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Summertime Rolls

Updated: Jul 20, 2023

Last Thursday, Secretary of Energy Jennifer Granholm (she goes by “Karen,” right?) hosted a meeting with oil executives. It ended after an hour, presumably because she was asked by the executives to buy an econ 101 textbook.


Perhaps more than any other CEO, Chevron’s Mike Wirth has made it clear that he is frustrated with the Biden administration. As he noted on Bloomberg TV a couple of weeks ago about the nature of bringing new refining capacity online, “You’re looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying: we don’t want these products. We’re receiving mixed signals in these policy discussions.”

The Biden administration is at once demanding US producers pump more to help lower gasoline prices at the pump and at the same time is talking about punishing US refiners and producers with a "windfall tax" and throwing public tantrums for "price gouging."

“We’re still seeing real strength in demand” despite international air travel and Chinese consumption not yet back to their pre-pandemic levels, Wirth said. “Demand in our industry tends to move faster than supply in both directions. We saw that in 2020 and we’re seeing that today.”

We haven’t had a refinery built in the United States since 1977, yet Worth went on to comment on the effect of policies around the world towards fossil fuels and put it this way: “My personal view is there will never be another new refinery built in the United States.”

That’s bad news because we’re facing the largest crack spreads of all time. The crack spread is the difference between the price of a barrel of crude oil and the price of all the refined products produced from that barrel of crude oil, and it’s up dramatically to $50-$60 a barrel from the $15-$25 range of recent years because there’s limited capacity in the refining market and companies are running full tilt.


Since Wirth’s interview with Bloomberg, the Biden administration has floated several terrible ideas about how to curb rising oil prices. They’ve proposed a surtax on companies that generate a profit margin over 10%, they’ve proposed handing out gas cards, and they have proposed a gas tax holiday.

As any five year old can tell you, any one of these actions would propel gas prices higher over the long term, not lower. While adding nothing to supply, they would serve only to increase demand.

According to JP Morgan, U.S. refinery capacity has declined significantly in recent years and is currently running at full capacity. War in Ukraine has taken many Russian refineries offline, and European refineries have cut back on refining diesel because of high natural gas prices. We know that there is less product available and that demand is higher; it follows that the price of the product will now increase.

Let’s be honest-- we all know it will; it's just that it’s so darn embarrassing when bankers have to explain these basic economic concepts to the leaders of the free world.


Energy is back down to about 4.3% of the S&P 500, compared to a recent peak of 5.2% and an average of 8.0%.

OPEC is set to hold a meeting on June 29 followed by a meeting of OPEC and non-OPEC members (OPEC+) on June 30. While many expect the group to stick to a plan for accelerated output increases in August, we see a cut in output as more likely.

Why? Because that’s all they can do. OPEC+ agreed to cut output by a record amount in 2020 when demand was slashed by the pandemic. By September, when that deal expires, the group will have limited spare capacity to lift output further for all the reasons cited by Chevron’s Wirth. The group has struggled to hit the monthly increase targets due to underinvestment in oilfields by some OPEC+ members and, more recently, losses in Russian output.

Therefore, we recommend expanding exposure to energy while underweighting tech (again). The most important thing you can do is stick to your financial plan, but we expect portfolios to continue to require frequent (i.e. more than just quarterly) rebalancing for at least the remainder of the year. We saw a nice little bear market rally last week, and we continue to recommend buying dips while selling rallies. …It’ll probably be that way for most of the summer.

Summertime Rolls, Jane's Addiction

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