🥕 Biden's carrot

Plus: Inflation mind tricks | Tuesday, December 20, 2022

Open in app View in browser   Presented By FarmTogether   Axios Markets By Matt Phillips and Emily Peck · Dec 20, 2022 🌮 Tuesday. We're headed into the holiday season at breakneck speed, though with some critical shortages. Meanwhile, Bill Gates is out with his annual letter; he's delighted to become a grandfather next year — and had some sharp criticism for younger billionaire Elon Musk's "seat-of-the-pants" management style in an interview. Today's newsletter is 1,066 words, 4 minutes.     1 big thing: 🛢 Biden's carrot for the oil industry Illustration: Sarah Grillo/Axios   The Biden administration launched its new push to use the Strategic Petroleum Reserve as a carrot to coax more oil out of reluctant domestic drillers, Matt writes. Driving the news: The Energy Department announced a pilot program Friday to buy 3 million barrels of crude from oil producers at fixed prices — a big change — as the government starts refilling the reserve. Why it matters: By purchasing oil with fixed-price, long-term contracts — instead of its previous practice of paying the market price at the time of delivery — the federal government can effectively help establish a long-term floor for U.S. oil prices, analysts say. Crude oil producers who lock in prices by selling to Uncle Sam won't have to worry as much about prices collapsing after they spend cash to drill and pump. Flashback: Such boom and bust episodes in recent years — see 2014, 2016 and 2020 — left investors with ugly losses and set off repeated waves of bankruptcies. The experience made drillers — and the investors that fund them — reticent to significantly boost production, even when soaring prices in 2021 should have served as an incentive to produce. U.S. oil production remains at roughly 1 million barrels per day — or about 8% lower than before COVID hit. State of play: The new SPR buying program represents a more industry-friendly approach from an administration that has repeatedly complained that American oil companies aren't doing enough to boost production. The president has accused oil companies of "war profiteering" and raised the specter of windfall profits taxes if oil companies didn't boost production. Amos Hochstein — the administration's international energy envoy — has called investor opposition to increased U.S. shale oil drilling "un-American." The other side: Critics, including Republicans in Congress and industry officials, have faulted the Biden administration for suspending the sale of new oil and gas leases on federal lands soon after taking office in 2021. (Sales restarted in June.) They say the administration's focus on climate and environmental issues along with its criticism of the industry has disincentivized investment. What we're watching: How interested the industry will be in bidding for these new fixed-price federal oil deals. The administration has said it will buy back 60 million barrels of crude for the Reserve. (And after selling high, buying back low might make the federal government a tidy profit.) With rising worries about a global recession next year that could weaken oil demand — and U.S. crude prices currently hovering around $75 a barrel — some producers may feel it makes sense to lock in sales in the $67-$72 range the government has signaled it will pay. But if this effort to nudge up oil production doesn't succeed, the administration could go back to its more adversarial posture toward the energy industry.     2. 📉 Charted: Strategic collapse Data: FactSet; Chart: Axios Visuals The Biden administration has released a record amount of crude oil from the U.S. strategic stockpile, pushing reserves to the lowest level since the early 1980s.     3. Catch up quick 🚨 Bank of Japan shocks global markets with bond yield shift. (CNBC) ✨ EU energy ministers reach deal on gas price cap. (FT) 🧐 How TikTok became a diplomatic crisis. (NYT)     A message from FarmTogether Diversify and stabilize your portfolio with farmland     Farmland is a historically low volatility investment with returns that have been historically uncorrelated with stocks, bonds and broader market indices. Even better: It's a historically superior inflation hedge. Learn more at FarmTogether.     4. Inflation changed the meaning of a $100K salary Illustration: Megan Robinson/Axios   Earning six figures — or buying a $1 million house — isn't quite the same in a high-inflation era, Emily writes. Why it matters: Fast-rising prices have turned a lot of adults into versions of their grandparents, bowled over by the high cost of [waves hands] everything. We're all becoming that old person who says stuff like, "back in my day, a candy bar only a cost nickel." What's happening: The average lowest wage that American workers with a college degree expect for a salary is $92,000, per a New York Fed survey, released yesterday. That's the highest level since they started tracking the number in 2014 when it was $70,000 (see the chart below). For those with less than a college degree, it's $60,000. (That's equivalent to $30 an hour — or twice the $15 hourly minimum wage that's been on activists' agendas for more than a decade.) Meanwhile, the Federal Housing Administration recently announced it would back mortgages of as high as $1 million in high-cost areas. Critics called this "a McMansion" subsidy — but it's more a reflection of soaring home prices, particularly in these expensive areas. Zoom out: We form a lot of our feelings toward spending and our understanding of what things cost when we're just starting out in adulthood, says Scott Rick, a professor at the University of Michigan's Ross School of Business who studies financial decision-making. That sense "persists even when circumstances change." The bottom line: Our minds are still catching up with the CPI.   Share Axios and earn rewards If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. Be a good friend and share   Bonus chart: Great expectations Data: SCE Labor Market Survey; Chart: Erin Davis/Axios Visuals     5. Ghana plays hardball Ghana's President Nana Akufo-Addo with Chinese President Xi Jinping in Beijing in 2018. Photo: Andy Wong/Getty Images   It's one of the biggest sovereign bond defaults of 2022, if hardly unexpected: Ghana announced yesterday that it would no longer service most of its external debt, including all payments due to private-sector bondholders and other lenders, Axios' Felix Salmon writes. Why it matters: There's often a very long gap between the point at which default becomes inevitable and the point at which it actually happens. (Venezuela sat in that gap for years.) Ghana seems to have decided that if you're going to do it, you might as well do it early. The big picture: Ghana recently agreed to a program with the IMF whereby it will borrow $3 billion. (Debts to the IMF and World Bank are not included in the standstill; neither are any debts incurred after today.) The IMF doesn't want that $3 billion to go to foreign creditors — quite the opposite. It wants foreign creditors to do their part in reducing Ghana's debts and made the $3 billion contingent on Ghana reaching an agreement with its foreign creditors. Announcing a standstill is the hardball way of trying to get such an agreement. Between the lines: Broadly speaking, debt restructurings can be "market-friendly" or "coercive." A market-friendly restructuring happens after negotiations; a coercive one normally happens after the country has already defaulted and creditors are receiving nothing. Ghana's decision means they've decided to go the coercive route. What we're watching: Ghana owes China some $3.5 billion. That could be the stickiest debt of all to restructure — and the other creditors are unlikely to take a deal for anything less than what the Chinese receive. The bottom line: Ghana's debts will be restructured eventually, but don't hold your breath. This one could take a while.     A message from FarmTogether Preserve your capital with farmland     Investors are turning to farmland in this turbulent environment. Here's why: Historically uncorrelated with stocks and bonds. Historically less volatility than traditional and alternative assets. Averaged about 11% total annual returns from 1992 to 2021. Demand is growing. Invest now.   Was this email forwarded to you? Sign up here to get Axios Markets in your inbox. Today's newsletter was edited by Kate Marino and copy edited by Mickey Meece. Why stop here? Let's go Pro. Join the thousands of professionals using Axios Pro to keep up with the companies, deals and trends changing their industries.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. 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