INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi the chief economist of Moody's Analytics and I'm joined by my two co-hosts, Cris deRitis. Cris is the deputy chief economist. And Ryan Sweet, Ryan is the director of real-time economics. Hi guys. How's it going?

Cris deRitis:                       All right.

Ryan Sweet:                      How are you doing in there? How are you doing, Mark?

Mark Zandi:                      I see Cris is in the office. Cris? Yeah.

Cris deRitis:                       Yes.

Mark Zandi:                      You are. And Ryan, you're still at home.

Ryan Sweet:                      I am.

Mark Zandi:                      And I think we're going back soon, aren't we? I saw I'm kind of email from...

Ryan Sweet:                      I think mid-April.

Mark Zandi:                      Mid-April. Is that when people are going back. I guess you can go back already if you want, but you're back.

Cris deRitis:                       Anytime.

Mark Zandi:                      Anytime you want. So what's the April date exactly?

Cris deRitis:                       I think that's an official welcome back to the office.

Mark Zandi:                      An official welcome back. Okay. Always good to have an official one.

Ryan Sweet:                      Where are you?

Mark Zandi:                      Actually, I'm in Sea Island, Georgia at a very interesting kind of think tank function and talking about economics and stagflation. The kind of things we talk about on this podcast. And also defense policy, national security, which obviously given Russia-Ukraine, and China and everything else, very interesting. Not something I get to listen to very often, but fascinating and very important. So that's what I'm doing down here in Sea Island.

Ryan Sweet:                      I appreciate your dedication plugging in the microphone.

Mark Zandi:                      I even walk around with my mic. I mean, I brought my mic to this.

Ryan Sweet:                      Not like Cris. Cris goes on vacation, leaves it at home.

Mark Zandi:                      Yeah, he's speaking from the wine cell or something.

Cris deRitis:                       I brought the headphones though.

Ryan Sweet:                      Yeah, he did.

Mark Zandi:                      Good point. That does show dedication. Okay. This podcast, we will be talking obviously about Russia-Ukraine, what it means through the prism of commodity markets. What does it mean for oil, natural gas, and then non-energy commodities, agricultural products, and industrial gases, and metals? 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 that's the key link between what's going on in 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 going 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. 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? It was obviously pretty ugly, but maybe you can give us a sense of that.

Ryan Sweet:                      Yeah, 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 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 we 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 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 Omicron variant, number of cases is falling, number of people going through TSA check going increased. 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 seventh consecutive month. Rents are usually pretty sticky, but we're going to see some pickup in 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.

Mark Zandi:                      Yeah. There's also a big increase in food prices, correct?

Ryan Sweet:                      Food prices, yep. Good point. They're up 1% month over month.

Mark Zandi:                      Of course, that's also so 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.

Ryan Sweet:                      Even like the core CPI where we strip out the volatile food and energy components, I mean that rose 0.5% month over month. But even there, energy plays an impact. Any good that's transported, diesel prices, fuel prices, all factor into there. So the core CPI doesn't remove all of the impact of energy.

Mark Zandi:                      Right. But the 0.5%, I don't think that was an acceleration month on month, right?

Ryan Sweet:                      That was a deceleration.

Mark Zandi:                      It was a slowing in growth.

Ryan Sweet:                      Correct.

Mark Zandi:                      And that goes to some good news in the report, right?

Ryan Sweet:                      Yeah, used car prices debt.

Mark Zandi:                      Yeah.

Ryan Sweet:                      0.2%. I mean, you got to squint to see the decline.

Mark Zandi:                      No, I know, but the message there is a broader message though, isn't it?

Ryan Sweet:                      Yeah. At least in February, price pressures within the core CPI weren't broadening out too much.

Mark Zandi:                      Yeah. Also, I mean, we've been making the case that once supply chain disruptions start to abate and we saw enormous supply chain disruptions 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 vehicle prices are starting to level. 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 goods price deflation you were just talking about. Maybe we see some big declines here in car prices later in the year.

Ryan Sweet:                      Great. So I think that over the next few months, the big story's going to be energy boosting the CPI. But at the same time, you got to look at the details because we're already starting to see some evidence to your point that some improvement in supply chains because our US supply chain stress index, which takes a number of measures of stress in the supply chains has actually improved over 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.

Mark Zandi:                      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, it feels like... Still high rates of inflation, but it doesn't feel like it's getting worse. Maybe we're starting to see signs that it's going to get better. Would that be a fair way to characterize it?

Ryan Sweet:                      I think so.

Mark Zandi:                      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?

Ryan Sweet:                      For February or March?

Mark Zandi:                      February.

Ryan Sweet:                      February is small, a small amount?

Mark Zandi:                      Really? You really think that. 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.

Ryan Sweet:                      Yeah, I was thinking the actual invasion from that day point. But if you go back when tensions started to escalate, commodity traders started putting a premium on oil, then yes, most of it would've been attributed to Russia-Ukraine. And it's all in March.

Mark Zandi:                      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, oil prices were not quite $100 a barrel, but they were pretty close, up $20, $25 a barrel. And then you had the invasion coming into March and now we're at... I didn't look today, but...

Ryan Sweet:                      $110.

Mark Zandi:                      $110, something like that.

Ryan Sweet:                      Yeah, give or take.

Mark Zandi:                      Yeah, give or take. Yeah. Okay.

Ryan Sweet:                      [crosstalk 00:09:42] your number is $294.50.

Mark Zandi:                      What's that?

Ryan Sweet:                      Is your number $294.50.

Mark Zandi:                      Oh, that's the increase in... We're already playing the game it sounds like.

Ryan Sweet:                      No, I just wanted to... Is it your number because I won't talk about it if it...

Mark Zandi:                      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 typical household that wants to buy the same stuff they did a year ago, today they need to spend $295, almost $300 more a month to buy that stuff.

Ryan Sweet:                      Correct. Yup.

Mark Zandi:                      Yeah.

Ryan Sweet:                      So that kind of highlights the cost of inflation.

Mark Zandi:                      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?

Cris deRitis:                       No, not really. The owners' 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 potentially. So that's going to continue to have an effect over the next few months. That's all I would suggest.

Mark Zandi:                      Yeah, next few months or...

Cris deRitis:                       I think so. Yeah.

Mark Zandi:                      ...longer.

Cris deRitis:                       Longer. Right. Because there's typically a one-year lag between house price increases and the rent increases.

Mark Zandi:                      And just for context, correct me if I'm wrong, but the housing all-in component of the consumer 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 every month on these different things. 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.

Ryan Sweet:                      It's a little bit more now.

Mark Zandi:                      Oh, is that right?

Ryan Sweet:                      With the new weights, I'm looking at it right now, it's 42.4%. That includes shelter, OER, owners' equivalent rent, and then also utilities.

Mark Zandi:                      That's got to be the share of core inflation. That's not overall inflation.

Ryan Sweet:                      Overall.

Mark Zandi:                      No, I don't think so.

Ryan Sweet:                      I have it right in front of me. I'm staring at it.

Mark Zandi:                      No, wait. The housing component accounts for 42% of the overall index.

Ryan Sweet:                      That's what [crosstalk 00:12:24].

Mark Zandi:                      I don't think so, Ryan. Yeah, take a look.

Ryan Sweet:                      I'll double-check.

Mark Zandi:                      Yeah. What do you think, Cris? Is that right?

Cris deRitis:                       That sounds high to me?

Mark Zandi:                      That sounds really high.

Cris deRitis:                       You're saying it's new weights.

Mark Zandi:                      No, I think that's the share of the core.

Ryan Sweet:                      Maybe it's the core.

Mark Zandi:                      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.

Ryan Sweet:                      Yeah, you're right. That was the share core.

Mark Zandi:                      That's share core.

Ryan Sweet:                      [crosstalk 00:13:03] is 32.8%.

Mark Zandi:                      33%, one-third of those. Hey, don't fool with the chief economist is say especially when it comes to data. Right. All right. I'm just saying, just remember that. Okay.

Ryan Sweet:                      Okay.

Mark Zandi:                      No, I get my fair share of statistics wrong for sure. Okay. Let's play the game, the statistics game. And just to remind folks, each of us 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. But it's not too hard that we'll never get it. 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 that would be good. And if it's related to the topic at hand, which in this case is Russia-Ukraine, oil prices, inflation, that kind of stuff. But again, these are loose rules. So did I get the rules right, Ryan?

Ryan Sweet:                      Yeah, you got them right.

Mark Zandi:                      Because I know you're a stickler for these rules.

Ryan Sweet:                      Yeah, you're good, you got them right.

Mark Zandi:                      I got it right. Okay. Very good. And if you do well at this game, you get a cow bell. And I can see one of the cow bells over there in the corner and there's one right next to Ryan. Okay. Very good. Okay. We all strive to get a cow bell. Okay. Who wants to go first? Chris, do you want to go first?

Cris deRitis:                       Sure. 527.

Mark Zandi:                      Is that 527?

Cris deRitis:                       527.

Mark Zandi:                      527.

Ryan Sweet:                      Dollars?

Cris deRitis:                       Nope.

Mark Zandi:                      Is it related to the CPI?

Cris deRitis:                       No.

Mark Zandi:                      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 as the Job Opening Labor Turnover Survey, JOLTS?

Cris deRitis:                       No.

Mark Zandi:                      Np. It wasn't that. It wasn't hires or quits or anything like that? No.

Cris deRitis:                       No.

Mark Zandi:                      527, is it... Go ahead, Ryan?

Cris deRitis:                       What's that?

Ryan Sweet:                      Is it gasoline-related?

Cris deRitis:                       It is energy-related.

Ryan Sweet:                      Energy-related.

Mark Zandi:                      527. Okay. I am going to bring in one of the other guests because they may be able to hang with you, Cris. I'm going to bring in Chris Lafakis. Chris, welcome to Inside Economics.

Chris Lafakis:                    Hi Mark, thank you.

Mark Zandi:                      Chris, is this your first time on Inside Economics? I can't remember.

Chris Lafakis:                    It's my second time on the pod.

Mark Zandi:                      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?

Chris Lafakis:                    Did I get one thumb up?

Mark Zandi:                      One thumb. Okay. One thumb, that's pretty good.

Chris Lafakis:                    We can aspire to get two thumbs, I mean.

Mark Zandi:                      Chris is one of our experts on the oil market and energy market more broadly. And Chris, do you have any idea what Mr. deRitis is talking about here, Dr. deRitis I should say, 527.

Chris Lafakis:                    So is it a price?

Cris deRitis:                       It is not a price.

Chris Lafakis:                    Okay. Is it a quantity?

Cris deRitis:                       It is a quantity, yes.

Mark Zandi:                      Is that to do with oil rigs, oil rig counts?

Cris deRitis:                       Bing, bing, bing.

Mark Zandi:                      Oh my gosh.

Cris deRitis:                       So what is it?

Ryan Sweet:                      That is your most impressive one.

Mark Zandi:                      What are you talking about, I've had many impressive ones over the past [crosstalk 00:16:43]?

Ryan Sweet:                      Yeah, that's good, that's impressive.

Mark Zandi:                      And I schooled Mr. Lafakis, the resident expert.

Cris deRitis:                       Phone a friend didn't work.

Mark Zandi:                      Explain Cris, what's going on there?

Cris deRitis:                       That is the US oil rig count as...

Chris Lafakis:                    Active rotary rigs, Baker Hughes rig count, weekly count. What very well done, Mark. That was amazing.

Mark Zandi:                      I think he's now sucking up. What do you guys think?

Ryan Sweet:                      Don't worry, Mark, you won't get my numbers.

Mark Zandi:                      Yeah, right. So Chris, 527, give us context. Okay.

Cris deRitis:                       Yeah. That is up by eight rigs in the week. Right. So that is pretty significant? That is significant.

Mark Zandi:                      It is significant.

Cris deRitis:                       Well, it had actually been growing recently as the price of oil has gone up, but eight in a week, it's 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's actually up 238 from the time President Biden took office.

Mark Zandi:                      It's still low, isn't it?

Cris deRitis:                       It's still low.

Mark Zandi:                      Compared to pre-pandemic.

Cris deRitis:                       Correct. Pre-pandemic, it was 683.

Mark Zandi:                      683. 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 rig counts are increasing and they're increasing at a pretty good rate here now

Cris deRitis:                       At least in the last couple of weeks. Yeah.

Mark Zandi:                      Last few weeks. Right. Which makes sense. Right. I mean because at these oil prices, these guys can make a lot of money. Right.

Cris deRitis:                       You would think. Right. But the drillers are also indicating that 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. There's also uncertainty around the price itself. Right. So they're not going to rush to the oil fields if this is a temporary increase.

Mark Zandi:                      Go ahead, Ryan, what were you saying?

Ryan Sweet:                      I was going to say that the rig counts feed into GDP in non-residential structures investment. And that helps offset some of the hit to GDP got from weaker consumer spending because of higher prices at the pump.

Mark Zandi:                      Yeah, that's right. So when you think about oil prices and how they impact the economy, it's cross-currents. Right. The negative to hit to the economy is what we talked about. If you 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 US produces a lot of oil. We produce I think, Cris, correct me if I'm wrong, but 20 million barrels a day, give or take, which by the way is a lot of oil. That's 100 million barrels a day globally. So 20 million barrels is a lot of oil. So it's a big part of the economy. And so if you get higher prices, 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.

Cris deRitis:                       Correct.

Chris Lafakis:                    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. That was a near-death experience, that was akin to the 2008 Great Recession for a lot of these mid and small-size oil drillers.

Mark Zandi:                      Oh, I got that wrong. Oh yeah, we consumed 20 million barrels, we produce how many barrels.

Chris Lafakis:                    11.6 million barrels per day. So that gap is like we import around eight and we export around eight or nine. So the US consumes about 20 million barrels a day, but only produces about 11.6.

Mark Zandi:                      Well, square 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.

Chris Lafakis:                    We import a lot of product. So 20 million is kind of the... Demand is measured as petroleum product supply. So that's oil plus diesel plus jet fuel plus heating oil. All of those together, the US' entire consumption is about 20 million barrels per day.

Mark Zandi:                      Oh, you're saying crude plus the refined product is 20 million.

Chris Lafakis:                    That's correct. Yes.

Mark Zandi:                      Okay. Yeah. Okay. But we produce 10 million in crude and how much of crude do we consume, 10?

Chris Lafakis:                    Oh, how much do the refineries use?

Mark Zandi:                      Yeah.

Chris Lafakis:                    It's around 14 million.

Mark Zandi:                      Well, I'm so confused with these numbers. How does this all add up?

Chris Lafakis:                    There's a distinction between oil and petroleum products. And so the US is if you can think of it very close to like a net neutral. We were a big importer, but now we're net neutral, close to it.

Mark Zandi:                      Because I saw a hand, I'm going to bring in our other colleagues that are also oil experts, energy experts. You can see this is a lot of moving parts here, so we need a lot of expertise, Tom Nichols, Tom, welcome.

Tom Nichols:                     Hello. Thank you.

Mark Zandi:                      And Tom, is this your first time on Inside Economics?

Tom Nichols:                     Yes, it is.

Mark Zandi:                      Okay, welcome. It's good to have you. And how long have you been with Moody's Analytics?

Tom Nichols:                     Coming up on seven years.

Mark Zandi:                      Really? It feels like you've been around for like 17 years. It's good though. Seven years. Good. And Juan Pablo, Juan, now you've been with us for 17 years.

Juan Fuentes:                   Almost, maybe like 14. I lost count. Many years.

Mark Zandi:                      Many, many years. Okay. Juan, you raised your hand, can you kind of put these numbers, get them squared away here.

Juan Fuentes:                   So the 20 million barrels as you said is product. So that is not crude oil. That's like what refineries produce and that's 20 million barrels. So from that 20 million, we produce 11.6 crude oil, but we also produce another like seven to 8 million in byproduct.

Mark Zandi:                      Got it.

Juan Fuentes:                   Okay. So in total, you have 11.6 crude, you have to add the eight that is product and this includes natural gas, liquids. That's a big one. That's like almost 6 million barrels and that's 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... Well, they produce [inaudible 00:24:08] crude oil and products, I would say it's close to 20 million because we are basically now not a net importer or net exporter. We are in the middle. We produce as much as we need to consume.

Mark Zandi:                      That makes perfect sense. So it's 20 million in consumption, 20 million in production, kind of what I was saying. But you got to make this distinction. These numbers are confusing because it's crude, kind of the raw material and use fuels. And the number 20 million also includes the final product.

Juan Fuentes:                   Correct.

Mark Zandi:                      Got it. Hey, I got one other question. So when you look at the data that comes from the EIA, the Energy Information Administration, that does a lot of this data calculation, they say I think, correct me if I'm wrong, the global consumption of crude is 100 million barrels a day roughly, is that correct? That's not refined product, that's crude. Isn't that right?

Juan Fuentes:                   No. That's oil liquids. That's what they call oil liquids.

Mark Zandi:                      Oh, so that does include refined products.

Juan Fuentes:                   So that's everything. You don't consume crude oil directly.

Mark Zandi:                      Got it.

Juan Fuentes:                   You consume products.

Mark Zandi:                      Yeah. Okay. So of the 100 million barrels a day of crude and refined product, 20 million is here in the United States, roughly. 20% of the pie.

Juan Fuentes:                   We are still the biggest consumer of [crosstalk 00:25:48].

Mark Zandi:                      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 basically produce what we consume. 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. Negative for consumers, a positive for producers, but net kind of 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 that are produced in the subsequent year of one 10th of 1%. That kind of gives you a sense of it.

Chris Lafakis:                    I would say that it's still a net negative for the US economy because the distribution of the gains is different from the distribution of the expenditures. So for instance, you've heard how energy, there's a historical opposition to raising the gas tax because people say it's regressive. It hurts people on the lower end of the income spectrum the most that have the highest propensity to spend. Whereas, on the producer side, a lot of those are 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 US is energy independent, if you will, 20 million barrels in, 20 million out, it's actually negative for the economy.

Mark Zandi:                      Yeah. I think that's what we're finding. Right. But it's a small negative. If you go from $75 a barrel to $85, that's different than going from $150 to $160 I think. It's kind of a non-linear relationship., but at the prices that we're normally prevailing, $75, $80, $100 a barrel, a $10 a barrel increase results in one 10th of 1% reduction in GDP for the reasons you nicely articulated, Chris. Tom, anything else you want to add on this conversation we just had around oil?

Tom Nichols:                     I think we're going to circle back around to it.

Mark Zandi:                      Okay. Fine. Yeah. Perfect. Before we go continue on with the game, and 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 ringing and debate and discussion about why haven't there been a bigger pickup in oil production in the United States. Oil rigs are rising and they rising more quickly, but why did it take so long? Why aren't we back to pre-pandemic levels, 680 on the rig count? Why are we still below? So Tom, do you want to weigh in on that? And obviously, there's a lot of debate. It's getting a little politicized now too. We had a webinar, I expressed my views on it and I got a lot of pushback and you could feel kind of the political tension starting to build. We don't want to do that. We want to be clear-eyed here. So what's your sense of what's going on here? First of all, do you agree with that characterization of what I just said and what's going on?

Tom Nichols:                     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. In the past decade really, US 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've 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. 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 sand that they need to frack wells, fracking proppants, 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 is the increase in capital costs, along with the regular supply chain issues that everyone's facing.

Mark Zandi:                      Okay. So it's a range of reasons, not one. So again, reiterate, number one is what? Reason for the slow pickup.

Tom Nichols:                     Initially, I would've said it was the getting locked into low expenditure budgets coming out of COVID.

Mark Zandi:                      Number two.

Tom Nichols:                     Supply chain issues.

Mark Zandi:                      And that's everything from labor to material.

Tom Nichols:                     Yeah, labor and materials.

Mark Zandi:                      Sand, whatever they need.

Tom Nichols:                     Exactly.

Mark Zandi:                      And three is.

Tom Nichols:                     Three is capital costs.

Mark Zandi:                      Just the cost of capital here given the shift in capital markets related to climate change and fossil fuels and that kind of thing.

Tom Nichols:                     Yeah.

Mark Zandi:                      Okay. I'm going to stop right there. I'm going to go to Chris Lafakis and then I'm to you, Juan. In your mind, did Tom get that right? Is that ranking how you would rank things or would you rank them a little bit differently? Is there another factor that he didn't mention that you think should be mentioned in the top three?

Chris Lafakis:                    Yeah, I would probably add three factors. I think that there are a lot of factors...

Mark Zandi:                      Different factors or these same factors or different factors.

Chris Lafakis:                    I would build to what Tom said, so three additional factors.

Mark Zandi:                      Okay.

Chris Lafakis:                    He's right on in terms of 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. Another perspective that I would add though, is we're sitting here, this is CERAWeek, 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. Many of us 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 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 5, 10, 15 years down the road. And many of these small and mid-size 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 increase is a little bit durable. And then the last reason that I'd add is...

Mark Zandi:                      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 revved back up is going to take some time. That's sort of what you're saying, right? Right, Tom, di I get that right?

Tom Nichols:                     Yeah, I think what Chris is highlighting is that this trend, 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?

Mark Zandi:                      Okay. Fair enough. Yep.

Tom Nichols:                     Right, Chris, is that...

Chris Lafakis:                    That's right. Because of what we saw in 2015, 2016, which by the way, the active rotary rig count increase that Cris highlighted is the most substantial pickup since that period of 2015, 2016. 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 animal spirits, 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 DUCs back then, where the rotary rig count measures when the drilling rig is working. But after it is drilled, 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 ready-made production to fall back on. It's 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.

Mark Zandi:                      Got it. Okay, Juan, we've 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?

Juan Fuentes:                   I would add two factors there. One is related to 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 early 2000s. That one was a demand-driven rally. So for investors, that was easier to see that it would be a long rally. And it actually lasted from 2002, 2003 until 2008, when the crisis in the US kind of killed the rally momentarily. And then it came back again in 2009 and 2010. This rally is different because it's a supply shock. There is more uncertainty. It could last two weeks, it could last one year, it could last two years. So there is more uncertainty. Everything depends on the price of oil for you as an investor, so there is more at stake, and I will think they will be more cautious.

Mark Zandi:                      That is a very great point that I hadn't even contemplated, but that feels right to me. Prices are up for a different reason that may not be as durable, therefore am I actually going to plunk down these fixed costs that are necessary to start a rig. Excellent point. Sorry, go ahead, Juan.

Juan Fuentes:                   The other one, it's more like from a geography point of view. The US doesn't have as much reserves. Shale oil was never supposed to be 100 years like Saudi Arabia. They can produce for 100 years. Shale oil reserves, they might last 10 years if they keep producing at this rate. So as time pass on, every new drilling is more expensive, more difficult to find. There is more technology required. Every new field is more difficult. The easy ones are gone.

Mark Zandi:                      Got it. Cris deRitis is biting at the bit here to get in. Go ahead, Cris.

Cris deRitis:                       On that last point, I was looking at the Baker Hughes report today, one thing that stood out to me was that 92% of the wells are actually horizontal versus vertical. I would have thought the opposite.

Mark Zandi:                      So explain that for people.

Cris deRitis:                       Well, maybe the experts can explain.

Mark Zandi:                      Explain what that means.

Cris deRitis:                       Seems more complicated.

Juan Fuentes:                   Well, the horizontal is the main technology used for shale formations. So you drill a hole, and then you go horizontal because the oil is trapped between rocks and it's not deep, it's just spread out. There is some guessing when you drill, you don't exactly know how much oil is around that particular well. With traditional extraction, you go deep like in the Gulf of Mexico, you go very deep and there is more certainty to know how much oil is in that particular field.

Chris Lafakis:                    Think about the tiramisu versus jelly donut. And the vertical is the jelly donut, you go down, you put the straw, it comes back to the surface automatically. That's easy, drill it, brilliant. Except Rockefeller got all the easy ones back in 1900.

Mark Zandi:                      What kind of jelly, Chris?

Chris Lafakis:                    Oh, it's got to be cherry. Cherry is the best.

Mark Zandi:                      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. 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 can't get permits, Keystone Pipeline, so forth and so on. What's going on there. Doesn't that matter? It's not even on your list. Chris Lafakis, Juan, Tom.

Chris Lafakis:                    It's not on my list.

Mark Zandi:                      Not even on the list. Whoa.

Chris Lafakis:                    Yeah. I mean, there's things that actually matter and then there's things that people talk about and sometimes those don't exactly match.

Mark Zandi:                      Okay. Anybody want to push back on that one at all?

Cris deRitis:                       I'll play devil's... Why not? Why isn't Keystone XL an issue here, right? Wouldn't we be in a better position if had that been approved?

Juan Fuentes:                   That was supposed to bring the oil from Canada. It doesn't have anything to do with the US production. I think in terms of pipeline, there is no other bottleneck as far as I understand right now. So there is the constraints from the supply side, more about labor supplies, drilling equipment. And to me, that's the immediate constraint. It's not a legal framework because you can still drill in the Permian Basin in Texas or North Dakota. Those are still there. I mean, there are some limitations in some new areas, but all the traditional areas are still open. I think I read that the Biden administration said that there were like, I don't know, a big number of permits that were...

Mark Zandi:                      9,000 permits.

Juan Fuentes:                   Yeah. So that doesn't seem to be the main reason why.

Chris Lafakis:                    I mean, what does this pipeline have to do with the CEO of Continental Resources' decision to drill for some new wells?

Mark Zandi:                      I'm sorry, I don't connect those dots, Chris, what's your point?

Chris Lafakis:                    If you built Keystone Pipeline that would bring oil from Canada to the United States, what does that have to do with the price of tea in China?

Mark Zandi:                      Oh yeah. You're saying that has nothing to do with putting up rigs here in the US. It doesn't make a difference. Yeah. Okay. Tom, did you want to say something? I saw your hand. No. Tom Nichols.

Tom Nichols:                     I think they nailed it.

Mark Zandi:                      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 you're not going to put up a rig unless you can't make money. Right. And if you think about the cost of putting up a rig and starting pumping oil, that's variable. It varies over time. Right now it's probably on the high side because labor is more expensive, 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 rig in the US, it's somewhere around $75 a barrel maybe. It 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 a barrel for any length of time, at least not long enough that it would give anyone confidence that it'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. 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 painting on a broad brush. 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?

Juan Fuentes:                   I think the breakeven point, that's the key variable for drilling. I think that a good source for that is that if Dallas Fed, they release a survey every quarter and they ask all companies what is your breakeven point for drilling. That question goes into the first quarter of every year. Last year, I think it was around 55 to 60.

Chris Lafakis:                    53.

Juan Fuentes:                   This year it's coming up maybe next week. It's coming up soon.

Chris Lafakis:                    Two weeks.

Juan Fuentes:                   I expect a big jump in the breakeven point.

Mark Zandi:                      Yeah. So you think my $75 might be roughly right. We'll see, I guess.

Juan Fuentes:                   That would be a huge [inaudible 00:45:40].

Chris Lafakis:                    Yeah, it's going to be lower than $75, but it's definitely going to be higher because as Tom mentioned the cost of sand and drilling rigs and labor have all increased. But I mean, the survey typically moves by five. 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 US producers, even when this profitable for them to drill, have not drilled.

Mark Zandi:                      Got it. Okay. Well, let's go on with the game. I'm sorry, Tom, go ahead.

Tom Nichols:                     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.

Mark Zandi:                      I do, so please go for it.

Tom Nichols:                     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. 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.

Mark Zandi:                      Got it. Okay. So you can get multiple wells off of one rig.

Tom Nichols:                     Yeah.

Chris Lafakis:                    And you do.

Tom Nichols:                     Yeah.

Mark Zandi:                      And you do typically. Okay. Oh, that's good to know. And then does that vary very much? I mean, is it two wells or 10 wells or 20 wells? I mean, that's just all over the map.

Tom Nichols:                     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 wells as they can in that time. They won't necessarily begin production from all of them right away.

Mark Zandi:                      Got it. Okay.

Chris Lafakis:                    I would say probably eight to 10 is what you would get and you go straight down and then you start going out in branches, 360 degrees. That's the horizontal drilling aspect. And that's 92% of all drilling in the US.

Mark Zandi:                      Cris, you want to [crosstalk 00:47:38].

Cris deRitis:                       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 minds right now in terms of increasing supply.

Mark Zandi:                      Or maybe what's the length of time between a rig and then a well and you get oil.

Cris deRitis:                       Yes.

Mark Zandi:                      What's that like? Is that like weeks, is that days, is that months, what is that?

Chris Lafakis:                    It's about three to four months.

Mark Zandi:                      Really. Interesting.

Chris Lafakis:                    Once you see it to show up in the rigs, it's probably another two months in terms of when it can actually start impacting production. But if a CEO wanted to make a decision today, the oil would show up probably four months from now.

Mark Zandi:                      You said two months.

Chris Lafakis:                    Well, two months for it show up in rigs. So you make a decision, you have to do...

Mark Zandi:                      I see. I'm going to increase production, four months later that's going to show up in oil.

Chris Lafakis:                    Right.

Mark Zandi:                      Got it. Okay. Hey, we forgot about the game.

Cris deRitis:                       Ryan.

Mark Zandi:                      Let's go back to the game. Ryan, I'm sorry, you're up, what's your statistic?

Ryan Sweet:                      11.7.

Mark Zandi:                      11.7.

Cris deRitis:                       Is that a CPI?

Ryan Sweet:                      It has a CPI. It's a calculation, but it includes a CPI.

Mark Zandi:                      I know what it is. Is this what you showed me the other night where you said...

Ryan Sweet:                      No, that's another 11.7%.

Mark Zandi:                      That was 11.7, tell people that one.

Ryan Sweet:                      It is. So that was the retail gasoline price as a share of average hourly earnings for production workers. So it's risen since the pandemic, but it's still much lower than it was in 2008, 2009.

Mark Zandi:                      The cost of gas per gallon divided by dollars per hour for a person working, how much they're earning. So you're saying right now the cost of a gallon of gasoline is 11 percentish of the amount they're making per hour.

Ryan Sweet:                      Correct.

Mark Zandi:                      And that, by historical standard is?

Ryan Sweet:                      Pretty low.

Mark Zandi:                      Pretty low. Right.

Ryan Sweet:                      Yep.

Mark Zandi:                      Yeah. It goes 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 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?

Ryan Sweet:                      I think it was north of 20.

Mark Zandi:                      North of 20. Yeah, 20%. Okay.

Ryan Sweet:                      That's not the 11.7. No.

Cris deRitis:                       I got it.

Mark Zandi:                      You do.

Ryan Sweet:                      I'll be really impressed.

Cris deRitis:                       Misery index.

Ryan Sweet:                      Oh, wow.

Mark Zandi:                      Oh, good one.

Ryan Sweet:                      That's awesome. Good job, Chris.

Mark Zandi:                      That is awesome.

Cris deRitis:                       All right.

Mark Zandi:                      And Cris usually does not get them.

Cris deRitis:                       I know.

Ryan Sweet:                      This is like a unicorn.

Mark Zandi:                      Explain the misery index for everybody.

Ryan Sweet:                      Right. So the misery index is a combination of the unemployment rate and inflation. So Arthur Okun created this back... Correct me if I'm wrong, Mark, was it late 1970s or early 1980s that he created this index?

Mark Zandi:                      I actually did not know that Arthur Okun invented the misery index.

Ryan Sweet:                      I forget which president he did it for, but he did calculate it.

Mark Zandi:                      Okay. I didn't know that. Yeah.

Ryan Sweet:                      And it's just a way of measuring pain for consumers because 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%. Average since the 1990s, excuse me, 8.4%. But it's well below what we saw when we had the high inflation in the 1970s and 1980s. So a lot of people use the misery index as a proxy for are we headed towards stagflation? So that's why I was surprised, you're hearing about stagflation a lot, but by definition, stagflation is high unemployment and high inflation. Right now we have high inflation, but very low unemployment.

Mark Zandi:                      Strong economy. So it's not stagflation. Maybe inflation, but it's not stagflation. Okay. All right. Do you know what the all-time high is on the misery index?

Ryan Sweet:                      25.

Mark Zandi:                      No.

Ryan Sweet:                      No. Did you just calculate it?

Mark Zandi:                      No. Well, I know this. I know things, Ryan?

Ryan Sweet:                      I'm going to have to check this.

Mark Zandi:                      Yeah. He doesn't believe me. 22.

Cris deRitis:                       22.

Ryan Sweet:                      I'm not that far off.

Cris deRitis:                       Well, it was a pretty good guess.

Ryan Sweet:                      Yeah.

Cris deRitis:                       That's half a cow bell.

Mark Zandi:                      Do you think that's a good guess?

Cris deRitis:                       Yeah.

Mark Zandi:                      Well, all right. I'll give it to you.

Cris deRitis:                       I think so.

Mark Zandi:                      It's in the ballpark. It's it has a 20 handle to it. Okay. I know I'm tough. Chris Lafakis is going, man, he's tough. Yeah, I am tough.

Ryan Sweet:                      We're really tough on this. You got to be right. You got to be spot on.

Mark Zandi:                      Right. So 11.7. So that's high in the context of the past 30 years, but 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?

Ryan Sweet:                      Consumer confidence fell, one-year inflation expectations jumped. But that's not surprising. That's food prices, that's gasoline prices, which cause consumers to expect more inflation down the road. Most of it is gasoline. I mean, gasoline just crushes the University of Michigan confidence survey. 81% of consumers expect higher gasoline prices down the road. So I'm not quite sure the other 19% of people, what they're thinking, but the majority of people know that higher gasoline prices are coming. That affects their psyche.

Mark Zandi:                      Well, that was a good one. And, Cris, bravo, that was a good guess.

Ryan Sweet:                      Yeah, Cris, that was really impressive.

Mark Zandi:                      That was really quite impressive.

Cris deRitis:                       Once. Thanks.

Ryan Sweet:                      All right. What's yours, Mark.

Mark Zandi:                      Okay. Are you ready?

Ryan Sweet:                      Yep.

Mark Zandi:                      And I hope this is a good statistic. I'm a little nervous about it, to be frank.

Cris deRitis:                       It's this week, right, this week.

Mark Zandi:                      Yes, it is this week. Actually, I'm going to give you two statistics because they're related and they might help you get to the answer because I'm a little afraid it might be too hard. The first statistic is 3.41%. 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.

Ryan Sweet:                      Related to inflation expectations.

Mark Zandi:                      Very good.

Ryan Sweet:                      All right. Now I just got to figure out which one.

Mark Zandi:                      Oh, very good.

Ryan Sweet:                      Is this the New York Fed's?

Mark Zandi:                      No, it's not the New York Fed's measure of inflation expectations, although that's a good guess. Yeah. How did you know I was going to do inflation expectations?

Ryan Sweet:                      I can forecast you, Mark. Whenever inflation comes out...

Mark Zandi:                      You got a model for me now.

Ryan Sweet:                      Yeah. It's inflation expectation. Is it our pulse combination of inflation?

Mark Zandi:                      No. And what is our pulse index? What is that for the [inaudible 00:54:44]?

Ryan Sweet:                      I didn't check this week.

Mark Zandi:                      No.

Ryan Sweet:                      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 kind of a summary of all inflation expectations.

Mark Zandi:                      Yeah. Okay.

Ryan Sweet:                      I know where you're going.

Mark Zandi:                      Okay.

Ryan Sweet:                      You're going five-year forwards.

Mark Zandi:                      Oh, very good. Which one is that?

Ryan Sweet:                      That is the second one.

Mark Zandi:                      2.35%, yeah. Five-year forwards, you tease it out 10-year treasury yield 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 feds target on CPI.

Ryan Sweet:                      Because they're based on the CPI, right?

Mark Zandi:                      CPI. So core consumer [inaudible 00:55:41], 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, in the long run, inflation is consistent with what the fed... Has credibility in the long run. Okay. So what's 3.41%.

Ryan Sweet:                      Is that the difference between... Yeah, go ahead, Cris.

Mark Zandi:                      Cris got it. He gets the cow bell, baby. He won. Yeah. Way to go, Cris? Although, I have to give a Ryan credit don't you think?

Cris deRitis:                       Yeah, absolutely.

Mark Zandi:                      Ryan, that's for you. That's definitely for you.

Ryan Sweet:                      Chris can have it.

Cris deRitis:                       Once I heard the five-year, breakeven was next.

Mark Zandi:                      That's five-year breakeven. So what that is, is you take a look at 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 that yield plus 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%, 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 TIPS started trading, right, back in 2003. It now 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 invaded Ukraine, it's moving straight up. And that data I just gave to you, that was from yesterday, 3.41%.

Ryan Sweet:                      Yeah, it's tracking oil prices.

Mark Zandi:                      Yeah, it goes to oil prices, and maybe it's overstating the case because it's oil, but nonetheless.

Ryan Sweet:                      It's still concerning, yeah.

Mark Zandi:                      And that's the key I think driving factor between two different scenarios. A scenario where inflation kind of moderates back down when Russia-Ukraine abates as an issue and oil prices come back in. When the pandemic has faded away and supply chains right themselves and labor markets get back to something more normal. But if we have inflation expectations that come unhinged 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 kind of environment and push on the economy a lot.

Ryan Sweet:                      That's fodder for a recession.

Mark Zandi:                      Exactly. I'd say that's fodder for recession.

Ryan Sweet:                      So that's a concern. So speaking of expectations, I know you guys are going to go into the big topic...

Mark Zandi:                      No, we've been in the big topic.

Ryan Sweet:                      All right.

Mark Zandi:                      We're coming in and out of the big topic.

Ryan Sweet:                      I got to run. My kids are expecting dinner.

Mark Zandi:                      Oh, you got to go.

Ryan Sweet:                      Yeah, sorry.

Mark Zandi:                      No. That's the first time he's given us the boot there, Cris. But he knows we're in good hands. Yeah, go ahead. I'm only teasing. Please, feel 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. 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, 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 the issue is demand and supply.

                                             And right now because of Russia's invasion of Ukraine, the West, the US is putting increasing sanctions on Russia and one of the most recent developments is that the US and some private sector companies, and I think some other countries like Canada are no longer buying Russian oil. So that means that's coming off the market and 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. Because it's coming into the US or Canada, now you got to turn around and ship it in another direction. That's not easy to do, and that's certainly not going to happen very quickly. That oil has to be replaced by something. And we talked about us oil frackers kind of kicking into gear and we might get more oil there. The Saudis might produce more oil, UAE, 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 1 million, 1.5 million barrels a day kind of get dislocated here, that's Russian oil that's not being consumed in the global market and we got to replace that. And that means temporarily higher prices. And that's my baseline outlook, meaning the most likely scenario. And I'm also assuming that 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 1 million to 1.5 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 $1. Remember, we were $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 how things play out in Russia and Ukraine and obviously it's a mess and Ukrainian people are getting just crushed and it's just very disconcerting to watch. I don't know exactly how this all plays out, but that's 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 2 million to 2.5 million barrels a day come off, then that's consistent with oil prices that could do about $125 a barrel on average through mid-year.

                                             And then in the darkest scenario, even Europe, which is very dependent on Russian energy supplies says no more, we're going to sanction and 3 million to 3.5 million barrels come offline, and by the way, I didn't mention it, but Russia produces over 5 million barrels a day for export. So let's say 3 million to 3.5 million barrels was the peak between now and mid-year, then you get oil prices that are closer to $150 per barrel between now and mid-year. And if you kind of do the arithmetic, what does it mean for US gasoline prices and US economy? And given kind of the ancillary 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, we'll be fine, the economy will grow 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 bucket barrel, and certainly that $150 bucket barrel, that's the fodder for recession. Particularly $150 a barrel, that would be gasoline prices that are well north of $5 per gallon, probably closer to $6, given all the non-linear areas in the economy and sentiment and everything else, that probably would mean 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?

Juan Fuentes:                   Yeah, I agree with the baseline. It seems that the most likely scenario right now. I think that when we start seeing the data coming, 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 exports, but production will give you that number around one, 1.5 in the next few weeks. I think it's a new scenario that has more uncertainty than usual for oil prices because it all depends on the conflict. Who knows how it's going to play out. But 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 these sanctions that are already in place, these financial sanctions, oil companies pulling out of Russia, that's going to have an impact on Russia's capacity to maintain oil production. Remember that just to keep production steady, you would 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's the case, if we say 1 million barrels, permanent destruction of capacity, I mean, that could be replaced by Saudi Arabia or other countries, but there are not many countries with that capacity to add 1 million barrels. I would say that Saudi Arabia is the only country with that kind of spare capacity. So if Saudi Arabia step in and increases production by 1 million barrels, that will leave the global spare capacity very thin. Markets usually react to that.

Mark Zandi:                      Yeah, interesting point. It goes back to your point about US 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 this. Certainly, not in Russia. So hopefully, that kind of starts to work into the thinking of these frackers and they bring in more rigs and pierce some more wells.

Juan Fuentes:                   And I think it has been in the news that the US met with the Venezuelan government and I think it was unexpected. It caught most people by surprise. And Venezuela's oil industry is devastated. I mean, they wouldn't be able to increase output by more than 200,000 barrels in maybe a month or two. But I'm thinking that the government's thinking about approaching Venezuela might be more a medium or long term play because Venezuela do has the potential to be a major producer, but it would 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 is thinking, well, this situation in Russia is going to get worse before it gets better and we have to think more down the road, how do we get that output replaced from somewhere?

Mark Zandi:                      Got it. Tom, what do you think about the way I kind of framed the outlook and the outlook itself? Anything to add there?

Tom Nichols:                     Yeah, so I think the way you framed it is accurate. And that's what I expect as well about 1 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. 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 we lose 1 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.

Mark Zandi:                      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?

Chris Lafakis:                    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've thrown out would've been 345 and that's the price of natural gas in euros per megawatt hour. And do you know what it was last year?

Mark Zandi:                      40.

Chris Lafakis:                    16.

Mark Zandi:                      Oh my goodness. Okay.

Chris Lafakis:                    Yeah. And also, the US has actually stepped up to the plate. In December, the US became the number one exporter of liquefied natural gas, and two-thirds of those cargos go to Europe. But gas is very important. And then the second point that I would want to make that's a little bit absent from this conversation. I'm an energy economist, but I'm also a climate economist. And one of the things that we look at are carbon pricing 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. Everybody wants to put up freaking holes in the ground. How is this transition going to happen if we get the signal from the market, now we want to undo it? And that goes to the misery index.

Mark Zandi:                      It would be nice to be able to plan for it and adjust to it and not just like...

Chris Lafakis:                    That's where I was trying to go, which is to say basically 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.

Mark Zandi:                      Got it. Okay. So we're all kind of coalescing around kind of on average between now and mid-year, $100 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. 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 Rogers. Jesse, you've been on inside economics already, at least once, maybe more.

Jesse Rogers:                    Yeah. Yes, I have. Hi Mark. Great to be with everybody. Wonderful conversation.

Mark Zandi:                      Unfortunately, you're not going to be with us very long because this is what I'm going to do, 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 short thrift 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 a mano on that. Is that okay?

Jesse Rogers:                    All right, a return ticket?

Mark Zandi:                      Yeah, absolutely.

Jesse Rogers:                    I'll take it.

Mark Zandi:                      Okay, good. 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, all the stuff that has gotten really messed up here. Aluminum

Jesse Rogers:                    Sounds 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, I'll be able to say that, I heard that before everybody else.

Mark Zandi:                      Well, I do want to thank everybody. Any parting words, Cris, to the group? Anything you want to mention?

Cris deRitis:                       Just thank you to the experts here.

Mark Zandi:                      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.

Cris deRitis:                       Horizontal drilling.

Mark Zandi:                      Horizontal drilling. Oh, of course, jelly donut and tiramisu, how can we forget that? I mean, that's a beautiful thing.

Tom Nichols:                     I always use baklava instead of tiramisu

Mark Zandi:                      Mr. Lafakis, I'd say the baklava... Oh, you're Greek. What the heck? He took your baklava.

Chris Lafakis:                    Yeah, I went Italian. I mean, I was making olive branch to deRitis here with the tiramisu.

Mark Zandi:                      Yeah, the Italians.

Cris deRitis:                       It did make me hungry.

Mark Zandi:                      Very good. Okay. Well, very good. And obviously, we'll be covering Russia-Ukraine as we go here on the podcast in webinars on economic view. Please let us know what else you like us to talk about it. 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.