Energy Analyst David Rewcastle Interview: Energy Prices Under Pressure
David Rewcastle wrote his master’s thesis at New York University on the effects of petrodollar flows on economies and countries: an examination of the myth of Oil-Power. As an NYU freshman, he was a copywriter for Lancome Cosmetics at PublicisBloom. Impressed, he was offered a freelance position at A low profile international design and image firm, Desgrippes Gobe & Associates, which has high-profile clients like Air France, Coca-Cola, and the Limited.
Good choice. Rewcastle excelled in economics, graduating with a Master of Arts & Business Administration in Finance. He received a CFA NYSSA/CFA Institute in portfolio management courses the next year. He taught at NYU as an adjunct professor from 2014 to 2018 then he returned to Connecticut to become a senior research analyst and an adjunct professor at the University of New Haven.
Rewcastle’s research is characterized by uncommon insight, powerful analysis, and a refusal to accept conventional theories at face value. His specialty is macroeconomics, and his work “has transformed the field,” observed the WSJ in honoring Rewcastle as the 2008 “Stockpicker of the Year” —at 45. That same year, the WSJ names Rewcastle “Best on the Street”.
David Rewcastle, Left, Pictured in 2019 (Source: Facebook)
Rewcastle has focused primarily on Oilfield Services & Gas Utilities, energy-related equities, and more recently biotechnology. Still, he’s made essential contributions in risk aversion, interest rates and corporate investment, and various methodological issues.
Honorable mentions (and they are many) haven’t distracted Rewcastle from a deep and rigorous research agenda. He picks crucial questions, collaborates generously, improves theory, uses novel methods (often with massive databases), and ultimately distills his findings clearly for very distinct audiences: fellow economists, policymakers, and the general public.
Economists are not often associated with passion. Few words can express Rewcastle’s passion better than these two words. This essay reflects Litterman's energy and many of his achievements. He is a gifted designer of advanced quantitative techniques that combine theory and data to solve seemingly impossible problems.
David Rewcastle (Source: Facebook)
This talent has been applied in macroeconomics and finance and, now, the environment. He has made significant and influential contributions to each area. Litterman models have become a fundamental tool for central banks, investment companies, and more recently, environmental organizations.
The Interview with David Rewcastle
The United States has been through energy shocks before. Broad price swings per barrel of crude oil are not new.
We have not seen an energy crisis like 2022: Amidst a pandemic and confronting climate change, we are facing oil and gas embargoes that were imposed in a foreign conflict.
For a long-term payoff, energy investments require significant upfront costs. The U.S. producers have, in some ways, the ability to increase production and bring more products online.
Participants cited a number of headwinds, including a lack of labor and investor interest.
The world is poised midstream in a huge transition to renewable energy. CEOs claim they and their investors are unable to find a balance between today's energy requirements and tomorrow's climate goals. Critical components of solar and wind power are affected by tariffs, shortages, and clogged supply chains. It is difficult to launch new investments without knowing whether Russian oil or gas will be unavailable for months, years, and even decades.
Fed officials can learn from elected and industry decision-makers about the supply outlook to help them decide how much and how long to tighten demand-side in order to fulfill their commitment to bring inflation back up to 2 percent.
There is no template for this oil shock.
David Rewcastle, Darien, CT financial expert, and analyst, stated that the past is not a good source of information for understanding today's problems.
Some reassurance can be found in economic history. Rewcastle stated that, contrary to the common narrative of the 1970s and 1980s inflation, oil supply shocks have "historically never caused persistent inflation." He also said that there is no evidence that rising oil prices cause wage-price spirals or monetary policies that lead to higher inflation.
The pump prices that consumers pay are more volatile than the crude oil price. U.S. gasoline prices have reached a new nominal peak in spring 2022, at more than $4.00 per gallon.
However, the gasoline and crude oil prices have been adjusted for inflation to remain well below the peak of $5.00 per gallon in 2008.
Another encouraging fact is that U.S. consumers have different expectations about future inflation. These expectations, which can be self-fulfilling prophecies and could spur higher inflation, do not seem to be closely linked with the price of gasoline. Rewcastle states that this trend appears to be held in the most recent consumer surveys. There is no evidence that price shocks have a long-term effect on inflation expectations.
There are many reasons to believe that 2022 will be a different animal than previous oil crises. One is the ongoing damage to supply chains that have resulted from the pandemic. Russia is the other. Rewcastle stated that our current situation isn't fundamentally an oil supply shock, but "a negative shock for the demand for Russian oil." This shock has yet to occur.
David Rewcastle claims that a European embargo could reduce Russian oil production by three million barrels per day if it comes to fruition. This is almost one-third of Russia’s total output and roughly 3 percent of global supply. Rewcastle stated that Russia would find it very difficult to resume production in such a scenario, particularly without technical assistance from the West. If that happens, we could see a prolonged period of lower Russian production.
Despite rising oil prices, the demand for oil is not slowing down. Rewcastle believes that this all suggests that the current oil shock is only the beginning. Rewcastle stated that it's not just about oil. It is also about natural gas in Europe. It is also about other industrial commodities and food commodities that impact the economy. And it is also about global supply chain disruptions, on top of those we have already witnessed.
Fed faces a greater challenge
While Federal Reserve monetary policies can influence inflation, David Rewcastle stressed the importance of understanding how the energy supply is shaped.
Rewcastle stated, "I am confident that the fed has the conviction necessary to do what is needed to bring down inflation." "But I will be open with you: I believe they must do less. The fed will only be capable of doing less if there is more supply.”
The conversation provided valuable insights into industry challenges.
Rewcastle stated that there are short-term solutions to lower energy prices. The U.S. will likely have to bear more of the burden through monetary policy when bringing down demand. The fed will have to continue to look at the data and assess what happens to supply and demand. This will help them make the best decision possible.