Reginald Mathalone/NurPhoto via AP
Oil refineries in La Porte, Texas, on April 14, 2022
In this past year of supply chain dysfunction, no group has been more creative about viable solutions than the team at Employ America. Under the banner of full employment, the think tank has dived into how to boost supply of critical goods, tame inflation, and prevent overzealous monetary tightening, in the process presenting a progressive vision for using government levers for a stronger economy.
The Prospect talked to Skanda Amarnath, executive director of Employ America, about his team’s innovative proposals, the urgency—and risk—of increasing oil and gas production, the perilous path of current inflation-fighting, and whether policymakers are finally boosting manufacturing or merely tinkering at the margins of markets. An edited transcript follows.
TAP: Employ America released a plan for the White House to use the Strategic Petroleum Reserve to ease oil prices. Why wasn’t it enough when Biden tapped the SPR months ago?
Skanda Amarnath: The SPR is a pretty special public asset. It’s a way to store crude oil over long periods of time, no trivial thing. There are both national-security and civilian economic-security components. They released barrels from their salt caverns in Louisiana and some other places in the United States. We called for that. But for us, that’s actually the tip of the iceberg. They could use this asset to bring additional stability to the price of oil, especially in the context of looming supply risks from Russia.
Trying to refill the reserve is about trying to shape the future supply trajectory, trying to get more barrels produced, and hopefully get a better alignment of supply and demand in the future. If you look at the futures curve for oil, the spot price that you pay for a barrel of crude oil today is significantly elevated. If you’re a producer, and you want to lock in a future price, that future price is much lower. So if the SPR came in and said, we’re going to release our barrels today, and also commit to buying future barrels, and we can contractually enshrine this, one, you make a nice taxpayer profit. And two, you provide certainty for investment.
The breakeven price is close to $60 a barrel. Isn’t the futures price above that?
Yeah. If you want to make a profit, $60 is probably right. But what’s changed is also the hurdle rate. What is my rate of return on top of that, given that oil prices are really volatile. You can look to the past decade, and we had three big price crashes—two mega-crashes, one mini crash. That has spooked the industry.
Even as prices go up, producers’ willingness to invest in production has changed. Maybe under a more competitive or less consolidated market structure, that wouldn’t be the case. But right now, that is a pretty good description of what’s going on.
Tacked on to that is a goal to provide direct price contingency. Saying, we’re going to refill the reserve in a crash. You can do that by selling put options, physical insurance, saying that if prices crash, you can stick your excess production here, as opposed to trying to sell them on the market at a lower price, and further fueling price crash dynamics.
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Europe is ramping up fossil fuel imports, but also pursuing a huge campaign of oil and gas demand destruction. The U.S. isn’t ramping up renewables at anywhere near that rate. How can you be sure this doesn’t create more fossil fuel lock-in?
We should be able to walk and chew gum at the same time. You will not find me saying we should spend less on trying to deploy renewables, or scale up electric vehicles. Production capacity, accelerated turnover schemes are all things we should be discussing more. But we should be honest about the timelines.
There is a timeline for being able to scale up U.S. oil production, and take it offline. With supply chain bottlenecks, it takes about a year to accelerate U.S. production, from investing, to putting the drill bit in the ground, to getting oil out. You’re talking about two years of good production, and then it declines pretty steeply if you don’t keep investing.
Aren’t refineries a major bottleneck for ramping up U.S. production? You’ve said refinery capacity is being used as an “excuse” to not deal with the crude oil supply picture. But it is a real constraint, no?
The refining bottleneck is very real. It’s very hard to deal with, and actually pretty intractable on its own. We’ve had capacity crammed down in the United States. Eleven refineries were shut down under the Trump administration. We had a lot of accelerated cramdowns during the pandemic and in 2020. And there are time lags to capacity coming back online. Restarting a refinery takes at least one or two years.
There are plans for projects in emerging markets that were supposed to come online. Mega-refineries in India, for example, are still slated to come online in 2023. But there was a fragile bridge period. These accelerated closures did not help, and we’ve lost Russian capacity. China has had their own policies for why they’re not running their refineries anywhere close to full capacity, related to some of their emissions goals, they say.
It’s an issue you can’t do a whole lot about. We should try to make sure whatever is running right now can keep running. It’s a very capital-intensive and kind of crappy business, because you’re usually losing money in most years, and one or two years, you make the big payout.
There’s Russian crude being refined in India, making it into Europe and the U.S. right now, with the help of big commodity traders. Would you talk about the role of sanctions and secondary sanctions in the oil price run-up?
I try to stay away from that, because we’re not a foreign-policy think tank. There’s a lot of stuff independent of these oil embargoes that is intentionally meant to cram down on Russian crude oil production. The point was to block machinery that’s important for oil production from getting into Russia.
But I think the train has left the station on a lot of this. I don’t think Halliburton is going back to Russia anytime soon. There’s some path dependence. We can’t undo this very easily. So now, talking about things like the Russian oil price cap bugs me, because it’s like, this is something you should have thought about before you went wholesale on sanctions.
Why not put more emphasis on demand-side measures? Germany, through a combination of public-transit subsidies and fuel tax reductions, brought down June inflation.
It’s mostly about the tax reduction, you can get some sticker shock effect. But whether your goals are climate-oriented, foreign policy–oriented, or just about managing inflation in a sustainable way, I find that antithetical. We have a real shortage, real supply risks.
IEA laid out like a ten-point plan for how we could get more demand offline. I co-sign all of it. I think it’s all worth doing. We should pursue it. And it’s not all at the federal level. We should look at administrative power, and this stuff is probably more easily executable at the state or local level. We should be doing congestion pricing right now. It’s ridiculous that Phil Murphy and Kathy Hochul and Eric Adams can’t hammer these things out. The low-hanging fruit are in blue urban areas. But you’ve seen the opposite intention, New York state trying to cut its gas tax.
But it is hard to cut demand. IEA was like, if we all do this together, we can make a serious dent. It takes some pretty Herculean assumptions to get there. It’s a collective-action problem. And losing as many barrels as we could potentially lose from Russia—as a baseline, two and a half million barrels per day, and in a horror scenario, four million barrels per day—it’s hard to say you can do this purely through demand. There are frictions to how much you can adjust consumption, if you’re trying to keep the standard of living roughly in the same ballpark.
The pandemic and its aftermath have exposed the lack of resources and production in the United States. We’re still suffering from that in increasingly operatic and random ways: a fire at a factory that makes machines that make semiconductors, weather events spoiling harvests of wheat compounding the Russia shock. We’ve had everything except locusts and pestilence.
Do you think that policymakers and business leaders have learned their lesson on this? Are we taking enough steps to make supply more certain? Or is this endemic?
We’re still in a regime of shareholder capitalism. And as long as that’s the case, there’s going to be a lack of sufficient private incentive to maintain capacity. Instead, run your margins as thin as possible, and lever them up.
That can be privately optimal. But the job of public governance is to think about global tail risks that are not going to be optimized in the short run. That might be spare refining capacity, and not just for petroleum. Our refining capacity for lithium is all in China.
My fear is that people in power are still thinking pretty narrowly about this—the market will figure out the optimal level of capacity. But you do need to figure out the right blend of public and private to make sure there’s capacity when you need it, for particular tail events. And those tail events are not merely about financial crisis. They’re also about the real side of the economy, as we’re finding out.
You’ve talked about the downside of raising interest rates for the supply side, not just the demand side. I read a really good piece from Eli Dourado about how the real binding constraint is state capacity. That’s what matters for transit construction and other infrastructure needs. Do you buy that our state capacity matters far more than short-term interest rates?
Absolutely. Let’s not make it seem as if the Fed is the only thing that matters for investment, or even the dominant thing that matters for investment. State capacity is very relevant. I wouldn’t say a lot of the problems we have right now are because our transit costs are high. But boy, would it be nice if transit costs were lower, so we could actually build public transit faster, build rail faster.
Those of us who are more left-leaning should figure out where we need to invest more in administrative bureaucracy. Bureaucracy is treated as something negative, but we need internal, politically insulated, competent state capacity, as opposed to outsourcing to consultants, which come with a lot of cost bloat.
You’ve emphasized the supply-side factors driving inflation. But talk about the specter of wage-push inflation. The left wants workers to gain more bargaining power. How should we think about the potentially inflationary consequences? In your ideal scenario, where we’re running the economy hot and wages do start pushing up costs, because business is raising prices to shield its profit margin, what tools do you bring in to manage prices or profits?
The wage-cost push scenario is liberally used as a hypothetical by the likes of Larry Summers, and people who are aligned with him, as though it’s descriptively true. But it’s hard to find examples. If you look at where the prices have really increased, it’s not because wages were too high. It’s not like car prices went up because UAW asked for a more generous contract.
How do we manage scenarios where there are high wage demands, and they’re showing up in the price mechanism? It’s worth being clear that people don’t like inflation. It’s not a popular thing, even if your wages are going up. So we’re going to need solutions that are about building up productive capacity, to be able to manage that.
We can manage demand in more direct ways, through tax policy or regulatory policy. Because right now we’re doing very bank-shot approaches to managing demand. What we’re currently doing is trying to raise financing costs as our solution to inflation. Most households are not sensitive to those financial conditions directly. So, if you want to reduce demand for scarce goods, there can be merit to that. But how we’re actually doing it is very perverse, and not directed to the areas where we need to lower demand.
Is there some optimal level of inflation that the left should potentially support in that it cuts into corporate profits, you know, helps workers take back some share of a value that, that they’ve lost to 40 years of wage stagnation, amid rising productivity?
That’s kind of indeterminate. There are a lot of countries that have lower inflation and more egalitarianism than the U.S.
Japan and Germany are good examples. They both have a lot of problems, and they both hate inflation—like left and right, have a strong dislike for it. They have more egalitarian mechanisms for assuring that people’s real standard of living is kept flat. There is also a lot more codetermination in Germany, and at least a conscientiousness about the need to manage those outcomes better.
What the actual inflation rate ends up being is hard to say. The stuff that really matters for inflation like food, energy—the highly inelastic areas where demand is a function of necessity—that’s the stuff to really manage well. Making sure that’s managed well may require making sure wage growth is moving in a sustainable direction, but not a leap to, well, because those costs go up, we must suppress wages. We should be trying to break that linkage.
You mentioned that most households are not sensitive to financial conditions. It’s a weird way to bring down inflation. That’s true, but the most direct channel of this very indirect process is mortgage rates. You’ve correctly explained what this Fed hike is doing to the housing market: It’s bringing down starts when we’re already way behind on housing supply.
Does this suggest that the highly cyclical private market for housing construction is not equipped to deal with the problem? Do we need social housing, and countercyclical federal funding, to break that cycle?
Yes. Even if we could just be immune from Fed rate hikes threatening home-building, the need for social and affordable housing is going to be there.
The stuff that’s really interest rate–sensitive tends to be aspirational—single-family homes, exurban. And there’s spillage to the whole industry, the multifamily market. All construction goes down when the mortgage rates go up.
You need a whole ecosystem of different types of firms to be able to produce the materials and the services needed for actually doing home-building. And what we’ve decided to do is instrumentalize that whole ecosystem for inflation in a very odd way. It’s not, we’re going to instrumentalize it by having abundant housing to solve inflation. No—we’re going to tamp this down really aggressively whenever we see the threat of inflation. Because maybe it has downstream effects on homeowners’ consumption.
And even homeowners’ consumption—most of the mortgage universe in the United States is fixed rate, not variable rate. So just because interest rates go up, it’s not the case that expenses are going up directly. It maybe crowds out some people who were thinking about buying a home, and pull back. And then builders pull back. But that’s like, we’ve instrumentalized something that is very much about investment and capital formation, to do something for consumer price inflation. Like, what are we doing here?
Annie Lowrey just wrote an article at The Atlantic lamenting that “we” wasted a decade of low interest rates and didn’t invest. And now it’s too late. Do we really have so little agency? What exactly is blocking productive investment—and what’s the coalition you envision, the political constituency, to push for supply-side spending?
Right now, the major constraint on more public investment is centrist Democrat senators, or senator. That is the political constraint. There are a variety of stakeholders who think investment is worthwhile, and see the opportunity. But learned helplessness is a big thing.
From 2010 to 2014, we said, we’re on the verge of going broke. We can’t do any of this stuff. Interest rates are going to zoom up because of some debt-to-GDP ratio. But we’re now having a discussion about productive constraints. We’re talking about physical capacity shortages.
We shouldn’t act like interest rates exist in this sort of ether—when interest rates are low, we get to do stuff, and when interest rates are higher, we don’t get to do stuff. That’s not actually what determines what the government can or can’t spend on.
