It’s HOST NICK EICHER. Today, we’ll have a regular discussion about business and the economy. David Bahnsen, a financial analyst, and advisor, is here. David, good morning.
SPECIAL GUEST, David BAHNSEN: Hello, everyone! It’s nice to meet you this morning, Nick.
EICHER: The big story in oil and gas right now is that our current foreign policy crisis is not creating a new dynamic in global economics, but rather exacerbating an economic problem that predates the crisis, which is something you brought up on your Dividend Café blog over the weekend. What do you think about this?
BAHNSEN: My Dividend Cafe point about exacerbating doesn’t change the fact that policy flaws persist in the exacerbation, even if Russia, Ukraine, and their energy story continue. You could even make the case that it’s gotten worse since then, right? because of the worsening of symptoms. If Russia hadn’t invaded Ukraine, it’s impossible for us rational people to understand why we haven’t maximized our oil and gas production potential. Our failure to take advantage of this opportunity to reduce our dependence on Russian oil and gas, Saudi Arabia, or any other nefarious Middle Eastern actor is inexcusable. It’s also shameful that we aren’t exporting our products. After that, whatever happens in the rest of Ukraine happens. And then, well, I guess I’ll have to agree with you. The price of oil has jumped from $90 to a whopping $120. That’s exactly what oil at $90 is saying. This is a failure of policy. And here’s a stat that I think is worth sharing, as well. At 120, we’re producing 500,000 fewer barrels of oil per day than we were at 60, just over a year ago. Wow. As far as I know, it’s not an economic one. No, there isn’t. As a society, we have no justification for not being pro-creation. Finally, I believe that public opinion is shifting in this regard. In some ways, this may have been a byproduct of Putin’s escalation, but it was already in motion before he came along.
EICHER: We’re told, and I’ve read and heard this all over: you can’t simply flip a switch. In order to solve the energy crisis, you can not simply flip a switch and produce oil.
In my mind, there are two things. If you’re stuck in a hole, stop digging. What is the opposite of that? Begin doing whatever it is that you need to accomplish. Yes, if I need to turn on the lights and have a slow-acting dimmer, I can do so more slowly than if I had a reverse dimmer. Despite the fact that I require it to be turned on immediately, this does not preclude me from doing so. That said, I wholeheartedly concur. As far as I’m concerned, this isn’t going to be an effective political talking point. However, it is true that we can not simply turn on a switch and activate all of the rigs at once. We could have done this a year ago. Economic factors such as declining demand and an increase in supply played a role in this as well. We’ve entered 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, permits, political pressure, and the pressure for Wall Street to cut off capital to the oil and gas industry. So we can start the process by reversing all of those things. In our own lives, I think we all know the answer to this question: when is the best time to start doing what’s right? immediately. Because some of those things do take time to bear fruit, I agree with that sentiment. Markets, after all, are forward-looking, right? They’re ignoring the fact that there are systems in place. As a result, just by knowing that production will be higher in the future, oil prices will begin to fall. As a result, starting the process of doing the right thing has a tremendous advantage. In the long run, this is necessary not only because of supply and demand realities but also because we will develop the technology to produce cleaner emissions. In this manner, we will be able to do so by increasing production and providing more incentives for further technological advancement. To put it another way, I’ve come to believe that there is never a bad time to do the right thing.
This time around, the White House blames businesses for not producing more. They are to blame, not him or his administration. He cites a lack of drilling permits as an example. According to his argument, about 10% of all on-shore oil production takes place on federal land. He isn’t the problem.
I mean, that’s completely incorrect, to be honest. But it’s a slap in the face. You are absolutely correct in your desire for energy companies to increase their output. However, by making such a generalization, they fail to take into account a number of important considerations. In order to make it impossible for smaller drillers to work independently, they have done everything they can. Because of capital markets and resource allocation, only large, well-established corporations are able to make the switch more quickly. For an additional 600,000 barrels per day, you need the smaller players Biden’s administration fought so hard against, and the AOC “Green New Deal mentality.” Take a look at Chevron’s stock price, which is currently $170. At the bottom of COVID, it cost $50. At the time of Biden’s election, it was worth $100. So, what has he done to harm Chevron, exactly? They aren’t harmed by it. Because of his actions, 20 companies in Midland, Texas, and Bartlesville, Oklahoma, which could be moving production up a little bit, have been hurt. It’s not true that the White House is solely to blame, but no one-including myself-is making that claim. However, the premise that more production is simply a matter of choice for the producers is absurd. This is something that all listeners are able to pick up on instinctively. A producer doesn’t need you to tell him or her to do something that will make money. There is no doubt about it: if they can profit from it, they will. It’s the red tape. It’s all about getting money. Everyone is aware of the approval process, the denial of permits for drilling, and the use of federal land.
EICHER: That’s good. Bahnsen is a financial analyst and advisor who heads The Bahnsen Group, a financial planning firm.
DividendCafe.com is where you can find David’s daily blog posts. Sign up for his daily e-mail newsletter on the economy and the markets here. Once again, many thanks to David!
BAHNSEN: Thank you for inviting me, Nick.