Episode Summary
Executive Summary: The episode examines how the Biden administration and the Fed are reacting to high oil prices, arguing that oil’s impact on inflation, politics, and growth is too large to ignore. Guests Rory Johnston and Skanda Amarnath propose unconventional government tools—especially using the Strategic Petroleum Reserve and Treasury’s Exchange Stabilization Fund—to flatten the oil curve, reduce price volatility, and incentivize more production, while warning that simplistic fixes like gas-tax cuts or export bans are inefficient or harmful.
Main Topics: Oil as the central macro and political problem: The hosts frame oil and gasoline prices as driving inflation expectations, consumer pain, and political pressure on the White House and the Fed. Using the Strategic Petroleum Reserve strategically: Skanda and Rory argue the SPR should not just be used to release barrels, but paired with forward purchases to lower spot prices while supporting future prices and producer incentives. Producer incentives, backwardation, and investment uncertainty: The guests explain that producers respond to the forward curve, not just today’s spot price, and that backwardation plus capital discipline are suppressing new drilling and capex. Why common policy responses fall short: They critique gas-tax cuts as demand subsidies and refined-product export bans as damaging to allies and U.S. refiners, arguing these do little to solve the supply problem. Refining bottlenecks and global capacity shifts: Rory details how old U.S. refineries, COVID-related closures, Russian supply shocks, and Chinese export limits have tightened global refining capacity and lifted crack spreads. Fed tightening, oil demand, and recession risk: The discussion links higher rates to weaker demand and tighter financial conditions, but warns that this can also suppress supply investment and worsen volatility. Policy optics and the clean-energy transition: The hosts and guests wrestle with the political difficulty of appearing to support fossil fuel production while still pursuing decarbonization and energy transition goals.
Key Arguments: Oil prices matter more politically and macroeconomically than policymakers often admit because consumers focus on headline inflation and gasoline prices. The Fed is implicitly willing to tolerate recession risk if needed to bring oil and gasoline prices down and anchor inflation expectations. The SPR can be used more effectively as a buffer by selling near-term barrels while buying future barrels, flattening the curve rather than simply dumping supply. Producers care more about the 12- to 18-month forward price than the spot price; backwardation weakens the incentive to drill even when current prices are high. Government price insurance or forward-price support could de-risk production and encourage investment without guaranteeing full downside protection in every scenario. Gas-tax cuts are an inefficient response because they subsidize consumption during scarcity and blunt needed demand adjustment. Banning refined-product exports would likely hurt U.S. refiners and allies in Latin America and elsewhere, creating diplomatic and supply-chain problems. The U.S. refining system is structurally tight because new greenfield refineries are rare, older plants have been retired, and pandemic-era closures accelerated decline. Oil shocks can trigger broader recessionary forces by squeezing consumer discretionary spending and by causing the Fed to tighten further. Even if clean energy is the long-term direction, oil and gas cannot be displaced instantly, so resilience policies may be needed in the transition period.
Data Points: Length of Bloomberg Stock Movers reports: Five minutes or less - Promotional intro for the new Bloomberg audio product. Forward price horizon: 12 to 18 months - Rory explains that producers hedge against future prices rather than spot prices. WTI spot price: Above $110 per barrel; around $120 mentioned - Used as the current high spot price benchmark during the discussion. WTI forward price: Decently below $100 per barrel at 18 months out - Illustrates backwardation and weak producer incentives. Treasury Exchange Stabilization Fund size: $221 billion - Skanda says Treasury has substantial unused flexibility in the ESF. Time from rig-count increases to production growth: About 9 to 12 months - Used to show oil supply cannot ramp instantly. US refining crack spreads: $50 to $70 per barrel - Rory says current refining margins are far above normal levels. Normal refining margins: $10 to $20 per barrel - Baseline comparison for what consumers usually pay in refining costs. Time since last major greenfield US refinery: Since 1915 or 1977 (as cited in different industry refrains) - Rory highlights how long the U.S. has gone without major new refinery builds. Cost to restart a Texas refinery: $3 billion - An example of the capital needed to bring closed capacity back online.
Pivotal Quotes: "The Fed implicitly said, I think it is willing to pay the price of recession to get the price of oil down." — Joe Weisenthal / Tracy Alloway discussion: Introductory framing of the macro stakes around oil and monetary policy. "What if you, for every barrel you sold today, you bought another barrel ... 12 to 18 months down the line?" — Rory Johnston: Explanation of how the SPR could be used to flatten the curve and support supply incentives. "The most proximate and binding constraint on U.S. domestic industry ... is one of high propensity for low investment, capital discipline." — Skanda Amarnath: High-level rationale for why producers are not ramping up quickly despite high prices.
Implications: The episode suggests policymakers may need more sophisticated commodity tools to stabilize inflation and supply. If they don’t, high oil could keep feeding recession risk, political backlash, and underinvestment even as the energy transition unfolds.
From the Episode
Expectations to get out of hand. And so the Fed will tighten in response to high oil prices. The Fed implicitly said, I think it is willing to pay the price of recession to get the price of oil down. Yeah. And I've been thinking about this a lot, but it's also like gas prices just loom large in the American consciousness and I guess politically as well. And I got to say, I was at my dad's house over the weekend, and all I heard was grumbling about gas prices and the Biden. Administration for three days. Well, so anyway, it has permeated the public. It is everything. The Fed has made it everything. On our recent episode, the one that we released on Monday with Peter Terzakin, we talked about the challenges of eliciting a supply response and getting more oil out of the ground rapidly. But the stakes are very high. Clearly, the White House is extremely stressed about this, having recently sent a letter to oil companies basically encouraging them to do more.
The release at the end of 2021 by the Biden administration was very much just a oil prices are high, so let's open the taps, let the oil out, and hopefully bring down the price of oil. That's a bad use of the SPR because it's using a finite resource. It's a stock of oil to bring down the prompt price without really anything else. And all else equal, that should reduce the investment incentive or investment signal to the patch. But what if you, for every barrel you sold? Today, you bought another barrel, like Skanda was saying, in the futures market, you know, 12 to 18 months down the line. So, then what you're doing is you're both bringing down the spot price and you're lifting up the back of the curve. So, you're flattening the curve, which both reduces that kind of inflationary pressure on consumers while also increasing the signal to producers to produce more. So, I think that is the way the SPR should be used. And it hasn't been used historically because it's a bit more, you know, technical, a bit more kind of
Production. They haven't been used. We'll get into the details, but why don't you just give us the very high-level idea here of how the White House can use the strategic petroleum reserve strategically to ease oil markets right now? The tools we've laid out are really about addressing what I'd call the most proximate and binding constraint on U.S. domestic industry. And that's one of a high propensity for low investment, capital discipline. For some pretty understandable and rational reasons that have to do with what I'd call uncertainty on sort of in terms of price risk, demand uncertainty, and it's called to some extent also financing uncertainty, depending on where you are in the industry. And so there are tools available within the federal government that can, if you work with industry, you can actually provide that kind of certainty because the government has a lot of long-term storage capacity through the Strategic Petroleum Reserve, which is not trivial, by the way, right? They have physical storage.
About Odd Lots
Bloomberg's Joe Weisenthal and Tracy Alloway analyze the weird patterns, the complex issues and the newest market crazes. Join the conversation every Tuesday and Thursday for interviews with the most interesting minds in finance, economics and markets.