Jim Himes Asks Powell Directly: 'At What Price For A Barrel Of Oil' Will US Feel 'Inflationary Effects?'

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During a House Financial Services Committee hearing, Rep. Jim Himes (D-CT) questioned Federal Reserve Chair Jerome Powell about oil costs and potential impacts on inflation in the wake of U.S. strikes on Iran.

Transcript

00:00Thank you, Mr. Chairman, and welcome, Chairman Powell.

00:06Let me start by thanking you for your careful keeping in your lane and steering clear of fiscal policy,

00:16and in particular for your stalwart defense of independent monetary policy.

00:20You're getting pressure from very powerful places and lots of kibitzing from lots of members on the interest rate question,

00:29and most know better that our independent monetary policy is the very bedrock of our economy, so thank you for that.

00:36Mr. Chairman, I want to talk just a little bit about some of the technical matters associated with energy prices and inflation,

00:42because obviously turmoil in the Middle East has sent oil prices swinging wildly,

00:46with West Texas Intermediate in the last month or so being anywhere between $61 and $75 a barrel.

00:54We recently saw the Iranian parliament vote to close the Strait of Hormuz,

00:57which currently handles around 20 million barrels a day, a fifth of global demand,

01:02and a little bit more in terms of natural gas.

01:06Chair Powell, you said last week that conflict in the Middle East in the 1970s resulted in very large inflation shocks.

01:12In contrast to the 1970s, today the United States does not import most of its energy.

01:19We call ourselves energy self-sufficient on a net basis,

01:23but I hear the argument made that I think is wrong,

01:27that because we're energy self-sufficient, somehow we are insulated from global energy price market prices.

01:35Can you comment on that?

01:36Is there any validity to the notion that we are not,

01:39American consumers of energy are not subject to global swings in energy prices?

01:43Yeah, so the price of oil is set globally, right?

01:51And I think if you go back a few years, the thought was that when the global,

01:58we had a natural shock absorber, which is that we would just drill more.

02:02And if prices went up, we would drill more,

02:04and so you wouldn't have these sustained price shocks that we had during the 1970s and the original OPEC era.

02:10I think that is actually in question now because, you know,

02:13the oil industry in the U.S. is being much more careful and focused on return on investment than they were,

02:19having been burned with overcapacity.

02:21Right, and I mean, yeah, in the long run, you can invest in additional extraction technologies,

02:26but this does not respond to day-to-day spot prices.

02:29So the point I'm trying to make is that the conflict in the Middle East,

02:34if it resulted in $120 barrel oil, which is where oil was in 2022,

02:38that would have a fairly substantial inflationary impact on the American household.

02:43Is that correct?

02:44We would certainly feel that, you know, and as we've discussed earlier,

02:48there's a lot of lore around looking through oil price shocks,

02:52but that depends on the facts and circumstances.

02:54What, as a technical matter, we tend to refer to CPI, which is a basket of goods,

02:58and we measure the price changes.

03:00Roughly speaking, what percentage of that basket is comprised of energy?

03:05Hmm. I don't have that on the top of my head.

03:09It's much less than it was, of course.

03:11The oil consumption is much less than it was in the 70s as a percent of GDP.

03:16But energy includes natural gas and gasoline and that sort.

03:19It's a meaningful portion of the industry.

03:21Yeah, so, of course, we have more natural gas than, we have so much natural gas,

03:25so that'll always be there for us.

03:27So none of us can predict what's going to happen in the Middle East in an hour,

03:32much less in a week or a month or a year.

03:35But as a technical matter, at what price for a barrel of oil

03:42does the American household begin to feel inflationary effects?

03:47So we're, you know, we're at $75 a barrel roughly right now.

03:50At what price point does the American household begin to feel some inflationary effects?

03:56I don't want to throw out a number.

03:57You know, I think we're, and we're, you know, we're, frankly,

04:00it's too early to say that something like that's going to happen,

04:03and I know you know that.

04:04But I wouldn't want to throw out a specific number.

04:06If, you know, if prices went up materially, people would feel that.

04:10Okay. Okay.

04:12Again, I think if I look at the data here, WTI per barrel, about 120,

04:21it peaked at about $120 in 2022.

04:26What do your models suggest would occur to inflation,

04:30and how would it influence the Fed's thinking,

04:32should we be back at $120 a barrel?

04:36Well, let's just say there's a big price spike in that range.

04:39So, you know, we would look at that, and we would ask ourselves,

04:43we look at the overall situation, we would ask ourselves, should we react to that?

04:47So, for example, during the, what we call the era of spring,

04:50back in the early teens, oil prices went up a lot,

04:54and that went into the price, and there was a discussion,

04:57and I think the right answer was to look through that.

04:59The question you'd be asking to yourself,

05:01because by the time you react, the price comes back down.

05:04I think the question today would be, you know,

05:06is the situation different, and what would be the implications of those differences?

05:10Gentleman's time has expired.

05:12I thank the gentleman.

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