Oct. 7, 2022

A President Searches For Oil

Mike Wirth's head must be spinning. As the CEO of the nation's number two oil company, Chevron, Wirth has been the point man in the industry's effort to have the Biden Administration support oil companies' exploration and production of new fields within the United States. But Biden has been steadfast in his efforts to curtail new energy sources' development, closing pipelines, restricting federal land leases, and opposing new plants and refineries.

Biden famously promised, in his campaign for President: "We are going to get rid of Fossil Fuels." (February 8, 2020). And the President has been consistent in his opposition to new oil fields in the U.S.

Earlier this year, when inflation was beginning to heat up, it was clear that the President understood that a chief cause of these higher prices was the rising cost of oil and gas. The President called out the oil industry in an open letter ordering the oil companies to cut the price of gas at the pump.

As the head of Chevron, Wirth shot back. Writing to the President, Wirth pointed out that it was a two-way street. The oil industry was ready to cooperate, but it needed the Administration to release its anti-oil policies.

Wirth said, quote:

"The U.S. energy sector needs cooperation and support from your Administration for our country to return to a path toward greater energy security, economic prosperity, and environmental protection." June 21, 2022.

Wirth went on to precisely delineate the company's concern with leases and permits to drill on federal land, access to building critical plants, and a reasonable approach to regulation that included both cost and benefit produced.

We're months later, and there has been no response from the White House. A previously scheduled meeting between Wirth and Secretary of Energy Jennifer Granholm occurred within days. But it reached no substantive agreement between the Administration and the Oil and Gas industry.

From my perspective, that's where negotiations ended. The White House position was crystal clear, and it was a repeat of that Biden campaign promise: "We are going to get rid of fossil fuels."

Flash forward to last Friday. In a seemingly unrelated event, the United States announced that Venezuela would release nine Americans, including five oil executives, in exchange for two nephews of President Maduro's wife. At the time, it looked like a simple prisoner for a prisoner exchange.

But it turns out it was much more than that.

Here's the timeline. Mid-July, Biden visits Saudi Arabia, asking for more oil production. Several reports indicate Biden was offering to pay $80 barrel. The Saudis categorically refused. But they did allow an account of a very slight increase in production to save face for Biden.

The Saudi rejection was likely the trigger to begin serious negotiations with Venezuela. Somewhere in the August/September time frame, prisoner negotiations were underway.

This week, OPEC, headed by the Saudis, put down any hope for an oil price reduction. OPEC voted to reduce production by two million barrels a day. Lower OPEC production will ensure that oil prices will rise by winter. The President's play for more oil from Saudi was now dead.

Thursday, the U.S. announced that it might lift sanctions on Venezuela that have stood for 18 years.

Any negotiations with Venezuela must have seemed incredible to Mike Wirth at Chevron's Headquarters in California. Here, he and the President have been locked all year in a battle to increase domestic U.S. Production. The Administration was implacable; it must have felt like the President was doing everything he could to cap Chevron's oil production.

Suddenly, out of the blue, Biden delivers one of its largest fields to Chevron. A proven property they couldn't get to because of those sanctions.

Perhaps we've gotten Biden wrong.

It's not that he's against oil.

It's just that he's against American oil.

Oh, that's better./s



Today's Notes



Wall Street has been betting for some time that the Federal Reserve will have to back off from its pushing higher and higher interest rates as the economy slows. But not so, says the Fed Governors. A whole slate of Governors are speaking this week, and their messages have all been the same: "No Fed Pivot." no rate cuts until after 2023 was the message.

After all, as Michael Every, over at Rabo Bank, points out, the Fed can't cut interest rates as long as the price of oil, the real cause of inflation, keeps rising.

The mess we're in is that OPEC determines our interest rate policy.

Germany reported earlier this morning that Industrial Production declined for just the second month this year. What makes this report interesting is that most analysts attribute this reduction to thelow water levels on German rivers; Germany is in the middle of a significant drought, which has brought waterway shipping to a near halt. So, Germany finds itself with a couple of substantial crises, both in energy and transportation.

In just a few minutes, they will release two critical labor reports; first, the unemployment report is expected to be unchanged at a 3.7% unemployment rate for the country.

And then the monthly non-farm payrolls, look for this to have some real impact. Analysts expect non-farm payrolls in September declined by more than 50K. That's a big hit. And remember, our working hypothesis is that this Fed is watching the labor markets as their principal indicator of Economic Health.