Moody's Talks - Inside Economics - Oil and More Oil

Episode Date: March 11, 2022

Mark, Ryan, and Cris welcome more Moody's Analytics colleagues to discuss energy commodity shortages due to the Russian invasion of Ukraine and how this effects the global economy.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.  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, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Chris DeReedies. Chris is the Deputy Chief Economist and Ryan Sweet. Ryan is the Director of Real-Time Economics. Hi, guys, how's it going? All right. How are you doing on there?

How are you? I see Chris is in the office, Chris? Yeah, you are. And Ryan, you're still at home. And I think we're going back soon, aren't we? I saw some kind of email from... I think mid-April. mid-April is that when people are going back I guess you can go back already if you want but you're back

anytime anytime anytime you want so what's the April date exactly I think that's an official welcome back in official welcome okay always good at an official where are you uh actually I'm in sea island Seattle in Georgia at a very interesting kind of think tank function and talking about economics and stackflation, the kind of things we talk about on this podcast and also defense policy, a national security, which obviously, you know, given Russia, Ukraine and China and everything else, very interesting. Not something I get to listen to very often, but, you know, fascinating and very important. So that's what I'm doing down here in Sea Island. Well, I appreciate your dedication. Yeah. You see, I got, I even walk around with my mic.

I mean, I brought my mic to this. Not like Chris. Chris goes on vacation, leaves it at home. Yeah, he's speaking from the wine cellars. Yeah. I brought the headphones, though. Yeah, you did. Yeah, good point.

That does show dedication. Okay, this podcast, we will be talking, obviously, about Russia, Ukraine. what it means, but through the prism of commodity markets. You know, what does it mean for oil, natural gas, and then non-energy commodities, agricultural products and industrial gases and metals? You know, these are things that Russia, Ukraine, export to the rest of the world, and obviously those markets have been turned upside down by events. And, you know, that's the key link between what's going on Russia, Ukraine,

and the rest of the global economy, including here in the United States. and we want to talk that through with a number of our colleagues that are experts in these markets. So I'll bring those folks in as we continue the conversation, but we're going to do a deep dive there. But before we go down that path, though, and not unrelated, obviously, is the big statistic of the week, economic statistic of the week, was the consumer price index that was released on Thursday. So yesterday, it seems like a long time ago, but just yesterday. So, Ryan, maybe I can turn the conversation to you and you can give us a lay of the land. What happened there was obviously pretty ugly, but maybe you can give us a sense of that. It was another ugly month and it's going to get worse.

March is going to be much worse than February. But the CPI, the consumer price index, was up 0.8% between January and February. That's compared to a 0.6% increase in each of the prior two months. So we're seeing a little bit of an acceleration month over a month. On a year ago basis, the CPI was up 7.9%, which is the largest increase since the early 1980s. Going through the details, energy was a big portion of the increase in February. So you saw the CPI for gasoline was up 6.6%. And that doesn't fully capture the recent increase in gasoline prices.

So we're going to see a big contribution to March CPI through gasoline prices. But it's now all energy related. You saw some of the reopening components of the CPI, reopening related to COVID. So lodging away from home, airfares, they all rose. Now, some of the airfare increases, jet fuel prices, they kind of track each other, but also demand. It's also demand driven because Omocron variant, a number of cases of falling, number of people going through TSA checkpoints increase. So there was a big pickup in travel.

So there was some demand increase there. The key shelter component, which we're all keeping a close eye on because that's going to really start to accelerate soon. That rose a trend like 0.4% for the 6th or 7th consecutive month. Rents are usually pretty sticky, but we're going to see some pickup and rents going forward. So if we don't get some good disinflation, some weakening in price growth, we're going to have bigger inflation problems in the summertime because services inflation is really starting to pick up. Yeah, there was also a big increase in food prices, correct? Good prices, yep. Yep. Yeah, they're up 1% month over a month. Of course, that's also, in part, energy related, because a big part of getting food on the store shelf is transportation and that's fuel. So that probably played a role. So even like the core CPI where we strip out, you know, the volatile food and energy components. I mean, that rose 0.5% month over month. But even there, energy plays, plays an impacting. Anything that any good that's transported, you know, diesel prices, fuel prices.

all factor into there. So, you know, the core CPI doesn't remove all of the impact of energy. Right. But the 0.5, that's, that, that wasn't really, I don't think that was an acceleration month a month, right? That was a deceleration. It was a slowing in the growth. Correct.

And that goes to some good news in the report, right? Yeah, use car prices did. Yeah. 0.2%. I mean, you got to squint to see the decline, but no, no, I know. but the message there is a broader message, though, isn't it? I mean, at least that in February, price pressures, you know, within the core CBI weren't broadening out too much.

Yeah. Also, I mean, we've been making the case that, you know, once supply chain disruptions start to abate, and we saw enormous supply chain disruptions, you know, beginning back last summer and fall with the delta wave of the pandemic, particularly in the vehicle industry, because all the chip plants in Asia shut down. You couldn't get chips. You couldn't produce cars. You got shortages.

And we've seen the skyrocketing in vehicle prices. But it feels like they're starting to vehicle prices or starting to level off. And that goes back to, well, chip plants are now open. We're getting some pickup in vehicle production. Inventories are no longer falling. Still shortages, but it's not getting worse, at least. And that's starting to cause prices to level off. And hopefully that's the start of,

that goods price deflation you were just talking about. Maybe we see some big declines here in car prices later in the year. Right. So I think over the next few months, the big story is going to be energy boosting the CPI. But at the same time, you've got to look at the details because we're already starting to see some evidence that, to your point, that, you know, some, you know, improvement in supply chains because our U.S. supply chain stress index, which is measures, takes a number of measures of stress in the supply chains has actually improved. the last few months. And that's starting to show up in some of the inflation data that we're getting less inflation from supply chains. So top line really ugly got worse, higher energy prices that's kind of affecting lots of different things, food prices, airline ticket prices,

things more broadly. But underneath that feels like still high rates of inflation, but doesn't feel like it's getting worse. Maybe we're starting to see signs that it's going to get better. that would that be fair way to characterize it? I think so. Okay. And can I ask one other question, going back to Russia, Ukraine, how much of the increase in oil energy prices that's in the CPI report would you ascribe to Russia, Ukraine? For February or March?

February. February small, a small amount. Really? You really think that, huh? Because my sense is oil prices started rising at the beginning of the year, and that's when Russia and Ukraine got on the radar screen. And that's when oil traders started sending up oil prices, even before they invaded. Yeah, I was thinking the actual invasion from that day point.

But if you go back when tension started to escalate and commodity traders started putting a premium on oil, then yes, most of it would have been attributed to Russia, Ukraine. And it's all in March. Right. I mean, in kind of my simplistic framing of what's going on here, oil prices back before Russia, Ukraine came on the radar screen at the end of last year was $75 a barrel. As Russia, Ukraine came on the radar screen, as it looked increasingly likely as the year started that Russia was going to invade Ukraine, oil trader says, oh, that's a problem and started

driving up oil prices. and that began in January, but really became evident in February because by February, all prices were not quite $100 a barrel, but they were pretty close. So it up $20, 25 bucks a barrel. And then he had the invasion that coming into March, and now we're at, I didn't look today, but 110. You know, something. Yeah, give or take.

You give or take. Yeah. Okay. Either your numbers, $294. $0.50. What's that? is your number $294.50? Oh, that's the increase in, we're already playing the game, it sounds like.

No, no, I just wonder, is it your number? Because I won't talk about it. No, no, that's not my number. But the 294, I think, is what you're saying is as of February, that's the increase in the monthly cost of living. So for a household, the typical household that wants to buy the same stuff they did a year ago, today they need to spend $294, almost $300 more a month to buy for that stuff. Yeah.

So you can, that kind of highlights the cost of inflation. Yeah, the downside, the negative hit to disposable incomes, real incomes, yeah. Right. Chris, on the CPI report, anything that Ryan and I missed in our conversation that you want to point out, or anything you push back on with regard to the conversation? No, not really. The owner's equivalent rent, right, housing component continues to rise, right? That's 4.3% year over year.

So that's going to continue to feed in. That's not going to bend very quickly, right, unlike energy and food, but potentially. So that's going to continue to have an effect over the next few months. That's all I would suggest, right? Yeah. Next few months or? I think so. Longer.

Longer, right? Because it's typically a one-year lag between house pricing. increases and the rent increases. So, yeah. And just for context, correct me if I'm wrong, but the housing all-in component of the consumer price index is about a third of the index. So the Bureau of Labor Statistics that puts the data together, they calculate prices

for all these different products and services, housing being one of those things, then they kind of create a weighted average and the weights are the share of that product or service in the consumption basket and the percent of what the typical household spends, you know, every month on these different things. If you add up housing, and this is out-of-pocket expenses, and housing accounts for about a third of the index. So it's a big piece of the pie here. A little bit more now.

Oh, is that right? With the new weights, it's, I'm looking at it right now. It's 42. That includes shelter, OER, owners equivalent rent, and then also utilities. So if you strip out. But that's got to be the share of core inflation. That's not overall inflation. Overall.

No. I don't think so. I have it right in front of me. I'm staring at it. No, wait. The housing component accounts for 42% of the overall index? I don't think so, Ryan. Yeah, take a look.

I'll double check. Yeah. What do you think, Chris? Is that right? That sounds high to me. That sounds really hot. You're saying it's new weights? I mean, no, I think that's the share of the core.

Maybe it's the core. Maybe it's the call it. It could be. Yeah. But let us know when you get there. But still, nonetheless, it's a big component. Just for context, I think energy all in, and that's fuel, fuel oils, everything, is 7% of the CPI, something like that. And food, 13, 14%, so food and energy is about 20% of the total CPI.

Yeah, you're right. That was the share core. That's share core. The headline is 32. 33. 33% one third of those. Hey, don't fool with the chief economy, what I say. Especially when it comes to data, right?

All right. I'm just saying, just remember that, just remember that. Okay. No, I get my fair share of statistics wrong for sure. Okay, let's play the game, the statistics game, and just remind folks, the good, here each of us throws out a sense. throws out a statistic and the rest of the group tries to use deductive reasoning to figure out what that statistic is.

The best statistic is one that is not so easy that it's a slam dunk. That is, but it's hard, it's not too hard that, you know, we'll never get it. It's nice if it's kind of related to the, it has to be a statistic that came out that week, more or less. I take license with that every once in a while unfairly, but, you know, that would be good. And if it's related to the topic at hand, which in this case is, you know, Russia, Ukraine, oil, prices, inflation, that kind of stuff. But again, you know, these are these are loose rules. So did I get the rules right, Ryan? Because I know you're a stickler for these,

these rules. You got it. You got them right. I got it right. Okay. Very good. And if you, if you do well at this game, you get a cowbell. So, and I can see one of the cowbells over. over there in the corner and there's one right next to Ryan. Okay, very good. Okay, we all strive to get a cowbell. Okay, who wants to go first? Chris, you want to go first? Sure.

$527. Is that $527? $527. $527? $527? Nope. Nope. Oh.

Is it related to the CPI? No. No, I didn't think so. Was it related to the other big number that came out this week that we didn't talk about is the job opening labor turnover survey jolts? Nope. No? Wasn't that?

It wasn't hires or quits or anything like that? No. 527. Is it gasoline related? Is it gasoline related? It is energy related. Energy related? 527.

Okay. I am going to bring in one of the other guests because they may be able to be able to to hang with you, Chris. I'm going to bring in Chris Lafacchis. Chris, welcome to Inside Economics. Hi, Mark. Thank you. Chris, are you, is this your first time on Inside Economics?

I can't remember. It's my second time on the pod. Oh, it is. Okay. And how did you do on the first one? I can't remember. How were your reviews? Did you get good reviews from the audience?

Did I get one thumb up? One thumb? Okay, one thumb. That's pretty good. We can't aspire to get two thumbs. I mean. Right. And Chris is one of our experts on the oil market and energy markets more broadly.

And Chris, do you have any idea what Mr. Derides is talking about here? Dr. DeReedy's, I should say, 527? So is it a price? It is not a price. Okay. Is it a quantity? Yes. It is a quantity.

Yes. It is a quantity. Oh. It's not. Does that do with oil rigs? Oil rig counts. Bing, Bing, Bing, Bing. Oh, my gosh.

Oh, baby. So what is it? That is your most impressive one. What are you talking about? I've had many impressive ones over the past. That's more, yeah, 500. That's good. That's impressive.

And I schooled Mr. Lafacchis, the resident expert. The phone of friend didn't work. Explain, Chris. What's going on there? That is the U.S. oil rig count. Active rotary rigs. Active rotary rigs, Baker Hughes. rig count, weekly count.

Very well done, Mark. That was amazing. Oh, I think he's now sucking up. What are you guys? Don't worry, Mark, won't get my numbers. Yeah, yeah, right. So, Chris, 527. Give us context, okay?

Yeah, that is up eight by eight rigs in the week, right? So is that a lot? That is significant. It is significant. It is significant. It had been relatively, well, it had actually been growing recently as the price of oil has has gone up. But eight in a week is a pretty sizable jump. It was actually flat the week before. And it's up 218 from a year ago. And for those of you who care on the pot, it is actually up

238 from the time President Biden took office. Although five, it's still low, isn't it? It's still low compared to pre-pandemic. Correct. Pre-pandemic, it was 683. 683 so and so we're moving in the right direction we need obviously more oil given what's going on and it feels like you're saying that the they're increasing the rig counts are increasing and they're increasing at a pretty good rate here now at least in the last week in last couple weeks last few weeks right which makes sense right I mean because at these oil prices these guys can make a lot of money right you would think right they're also you know the the the drillers are also indicating that, you know, they've got their own supply chain issues and trouble finding

workers. So they can't accelerate as quickly as perhaps we might otherwise expect, given these prices. They're also uncertainty around the price itself, right? So they're not going to rush to the oil fields if this is a temporary increase. Okay. I'm going to go ahead, Ryan, what were you saying? I was going to say that the rig counts feed into GDP in non-residential structures investment. And that And that helps offset some of the hit to GDP grow from weaker consumer spending because of higher prices at the pump. Yeah, that's right. So when you think about oil prices and how they impact the economy, it's cross currents, right?

The negative hit to the economy is what we talked about. If you've got to put more money into your gas tank, as a consumer, you have less to spend on everything else. therefore less spending, less production, that's less GDP, so it's a hit. But the positive is that the U.S. produces a lot of oil. We produce, I think, I'm, I think, close, Chris, correct me if I'm wrong, but 20 million barrels a day, you know, give or take, which by the way is a lot of oil. That's, you know, 100 million barrels a day globally, so 20 million barrels is a lot of oil.

But so it's a big part of the economy, and so if you get higher prices, that's a lot of, That lifts rig counts and production and investment. And so the net of all that is still a small negative for the economy, but it's a small negative. It's not a big negative. It's a small correction. We consume about 20 million, but we produce about 11.6 million. But, I mean, this is the most substantial increase in the rotary rig count since 2015, 2016, when, you know, that was a near-death experience. That was akin to the 2008 Great Recession for a lot of these mid and small-sized oil drillers.

Oh, I got that wrong. Oh, so we consume, oh, yeah, we consume 20 million barrels. We produce 11.6 million barrels per day. And about eight of those are, so that gap is like we import around eight, eight, eight, eight, and we produce, we export around eight or nine, but, you know, so, you know, the U.S. consumes about 20 million barrels a day, but only produces about 11.6. Well, score that circle for me. I'm not following the arithmetic. So 20 million we consume. We produce 10. Imports and exports kind of net out. We import a lot of product, too. We import a lot of product. So 20 million is kind of the, you know, demand is measured as petroleum products applied. So that's oil plus diesel plus jet fuel plus heating oil, all of those together. The U.S.'s entire consumption is about 20.

20 million barrels per day. Oh, you're saying crude plus the refined product is 20 million. That's correct. Yes. Yeah. Okay. But we produced 10 million in crude. And how much of crude do we consume?

10? Oh, how much do the refineries use? Yeah. It's around 14 million. Well, I'm so confused with these numbers. Yeah. How does this all add up? There's a distinction between, you know, oil and petroleum products.

And so, you know, the, the U.S. is, if you can think of it, very close to, like, a net neutral. You know, we were a big importer, but now we're net neutral. Okay. I'm going to bring in. Because I saw a hand. I'm going to bring in two of our other colleagues that are also oil experts, energy experts. You can see this is a, you know, a lot of moving parts here, so we need a lot of expertise. Tom Nichols, Tom, welcome.

Hello, thank you. And Tom, is this your first time on Inside Economics? Yes, it is. Okay, welcome. It's good to have you. And how long have you been with Moody's Analytics? Coming up on seven years. Really?

I didn't know that. It feels like you've, you know, you've been around for like 17 years. I don't know. It's good, though, seven years, good. And Juan, Juan, Pablo, Juan, you, now you've been with us for 17 years. almost maybe like 14 I lost count yeah yeah many years many many years okay Juan you raised your hand can you right get these numbers get them squared away here what's so we we produce so the

20 million barrels is as you said is it's products so you that's that is not crude oil that's like what refineries produce and that's 20 million dollars barrel. So from that 20 millions, we produce 11.6 crude oil. But we also produce another like 7 to 8 million in byproducts. Got it. Okay. So in total, you have 11.6 crude. You have to add the eight that is the products. And this includes natural gas liquid. that's a big one, that's like almost six million barrels. And that's like a byproduct of crude oil extraction. And then you have refinery processing gains,

and that's like another million barrels. So overall, the US produces between what it produces crude oil and products, I would say, is close to 20 millions because we are basically right now, like a net imported or net exporter. We're like in the middle. We produce as much as we need to consume. That makes perfect sense.

So it's 20 million in consumption, 20 million in production, kind of what I was saying, but you've got to make this distinction. These numbers are confusing because we're making it. It needs to be crude, you know, kind of the raw material for these and use fuels. And the number of 20 million also includes the, the final product. Correct.

Got it. Hey, I got one other question. So when, you know, you look at the data that comes from the EIA, the energy information administration that, you know, does a lot of this data calculation, they say, I think, correct me if I'm wrong, that global consumption of crude is 100 million barrels a day, is, you know, roughly. Is that correct? That's not a fine product.

That's crude, isn't that right? No, that's oil, oil liquids. That's what they call oil liquids. Oh, so that does include a fine product. So that's everything. Okay. That you don't consume crude oil directly. Got it.

You produce, you consume products. Yeah, okay. So 100 million barrels is, so of the 100 million barrels a day that we, of everything that fuel accrued and refined product, 20 million is here in the United States, roughly. 20% of the pie. We are still the biggest consumer. We're still the biggest consumer, but the good news is because of the increase in production due to fracking and all the natural gas and oil that now we are, you know, we basically produce what we consume. And so therefore, that's kind of the key statistic.

We're trying to understand what the impact of higher prices or lower prices means for the broader economy. And it's saying pretty much a wash. you know, a negative for consumers, a positive for producers, but net net kind of like washes out. In our calculations, just to give people a rule of thumb, for every $10 increase in the price of a barrel of oil, you get a reduction in GDP, the valuable things are produced in the subsequent year of one-tenth of 1%. That kind of gives you a sense of it. Yeah. I would say that it's still a net negative for the U.S. economy because the distribution of the gain. is different from the distribution of the expenditures. So, for instance, you've heard how, you know,

energy, there's a lot of historical opposition to raising the gas tax because people say it's regressive. It hurts people on the lower end of the spectrum, income spectrum the most that have the highest propensity to spend. Whereas, you know, on the producer side, a lot of those are, you know, rents that are collected and paid out in the form of dividends or share buybacks that benefit consumers that have higher savings rates. So if you actually measure the net economic impact, even though the U.S. is, you know, energy independent, if you will, 20 million barrels in, 20 million barrels out, it's actually negative for the economy.

Yeah, I think that's what we're finding, right? I mean, but a small negative, at least at least at prices that you, I mean, if you get from, I think it might be different, if you go from 75 bucks a barrel to 85, that's different something going from 150 to 160, I think. It's kind of an economist for a nonlinear relationship. But at the prices that were normally prevailing 75, 80, 100 bucks a barrel, a $10 a barrel increase results in a one-tenth of one percent reduction in GDP for the reasons you nicely articulated, Chris.

Tom, any anything else you want to add on that conversation we just had around oil? I think we're going to circle back around to it. Okay, fine. Yeah. Yeah. Perfect. Hey, there's one other top, before we go continue on with the game, maybe this is a good time to talk about one other aspect of oil and energy markets, going back to Chris's statistic.

And that is there's been this hand-wringing in debate and discussion about why haven't there been a bigger pickup in oil production in the United States. Why aren't there more, you know, oil rigs are rising and they're rising more quickly, but why did it take so long? You know, why aren't we seeing, you know, why isn't it at, why aren't we back to pre-pandemic level, 680 on the rig count? Why are we still below? So, Tom, you want to weigh in on that? And obviously, there's a lot of debate is getting into the, you know, it's getting a little politicized now, too. We had a, we had a webinar.

I expressed my views on it, and I got a lot of pushback, and you could feel the kind of the political tension. you know, starting to build. And I don't, we don't want to do that. We want to be clear-eyed here. But so what's your sense of what's going on here? Why? Well, first of all, do you agree with that characterization of what I just said and, and what's going on? Yeah.

So I think there are a couple of reasons that we're not seeing drilling at the same pace that we typically would at this price level, right? You know, in the in the past decade, really, U.S. producers have been really aggressive. As soon as they see prices jump, it's drill baby drill. And that has not really materialized in sort of the post-COVID environment. I think one reason is a lot of oil companies got locked into low spending plans during COVID. So they were a little bit slower off the floor than they would have been.

So that effect at this point has kind of gotten washed out. But I'd say initially that was an important cause. Currently, I think a lot of it is due to the same supply chain issues that we're seeing in any goods producing industry. You know, we're talking about the difficulty with inflation, difficulty getting materials, difficulty getting labor. So all of those things are affecting the oil market as well. A lot of oil companies are talking about the increase in price for the metals that they need to finish the wells in case the wells, the sand that they need to frack wells, the fracking propents, they call them, that they use to actually extract the oil. And then another effect that we're beginning to see is an increase in capital costs. There's starting to be a push amongst lenders, amongst the financial industry to decarbonize their lending portfolios.

Basically, with the expectation that climate change or climate change regulation further down the line is going to have a negative effect on certain industries, mining being really chief amongst them. So that is beginning to take effect as well as the increase in capital costs along with the regular supply chain issues that everyone's facing. Okay. So it's a range of reasons, not one. So again, reiterate, number one is what? Reason for the slow pickup? Initially, I would have said it was the getting locked into low expenditure budgets coming out of COVID. Number two?

Supply chain issues. And that's everything from labor to materials. Yeah, labor and materials. whatever they need. Exactly. And three is? Three is capital costs. Cap,

just the cost of capital here to actually, given the shifting capital markets related to climate change and fossil fuels and that kind of thing. Yeah. Okay, I'm a stop right there. I'm going to go to Chris Lafacchus and then I'm going to go to you, Juan. In your mind, did Tom get that right? Is that ranking is how you would rank things? or would you rank them a little bit differently?

Or would you, is there another factor that he didn't mention that you think should be mentioned in the, in the top three? Yeah, I would probably add three factors. I think that there are a lot of factors. Different factors? Different factors? Are these same factors or different factors? I would add, I would bill to what Tom said.

So three additional factors. Okay. He's right on with, in terms of, you know, the increase in input costs that are constrained. We have constrained supply. We have ending COVID. And then obviously capital costs as well. which is a big part of this. You know, we're sitting here.

Another perspective that I would add, though, is we're sitting here, this is Sarah Week. You know, so this is the one week in the year where the who's who and the oil industry gather in Texas and they meet and they talk to each other. And a lot of the CEOs are talking to each other right now and they're saying, we're doing what our shareholders want. You know, many of us, you know, almost went bust in 2015, 2016. and the message that we heard from shareholders loud and clear is retire debt, buy back stock, and pay dividends. And these strategies have been very successful in lifting company stock prices. And the people that are making decisions are CEOs. And they're compensated based on how their stock price performs.

So they're listening to the market. The market is saying this is what you need to do to get a better valuation. And they're doing that. So I would say that reason number four would be shareholder pressure or the decision to not reinvest capital that is earned and instead use that to retire shares and institute buybacks. I would say that reason number five is, you know, after we came out of the global financial crisis, it took us a while to get our mojo back. Those animal spirits really didn't start roaring until five, 10, 15 years down the road.

And many of these small and mid-sized producers were shell-shocked. They suffered near-death experiences. And they're very reluctant to put it all on the line again so soon. They want to make sure that the price increases is a little bit durable. And then the last reason that I would add is... Can I just say on that one, that feels kind of like a variation on the theme of Tom's number one, Right. Tom is saying everyone got creamed in the pandemic, getting everything rev back up is going to take some time.

That's kind of sort of what you're saying, right? Right, Tom? Sure. I get that right. Yeah, I think what Chris is highlighted is this trend is, you know, it's past the COVID point. And now we're seeing prices leap for another reason that is not necessarily tied to the market. And how much can we actually invest on this? Can we go to the bank on the recent price increase or not?

I see. Okay, fair enough. Right, Chris? Is that? That's right. Because of what we saw in 2015, 2016, which by the way, the RIG, the active rotary rig count increase that Chris highlighted is the most substantial pickup since that period of 2015-16.

And we know how that turned out for all these energy companies. They got creamed, right? Their stock prices went to single digits. And investors wanted nothing to do with them. So I think that that's, you know, animal spirits, the lack of the lack thereof is a big component of this as well. The last point that I would add is we had an inventory of drilled but uncompleted wells, so-called ducks back then, where, you know, the rotary rig measures when the drilling rig is working. But after it is drilled, that that well needs to be completed before oil can begin to flow. And that's where fracking comes in.

And so we had drilled lots of holes everywhere, but had not turned them into actual producing wells. And we don't have that inventory overhang here this time around. So it's not like ready-made production to fall back on. You have to drill a new well. You have to start the new process. And as such, it's very difficult for producers to ramp up production. Got it. Got it.

Okay, one, I know I left you last. We got six different reasons why producers have been slow to ramp it up. Is there anything else you want to add to the list? Or would you reorder any of the things that these two other guys put forward? I will add two factors. One is related to what the financial situation that Chris was mentioning. And I think the nature of this oil rally is different from the one we had in the 2000s, early 2000s.

That one was a demand-driven rally. So for investors, that was easier to see that the rally had, like, it would be a long rally, and it actually lasted from 2002, 3 until 2008, when the crisis in the U.S. kind of killed the rally momentarily, and then it came back again, 2009 and 10. This rally is different because it's a supply shock. And it's a lot of, there is more uncertainty. It could last, you know, two weeks. It could last one year, it could last two years.

So there is more uncertainty. And if you're an investor, you have a, you know, everything depends on the price of oil for you as an investor. So there is more a stake. And I will think they will be more cautious. That is a very, that is a very, very great point that I hadn't even contemplated, but that feels right to me. It's a different, prices are up for a different reason that may not be as durable.

Therefore, am I actually going to, you know, plunk down these fixed costs that are necessarily to start a rig? Excellent point. Hey. Oh, sorry, go ahead. One. The other one was, it's more like a, from the geography point of view, the U.S. doesn't have as much reserves. Shell oil was never supposed to be like a hundred year like in South Arabia. They can produce for a hundred years.

Shell oil reserves are like maybe lasting. They might last 10 years if they keep producing at this rate. So there is more as time passed on, there is every new drilling is more expensive, it's more difficult to find. There is more technology required. every new feel is more, you know, difficult. The easy ones are gone. Got it. Chris DeRides is biting at the bit here to get in.

Go ahead, Chris. On that last point, one thing, I was looking at the Baker Hughes report today. One thing that stood out to me was the 92% of the wells are actually horizontal. Right. Versus vertical. Oh, I would have thought the opposite. So explain that, explain that for people. Well, maybe the experts can explain.

Yeah. Explain what that means. means seems more complicated well the horizontal is the main technology used for shell formations so you you drill a hole and then you go horizontal because the the oil is is trapped between rocks and it's not like deep it's just like spread out so you have to there is some guessing when you drill you don't exactly know how much oil is around that particular well with 30 additional extraction, you go deep, like in the Gulf of Mexico, you go very deep. And there is more certainty, like to know how much oil is in that particular field.

And it's think about the Taramisu versus Jelly Donut, you know, and the vertical is the jelly donut. You go down, you put the straw, it comes back to the surface automatically. That's easy. Brilliant, brilliant. Except, you know, Rockefeller got all the easy ones. back in 1900. What kind of jelly, Chris?

Oh, it's got to be cherry. I mean, cherry is the best. I can taste it. Hey, one thing you guys did not mention, which I found a little surprising. And you gave me almost a list of 10 reasons. Nobody mentioned regulation. Yeah. What's that all about?

I mean, that's all I hear. That's what we heard on the webinar. You guys aren't thinking about regulation. You know, you can't get permits, keystone pipeline, you know, so forth and so on. What's going on there? Isn't that, doesn't that matter? It's not even on your list? Chris, Lepacas, Juan?

Tom, it's not on my list. Not even on the list. Whoa. Yeah. I mean, it's just, you know, there's things that actually matter, and then there's things that people talk about. And sometimes those don't exactly match. Okay. Okay.

Anybody want to push back on that one at all? I just, I'll be, I'll play devil's up. Why not? not. Why isn't Keystone XL an issue here, right? Wouldn't we be in a better position if had that been approved? Well, that was supposed to bring the oil from Canada. It doesn't have anything to do with the U.S. production. I think in terms of pipeline, there is not a bottleneck as far as I understand right now. So there is the constraints from the supply side are more about labor, supplies, drilling equipment and to me that's that's the immediate constraint it's not a legal framework

because you can still drill in the permian you know based in in Texas or north Dakota those are still there i mean there is no there are some limitations in some new areas but all the traditional areas are still open for i think i read that the the the Biden administration said that there were like, you know, I don't know, a big number of permits that were. 9,000, 9,000 permits. So that was no, that doesn't seem to be the main reason why. Yeah, I mean, what does this pipeline have to do with the CEO of Continental Resources decision to drills for some new wells?

I'm sorry, I don't connect those dots, Chris. What's your point? So that oil, you know, if you built Keystone Pryston Pryston. pipeline, that would bring oil from Canada into the United States. But what does that have to do with the price of China? Oh, yeah. You're saying that has nothing to do with drilling, was putting up rigs here in the U.S. That's not going to, that's not going to.

Right. Yeah. Okay. Tom, did you want to say something? I saw your hand. No. No. Nichols?

I think they nailed it. Okay. Okay. Well, while we're on the subject, the other thing I wanted to ask is kind of the way I think about this in my frame is that in, you know, you know, I'm going to, you know, I'm going to, you know, You're not going to put up a rig unless you can make money, right? And if you think about the cost of, you know, putting up a rig and start pumping oil, that's variable.

It varies over time. Right now it's probably on the high side because labor is more expensive, the cost of sand, all the other materials is more expensive. The cost of capital, as you guys pointed out, is more expensive. So my thought is that for the typical well here, a rig in the U.S., it's somewhere around 75 bucks a barrel, maybe. Could be even a little higher than that. So you need to get above that price on a consistent basis

and believe it's going to stay above that price for an extended period before you actually plunk down the dollars to invest to open up a rig. And if you look at the data, oil prices really didn't get much above 75 bucks a barrel for any length of time, at least not long enough that would give anyone confidence that's going to stay there for very long. And before Russia invaded Ukraine,

before it got on the radar screen, at the start of this year, oil prices were $75 a barrel. So from an economic perspective, that's just economics, right? I can't make money. Therefore, I'm not going to put up a rig. Therefore, that's why we hadn't seen more rigs. Does that, and I know $75 is highly variable. It's hard to measure, and who knows, and that's kind of the typical,

that I'm paying with a broad price. Some rigs can put up more cheaply. some more expensive, but on average, what do you think about that frame for thinking about this in terms of answering this question, why we haven't seen more rig development? What do you think? Tom, Chris, Juan, anybody? Do I have this right? And is that a good frame?

I think the break-even point is, yeah, that's the key variable for drilling. So I think that a good source for that is that Dallas-Fed. They release a survey every year, every quarter, and they ask all companies, what is your break-even point for drilling? Last year, they do it every, that question goes into like the first quarter of every year. Last year, I think there was around 60, 55 to 60. 53. 53. I expect that this year's is coming up maybe next week. It's coming up soon.

Two weeks. I just take a big jump in the break-even point. Yeah. So you think my $75 bucks might be roughly right? Or we'll see, I guess. That will be a huge thing. Yeah, it's going to be lower than... It's going to be lower than $75, but it's definitely going to be higher.

I mean, because as Tom mentioned, you know, the cost of sand and drilling rigs and labor have all increased. But, I mean, the survey typically moves by, you know, 5, may 10 would be like a huge increase. So, I mean, I think it goes back to these 10 reasons that we gave you of why the U.S. producers have, even when it's profitable for them to drill, have not drilled. Got it. Okay. Well, let's move on with the game. Oh, I'm sorry, Tom. Could I briefly interject one thing?

I just want to define the difference between a rig and a well. I think some people use them interchangeably, which actually isn't right. I do. So a rig. Yeah. So a rig drills a well. A rig creates a well. and then a well produces oil.

So a rig can create multiple different wells. Okay. So when you see the rig count rise, that doesn't mean the number of wells. That means the number of people who are drilling new wells. Got it. Got it. Okay.

So you can have multiple wells off of one rig. Yeah. And you do. Yeah. And you do typically. Okay. Oh, that's good to know. And does that vary, very much?

I mean, is it, does it, is it two wells or 10 wells or 20 wells? Does I mean, or that that's just, it's all over the map. I don't exactly know. But typically the way it happens is a company will hire a drilling crew. And that's when the rig goes active. And they'll hire them for a certain amount of time. And they'll drill as many as many wells as they can in that time. They won't necessarily begin production from all of them right away.

Got it. Got it. Yeah, I would say probably eight to 10 is what you would get. And it's you go straight down. And then you start going out and branches. 360 degrees in order. That's the horizontal drilling aspect of, and that's 92% of all drilling in the U.S. Chris, you want to...

Yeah, while we're on the topic, what is the typical timeline between drilling a well and then the production? I think that's on a lot of folks' mind right now in terms of increasing supply. Or maybe what's the, like the time between a rig and then a well, and then you get a oil. Yes. Yes. What's that like, is that like weeks? Is that days? Is that months? What is that? It's about three to four months. Really?

Once you see it show up in the rigs, it's probably another two months in terms of when it can actually start impacting production. But, you know, if a CEO wanted to make a decision today, the oil would show up probably four months from now. You said two months? Well, two months for it to show up in rigs. So you make a decision. Oh, I see. I see. I'm going to increase production four months later that's going to show up in oil. Right. Got it. Got it. Okay. Hey, we forgot about the game. I think. Yeah, Ryan. Let's go back to the game. Ryan, I'm sorry. You're up. What's your statistic? 11.7. 11.7. 11.7. 11.7.

Is that a CPI? It has a CPI. The calculation, but it includes the CPI. Oh, I know what it is. Is this what you showed me the other night? No, no. That's another 11% percent. That was 11.7.

Tell people what that was. So that was the retail gasoline price as a share of average hourly earnings for production workers. So, you know, that's, it's risen since the pandemic, but it's still. still much lower than it was in 2008, 2009. So the cost of gas per gallon divided by how many dollars per hour for person working how much they're earning. So you're saying right now the cost of a gallon gasoline is 11%ish of the amount they're making per hour.

Correct. And that by historical standard is pretty low. Pretty low, right? Yeah. Yeah. I know this back to the earlier point that higher oil prices hurt the economy, but not that much. Certainly not to the degree that it did 20, 30 years ago. So like if you go back 20, 30 years ago, it was a lot higher.

It was like, what was it? I can't remember. Do you remember? I think it was north of 20. More north of 20. Yeah, 20%. Okay. Okay.

That's not the last point. No. I got it. You do? I'll be really impressed. Oh, wow. Oh. Oh.

Oh, good one. That's awesome. Good job, Chris. That is awesome. And Chris usually does not get... I know. This is like the unicorn. Explain the misery index for everybody.

All right, so the misery index is a combination of the unemployment rate and inflation. So Arthur Oaken created this back. Correct me if I'm wrong, Mark. It was the late 70s, early 80s that he created in the misery? I actually did not know that Arthur Oaken invented the misery index. Yeah. I forget which president he did it for, but he did calculate. Okay. I didn't know that. Yeah. And it's just a way of measuring, you know, pain for consumers because, you know, what's important to consumers is the labor market. So that's the unemployment rate and inflation. So when you combine them, it's 11.7% today. Average since the 1980s, 8.4, or an average since in 1990s, excuse me, 8.4. But it's well below what we saw, you know, when we had, you know, the

high inflation in the 70s and 80. So a lot of people use a misery index as a proxy for, you know, are we headed towards stagflation? So that's why I was surprised, you're hearing about stagflation a lot. Yeah. But by definition, stagflation is high unemployment and high inflation. Right now we have high inflation, but very low unemployment. Strong economy. So it's not stagflation. No, it's not stagflation. But it's not stagflation. Okay. Okay. Do you know what the all-time high is on the misery index. 25? No.

No? Did you just calculate it? No. Well, I know this. I know things, Ryan. I'm going to check this. Yeah, he doesn't believe me. 22, 22.

Ah. Not that far off. Well, it was a pretty good guess. Yeah. That's a half the call about. You think that's a good guess? Yeah. All right.

Well, all right. I'll give it to you. It's in the ballpark. It has a 20 handle to it. Okay. I know I'm tough. Crystal Fackis is going, man, he's tough. Yeah, I am tough.

We're really tough on this. You've got to be right. I know. Yeah. Right. So 11.7. So that's high in the context of the past 30 years, but it's, it's been a lot higher. And this goes to another statistic that came out this week is the University of Michigan survey, right?

So what happened there, Ryan? Consumer confidence fell. One year inflation expectations jumped, but that's not surprised. rising. That's food prices, that's gasoline prices, which cause consumers to expect more inflation down the road. But if you look in the detail, it's all, most of it's gasoline. I mean, gasoline just crushes the University of Michigan Conference Survey. Eighty-one percent of consumers expect higher gasoline prices down the road. So I'm not quite sure with the other 19 percent of people, you know, what they're thinking, but, you know, the majority of people know that higher gasoline

prices are coming. That affects their psyche. Well, that was a good one. And Chris, Bravo, Oh, that was a good, good guy. Yeah, Chris, that was really impressive. It was really quite impressive. Once, yeah, thanks. All right, what's yours, Mark? Okay, you ready? Yep.

And I hope, I hope this is a good statistic. I'm a little nervous about it to be frank. It's this week, right? This week. Yes, it is this week. Actually, I'm going to give you two statistics because they're related and they might help you, you know, get to the answer

because I'm a little afraid it might be too hard. The first statistic is 3.4. Just absorb that for a second. 3.41% and the second one is 2.35%. 2.35%. Okay. What is that number? Those numbers, I should say.

Related to inflation expectations? Very good. Very good. I just got to figure out which one. Oh, very good. Is this the New York Fed's? No, it's something your feds to measure inflation expectations. That's a good, good guess.

Yeah. How did you know I was going to do inflation expectations? I can forecast you, Mark. Yeah. Whenever inflation comes out. Got a model for me now. Yeah. It's inflation expectation.

Is it our pulse combination of inflation? No. And what is our pulse index? What is that? I haven't checked. I didn't check this week. No, no. I meant in.

Oh, we just take all these different measures of consumer-based and market-based measures of inflation expectations, combine them together to, come up with, you know, kind of a summary of all inflation expectations. Yeah. Okay. Oh, I know where you're going. Okay. You're going five year, five year forwards.

Oh, very good. Which one is that? That is the second one. 2.35. Yeah. Five year, five year forwards. And five year, five year forwards, that's, you tease it out of 10 year treasury yields. And that is what investors are saying inflation five years from now will be in the subsequent

five-year period. So this is long-run inflation expectations. Consumer price inflation expectations, 2.35. That, I would say, is very consistent with the Fed's target on CPI. They're based on the CPI, right. CPI. So, you know, the core consumer expenditure expenditure to say two, given the differences in measurement and composition, everything else, CPI, if you said 2.35, that would be, in my view, consistent with the feds. So the market is saying, investors are saying, the long run, inflation is consistent with what the Fed has credibility long run. Okay, so what's 3.41? Is that the difference between, yeah, go ahead, Chris.

Chris got it. He gets the cowbell, baby. He won. Yeah. Where you go, Chris. Although I had to give Ryan credit, don't you think? Yeah, absolutely. Ryan, that's for you.

That's definitely for you. Chris can have it. Once I got the, once I heard the five year, five year. Yeah. Break even was next. It was five year, that's five year break even. So what that is is you take a look at the five-year, the yield on the five-year treasury security, and you compare that to the five-year treasury inflation-protected security.

So you buy that bond, you get, you know, that yield plus inflation, CPI inflation. And that difference between those two is what investors are saying they think inflation will be over the next five years. 3.41 percent, okay, that's a problem. That's high. That's the highest it's been, I believe, in the data that we have back to 2003. And I think that's when TIP started trading. Correct.

Right back in 2003. It's now, it breached the high that we achieved a few months ago before Russia, Ukraine. And now we're above it. And if you look at it, since Russia, you were invaded Ukraine, it's moving straight up. It's moving straight up. And that data, that point that data I just gave to you, that was from yesterday. 3.4-1. Yeah, it's tracking oil prices.

Yeah, it goes to oil prices, but maybe it's overstating the case because it's oil, but nonetheless. No, it's still concerning, yeah. And that's the key, I think, driving factor between two different scenarios, a scenario where inflation kind of moderates back down when, you know, Russia-Ukraine abates as an issue and oil prices come back in, when the pandemic has faded away and supply chain. gains right themselves and labor markets get back to something more normal. But if we have

inflation expectations that come on hinge and untethered, then you get into a situation where you might get into some kind of wage price spiral where wages feed on prices, prices feed on wages. That's a much more endemic, persistent form of inflation. And that could be a problem. And that's where the Fed would say, hey, I got to raise interest rates much more aggressively because I got to break that cycle. I don't want to get into that, that kind of environment and, and push on the economy a lot of a lot of time. That's a fodder for, that's a fodder for a recession. Exactly. I'd say that's a concern. So speaking of expectations, I know you guys are going to go into the big topic. No, we've been in the big topic. All right. Well, my kids are coming in and out of the big topic.

Yeah. Yeah. I got to run. My kids are expecting dinner. Oh, you got to go? Yeah, sorry. No, no, no, no, no. That's the first time he's, you know, he's giving us the boot there, Chris, but he knows we're in good hands. Yeah, go ahead. No, I'm only teasing. I'm only teasing. No, no, please. You'll free. All right, Ryan, thanks very much. Talk to you later. Yeah, take care. Okay, one more thing on oil, and then I want to talk a bit about non-energy commodities, and that's the outlook for oil. Okay, this is the way I'm just going to frame the way I think about this, and then you guys tell me if you think the frame is a good

one, if it's right, wrong, how would you change it, you know, so forth and so on. And this is going to the outlook now, because we're talking about the oil price outlook, which is really critical, obviously, to what's going on here and how it's all going to play out. So my thought is that, you know, the issue is demand and supply. And right now, because of Russia's invasion of Ukraine, the West, the U.S. is putting increasing sanctions on Russia. And one of the most recent developments is that the U.S. and some private sector companies and I think some other countries like Canada are no longer buying Russian oil. So that means that that's coming off the market. And, you know, it could go, it might be able to go someplace else. It might be able to go to China or someplace else.

But that's a pretty hard pivot, even just physically doing it, you know, taking it because it's coming into the U.S. or Canada, now you've got to turn around and ship it in a another direction. That's not easy to do, and that's certainly going to happen very quickly. That oil has to be replaced by something, and we talked about U.S. oil frackers kind of kicking into gear, and we might get more oil there. The Saudis might produce more oil, UAE, some other Iran, so forth and so on. But if you do the arithmetic, and this is an assumption, this is the outlook, I'm assuming that about a million, million-half barrels a day kind of get dislocated here that that's Russian oil that's not being consumed in the global market.

We've got to replace that. And that means temporarily higher prices. And that's my baseline outlook, meaning the most likely scenario. And in that, if that's right. And I'm also assuming that, you know, Russia, Ukraine, things kind of start to resolve themselves a bit towards the second half of the year. And if that's the case, the peak in this dislocation is between now and mid-year, one to one-half million barrels a day.

If that's the scenario, and again, it's my baseline view, that gives you oil prices on average. They're higher now, but on average between now and mid-year of about 100 barrels a dollar. That's kind of where we're, remember, we're $75 a barrel before all this began. I'm saying it's going to average $100 a barrel through mid-year, and then it'll start to come back in. And by this time next year, it settles in back close to that $75 a barrel oil that we had before all of this. And I'm obviously waving my hands here a lot about, you know, how things play out in Russia and Ukraine. And obviously, it's a mess. And the Ukrainian people are getting, you know, just crushed.

And it's just, you know, very disconcerting to watch. And I don't know how it's going. I don't know exactly how this all plays out. But that's the kind of the working assumption. If, however, things go astray, it plays out less well. And other countries start to impose sanctions on Russia and stop buying. oil, and let's say two to two and a half million barrels a day come off, then that's consistent with oil prices, oil prices they could do about $125 a barrel on average through mid-year.

And then in the dark scenario, the darkest scenario, even Europe, which is very dependent on Russian energy supplies, says no more, you know, we're going to sanction. And three to three and a half million barrels come offline. And by the way, I didn't mention it, but Russia produces about five million, a little over five million barrels a day for export. So let's say three to three and a half million barrels is the peak between now and mid-year. Then you get oil prices that are closer to $150, you know, per barrel between now and mid-year. And if you kind of do the arithmetic, you know, what does it mean for U.S. gasoline prices and U.S. economy and given all the kind of the incillary effects

that would have on confidence and sentiment and stock prices and inflation expectations and monetary policy, I would say if we get the baseline $100 a barrel, you know, we'll be fine. The economy will be, will grow, you know, strongly this year. Everything sticks to script. We get back to full employment by the end of the year and inflation starts to moderate significantly by next year. But if we get into that 125 buck a barrel and certainly that 150 buck a barrel, that's the fodder for recession, particularly $150 a barrel. You know, that would be gasoline prices, you know, that are, you know, well north of $5 per gallon, probably closer to six. And that would be, given all the nonlinear areas in the economy and sentiment and everything else, that probably

would mean, you know, recession. Okay, that's a long-winded kind of story, narrative, description of the outlook. What do you think? Is that a good way of thinking about things? And let me begin with Juan. Juan, do you have a perspective on this? Anything you would say about that frame and just the numbers? I think that, yeah, I agree with the baseline.

It seems that the most likely scenario right now. Russia, I think that when we start seeing the data coming, where it's going to see a decline in production from Russia, which is probably the same as exports. We don't usually get data on export production. We'll give you that number around 1, 1.5 in the next few weeks. I think there is, it's a scenario that is, it's an scenario that is, more, it has more uncertainty than usual for even for all prices because it all depends on

the conflict that, you know, who knows how it's going to play out. But there is a, there could be another scenario where prices don't go up to 150, but they also stay higher for longer, let's say, around 100 through the end of the year. Just because this sanction, that are already in place, financial sanctions, oil companies pulling out of Russia, that's going to have an impact on Russia's capacity to maintain all production. Remember that just to keep production steady, you need to invest aggressively every month, just to keep production steady. So if you're not able to do that, production capacity starts to decline over time.

So if that is that the case, if we say one million barrels, permanent destruction of capacity, I mean, that could be replaced by Saudi Arabia or other countries, but there are no many countries with that capacity even for to add one million barrels. I would say that there is only only Saudi Arabia is the only country with that kind of spare capacity. So if Saudi Arabia step in and increases production by one million barrels that will leave their global spare capacity like a very thing. And markets usually react to that. Yeah, interesting point.

Yeah. That goes back to your point about U.S. frackers not kicking into gear because they're fearful that it's a supply shock and supply might come back. But here you're saying, well, maybe not. certainly not in Russia. So hopefully that kind of starts to work into the thinking of these fractures and they start putting in more rigs and produce more wells. And I think it has been in the news that the US met with the Venezuelan, the Venezuelan government. And that kind of, I was, I think it was unexpected. Most people got most people by surprise. And Venezuela oil industry is

devastated. I mean, they wouldn't be able to increase output by more than 200,000 barrels in maybe like a month or two. But I'm thinking that the government's thinking about approaching Venezuela might be more like a medium or long-term play. Because Venezuela do have the potential to be a major producer. But it will require a lot of investment and it will take maybe one, two, or three years to get there. So there could be a scenario where the government many thinking, well, this situation in Russia is going to be, it's going to get worse before it gets better. And we have to think more like down the road. How do we get that output replaced from somewhere else? Got it. Got it. Tom, Tom, any, what do you think about the way I kind of frame

the outlook and the outlook itself? Anything to add there? Yeah. So I think the way you framed it is accurate. And that's what I expect as well, about a million barrels coming off. There's one little bit of color that I'd add to that, which is that we were expecting even before the invasion for a really large increase in supply this year from countries other than Russia. You know, the OPEC block is planning on boosting production by a lot. So we were actually expecting supply this year to exceed demand before the invasion, which meant that there was going to be oil flowing into inventories. So even if Russia, even if we lose a million barrels per day from Russia, that doesn't necessarily mean that we have a shortfall in supply that we can't meet demand. Probably we still will be

able to meet demand. It'll just be much more evenly matched between supply and demand this year. Got it. That's a good point, too. Thank you for that. And Chris, anything you want to add? First of all, do you agree with that frame and the kind of the numbers broadly and anything else you want to add? Yeah, absolutely. I agree with the frame. I think that there's two things I would like to add. One is as important as oil is, it's not just oil. If I were to throw a number out, the number I would have thrown out would have been 345, and that's the price of natural gas in euros per megawatt hour. And you know what it was last year? 40? 16. Oh, my goodness. Okay. Yeah. So, and also, you know, the U.S. has actually stepped up to the plate in December of the

U.S. became the number one exporter of liquefied natural gas and two-thirds of those cargoes go to Europe. But gas is very important. And then the second point that I would want to make that it's a little bit absent from this conversation, you know, I'm an energy economist, but I'm also a climate economist. And one of the things that we look at are carbon price scenarios where, okay, well, what is the energy price that is necessary to get us off of fossil fuels? Okay. Well, here we have basically a carbon tax that has been put in.

place by Russia's invasion of Ukraine. And instead of running to renewables, everybody wants to drill more, you know? Everybody wants to put up freaking and coal in the ground. So how is this transition going to happen? You know, if, you know, we get the signal from the market, now we want to undo it. Yeah. Although. And that goes to the misery index.

It would be nice to be able to plan for it and adjust to it. And not just like, yeah. That's where I would want. That's where I was trying to go, which is to say basically, like if this transition is going to happen, it's going to have to be a gradual one because the political consequences of a sharp and sudden increase are too much to bear for any president at any time. Got it.

Okay. So we're all kind of coalescing around the kind of on average between now and midyear, 100 bucks a barrel, something like that, which would probably translate into what would that translate? That translates to pretty close to, what, $4.50 for a cost of? a gallon of regular unleaded nationwide? Something like that. Yeah, that's kind of, okay.

So that's kind of the benchmark for our forecast. Hey, I have another colleague here that we've kind of not brought into the conversation. I apologize. Jesse, Jesse, Roger. Jesse, you've been on Inside Economics already at least once, maybe more. Yeah, yes, I have. Hi, Mark. Great to be with everybody.

Wonderful conversation. Unfortunately, you're not going to be with us very long. Because this is what I'm going to do, Greg, Jesse. I'm tired. And I think everyone's tired. I'm going to cut the conversation. It was a great conversation about oil. And I don't want to do, you know, I don't want to short shrift what's going on in the rest of the commodity complex because there's a lot going on.

So I'm going to have you come back. Okay. And then we're going to talk Mano, Amanda on that. Is that okay? All right, a return ticket. You got to, yep, I'll take it. Yeah, I'll take it. Okay, good.

And so we'll have you back in the next week, two or three, to talk about non-energy commodity prices, wheat, corn, neon, palladium, titanium, you know, all the stuff that's gotten really messed up here, aluminum. That's good. I mean, it's great to have the first cut of all this expertise and all these great views going back and forth. So at least be able to say that. I heard it before everybody else.

Well, I do want to thank everybody. Any parting words, Chris, to the group? Anything you want to mention? Just thank you to the experts here. Yeah, well done. I actually learned a lot. Just straightening out those numbers for me on production and consumption was very helpful. I appreciate that.

And the tutorial on rigs and wells all very good. Horizontal drilling. Horizontal drilling. Oh, of course, jelly donut and taramisu. How can we forget that? I mean, that's a beautiful thing. I always use baclavah. Oh, okay.

Mr. Lafacca, I'd say the baccala is even, oh, and you're Greek. Oh, what the heck? He took your bacclovaa. Yeah, I went Italian. I mean, I was making an olive branch to Doridis here, you know, with the Surma, too. The Italian. It didn't make me hungry, so. Yeah, very good.

Okay. Well, very good. And obviously, we'll be covering Russia, Ukraine, you know, as we go here on the podcast and webinars on Economic View. So please let us know what else you'd like us to talk about. I mean, obviously, this is top of mind, but we like your suggestions. So with that, we're going to call it a podcast. Thanks, everyone.