MacroVoices #317 Philip Verleger: Central Bank Policy Trumps Energy In Economics

Episode Summary

Executive Summary: Macro Voices episode 317 centered on the macro impact of war, inflation, and the energy transition. Eric Townsend and energy economist Phil Verleger argued that oil and diesel remain structurally tight despite SPR releases and diplomacy, while gold’s muted response to geopolitical risk remained puzzling. Verleger warned of higher energy prices, recession risk, and the need for smarter policy and investment discipline.

Main Topics: Oil market tightness and volatility (Priority: 5/5): Verleger argued oil remains under-supplied despite SPR releases, diplomatic headlines, and short-term price pullbacks. He emphasized hoarding, low inventories, and persistent diesel shortages as the real drivers of price structure. Inflation, recession, and central banks (Priority: 5/5): The discussion framed inflation as a central-bank problem driven more by wages, logistics, and food than energy alone. Verleger expects tightening to continue and sees recession as likely, though not necessarily sufficient to collapse energy prices immediately. Energy transition and grid constraints (Priority: 4/5): Verleger described the shift away from fossil fuels as necessary but poorly sequenced, arguing that the current grid cannot support full electrification and that the transition requires new generation and distribution models. Gold’s weak response to geopolitical risk (Priority: 4/5): Eric and Jonathan Aud discussed why gold and miners were not reacting strongly to war and inflation. Aud suggested the broader backdrop remains bullish, but generalist investors remain hesitant and mining shares are still digesting capital-market discipline issues. Investor behavior and fossil fuel underinvestment (Priority: 4/5): Verleger said investors are turning away from oil, gas, and coal not because policy alone is forcing them out, but because they see better returns elsewhere. He argued this capital retreat will keep fossil fuel prices elevated. Private placement logistics and mining equity structure (Priority: 3/5): Jonathan Aud explained how Dakota Gold handled early shareholder liquidity before listing, reducing the risk of post-listing dumping and illustrating a more investor-friendly capital-raising process. Policy responses: price controls, cash transfers, and hedging (Priority: 4/5): Verleger strongly opposed price controls, preferring direct consumer support and market-based demand reduction. He also proposed tighter rules on oil call-option writing to reduce speculative volatility.

Key Arguments: Oil prices remain structurally bullish because temporary bearish headlines (SPR releases, ceasefire hopes, diplomacy) are unlikely to overcome tight physical markets, low inventories, and hoarding behavior. Diesel is the key bottleneck: refining capacity for low-sulfur products is constrained, and diesel margins were cited as extremely high, putting upward pressure on crude and inflation. Central bankers care more about inflation expectations and wages than headline energy prices; energy matters, but it is not the main macro driver of inflation. A recession may be caused by high energy prices rather than simply causing them; however, energy markets can stay tight into a recession if spare capacity remains limited. The energy transition is technically possible, but not with the current grid and infrastructure; electrification will likely require distributed generation, batteries, and a very different power system. Price controls are a bad idea because they create bureaucracy, distort incentives, and worsen shortages; targeted consumer cash payments are preferable. Oil investors have largely abandoned the sector, which supports the thesis that fossil fuel supply growth will remain constrained and prices elevated until demand destruction or transition catches up. Gold’s muted performance despite war and inflation is puzzling, but the longer-term setup may still be constructive as global alliances shift and central banks remain hawkish.

Data Points: Macro Voices episode: 317 - Episode number of the podcast Recording date: March 31, 2022 - When the episode was recorded S&P 500 move after FOMC: up 500 points - Patrick noted the rally since the FOMC meeting S&P 500 level briefly reached: over 4,600 - Recent market strength discussed at the start U.S. dollar index resistance: 100 - Eric identified this as a major round-number resistance level Crude oil inventory draw: 3.4 million barrels - Weekly U.S. crude draw reported Cushing crude draw: 1 million barrels - Portion of crude draw from Cushing, Oklahoma Gasoline inventory build: 785,000 barrels - Weekly U.S. gasoline inventories Distillates inventory build: 1.4 million barrels - Weekly U.S. distillate inventories U.S. crude production: 11.7 million barrels/day - Cycle high mentioned during inventory discussion Recent U.S. crude production increase: 100,000 barrels/day - Increase from the prior period 10-year Treasury yield: 232 basis points - Yield level at time of recording after a move from 170 to 250 bps Earlier 10-year Treasury yield low: 170 basis points - Level before the sharp rise Recent 10-year Treasury yield high: over 250 basis points - Peak reached during the prior three weeks Oil hoarding premium on Brent: about $16-$18 per barrel - Verleger’s estimate of prompt premium driven by scarcity fears Diesel/heating oil hoarding premium: about $40 per barrel - Verleger’s estimate of prompt premium for distillates OPEC spare capacity estimate: 3 to 3.5 million barrels/day - Verleger’s estimate for Saudi Arabia and UAE combined Strategic stocks used: 5% - Verleger said only a small portion of strategic stocks had been released Global strategic stocks: 1.5 to 1.6 billion barrels - Approximate total stocks referenced California gasoline consumption decline: 18% - Aud/Verleger reference to EV penetration and reduced gasoline use Gold price: around $1,925/oz - Current gold price referenced by Jonathan Aud Pretium/Brucejack transaction value: $3.8 billion - Bob Quartermain’s prior success cited by Aud Brucejack mine capex: $750 million - Project development and build-out cited by Aud Homestake output: over 40 million ounces - Historical gold production from the district Homestake mine operating period: 1876 to 2001 - Historic range of production mentioned Dakota Gold land package growth: 3,000 acres to over 42,000 acres - Expansion using Barrick data and acquisitions Dakota Gold listing date: April 5, 2022 - Expected first trading day on NYSE American New ticker symbol: DC - Dakota Gold’s NYSE American symbol

Pivotal Quotes: "Wars are not generally bearish, the stock market, except in the very beginning." — Eric Townsend: Explaining why equities can rally during wartime even amid central bank tightening "This time will be different because there's a huge problem with wheat from Ukraine and Russia, so we may have very high food prices." — Phil Verleger: Describing how the current inflation and recession backdrop differs from prior cycles "You don't want price controls. There are some, the financial markets are out of control." — Phil Verleger: Arguing against government price fixing while acknowledging speculative excess in derivatives

Implications: Energy prices may stay elevated even into recession, keeping inflation and policy pressure high. Investors should watch diesel, inventories, and spare capacity closely, while recognizing that electrification and gold investing both depend on capital, policy, and market discipline.