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U.S. could enter ‘whole new phase’ of exporting natural gas, economist says

FS Investments chief U.S. economist Lara Rhame joins Yahoo Finance Live to discuss Europe's energy crisis, the economic outlook, inflation, and how geopolitical uncertainty continues to affect markets amid the ongoing Russia-Ukraine war.

Video Transcript

- You know, Goldman Sachs has now come out and said because of what they have seen play out in Europe, they expect European energy bills to surge $2 trillion by 2023. What's the knock-on effect here in the US that Americans should be looking out for?

LARA RHAME: You know, it's extraordinary the rise that we've seen. And we tend to focus on oil. But of course, for households, it's not just about crude oil prices. It's about electricity, natural gas. In Europe, those in particular are the prices that have just skyrocketed-- over 100%-- and are punishing the budgets of every single household across Europe. And it does have a knock-on effect in the US. We've seen our own natural gas prices quite a bit higher, our own electricity prices.

And I think this is something people miss when they think about slowing the US economy down. There's a lot of focus on Fed policy and the fact that higher interest rates will impact US household spending. The reality is higher energy prices have a much more direct impact on US household spending for most households.

The top quartile are going to be more the wealthier folks are going to be more impacted by higher interest rates. But everybody else, really higher energy prices is very punitive. And it's not just the prices at the pump. We have to look across the board.

- No question we have seen energy-- one of the key drivers of inflation. I realize you're not an energy analyst per se, Lara. But let's try to separate the two here. Natural gas, a lot of people are looking at what's playing out in Europe and saying, well, what does this mean for LNG exports coming out of the US at a time when there's concerns about going into the winter how things will look? And then more importantly, on oil, things have pulled back significantly. You've got the Biden administration coming out and saying they believe it can remain at these levels over the next few months. What do you see?

LARA RHAME: So for tackling natural gas first, there's definitely now a whole new phase of US opportunity to export natural gas to the European Union. The problem is it just isn't as fungible as oil. So we need to build new gas pipelines. And you can't just quite as easily unload liquefied natural gas in European ports like you can crude oil.

I think that's coming. It means we're going to see more investment, which on the one hand is good for the economy. But on the other hand, is going to be bad for margins and for budgets. I think looking also at just the broader crude oil prices, this is the problem when you under invest in a sector for five to seven years.

We're going to be seeing more investment in this sector. Again, it's this dual, funny way when you think about the connection between the economy and financial markets. It could be good for growth-- real GDP growth. But it could impact margins and make it tough for traditional assets.

I do think that over the winter commodities are going to be a huge wild card. We've seen that July surge in the S&P 500. It felt very much like a bear market rally to me. And I think that's been proven out because policy is still uncertain. The economy is still uncertain. And commodities really amplify that.

We've had this decline for now. But given the really low growth trajectory, the fact that oil is still where it is, it's below where it was, right? But I think without Russia and the Ukraine conflict, oil would be more like $70 a barrel and not where it is today. So I think we're still paying a premium for uncertainty, for geopolitical uncertainty. And that's still a real problem for these traditional large cap equities.

- Finally, Lara, getting back to some of the economic data here in the US. We had a jobs report come out on Friday. Some would argue it is a bit of a Goldilocks scenario. It sort of showed that things were slowing, but the job market was still strong. Jay Powell speaking again later this week. Has this changed anything at all in your view in terms of the trajectory for the Fed going into that meeting later this month?

LARA RHAME: You know, Friday's report I think showed a couple of things. People are reentering the workforce. That's a big positive. That's why the unemployment rate rose. So we shouldn't see that as bad news.

To your point, it did give it a very Goldilocks feel. But right now, I think the Fed is still laser-focused on inflation. Even though they're sort of connecting the dots from the economy to policy and Fed rate hikes through the labor market, the reality is inflation is coming at us from virtually every single direction. So when it comes to September's rate hike meeting, still a coin toss for me between 50 basis points and 75.

Next week's CPI is really going to be the determinant of that, not the labor market. But hey, it's good news to see people coming back into the labor force. It's really what our economy needs.

- OK, certainly we'll continue to watch all this. Appreciate you breaking it down for us. FS Investments Chief US Economist, Lara Rhame.