Can the Fed stay independent under Trump?

This transcript was generated using transcription software.
 

00:00:04:21 – 00:00:10:05
Kassandra Sundt
Hey, and welcome to The Dip the podcast bringing the world of money to the US and the US to the world of money. I’m Kassandra. 

00:00:10:06 – 00:00:24:15
Daniel Winter
And I’m Daniel, and it’s time for another round of the spat, I guess, between President Trump and Jerome Powell. He’s the Federal Reserve chair in the US, and Trump has been putting pressure on Powell to lower interest rates for a while now.

00:00:24:16 – 00:00:38:00
Kassandra Sundt
That’s right. But in this round, the Trump Department of Justice is really upping the ante. Powell says that they opened a criminal investigation into him that essentially accuses him of splurging a bit too much on Federal Reserve building renovations.

00:00:38:01 – 00:00:47:19
Daniel Winter
Now, normally, as you know, Powell is quite reserved in his statements, quite calm. Like a lot of central bankers. Some may even accuse him of being boring. Not actually.

00:00:47:19 – 00:00:48:03
Kassandra Sundt
Like it.

00:00:48:06 – 00:00:58:03
Daniel Winter
No no no no no, we don’t we don’t we don’t have anything against him. But quite stable, let’s say. But in this statement, released late on Sunday night, Powell was firmer than usual.

00:00:58:05 – 00:01:21:17
Jerome Powell
The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president. This is about whether the fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead, monetary policy will be directed by political pressure or intimidation.

00:01:21:19 – 00:01:32:01
Kassandra Sundt
To find out what this means for the US and more, we’re joined by DW’s own Janelle Dumoulin in Washington, D.C. and Peter Ricchiuti. He’s a professor at the Freeman School of Business at Tulane University.

00:01:32:04 – 00:01:44:08
Daniel Winter
So, Janelle, let’s begin with you. How did you feel when you saw this news come through? Was it a shock because Trump has been putting pressure on, Jerome Powell for a bit of a while now?

00:01:44:10 – 00:02:05:09
Janelle Dumalaon
I mean, the investigation, was a really unprecedented step, right? So, from my perspective, I did find it quite shocking. So we’ve all actually heard from Powell that much since I saw that video message that he released. You know, the one that has become famous now for the unusual level of directness, the unusual level of pushback against the president.

00:02:05:10 – 00:02:23:07
Janelle Dumalaon
It feels to me like he said his piece and then went back to stoic relative silence. Powell like silence. Some would say. But you know what’s worth saying? What he said. Of course, I boomeranged around the halls of Washington, prompting criticism of the investigation from with his own party. I don’t know if you’ve heard some of the remarks.

00:02:23:07 – 00:02:53:12
Janelle Dumalaon
Remarks from the likes, for example, of Senator Lisa murkowski of Alaska. She said that this was a clear attempt from the administration, to coerce the fed. Larry Kudlow, one of, Trump’s former economic advisers from the first term, also slammed the investigation. And perhaps most notably, we also heard from Treasury Secretary Scott Vincent, who also reportedly told Trump that this investigation actually impedes their ability to get to the fed candidate that they want, in place.

00:02:53:14 – 00:03:11:23
Janelle Dumalaon
So the president, on the other hand, you know, he’s remained vocal about him. Obviously, he’s asked about Powell almost every day this week who said Powell was either incompetent and or crooked, saying that Jurich will be gone soon so that. But then he also told Reuters that he has no intention of firing Powell into early to determine what to do.

00:03:11:23 – 00:03:14:05
Janelle Dumalaon
So a mixed bag there, but I guess we’re going to get into.

00:03:14:07 – 00:03:34:14
Kassandra Sundt
Yeah, there’s a lot to unpack here, right? This has been like a multi-season drama. But, Peter, I want to turn to you because the common wisdom is that central bank independence is vital to the long term health of an economy, no matter if it’s the US or another country. And we’ve not seen very many examples of central banks, who are entwined with politics and then that country doing well.

00:03:34:14 – 00:03:39:13
Kassandra Sundt
So what’s your read of the situation of the importance of independence here?

00:03:39:15 – 00:04:02:11
Peter Ricchiuti
It’s the most important thing in the markets, the most important thing to the economy. It’s very difficult to first of all be an investor, an investor. You just can’t really know, know where things are going to go. And all the ideas that have been, floated around, like lowering rates on credit cards and, and housing and such is a lot more complicated than, than is being presented as.

00:04:02:13 – 00:04:11:20
Daniel Winter
And Janell, why is Trump putting the pressure on now when Powell only has, just a few months left in his term?

00:04:11:22 – 00:04:33:06
Janelle Dumalaon
I mean, Cassandra set it right like this was like a multi-season drama. So it’s fair to say he’s been putting pressure on Powell pretty consistently. Right? Like throughout since being back in office. The really new thing here is the investigation. But the investigation, it’s also coming at a time where Trump has reportedly lashed out at the DOJ and lashed out at his U.S. attorneys for not doing enough to prosecute his enemies.

00:04:33:11 – 00:04:53:22
Janelle Dumalaon
He has called them weak. And that timing is interesting because he reportedly did that right before these subpoenas for the fed were issued. But it’s a justifiable question, right? We know that Powell is term is adding in May. There’s been a lot of supporting to suggest that many in the Trump administration would have preferred a patient waiting out till Powell was out of the chairmanship.

00:04:53:22 – 00:04:57:16
Janelle Dumalaon
So there’s been a lot of speculation as to why appears to be rising up the pressure.

00:04:57:16 – 00:05:17:11
Kassandra Sundt
Now, really what I want to know, though, is you’ve outlined all these reasons that Trump should have maybe just let sleeping dogs lie, right? So why make the suspect a call? Why make this a headline? You’ve got like four months left. Left with Powell. Like, why not just like, let this go, fade into the horizon?

00:05:17:13 – 00:05:37:21
Janelle Dumalaon
Yeah. I mean, I wanted to say that like, the the approval, the low approval ratings. This is a phenomenon that he is experiencing now. Right. Like on the economy. And there has been some speculation to suggest that, in fact, what he is looking for, in Jerome Powell is a scapegoat. This is somebody who doesn’t know how to raise interest rates when he should.

00:05:37:21 – 00:05:54:01
Janelle Dumalaon
It’s impacting the economy. It’s keeping your borrowing costs high. And you know what? He might even be crooked. Look at the suspicious building project that he has undertaken. So I think that, you know, difficult to say whether that’s true or not, but this is definitely a speculation that has been floated.

00:05:54:03 – 00:06:10:23
Daniel Winter
Okay. We’ll get back to the politics of it all in just a second. But, Peter, the reaction from the markets wasn’t that explosive, despite the fact that, as you said, the independence of the Federal Reserve is a very serious thing and could have, serious impacts down the road. Why do you think that is?

00:06:11:00 – 00:06:24:23
Peter Ricchiuti
You know, I think that it’s hard to explain, really, what this is exact opposite of what the markets want. I think what Powell is doing by the way, you know, said he was an idiot and all that, which is ridiculous. I’m not sure they have the problem.

00:06:24:23 – 00:06:26:19
Kassandra Sundt
Saying Powell was an idiot and so on.

00:06:26:19 – 00:06:43:21
Peter Ricchiuti
Right, right. And, you know, Trump was saying that, you know, Powell was an idiot and all of that kind of thing. First of all, the people we have at the fed are the brightest people I know. I, a former students there, I have friends there. I mean, they’re smarter than me. They’re you’re better dressed. They have less body fat.

00:06:43:21 – 00:06:45:12
Peter Ricchiuti
These people are real perfect.

00:06:45:12 – 00:06:45:23
Kassandra Sundt
Humans.

00:06:45:23 – 00:06:47:02
Janelle Dumalaon
And possible.

00:06:47:04 – 00:07:13:09
Peter Ricchiuti
Yeah, yeah. And the idea that they, they, that a politician should be able to have more say in that. The other thing is Powell is doing the right thing. There are indications in the labor market and are indications, at GDP that things might be inflating. And so to lower rates like the president wants is very, very dangerous because if, if you lower rates, the economy will be stimulated.

00:07:13:09 – 00:07:31:04
Peter Ricchiuti
And on the short term that’s going to be great, but it will also raise inflation. It’s not that Powell doesn’t know that rates when they go lower stimulate the economy. It’s it’s that he’s being cautious in here. And I think I think just about every economist, every central bank president thinks it’s a reasonable way to go about it.

00:07:31:06 – 00:07:47:02
Kassandra Sundt
So there was a little bit of reaction after this weekend kind of revelation. Right? I was reading reports about this Sell America trend. Maybe is the right word in reaction to the Powell investigation. Can you explain what that is, Peter, and whether or not we actually saw it?

00:07:47:04 – 00:08:08:23
Peter Ricchiuti
Well, one thing is the, in the last year, the foreign markets have done better than the US market has. So a lot of people don’t don’t focus on that. And very and the other thing I could tell you is that, the Federal Reserve was a real and their actions were real esoteric. You were either a finance professor or you, you were a, a trader in the markets.

00:08:09:04 – 00:08:26:12
Peter Ricchiuti
Nobody went around talking about the fed. You know, they thought the fed was like maybe an Indian reservation or a brand of bourbon or something like that. They had no idea. And so we’ve, it’s just incredible. They did a poll, few months ago, said 80% of the people don’t think the Fed’s a good job doing a good job.

00:08:26:12 – 00:08:43:12
Peter Ricchiuti
I mean, this is crazy. I mean, these are, these a lot of these people, you know, couldn’t plug in a toaster and you’re making indications about how the Fed’s doing. So, I don’t know. And I think, you know, what was mentioned a little bit earlier is that the Epstein files were starting to be released. There’s a lot of pressure.

00:08:43:12 – 00:08:49:09
Peter Ricchiuti
The, the popularity, late rates would drop down, and certainly it’s pushed it off the front page.

00:08:49:13 – 00:09:02:24
Kassandra Sundt
Yeah. So kind of blame the bureaucrats, right. I’m wondering, is, are the markets just assuming that maybe this investigation will fail or that, you know, Powells term will outrun, these problems?

00:09:03:01 – 00:09:17:20
Peter Ricchiuti
I think that that is and I, I’m kind of shocked, really. In four months, Powell is going to step down from that position. And I don’t know what more you would, you’d really want to see. And he’s going to put his own people in there. And of course they’re going to lower rates and jack up the economy.

00:09:17:20 – 00:09:38:17
Peter Ricchiuti
But I don’t see that as, as a good move at all. And the other thing is that people don’t understand there’s another group on the other side, for instance, the mortgages to, credit cards. The lower the rates on those somebody owns those securities, so it’s not safe. If he kept the existing securities of the mortgages, you might be all right for a bit.

00:09:38:19 – 00:09:44:02
Peter Ricchiuti
But this is a huge market that’s on the, the edge of their seats.

00:09:44:04 – 00:10:13:23
Daniel Winter
So I’m just thinking here, like, what would it take for investors to kind of really sit up and notice, what’s going on right now? Is what what needs to happen for for that to take place, for people to really be shocked by what’s going on because the consequences are they fed, which is influenced heavily by politics especially, you could imagine further down the road, progressing worse and worse could have serious consequences for the economy, because you might not be able to trust what the fed is saying.

00:10:13:23 – 00:10:22:09
Daniel Winter
You might have to price in an inflation risk premium into your investments that you’re doing. So what will it take for them to sit up and listen?

00:10:22:11 – 00:10:46:07
Peter Ricchiuti
And that is a great question. I think one of the problems is we’re seeing numbers and they come out every month like they have since the Earth cooled, but it’s but people don’t know. They’re kind of they’re kind of scared that those numbers are correct. I mean, you fired the the labor statistics people. Wall Street’s try to take that over during the shutdown, but you just don’t really know what those numbers are supposed to be.

00:10:46:07 – 00:11:14:14
Peter Ricchiuti
And so every, oh, every, every month, you get something out that pushes in different directions if unemployment goes up, which it has been. That’s that’s a reason to lower short term rates. And these rates, by the way, aren’t ten year. They’re just overnight rates. And if you have the the tariffs finally kicked in, a lot of people say that’s just ship after ship out in the ocean, and that those haven’t come into the market yet with clothing and shoes and everything else.

00:11:14:16 – 00:11:21:02
Peter Ricchiuti
That’s going to be very, very important if it does raise inflation. The, the fed really is in no position to lower interest rates.

00:11:21:04 – 00:11:33:17
Kassandra Sundt
Janelle I’m hoping we can just get real for a second, because I’m really wondering what’s the point of this investigation like, really? Is Trump just setting the stage for his new Fed Reserve chair? Like I don’t know what gives.

00:11:33:19 – 00:11:49:03
Janelle Dumalaon
I mean, you know, we’ve been real this whole time because first of all. But, it really does look like this investigation is a new step in the pressure campaign against Powell. Right. So just to get into it a little bit, I don’t know if you want to do that, but briefly, this is about cost overruns for the renovations at that complex.

00:11:49:03 – 00:12:10:18
Janelle Dumalaon
It’s something like $700 million over budget. The price tag is something like $2.2 billion, which would be very, very expensive. On the other hand, we are talking about very old buildings here, buildings that are, more than 100 years old, and they have to take specific steps in order to preserve certain kind of features. But yeah. So but there have been like very few reactions to suggest that anyone is taking this at face value.

00:12:10:18 – 00:12:33:24
Janelle Dumalaon
It’s really hard for observers to look at this and really see a case about potential fraud in building renovations, because Trump has so consistently put the heat on Powell, in these past months. So we know for certain that this is the view that some in Congress have taken. I have written earlier, what you’re asking is, you know, this is the way for Trump to set the stage for his new fed chair.

00:12:34:05 – 00:13:04:11
Janelle Dumalaon
Ironically, I think in doing this investigation, he’s actually made that harder from himself for himself. So we’ve heard reaction, for example, from Senator Thom Tillis of North Carolina. So he has said that he would block any sort of Trump nominee for the fed until this matter is resolved. So, that is certainly some pushback there. And I guess, you know, that’s important because he is a swing vote on that Banking Committee that so sort of oversees the fed and approved central bank nomination.

00:13:04:11 – 00:13:14:07
Janelle Dumalaon
So in trying to clear the way for a more pliable fed chair, perhaps it looks like he dumped more obstacles in the way of that project.

00:13:14:09 – 00:13:31:03
Daniel Winter
Right. But, Janelle, if I had a nickel for every time a governor was leaned on by Trump last year, I would have two nickels, which isn’t a lot, but it’s weird that it’s happened twice. And the fact is, because he’s also leaned out. Anyway, I’m glad you like that one. He’s also there’s a case pending against, Board Governor Lisa Cook as well.

00:13:31:07 – 00:13:42:13
Daniel Winter
Let’s not forget, related to a mortgage that she, she took out. So, what can you say about how unusual this kind of political pressure is? And we touched on it a bit. I think it’s worth emphasizing.

00:13:42:15 – 00:14:06:03
Janelle Dumalaon
Yeah. So first of all, your nickels. I’ll take them. That is good American money, even if there are only two. But, yeah, just to back up a bit, this is, this is about Trump trying to fire, fed Governor Lisa Cook because, she claimed allegedly multiple homes in as a primary residence on mortgage applications to get better low insurance code, of course, has strongly denied that she has also sued that.

00:14:06:03 – 00:14:24:12
Janelle Dumalaon
And she’s argued that Trump lacks the legal authority to do this under the Federal Reserve Act. You know, remember that Trump can only removed people in the fed, for due cause. So now this is going this is going to go to the Supreme Court. So anyway, that’s a short of it. But, how unprecedented is this again?

00:14:24:12 – 00:14:44:15
Janelle Dumalaon
Obviously, every president wants to take credit for an economic boom. Every president wished wishes that the fed would help them in that regard. But and there are a few examples in history where you actually do have the government, leaning on the fed to do what they want. So Richard Nixon, I look this up, leaned famously on the fed chair.

00:14:44:15 – 00:15:04:02
Janelle Dumalaon
Arthur Burns up before the 1972 election. He wanted to keep rates low. It were politically, but led to this big inflation burst in the 70s. So for the most part, but for the most part, Ed independence has been a sacred cow, like our good professor has said. It is the most important thing, and I think most people actually do understand that.

00:15:04:04 – 00:15:18:04
Kassandra Sundt
Yeah. Peter, I want to turn back to you because obviously the US is the world’s biggest economy. But what does the rest of the world do if it trusts the fed less? If this lean does work and the independence becomes questionable?

00:15:18:06 – 00:15:42:00
Peter Ricchiuti
Yeah. And, you know, in terms of comparison of other countries and such, this has been the gold standard. Is the Federal Reserve so very difficult that the thing is, on the business side, businesses can’t make big commitments going forward. Other than the all that’s going on. And I, and that’s that just stops them because the you ask, we visit companies all the time and aren’t here to land.

00:15:42:00 – 00:16:00:17
Peter Ricchiuti
I take a group of students out to visit companies, and one of the things they say is that they you ask them what’s their 3 or 5 year plan, and they look at you as if you had two heads. I mean, because they don’t they don’t see this at all. I mean, I’m, I wake up in the morning, the, the the rules have changed.

00:16:00:17 – 00:16:08:22
Peter Ricchiuti
I mean, this is a tough way. No matter how smart a CEO you are, you’re pulling the reins in, and, And they can’t be blamed for it.

00:16:08:24 – 00:16:27:04
Daniel Winter
Okay. And, Peter, there’s, another Federal Reserve meeting, at the end of the month, where we’re going to basically see a transition and potentially take place. And that is that one of the governors is, is leaving and another one gets to be put in. It might take a while to confirm that, of course, but what are you expecting to see here?

00:16:27:04 – 00:16:32:00
Daniel Winter
What moves are we going to see? At that board level?

00:16:32:02 – 00:16:47:17
Peter Ricchiuti
I think, there was a lot of split, by the way, the last time they announced, whether they’re going to cut rates or not. But I think, I think the lower, by a, by a quarter point, a lot of people are hoping for a half a point. Still think whatever direction they go, it’s got to be gradual.

00:16:47:19 – 00:17:09:20
Peter Ricchiuti
And that’s one reason the markets have held up. It’s, you’re not expecting, you know, something very, you know, off the curve, you’re just going to look maybe lower and lower and lower until things catch. But there’s real problems in the economic numbers in, in the US. And they’ve just, you know, they’re just hard to, to digest at this point.

00:17:09:20 – 00:17:24:00
Peter Ricchiuti
And and the tariffs have been pushed under the rug and they change every, every moment. I think I get up pretty early in the morning, but I have not been able to get up early enough to, to beat these stories coming out. And, I think a lot of people feel the same way. And by.

00:17:24:00 – 00:17:24:24
Peter Ricchiuti
The way, the feeling like I.

00:17:24:24 – 00:17:47:16
Peter Ricchiuti
Started this business, I started this business in 19, in the business in 1979. And, you know, back then we had, we had 18% interest rates on mortgages. So I guess it’s I’m showing my age, but I’m having trouble just, you know, falling apart and falling on the floor with these kind of rates that we, you know, seen.

00:17:47:16 – 00:18:12:04
Peter Ricchiuti
So, I don’t know, that was Volcker that did that. And, and he was trying to kill inflation off. So, and that’s the job of the fed not to ask answer to people or, or ask questions. They are the people to do it. And, I think this idea of politicians get in the middle of things is, it’s just it’s really dangerous.

00:18:12:06 – 00:18:17:00
Kassandra Sundt
Now, Germany was once dubbed an economic miracle, but now some of the magic is missing.

00:18:17:00 – 00:18:26:16
Daniel Winter
But can Germany get that magic back? Well, that’s a subject of a podcast called Delay Land from DW. And let’s find out a little bit more with a sneak peek from them.

00:18:26:18 – 00:18:41:13
DelayLand Promo
Germany, the land of precision engineering and legendary efficiency. But something changed. The trains are late. The infrastructure is crumbling. So what happened to the magic? How did a country famous for perfection.

00:18:41:13 – 00:18:43:06
DelayLand Promo
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00:18:43:08 – 00:18:58:09
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We travel to other countries and ask what are they doing differently? What can Germany learn? Delay land, Germany and the missing magic. Wherever you get your podcasts.

00:18:58:11 – 00:19:06:12
Daniel Winter
It’s been two weeks now since the US military captured the Venezuelan president, Nicolas Maduro, bringing him back to the US on drug charges.

00:19:06:12 – 00:19:27:24
Kassandra Sundt
Right. It was a dramatic action towards a country in the Western Hemisphere, and one that has many viewers wondering if the US is returning to the days of starting wars to get access for resort to resources. Because the big part of this here is oil. It’s something that Venezuela has a lot of. And President Trump has kind of been saying the quiet part out loud, mentioning oil a lot.

00:19:28:02 – 00:19:43:23
Kassandra Sundt
Something else that President Trump has almost been thinking about out loud, out in public is whether or not to strike Iran, though he has said that if he were to strike Iran or if the US military was to strike Iran, that would be at least on paper, to aid protesters who are currently demonstrating against the Iranian government.

00:19:44:00 – 00:20:00:14
Daniel Winter
Now, of course, it’s a very dynamic situation, but as of recording, there has been no direct US action on Iran, at least not this time round. And but let’s kind of step back and kind of touch on what you were saying there about oil and kind of just get a lay of the land, because of course, the price of oil affects everything.

00:20:00:14 – 00:20:17:00
Daniel Winter
It’s not just about the black stuff itself or the petrol price or whatever, but rather the ripple effect that high energy prices can have on inflation in general. And of course, a lot of Americans need the price at the pump. They need to keep their eye on it in order to make sure that their household expenses don’t get out of control.

00:20:17:00 – 00:20:19:22
Daniel Winter
So whenever oil spikes, a lot of people are affected.

00:20:19:23 – 00:20:38:21
Kassandra Sundt
That’s right. And so to get a better sense of how these U.S. actions in Venezuela and at least the threatened U.S. military actions in Iran, how all of that is affecting oil markets. I spoke to Carol Notley. She’s the CEO of Crystal energy. And now things might have changed by the time you’re listening or watching this episode right now.

00:20:38:21 – 00:20:48:21
Kassandra Sundt
But I started off by asking her about how she’s reading the situation on the ground in Iran. As the protests and the deadly government response both intensified.

00:20:48:23 – 00:21:11:06
Carole Nakhle
Well, what’s happening you want is something that everybody is watching very closely because yes, we have seen unrest in the past. If you remember the Green Revolution many years ago and occasional unrest here and there. But today the situation is very different from what we saw before, primarily because of the changes in the region and also what’s happened as well.

00:21:11:06 – 00:21:35:14
Carole Nakhle
Let me elaborate on that. So, for example, we saw in the last few years how the Iranian proxies in the middle East have been weakened significantly. You have Hamas, you have Hezbollah in Lebanon, but also the removal of Bashar Assad, who used to be a very close ally to Iran. And then we saw the attacks by, the US on Iran, let alone, you know, what the Israelis have been doing.

00:21:35:16 – 00:22:01:04
Carole Nakhle
And also, you have to take all that to consideration. Plus what’s happened recently in Venezuela, and the willingness of, the US to intervene in, a fertile environment whereby, there is a strong appetite for, a change in the system. So this is why I think today what is happening in Iran is not a repetition of what we saw in the past.

00:22:01:06 – 00:22:16:13
Carole Nakhle
It’s different given its scale, its seriousness, but also because of Iran today and the situation in the region are very different from not long ago. And that by itself can highlight fragility of the Iranian regime today.

00:22:16:15 – 00:22:25:13
Kassandra Sundt
Are we seeing any fragility in the oil markets as a response, or how have the markets, responded to what we’ve seen out of Iran so far?

00:22:25:15 – 00:22:46:17
Carole Nakhle
I mean, interestingly, despite all the geopolitical instability that you are seeing around the world, and not just this year, but over the last few years, we can see that oil markets have been relatively calm. And there are several explanations for that, the calm, calm situation in the market, but primarily that we have not seen any disruptions to supply.

00:22:46:17 – 00:23:08:14
Carole Nakhle
There is lots of oil around, even OPEC itself. OPEC plus released more than it was last year. Still, we have strong growth from outside OPEC led by the US, but also other countries such as, Guyana and Norway, Canada and Brazil. And demand is not really booming. So that’s something we should take frustration at is growing.

00:23:08:18 – 00:23:29:12
Carole Nakhle
But supply is expected to grow faster. So for this year alone, there is a consensus among market observers that we are, as we should expect, a surplus, which means that more supply then demand. And that should keep the keep the lid on prices. But of course, things can change drastically if we end up having this sudden disruption.

00:23:29:12 – 00:23:39:04
Carole Nakhle
Notable disruption in supply. If, for example, the situation escalates further in Iran and the trade of oil gets seriously disrupted, then the picture is going to change.

00:23:39:06 – 00:23:58:17
Kassandra Sundt
Yeah, I want to talk a little bit more about supply in a moment, but I’m going to get nerdy with some numbers for just a second to ask you about a broader point, which is essentially, there was this record number that came out from over the weekend, and things can change, of course, where Iran has 166 million barrels, at the end of last week, out at sea on the water.

00:23:58:17 – 00:24:11:14
Kassandra Sundt
That’s apparently equivalent to 50 days of output. Looking at this big figure, what does a big figure out at sea tell you about Iran’s oil and oil based products right now.

00:24:11:16 – 00:24:44:14
Carole Nakhle
We have to accept that Iran is a significant player in global oil markets, much more important than Venezuela simply because of the volumes it is producing, despite the years and decades of sanctions, because it’s one of the main oil producers, has been the longest under sanctions. I would be careful in kind of putting a specific figure on how much oil is being is leaving Iranian territories, because a lot of that oil is traded in an opaque system.

00:24:44:14 – 00:25:15:03
Carole Nakhle
And just like Russian oil, they rely on that feed. But I would say that Iran has mastered this kind of sanctions evasion long before Russia and long before Venezuela, because they have been under sanctions for many, many years, now and therefore nobody knows for sure. So we are engaged in some kind of rough estimates. But yes, even Iranian oil is still being traded globally, but primarily I would say when I say globally, it’s going to international markets, but it is largely and it’s not exclusively sold to China.

00:25:15:07 – 00:25:21:03
Carole Nakhle
But that by itself adds to the how much barrels that are in the market and market globally.

00:25:21:05 – 00:25:42:08
Kassandra Sundt
Yeah, we mentioned sanctions as obviously one financial tool used by the US and the West against, countries that it wants to punish, frankly. But then there’s also another favorite tool of the Trump administration, which is tariffs. On Monday, US President Donald Trump said that any country trading with Iran could face a 25% tariff on its commerce with the US.

00:25:42:08 – 00:25:54:07
Kassandra Sundt
And it seems to be that that’s trade in general, not just oil. But since oil and oil derived products are such a massive part of the Iranian economy, what do you make of this?

00:25:54:09 – 00:26:20:22
Carole Nakhle
Okay, so first of all, let’s think about the way you can exercise pressure on some countries. Sanctions is one of those tools that’s like more like economic warfare. And then you try to use economic tools to put pressure on a country to create certain change, desirable changes. And in this case, the sanctions on Iran have indeed crippled the economy, but they did not result in a regime change.

00:26:21:00 – 00:26:44:21
Carole Nakhle
So how do you escalate the situation? You target the buyer. So other countries dealing with Iran, not just for oil but from other things. So definitely it may make countries think twice, but from experience, I don’t want to be the cynical here, but it China is unlikely to take those, threats into consideration. They have been buying oil that nobody else wanted.

00:26:44:23 – 00:27:01:21
Carole Nakhle
Other countries. Also, despite the threat of tariff, they always managed to get around the sanctions because they are more driven by their own national commercial interests and getting oil and other products cheaply. Then let’s say, meeting Western agenda and priorities looking.

00:27:01:21 – 00:27:24:18
Kassandra Sundt
There’s been several big protests in recent decades that have rocked Iran. But you mentioned that so far with with these protests that we’re seeing right now, that there hasn’t been a slowdown in production, has there in the past been a slowdown in production when we’ve seen previous protests? So I’m asking basically, could this be on the menu this time around as well, if it’s happened in the past?

00:27:24:20 – 00:27:51:10
Carole Nakhle
I mean, so far we did not really see protest directly and significantly affecting production from Iran. But Iran today is producing a fraction of what it could produce given its significant, proven reserves. I mean, it’s really it sits on large reserves for all, but even more so of natural gas. And still they hardly export any gas. Actually, they use it mostly domestically.

00:27:51:16 – 00:28:20:15
Carole Nakhle
So what’s Iran is producing today? Irrespective of the protest, is just a fraction of its true potential. I think that the protest might lead to disruptions if we see some threats to the regime. Military deploy, direct attacks on the infrastructure or, distribution routes are being blocked. So all sorts of things can disrupt. But I wouldn’t say that the protests have been successful in curtailing, Iranian production.

00:28:20:17 – 00:28:37:01
Carole Nakhle
If anything, I think what Iran is struggling with is mainly above ground factor from their own making, from the government policy. Plus, add to that the sanctions and the limited investment that has come to you on that has had a much bigger impact than than the protest that you are seeing in the street.

00:28:37:03 – 00:28:59:10
Kassandra Sundt
Well, with everything that’s happened from the US and in the US in recent days, another country, Venezuela, has really fallen off some headlines. But let’s remember that it was less than two weeks ago that the US attacked Venezuela and captured. It’s disputed President Nicolas Maduro, but Venezuela, it seems, is set to resume oil exports soon. What kind of volume are you expecting from that country?

00:28:59:14 – 00:29:33:23
Carole Nakhle
Yeah, I first of all, Venezuela did not stop or has not stopped exporting oil even under sanctions, because even though, there was exemptions, let’s say, for the Chevron license to still export some barrels, two particularly to the American refineries. And not all of the production was, sanctioned. And again, part of the oil that was even that was sanctioned was also being traded through OPEC routes using the dark fleet, which is a practice shared, between Russia, Iran and Venezuela, primarily.

00:29:34:00 – 00:30:08:16
Carole Nakhle
Now, of course, as the Americans move on to lifting the sanctions and therefore legitimize the sale of, Venezuelan, oil, then you will see perhaps, an addition and the barrels in the visibility, a better clarity, I would say, of the barrels that are being traded out of Venezuela and probably an addition, additional supplies coming to the market, but I wouldn’t expect to see suddenly the market to be flooded, because, to increase exports significantly, you need to increase production significantly.

00:30:08:18 – 00:30:37:08
Carole Nakhle
And to increase production significantly, you need to have significant increase in investment. And this is really the missing point that it’s not a question of opening the tap or closing the tap. In Venezuela, I think for Venezuela the problem is structural. It has been in the making for decades, and it requires a lot of capital deployed within the country, plus a change in the legislation and the contract terms that companies are going to sign was, the Venezuelan government.

00:30:37:08 – 00:30:46:15
Carole Nakhle
All of these need to be put in place to see a serious change in Venezuelan oil production and therefore export. It is possible, but it will not happen overnight.

00:30:46:17 – 00:30:51:16
Kassandra Sundt
Yeah, it sounds like the tap needs to be maybe rebuilt from scratch here. You can’t just turn it on.

00:30:51:18 – 00:30:52:15
Carole Nakhle
Trust. See?

00:30:52:17 – 00:31:10:15
Kassandra Sundt
It’s rusty. Exactly. I’ve heard some big numbers floating around on what Venezuela is capable of producing. I’ve heard some numbers, like 2 million barrels per day, according to some. What’s your take? What’s realistic here? Could Venezuela be a big player in a few years? Or maybe a decade or two?

00:31:10:17 – 00:31:40:08
Carole Nakhle
Well, let, let let let us use history as guidance. So long before Venezuela, established itself as the largest holder of proven oil reserves. And despite the, limited technology back then, Venezuela was capable of producing 3.76 million barrels a day in 1970, and that was the peak that was never reached after then. We got close to that number in the 1990s when Venezuela decided to open up to international investment.

00:31:40:10 – 00:32:01:05
Carole Nakhle
But today, really, it’s less than 1% of global supplies, less than a million barrels a day. So if you want to ask me what the scenario is, I would say Venezuela can perhaps one day produce up to the lat peak that it was used back in the 70s and even exceed that. And we saw that happening with Iraq, for example.

00:32:01:07 – 00:32:25:18
Carole Nakhle
But that can take a long time. And it requires, I mean, Iraq, the Iraq war, the second war, what, 2003 and then to oust Saddam Hussein, Iraq, the first licensing round it had was in 2009. And then it took, even after that many years for Iraq to really increase production, knowing that in Iraq the fields are perhaps easier and the quality of oil is different than in Venezuela.

00:32:25:24 – 00:32:47:19
Carole Nakhle
I’m not saying that the two countries are identical, but this just gives us an idea of the potential and how long it will take us to reach that potential. If, if and there is a big if investment comes back a big time. Still, we are not looking before five years at least before we see a notable increase in production coming from Venezuela.

00:32:47:21 – 00:33:10:01
Kassandra Sundt
You know, it seems like since the the US strike in Venezuela that US President Donald Trump has basically just laid his cards on a table and said that oil was a big reason that his country launched these strikes. I’m wondering, you know, when would we see you’ve laid it out quite clearly that that could be a long time between Venezuela before Venezuela can actually, up production in a serious way.

00:33:10:05 – 00:33:22:17
Kassandra Sundt
But I’m wondering, how realistic is this desire or how realistic is it that this desire will be fulfilled from the president, that potentially oil prices could come down in the near or, I don’t know, maybe distant future?

00:33:22:19 – 00:33:46:24
Carole Nakhle
Okay. So I’m going to, you know, separate between how much Venezuela can produce and one day and then the impact on prices. And let me start with the matter, because today, again, we have to put with oil markets, we don’t look only at one factor like, oh, Venezuelan oil or Iranian oil. We look at the overall picture of many moving parts, determine what happens to oil markets because they are global and complex.

00:33:47:01 – 00:34:09:01
Carole Nakhle
But if I want to keep it simple, and I look at the situation of the market today because it is a market that is expected to be in surplus, there is already a lot of supply in the market, much more than what we are seeing coming out of demand in terms of demand growth. Therefore, even if you put few barrels, additional barrels in the market doesn’t have to be in the millions.

00:34:09:03 – 00:34:36:10
Carole Nakhle
If you put few hundred thousands that say back on the market, even though in the bigger picture this is nothing, but because the market is already experiencing a surplus that can put downward pressure on prices now, it does not mean that prices are going to collapse, because maybe you’re going to lose oil from elsewhere. Or it could even be that OPEC, plus decides to revisit its strategy and you throw some barrels from the market.

00:34:36:10 – 00:34:59:01
Carole Nakhle
So the impact on prices. Yes. The risk today if I move the risk, the geopolitical risk from Iran can be on a lower, towards the resulting in lower prices. But mind you, the situation in Venezuela could even get some more sour. This is another scenario I have to keep in mind that it’s not because you removed a president.

00:34:59:07 – 00:35:10:08
Carole Nakhle
Everybody’s going to live happily ever after. I think there are. There is a big risk of things turning nasty before turning better. So that’s another thing factor that you want to consider.

00:35:10:10 – 00:35:29:01
Kassandra Sundt
I want to zoom out for a second and talk about these downward pressure potentially on prices to go downwards, because there was a note from the weekend from Goldman Sachs that said that oil is likely to drift downward this year because there’s a wave of supply incoming. And I’m wondering, you know, are you seeing this year that prices will come down?

00:35:29:01 – 00:35:36:03
Kassandra Sundt
I ask just because a lot of Americans are wondering about cost of living and oil is so related to expenses across the board.

00:35:36:05 – 00:36:01:20
Carole Nakhle
Of course, I mean, the US, the price of oil, I mean, it’s almost everywhere, but primarily in the US, it’s something very important. But, yes, I mean, definitely we started the year and even when you look at last year’s forecast for this year, the general agreement is, we should see more supplies coming to the market because we are still seeing strong growth from outside OPEC.

00:36:01:22 – 00:36:23:07
Carole Nakhle
OPEC last year put a lot of barrels in the market, but they decided at the beginning of this year for the first meeting not to change their strategy before at least March the 1st quarter of this year, although all the indicators are good. But they also refer to a cautious approach. By the way, their meeting took place one day after the American actions in Venezuela.

00:36:23:09 – 00:36:47:00
Carole Nakhle
So we are in a mode of wait and see. But if I leave on the side the geopolitical risk and that is a big card in the market, if I base it only on the existing market, fundamentals of supply and demand, I definitely don’t see prices, changing very much from the levels that they have started to trade on this year.

00:36:47:02 – 00:37:03:10
Carole Nakhle
But again, it’s a dangerous game to try to predict prices, especially when you have so much elevated political uncertainty affecting key producing countries. So I will keep my, you know, I will share with you what I believe, but actually was great reservation.

00:37:03:12 – 00:37:21:13
Kassandra Sundt
Carroll. You know, I’m not an oil expert. That’s why I’m talking to you. But I’ve been watching this program land man recently, and he was saying that, you know, $70 a barrel is a sweet spot for oil producers. So when we hear about these lower prices, what’s your take? Are we at a sweet spot right now, or is there a better price from the American side that we should be seeing?

00:37:21:15 – 00:37:45:14
Carole Nakhle
A sweet spot for? One producer is a sour spot for another, because not all producers are the same. There are those who have limited economic diversification, such as, for example, Middle Eastern producers or African producers, and they need much higher prices than 70 to balance their budget. But there are also the high cost producers like to say, if you are offshore deepwater, it’s much more expensive in general than onshore.

00:37:45:16 – 00:38:05:16
Carole Nakhle
But you mentioned the US producers, you know, usually if you think about the US and oil prices and of course, this is something that, President Trump, puts great emphasis on in his presidential campaign that he wanted to keep energy prices low and oil prices low, but not too low because the US is in a really interesting situation.

00:38:05:22 – 00:38:27:20
Carole Nakhle
They are a major, consumer of oil and, you know, sometimes people tell you that the popularity of a president depends on where on oil prices, if they are high or low, at least gasoline prices at the pump. But the other interesting position of the US is that it is the largest oil producer in the world and primarily through shale.

00:38:28:00 – 00:38:55:06
Carole Nakhle
So you also want to keep your very important industry very healthy, because it is that industry that gave you this kind of energy dominance that the U.S is pursuing, especially under the current administration. So, yes, low oil prices are good, but not too low because otherwise you got to squeeze out your very important industry. So somehow a balance needs to be, achieved between keeping consumers happy but also keeping American producers happy.

00:38:55:08 – 00:39:19:24
Carole Nakhle
And so far and again, nobody can know for sure what is that sweet spot. But the prices that we saw last year, the 61 on the $60 a barrel or 60 to 65, I would say it kind of kept everybody happy. Yes. Content, I would say, so deviate from that. You will end up upsetting one party for sure.

00:39:20:01 – 00:39:25:15
Kassandra Sundt
And that’s it for us this week on the dip. If you haven’t subscribed or liked us yet, please do us a favor and just do that right now.

00:39:25:16 – 00:39:37:07
Daniel Winter
Yeah, and if you have any questions or comments, just leave them underneath wherever you are watching or listening to us, whether it’s on YouTube, whether it’s on Spotify, and if you can’t find us there, then go to one of the other platforms and just leave us a message. Go ahead, do it, do it.

00:39:37:07 – 00:39:41:03
Kassandra Sundt
Just do it now. But until next time, that’s it for us here at the Dip.

00:39:41:07 – 00:39:42:12
Daniel Winter
That it. Bye bye. See you.