Gas prices: ‘Consumers are having real sticker shock,’ analyst says

Vectis Energy Partners Principal Tamar Essner sits down with Yahoo Finance Live to talk about consumer reactions to trends in gas prices, slow transitions in energy infrastructures, moves away from Russian oil, and commodity market opportunities for countries like India and China.

Video Transcript

- Higher energy prices can impact consumers at the pump and companies' supply chains. And there's historical precedent. In the 1970s, the oil price surges leading to a recession. Joining us now with more insights on the trend higher in oil price rises that we've seen, Tamar Essner, who is the Vectis Energy Partners Principal. And Tamara, great to speak with you here on the day.

First and foremost here, higher oil prices, they impact economic growth. And with regard to where we sit right now and trying to see an economy rebound from the pandemic, how much of a headwind does this create in the near term? And what type of demand destruction could it create, as we were just discussing with some of our markets guest a moment ago?

TAMAR ESSNER: Yeah, well at the moment we're seeing that consumers are having real sticker shock. And the question is, does the sticker shock translate into actual demand destruction? And we think in certain parts of the economy, that's already happening. In certain parts of the world, that already is.

But relative to the 1970s, the consumer overall is in a much better space today. I mean, when you also look at the less overall relative to the 1970s, we are a net producer. And so in a way, you're really just looking at a wealth transfer from consumers to producers who are based in the US.

So long-term if prices sustain at this level, that is not good for consumers. And we agree that the risk of recession goes up, especially because another contrast to the 1970s is that it's not just oil prices that are high, but natural gas prices, energy prices, agricultural and food prices. So this is potentially more damaging if prices sustain at these levels.

But the consumer so far has been holding pretty strong overall.

- What type of inflection point, or even flashpoint, do you expect this to create for cleaner energy solutions in the future?

TAMAR ESSNER: Well, we've seen billions of dollars roll into the energy transition. And we think that trend continues. Longer term decarbonization and electrification are trends that will continue and will continue to garner a lot of capital. But what I think that this crisis points out is, is that we are a long ways away from fully realizing the energy transition. And that's not for lack of investment.

That's for technology can only work as fast as it works. And really, physics is on the side of oil and gas when it comes to energy density and the price sustainability. So we need to think about so much of the world economy runs on fossil fuels. That will take a long time to transition.

So I don't think that this really accelerates it, but I think that the transition will happen. And this highlights the need in the interim until that transition happens to invest in oil and gas. A lot of people don't want to, but it is unfortunately for better or worse, depending on what side of the aisle you are, going to be a requirement if you want to keep the economy going until that transition is fully realized.

- We've also evaluated even the amount of oil that is imported or energy that's imported from Russia. And so it's prompted us to think even more about the net effect of the Biden energy import ban as of right now, and some of the sanctions that have been put forward. The net effectiveness of those, well, what do you believe that to be?

And then even in the future if we don't see sanctions lifted later on down the line for months, maybe even years, what type of longer term impact might that have?

TAMAR ESSNER: Well, I think the longer term energy map is being rewritten here. I mean, even if there is-- we hope, of course, a cease fire-- really imminently, even if that does happen, longer term I think that the West is really reorienting itself. Europe, in particular, will move away from Russian oil and gas and more toward US or Australian or even Qatari in the case of natural gas. So I think that will happen, as well as we move forward with their energy transition. They'll probably have to adopt fuels that they weren't really using before-- mainly, nuclear when you're talking about the power side.

So I think that in terms of how this plays out in the long term, the sanctions are going to have a sticky effect. I think one of your other guests was talking about a similar thing that he doesn't see that Western companies will reorient toward Russia. And they may even pull back from China as well. So longer term, we do see that as being sticky. In terms of the shorter term and what's going on today, to answer your question, I think one of the reasons the market got spooked today with oil prices is that we've seen that some of the loading data for Russian tankers is showing that those tankers are continuing.

So really when you're talking about the existing bans on Russian oil, it's mainly for the US, Canada, the UK, not material amounts. And so what we're seeing now is that the Russian oil is continuing. But I think traders misunderstood that because that's high frequency data that's based on purchases that were made prior to the sanctions, in many cases, prior to the invasion overall. So I think we do need to have a little bit of time to see how many buyers around the world-- actually, other than US and UK and China-- do pull back from Russian seaborne barrels. The pipeline barrels for Russia will continue into Europe, but Russia exports two to three million via tanker.

And that's really the question if China and India in particular pick those barrels up on the cheap-- we've seen that India is picking them up-- a little bit more uncertain now with China. So we kind of need more time to evaluate what China ends up doing with those barrels if they purchase them or not.

- Gotcha. Just lastly while we have here Tamar, because I think you raise a really interesting point in where some of the European countries would then have to look to for some of their energy resources. Is it as simple as the US or somewhere else pumping more oil? And what would the ultimate kind of ramifications from something even like that mean? And we only have about 30 seconds left.

TAMAR ESSNER: I think Europe's going to have to rethink their overall policy. So it will be oil and gas from other places, as I mentioned. But also looking at other fuels that they haven't been looking at. And probably nuclear stands to be the immediate winner in that case. And maybe a little bit more longer term reliance on natural gas, you're sort of wanting to phase that out. And I think that they're going to see that there's really ample supplies from the US and that might be a longer term solution than what they had initially been anticipating.

- Tamar, great to get your insights here with us today. And I appreciate the breakdown in context. Vectis Energy Partners Principal Tamara Essner joining us here on Yahoo Finance Live.