$100 Oil...and Counting

Welcome to Inside Economics. I'm Mark Zandy, the Chief Economist of Moody's Analytics,

and I'm joined by one of my trusty co-hosts, Merissa Dean-Itali. Hey, Merissa.

And Mark, how are you doing?

You know, rough start.

Rough start to this podcast. A lot of technical difficulties. We're on Zoom, so that explains

the weird kind of camera angle in the sound. But we'll make our way through this. I'm

here in C.I.L. in Georgia at a function. So, beautiful weather here in C.I.L. and

the lots of beautiful isailia's out. It's really pretty time of year in Georgia.

I've never been there, but I hear it's beautiful.

Yeah, it's very nice. And you're in, uh, safely in Skonston, Southern California.

I am. Yep. We have a, we have a heated advisory these past two days. So it's been in the

mid 80s here by the beach, which is about as hot as it gets ever.

Some of the time. Yeah. What does that mean for the summer?

A, a shutter to think, because I don't have air conditioning. So, oh, is that right?

You don't have air conditioning. No, like most people around here don't, um, if you live

really close to the ocean, because you get a ocean breeze and it never gets, it never

gets much above 85. And even that may be a week or two in September. It's really hot,

but yeah. So hopefully it doesn't portend a very, very hot summer, but I think it may.

Well, I think there's an El Niño or something. Yeah. I think so. Yeah. Wow. Okay.

Well, buckle up. Uh, and, um, we've got a few guests. Uh, we've got Matt Collier.

Hey, Matt, how are you? Uh, I'm doing well. How are you, Mark? And when Matt's on,

that means, uh, inflation, we've got a bunch of inflation readings this week. Uh, it's

just commenting. Uh, have there, has there ever been a case when the consumer price

index has been released the same week as the consumer expenditure deflator release?

I don't, I don't have to be shut. I can't venture a guess, but it would have to be shut down

related if it ever did. Right. I would say no. Uh, but it's been a busy week. Interesting.

Anyway. Yeah. So we've got a lot of inflation. We'll cover that. And of course, the war in

the Middle East, uh, with Iran, a lot going on there. And we were bringing back, uh,

Chris Lufakis and one Pablo Fuentes. Hi, guys. Hey, guys, we're back for more back

for more. Yeah, a lot to talk about. Uh, so, uh, you're on last week. I was listening

to that podcast. Uh, that was very informative. Uh, just bottom line is the forecast change,

Chris? I would say I've grown a lot more pessimistic over the past week. Right. I was kind

of thinking this time last week, this would all be over by now. Right. It's kind of fingers

crossed, you know, the markets are down. You think the president would step back, but he

hasn't. So, okay. Well, we'll come back to that. Let's, um, we're going to keep this podcast

short because I am away. And we, I am having technical difficulties. And who knows what

else is going to happen here. So let's dive right in. Let's talk about, uh, GDP because

that was the, that was a bit of a shocker. Wasn't it, Ursula? The GDP number for Q4 2025,

the, the, uh, this is the, that, this is the second print. So this is a revision to the,

uh, release that we got a few weeks ago. That's right. Yeah. It was, uh, so the, the,

we're still talking about the fourth quarter of 2025 here. So the first print had showed

annualized growth of 1.4% in fourth quarter GDP. This revision took that down by half. So now

we're looking at growth in the fourth quarter of 0.7% annualized, 2% exactly year over year

from the fourth quarter of 2024. And the revision's mostly came in consumer spending, investment,

government. It was kind of all over the place. Um, one thing we learned is how big of a drag the

government shutdown was in the fourth quarter. It took a full percentage point off of GDP growth

in the fourth quarter. So let's say you add that back in 1.7% that's still below potential.

That's still much weaker growth. For a reminder, we had 4.4% growth in the third quarter. So

we went from 4.4% in Q3 to now 0.7 in, in Q4. So yeah, this was a big, big downward surprise in

the revisions. So 2025 is in the books. There will be more revisions, obviously. So

going to play out over a while. But let's just take the numbers as is. You're saying 2025 calendar year

was 2% real GDP was 2% on the nose or was that Q4? Q4 to Q4 is 2% that's right. Got it. Okay.

And that is below the economy, the economy's potential, which is probably at least a half

a point higher than that. And that would be consistent with the run-up and unemployment we

observed in 2025. Yeah. And you said that revisions were downward across pretty much the board,

across all the components. Everything was. Yeah, the biggest downward revisions were to

consumer spending and investment. Yeah. So Christmas was, wasn't the greatest?

It was not. And we have separate spending data to show us that, you know, the last few months

of 25. And now it's looking like the beginning of 26 showed a marked slowdown in spending as well.

So we got real consumer spending for the month of January 2026. And you're saying that what was

that? It was up 0.1% over the month. And that is on a real basis. So nominal was up 0.4% month

over month. It's been 0.1% since October. So it's been 0.1% for the past three months that have

been reported. Again, we're talking about January. Good spending is falling in real terms for two

consecutive months and that decline accelerated in January. So good spending was down 0.4%.

In January over the month, mostly led by durable goods, which were down 1.1% over the month,

very big, a big decline in spending on motor vehicles. Non-durable good spending was flat,

followed by a decline in December. So really nothing going on just outright declines in good

spending. So this is any spending that's happening is being propped up by services spending.

But what I find interesting about that is the mix of services spending. So it's kind of essential

services spending that's happening. It's medical care, insurance, housing,

the sort of discretionary stuff is falling. So recreation, food services, restaurants,

hotels, that kind of stuff is actually negative in January, if not in January and December.

So a real weakening here in consumer spending.

What about income? Because that also came out for the month of January. The personal income

report. Yes. So personal incomes rose 0.4%. That was a little bit of that was actually an

acceleration. Now some of this income stuff is juiced by the tax cuts though that went into

effect in January. And by all these outlays, cost of living adjustments like Social Security Living

Adjustment. So you have to take that with a grain of salt. So we're looking at 0.4%. We are looking

at 4.4% increase in income on a year over year basis. Again, this is for January. That's

significantly weaker though than what we've seen. If we look at it year over year, then we've

seen in the past few months. So it was 4.6% year over year in December, 4.7 in November. So we're

seeing a bit of a slowing there in income. The savings rate popped up. It did. So that went from

4% in December to 4.5% in January. But again, there's some adjustments there because of the income

being juiced in the month of January. That's kind of explains that. Got it. Got it.

In one more big economics, just it came out today and that was durable goods. That's a window

into business investment. And I believe that we got that. Then we, I'm away. So I wasn't able to

do that. That's also for the month of January. Yeah. So core, we look at core, because

typically durable goods spending is very impacted by spending on transportation equipment,

basically planes and whether military or civilian really whipsaws that data. Actually,

the aerospace spending was down. If you take that out and you just look at core, so this is real

business investment spending X aircraft, that new orders were flat over the month zero.

Shipments actually fell for core capital goods, non-defense core capital goods fell over the month.

So that, and that's sort of a window into what's happening right now. The new orders is sort of a

preview of what's to come, right? So that also looks pretty weak. And on a year over year basis,

both have weakened quite a bit from where they were at the end of last year.

So, so the, it seems like the overarching message here is, we ended last year 2025 on a soft note,

and we're starting 2026 on an equally soft note. Yeah, looks like that's continuing, right?

Right. Right. And of course, business investment, again, durable goods is a read on business

investment, had been quite strong at the end of 2025. So, well, to see if this read, I

wanted to think that this would rebound given the tax cuts to corporations, the expensing

that they got under the one big beautiful bill act, and everything related to AI, all that

investment. Right. So something to watch. Okay. Definitely. Okay, so soft. I think, just one more

data point I'd like to mention is the University of Michigan Consumer Confidence Survey, which we

kind of tend to write off, I think, a bit, right? Because of how whip-sotted is by people's political

beliefs. But what I want to say about it is that this was for the month of March, and Michigan said

about half the surveys that came in, came in after the war with Iran started. So there is some

measure of sentiment about very current events, and confidence fell quite a bit. It fell by

over a point compared to February. And interestingly, it wasn't the present conditions index

that fell. It was the expectations index that fell. And also, the inflation expectations held

steady, despite what you might think, given the war and the increase in gasoline prices. But

this survey sort of straddled the time period when the war started. So I think we'd have to see

what happens when we see April data, and we get a full accounting of people's perceptions,

because we know Michigan very much tracks sort of inflation expectations and prices at the pump,

and what people are paying in real time for gas and groceries and that kind of thing.

Okay. All right. Well, very good. And we also, as I, before we're going to come back to the war,

obviously, and what's going on overseas. But before we do that, let's talk about the inflation

statistics that came out for the month of January today. And this week, I should say. And Matt,

do you want to give us your sense of both the CPI, the Consumer Price Index and the PCE,

the Consumer Expendorship later? Yeah. So Wednesday, we got the more recent data point. That's

the February Consumer Price Index report. And then this morning, Friday, we got, we received

the BA released January's PCE deflator, the inflation metric, that the Fed's target. So I'll start

with the CPI on Wednesday. But frankly, I have couched both of these reports this week,

because they're always a snapshot of the past. But as we alluded to, it seems particularly the case

now, given all this data was gathered before everything that's happened in the Middle East over

the past few weeks. But there still is a ton to clean from both reports. So headline CPI rose

0.3% in February. That was a modest acceleration from the month before about what we expected year

over year rate. And remember, this is downward bias from the federal government shutdown, but 2.4%

same as the month before for headline CPI. Core CPI. So looking just taking food and energy

prices away, 0.2% increase in February, a little bit slower than the month before. And there,

we have year over year core CPI inflation at 2.5%. Since the shutdown, every time I'm on, I carry on

about the downward bias. I think we address well, if not conservatively, shelter inflation, the

way that the government had to address data gaps from October, really introduced a downward bias.

So really, what's our estimation? If that didn't happen, if a different methodology was used,

we're at 2.7% for both headline and core CPI inflation. I think now that we've gotten a few months

away, we can look at three, six month moving average, a little bit of interpolation still needed,

but we have enough data from the government shutdown that we can say, take those year over year,

wonkiness out of it, and just what is inflation running now? Right. And there, so the

mouthful, but the annualized three month moving average means a lot right now, in my opinion,

and we're at 3% for both core and headline CPI. Oh, is that right? Interesting.

Yeah, so just there's enough data in hand now that we can, we can ignore what was happening

prior. So the, you know, I know it's a comparison, you know, a comment you make often that we're

closer to 3% than 2%, I think that's becoming increasingly clear. So within, I just to reiterate

too, within this report, we got a modest increase from energy. Again, doesn't tell us a whole lot

about what energy is likely to look like in the coming months, 0.6% increase in CPI for energy.

It's still the middle of the month now. We'll see where that ends up over the average, but pretty

clearly going to be a big positive contribution to the headline CPI in March. Food prices,

0.4% in the CPI for food at home grocery store prices. That's an acceleration. I think that's

something to flag. And again, fertilizer, diesel, all these are inputs that are going to cost more

in the coming months that feed into the agriculture and food industries. So this isn't just an

energy shock. It's an energy shock that's going to show up in a lot of different ways. And we're at

2.4% year-over-year inflation for grocery prices increase of 2.1%. A good story, shelter inflation

continues to come down. So we got, we had the tenants rent and OER owners equivalent rent,

but just broadly together, they're both trending in the right direction. They both OER 0.2%

you're from January to February. It's the same as the month before 3.1% year-over-year growth

in the CPI for owners equivalent rent. It's the biggest component in the CPI. And that's the

lowest rate since 2021. So encouraging, relatively predictable, it's a slow-moving component,

and it's certainly bringing overall inflation down. Health care? No. Opposite. Yeah, rising quickly,

and I'm kind of leading into why the story is less encouraging. We look at the PC deflator,

but medical services inflation, healthcare inflation, 0.6% increase in February. That's big year-over-year,

4.1%. It's another component that moves slowly, so month-to-month readings, and year-over-year

comparisons are informative in a way that others might not be. That we consider noisier.

Three-month moving average there for healthcare costs, 5.3% higher. A lot of different components

underneath that are all kind of rising similarly, whether it's physician services,

inpatient services, hospital services. So that's a big source or a growing source of inflationary

pressure and kind of offsetting some of the improvement we're seeing with lower shelter costs.

And then finally, I think the point worth flagging is the basket of things that we pull out of the

CPI that to us look and there's rigorous quantitative backing for this, but the things that we look

at and say are vulnerable to tariff so trade dependent goods. And there we saw 0.5% increase

in February. That's an acceleration. And that's even with new vehicles, which is in that basket.

A lot of cars are imported. New vehicle prices didn't really change in February. It's perplexing,

but they didn't again. And even with that flat growth in February, we see a half a percentage point

increase in our tariff index that we created. So I think it's a lot going on there, some predictable

and some things are heading into a much different price environment, given everything that's

happening in energy markets. They were likely to see some further acceleration.

And to just reinforce the point that it feels like inflation is at 3%,

the PCE deflator, both top line and core, excluding food and energy, they're also around 3. I

think the core is actually 3.1%. So that's right. In January. In January. And of course, as you

say, just to reinforce it, the PCE deflator is the measure of inflation that Fed uses to set

its 2% inflation target. So we're at 3 and it feels like it's accelerating and target is at 2.

That's right. Yeah, that's right. So if I take all of this together,

what Merce has said, what you're saying, it feels stagnation-esque, doesn't it? I mean,

slower growth, end of last year coming into this, and uncomfortably high in accelerating inflation.

I mean, it's not stagnation like circa 1979. I'm not arguing that, but it does feel like we're

moving in that direction. So these, we've been long saying this, the policies, such as tariffs,

such as heavy-handed immigration policy, they would be stagnationary and it feels like we got

that in just to reinforce the point. This is all before the fallout from another shock,

stagnationary shock, and that's the run-up in oil prices related to what's going on in the

Middle East. Is that fair characterization? Yeah, three supply shocks as you outlined and

that push prices higher and slow growth simultaneously happening. Okay, let me ask you one more

thing before we bring in Chris and Juan Pablo. Inflation expectations, because this is really important,

this is one reason often given that I've often given for why kind of the stagnationary

environment that we're in will result in a kind of a stagnation circa 1979, and that is inflation

expectations. What investors and consumers and business people think inflation will be

still remains low and stable, that there are an anchor on overall inflation. So this inflation

we're observing ultimately will recede. Do you have any sense of the numbers there? Have you

taken a look? Yeah, I don't think markets are disagreeing with you entirely, but I would

couch that majorly in the many of the series that are most reliable and that we look at just have

not fully absorbed what's happened over the past few weeks, but if we look at financial markets

liquid, see things quickly, five-year break even, so what do investors think inflation is going

to average over the next five years is essentially what this measure is telling us. That's a reason

about point, about 20 basis points, so 2.4 for most of 25 or through this year, 2026, and last year,

hovering around 2.4%. There's the average inflation that investors are looking at. Now we're at 2.6.

That's not a cataclysmic, but that's an increase there that is a reaction to what we're seeing,

and how much we don't know about where energy prices and the broader shock spills into. It's

there in the five-year break even, I think most clearly, University of Michigan Survey,

Morrison mentioned, half of those responses came before the conflict began. Don't see any change in

one-year inflation expectations. I don't think that's retail gas prices are already up about 60-65 cents

on per gallon, as I understand it. What we know about that survey, what we know how salient

gasoline prices are to what respondents say, no way to expect that that stays the same in the revised

revision, revised survey we get later this month from University of Michigan. Two-year treasury yield,

that's a little more abstract. It's what investors think inflation's going to do and how the fed's

going to respond. There you have 15, 20 basis point increase over the past few weeks in the two-year,

I'm sorry, 30 basis points to the two-year yield, about 15 to 20 basis points in the one-year yield.

So fewer cuts, why inflation's going to be higher, feds going to have their hands tied a bit. So

markets are reacting, but my overarching opinion or evaluation is that it's still too early to

have a good sense of the impact. Okay, all right, so can't conclude that inflation expectations

are picking up, but can't conclude that they're going to stay down either. Yeah, I don't. Yeah,

I can't say they're looking through it for sure, but there was a kind of on-high alert, I guess,

which I guess makes sense in the context of everything. Okay, anything else on the inflation front

before we move on, Matt? No, nothing jumps out. Okay, so Chris, give us an update. What's going on

in the Middle East? Open any question, take it wherever you want it. I know there's a lot going on,

just give us a sense of things and how they're playing out. All right, so there's been a lot

that's happened over the past week. It feels like it's more than a week, it feels like it's been

a month or two since we last talked, but there's six new developments that I want to specifically

point out. It's new develop six. Yes, okay. Yes, already. And I'll try to go quickly.

The first is that Iran has rejected a ceasefire. This was put forth by foreign minister Abbas,

R.O.G. and also the parliamentary speaker, Muhammad Bagger, Kali Baf. And also the president of

Iran put forth three conditions for which would need to be met in order for a ceasefire to be met

from the Iranian perspective. And those would be respecting the country's rights, paying reparations

and guaranteeing that there is no attack in the future. So needless to say, those are a pretty

good bit away from the Trump administration's conditions, which are an unconditional surrender.

So that's development number one. The second relating to the oil market was a report on Sunday night

by Reuters citing Iraqi oil officials that the country's production at its three main oil fields

was down roughly three million barrels per day equivalent to 64% of total Iraqi production.

That was seismic for the oil market and a good reason why on Monday we opened up significantly

higher. Also the Bloomberg, there was another, the third development was a Bloomberg report that said

not only are we down three million in Iraq but we're down six point seven million barrels per day

in the region if you include cuts by Saudi Arabia, the UAE and Kuwait. That was on Monday,

Sunday Monday as well. And then an IAA report came out on Wednesday. The IAA, the International

Energy Agency is the foremost arbiter of oil, news and information and data for or Western

oil countries. It's Paris-based. It's an international organization. It has immense credibility

across the oil industry. They said not only we're down six point seven, we're actually down 10

million barrels per day if you encounter, if you take into consideration all of the countries

in the region, 10 million barrels per day. At that point oil was started to rock it up near 90

and then on Thursday we had successful attacks in the straight-of-war moves, images of

a supposed American oil tanker set on fire that was shared by the Iranian government and a

successful attack of a tie-linked tanker as well. And if you look at the IMF's Port Watch,

they do a great job of measuring the number of port calls in the straight-of-war moves. That is

down by over 90 percent. Remains down has been down since the start of the conflict. If you look

at the UK Maritime Trade Organization, they measure the number of attacks that vessels both

tankers and merchant vessels have reported. Their estimate is that since February 28 until March 12,

that's yesterday that there have been 16 attacks against vessels that have been reported.

And that is development number five. And development number six happened today when US officials

told the New York Times that Iran had begun to mine the straight-of-war moves.

We've seen this movie before and the conflict between Iraq and Iran in 1991, Iraq put 1,000

sea mines in the straight-of-war moves. US ships had to go in and clear them. It took US ships

roughly two months to clear all of the mines. So that's informative on the timeline. And I'm

sure we'll come back to that. But this would be a significant escalation in the conflict. And it

was one of the catalysts for pushing Brent crude oil to $100 per barrel. So as of Friday afternoon,

we're looking at 103 for Brent. So those are the six developments that have happened.

They explain the run-up and energy prices. I didn't even mention another development which was

intended to be offsetting a coordinated release of oil inventory from the strategic petroleum

reserves of not just the United States, but other countries, Germany, Japan, etc. The announced

release of SPR or strategic petroleum reserves was 400 million barrels. That's equivalent to

about four days of what the global economy needs to run because we consume about 100 million barrels

per day. Of the 400 million, the US is 170 million of that. That took prices down a little bit on

Tuesday. There was also a since-deleted tweet made by the Secretary of Energy, US Secretary of

Energy that the US had successfully escorted a tanker through the state of our moves. The US

government walked back that claim and the tweet has since been deleted. Those were temporary

reasons for oil prices to go back down on Tuesday from where they had opened up on Monday. But as

I mentioned, because of the developments on Wednesday, Thursday, Friday, we're now sitting at a

hundred dollars a barrel. Okay, so a lot there, but just to summarize, before all this started,

Brent Price was sitting, what, $65 a barrel? Around that. Around there. I would say we were close

to 60 at the beginning of the year before we started our price in the risk of a Middle Eastern conflict.

Okay, so let's say 60 and now we're at 100. That's the increase in price. That has resulted from

this disruption to supplies and expectation for further disruption. In terms of supplies,

just taking all the numbers you said because there was a lot of moving parts there, it feels like

what you said is that I have the 100 million barrels a day of oil that was being produced and

consumed before this mess, about 10 million has been taken off line, roughly 10 million. So a 10

percent reduction in production has occurred up to this point in time. Is that right? Is that

roughly right? That is right. And the reason that that is occurring is because oil production is

being shut in because oil can't be exported. It's being stored and best storage is in the ground.

So just stop producing. You can't 20% of the world's oil goes through the

straight of our moves, nothing's going through. The producers produce until they filled up the

storage, the facilities that they had, they filled those all up. Now they have to cut production

and they've cut production by about 10 million barrels. That's kind of sort of where we are.

Okay. That's where we're at. Okay. If that were, if we stayed at 100 bucks at barrel,

you know, for the foreseeable future, what would that mean for US gasoline prices and just kind of

more broadly the economy? What do you think? Could we digest that? If it was if it stayed at 100

dollars at barrel? Could the economy avoid recession? Let me ask, just to give context.

So if I go from 60 to 100, that's a $40 increase. That feels like that would raise the price of

this is now Zandee's kind of rules of thumb that I've ultimately gotten from you over the years.

That would add about a buck to a gallon of regular and let it, right? You could go from,

we were at $3 for a gallon before this. This would now send it. We're not quite there yet because

it takes a little bit of time. We're at $363.70, but we're headed to four. That's where we're headed.

Is that? Absolutely. Okay. Absolutely right. Okay.

And then that doesn't, of course, cuts right into purchasing power, consumers purchasing power.

People have to put more of their hard-earned money in their gas tank. They have less to spend on

everything else. And then, of course, the higher oil prices has all kinds of other impacts on

diesel prices, which goes into anything that's put on a truck, so groceries and Amazon

packages, whatever it is. It goes to jet fuel and therefore airline tickets and that kind of thing.

So when you add it all up, if I go from 60 to 100 on a barrel oil,

roughly speaking, how much does that add to inflation? Say CPI inflation.

So that would add about six tenths. Six tenths. And it would take out about $120 billion

from the economy. And to put that in the context, Mark, I would just compare it to the

amount of fiscal stimulus that we were expecting to get coming into 2026. You know, remember,

that was one of the big reasons why we thought that 2026 was shaping up to be

pretty good. Another year of economic expansion, I believe it was five tenths of GDP,

five tenths of 1%, half a percent of extra GDP growth that we would expect to see in 2026,

because of the fiscal stimulus measures, you know, things that were passed in the one big

beautiful bill, the no tax on tips, the extra pay for overtime work, tax reductions,

salt tax, etc. That was supposed to be around 0.5% on GDP. And so we're going to lose all that

and then some, you know, if we stay at a hundred bucks for the entire year. Got it. Got it. Okay.

So JP, Juan Pablo, anything that Chris gave us, he said six, but he gave us seven developments

and all. Anything he missed, I can't imagine he did, but anything he missed that you want to

call out on what's going on overseas? Well, yeah, I will try to, you know, put us

a positive spin on all this. I think the seven things about six of the seven were pretty negative.

The SPR release was a positive, but I will go back to the IEA report that came out on Wednesday,

and one thing that surprised me a little bit is that they expect all supply to be fully restored

by June, which is kind of consistent with our baseline at the beginning of this conflict.

We're saying this cannot go on for too long. It's just something going on. So the IEA is saying,

yes, by June, we basically go back, we recovered those 10 million barrels that we lost in March.

So they don't explain how and why, you know, how this happens in the sense of, you know,

what are the designs that are there to think that the conflict is going to end or that the

trade is going to open, but the implication is that once that happens, the resumption of supply

is going to be relatively fast. That that's your optimistic spin? Yes.

You know, that June's a long time, right? But I mean, prices will respond before that, you know,

because if we're saying June were fully restored, like we are back to pre-war, like prices will go

down before June. It would be like, we will start as soon as there is a clear picture that that

could happen that we're going to, this is only going to be a two-month disruption, then prices

are going to respond to that. Got it. Got it. Well, I think you mentioned our baseline. That's kind of

like the most likely scenario in the middle of the distribution of possible outcomes and goodness

knows there's a pretty wide distribution of possible outcomes here. We're thinking is that the

President Trump will take in all of the economic consequences of what's going on. So, you know,

the cost of a gallon of regular on the lady going from three bucks to four bucks. The fact that

the stock market has got a lot of red, bringing a lot of red on everyone's screen, you know, we're

four, five percent from the peak. So, it's not that much, but that seems every day, it seems to be

going down another notch. Interest rates are up, long-term interest rates are up. So, the 30-year

fixed rate mortgage, before all this was six percent, maybe even a little bit below that now,

we're at 6.3, 6.4 percent, it's starting to rise. So, taking all that in, the President will say,

okay, this isn't really working. I'll declare victory and we'll move forward, and that's how you

get to that. Everything's back to normal in the straight-offermos. Everything's flowing by

June, early June. That's the kind of the narrative, the logic behind that. The IEA didn't,

that's not what they didn't tell it. They didn't say that. That's not something they would do,

but I suspect they got a pretty similar perspective that we do. That's kind of what's going on.

If that's the case, if that baseline comes to pass and we go from $100 a barrel back down to

something closer to, presumably when everything kind of winds down, we're not going back to 60,

65, because there'll be some kind of risk premium there, but let's say we go back down to 70,

that's our baseline. That's what you're thinking. Yes. That was our baseline for March.

We go back to basically our February baseline for oil prices by the end of the year.

It's going to be a gradual adjustment, but we will be,

March April will be the peak in terms of oil prices, and then we'll see prices declining.

Of course, for that to happen, we have to see, we have to have some positive news in terms of

potential ceasefire and reopening of the street.

Chris, anything to add on the baseline scenario? The narrative I just laid out, now that plays

out in terms of oil prices, is that a fair way of presenting it?

Absolutely. The baseline forecast that we have maintains that this is within President Trump's

power to draw to a swift conclusion. We have alternative scenarios in which that is not the case,

and the conflict drags on for quite a bit longer.

Right. You alluded to this earlier, or maybe you just point blank, said it,

feels like that baseline outlook, it's still the outlook that we had a week ago,

but you don't feel nearly as confident in that outlook today as you did a week ago.

Yeah, and in fact, I wasn't too confident about it a week ago.

Right. Even more than now.

For the careful listener listening to the podcast, but yes, I am less confident in it now.

I will say, another reason for that to happen, or for that optimistic scenario,

is that this is very painful for the Middle East countries.

Saudi Arabia, where all of them are going to be the biggest losers in this conflict.

Even more than I run right now, because I run is the only country that's still exporting oil,

while everybody else is stuck with no revenues. I think they do have a lot of low

power with the US and other Western countries. In everybody's interest for this to end as soon as

possible. Including the Iranians? Including Iranians? Yeah, I don't know about them,

because again, they are the only ones that still exporting, they haven't have to cut supply,

but that's not a guarantee, because one development that I think could be devastating would be

if the Israel or the US bombed this little line of the coast of Iran that is

exports 90% of their oil. If they decide that to take that away, then we will see Iranian

production losses, maybe 90% of their production will be gone. That would be a point of no return

for them. This is a really interesting point. Up to this point in time,

Iran has been able to continue to export, because they have control in their exporting.

How much is that as much as 3 million barrels? They produce about 3.5, I think exports are

around 2 million barrels. And so far, the US and Israel have not disrupted that supply, presumably,

because if they did, that's another 2-3 million barrels off the market, another 10-15-20 bucks on

price of oil. That presumably is why. And then they could also retaliate and really target

production facilities in Iraq and Kuwait and Saudi Arabia. So far, they have avoided too much

damage in the oil infrastructure of those countries. That would be a river con. That would be.

I mean, they've lifted Russian sanctions on oil. The US has lifted Russian sanctions on oil.

So obviously, they're very concerned about the impact on oil prices.

By the way, Russia is the only happy country out of this.

Listening to the conversation, I get a little even more worried about our baseline.

Because if the Iranians are able to continue to export oil and generate oil revenue,

that feels like there's less pressure on them to actually come to end this thing,

that they'll continue to push here. It feels like, no?

It does. I think that the pressure on Iran comes from the geopolitical cost. I think

want Pablo is alluding to this because they've upset many, many countries in the Persian Gulf.

Also, through the degradation of their conventional military arsenal,

a number of misalantras have been taken out. Drone carriers have been taken out.

Naval vessels have been sunk, etc. But I would note that Iran still maintains an arsenal of

thousands of missiles, thousands of drones, thousands of sea mine. That's why the US has not deemed

it safe for US vessels to escort commercial shipping vessels through the strait right now.

If the US thought that it would be safe to do so without the risk of a US vessel getting sunk,

then they would do so. But they deemed that that's not realistic right now, and that Iran's

military continues to need to be degraded before that's safe to do.

Yeah. Okay. All right. That does leave all this conversation, does leave a high probability,

an uncomfortably high probability that we're going to go down a darker path here.

And I know we have constructed an alternative scenario that we've designed to be on the 10th

percentile of the distribution. So not all the way on the tail, but kind of out there a little bit

in terms of where it is in the distribution. Chris, do you want to describe that scenario?

Yeah, absolutely. So that is that mark is referring to the S6 scenario for all of the

the people that are familiar with our alternative scenarios. We release our baseline forecast every

month. We also construct a set of standard alternative scenarios. Those are updated every month as

well. And S6 is the most severe scenario in terms of oil prices. In that scenario, we reach a peak

price of $125 per barrel on Brent averaging for Q2. And that assumes that the

straight of our moves is closed until early to mid June. And after that, the straight begins to

reopen. It takes a while for us to be fully back online with 20 million barrels per day of oil

and product moving through the straight. But we start to resume normal activity in early to mid

June prices start falling in Q3 and beyond. Yeah. And by the way, good time to advertise our webinar.

You know, we have a webinar this coming Wednesday. And that's where folks that are deep into

these scenarios can come and listen and we'll give you a good clear sense of things. But just to keep

it a little higher level. So just to make it clear, just to make sure I have it right. In our

baseline, we're assuming that by early June, the straight of our moves is up and running, oil is

flowing. The world's consuming producing 100 million barrels a day. That the world is back to

where it was in early June. In this alternative scenario, we're assuming that the straight of

our moves is completely closed all the way through June of this year. And it's not until after

that that it starts to reopen and take some time to get back to normal. So it's a lengthier period

of closure. Is that roughly right? So I'm not sure if I heard you right, but our baseline assumes

that the straight begins to reopen by the end of March. Yeah. And it's back to normal by early June.

Yes. And our alternative scenario 125 for Q2 assumes that we're completely closed until early to

mid-June with normalization just after that. And just to be clear, in both the baseline and this

alternative scenario, 10 million barrels is still offline until the straight is reopened. So the only

assumption that is changing that is varying here is the amount of time that the straight remains shut.

Got it. Got it. And in the base, we're at $100 a barrel for Q2 roughly. And in the scenario,

the alternative scenario, we're at 125, you know, something to that effect. Roughly speaking.

Well, our baseline has a much lower crude oil price for Q2. It does. Okay.

Right now. But, you know, as you said, that was before the developments of the past week.

So, you know, we do our baseline forecast every month. So our next opportunity to incorporate

developments would be for the April forecast. Okay. Got it. Got it. Okay.

Needless to say, there's a lot of moving parts here. And things are changing very rapidly. But

but no matter how you cut it, it feels like this is a a meaningful what's going on here is a

meaningful and growing threat to to the economy. And as we began the conversation, the economy

already feels like it's on the soft side of things coming into 2026. Yeah. I mean, and just to

expand on that, I'm not sure if we've had certainly not while I've been covering energy and I've

been in economy, this will be my 20th year as a professional economist and cover energy for most

of that. Have never seen a supply disruption of this magnitude. We saw we saw it just demand

disruption with COVID that was along the scale or more. But have we ever had 10 million barrels

per day just go offline in a matter of weeks? I certainly haven't seen it. Yeah. Okay. All right.

We're going to keep the podcast relatively short. As I mentioned, we do have a webinar on Wednesday.

Anything else to add to the conversation before we call it a podcast, Chris, on Pablo, Marissa,

Matt, anything? No. I don't think so. Yeah. Let's see what the geopolitical developments are.

Yeah. Well, going on. And I do want to advertise another one more advertisement. I've done this

for the last couple of weeks. I'll do a couple more. We've got our banking summit, the summit in

San Diego in early May. The economic stay is May the 6th. So we hope to see you there.

Please join us in San Diego in a couple of months. And with that, I think we're going to call

this a podcast. Thank you for listening to your listener. Talk to you next week.