Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 2: and this is Trumperonomics, the podcast that looks at the
Speaker 2: economic world of Donald Trump, how he's already shaking the
Speaker 2: global economy and what on earth is going to happen next.
Speaker 2: Events are moving fast in the US Israeli conflict with Iran,
Speaker 2: but as of this recording Wednesday afternoon in London, the
Speaker 2: ships in the hall moves straight are not. We have
Speaker 2: a ceasefire declared overnight, the implications of which policymakers, investors,
Speaker 2: and anyone with a ship stuck in the Straight of
Speaker 2: horm Moose are all working in real time to understand. Meanwhile,
Speaker 2: Brent crude prices have fallen back below one hundred dollars,
Speaker 2: but still about the third higher than before the star
Speaker 2: the conflict, and some bombs are still flying, while a
Speaker 2: chunk of global oil and gas production is still offline.
Speaker 2: I saw Exon reported this morning six percent of its
Speaker 2: global production in the first three months of this year
Speaker 2: been knocked out by events in the Persian Gulf. Well,
Speaker 2: if we just get to the Straight of Hormuz, eight
Speaker 2: hundred ships are stuck right now, as usually around one
Speaker 2: hundred and thirty passing through every day, they will not
Speaker 2: get cleared overnight. And it looks as though whatever happens,
Speaker 2: what used to be a relatively simple act passing through
Speaker 2: that narrow strait is not going back to normal anytime soon,
Speaker 2: if ever, and whatever happens, the reputation of the US
Speaker 2: as the guardian of global shipping is going to be
Speaker 2: forever damaged. Indeed, of all the things Donald Trump has
Speaker 2: done to disrupt global commerce, from levying punitive tariffs to
Speaker 2: tearing up trade deals, this change in the US role
Speaker 2: with regard to global shipping may actually have the most
Speaker 2: lasting impact. That's what we're going to get into, not
Speaker 2: exactly what's going to happen in this conflict, let alone
Speaker 2: gaming out who may have won this particular round, but
Speaker 2: unpicking the current state of play for shipping in the
Speaker 2: Gulf and the knock on effects for every business everywhere
Speaker 2: that relies on fuel being put in a tank to
Speaker 2: get their products to consumers. But also what did ensure
Speaker 2: free passage of goods through the straight of horn Moves
Speaker 2: and other shipping choke points around the world before the
Speaker 2: end of February, and what are the implications if that
Speaker 2: underpinning for free transit is now absent. So here in
Speaker 2: the London studio with me, I'm delighted to say we
Speaker 2: have Brendan Murray, our Global trades are who coordinates all
Speaker 2: of Bloomberg's global trade supply chain and geoeconomic statecraft coverage.
Speaker 1: Good to have you back, Brendan, thanks for having me.
Speaker 2: And joining us from Nairobi is Peter Martin in Africa
Speaker 2: and Middle East correspondent who tends to dabble in many
Speaker 2: other things, including defense and intelligence.
Speaker 1: Peter, it's great to have you. Thanks for having me.
Speaker 2: We know that there's a lot going on, and I
Speaker 2: want to have two parts to this. In the sense
Speaker 2: of thinking about what we're seeing already zeroing in on
Speaker 2: the sort of transportation shipping aspect of the impact of
Speaker 2: the Iran conflict and specifically that effective closure or much
Speaker 2: constrained passage of ships through the Strait of horn Moose.
Speaker 2: I was also sort of interested in thinking more broadly
Speaker 2: of the US role in sort of underpinning the free
Speaker 2: passage of shipping through places like the Strait of Horn Moose.
Speaker 2: You wrote about that recently, so we will get into that,
Speaker 2: But Brendan, let me check in with you first. If
Speaker 2: I ask you, as our trades are, what the impact
Speaker 2: of this conflict and the situation the Strait of a
Speaker 2: Moose has been on global transportation, how would you summarize that?
Speaker 3: Well, it's still mainly an energy crisis. The ceasefire that
Speaker 3: was announced presumably would allow some ships to start going
Speaker 3: through the Strait of horn Moose again, but that's going
Speaker 3: to be a long process. Many of the experts that
Speaker 3: we're hearing from say it could take many months. And
Speaker 3: so the knock on effects are things like jet fuel
Speaker 3: prices and diesel prices, and gasoline prices rising, not just
Speaker 3: in the region and in Asia where they are the
Speaker 3: most that the biggest buyers of Middle Eastern energy, but
Speaker 3: also in Europe and the US. So most Americans would
Speaker 3: be able to tell you what the price of a
Speaker 3: gallon of gasoline would be within a nickel of their
Speaker 3: local station the current price, but they couldn't tell you
Speaker 3: what the price of diesel has been. And diesel has
Speaker 3: actually gone up much more steeply than the price of
Speaker 3: gasoline has. And so that's sort of the you know,
Speaker 3: literally the thing that fuels the industrial economy in places
Speaker 3: like Europe and the US, so the knock on effects
Speaker 3: were being seen fairly quickly, just not at the doorstep
Speaker 3: of the average American.
Speaker 2: Now we're learning there's usually a reasonably stable margin between
Speaker 2: the cost of the crude oil, and we always think
Speaker 2: in terms of Brent crude, but of course no one
Speaker 2: buys Brent crude except refiners. Everybody else is dealing with
Speaker 2: refined petroleum products. That had always been quite a stable margin.
Speaker 2: And then what we saw was it sort of exploded,
Speaker 2: as we not only saw an increase in Brent crew
Speaker 2: but we also saw question marks about actual supplies of
Speaker 2: those refined goods and even some questions about ports potentially
Speaker 2: running out of this the fuel that the container ships
Speaker 2: run on Brendan. I mean, how much has that been
Speaker 2: a feature?
Speaker 3: Yeah, that has been a huge issue for as you mentioned,
Speaker 3: the container shipping industry. One of the big carriers, a
Speaker 3: German company, said recently that this was costing them fifty
Speaker 3: million dollars a week. So you start adding up a
Speaker 3: five week long conflict and you're talking about billions of dollars.
Speaker 3: Delta Airlines recently said that the jet fuel surge is
Speaker 3: going to hit them to the tune of about two
Speaker 3: billion dollars. And so we've seen a conflict that's been
Speaker 3: pretty contained in time frame have very significant and far
Speaker 3: reaching impacts to companies that as much as we like
Speaker 3: to think that we have gone green, they still rely
Speaker 3: a lot on fossil fuels and this is really hitting
Speaker 3: their margins hard.
Speaker 2: I had someone talk about the air in the pipe
Speaker 2: if we normally have it, whatever it is, one hundred
Speaker 2: and thirty five ships going through the straight of all
Speaker 2: moves a day these weeks where you haven't had that
Speaker 2: one hundred and thirty five, many of those ships would
Speaker 2: not have arrived yet anyway. So people are not only
Speaker 2: going to see the lack of them maybe in a
Speaker 2: six weeks or a months time, what does the delayed
Speaker 2: response even if we start to see quite a lot
Speaker 2: of shipping go through as a result of this cease FI.
Speaker 3: I think what you've seen, especially in Asia at least initially,
Speaker 3: was governments saying to people that they should conserve their
Speaker 3: fuel use, turn their lights off when they're not using them,
Speaker 3: and to try to control exports so their domestic supplies
Speaker 3: wouldn't be run down so much. And so what we're
Speaker 3: going to see if the straight reopens, is those vessels
Speaker 3: that have crude oil or LNG reach their destinations and
Speaker 3: basically replenished supplies back up to normal levels. And the
Speaker 3: question then will be can that cycle continue to where
Speaker 3: we're not just in this back and forth of domestic
Speaker 3: inventories being run down and then just being refilled to
Speaker 3: normal levels. That's where you see the reverberations really spreading
Speaker 3: out more widely than Asia. You have. You know, it
Speaker 3: takes thirty or forty days for a vessel to get
Speaker 3: from the Middle East to northern Europe, and so that's
Speaker 3: essentially the length of this conflict, and so there's a
Speaker 3: sort of bull whip effect, if you will, that will
Speaker 3: will kind of reverberate back and forth until supplies can
Speaker 3: be stabilized.
Speaker 2: Finally, just on this point, you mentioned Brendan that you know,
Speaker 2: in the US you wouldn't necessarily see it, although we
Speaker 2: have seen gas prices go up. But you did write
Speaker 2: a piece about how the sort of the trucking industry
Speaker 2: was being affected in the US. You compared it to
Speaker 2: some of the stresses that we saw following COVID and
Speaker 2: the war in Ukraine. Just so how is how is
Speaker 2: US freight being affected?
Speaker 3: Well, at the moment, there's an indicator we look at
Speaker 3: that has three components to it. One of those is
Speaker 3: transportation costs and capacity, the other one is where how
Speaker 3: costs and capacity, and the final one is inventories. And
Speaker 3: all three of those measures so it's called the logistics index.
Speaker 3: All three of those measures are spiking higher at the moment.
Speaker 3: The latest reading in March showed that there's a real
Speaker 3: strain in the logistics capacity at the moment, and that
Speaker 3: just means higher prices for everything that needs to move
Speaker 3: from point A to point B, particularly particularly imports that
Speaker 3: have a larger portion of their price being the transportation
Speaker 3: of actors. So the reaction, especially to higher diesel prices
Speaker 3: was pretty immediate. And the capacity this time around is
Speaker 3: tighter than it was before because we were in COVID
Speaker 3: and there was you know, there was there was some
Speaker 3: excess capacity around, and so this time around there may
Speaker 3: not be the slack that can absorb this particular shock.
Speaker 3: If what we end up with is something that kind
Speaker 3: of muddles along here for months.
Speaker 2: I'm so glad we have you. I think of you
Speaker 2: as the kind of real world correspondent. You know, we
Speaker 2: often talk about these kind of you know, grand terms
Speaker 2: about the global economy, but you spend most of your
Speaker 2: time thinking about physically how long it takes for things
Speaker 2: to get places and why what they need in order
Speaker 2: to do that. And we've had to care about that
Speaker 2: more in recent years, Pete. Stepping back from that, we're
Speaker 2: now looking at a very uncertain state of play in
Speaker 2: the Straight of Four Moves, with many claiming it's still
Speaker 2: Iran has no right to be coordinating, constraining maybe charging
Speaker 2: for passage through that very narrow straight Just remind us
Speaker 2: what was the situation before this conflict.
Speaker 4: Really, in the decades since the Second World War, the
Speaker 4: US has seen itself as the guardian of safe passage
Speaker 4: for ships all over the world, so through the Moves,
Speaker 4: but also the Panama Canal, seers the Straits of Malacca.
Speaker 4: Sometimes the US has felt that the burden has fallen
Speaker 4: under on Washington in doing that, but in reality, the
Speaker 4: presence of the US Navy around the world anti piracy
Speaker 4: operations are the kind that we saw off the coast
Speaker 4: of Somalia about a decade ago. Those kinds of military
Speaker 4: operations have really kept trade flowing through the world and
Speaker 4: have been a crucial means of underpinning American power and
Speaker 4: also American prosperity.
Speaker 2: What's the international law that the US was underpinning by
Speaker 2: ensuring that passage.
Speaker 4: The international law is the United Nations Convention on the
Speaker 4: Law of the Sea, which the US helped to craft
Speaker 4: but never actually ratified. But it's the basis of free
Speaker 4: passage around the world, and the US has really been
Speaker 4: the primary enforcer of that law, despite the legal technicalities.
Speaker 2: And it's interesting because they haven't signed up to it,
Speaker 2: and neither is Iran. And yet we'd somehow exact situation
Speaker 2: where one was securing it and the other was abiding.
Speaker 2: But what's the practicalities of moving through a different system now?
Speaker 2: If Iran is suggesting it's going to have a permanent
Speaker 2: role in controlling access to the almost Straight, I mean,
Speaker 2: you know, what does that look like?
Speaker 4: I think in truth no one knows, including Iran or
Speaker 4: President Trump. And it would be incredibly problematic, clearly an
Speaker 4: increased cost for shipping companies looking to move goods, energy, etc.
Speaker 4: Through the Straight and I think, in the eyes of
Speaker 4: many also potentially illegal because this is not something that
Speaker 4: the countries are supposed to do.
Speaker 2: When the US talk about we can't be the world's policeman,
Speaker 2: this sense of the underpinning freedom of navigation, what's the
Speaker 2: broader implications of the US backing away from that.
Speaker 4: The implications are pretty profound. So I've spent a lot
Speaker 4: of the last week speaking to Asian officials, European officials
Speaker 4: about how they view this. And as you said, it's
Speaker 4: something that's often taken for granted, but really, without the
Speaker 4: free passage of goods around the world, the global economy
Speaker 4: would come grinding to a halt. And I think that's
Speaker 4: seen most acutely in Asia, where the US has spent
Speaker 4: decades talking about the need to maintain freedom of navigation,
Speaker 4: the fact that China could pose a threat to that,
Speaker 4: the fact that the global economy would suffer.
Speaker 1: If it did so.
Speaker 4: But the reality is now that lots of America's partners
Speaker 4: in Asia and in Europe too, are looking at the
Speaker 4: US's actions and starting to wonder if really Washington does
Speaker 4: provide the kind of stable guarantee for freedom of navigation
Speaker 4: that they've always assumed it did.
Speaker 2: The US clearly wants to make sure it stays open
Speaker 2: or is reopened. But if you're aroun clear that the
Speaker 2: US actually is minded to take the actions needed to
Speaker 2: do that. I mean, there's been no operation that's been
Speaker 2: undertaken in the straight of hom Moves to underpin that.
Speaker 4: You know, it would be from a military perspective, incredibly
Speaker 4: complex to do so. Straight up, hor Moves is extremely narrow,
Speaker 4: Its long ships have very limited maneuverability. The water is shallow,
Speaker 4: which means that it's easy to mine. It's also it's
Speaker 4: surrounded by mountains, which makes it easy to hide missiles
Speaker 4: and drones. So all of these things mean that militarily
Speaker 4: it would be very difficult for the US to secure
Speaker 4: the Strait. The option that lots of people talk about
Speaker 4: is escorts of ships. But before this crisis there were
Speaker 4: about one hundred and forty ships per day moving through
Speaker 4: the Strait, and it's clear that the US without allied
Speaker 4: backing doesn't have the ability to escort all of those vessels.
Speaker 4: So really what's required, in the eyes of most experts,
Speaker 4: is some kind of political solution, a sea fire or
Speaker 4: a peace deal which allows safe passage to resume.
Speaker 2: I think if you're around you have an interest in
Speaker 2: ships still passing through. But if you can make money
Speaker 2: out of that. That seems like quite a good and
Speaker 2: potentially constrain who goes through, but also charge people to
Speaker 2: go through. That seems something that they are contemplating even
Speaker 2: doing in some cases. We had some reporting last week
Speaker 2: about the details of negotiating potentially with crypto currency payments
Speaker 2: to the Iranian military in order to pass through. Do
Speaker 2: you get the sense that that is becoming more of
Speaker 2: an official process.
Speaker 4: It does seem like they attempting to formalize it, and
Speaker 4: President Trump has even hinted that the US may in
Speaker 4: some way be involved in some of those negotiations, although
Speaker 4: the details are extremely murky at the moment. I mean,
Speaker 4: I kind of think of it as a too pronged
Speaker 4: advantage for around. There are economic benefits they can derive
Speaker 4: from the situation, but there's also the constant threat hanging
Speaker 4: over the US and the rest of the global economy
Speaker 4: that they could close the straight again, which I think
Speaker 4: has proved to be a very potent Deterran.
Speaker 2: Brendan, you spend more time than any of us talking
Speaker 2: to shipping companies, and I saw that one of the
Speaker 2: world's biggest shipping companies advised ships today not to not
Speaker 2: to do anything without talking to the US and the Iranians.
Speaker 2: I mean, it doesn't there's no sense that it's a
Speaker 2: safe thing to do yet to go through. Do you
Speaker 2: have a sense of are they now reconciling themselves to
Speaker 2: paying to go through the strait? How are they thinking
Speaker 2: about it? Yeah?
Speaker 3: I think they're They're going to react very slowly given
Speaker 3: the you know, the sheer uh, you know, financial value
Speaker 3: of what they're carrying, and then the people on board.
Speaker 3: It's going to it's very murky at this stage. Do
Speaker 3: you know that we don't know how the Iranians are
Speaker 3: going to process the paperwork. They apparently they're looking at
Speaker 3: manifests and cargo history and and sort of you know,
Speaker 3: what your relationship is to the US and Israel in
Speaker 3: the past, so you know, these if what we end
Speaker 3: up with is some sort of toll system, just to
Speaker 3: follow on what Peter said, the Iranians will wind up
Speaker 3: picking winners and losers. To a certain extent, the Chinese
Speaker 3: owned a lot of ships, and so do European companies
Speaker 3: in European countries, So you know, we could see this
Speaker 3: geopolitical struggle that the US is in with mainly China,
Speaker 3: but you know, more broadly kind of playing out right
Speaker 3: there in this waterway where Iran says, you know, the
Speaker 3: Chinese get the first five slots this morning, and the
Speaker 3: European companies, you know, can go this afternoon, and you
Speaker 3: run into this situation where Iran dictating the terms of
Speaker 3: transit is going to get obviously very costly and unpredictable,
Speaker 3: and the shipping companies their number one priority is can
Speaker 3: they get through safely? And you know that's going to
Speaker 3: be a very uncertain process if this is what we
Speaker 3: end up with going forward.
Speaker 2: And I mean it's striking because it's one of the
Speaker 2: industries that the US was keen to get back into
Speaker 2: and try and build some kind of capacity because as
Speaker 2: you say it, just in terms of global shipping, those
Speaker 2: massive containerships, they're pretty much all Chinese or maybe South Korean.
Speaker 2: But it's not going to be much good to be
Speaker 2: a US containership if you're not going to be able
Speaker 2: to get through the straight Still with you, Brendan, we
Speaker 2: had talked the other day actually on this show about
Speaker 2: you know, okay, Rana has shown that it can use
Speaker 2: this as a very powerful bargaining chip, and you can't
Speaker 2: help thinking they'll use it again, but by the same token,
Speaker 2: you'd expect shippers, companies, businesses to all think about alternatives
Speaker 2: so that they're not in this position again. How do
Speaker 2: you think the industry will be thinking about avoid getting
Speaker 2: round the straight of hormus in the field.
Speaker 1: Yeah.
Speaker 3: I think one of the lessons coming out of this
Speaker 3: is going to be a lesson that people learned after
Speaker 3: COVID and after the Russia full scale invasion of Ukraine,
Speaker 3: and that's you can't have all your eggs in one basket.
Speaker 3: And that's not just you know, having one supplier in
Speaker 3: one country, it's we have to be able to get
Speaker 3: goods in multiple different routes, through multiple different transportation modes,
Speaker 3: and we need to build in that extra resilience that
Speaker 3: we already probably did after COVID and after you know,
Speaker 3: the Russia Ukraine war unfolded. So this is just going
Speaker 3: to be another lesson in self reliance independence when it
Speaker 3: comes to your supply chain, resilience in your supply chain,
Speaker 3: and now that this geopolitical cloud of uncertainty hovers over
Speaker 3: the global economy, how can we make sure our supply
Speaker 3: chains are robust enough to withstand you know, a five
Speaker 3: weak closure of the straight of hormose or there are
Speaker 3: a lot of straits and a lot of waterways in
Speaker 3: the world, and a lot of them are in unfriendly places,
Speaker 3: not just in the Mid East, And so I think
Speaker 3: you're going to have contingency planners going back to the
Speaker 3: drawing board and saying, Okay, this is now a new
Speaker 3: risk that we have to factor in, and it's going
Speaker 3: to be a costly one if we don't prepare for it.
Speaker 2: It does strike me that one sector that does very
Speaker 2: well out of all these developments is the insurance industry.
Speaker 2: Are you seeing the cost of premiums and even taking
Speaker 2: out of insurance going up.
Speaker 3: Yeah, definitely. Those are some of the key players in
Speaker 3: all of this. They will ultimately decide, the insurers will
Speaker 3: whether a ship is cleared to go through, and if
Speaker 3: it's not, then you know, those ships will not move
Speaker 3: through a zone that the insurers feel isn't safe, and
Speaker 3: so that just gets added into the overall cost of
Speaker 3: transportation and ultimately what importers and exporters pay. And so
Speaker 3: they have a pretty immediate surcharge that they can slap
Speaker 3: on the price of a cargo that factors that in.
Speaker 3: And so we'll have to see whether the risk goes
Speaker 3: down and whether Iran let's ships move through. But the
Speaker 3: insurance factor is definitely going to be one that we'll
Speaker 3: have to watch in the weeks ahead, because not many
Speaker 3: people think that the risks are are gonna go away
Speaker 3: very soon.
Speaker 2: And you know, if you even look at the statement
Speaker 2: from the Iranians today, the fact that you can now
Speaker 2: pass through the straightforard moves in coordination with the Aralian
Speaker 2: military authorities doesn't, I'm sure, instill a great deal of
Speaker 2: confidence in the typical kind of container ship pilot. Brendan Murray,
Speaker 2: thank you so much for talking to us. I know
Speaker 2: when you're dashing off to a flight, we really appreciate it.
Speaker 2: And Pete Martin in Nairobi, thank you so much.
Speaker 1: Thanks for having me, Thanks for having me, Thanks.
Speaker 2: For listening to Trumponomics from Bloomberg. It was hosted by me,
Speaker 2: Stephanie Flanders, and I was joined by Bloomberg Global Trade
Speaker 2: editor Brendan Murray and Middle East and Africa reporter Peter Martin.
Speaker 2: Trumponomics was produced by Samma Sandi and Moses and Am
Speaker 2: with help from Amy Keen, and sound design was by
Speaker 2: Blake Maples and Kelly Garret, and to help others find
Speaker 2: and enjoy this show, Please rate it, review it highly.
Speaker 1: Wherever you listen