SCOTT SIMON, HOST:
We start this hour with a chief concern for Americans - the cost of gas. AAA says the national average for a gallon of gas is hovering around $4.50. Many Western states say it's above $5 a gallon, and California is more than $6. President Trump acknowledged that the war in Iran is responsible for the spike in prices, speaking at a rally in North Carolina this week for the Republican Senate candidate there.
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PRESIDENT DONALD TRUMP: It's a very inexpensive price to pay for what we've done. Remember that. It's a little more. It's - even if it was - frankly, even if it was a lot more. But that's going to come tumbling down. That's going to be like a rocket ship in reverse.
SIMON: But before prices come tumbling down, more increases are ahead, likely. We're joined now by Bob McNally, founder of Rapidan Energy Group, an independent energy consulting firm. He was also an adviser in the George W. Bush administration. Mr. McNally, thanks so much for being with us.
BOB MCNALLY: Good morning, Scott. Thanks for having me on.
SIMON: What would it do to the economy if gas prices continue to go up?
MCNALLY: Well, the key thing to realize now is, so far, it's been resilient. I mean, so far, it hasn't negatively impacted the broader economy - retail spending, capital expenditures, etc. It has hurt low-income families. That showed up in some surveys in August. It is certainly showing up in inflation data, at least the broad inflation data. If this continues and oil prices keep rising, the risk is that broader economy. And especially through the Federal Reserve and its monetary policy, it'll start to have bigger and wider effects. But so far, we've been lucky and resilient.
SIMON: Well - but when you talk about could have broader effects, this'll drive food prices up even more 'cause it costs more to deliver them?
MCNALLY: Absolutely. And the big concern there is the underappreciated fuel - diesel. We also think of that as heating oil. That's the real workhorse of the economy. It does everything. It transports everything. It flies everything. It's in home heating. It's in manufacturing, defense. Gasoline's great. We all see the price at the pump, but that's about getting from A to B. Important, but diesel is really a bigger input across the economy. So you're exactly right - diesel prices, which are up 80% year over year and are - and that diesel market's very tight. The Russian export ban hasn't helped. If all of this continues, that's where the big risk to the economy could come in down the road.
SIMON: Is there anything that you believe Congress or the president can do to bring down prices?
MCNALLY: Scott, I've been in the White House during energy crises. I've looked through the toolkit all over the place. There really isn't. The best option any president has is to call Saudi Arabia and ask them to increase production of crude. However, Saudi Arabia's crude-production capacity is trapped in that war zone. So there are only - there are no good options. There are only bad options at this point, things like windfall profits taxes or export restrictions - very shortsighted, counterproductive proposals. I learned in the White House, Scott, part of good policymaking is avoiding bad policymaking.
SIMON: Well - but stopping the war in Iran would bring down prices?
MCNALLY: Well, I think ending the disruption would bring down prices as long as there was no permanent or long-term physical damage to infrastructure, like we've seen with LNG. Now, having a bruised but battered and nuclear-powered Iran lording over the Gulf would not give us much long-term restraint. So one hopes the war will end with Iran neutered at least.
SIMON: Is energy a weapon that Iran is using to fight the war?
MCNALLY: Absolutely. It went - right from the very beginning in March, it decided to play the Hormuz card, knowing that if it were to choke off that oil supply through Hormuz and threaten infrastructure, as well as urea and sulfur and other - LNG - other important economic inputs, it knew that it would have leverage over President Trump. And that - so far, that card has worked.
SIMON: What do you foresee? How long should Americans try and plan with higher energy prices in their budget?
MCNALLY: Scott, I wish I had better news for you. But here at Rapidan, my colleagues and I expect an indefinite conflict. It may oscillate between major fighting and fast-rising oil prices and lower ones. But I think for the foreseeable future, Scott, everyone's got to buckle up 'cause this is not going to get better soon.
SIMON: Could state governments and cities make a difference?
MCNALLY: Not a lot they can do. They can always help low-income folks. Those are the folks who are most negatively impacted by rising fuel prices. So there are subsidies and policies there that they can help with, but this is about cushioning the lowest-income families and businesses and riding this out otherwise.
SIMON: And if the war were to end tomorrow, rising prices would still be a problem?
MCNALLY: No. I think oil prices would - as President Trump said, would fall sharply. We've avoided major physical damage so far. If the war ended and stayed ended tomorrow, I think oil prices would fall very sharply.
SIMON: Bob McNally of the Rapidan Energy Group, thank you so much for being with us.
MCNALLY: Thank you, Scott. Transcript provided by NPR, Copyright NPR.
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