Moneybeat - The policy failures fueling high oil prices

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

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

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

EICHER: I want to draw out a point you made over the weekend on your Dividend Café blog, because the big story we’re talking about is oil and gas and you made the point—among many other things—that the foreign policy crisis we have is not bringing a new dynamic into global economics, but rather that it’s exacerbating an economic problem that predates the crisis. Talk a bit about that.

BAHNSEN: Well, I do think that just if, in the context of the Russia, Ukraine, there is a continued energy story, and my Dividend Cafe point about exacerbating doesn't change the fact that the policy flaw is still the same in the exacerbation. And you could argue it's now worse, right? Because of the exacerbation. In other words, if Russia never invaded Ukraine, it is just simply unfathomable to us rational people that we are not taking advantage of our oil and gas capacity for production. And my argument is we're, it's inexcusable that we're not taking advantage of it not only (to) meet our own energy needs to be less dependent on Russian oil and gas, to be less dependent on Saudi, or OPEC, or any nefarious Middle East actor. It's also inexcusable that we're not becoming an exporter. And and so then the rest of Ukraine thing happens. And all of a sudden, well, yeah, I guess I agree with you. Now that oil isn't only $90, but is a whopping 120. Well, oil at 90 is telling the same story. It, this is a policy failure. And here's a stat that I think is worth sharing. We're making a million and a half less barrels per day of oil at 120 than we were when it was at 60 - just over a year ago. Wow. So is that an economic decision? Of course not. There is absolutely no reason for us to not be in a framework of being pro-production. And ultimately, I think public sentiment is changing on this. And perhaps that is a byproduct of exacerbation, but the trend, the need, the dynamic was all in place, even before Putin.

EICHER: What we’re hearing, though, and I hear this and read this everywhere, that you can’t just flip a switch. You can’t solve the energy problem by just flipping a switch, producing oil, and bringing it to market.

BAHNSEN: I mean, there's two things. If you're in a ditch, quit digging, right? Okay, so then what's the inverse of that? If there's something you need to do, start doing it. Yeah, if I need my lights on, and I have one of these things that is slow, you know, not like a reverse dimmer that makes the light come on slowly, instead of quickly. The fact that I need it on quickly doesn't mean I shouldn't just turn it on and really start the process. But I most certainly agree. I don't think this is going to be helpful for people who want a strong political talking point. But there is truth to the fact that we cannot turn on a switch right now and get all the rigs active. However, we could have a year ago. And the reason that they weren't was partially because of the economics at the time of demand erosion and higher supply. As those things have changed, we went into a supply/demand environment where economic actors are making decisions on the permits that were being denied—tens of thousands of applications for leasing, drilling, permitting, the political pressure, the pressure for Wall Street to cut off capital to the oil and gas industry. So all those things can be reversed so that we can start the process. I mean, this is something that I think we all know, in our own lives, when is the right time to start doing the right thing? Immediately. And so to the extent some of those things take time to bear fruit, I agree. But you need to start it and markets will price it in quicker because markets are forward looking, right? They're discounting mechanisms. So you'll start to bring oil prices down just by knowing production’s going to be higher, it trades on a futures forward curve. And so there is a tremendous benefit to starting the process of doing the right thing. And ultimately, this has to happen, by the way, not just because of supply/demand realities, but environmentally, we will develop the technology to be cleaner emitters. And that way, we will do that by having more production, more incentive that drives greater technological progress. And so I'm convinced that there's never a wrong time to do the right thing.

EICHER: Now, the president is blaming companies for not producing more. It’s not his fault or his administration’s fault, it’s theirs. He points to unused drilling permits. He makes the point that only about a tenth of onshore oil production takes place on federal land. He’s not the hold up.

BAHNSEN: Well, I mean, it's totally incorrect. But it's disingenuous. It is absolutely true that you want to see the energy companies increase production. But when they say something so simplistic, they're ignoring a few things. First of all, they've done everything they can to make it impossible for smaller drillers, for independent companies. The only people that really have the capacity right now - because of capital markets and resource allocation - to flick the switch quicker are the big, huge companies. But to really get on the margin an extra 600,000 barrels a day, you need the smaller players that the Biden administration really went to war with, and that kind of AOC Green New Deal mentality. Look, just look at Chevron stock price, it's $170. It was $50 at the bottom of COVID. It was $100 when Biden took office. So what has he done to hurt Chevron? It doesn't hurt them. But he's hurt 20 other companies in Midland, Texas, and Bartlesville, Oklahoma, and these are the companies that could be marginally moving production higher. So the idea that it's just the White House's fault is not true, but no one is saying that - I'm not saying it. But the idea that it is just the producers that, if they wanted to, they could simply produce more. All listeners know this part intuitively. You don't need to tell a producer to go profitably do something. If they can profitably do it, they're going to do it. It is regulatory hurdles. It is capital access. It is the approval process, the denial of permits of drilling of leases, of federal land, all of this stuff, and everybody knows this.

EICHER: All right, David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group.

You can catch David’s daily writing at DividendCafe.com. Sign up there for his daily email newsletter on markets and the economy. David, thanks again!

BAHNSEN: Thanks for having me, Nick.

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