Moneybeat: Oil and nuance don’t mix

MARY REICHARD, HOST: Coming up next on The World and Everything in It:The Monday Moneybeat.

NICK EICHER, HOST: Alright time now to talk business markets and the economy. Financial Analyst and advisor David Bahnsen joins us. He's head of the wealth management firm, the Bahnsen Group, and he joins us now. David, good morning.

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Well, David, I'd like to begin today talking about energy production in the U.S. Big story just a few days ago in The New York Times, and I will quote: "Only three years after U.S. oil production collapsed during the pandemic, energy companies are cranking out a record 13.2 million barrels a day. That is more than Russia or Saudi Arabia. The flow of oil has grown by roughly 800,000 barrels a day since early 2022. Analysts expect the industry to add another 500,000 barrels a day next year. Now this is a Republican talking point that we in the GOP are going to bring energy independence. The Democrats all they talk about are energy sources decades into the future, if ever. But in reality, it appears the Biden administration is out-drilling the Republicans. How can that possibly be?

BAHNSEN: A lot of it is in the setup of things. The Biden administration doesn’t drill oil, the companies drill oil, and the decision to increase or decrease production is made at the corporate level. But then there is a governmental influence on it.

Right now you’re getting over 13 million barrels a day despite the various impediments to production, not because of them. The government can’t stop a certain degree of extraction from already permitted land where there’s already rigs, but they can discourage the ongoing growth of oil production by not allowing drilling on federal land and by refusing to give new permits for new wells or new rigs.

Ultimately, the reason domestic production is outdoing Saudi production is because we had been underproducing in terms of demand to the degree that OPEC+ just said, “we’re not going to stand for it.” Domestic producers backed off of their production to see prices go higher. And their argument was that if the federal government of the United States was not going to refill the strategic petroleum reserves that they flooded the market with last year to keep prices down, we’re not going to do our part to keep prices down. So there is a lot of blame to go around, and the Biden administration has been very discouraging of new ongoing investment in infrastructure for oil and gas.

But it is true that the Republican talking point lacks the nuance I wish it would’ve had, but nuance doesn’t do really well with regard to political talking points. And it doesn’t do really well in media headlines sometimes either. Ultimately, the issue is not the absolute number of barrels being produced. It’s the number of barrels being produced relative to demand. You can be producing 12 million barrels and be over producing, and you can be producing 13 or 14 million and be under producing. And that’s the issue: We have to produce to the level necessary to clear demand. And our oil and gas producers firstly want to avoid over producing because they’ve been burned twice in the last decade by over investing in production then having the market go south and it becoming a really horrid situation for their financial structure. But secondly you have the ESG movement, the political and cultural incentives and influences. They’re all anti-fossil. There’s a lot of factors at play. But the basic talking point that we’re now producing high levels oil, that’s true, we are now producing more, but we’re producing more despite these things, not because of them.

EICHER: Well, you mentioned the Strategic Petroleum Reserve, David, and you've been critical of drawing it down as has been done. Do you think that now is the time to start refilling it?

BAHNSEN: Well, you can’t refill 300 million barrels at once in this case. They’re only going to be able to do a few million at a time without moving the price. And I think that if the price were anywhere in the 70s—and earlier in the year it was in the high 60s—I’d be taking nibbles at trying to refill. And I don’t want to overly complicate this (and I don’t say anything to defend this administration on energy policy, I think they’ve been abysmal,) but it is also true that in addition to the fact that they haven’t done it or had the will to refill it, there’s a difference between the price in the 70s, where it may be and then the refiner spreads. And that’s part of the issue: The oil that has to go back to the strategic petroleum reserves is of a different grade. So that pricing differential matters, too, and that gets a little more confusing.

EICHER: Alright, David. We're into the first full week of December, so you've had a little bit of a chance to review the month of November for the stock market. Looks like stocks have erased the summer swoon and had their best month of the year, then followed up Friday, December 1 by setting another new high. It's going pretty well in the stock market, isn't it?

BAHNSEN: Yeah, it was an unbelievable month of November. And then as we go into the month of December here, there is still heavy dependency on just a very small number of companies that are quite expensive. I wrote a whole piece at Dividend Cafe that was published over the weekend that deals with the valuations of artificial intelligence and the challenges for investors trying to go into that space. But the overall market had a heck of a month in November and looks like it’s going to finish the year in pretty good territory.

EICHER: Okay, so before we go, David, another story moved last week, a revision to Q3 Gross Domestic Product. And normally, I wouldn't bother you with the GDP revision, but this one kind of caught my attention. And it did dominate the wires because of the figure, a revision upward to 5% annual economic growth in the July, August, and September quarter. That's quite a number. And it's really what you want to see. And again, I hesitate to bring it up, because it's basically a mathematical adjustment of a thing we've already talked about. But as I say, 5 caught my eye. Does it have any significance to you?

BAHNSEN: Well, the story doesn’t have significance to me simply in the revision. It was a significant story just in what it was originally, which was that the GDP number was much higher than expected. It’s important for people to realize that these quarterly numbers are being annualized. It isn’t like they’re saying, “Wow, we were up 5% in the quarter so that means 20%, annualized.” They’re taking the quarterly number and analyzing it. And yet, it’s a big deal relative to the predictions of those who thought we were going to be in a recession at this time, whereas now you’re getting some of that highest growth in the GDP number that we have seen in a long time.

However, as we talked about when the original number came out—more important than the revision itself—the importance is in the source of that growth. Basically, the consumer part is always pretty strong, and it was strong. And you know my bias around the fact that I don’t believe the consumer weakens very often in America. It takes really a removal of credit, or a big decline of income for our consumers in this country to show as a slow down in spending. So then you have to look to the business investment, government spending, and then inventories. And the inventory issue was really where a lot of this came from. And that is highly transitory, in that you can have an inventory build up that adds to GDP one quarter and then removal or reversal that takes away the next quarter. So I don’t generally get real excited about it, and when that’s the source of GDP growth, and ultimately, when I don’t see a big move up in non-residential fixed investment (which is business CapEx investment) then I don’t view a lot of it as being likely sustainable.

But out of the CHIPS Act, and the infrastructure bill—some of these government spending programs—there is a certain amount of money that has come into the economy that has that investment that will help to bring those numbers higher. So it shouldn’t be a surprise that that is useful to GDP in the short term.

But of course, in the long term, the question is, “What was the cost?” You can’t pull money from one source of the economy to move it into another source and think you got a free lunch. This is economics 101. But I don’t think that there is a surprise that in the short term, some of those governmental spending programs are adding to GDP right now, but they will take away from GDP in the future.

EICHER: Okay, David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. You can keep up with David and his personal website, that is bahnsen.com. His Weekly Dividend Cafe you can find at dividendcafe.com. David, thank you so much. We'll see you next time.

BAHNSEN: Thanks so much, Nick.

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