Persistent Inflationary Pressures Challenge Dovish Fed Policy Expectations

Key Quotes

"Well you know we make our investment plans on a long term basis we look at supply and demand well out into the future and so the the price of oil today can affect short term financial performance of the company but it really doesn't play as much into some of the longer term investment plans as we look down the road not really out the window as we decide what the capital program looks like."

Mike Wirth, CEO of Chevron, explains that investment decisions are based on long-term supply and demand forecasts, not short-term oil prices. This highlights Chevron's strategic approach to capital allocation, emphasizing a forward-looking perspective over immediate market fluctuations.

"Exploration uh is a long cycle business we just brought a project online in uh the gulf of america last year where the discovery was made 20 years prior and so the timeline between when you actually make a discovery uh when you appraise that and you ultimately develop it and bring it to market can be years or even decades and so we really have to uh take that long view on on the business."

Mike Wirth further elaborates on the extended timelines in the oil and gas industry, using the example of a project that took 20 years from discovery to production. This underscores the necessity of a long-term strategic vision for exploration and development activities.

"We are uh in that long cycle business and uh you know the capital spending uh amary has become more efficient in our industry a decade ago uh we were spending money on big projects there was a lot of growth going on in shale at a relatively high cost structure and the entire industry has found ways to standardize designs simplify projects and actually get more for every capital dollar that we spend so so the size of our capital spending doesn't necessarily uh correlates to the growth the way that it would have in years gone by."

Mike Wirth discusses the increasing efficiency in capital spending within the oil industry. He notes that standardization and simplification of projects allow the industry to achieve more with each dollar invested, meaning that capital spending levels do not directly correlate with growth as they once did.

"Well we always look to strengthen our portfolio uh iraq is a country that's blessed with uh very substantial uh petroleum resources and some of the largest fields in the world and so those are the kinds of things that we always look at."

Mike Wirth expresses Chevron's continuous interest in enhancing its portfolio by considering resource-rich regions like Iraq. This indicates a strategic focus on acquiring or developing assets in areas with significant petroleum potential.

"Yeah so uh in shale for instance which is something the us has been a world leader in uh a decade ago break evens were 70 or 80 a barrel today they're not even half of that as we found ways to drill longer laterals to optimize the spacing of wells to complete wells uh at lower cost with with greater production coming out of them so it's a series of things."

Mike Wirth details the efficiency gains in shale oil production, explaining how improved drilling techniques and well optimization have significantly lowered break-even costs. This demonstrates how technological advancements and operational refinements are driving down costs and increasing output.

"We're in i think we're still in the very early days of applying ai at scale in our industry uh one of the things that's undeniable about ai is it needs lots of data a company like ours has as much data as just about any company in the world and so we've got decades and decades of geologic data seismic data operating data all of which can be used to feed these models to optimize operations uh to improve our exploration success uh to squeeze more production out of existing assets."

Mike Wirth describes the nascent stage of AI adoption in the oil industry, emphasizing the vast amounts of data available to companies like Chevron. He highlights the potential of AI to optimize operations, enhance exploration success, and maximize production from existing assets.

"Well certainly the demand for power has been you know talked about and now for the last year or so as the constraint in the growth of of ai data centers uh in their ambition for data centers at a scale we've never seen before is uh has become a commonplace uh the reality is uh we need large scale power what we're working on is uh off grid power because it's also becoming an issue with electricity prices and we're seeing this show up in consumer sentiment and elections."

Mike Wirth addresses the significant demand for power driven by AI data centers and Chevron's initiative to develop off-grid power solutions. He points out that electricity prices are a growing concern, impacting both businesses and consumer sentiment.

"Well i think the fed is well aware of the fact that inflation remains a very sizable problem as we see the majority of fed officials have come out and spoken against or at least questioned the need for further rate cuts so there's a very clear divide among fed officials right now some focused on the employment component but still as i mentioned a majority concerned that we did not do enough the first time around to reinstate price stability and now that it becomes even more of a challenge for the fed to get us back to 2 having left prices well above that target level for so many years now."

Lindsey Piegza of Stifel Nicolaus asserts that a majority of Federal Reserve officials recognize inflation as a significant issue and question the necessity of further rate cuts. She points out a division within the Fed, with some prioritizing employment while most remain concerned about not having adequately addressed price stability.

"So this is one of the biggest concerns right now we're looking at inflation and we're saying okay there's not necessarily a tremendous amount of upside momentum that we're concerned about but as we turn the calendar page if we see a stronger growth profile than expected right now according to the atlanta fed we could see q3 gdp up over 3 and a half percent much stronger than what the fed had anticipated we're still seeing a very spendy solid consumers we go into this holiday shopping season and my biggest concern is businesses drawing down inventories eating into profit margins if they begin to pass through more of these tariff related or other policy related costs onto the end consumer any one or a combination of those factors is going to drive inflation higher."

Lindsey Piegza expresses concern that stronger-than-expected GDP growth and robust consumer spending could lead to increased inflation. She highlights the risk of businesses passing on tariff-related costs to consumers, potentially driving inflation higher if the Federal Reserve eases policy too dramatically.

"Well we have seen energy go up over 40 in the last five years but we haven't seen oil prices go up and this is sort of the question of at what point can you factor in government interference in trying to skew prices to the downside because of some of the political concerns leaving a sort of subdued inflation even if the supply demand dynamic might otherwise signify something else."

Lindsey Piegza notes that despite a significant increase in energy costs over the past five years, oil prices have not risen proportionally. She questions the extent to which government intervention might be influencing prices downward, potentially masking underlying supply and demand dynamics and affecting inflation figures.