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What's Behind the Rise in Oil Prices · Trumponomics

• 0:03
  Speaker 1: In the price of a barrel of crude oil was
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  Speaker 1: at its lowest point in more than a decade. That
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  Speaker 1: made for pretty cheap gas at the pump. But things
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  Speaker 1: look very different today. It now costs almost three dollars
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  Speaker 1: at gallon to fill up your gas tank in the US.
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  Speaker 1: So why has the price of fuel changed so dramatically?
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  Speaker 1: How much higher can it go? And who will be
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  Speaker 1: the winners and losers in the global economy. Welcome to Benchmark.
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  Speaker 1: I'm Scott Landman, an economics editor with Bloomberg News in Washington,
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  Speaker 1: and I'm Daniel Moss, economics rhiner and editor at Bloomberg
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  Speaker 1: Opinion in New York. Now, before Dan and I get
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  Speaker 1: into a little debate about the economic side of this issue,
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  Speaker 1: we're going to have one of our best in house
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  Speaker 1: experts to talk the out oil. Haveavier Plush is chief
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  Speaker 1: energy correspondent for Bloomberg News based in London. Haveavier, thanks
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  Speaker 1: for joining us on Benchmark. My pleasure. So have your
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  Speaker 1: brief history lesson. First, why did the price of oil
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  Speaker 1: fall so far? Just a few years ago? In one
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  Speaker 1: war is opaque? The oil cartel? In two thousand and fourteen,
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  Speaker 1: OPEG was really worried that ushil production, so think about
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  Speaker 1: North Dakota and Texas was increasing so much that at
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  Speaker 1: one point they were going to lose control of the market.
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  Speaker 1: So what they did was to increase their own production,
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  Speaker 1: bring the price down massively on the hope that everyone
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  Speaker 1: else was gonna get more or less out of business.
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  Speaker 1: It really wore that way. What happened. They created a
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  Speaker 1: massive glot that depressed prices to less than thirty dollars
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  Speaker 1: a barrel and brought the price of petrol or gas
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  Speaker 1: in the United States petrol here in Europe significantly lower,
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  Speaker 1: benefiting consumers. And since then, you know, obviously the American
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  Speaker 1: producers have not exited the market, but the prices come
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  Speaker 1: back up a fair amount. Why has it come back
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  Speaker 1: so much in the last couple of years, Well, after
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  Speaker 1: a couple of years of OPEC really trying that policy
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  Speaker 1: of increasing their own production, trying to get the producers
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  Speaker 1: of the United States out of business, they realized that
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  Speaker 1: it's very difficult to go head ahead with the Texas producers.
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  Speaker 1: So what they did was the opposite. They decided to
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  Speaker 1: cut their own production. So Saudi Arabia made a deal
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  Speaker 1: with Russia with this outside OPEG and it broke a
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  Speaker 1: large qualition of oil producers that decided at the end
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  Speaker 1: of two thousand and sixteen to reduce their production in
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  Speaker 1: the horb that they will bring prices up. It really
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  Speaker 1: has worked and they have got Estra help. For one,
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  Speaker 1: the global economy is doing a lot better than expected,
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  Speaker 1: and that means that we are consuming more oil. Con
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  Speaker 1: the production started to fall in places like Venezuela, where
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  Speaker 1: political mismanagement has meant that production is probably close to
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  Speaker 1: the lowest in thirty years. And then you have geopolitics.
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  Speaker 1: The Middle East looks pretty nasty right now, and particularly
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  Speaker 1: now that we have extra conscience about production in Iran
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  Speaker 1: due to the new senstions from the United States. I
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  Speaker 1: thought OPEC was a busted flush. I recall every couple
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  Speaker 1: of years stories were written or at least a sign
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  Speaker 1: that OPEC was a thing of the past. They couldn't
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  Speaker 1: control anything anymore. The biggest, most influential producers were largely
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  Speaker 1: outside OPEC. Why are we still even talking about these guys?
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  Speaker 1: While I can tell you that in twenty years I
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  Speaker 1: have been covering in OPEG, I have seen people declaring
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  Speaker 1: OPEC that several times, and it has always survived every crisis,
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  Speaker 1: and they have done a lot better than we expected.
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  Speaker 1: You think about every time that Opeque cuts production, we
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  Speaker 1: expecting that they're going to cheat quite a lot, and
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  Speaker 1: that the cats will be about sixty percent of what
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  Speaker 1: they promise. This time around, the big surprises they are
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  Speaker 1: even the over the livery in the production cats are
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  Speaker 1: a hundred and ten percent of what they use announced,
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  Speaker 1: and that's a lot due to Saudi Arabia, which is
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  Speaker 1: cutting more than enough to compensate for everyone else that
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  Speaker 1: is cheating. The Saudis have really broad Opeque alive. Let's
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  Speaker 1: talk about Saudi Arabia. You know, another idea that's been
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  Speaker 1: rammed down our throats is how Saudi Arabia's economy is
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  Speaker 1: branching out in an entirely new direction. The reformist Crown
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  Speaker 1: Prince wants to put oil behind him. The era of
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  Speaker 1: the hydro carbon in the Middle East is fading. How
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  Speaker 1: does that play into all this? Saudi Arabia really wants
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  Speaker 1: to diversify his economy, and he's saying that he wants
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  Speaker 1: to cut his dependence on hydro carbon, but so far
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  Speaker 1: it remains as soil dependent he has always been. Maybe
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  Speaker 1: in the future, if all those reforms take place and
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  Speaker 1: they are properly implemented, the Southist will need less oil
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  Speaker 1: and probably lower prices. So far, what's happening is more
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  Speaker 1: or less the opposite. While they are trying to implement
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  Speaker 1: those reforms, they need a healthy economy, and that is
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  Speaker 1: only happening you have a higher oil price. The International
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  Speaker 1: Monetary Fund believes that Saudi Arabia needs something like eighty
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  Speaker 1: five dollars a barrel to break even his his budget,
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  Speaker 1: so that means that they really need even higher prices
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  Speaker 1: that we are experiencing now to to make it fiscally,
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  Speaker 1: and that is going to be one of the reasons
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  Speaker 1: why the Southis are trying to keep prices as high
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  Speaker 1: as they can. However, how much has the increase in
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  Speaker 1: American production fundamentally disrupted the oil market and made it
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  Speaker 1: a lot harder to reach the kind of prices or
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  Speaker 1: at least sustain at the kind of levels that you're
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  Speaker 1: talking about. Well, US shell production is the biggest factor
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  Speaker 1: and the biggest disruption that we have seen in the
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  Speaker 1: oil market in a very long time. Probably you have
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  Speaker 1: to go to the collapse of the Soviet Union about
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  Speaker 1: thirty years ago to find something of that scale, just
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  Speaker 1: giving you a couple of numbers to put things in perspective.
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  Speaker 1: At the pick about a decade ago, the United States
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  Speaker 1: have net oil imports that includes good oil and refined
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  Speaker 1: products like gasoline. On a net basis, the US was
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  Speaker 1: important about twelve million barrels a day. That's about a
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  Speaker 1: bit more than ten percent of global consumption. Next year
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  Speaker 1: according to JUS government forecast, that will go from twelve
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  Speaker 1: to goin and a half. The last time that the
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  Speaker 1: US imported on a net basis so little oil from
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  Speaker 1: overseas producers was what Dwyis Howard was that the y House,
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  Speaker 1: more than sixty years ago. That gives you a sense
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  Speaker 1: of how profound the disruption of US shale has been
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  Speaker 1: for the oil market. How it sounds like you've just
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  Speaker 1: slayed another sacred cow. As far as the oil industry concerned.
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  Speaker 1: There's no US terminal decline. The US is the swing factor,
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  Speaker 1: Yes it is. I mean that that has been one
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  Speaker 1: of the biggest changes that we have seen. And what
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  Speaker 1: we have seen also is that shell producers, every time
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  Speaker 1: that old peg has attacked then and broad then low
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  Speaker 1: prices meaning pain rather going out to business, they have
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  Speaker 1: got better. They are now linear and miner, and they
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  Speaker 1: can increase production faster than in the past. I was
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  Speaker 1: in Midland at the center of the Permian in West
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  Speaker 1: Texas earlier this year, and everyone thought, why, well, probably
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  Speaker 1: in the past we needed seventy five to ninety dollars
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  Speaker 1: to survive. Today we can do it at fifty dollars,
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  Speaker 1: and that is a lot lower than where the oil
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  Speaker 1: prices today. So what you're saying, or what we're talking
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  Speaker 1: about here, is that the oil market has fundamentally changed
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  Speaker 1: in some ways and in other ways it hasn't, and
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  Speaker 1: some of these issues still remain as that right, Yes,
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  Speaker 1: I mean Salthia Arabia is gonna still needing very high prices.
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  Speaker 1: OPEC has an influence on the market, but a lot
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  Speaker 1: of what is going to happen now for OPEC to
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  Speaker 1: be able to manipulate the price of oil is gonna
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  Speaker 1: depend on what is happening in the US, whether shale
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  Speaker 1: production is growing or not, and we know that is
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  Speaker 1: rowing a lot. So then OPEC needs a bit of
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  Speaker 1: help from the global economy. As long as the global
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  Speaker 1: economy think about countries like India, China, Indonesia are doing well,
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  Speaker 1: then OPEC probably will be able to put prices higher.
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  Speaker 1: When that doesn't happen and global economic growth slows down,
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  Speaker 1: then OPEC is going to be in deep trouble because
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  Speaker 1: US shell production is unlikely to stop going. I'm glad
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  Speaker 1: you mentioned China. What role is oil consumption in China
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  Speaker 1: and its appetite for imports playing in this narrative? It
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  Speaker 1: is very important. Is one of the biggest factors, as
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  Speaker 1: big as the US. It is as big as the US.
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  Speaker 1: China is very close to consume to import as much
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  Speaker 1: oil as the United States. Is not consuming as much,
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  Speaker 1: but China is really the big factor. And in the market,
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  Speaker 1: the intensity of oil demand is not really slowing down
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  Speaker 1: a lot. And what we have seen is when we
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  Speaker 1: thought that maybe demand was slowing down because the Chinese
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  Speaker 1: have already bowed a lot of cars and a lot
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  Speaker 1: of tracks, etcetera, etcetera, we have seen another boom now
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  Speaker 1: in oil demand. This is coming from the petrochemical industry
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  Speaker 1: the Chinese and consuming a lot of plastic, really a lot.
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  Speaker 1: So what are the forecasts, what are the smartest people
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  Speaker 1: saying about where the price of oil will be, say
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  Speaker 1: at the end eighteen or the end of twenty nineteen.
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  Speaker 1: Where do people see it going? And here is the problem.
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  Speaker 1: The smartest people in the room say that the oil
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  Speaker 1: price is gonna be anywhere from above a hundred dollars
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  Speaker 1: to below fifty a barrel, And that very much depends
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  Speaker 1: on what is your view of many factors on the market.
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  Speaker 1: What's gonna happen with Venezuela, what is going to happen
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  Speaker 1: with the tensions in the Middle East and in particularly
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  Speaker 1: in Iran, what is going to happen with the global economy,
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  Speaker 1: and what's happening with Opeque. But I'm gonna tell you something.
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  Speaker 1: Usually it matters a lot in the oil market what
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  Speaker 1: the South is. One. It may be that it takes
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  Speaker 1: a bit of time to get what they want. Sometimes
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  Speaker 1: it could take years, But the South is usually can
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  Speaker 1: get around with their oil price preferences or targets. They hate.
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  Speaker 1: The Southeast hate the world target for the oil price.
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  Speaker 1: I will call it what is their preference, And their
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  Speaker 1: preference today is get the price of oil around eighty
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  Speaker 1: dollars a barrel. So after all these years and all
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  Speaker 1: these economic cycles, Saudi Arabia is still the federal reserve
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  Speaker 1: of oil. You are absolutely right. The sudiast have been
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  Speaker 1: and continue to be the central bank of the oil market.
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  Speaker 1: And it's not only because they can increase and decrease
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  Speaker 1: production to manipulate the price of oil. The Salthias are
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  Speaker 1: the only country in the planet that they are paying
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  Speaker 1: billions of dollars to sustain a spare capacity. That means
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  Speaker 1: that they are sitting into the capacity to increase their
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  Speaker 1: production at very short notice if it's needed, and that's
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  Speaker 1: really their power use in money. In a geopolitical crisis,
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  Speaker 1: something happens in Venezuela, the Saltis are going to be
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  Speaker 1: the ones who can increase production in a matter of hours,
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  Speaker 1: in a matter of days and bring new supplies to
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  Speaker 1: fill the gap. That is where the South is played.
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  Speaker 1: The role of the central bank of the oil market
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  Speaker 1: one that they have been doing in the seventies. And
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  Speaker 1: I don't see anything so futt that he's going to change.
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  Speaker 1: In Javier, it's always educational talking to you. Thank you
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  Speaker 1: so much for joining us on benchmark my pressure. So Dan,
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  Speaker 1: let's talk about the economic impact of oil. Now. I
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  Speaker 1: think there's a really a lot here. You have Trump
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  Speaker 1: tweeting that prices are too high, then he pulls out
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  Speaker 1: of the Iran nuclear deal, which pushes prices up. You've
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  Speaker 1: got an American oil sector that's pumping so much shale
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  Speaker 1: oil that it's totally changed the dynamics of the global industry,
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  Speaker 1: as Javier was talking about. And you have another producer,
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  Speaker 1: Venezuela that's basically in total chaos. And also an economic
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  Speaker 1: angle we're following closely. Here is the tax cut signed
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  Speaker 1: into law by Trump that are being partly negated because
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  Speaker 1: of rising gas prices. For me, I see a lot
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  Speaker 1: of different factors going back and forth on the US economy,
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  Speaker 1: on the global economy, But you seem to think that
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  Speaker 1: it's really just the same story that we've been talking
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  Speaker 1: about for the last thirty fifty years. Well, I'm not
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  Speaker 1: saying the contours of that narrative haven't changed, but it
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  Speaker 1: feels like the more people try to emphasize how it's
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  Speaker 1: different this time, then the more it seems like it isn't.
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  Speaker 1: It's kind of frustrating to see every time the oil
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  Speaker 1: price rises x y z or z dollars. Well, we've
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  Speaker 1: got to have a big, you know, naval gazing exercise
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  Speaker 1: on what it means for the US economy, haven't we
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  Speaker 1: moved on. Well, isn't it possible to see it in
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  Speaker 1: a more nuanced way that that maybe things are a
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  Speaker 1: little different than they were before, because you know, clear
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  Speaker 1: really OPEC doesn't have the total domination power to adjust
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  Speaker 1: oil prices, to control oil prices like they did in
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  Speaker 1: the past, and they haven't been able to get rid
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  Speaker 1: of the American oil industry to to knock them out.
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  Speaker 1: In fact, they've only made America's oil sector stronger. And
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  Speaker 1: maybe the way you're looking at it is that all
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  Speaker 1: these forces have just made the story more boring than
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  Speaker 1: it used to be. And boring is synonymous with good.
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  Speaker 1: Is that what you're saying? In some ways, it's interesting
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  Speaker 1: from a news perspective, but boring in that it doesn't
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  Speaker 1: royal up the global economy as much as it used to,
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  Speaker 1: and yet it does create some challenges for Saudi Arabia
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  Speaker 1: and these other kind of large producers in the Middle East.
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  Speaker 1: You know, I loved hearing Jave's overview. It was a
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  Speaker 1: refreshing tonic to a lot of the hype that we
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  Speaker 1: hear about the US domestic oil industry, about how Saudi
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  Speaker 1: Arabia is supposedly changing. And you know, OPEX obituary appears
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  Speaker 1: to have been written every couple of years, and Lazarus
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  Speaker 1: like it's back. I'm having trouble figuring out whether the
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  Speaker 1: most important thing is the broad narrative or whether it's
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  Speaker 1: the little nuances where things clearly do change at the margin,
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  Speaker 1: but cumulatively have they changed enough. Benchmark will be back
• 15:32
  Speaker 1: next week. Until then, you can find us on the
• 15:34
  Speaker 1: Bloomberg terminal, Bloomberg dot com or Bloomberg app, and podcast
• 15:38
  Speaker 1: destinations such as Apple Podcasts, Spotify, or wherever you listen.
• 15:44
  Speaker 1: We'd love it if you took the time to post
• 15:45
  Speaker 1: a review of the show so more listeners can find us.
• 15:49
  Speaker 1: You can also check us out on Twitter, follow me
• 15:52
  Speaker 1: at scott Landman Dan, You're at Moss Underscore Echo, and
• 15:58
  Speaker 1: our guest Javier is at Pavier v l a s two.
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  Speaker 1: Benchmark is produced by tofor foreheaz. The head of Bloomberg
• 16:06
  Speaker 1: Podcasts is Francesca Levy. Thanks for listening, See you next time.