number would have been 5.3 uh of course million barrels per day that i know what it is i know it is oh okay that that includes the uae too though doesn't it it does yes it does it does

um and and and and and opec has been signaling that it wants to bring this barrels back online we cut production in 2022 to boost prices and There's been surprising cooperation among the cartel to keep excess capacity at above average levels. You know, in the average oil market, you'll have excess capacity. It's around three and a half, four million barrels per day. And we've been north of that for almost three years, which is a very long period of time, unprecedented if you go back 20 or 30 years. But they would like to bring that production back online.

And they've already said in December, we were going to bring it back. online and in the OPEC meetings that we've had in recent months, OPEC has reaffirmed a trajectory of 411,000 barrel per day increase in volumes in April, May, and June. Effectively, what that would mean if they followed the script would be 800K barrels per day of an effective increase in production that would take effect as of July. And so that's going to fill a lot of the hole from Iranian exports if it comes to that. If it comes to that. Now, Israel has hit a major fuel depot in Tehran, a major refinery in Tehran, and the South Pars gas field, which Iran shares with Qatar, that's the largest gas field in the world. But it hasn't hit the actual oil production facilities.

And again, we're speaking as of Monday afternoon. So obviously, you know, you, you know, you, you don't need sanctions if the fields can't produce any oil. As of now, that the capacity to export remains intact. Feels like then this is something to watch. It's a risk, but at this point, it feels contained.

But maybe we should spend a few minutes just providing a bit of a primer on, you know, what higher oil prices mean for, now here we're looking at through the prism of the U.S. economy. What does it mean for the U.S. economy? You know, what are the channels and, you know, what are the numbers?

So let's say oil goes up $10. Say we're at 60 and now we're at 70 and we stayed at 70, that $10 barrel increase. You know, how does that flow through to the economy? And what are some of the numbers to give that context? Yeah, sure. So it's going to boost prices at the pump. That's, you know, the most notorious price in economics, I would argue, by roughly 25 cents per gallon. So $10 increase in the price of oil, $25 per gallon at the pump.

Now, consumers spend money on not just gasoline, but other types of energy goods as well, and energy services. So when I say energy services, I'm talking about things like household heating and part of that is natural gas. Part of it is heating oil, which is derived from crude oil, electricity, which fossil fuels are used to produce. Other types of non-durable goods include diesel and kerosene, jet fuel. So everybody buys plane tickets. So that's an indirect channel would be through airfare increases that are tied towards oil price fluctuations. So if you add all of that up, what you're looking at is roughly $40 to $50 billion of the course of a year or every $10 increase in the price of oil. If we go from 60 to 70, $10 barrel oil increase, it's sustained.

It raises the cost of a gallon of regular unleaded by a quarter of 25 cents, and that translates into as much as 50 billion in spending over the year, additional spending, on the, because of the higher cost of oil. Okay. Exactly. And that's, it acts as an effective tax increase. That's money that people don't have to spend on other types of goods and services. and that comes out to about 0.15% of GDP.

15 basis points or 0.15 percentage points. That's correct. Yes, 15 basis points. I guess that's probably on the high side, right? Because that assumes that some consumers don't have other sources of cash or resources that they would use to kind of just pay the higher price. It wouldn't affect their spending. Yeah, it seems a constant saving rate.

Yeah, so that gives you kind of a sense of the magnitude. Okay. There's a question to you. What does that translate into spending per household over a year? So the increase would be around $3.75 per household. That's for a $10 increase. But consumers spend, you know, close to $4,000 per year on gas. And that's just the level of spending.

So these are all kind of negatives, right? These are all a negative to growth. But we also produce a lot of oil here too, right? We do. So won't the higher oil prices result in more, at least in theory, more investment in an increase in economic activity? Yes, in certain parts of the country that produce oil. So Texas is number one. North Dakota, Oklahoma, those are some kind of smaller players as well.

But those types of regional economies would benefit. Now, the price, the current level of oil prices has fallen by quite a bit over the past two years. And we were anticipating a slowdown in investment and production in the U.S. as a result of lower prices. And in fact, some exploration production firms, E&P firms have said that U.S. production has already peaked. U.S. oil production has already peaked. And that's in response to, you know, the OPEC signal that it wants to normalize production and the impact that it's had on prices. Demand has also been a lot weaker than it was pre-COVID. We're only growing at around 7,800,000 barrels per day in global demand.

Almost all of that is in emerging economies, namely Southeast Asia. And part of that has been because of the proliferation of electric vehicles and less commuting, less miles driven, et cetera, those have kind of conspired to sap gasoline demand. So we've had the situation of lower gasoline demand and OPEC wanting to normalize production that's kind of lowered prices from where they've been a couple years ago. And that was going to be a major drag on the U.S. oil space. And now it's going to be less of a major drag if prices are higher, right? Because that's going to incent firms to maybe not cut their rigs and they're well finishing quite as much.

Yeah, kind of the way I think about it is the U.S. consumes and produces about the same amount of oil. So we're kind of net neutral. So prices go up. Consumers of oil get hurt, producers of oil benefit. Ultimately, that all kind of washes out, and it's like no effect. But that abstracts from timing that, you know, the consumers feels effects first in this context. because in the current context, oil producers are pretty reluctant to invest because they're

unsure of whether these prices are going to stay at 70 bucks a barrel. They may come right back in and they could get wrong footed. So you might not see the investment. So net net, in the current context, probably is a small negative, but, you know, in the longer run, you know, maybe not that big a deal, you know, to the economy. Is that roughly fair? Yeah, absolutely. Chris does that make sense?

Chris Ries, I saw your head shaking on. You agree with that? Yeah, in general. In general. In general. I would say that, you know, we talked about inflation expectations last week. Ah, that's a good point. So that's something to consider that the increases in those prices, right, they're felt broadly

and they could have some knock on effects if consumers believe that this is something that could continue or accelerate. Yeah, I was doing a little work on oil and gasoline and inflation expectations. And I just calculated a simple correlation coefficient over the last decade between WTI, the price of West Texas Intermediate, and inflation expectations as measured by five-year break-evens. And I excluded the most kind of the period since the beginning of the year because that's affected by, you know, other factors. So I just basically last 10 years up to 2015. Guess what the correlation coefficient is, a bond market expectations, five-year break-eas. Evens.

0.88. Okay. Okay. Right? That's much higher than I expected. And then I looked at the cost of a gallon of regular unleaded vis-a-vis the one-year-ahead inflation expectations for consumers as measured by the U.Mish. Guess what that correlation coefficient was.

0.81. 0.81. Really? Yeah, right? Pretty significant. You're skeptical, Maryssey. I just always find those University of Michigan inflation expectations. to be kind of wild.

Actually, if you do just a simple chart, you can kind of see it. You can see the relationship between the two. Interesting. Yeah. I guess over a long period of time. Yeah. Yeah. Long period of time, 10 years.

Yeah. Something like that. Anyway. So you're making a good point, Chris. You're saying when you add all the negatives and positives in the current, again, in the current context, because we are focused on inflation, inflation expectations. This is more, certainly any rise in oil prices is much more of a negative than a positive And certainly in the immediate wake of the run-up in oil prices.

That's right. And you make a great point about timing, right? This is immediate. Consumers see it. Yeah. Maybe the benefits come later to the producers. And then, of course, the winners and losers vary a lot across the country. Of course, the winners are the states you mentioned, Chris, Texas, North Dakota, Oklahoma.

But the losers are more diffuse and lower income, particularly in the southeast and the parts the mountain west. So you get very different kind of economic effects depending on which demographic group you're looking at and where they are in the country. But interesting dynamics. Okay. So the upshot of this conversation is we got a lot of things going on. I don't see any upside to any of it, but it feels like the downside is kind of sort of limited at this point we need to watch. And that's kind of like what's going on in the Middle East is like that and what's going on U.S. China is kind of like that. Is that guys disagree with that statement or take umbrage with it or is that kind of fair?

Chris Lafacchus? Yeah, I think that's pretty much on point. I mean, I think that we will increase our oil price forecast as a result of these actions, but not dramatically and the price impact will fade over time because the supply side always takes a little bit longer to respond than the demand side. And so, and that goes back to what you were saying, Mark, about consumers feeling it first. But over time, if you give producers enough time and a price signal, they will respond in kind and they will normalize supply and demand. And so whether that through increased U.S.

production or increased Saudi production, you know, the prospects for Iran's market share of the global oil trade have diminished quite a bit over the past week. But there should be enough oil out there for other countries like the U.S. and Saudi Arabia to make up for it. And Steve, same to you. Did I get that roughly right or am I being too sanguine? Well, my thought was, as you're making that statement, I think you're a little too sanguine on China, U.S. only because really I think there's more. See how he's managing up because you were a little too sanguine.

A little. You said, you moron. There's so many, oh, you got me, Mark. There's so many ways things could go wrong with China. And a lot of things can go wrong with the Israel war. It's almost like, well, we've been through this before. But China, a trade war,

there's so many different levers that could be pulled. And it's just hard to know where it's going to go. Got it, got it. We're going to keep this podcast short because this is weird because we're taping this Monday afternoon. And we're doing that because we're all kind of traveling and can't kind of get our schedules lined up to do this on a typical Friday. So it's a little weird, a little different, a little weird, but hopefully you found it useful. And questions. If you guys have questions, listeners have questions, fire them our way.

It's always a lot of fun to, you know, take those questions and respond to them. So please feel free to do that. Chris, what's the email again they should use? I always forget. That's a help economy at moody's.com. Help economy at moody's.com. Okay, very good. And, Marissa, any other ways they can get a hold of us?

Carrier pigeon? Smoke signal, right. Smoke signals. Yeah. And when you write a question, if you can make it succinct, that would be great. If it has links to papers and presentations and probably not going to read it.

So if you'd like to get your question read, I think succinctness is important. Yeah, if you want to ask a question, make it a damn good question, please. Yeah. None of these bad questions. It's not going to take me an hour to read it and determine if it's a good question. Well, give it to Notebook LM, turn it into a podcast. Oh, no one listened to that. Take that back.

Have you guys listened to the Notebook LLM? podcast? You haven't? Ooh. No. Pretty good. No, I keep meaning to do you get it. Yeah. Boring. They're a little boring. I say they're boring. Certainly compared to this one. Absolutely. Absolutely. Yeah. All right. Dear listener, we're going to call this a podcast to take care and we'll talk to you soon.