Plain English with Derek Thompson - Why Gas Prices Are Skyrocketing—and an Ingenious Plan to Bring Them Down

Episode Date: June 21, 2022

Expensive energy is an economic, psychological, and political scourge. Nominally, gas prices are at a record high. Adjusted for inflation, they could break the all-time record if they rise just another 35 cents. We should be desperately curious to solve this problem; so, that’s what this episode is all about. Today’s guest is Skanda Amarnath, the executive director at Employ America, which has quickly become one of my very favorite sources of research and commentary on economics. He is also the coauthor of an ingenious plan to increase oil capacity in a way that could reasonably bring down gas prices. This episode gets pretty deep into the weeds of policy and oil markets. But it was one of the most educational conversations I’ve had on this show. And I hope you find it similarly stimulating. Host: Derek Thompson Guest: Skanda Amarnath Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up, guys, Rachel Lindsay here, and I am teaming up with your favorite Ringer podcasters to deliver the Bravo drama and news that you've been craving on morally corrupt. It's the show about all things Bravo, from the housewise to summer house and everything in between. We'll be mentioning it all every week. Check it out on Spotify and the ringer.com. Today's episode is about skyrocketing oil and gas prices and an ingenious plan. to bring them down. Average gas prices in the U.S. have hovered around $5 for the last few weeks. Nominally, that is an all-time high.

And even if you adjust for inflation, gas prices could still break the all-time record if they rise just another $0.34. So energy is really expensive right now. And at risk of stating the absolutely obvious, expensive energy is very, very, very important. It is important economically because higher oil and gas prices make it. more expensive to do or move anything, not just cars and people, but your family on a road trip, goods that are trucked across the country, diapers, medicine, steel, furniture, everything. Expensive energy is also important psychologically, in part because gas prices are the only

price printed in size one zillion font on the side of the highway. And finally, expensive gas is important politically. In 2016, the researchers Harbridge, Krosnick, and Woolridge, looked into the question of how high gas prices affected presidential approval ratings. And they came to the conclusion that, quote, an increase in gas prices led to a decline in approval, independent of the volume of news media coverage of gas prices. End quote. You got that?

This is not a news media effect. People just really, really, really hate high gas prices, and they take it out on the president every single time. Like, I'm a pretty even-keled guy, But I do get really pissed off when people push back against this point. There have been a bunch of liberals, not going to say names, who have been arguing over the last few months, years, that Americans just need to sort of get over inflation,

that the media shouldn't cover high gas prices. Expensive energy is not a news media sci-op. It is an economic, psychological, and political problem that we should be desperately curious to solve. and solving it is what this episode is all about. So you've got the Biden administration out there talking about a gas tax holiday or gas card rebates, relief for consumers, cash. Now cash is a demand-side solution.

But expensive energy is not just a demand-side problem. It's a supply problem. There isn't enough oil in global markets to satisfy demand. So rather than try to fix this crisis with more cash, I think we ought to try to solve it with more capacity. That brings us to our guest, Skanda Amarnath. Skanda is the executive editor at Employ America, which has very quickly become one of my favorite sources of research and commentary on economics. And he is the co-author of what I think is a pretty ingenious plan to increase oil capacity in a way that could reasonably bring down gas prices with, within a few months. Now, warning, this episode gets kind of deep into the weeds of policy and

oil markets, but I loved it. It was one of the most educational conversations I've had in this show, and I hope you find it similarly stimulating. I'm Derek Thompson. This is plain English. Skanda, welcome to the podcast. Thanks for having me. Really happy to be here. So I just did this whole thing in the open about why I think gas prices are a real problem, and not just a tolerable inconvenience. But I'm really curious to hear from you before we go into your plan. Let's say you're talking to someone who believes climate change is incredibly serious and important, someone who generally thinks oil and gas companies are, you know, evil, and someone who would prefer not to think about inflation because it makes the Biden administration look bad.

Like, what do you say to someone who wants to know why is expensive energy important in the first place? So energy is, to my mind, incredibly important because it's an essential input within our existing economic structure, how we produce things, how we distribute goods and services, how we actually consume as a society. It is true that we would like to be able to shift our consumption patterns away from fossil fuels, crude oil, natural gas. These are fundamental to how we transport goods, how we transport people, how we rely on electricity. It's the sort of fundamental power source for electricity in America. And that is relevant to the production of everything. It's also incredibly relevant to the standard of living of everyone in America. That doesn't mean we should be dependent on it forever, but it does mean we need to think seriously about how we manage our current standard of living,

against the future we want to build. And that's a great answer. And it's very much in keeping with my own philosophy, which is that energy prices are a line item on every receipt. You should care, if you care about the price of things, you should care about the price of energy. And it's why energy inflation like we're seeing today is such an economic, psychological, and political problem.

So let's talk about oil markets. Oil markets are really weird. Like in most markets, when a price goes up, it sends a very clear signal to producers to make more stuff. or sell more stuff. So like a really obvious example, even if a simplistic example, it's like Uber. When Uber needs more cars in the road, the price is surge and then more drivers come online. But one of the really interesting and big problems with the oil market right now is that this dynamic is not playing out. Oil prices are up. And you have the Biden administration literally

like begging oil companies to increase output, but oil companies have been slow to respond. And a huge part of this is that they're once bitten and twice shy, or maybe twice bitten and three times shy. Oil prices have crashed several times in the last eight, 15 years. And so a lot of executives are afraid that another crash will come if they start to plow all this money into drilling up more oil, right? That's a huge part of the reason while oil rigs have not increased as fast as oil prices have increased. Is that right? That's exactly right. So we saw in the, a little bit of potted history here. The early 2010s is the fracking revolution, where the

U.S. became this very elastic supplier of oil. When prices rose, and as they stayed high, U.S. production, U.S. investment was brought online with a six to nine month lag or so. There was a response time that actually allowed

U.S. production to fill the gaps that existed. And that was pretty critical to not just supplying markets, but also oversupplying them. So markets became oversupplied, and we had a big crash from 2014 to 16, where we had oil prices were in triple digits in 2014. They fell to 25 bucks a barrel by early 2016. We had a sort mini crash in 2018-19, where again, US production was ramping up, ramping up, and that also

changes how OPEC behaves. And we had a mother of all crashes in 2020, when we had negative oil prices, which is itself a kind of a weird thing that's just suggesting. I'm not sure. some people remember this, but the price of oil for maybe one, two, three weeks, or maybe just a handful of days went negative in 2020. So if you're an oil company and you're thinking about bringing on new production, drilling new wells, bringing more oil online, you are thinking, wait, what just happened two years ago? The price of oil collapsed. What happened four years ago? The price of oil collapsed. What happened six years ago or seven years ago? The price of oil collapsed. So they're afraid that if they build all this production to bring more oil online, that the price of oil will collapse and they will lose a lot of money because financing these rigs is really expensive and it might turn out that the price of oil that they're digging up is going to be nowhere close to the price of oil that's selling today.

That's a huge part of the fear of oil companies right now. Yes. And you see it in their actual performance in terms of shareholder return. their ability to deliver return on capital. Yes, profits are really high for the oil and gas companies right now. They were terrible for seven, eight years, especially from 2014 onwards, where you had really negative returns for the energy industry. And it was precisely because it was actually,

ironically speaking, very relatively easy to be able to scale up investment. Everyone wanted to do it. And there was enough actors who were able to scale. scale up investment. And so you were left with these really oversupplied markets very easily. And that ended up in a situation where the industry takes on a lot of price risk. Right. So whenever prices go down, profits go down. When prices go up, profits go up. It's a very cyclical industry. Looking at one year's profits is not actually very representative of what's going on in terms of how they're thinking about their decisions.

Because for a lot of companies, they lost so much money. This is the period when they're actually starting to break even on a more holistic basis. And I think that's just a context that's worth keeping in mind when sort of assessing their decision-making why they invest or why they don't want to invest. I'm reminded of the fact that in a previous episode, we had an investment analyst talk about the fact that at one point during the pandemic, Zoom, which we are now using to talk about oil prices, was worth more than Exxon. Today, Exxon is worth 10 times more than Zoom. So that little factoid actually explains a lot of why gas prices are so expensive right now, right? That factoid is a great explainer of how gas prices or oil prices collapsed during the pandemic.

Crude oil prices crashed, but now they're soaring. Exxon is worth $300 billion, but oil producers are still afraid of opening new wells because they remember that the price keeps crashing. So you have a plan to solve the problem of under supply and under investment in oil capacity. This is a plan that you hatched with Arnavdata, who is a friend of the podcast, and Alex Williams at Employ America. It's a plan designed to give oil and gas companies the certainty to drill. What is your plan? Sure. So our three-part plan rests on certainty around, first, call it demand and pricing.

Second is certainty around financing. and third, which probably not as important as the first two, but still relevant as cost certainty. Okay, let's kick it off with demand and price certainty. Where should we start? So it starts with the Strategic Petroleum Reserve, which is how the government is able to store crude oil for the long term. So it actually sticks it in these salt caverns, deep underground, and we can store a lot of crude oil. We typically, stored more than we have right now, but we are trying to release as much as we can to meet current demand, right? So current demand either has to come from existing inventories or current

production. If current production isn't enough, you draw down from your existing inventory. The Biden administration has already released some oil from the strategic reserve. I know you don't think this is sufficient because it doesn't increase productive capacity in the future, but it's still helpful, right? That's a helpful sign. That's helpful. But it's rarely enough. when you think about the future trajectory of demand and supply. And so there's actually more to be done in terms of providing the demand in the future that helps give producers more confidence. So producers have seen this boom-bust environment for the last seven, eight years, and they

are understandably concerned about what's the evolution of that market going to look like? And if I produce, how am I going to make sure that I don't, I'm not left whole. holding the bag. And tell us how we would do that. What's our policy tool to convince oil and gas companies that it's not hopeless to open new wells? Sure. So when you think about how we're going to avoid leaving producers holding the bag with, in terms of their decisions now to invest in future production and to make sure that the future production

actually is economical, it actually checks out, that's where the government's unique ability to store crude oil long-term can be very helpful, can serve as an insurance, a demand insurance function. So if the government is a buyer of crude oil, and if the government contractually agrees right now to be able to buy crude oil in the future from U.S. producers, there you have the kind of arrangement that actually gives a lot more certainty for a producer to invest today. Let me try to reframe what you're saying. I think I understand it. We've released all this oil from the Strategic Reserve. That's good. That's step one. But the problem is we need to bring more oil online. So how to be encouraged that? How to be encouraged the oil and gas companies to finance the

exploration of more oil wells if they're afraid the price of oil will keep crashing. What you're saying is the government can come along and be like, we will promise to buy future oil from you, the gas companies, oil and gas companies. We promise to buy oil from you at this price, at no lower than this price. And that will overcome the uncertainty that these companies feel, about the possibility of oil markets collapsing when circumstances change, when the Russian war ends or OPEC changes its mind, right? Is this the idea that a price floor is critical in terms of encouraging more exploration and drilling right now?

I think that's critical, but I'll just go one step further. The government doesn't even have to be forcing the producers to sell to the government at a specific floor price. It just has to offer the option, right? So if you have the option to sell at a floor price, but let's say global oil markets could be tight for multiple years right now, given what's going on in Russia. And because of that, prices could stay high. If prices stay high and producers want to take advantage of that by selling in a tight market and prioritized to selling to the highest bidder, that option can still be left

to them. Right. You've called this price certainty. You've called it insurance. Others might call it a put option, whatever word, whatever phrase you want to use. The point is, the U.S. government can guarantee that oil companies can help us right now, can come to the rescue of energy markets today, and they'll be rewarded with the certainty that someone will buy their stuff for a minimum price. That's exactly right, that you could actually create the kind of price certainty, and that price certainty is huge in this market. I can't underestimate, I understate just how important it is to have some kind of downside

protection, how valuable that is to the industry, because this is a hypercyclical market, hypercyclical business. And if you can provide that kind of downside protection and the option to sell to the government in a time of, I call it oversupply, time of oversupply crisis, that's just incredibly important to be able to make the financial math work in terms of how am I going to actually get a return on my investment. And just to draw a sharp contrast here, you've got Biden out there begging the oil and gas companies to pump more oil because it's their patriotic duty. And the oil companies are like, nope. So what you're saying is like, don't beg. Don't appeal to like the airy virtue of patriotism.

If you want them to pump more oil, set a price floor, guarantee return on investment. So that's part one. Demand and price certainty. Part two is financing certainty. What is that? So the first plan we're dealing with the strategic petroleum reserve serving as a buyer, of last resort. That's the kind of demand certainty and it can probably demand certainty at a certain price. The second is the exchange stabilization fund from the Treasury Department providing financing certainty. They could do loan guarantees. They could really change the proposition for shareholders in terms of their willingness to engage in accelerated investment. Let me stop you right there. What is the exchange stabilization fund? So the exchange stabilization fund is a

I guess for lack of better term, a pot of money the Treasury Department has. It is devoted to sort of the conditions that make exchange rate stability possible and making sure stable exchange rates across countries possible. In the past, it has been used, I would say legitimately, but in pretty strained ways. So in 2008, it was used to guarantee money market funds that were subject to uncertainty. So it was kind of critical plumbing after Lehman collapsed. And so that guarantee was justified under the guise of it is important to financial stability. And financial stability is important to exchange rate stability.

I think that is correct. But it is like more, it's pretty intenuated because money market stability and exchange rate stability don't always go hand in hand. All right. So we've got a pot of money at the Treasury Department that is earmarked for exchange rate stability. but we can basically use it for all sorts of economic and commodity shocks, and this is a shock. So we can use this money for things like loan guarantees. And I want to do a quick, plain Englishy glossary on that. Loan guarantees.

Everyone knows what a loan is. With a loan guarantee, that basically means that if the borrower defaults, the lender is still taken care of in some way. So quick, quick example. Let's say I want to open a cookie store. I want $10,000. I say, sconda, will you lend me $10,000? You're like, no, I am not optimistic about your baking skills at all.

But then our mutual friend, Arnab, comes along, and he's like, Skanda, if Derek goes belly up, I'll still pay you a portion of the debt, right? Now suddenly giving me $10,000 is much less risky to you, and you can make the loan. So in this way, you can see the loan guarantee stimulates economic activity. It creates a loan that otherwise wouldn't exist without Arnab. And so in this case, in the oil markets, rather than the cookie markets, if the U.S. government offers loan guarantees for oil and gas companies and exploration firms, that makes all sorts of economic activity here likely that otherwise wouldn't occur, right? Is that a big part

of why it's so significant? I think it's incredibly important and significant because of that certainty that those who are actually in the private sector doing the financing have that kind of certainty. We do this for residential, for mortgages, right? We do this in terms of the government provides some kind of backstop because otherwise housing activity is also very cyclical. And so typically private bankers made mortgages very expensive in the absence of some kind of government support that they would be a guarantor in periods when recession defaults emerge. We had this problem with the Great Depression. Similar problems are analogous here, right?

That we have a super cyclical industry. Bankers are rightfully skeptical about return prospects in this industry because their performance has been very poor. It's been hypercyclical. And how do I know that you know exactly when to invest and when not to invest? Well, right now, socially, there's just a, there's a misalignment in terms of investment. we're not getting the scale of investment that's going to be needed to sort of cushion against some of these risks and shocks we're facing.

All right. So quick review. We've released oil from the Strategic Reserve. We have replenished it by setting a price floor for oil. We're increasing finance and investment and exploration with these loan guarantees backstopped by the Exchange Stabilization Fund at the Treasury Department. What is the third part of your plan again? Third is cost certainty.

There's probably limited room to do. this aggressively, but there's room to work with industry on particular bottlenecks that are actually important. Steel pipe, fracking sand, machinery parts, these have all been in shortage over the last few months for reasons that the government could likely play a constructive role in coordinating, working with suppliers. Again, there are probably some funding issues where backstopping their own inputs in production and capital expenditures would be very high. helpful. This could be done through the Defense Production Act. Obviously, the Defense Production Act has been the news, probably a little bit over-glamarized, but it still has some helpful tools here

for cost certainty. Yeah, so connect that dot for me. A lot of people are talking about the Defense Production Act, and here you have this problem of cost certainty for the oil and gas companies. What is the Defense Production Act, first of all? Give me a one-sentence explanation of that, and then what are two, sentence explanation of that, and then tell me how it could help to resolve some of the cost and certainties. Yeah. So the Defense Production Act, the latest iteration of it came out of the Korean War. We're sort of trying to deal with, we have certain production needs for the war.

We need to make sure that's prioritized. How do we prioritize it? We've used it in the pandemic for vaccine development. So we've managed to expand how it's used. In this case, we're dealing with something that's not quite a formal war in terms of U.S. going to war with anyone directly. but at the same time, it's actually a little bit closer than maybe the pandemic. It was used very successfully in the pandemic to actually give a lot of certainty and commitments

around individual suppliers for actually the distribution of vaccines involves incredibly large amount of inputs. It's not just about even the sort of pharmaceutical companies that are designing and developing the vaccines, but also all sorts of manufacturers and suppliers and sub-suppliers. So we used it pretty liberally then. I think there's room to use it precisely for that kind of constructive coordinating role in how we go about providing the kind of inputs that are needed. Because if you hear also what, along with a lot of the CEO's own words about how they're reluctant to invest and how they are trying to constrain investment actively and constrain production actively to only a certain amount of growth, they're also worried

about costs going up. And they always worry that if costs are going up, this is probably not a great time for us to invest because it means that our margins are under threat. And then what we, what we plan on delivering back to shareholders doesn't quite materialize because of some costs spike here or there. Costs have been going up on a few key categories. I'd say steel products are pretty important one. There are some things around the inputs around like fracking sand. There's a lot of machinery that used to be used specifically for its parts. But now you actually need more machinery with all of its parts to actually produce, to actually have built, raise rig counts and produce more from more wells.

So let's say we get lucky. And your entire plan comes to fruition. We open the Strategic Reserve. By the way, we've already done that. The Biden administration's done that. But we do your plan. We set a price floor. We stimulate investment.

We use the Defense Production Act to get more steel pipes and fracking sand. When would this help? When would we realistically see this having an effect on oil prices? Yeah, so there's a, from the time you stick a drill bit in the ground to when you actually get production out of a well. That timeline would have been six to nine months prior to the pandemic, something like that. Now with sort of these supply chain bottlenecks with some of the frictions that have emerged post-pandemic around some things around labor shortage, it's probably better to assume things around like nine to 12 months to actually see that kind of response time to actually specifically from when I give you the sort of assurances and certainty

to when you're able to find the units to actually be able to put a rig and get a rig online. There are a lot of people are going to be like, wait, that sucks. Wait, like I'm not going to see lower prices for nine months, 12 months. Is there any way that the prices might come down before that oil actually comes? But that's precisely the point, right? That you actually see prices, you have a forward-looking component to them. And as you get closer in time to when supply can come online, typically market participants are not, like,

there's a lot of stupidity in financial markets and crude oil markets, but they're not that stupid. They can see when supply is actually emerging in the likelihood of supply as it emerges in time. So the actual price effects are sooner. I think that's how soon depends on the market conditions. But I think if you're looking at some like six months to eight months is like very, I don't think I'm stretching there. I think I could try to stretch more and say that it's a shorter response time for crude oil prices.

But what you want is confidence about investment. Right. Yeah. Prices reflect present conditions, but also future conditions. And so if everyone is convinced that the Biden administration, the U.S. government, is going to do absolutely everything possible to increase investment in oil supply, then prices might come down now, even before that supply actually comes online. One question that I feel like some people have to be sort of screaming at the back of their head is,

what about climate change? Like how, why are we investing in crude oil if what we want is for wind and solar and geothermal and nuclear to take over the entire grid? So like, what if I told you, like, look, man, this is a great strategy to increase capacity. It's a very interesting plan to bring down the price of oil in the next maybe six months, maybe nine months. But in the long run, climate change is a much more important phenomenon than high gas prices in 2022. So why not just swallow the pain, encourage people to buy electric cars, carpool, work from home, put solar panels on your roof, do anything except what you're saying, do anything except dig more oil out of the ground? Why isn't that the better strategy for the world?

What do you say to that? So, yeah, so I am very sympathetic to the general goals of building out the infrastructure, physical capacity around climate change, mitigation, reducing emissions. There's a lot of things we can do, we should do. But let's be clear about a couple things. One, there's a lurking risk of significantly higher oil prices. Let's say, $150 a barrel, $200 a barrel. These are not implausible, given.

where inventories are and the potential for production to collapse. And it's a global market. So think about that first. Our production and consumption structures are very tied to crude oil for some key things. That production structure is one in which, even as me, a person who lives in Jersey City, who does not own a car, who actually uses public transit and bike share and lives in dense housing and all walkable, I still rely on diesel to move all my goods around. That's a reality. I should accept that reality, at least for the time being.

And so we're going to have to be clear-eyed about, like, this is the way we consume. Let's try to change the way you consume. The way we're going to change the way we consume is going to require a ton of infrastructure. It's going to require some additional technological development. It's going to require us to scale up and commercialize things like electric vehicles. And so that's going to take time. In that time, there's a whole set of inputs that we need, even for the energy transition for which oil is relevant. And we should be very, very clear about that particular challenge being a consumption challenge and not equivalent to a production challenge. Because what we're actually saying about the price floor aspect is really important.

It's saying that we'll take your excess production offline so that oil prices don't crash and then consumers don't go back to consuming gas guzzlers and SUVs in the quantities that they did from 2014 to 2020. Because we actually were getting a lot more economical about our usage of motor fuel. from 2007 to 2014. Auto makers actually grew a lot more interested in fuel-efficient vehicles, were more willing to go along with higher fuel efficiency standards. It just seemed like that was a natural progression of how we're going to deal with higher oil prices.

So consumers made a lot of progress, and then we saw a lot of backsliding from 2014 to 2020. By keeping prices higher and providing that kind of certainty so that it's not good for oil prices to crash either for the climate or for, in the industry itself. That's a strange bedfellow's coalition that I don't think people quite realize, but it's actually true that like it's not good for either of us in terms of we should be trying to shift our consumption as fast as possible, but we do need to be realistic about what that timeline is going to look like. And we do also have to recognize that like oil is a pretty big part of our standard of living as currently stands.

I think it's such an interesting answer. I never would have thought about this. But it seems totally right that price volatility in oil is bad for climate change. because when the price of oil plummets, then maybe you have all these people who are like, oh, forget electric vehicles, I'm going back to my non-electric Ford F-150 pickup truck. But if the government's coming in and saying, we are setting a price floor for oil at $80 or whatever, they're buying all that excess oil, they're keeping it in the Strategic Reserve, that is a mechanism that helps to keep oil prices stable and not collapse. It's a force for stability.

It's a force for keeping prices from going below their like environmentally unsustainable price. Now, I want to talk about what the Biden administration is doing and not doing, right? The administration has already released reserves from the Strategic Petroleum Reserve. They've done that part of part one in your plan. But now the tone of the Biden administration seems like it's kind of the opposite of the rest of your plan. They're not talking about supply capacity. they're talking about like giving people more money, right? They're talking about a gas tax holiday

or giving people checks or rebate cards to buy more gas from Exxon. What do you think about this idea of just basically giving people money until oil prices come down? I find this incredibly frustrating to hear because it's a way of subsidizing the very commodity that's scarce,

the very commodity that I think it's fair to say Russia has some leverage over sort of the West on because it is sort of a pivotal producer of oil, and that's why there's no oil embargo taking place right now. So this is a critical commodity, and we're trying to subsidize consumption of it. I think we can be honest and realistic and judicious about, hey, we're going to need a certain amount of oil. That's just that is a reality of current U.S. economic production structures and consumption patterns. But why are we trying to gratuitously subsidize it when in general, that subsidy is generally a cross-subsidy,

so it's generally a way to, the consumers will spend more on oil because the price is lower in terms of tax. That's generally going to accrue actually to the producers itself, just very inefficiently. When you say accrue to the producers, what does that mean? It's like you're going to raise demand for gasoline, encourage people to drive more of the margins.

That demand still has to be supplied from somewhere. So then if there's a scarcity, prices adjust, and who gets the winnings of that tax cut. That tax cut is actually a tax cut for producers. It's just very, it's intermediated through all of these different sort of lenses and intermediating mechanisms that make it incredibly inefficient. If we could both manage our demand and try to be a little bit more judicious on the demand side, for those who can, I just want to say this also.

Like people in the U.S., there are plenty of people who are just auto-dependent, dependent on their internal combustion vehicle, can't afford an EV, can't afford to be able to make that switch so easily or drive less. They may be driving the minimum. So those people are obviously hurt by this, and that's not fair to them. At the same time, there are people who clearly could manage

how many vehicle miles they traveled, how much they rely on their internal combustion vehicle, and they could be reducing demand. We're taking that away when we start to say, let's just give a gas cards out, let's subsidize consumption. We could be trying to be judicious about consumption and also be realistic about the production realities in front of us

that we should be trying to scale production to get a healthier balance of supply and demand. We're effectively taking the demand side completely away, and we're subsidizing production through the backdoor, which is very inefficient, because it just feels icky to say, let's work with industry because somehow the industry is evil, and I find that to be, yeah, it's incredibly incoherent.

I find it very frustrating and also very confusing. I thought that people in the bottom, administration and people associated with the Biden administration, we're talking about greedflation and how all these companies like Chevron and Exxon were so incredibly greedy. And now we're talking about a plan that's essentially a direct $100 billion subsidy of Exxon. Like if you give people, you know, gas rebate cards or, you know, checks that can only be used on gasoline or that we expect to be used on gasoline. We're just basically giving them money that we know they're going to give to Exxon, even though we're doing nothing to fix a supply side here. It just doesn't seem very coherent at all to me.

And it makes me think about the difference between trying to solve these problems on the demand side by handing out cash and fixing these problems on the capacity side by increasing supply. Like, I see your approach to these issues on gas prices to be very much in line with an idea that I've written about a lot called the abundance agenda. This is close to Ezra Klein's concept of supply-side progressivism. My abundance agenda idea is this notion that like in industries, whether it's energy or housing or health care, A lot of the major crises that we're facing are crises of scarcity. We don't have enough homes. We don't have enough doctors. We don't have enough clean energy. We don't have enough oil supply at the moment. And most of those shortages are designed. They are the predictable result of public policies to constrict home building and medical residency slots and oil investment. And so this is a topic

that I haven't talked about a lot yet on the podcast, the abundance agenda, but I'm going to talk about it more, and this is a good time, I think, to do so. I would love to know what you think, as a liberal, why do you think there is this subtle and important shift undergoing from sort of demand-side progressivism to supply-side progressivism? I think for the longest time, we have not been particularly descriptive about the supply side. We've not actually, we said a lot of things like, it's very tempting for a lot of people to say, my favorite policies are supply-side policies, actually, because it's actually great. It's like, oh, it's going to lead to more output and lower prices, right? And everyone likes that. But what does that mean in the nitty-gritty?

What does it actually mean industry by industry? Why is it the case that microship bottlenecks have materialized? And what's the reason? What made that happen? And why has it actually had a pretty outsized effect on at least certain subsets of sort of the inflation picture? That part of the mix, I would just say, for the long time, there's been so much sort of easy thinking. naive thinking about how, oh, industries, it's either corporate greed. It's like one aspect of it that can lead to like sort of a lack of descriptiveness. I mean, you can say shareholders are being greedy in one sense, but shareholders also just want compensation for their returns.

And sometimes that's just a very rational thing. So we should be able to describe that part well. We should also be able to describe how these things are connected to each other. Well, and I'll just say there's generally a lot more eagerness to talk about things at a hyper aggregated level. There's aggregate supply. Something I do that I like. is raising aggregate supply, something that you do is either hurting aggregate supply or somehow

is just like sort of cheaply demand-related. But if we look at these industries, what stops them from investing? What stops them from actually wanting to do more? Being able to really parse through the reasons, like the oil industry gives you plenty of reasons for why they're not going to invest, environmental regulation, and like there are versions of it that are more true or less true. It's going to require like liberals and people on the left to actually engage in these discussions and actually pay attention.

And I will just say, in general, I don't see a lot of that. Yeah, that's a really interesting way of putting it. I don't think I've ever thought of it quite like that, that in order to be a true sort of abundance agenda person, in order to be a true supply-side progressive, you really do have to understand not just the virtue of supply-side abundance, not just the virtue of more stuff, but exactly how these industries work.

Because the answers in housing are very different than, the details in, say, energy or health care. Like, in housing, the easiest answer to the question, why aren't there enough homes in America, have to do with local regulations, environmental regulations, and citizen voice. That is very little to do with, like, why are small oil exploration companies

not drilling right now? Like, it's not, the answer isn't nimbism. The answer isn't citizen voice. The answer is, in part, enormous price volatility over the last eight years has made it extremely risky to invest heavily in building out the capacity to drill new oil. And that is very different from the question of, why does America have so few physicians? Well, that's actually because of like medical residency slots, which has nothing to do with

citizen voice and nothing to do with Nimbism and nothing to do with the price of oil. It's its own bottleneck. And so to be a good abundance agenda representative, you actually have to be a kind of bottleneck detective. And you have to go industry by industry to see what's the bottleneck here in healthcare? What's the bottleneck here in energy? What's the bottleneck here in housing? And that's fucking hard. It's really annoying if you want a really easy answer to everything to draft yourself as a supply-side capacity bottleneck detective. I co-sign all of that. And I think that that is, it does make it really hard when you start to

get more granular and you're sort of going into the microeconomics and how it feeds up to the macroeconomics. of all these industries, and they're all relevant on some level. Healthcare is relevant housing for how people's standard of living, standards of living evolve. So we need to, I think the values of being a bottleneck detective is like that, I think that's got to be part of it, right? That's where everyone should be eager to be accurately descriptive. And that means like some lower tolerance for BS, lower tolerance from BS from other people

who are making politically convenient claims. And also that can be people who are just in partisan politics, but also people who are from these industries who sometimes put forward certain lines because they, like, look, the oil industry has said a lot of things that are the cause of their woes.

And somehow they always seem to be the same things, even as conditions change. So there's a good reason to take them skeptically. But at the same time, there are also good ways to identify useful information about what's constraining their behavior and not sort of cast everything and these kind of like everyone's acting for nefarious reasons.

It's the, you don't have to believe everyone's rational actor, but you can say that like there are certain motivations that are clearly going to be prioritized, especially financial motivations. And like, let's just take them, let's try to be descriptive about why these industries have the problems they do, what might be the incentives that are distorting things, what are the institutional frictions that are at play here. That's, I think it has to be critical to this, right? Like if people are going to actually take this stuff seriously,

because otherwise, like, look, Republicans had a long time for this as like supply-side conservatism. And that just meant like, well, if I do any kind of tax cut, no matter how it's badly designed, it's actually supply side because it like makes people want to work more or invest

more. But it's like, where did like we find evidence that actually showed this to be the case? Like, did we, were you super careful about this? Like, no, but it's just like I feel like it. I feel like it. I feel like saying it's supply side because it makes me feel good. I think for us to avoid those caricatures that kind of, I think, plagued a lot of the right, the views about supply side economics on the right, if you want to avoid that.

I think it's for us, it's like, how do you actually keep the sort of descriptiveness really at the forefront? Yeah, fundamentally, I think that the reason that I find your oil plan so ingenious is that it takes the oil companies seriously, but not literally. You're listening and watching what they do in order to understand the kind of incentives that shape oil capacity without thinking that every, you know, single thing that the CEO of Exxon says on every single earnings call is the absolute unalloyed truth. You have to sort of disentangle one of these companies lying and what are they actually

being constrained by certain things that we should potentially unconstrained if what we're interested in is energy abundance. Any final thoughts here? I think that this is an incredibly important issue for a variety of reasons if you want to think coherently about energy transition and climate, but also if we want to think about standard of living and how we're going to actually maintain standard of living during energy shocks. So I think there's a high relevance on politics, foreign policy, economics. So it's an important issue. And there's a lot of matters and substance that are going to be relevant for a whole host of it in industries. How do we manage and mitigate uncertainty constructively in other sectors? What do we need to tailor? So I hope

your listeners can be excited and take something away from that too. I do too. Skanda, Thank you very much. Thank you very much for listening. Plain English is produced by Devin Manzi. If you have a comment, a concern, a question, an idea for a future show, please email us at plain English at Spotify.com. That's plain, no space, English at Spotify.com. Convierte your passion in a business with Shopify

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