MacroVoices #335 David Hay: Why US Energy Prices Can Rise Even In Recession

Episode Summary

Executive Summary: Macro Voices Episode 335 centers on the clash between near-term recession fears and longer-term scarcity in energy and resources. Eric Townsend and guest David Hay argue that underinvestment, geopolitics, and policy distortions are creating a durable energy crisis even as crude prices correct on weak demand. They also discuss greenflation, gold, the strong dollar, Fed policy, and relative opportunities in energy equities, credit, and metals.

Main Topics: Oil market selloff vs. structural energy shortage (Priority: 5/5): Eric and David debate whether crude oil’s break below the 200-day moving average is a temporary recession-driven decline or the start of a deeper move. Both maintain the world still lacks spare capacity and that the medium-term energy backdrop remains bullish despite short-term demand destruction. Greenflation and the cost of the energy transition (Priority: 5/5): David revisits his 'greenflation' thesis, arguing that the transition to green energy is not free and is already raising costs via scarce materials, capital constraints, and policy-driven underinvestment in fossil fuels. Geopolitics, Russia, China-Taiwan, and market complacency (Priority: 4/5): The hosts discuss how Chinese military actions around Taiwan and the ongoing Russia conflict could eventually support crude and gold, though markets are currently reacting with surprising calm. Gold, inflation, and the strong dollar (Priority: 4/5): Gold is framed as a geopolitical and fiat-currency hedge, but its recent muted response is attributed largely to dollar strength. Gold miners are seen as cheaper than broad equity markets but less compelling than energy. Fed balance sheet, QT, and negative real rates (Priority: 4/5): The conversation highlights the Fed’s slow quantitative tightening, ongoing massive balance-sheet legacy from COVID-era stimulus, and historically negative real rates as evidence of persistent monetary distortion. Relative value in energy equities and credit (Priority: 3/5): David argues energy stocks remain deeply undervalued versus long-dated crude futures, while also pointing to attractive opportunities in double-B bonds, mortgage-backed securities, mortgage REITs, and some emerging-market debt.

Key Arguments: The recent crude selloff is being driven more by recession expectations and demand destruction than by any resolution of the structural energy shortage. OPEC’s tiny output increase and stated lack of spare capacity confirm that the world cannot quickly restore pre-pandemic energy availability. Fuel switching in Europe from gas/coal to oil could add substantial crude demand and offset part of recession-related weakness. Green energy growth is real but constrained by expensive inputs such as lithium and copper, plus China’s dominance in critical supply chains. Gold should benefit from geopolitical stress and de-dollarization, but dollar strength has masked that effect in U.S. pricing. Energy equities have fallen more than crude itself and may represent better value than the underlying commodity, especially on long-dated valuation metrics. The Fed has not normalized policy; QT remains minimal relative to the size of prior stimulus, and real rates remain deeply negative by historical standards. A deep recession could still push oil lower before the structural shortage reasserts itself and drives prices higher again.

Data Points: Macro Voices episode: 335 - Episode identifier Recording date: August 4, 2022 - Show recorded before close of Thursday session Crude oil price: $88.12 - Referenced during discussion when crude broke below the 200-day moving average Crude 200-day moving average: $88.74 - Key technical level discussed repeatedly Dollar index: 105.71 - Near the 106 level discussed as strong 10-year Treasury yield: 2.70% - Yield cited as having bounced after approaching 2.5% OPEC production increase: 100,000 barrels per day - OPEC’s announced September increase described as de minimis SPR draw referenced: 4.7 million barrels - Part of the weekly U.S. inventory headline U.S. crude inventory headline: +4.5 million barrels - Headline build due to SPR accounting despite a small underlying draw Underlying U.S. crude draw: -0.2 million barrels - Net crude inventory movement before SPR effects SPR draw component: -4.7 million barrels - Offsetting draw from the Strategic Petroleum Reserve Cushing inventory build: +1.0 million barrels - Weekly inventory data Gasoline inventory change: +0.2 million barrels - Weekly inventory data Distillates inventory change: -2.4 million barrels - Weekly inventory data Europe natural gas price: $58/MMBTU - Used to illustrate extreme European energy stress Oil equivalent gas price: ~$18/MMBTU equivalent - David’s conversion comparing oil to European gas Potential European oil demand from fuel switching: ~800,000 bpd to 1 million bpd - Estimated additional oil demand from switching away from gas/coal Russia-related supply loss estimate: 1 to 2 million bpd - David’s rough estimate of potential Russian oil loss XLE performance since prior interview: +36% - Energy ETF performance cited as proof of the bullish call S&P 500 performance since prior interview: -10% - Comparison showing energy outperformance Nasdaq performance since prior interview: -17% - Comparison showing energy outperformance Midstream performance since prior interview: +15% - Relative performance comment Energy equities undervaluation vs. 2-year crude futures: ~60% undervalued - Based on slide showing equity index versus long-dated futures Copper current annual consumption: 24 million tons - David cites current global copper demand Copper used in green areas today: 1.5 million tons - Portion currently tied to green energy uses Copper demand forecast: 30 to 50 million tons by 2035 - Estimates cited from Goldman Sachs and S&P Lithium price increase: 1,000% - Illustrates scarcity in green transition inputs World Health Organization estimate: 2 to 3 million deaths per year - From poor indoor air quality due to dirty household fuel use Natural gas exports to Europe: ~10 billion cubic feet per day - U.S. LNG export discussion Freeport LNG outage impact: ~2% of U.S. exports to Europe - Facility outage described as tightening supply further U.S. gas production share exported: ~11% - Share of total U.S. production directed to Europe Fed rate vs inflation spread: ~7 percentage points negative real rate - Used to emphasize historically loose policy Stock, bond, crypto drawdown theme: Largest post-WWII wealth wipeout in first half of 2022 - Slide discussing simultaneous declines in stocks, bonds, and crypto

Pivotal Quotes: "I think we are at the early stages of a multi-year energy crisis." — David Hay: David summarizes his long-term thesis on energy scarcity and underinvestment "The world could get by without gold, although it never will." — David Hay: David frames gold as a hedge but places greater emphasis on consumable commodities like energy "We can't get there from here, and we've made policy mistakes that are going to prevent us from getting there for years to come." — Eric Townsend: Eric argues that the energy transition has been mishandled and cannot be completed quickly with current supply constraints

Implications: Listeners should view near-term oil weakness as potentially cyclical, not structural. The strongest opportunities may be in undervalued energy equities, scarce commodities, and select credit, while gold remains a hedge against policy and geopolitical stress.