Summer heat waves might make Europe ‘more vulnerable to Russian influence’: Economist

UC Berkeley Haas School of Business Professor Severin Borenstein joins Yahoo Finance Live to discuss rising oil prices, President Biden’s visit to Saudi Arabia, and how European heat waves could impact natural gas and electricity supply.

Video Transcript

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- Oil prices on the rise this morning. This as President Biden recently concluded his visit to Saudi Arabia without much to show for it. Special envoy for International Energy Affairs Amos Hochstein, though, saying his administration is playing a longer game with the world's oil producers. Take a listen to what he said to "Face the Nation" over the weekend.

- There is additional spare capacity. There is room for increased production. As we've told producers in the United States, we've had conversations over the last several months and weeks with OPEC, and I believe that there is still more room to see additional steps.

- For more on what's going on in energy, let's bring in Severine Borenstein, professor at UC Berkeley's Haas School of Business and faculty director of the Energy Institute there. Great to have you on the program this morning. I want to ask you about the developments that we saw out of Saudi Arabia, some pretty phenomenal pictures between the heads of state of the United States and Saudi Arabia meeting there. What do you think was the outcome of that meeting? You think the Biden administration did what they wanted to do, which is hopefully address the overall issue of rising oil prices?

SEVERIN BORENSTEIN: Well, I don't think any of us really know as Biden said that he expects some changes and Saudi Arabia said nothing's going to happen until they talk to the rest of OPEC. I think we will find out over the next few weeks whether this is actually going to lead to an increase in production. It's absolutely right. There is available capacity in Saudi Arabia and other parts of OPEC, but they have to choose to actually use it and to lower gas-- oil and gas prices. Right, now they are making a lot of money off these very high prices, and so it is certainly tempting for them to just keep prices high.

- Yeah, Amos Hochstein in that CBS interview seemed to allude to the fact that they got sort of a wink and a nod to say the next time OPEC meets, yes, we're going to keep this request in mind. He also talked about, though, how quickly gas prices have been coming down and said that he expects it to get to $4 nationally. Is that where you see things going?

SEVERIN BORENSTEIN: Well, I think that would be pretty optimistic. The futures market for crude oil is suggesting another $15 drop over the next year. That's not a perfect predictor, but it's probably the best thing out there. That wouldn't quite get us to $4 a gallon.

Maybe they know something that the futures market doesn't and particularly that Saudi Arabia is going to really open the tap. I would be surprised to see that happen, but I don't really-- I'm not privy to the insides of those political negotiations.

- I want to ask about of kind of another story that's been developing lately, that is the heatwave across all of Europe. There's also in some areas of the United States even this week gonna be some pretty hot temperatures. Wondering if there are any energy implications to that as well since we know that homes might need to rely on some extra boost to keep their homes cool. You think that weighs on the price of oil over the short term as well?

SEVERIN BORENSTEIN: It doesn't have a much effect on the price of oil. It has a big effect on the price of natural gas potentially, and that has a big effect on the price of electricity. And particularly in deregulated markets where those prices come through to the retail consumers, you might see a boost as a result.

It also has implications for natural gas as we go into the winter because right now natural gas sellers are trying to build up inventories. And if they have to use a lot more of that right now to run electricity generation, that makes it harder to build up inventories, and frankly that puts us in a tougher position against-- with respect to Russia and their threat of cutting off natural gas supplies.

- I mean, that gets to the point we were talking about early on in the show about this heatwave that we're seeing in Europe, obviously the UK the focus today. But, I mean, you could argue they are in a much tighter supply crunch right now than in the US. If we're talking about huge strains on the grid right now because of the heat, what does that mean in terms of supply come the winter?

SEVERIN BORENSTEIN: Well, that's the problem. When we get to the winter, we need to have natural gas. The US is actually in pretty good shape on natural gas, and I think that we're not likely to see a big hit as a result of the summer heatwave.

Europe is a whole different story. They are in a very, very tight gas market. Prices are many times higher than in the United States, and they really need to be able to build up reserves during this summer, a bad summer in terms of heat, which means running more natural gas-fired power plants is going to mean we have less reserves in Europe when we get into the winter. And that definitely makes the Western European economies and people more vulnerable to Russian influence.

- Finally, professor, I wonder how you can-- how you're looking at the supply demand dynamic right now. We had a guest on Friday from the Eurasia group who said that he doesn't think this is actually a supply issue, that it is about the demand and the fear of supply coming down, that necessarily hasn't materialized it yet. Is that how you see it?

SEVERIN BORENSTEIN: Well, demand is definitely coming back, and we've seen very strong demand for gasoline, which is interesting 'cause at the same time, public transit ridership is still at around half of pre-pandemic levels. So part of it is the economy, and people are getting back to work. Part of it is the fact that people are avoiding public transit and driving a lot more. So that is pushing oil demand up. A recession, if we actually have one, would certainly push it down, and that's been the major driver of the drop in oil prices over the last month or two is fears of recession, global recession, which would depress oil demand and depress prices.

- Yeah, and still no resolution in sight with Russia in Ukraine as well, which is going to continue to linger. Severine Borenstein, professor at UC Berkeley's Haas School of Business and faculty director of the Energy Institute at Haas. Appreciate your time today.