Key Points Discussed (original link and summary by Richard Snow)
- The Texas oil revolution
- Diminishing effectiveness of monetary policy
- Commodity prices and the Trade War ‘facade’
- Perverse incentives and the inverted credit cycle
- The Chinese debt load
- Forecasts and trading strategies for 2019
In this interview senior market analyst, Tyler Yell speaks to Chief Economist and best-selling author, Daniel Lacalle about his latest work, the end of QE in a low growth environment and crude oil expectations for 2019.
We will touch on some of the key talking points in this write-up but be sure to check out the podcast for the full interview:
THE TEXAS OIL REVOLUTION
The recent Shale boom in the US, along with reduced bottlenecks, resulted in the US becoming a net exporter of oil for the first time in decades. Daniel explains how this was made possible.
Tyler Yell: You wrote two wonderful books, one of them is ‘The Energy World is Flat’ can you share with the audience some of the key points that drove you to write this well-respected book?
Daniel Lacalle: In ‘The Energy World is Flat’ the idea was to debunk the theory that we were going to be living in an environment in which supply would be scarce and we would have tremendous inflation in energy commodities. It’s an analysis of both the demand and supply environments for oil but also talks about renewable energy. The book explores how new technology, efficiencies and improvements lead to a disinflationary environment and highlights the radical role of natural gas in this beautifully, disinflationary environment. This means that supply will be more abundant and lead to a better energy environment for everybody. This is the key factor in driving growth. It’s basically a book that talks about improvements in technology and diversification.
TY: In the book your co-author Diego Parrilla mentions that the last barrel of oil will not be as valuable as one would imagine. This just reinforces the “10 forces” that you identify in the book that are flattening the energy world. Could you shed some more light on how these forces are playing out today?
DL: Absolutely, yes. I think it was the ex-CEO of Exxon, Rex Tillerson who said the energy world did not have a problem of resources it only had a problem with access and development of those resources. I think that what has happened in this period of low interest rates and high liquidity, there has been a massive improvement that has led to the energy revolution in Texas which has propelled the US in very little time from a net importer of oil to essentially being energy independent. This very factor has helped drive, what we call in the book, the “energy broadband”, which is this absolutely massive level of investment in diversification and technology and alternative sources of energy like natural gas and renewables. What we are seeing is this beautiful role of competition between the different sources of energy that has contributed to the decline in the average household bill for electricity and gas decline despite high growth in the economy and alleged geopolitical challenges in the supply chain.
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THE DIMINISHING EFFECT OF MONETARY POLICY
TY: You wrote another great book, ‘Escape from the Central Bank Trap’, can you share with the audience some of the key points that drove you to write this well-respected book?
DL: ‘Escape from the Central Bank Trap’ talks about, from a constructive perspective, the challenges that we are facing after this monstrous increase in liquidity injections, central banks’ balance sheets soaring and lowering interest rates to all-time lows. The idea of the book is to be critical and at the same time constructive as there are differing opinions on the effectiveness of monetary policy currently.
TY: In reference to these two books, one would assume they are different topics but in the same breath, a lot of the trouble the Central Bank is having is that inflation is nowhere to be found and energy is such a key driver of inflation. It seems like technology has backed central banks into a corner because inflation is harder to come by. What are your thoughts on this?
DL: Central planners are looking at the economy with a rear view mirror specifically in terms of how price formation happened in the past. Therefore, they try to implement the same measures that they used in the past in order to drive inflation and growth, but these measures don’t work anymore. Technology is working as a fantastic disinflationary factor but also the world is much more interconnected. It is a lot more difficult to get those drivers of inflation that existed in price formation and the appearance of technology giants has a key part to play in this.
Central banks, through liquidity injections and low rates, have been driving absolutely amazing amounts of investment into technology. This is similar to what we saw during the Tech Bubble in that we are now seeing what we call the energy broadband. The result of this increased investment will lead to better access to different products and services which will undermine the efforts of the central bank to inflate prices in an attempt to deflate debt. At the end of the day, monetary policy becomes disinflationary because it is perpetuating overcapacity.