Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Who's really happy is the market because the market's gone
Speaker 2: up thousands of points over the last four or five
Speaker 2: days since hearing about it. And the Strait is going
Speaker 2: to be opening, It's already partially opened, it's going to
Speaker 2: be opening up.
Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 3: and this is Trumpnonomics, the podcast that looks at the
Speaker 3: economic world of Donald Trump, how he's shaking up the
Speaker 3: global economy and what on earth is going to happen next.
Speaker 1: Now.
Speaker 3: We're recording this in London on Wednesday, the seventeenth of June.
Speaker 3: We don't know, may never know the exact detail of
Speaker 3: the agreement between the US and Iran that we expect
Speaker 3: famous last words to be signed in Switzerland this coming Friday.
Speaker 3: But President Trump tells us the horn Mo is going
Speaker 3: to be opening up, and for now investors and those
Speaker 3: closest to the oil industry seem to believe in But
Speaker 3: what does that mean from a practical standpoint, and why
Speaker 3: there seem to be such wildly differing views inside and
Speaker 3: outside the market on how long it will take for
Speaker 3: the oil market to in some sense get back to normal.
Speaker 3: I mean, depending on who you talk to, it's either
Speaker 3: going to take months to demine the straight offol moods,
Speaker 3: fix all those damage refineries, or the whole thing could
Speaker 3: seem like a bad dream in a matter of weeks.
Speaker 3: I want to get to the bottom of that today,
Speaker 3: but I also want to step back to ask how
Speaker 3: this entire conflict since the end of February has changed
Speaker 3: the course of the global economy compared with what we
Speaker 3: might have been expecting on February twenty seventh. And if
Speaker 3: we get time, I'd also like to ask whether the
Speaker 3: global oil market has also been changed for good. I
Speaker 3: noticed the UAE said today it was working on completely
Speaker 3: eliminating its reliance on the straight offoil moods over the
Speaker 3: next few years. Well, Javier blast is absolutely the man
Speaker 3: to ask about all of that, and I'm glad to
Speaker 3: say he's on the line.
Speaker 1: Have you. Thank you so much, my pleasure, Thank you
Speaker 1: for having me.
Speaker 3: Should remind people you're the Bloomberg Opinion, the Bloomberg Opinion
Speaker 3: columnists covering energy and commodities after years and years covering
Speaker 3: those markets as a reporter, and you're also the co
Speaker 3: author of the world for sale, money power and the
Speaker 3: traders who.
Speaker 1: Barter the Earth's resources.
Speaker 3: But on the broader economic piece of the story, I'm
Speaker 3: glad to say we also have in the studio here
Speaker 3: in London, Jamie Rush, director of Global Economics at Bloomberg
Speaker 3: and co author of the Price of Money. He's worked
Speaker 3: before at the British Treasury, the New Zealand Treasury and
Speaker 3: the UK Office for Budget Responsibility. Jamie, thanks for joining pleasure.
Speaker 3: Normally you're far too busy on all of our forecart
Speaker 3: and our modeling and our crack views on everything, so
Speaker 3: I'm glad I'm been able to get you into the studio.
Speaker 3: Have tell us what you understand by the opening of
Speaker 3: the Ormond straight and what would that mean and relative
Speaker 3: short term for oil prices and the oil market generally
Speaker 3: oil supplies.
Speaker 4: Let's call the reopening of the Street of Hormones the
Speaker 4: day that we see from the Persian Gulf region, so
Speaker 4: that is Saudi Arabia, the United Arab Emirates, Iraq, Kubait
Speaker 4: and Iran plaskatter more or less the same amount of
Speaker 4: oil that we were seeing on February the twenty seven.
Speaker 4: And the reason that they are so diverge in abuse
Speaker 4: is that never anything similar to what we are about
Speaker 4: to witness has been ever done. The oil industry needs
Speaker 4: to restart about Ghibet or take ten thousand oil wells.
Speaker 4: We don't know whether those wells are going to come
Speaker 4: back into life with oil flowing. They're gonna be dry,
Speaker 4: They're gonna have problems. We don't know if the pipelines
Speaker 4: are in good shape. What happens when you restart the machinery.
Speaker 4: What comes out of an oil well is not all oil.
Speaker 4: Is a bit of oil, a bit of water, a
Speaker 4: bit of gas, and a bit of sand that needs
Speaker 4: to be separated. The industrial plants that do that separation
Speaker 4: have been shut down for one hundred days. We don't
Speaker 4: know what happened when you re start then you know
Speaker 4: from the coal I sit on the optimis side, having
Speaker 4: to spend some time in recent weeks talking to people
Speaker 4: who do a lot of maintenance in these oil fields
Speaker 4: in the Middle East. My kind of expectation is that
Speaker 4: fifty percent of the production capacity comes back into what
Speaker 4: I call days, somewhere between five and ten days. We
Speaker 4: get a significant chunk of production capacity coming back and
Speaker 4: heating myself, But say somewhere between three and six weeks
Speaker 4: you get to seventy five percent. Getting back the one
Speaker 4: hundred percent, that's a bit more difficult. The final bit
Speaker 4: is going to take more time. I think that it
Speaker 4: takes perhaps months. Can it be that returning to one
Speaker 4: hundred percent takes more than a year? Yeah, that's possible.
Speaker 4: But in some ways, and excuse me to put it
Speaker 4: this way, I care very little about the last two
Speaker 4: percentage points of oil supplies coming back because two reasons. One,
Speaker 4: oil demand is weaker than we were in February the
Speaker 4: twenty seven, so the market balance at a lower production level.
Speaker 4: And also, because the rest of the world has moved on.
Speaker 4: You have American oil production scenes increasing significantly to an
Speaker 4: all time I may. You have Brazilian production app nearly
Speaker 4: twenty percent year on year. So we do not need
Speaker 4: to go back exactly to where we were on February
Speaker 4: the twenty seven for the oil market to revalance. So
Speaker 4: I think that on that debate of how long it takes,
Speaker 4: I am on the days and weeks rather than on
Speaker 4: the months and years.
Speaker 3: Okay, And it's interesting there's various things embedded in that,
Speaker 3: and then that sort of relatively optimism, which I notice
Speaker 3: relative to those who have sort of suggested it was
Speaker 3: all going to take a much longer. So there's a
Speaker 3: question mark about what happens when you reopen the production facilities.
Speaker 3: But they actual damage to those facilities, you know, the
Speaker 3: talk of you know, years and years of repairs. You
Speaker 3: don't think that's going to be a significant issue.
Speaker 4: No, the oil industry in the Middle East has suffered
Speaker 4: relatively little damage in the oil side from the war.
Speaker 4: What is on production facilities. There has been damage or
Speaker 4: what we call the downstream side of the industry. That's
Speaker 4: more the refining side where son refineries are going to
Speaker 4: need significant repairs, and that's going to be measured more
Speaker 4: into probably the end of the year or the beginning
Speaker 4: of twenty twenty seven. But what is the production facilities,
Speaker 4: or what we typically call in the oil industry the
Speaker 4: upstream side, so that's the oil wells, the processing centers,
Speaker 4: the pipelines, et cetera, et cetera.
Speaker 1: There has been relatively very little damage.
Speaker 4: Most of the damage that was sustained, particularly in Saudi
Speaker 4: Arabia and Kubay, has been repaired. And this is also
Speaker 4: a very important question. I was asking a few weeks
Speaker 4: ago to someone who does a lot of work in
Speaker 4: the oil fields of the Middle East, and I said,
Speaker 4: what you guys have been doing and they said, well,
Speaker 4: we have been working the oil fields, burying a few
Speaker 4: missiles here and there.
Speaker 1: But the oil.
Speaker 4: Fields were not a battleground. They were not a war
Speaker 4: vote over the oil field. This is very different to
Speaker 4: Kube nineteen nineteen, nineteen ninety one, or Olivia during the
Speaker 4: civil war in twenty eleven, where I was in the
Speaker 4: oil fields and the different factions were fighting for the
Speaker 4: controls of those oil fields. They were bombing the oil
Speaker 4: fields and the facilities were damaged in some occasions. This
Speaker 4: is a war that has not really affected the oil fields,
Speaker 4: and maintenance have been taking place, and engineers have been
Speaker 4: doing preventive war, so when the day comes that they
Speaker 4: can't re esta the world, they can't do it.
Speaker 3: I did notice our chief merging market economists actually pointed
Speaker 3: out that in some ways, if you're thinking about what's
Speaker 3: the key constraint on oil while the strait still closed,
Speaker 3: is it the sort of damage to the facilities, or
Speaker 3: is it the strait itself. And he pointed out there's
Speaker 3: kind of been a natural experiment that the attacks have
Speaker 3: hit facilities on both sides of the Strait, but the
Speaker 3: non hill move sites have kept operating while the homo's
Speaker 3: activity felt so the difference was clearly not about the
Speaker 3: attacks damaging the facilities, it was where their energy could
Speaker 3: actually get out. Before I get onto Jamie on the
Speaker 3: broader economics, I just want to sort of tick off
Speaker 3: a couple more things with you have yet the other
Speaker 3: things that people talk about, which again embedded in your
Speaker 3: first answer, seemed to be not compelling constraints, the demining
Speaker 3: of the Strait again talk of that taking months and months,
Speaker 3: and also that it's not an issue for the sort
Speaker 3: of stability of the market and the pricing to have
Speaker 3: all of those reserves having been run down over the
Speaker 3: last few months. There's no expectation that all of these
Speaker 3: reserves have to be back up before you before prices
Speaker 3: start to come down.
Speaker 4: Now, I think that we will need to rebuild some
Speaker 4: of those inventories. Certainly, if we look at demand for
Speaker 4: oil in twenty twenty seven, we need to assume that
Speaker 4: it's not the oil barrels that we are going to
Speaker 4: consume or burn, but it's also the oil barrels that
Speaker 4: we are going to put aside and put back into
Speaker 4: a staategic reserves. So the demand may be a bit
Speaker 4: a bit higher than we think. One constraint is going
Speaker 4: to be the amount of vessels that they are available.
Speaker 4: We need to reposition all the oil tankers back into
Speaker 4: the Middle East, and some one of those tankers are
Speaker 4: now at the wrong location because they are picking up
Speaker 4: crude oil, say in the Gulf of Mexico for Japan,
Speaker 4: rather than picking up crude oil in the Middle East
Speaker 4: the Persian Golf.
Speaker 1: So you have to recall some of those basons.
Speaker 4: And we are starting to see diversions on some vessels
Speaker 4: that they were close to turn around Africa into going
Speaker 4: into the Atlantic. They are performing your turns and they're
Speaker 4: going back to the Indian Olsa and heading back into
Speaker 4: the Middle East. So we are beginning to kind of
Speaker 4: reposition all the vessels. That takes a bit of time.
Speaker 4: These vessels they move at not that the speed of
Speaker 4: a high speed train or a car.
Speaker 1: I mean, they make about twenty.
Speaker 4: Five kilometers per hour or take if we put it
Speaker 4: in card terms, So it takes time to move them around.
Speaker 4: But there are about sixty seventy tank has already waiting
Speaker 4: in the Gulf of Man, ready to go the moment
Speaker 4: that the strade opens. I think that the mining is
Speaker 4: a question. There are areas of the stradio hormones that
Speaker 4: they are clear of minds, close to the Omani coust,
Speaker 4: close to the Iranian cost, so that is a vailable
Speaker 4: and I think that what we need is a proof
Speaker 4: of concept the oil shipping industry. There are a number
Speaker 4: of ship owners who have a reputation for being I
Speaker 4: think that the sympathetic term is more adventurous at the
Speaker 4: non sympathetic term is more buccaneering. But they will be
Speaker 4: the first ones to cross the stradio hormones. They will
Speaker 4: be the proof of concept that actually you can do it.
Speaker 4: And when they do it, we will start with a trickle,
Speaker 4: but the flood will follow very quickly.
Speaker 3: So, Jamie, where is it that Bloomberg Economics thinks oil
Speaker 3: prices or what are our kind of best guesses of
Speaker 3: how quickly the oil market can adjust and what that
Speaker 3: means for prices, Because obviously it doesn't seem like we're
Speaker 3: going to get back to where we were before the
Speaker 3: conflict anytime soon, but it's still going to fall.
Speaker 5: Yeah, I mean, I suppose we're using similar rules of
Speaker 5: thumb to others. If you go into this into the
Speaker 5: Iran conflict, what happened to oil prices when we lost
Speaker 5: the supply, Well, that gives you a rough feel for
Speaker 5: what might happen to prices. They go down right if
Speaker 5: you use kind of these rules of thumb, they weren't
Speaker 5: a bad guide on the way in. Let's just imagine
Speaker 5: that you get five million barrels a day, which is
Speaker 5: very conveniently five percent of global supply, an elasticity of
Speaker 5: four So if you lose one percent supply, prices go
Speaker 5: up by four percent. Well, that means you might get
Speaker 5: a drop in prices of around about twenty percent, which
Speaker 5: takes you from ninety dollars down to seventy to seventy five.
Speaker 5: So I think that's the kind of range you'd expect
Speaker 5: oil prices to settle in if that's the kind of
Speaker 5: increase in supplied the BC over the over the next
Speaker 5: month or so.
Speaker 3: I remember even a debate on this podcast, for we
Speaker 3: had Ziad and Haveavier at the beginning of the conflict,
Speaker 3: and you know, very focused on the significance of the
Speaker 3: straight Orfom moves, and at that point and I remember
Speaker 3: feeling that it maybe was on the low side. We
Speaker 3: had as our kind of dark downside scenario that the
Speaker 3: oil price would go to one hundred and ten, and
Speaker 3: Havevier and many others were saying, surely that the downside
Speaker 3: could be a lot higher than that, despite the fact
Speaker 3: that the conflict has continued so much longer than people
Speaker 3: would have expected or hoped at that time from an
Speaker 3: economic standpoint, why have they not gone as high as
Speaker 3: some thought?
Speaker 5: Well, I'll punt it back to have and tell us
Speaker 5: what is wrong. I mean, there are a couple of factors, well,
Speaker 5: a couple of things to think about. One is as havier.
Speaker 5: It set out that the adjustment that China has made
Speaker 5: to its importance of oil has been a big insulating factor.
Speaker 5: More broadly, though, I think the oil market, its role
Speaker 5: in the globe economy has changed immeasurably over the last
Speaker 5: ten to fifteen years. So if you go back to
Speaker 5: twenty eleven, which is the last time we saw a
Speaker 5: sustained period of oil at one hundred dollars a barrel, well,
Speaker 5: two things have happened since then. We've seen the price
Speaker 5: of everything else has gone up by about forty percent,
Speaker 5: related to the price of oil, and the efficiency with
Speaker 5: which we use oil has gone up by about twenty
Speaker 5: five percent if you put these things together, or to
Speaker 5: get an oil price shock of one hundred dollars a
Speaker 5: barrel now or how it felt like in twenty eleven,
Speaker 5: you'd actually need oil to move to one hundred and
Speaker 5: ninety dollars a bowl. So just those two factors alone
Speaker 5: explain part of the economy's resilience and also perhaps why
Speaker 5: the oil price itself hasn't jumped quite so much.
Speaker 3: And there's also this point about the demand destruction. But
Speaker 3: you know, as the price goes up, you're gotting reduced demand,
Speaker 3: which in turn prevents it from going higher and high.
Speaker 3: But I should be fair to you, have you the
Speaker 3: really high end numbers that you talked about was if
Speaker 3: there were serious attacks on, for example, desalination plants, which
Speaker 3: clearly didn't happen. So I don't think you were making
Speaker 3: sort of super high productions if that didn't happen. But
Speaker 3: it was certainly the case that a lot of people
Speaker 3: thought that prices would go higher than they have, and
Speaker 3: they've certainly been surprised at how long they've been under
Speaker 3: one hundred dollars in many cases, certainly in the last
Speaker 3: few weeks. So what's your explanation.
Speaker 4: It's quite interesting because I was sanguine on where prices
Speaker 4: were going to go if unless we have an open war,
Speaker 4: and we started, you know, seeing Iran and his rivals
Speaker 4: start getting the oil fields, which really never happened.
Speaker 1: The oil price surprise me.
Speaker 4: To the downside, the steel which has been I will
Speaker 4: have expected that prices will have been more sustained over
Speaker 4: one hundred dollars. I think that Jamie allude to some
Speaker 4: of the of the factors, and there are a number
Speaker 4: of them, but you have to say, well, you can
Speaker 4: only name one, and only one.
Speaker 1: Will be against China.
Speaker 4: China surprised me because reduced oil imports by tanker by
Speaker 4: forty five percent relative to pre war level, and we
Speaker 4: don't really know how that happened. I mean, we have
Speaker 4: our suspicions lower demands on shifts on refineries, but we
Speaker 4: do think that some kind of inventory droughtdown happened, whether
Speaker 4: that was commercial inventories or strategic inventories. You look at
Speaker 4: India was important in May of twenty twenty six exactly
Speaker 4: as much oil as it was important in May or
Speaker 4: twenty twenty five. So the fact that China came down
Speaker 4: allow a number of other economies in Asia to continue buying.
Speaker 4: I think that the use of the state petroleum reserves
Speaker 4: in the West, particularly the US in Japan, very early
Speaker 4: in the conflict was very important and a significant change
Speaker 4: of how we have used the SPR in the past.
Speaker 4: I mean, you look at the conflict of Livia, the
Speaker 4: kind of the previous time that we use the sat
Speaker 4: Patrolan reserves. It took about six months of civil war
Speaker 4: for the West to decide that there was a time
Speaker 4: to use the SPR. Similar situation in nineteen nineteen nine.
Speaker 4: In ninety one during the basis of Kubei here we
Speaker 4: used the SPR before the second week of the conflict
Speaker 4: have ended so very, very different. And there are a
Speaker 4: number of other factors that I think that they're important.
Speaker 4: By going to number name only two more one U
Speaker 4: allude to it demand destruction. We saw a significant amount
Speaker 4: of oil consumption just to disappear without really causing a
Speaker 4: lot of damage to the global economy. Perhaps it's because
Speaker 4: we are having this narration from the West and we
Speaker 4: didn't suffer and this was more of a crisis that
Speaker 4: affected the number of economies in Southeast Asia poor economies,
Speaker 4: but people in Europe, in Japan, in certainly in the
Speaker 4: US and Canada didn't have to change the day to
Speaker 4: day way of living, driving, flying around.
Speaker 1: Nothing changed.
Speaker 4: So that was very interesting how demand came down without
Speaker 4: affecting those economies. And the other one is the fact
Speaker 4: that the Estrado hormus was never really truly close. There
Speaker 4: were two big pipelines that provide bypass routes around the
Speaker 4: Straateia hormones, one through Saudi Arabia, the other one through
Speaker 4: the United Arab Emi dates and also towards the very
Speaker 4: end of the crisis, and let's hope that this is
Speaker 4: the very end of the crisis. We saw whether started
Speaker 4: that trick call one or two oil tankers a week
Speaker 4: crossing the straight of hormones, what we call dark modes,
Speaker 4: or they're beacon the location beacon off at night, very
Speaker 4: close to the coast, closer to the coast that typically
Speaker 4: you see these big vessels with are about three hundred
Speaker 4: and thirty meters long. And that started like one or
Speaker 4: two a week, and very quickly by last week it
Speaker 4: was one or two or even three a day. And
Speaker 4: that makes a big difference because you only need five
Speaker 4: or six a day, and you are pre war levels.
Speaker 4: When people say, oh, you know, before the war, about
Speaker 4: sixty vessels were crossing the Straight of hormones every day.
Speaker 4: That really include with every kind of vessel from from
Speaker 4: the big oil tankers to a small fishing troller. For
Speaker 4: the big tankers, we need about seven a day big
Speaker 4: oil tankers to cross the Straight of hormones and we
Speaker 4: are at pre war esport levels, so that's also important
Speaker 4: to remember.
Speaker 3: It's funny because we've been focused on this issue for
Speaker 3: so long and there's still things that I haven't had before.
Speaker 4: So the mats go as Basically, you need about fifteen
Speaker 4: million borrowers a day of crude oil esports to go
Speaker 4: back to pre war level through the Straight of hormones.
Speaker 4: Each of what we call a BLCC very large crew
Speaker 4: carrier is two million barrels thereabouts, so it's about seven
Speaker 4: seven and a big tankers gives you there. And if
Speaker 4: you consider that, probably we are going to still see
Speaker 4: those bypass pipelines working. Actually probably we only need to
Speaker 4: cross through proper a stray hormos about ten million barrels,
Speaker 4: which is five vessels a day. It is not a
Speaker 4: huge even if you have to basically seek sag. I'm
Speaker 4: on the minds it's only five tankers a day. It
Speaker 4: is not fifty sixty one hundred veersels a day.
Speaker 3: I love that VLCC. There's very large containers. If I'm
Speaker 3: just going to start referring to that, you know with
Speaker 3: people who you have your VLC, you have your very
Speaker 3: large car. Jamie. Have you mentioned about the sort of
Speaker 3: relatively muted impact on activity, certainly in the more advanced economies.
Speaker 3: So I guess that sort of takes us to this
Speaker 3: kind of second piece of just okay, assuming that this
Speaker 3: is some kind of turning point, some kind of reopening point,
Speaker 3: thinking about what path the global economy is on now
Speaker 3: relative to what we would have expected in mid February
Speaker 3: or you know, even the beginning of the year. How
Speaker 3: has this conflict changed the world from an economic standpoint.
Speaker 5: Well, I think we take a step back and look
Speaker 5: at kind of economic outlook over the past year as
Speaker 5: it looked at each point. So let's think about the
Speaker 5: impact of tariffs, the uncertainty that cause, and the impact
Speaker 5: that had on the economy. Well, the economy was in
Speaker 5: a pretty much global slowdown, in twenty twenty five. As
Speaker 5: we got towards the end of twenty twenty five, though,
Speaker 5: things were really changing. Uncertainty basically disappeared. We knew what
Speaker 5: Trump's end game was roughly with tariffs, and the economy
Speaker 5: was starting to really recover. You saw that in advanced economies,
Speaker 5: you saw it in developing economies, and of course you
Speaker 5: had the AI boom sort of supercharging all of that.
Speaker 5: So things were really looking up. At the start of
Speaker 5: the year February the twenty seventh, the global economy looked
Speaker 5: great and it doesn't look like that now. So if
Speaker 5: we've got a global GDP tracker, which kind of uses
Speaker 5: machine learning methods to combine lots and lots of information
Speaker 5: soft information, which is kind of very very timely, and
Speaker 5: you can see that immediately after the straight shut the
Speaker 5: global economy started down. There are a few reasons why
Speaker 5: that's the case. Right. One is that there's the direct
Speaker 5: effects of oil prices being higher, squeezing consumers making it
Speaker 5: harder for them to buy stuff. That's the direct effect.
Speaker 5: Then you have the uncertainty how long is it's going
Speaker 5: to last. The oil price is going to go buy more?
Speaker 5: Am I going to be able to fly somewhere. These
Speaker 5: things will affect people's decision making. And then finally you've
Speaker 5: got tighter financial conditions because central banks are waking up
Speaker 5: to the risk that inflation will be higher. They're not
Speaker 5: cutting or they're indeed hiking, and this, of course is
Speaker 5: making it harder for businesses to invest, it's making it
Speaker 5: more costly, it's making more costly to borrow. So all
Speaker 5: of these things are coming together to act as a
Speaker 5: drag on the economy. And the question is how fast
Speaker 5: are all these things are going to go away? The deal
Speaker 5: is signed, maybe the straight open straight away, Maybe uncertainty
Speaker 5: diminishes really fast, But how long is it going to
Speaker 5: be before central banks change their mind? They were kind
Speaker 5: of very slow to kind of acknowledge that this was
Speaker 5: an inflation risk, and one imagines that it could be
Speaker 5: very very slow to appreciate that the risk has passed
Speaker 5: because they've been burnt before.
Speaker 3: But every time we've talked about this in the past,
Speaker 3: we've pointed out that a higher oil price is a
Speaker 3: rational mechanism, and the countries that end up with much
Speaker 3: less oil are the ones that just can't afford to pay,
Speaker 3: and they're the ones who are also going to have
Speaker 3: the bigger impact via the cost of the difficulty of
Speaker 3: getting fertilizers. So Jamie is just to complete that picture
Speaker 3: in terms of what the global impact is. But thinking
Speaker 3: about emerging market economies and specifically the developing countries, well.
Speaker 5: I guess I mean one thing hasn't changed, which is
Speaker 5: that the losers in this are always the economies which
Speaker 5: are at least able to pay. They've got the highest
Speaker 5: elasticity of demand. They have to destroy their demand when
Speaker 5: this happens, and so that there is suffering happening around
Speaker 5: the global economy. And as Javier said, it's just not
Speaker 5: happening so obviously in the West where we are, and
Speaker 5: of course it's compounding other other risks we've heard about
Speaker 5: fertilizer about We know that food prices are going up
Speaker 5: in some places. We know that the client itself is
Speaker 5: also compounding risks to food costs, and when you put
Speaker 5: all work together, then you get a fair depressing picture
Speaker 5: for the risk of additional conflicts spinning out elsewhere in
Speaker 5: some of the lower economies. We have research on that
Speaker 5: other terminal as well. So it's so the consequences are
Speaker 5: the same as as always in some sense. But I
Speaker 5: guess what's different this time relative to twenty twenty two
Speaker 5: is we don't have the compounding factor of the FED
Speaker 5: hiking rates by a huge amount and compelling other emerging
Speaker 5: market economies to do the same. So we should in
Speaker 5: that in that respect be slightly better.
Speaker 3: And given that we have spent a lot of time
Speaker 3: over the last few years talking about what constitutes are
Speaker 3: temporary versus the lasting impact on inflation, and if we
Speaker 3: look through to the end of the year, if things
Speaker 3: do pan out broadly as we've discussed in terms of
Speaker 3: old prices in most countries, you'll be looking at a
Speaker 3: higher most developed countries, you're looking at a higher inflation
Speaker 3: rate at the end of this year, right.
Speaker 1: Yeah, it's right.
Speaker 5: So I think with the US people expecting inflation to
Speaker 5: be about a percentage point higher at the end of
Speaker 5: the year than it would have been had we not
Speaker 5: had this crisis. For the UK and Europe, where there's
Speaker 5: much more reliance on natural gas and a very segmented
Speaker 5: market in the global gas market, it's more like one
Speaker 5: and a half percentage points higher, so a bigger problem.
Speaker 5: And the GDP impacts well, it's worse for the UK
Speaker 5: and the EU area because we don't produce any oil ourselves.
Speaker 5: For the US, it's pretty modest. So central banks have
Speaker 5: to weigh these two things, and generally it looks like
Speaker 5: we're expect basically lost three cuts from the FED. You've
Speaker 5: got maybe two hikes from the ECB. And who knows
Speaker 5: what the Bank of Being is going to do, because
Speaker 5: they're in a very sticky position because they keep worrying
Speaker 5: about inflation so much, because they're still fighting the last
Speaker 5: crisis on inflation. So it's a bit of a mess.
Speaker 5: I mean, the labor market looks completely different now from
Speaker 5: what it did in twenty twenty two. There's the likelihood
Speaker 5: of second round effects, so that people pushing for higher
Speaker 5: wages because they see their gas prices going up, their
Speaker 5: fuel prices going up. That that's a lot less likely
Speaker 5: this time around, but central banks are very scared, and
Speaker 5: so we may all end up paying the price for it.
Speaker 3: I mean, it is striking. In fact, we have a
Speaker 3: little dashboard as a sort of market dashboard on the
Speaker 3: Bloomberg main website. We have like what's going on today.
Speaker 3: It's also just a nice little thing they've had since
Speaker 3: the end of February on how key prices have changed
Speaker 3: since February twenty seven. The US stock market's still up
Speaker 3: seven eight percent. I think the dollars a bit higher,
Speaker 3: but there's more than thirty percent increase in the average
Speaker 3: price of petrol gasoline in the US since February twenty seventh.
Speaker 3: I mean, have you I guess a sort of similar,
Speaker 3: sort of oil related version of that question for you. Obviously,
Speaker 3: supplies or reserves are going to be lower for quite
Speaker 3: some time. But if you're just looking at the state
Speaker 3: of the global oil market or the global energy market
Speaker 3: now and sort of the likely state by the end
Speaker 3: of the year, how would you tell that the Iran
Speaker 3: conflict has happened? What are the sort of big changes
Speaker 3: in terms of prices and other things.
Speaker 4: The way I look at the market, I see two
Speaker 4: main changes. Two that they are bullish. We emerge from
Speaker 4: the conflict with significantly lower strategic petroleum reserves in most countries,
Speaker 4: those will need to be rebuilt over time. That means
Speaker 4: buying barrels out of the open market to put into
Speaker 4: the stockpile.
Speaker 3: So, just to be clear, if you're sitting in the
Speaker 3: your market, bullish means you're expecting prices to stay higher
Speaker 3: and demand for the rest of us if they feel.
Speaker 4: Bully pullice is it's good news if you are an
Speaker 4: oil producer, so higher. Let's let's use the proper the
Speaker 4: proper terminology. Higher oil prices for two reasons. One because
Speaker 4: we need to rebuild the petroleum reserves in the case
Speaker 4: of the United States, that they are the lowest in
Speaker 4: forty plus years.
Speaker 1: That needs to be addressed. That means that demand next
Speaker 1: year will be higher.
Speaker 4: And also bullies because we can see the straight of
Speaker 4: hormones close again at short notice.
Speaker 1: Nothing guarantees that this deal is going to hold.
Speaker 4: And also it's a complete This war staff happens that
Speaker 4: is unpredictable. So the straight of hormones may reopen from Friday,
Speaker 4: but it may close Monday, and we need to be
Speaker 4: aware of that. Parish oil price. Lower oil prices. Why
Speaker 4: a couple of other factors there, perhaps more long term one.
Speaker 4: We have learned that China can add as a buffer
Speaker 4: against any supply disruption, reducing his own oil imports in
Speaker 4: a way, in a magnitude and in a speed that
Speaker 4: no one in the oil market have previously anticipated, and
Speaker 4: that perhaps lowers forever the risk premia or the geopolitical
Speaker 4: risk premia in the oil market, because yes, we do
Speaker 4: know that there are significant risks for the supply of oil.
Speaker 4: But now we know that there is a country which
Speaker 4: happens to be the world's largest oil importer, who is
Speaker 4: able to swing his imports up or down forty percent
Speaker 4: in response to an exogenous shock. And Barry is also
Speaker 4: lower oil prices because I think that we have seen
Speaker 4: pig hormus the most influential moment of hormos in the
Speaker 4: oil market. Going forward, every oil producer in the Middle
Speaker 4: East is going to try to build or increase the
Speaker 4: capacity of those bypass pipelines. The United Arab Emidays have
Speaker 4: announced today that their ambition is zero hormus, that they
Speaker 4: do not rely at all on the waterway for any
Speaker 4: of the oil esports. They have an oil pipeline already
Speaker 4: that bypass the Strada Hormons. They are building as we
Speaker 4: speak another one that they will be ready by mid
Speaker 4: of twenty twenty seven, and now they are thinking about
Speaker 4: building a third one. Saudi Arabia is very likely to
Speaker 4: do the same. Iraq Kuwai we may see more so
Speaker 4: we may find ourselves that perhaps in the northeast and
Speaker 4: future and I'm thinking about two thy and thirty where
Speaker 4: enough pipeline capacity has been built to make if not
Speaker 4: the strado hormones, if relevant, at least why significant mitigated
Speaker 4: force in the oil market compared to what is today.
Speaker 1: That's interesting.
Speaker 3: I mean, have it so just the sort of suiting
Speaker 3: so you've got the short term bullish in the sense of,
Speaker 3: you know, people are going to have to replenish their stocks,
Speaker 3: prices will stay high to some extra stent. Well, that happens,
Speaker 3: but longer term that kind of more of a ceiling
Speaker 3: to prices over time. Because of that fascinating point about
Speaker 3: China as the sort of swing importer.
Speaker 4: To me, what China has done in this crisis is
Speaker 4: complete awakening. Now we do really need to consider that
Speaker 4: if anything similar was to happen, China can do it again.
Speaker 3: Why are they not talking about it? They have tended
Speaker 3: to not be slow to take credit when they're acting
Speaker 3: as a shock absorber or as a sort of good
Speaker 3: economic global citizen. I'm intriguing that they haven't talked about.
Speaker 4: It's Sephanie, you you absolutely arell on because as an
Speaker 4: oil analyst, I was speaking over the last few hours,
Speaker 4: say why is Beijing not bragging about these and telling us,
Speaker 4: you guys have been enjoying a relatively moderate oil prices,
Speaker 4: thank you to our policies. We invested in estaday, petrol researve,
Speaker 4: we invested in this and that and that, And one
Speaker 4: of the problems that we have is we don't know
Speaker 4: exactly what I mean. We know what the outcome of
Speaker 4: whatever China did has been a significant reduction of oil imports,
Speaker 4: but we don't really know how they did it. Why
Speaker 4: is Beijing not from every loud speaker saying we did
Speaker 4: this for you.
Speaker 5: They may not want to. A Asia economists, our chief
Speaker 5: economists in China tells us that what we see is
Speaker 5: a significant reduction in the use of gasoline and diesel,
Speaker 5: not just withdraw from from reserves. So if that's the case,
Speaker 5: that would flag an economic weakness to come, and that's
Speaker 5: not something that the policy makers wish to brag about
Speaker 5: on the global stage. So it may be that it's
Speaker 5: not a deliberate policy choice. Rather, oil is very expensive
Speaker 5: and they don't want to pay for it.
Speaker 3: I do think that's probably an element of that. Jamie Moore, broadly,
Speaker 3: I guess some of the things that Javier was saying
Speaker 3: about building more pipelines to avoid horror moves. At the
Speaker 3: same time, we also have countries have often now accelerated
Speaker 3: some of their moves to net zero to reduce their
Speaker 3: reliance on carbon. I guess both of those things again
Speaker 3: kind of continue that move away from a world in
Speaker 3: which you can have a big Middle East energy disruption
Speaker 3: affect the global economy.
Speaker 5: The great pleasures of my job is that I get
Speaker 5: to have depressing conversations about oil and the very uplifting
Speaker 5: conversations about the new technologies which are driving forward the
Speaker 5: decarbonization of our economy. If you look at Bloomberging Energy
Speaker 5: Finance their projections for the uptake of these new technologies, Well,
Speaker 5: this is another nudge. It's a reminder. It's a market
Speaker 5: based reminder, not a policy led reminder. There are sharp
Speaker 5: incentives to get on with it. And so I think,
Speaker 5: if anything, it does nudg just further down that road.
Speaker 3: You know, again, with your sort of global macro head on,
Speaker 3: we've also in the line few years become used to
Speaker 3: thinking about there being more frictions, more question marks, more
Speaker 3: geoeconomic risk actually embedded in global trade and embedded in
Speaker 3: the global economy. And the straits of all moods. Although
Speaker 3: it always featured in these kind of wargame scenarios, it
Speaker 3: basically that the sort of safe passage through the straight
Speaker 3: upfe moves was not something that had been an issue
Speaker 3: up until now, and we hadn't talked about it in
Speaker 3: some of these other cases, like the straight of Malaca, whatever.
Speaker 3: All of those kind of question marks, risks, you know,
Speaker 3: have increased yet again.
Speaker 5: Indeed, and we've see there's already some action I think
Speaker 5: and HAVEVMA know more. But there are some countries which
Speaker 5: are already seeking storage outside of the strait and having
Speaker 5: relationships that we could create more buffers outside of the middleast,
Speaker 5: so that if this happens again, the buffer is outside
Speaker 5: of the straight.
Speaker 3: Will it now just be baked in for all the
Speaker 3: people that you talk to, spend your time with in
Speaker 3: the oil market, that they're going to pay a price
Speaker 3: to pass through the state moves on a kind of
Speaker 3: ongoing basis, whether it's called a fee or an arrangement
Speaker 3: cost or toll.
Speaker 4: I sense that acrossing the street of hormones is going
Speaker 4: to be more expensive going forward for at least the
Speaker 4: foresever future, because sheep owners are going to be asking
Speaker 4: for more money for the rias that their.
Speaker 1: Vessels get trapped.
Speaker 4: Insurers are gonna be also demanding more money the Straight
Speaker 4: of Hormones or the Persian Golf.
Speaker 1: Just in mind that that's a.
Speaker 4: London street which suddenly we have seen ten robberies in
Speaker 4: the last six months. Every insurer is going to increase
Speaker 4: their premium just because the rice have increased. So the
Speaker 4: Straight of Hormones Street has seen ten robberies, some of
Speaker 4: them very violent, and the insurer is going to say, well,
Speaker 4: you want to ensure the house on that street, you
Speaker 4: have to pay a bit more money.
Speaker 1: Will it be a fee at all?
Speaker 4: I suspect that on the very early days and weeks,
Speaker 4: I will not be surprised that we see some kind
Speaker 4: of payments.
Speaker 1: I don't think that we're going to use.
Speaker 4: The word at all. But can we see some navigation fees?
Speaker 4: I would not be surprised. They are similar fees in
Speaker 4: other straits and the boss for us in Turkey, for example,
Speaker 4: will it surprise me while you know mine Clarence contributes
Speaker 4: fee for the disposal of all their weapons. I would
Speaker 4: not be surprised. I don't think that that money will
Speaker 4: reach the Iranian people. I think that they will reach
Speaker 4: some very influential people in the in the Iranian government.
Speaker 3: Have you ever Blass, Jamie Rush, thank you so much.
Speaker 3: I guess we still have to wait to see whether
Speaker 3: that memoryment of understanding is signed, and then we wait
Speaker 3: to see if we ever get to read an official
Speaker 3: published versions. Not entirely clear yet, I feel like this
Speaker 3: was the definitive guide to how this conflict is going
Speaker 3: to affect the global economy getting forward. Thanks so much,
Speaker 3: thank you, thank you, thanks for listening Trumpnomics from Bloomberg.
Speaker 3: It was hosted by me, Stephanie Flanders and I was
Speaker 3: joined this week by Bloomberg opinion columnist Tavier Blass and
Speaker 3: Jamie Brush, director of Global Economics at Bloomberg. Trumponomics was
Speaker 3: produced by Summer Study and Moss Andam with help from
Speaker 3: Amy Keen and sound design by Blake Maples and Kelly
Speaker 3: Gary And. To help others find the show, rate us,
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