WEBVTT - There’s War in the Middle East. Why Are Oil Prices Falling?

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. On Monday, Iran responded

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<v Speaker 1>to the US's weekend strike on its nuclear facilities by

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<v Speaker 1>launching missiles at a US air base in Qatar. Qatar

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<v Speaker 1>said it intercepted the Iranian strike. No casualties were reported,

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<v Speaker 1>and oil prices dropped.

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<v Speaker 2>The biggest story of the reaction of the oil market

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<v Speaker 2>to the conflict in the Middle East is one of

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<v Speaker 2>what has not happened.

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<v Speaker 1>Javier Blass is an opinion columnist for Bloomberg. He's covered

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<v Speaker 1>oil markets for the last twenty five years, and he says,

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<v Speaker 1>after past flare ups of violence in the Middle East,

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<v Speaker 1>oil prices have spiked, but not this time.

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<v Speaker 2>You have asked people what was their biggest political race

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<v Speaker 2>for the oil market that was an open conflict between Israel,

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<v Speaker 2>Iran and also involving in the United States, and what

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<v Speaker 2>was going to be the back of the oil market.

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<v Speaker 3>The answer was triple digit oil. There was a debate.

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<v Speaker 2>About it was one hundred, one hundred and fifty two

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<v Speaker 2>two hundred and fifty and that has not happened.

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<v Speaker 1>When the market opened, Brent oil futures were trading at

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<v Speaker 1>around eighty dollars a barrel, and after Iran struck the

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<v Speaker 1>US air base Monday afternoon, oil prices started falling, at

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<v Speaker 1>one point dipping below seventy dollars a barrel.

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<v Speaker 3>It is lower than where we started the year.

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<v Speaker 2>It is lower than where we were when the origins

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<v Speaker 2>of the conflict in twenty twenty three, with the attack

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<v Speaker 2>by Hamas into Israel happened. And it's about the price

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<v Speaker 2>of about twenty years ago.

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<v Speaker 1>And while it tracks that oil prices would go down

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<v Speaker 1>because markets interpreted the attack from Iran as a de escalation,

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<v Speaker 1>which watchers say it was, Javier says oil prices were

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<v Speaker 1>already less vulnerable to this conflict than one would expect

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<v Speaker 1>because there's a relatively new dominant player in the global

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<v Speaker 1>oil market, the US. I'm Sarah Holder, and this is

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<v Speaker 1>the big take from Bloomberg News Today. On the show

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<v Speaker 1>what war in the Middle East means for global oil

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<v Speaker 1>markets and what it doesn't, Bloomberg Opinion columnist Javier Blass

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<v Speaker 1>says the conventional wisdom has long been that conflict in

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<v Speaker 1>the Middle East equals an increase in the price of oil.

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<v Speaker 1>It was a given that with one would come the other.

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<v Speaker 2>Because the Middle East is so important for global supply,

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<v Speaker 2>and particularly the stray the hormones is so important to

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<v Speaker 2>global supply, the conventional cuiston. And actually the reality has

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<v Speaker 2>been that every time that we have been involved in

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<v Speaker 2>conflict in the Middle East, the oil price have increased.

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<v Speaker 2>It just because the market was pricing the potential of

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<v Speaker 2>a disruption, and because of the centrality of the region

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<v Speaker 2>into the global supply, a price increase will happen almost

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<v Speaker 2>every time that conflict has happened.

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<v Speaker 1>There, but that hasn't happened this time. Javier says there's

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<v Speaker 1>two reasons why. First, oil markets have learned not to

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<v Speaker 1>increase prices because of the fear of a future disruption

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<v Speaker 1>and supply because often those disruptions haven't materialized.

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<v Speaker 2>The second reason is that this is really the first

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<v Speaker 2>time that we see Middle East conflict in what I

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<v Speaker 2>will call the post US sale revolution era. The US

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<v Speaker 2>has gone from producing around seven and a half million

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<v Speaker 2>borrows a day when you count all the barrels twenty

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<v Speaker 2>years ago, to produce almost twenty one million borrows a

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<v Speaker 2>day today, and his dependence on the flow of oil

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<v Speaker 2>from the astrata hormones have come down significantly. So again,

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<v Speaker 2>from a psychological point, when you are less reliant on

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<v Speaker 2>that waterway. Perhaps traders feel that they don't need to

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<v Speaker 2>put as much price raise for a potential disruption.

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<v Speaker 1>Well, the US shell revolution is so significant to the story.

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<v Speaker 1>As you're saying, the US pumps more than a fifth

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<v Speaker 1>of the world's total oil right now. That's more than Russia,

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<v Speaker 1>that's more than Saudi Arabia. Can you say more about

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<v Speaker 1>what happened over those past twenty years?

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<v Speaker 2>The sheale revolution started about twenty years ago when some

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<v Speaker 2>American oil engineers and business people try to crack a new.

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<v Speaker 3>Type of rock called shale.

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<v Speaker 2>They discovered that they could drill vertical wells, then turn

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<v Speaker 2>the drill bad ninety degrees and go horizontal to tap

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<v Speaker 2>those very fine shale rock formations. And then the problem

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<v Speaker 2>is that the oil will not flow until one crack

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<v Speaker 2>at the rock and to crack it. What they discovered

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<v Speaker 2>is what we call today fracking or hydraulic fracturing, which

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<v Speaker 2>consists of injecting water, sun and chemicals underground at huge

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<v Speaker 2>pressure until they create fractures.

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<v Speaker 3>On the rock that allow the oil to flow.

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<v Speaker 2>That really unlock a significant amount of new deduction in

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<v Speaker 2>the United States, particularly in Texas and New Mexico.

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<v Speaker 1>So one of the effects of the Shell Revolution is

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<v Speaker 1>that the US is less reliant on Middle Eastern oil.

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<v Speaker 1>What has the reaction been in the Middle East then,

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<v Speaker 1>to the dominance of US shale.

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<v Speaker 2>The reaction has been several times to try to kill

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<v Speaker 2>that revolution, bring prices down. That's what OPEK, led by

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<v Speaker 2>Saudi Arabia did in twenty fourteen to twenty sixteen, trying

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<v Speaker 2>to bring prices down to make shale an economic. And

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<v Speaker 2>now I think that what the Saudias have discovered is

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<v Speaker 2>that shale continues to grow and they are trying to

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<v Speaker 2>increase production to recover market share that they have been

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<v Speaker 2>losing against Shell. And that is also very interesting right

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<v Speaker 2>now because the crisis has come at a time where

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<v Speaker 2>shale production was booming and Saudi production was also increasing

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<v Speaker 2>in an effort to recover market share.

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<v Speaker 1>How is that sort of impacting strategy and geopolitics it

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<v Speaker 1>comes to this conflict, like why is there such a

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<v Speaker 1>game changer for American presidents, for example, thinking about intervening

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<v Speaker 1>and entering conflicts in the Middle East. Did the fact

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<v Speaker 1>that the US is less reliant on oil from around

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<v Speaker 1>play into President Trump's decision to strike around this weekend.

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<v Speaker 2>Every time that the US has faced conflete in the

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<v Speaker 2>Middle East, the White House knew that the consequence of

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<v Speaker 2>that was going to be an increase in oil prices,

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<v Speaker 2>and that means more expensive gasoline in America.

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<v Speaker 3>And I expoke to senior.

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<v Speaker 2>Advisors on oil for former President George W. Bush and

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<v Speaker 2>Barack Obama, and they told me that they knew that,

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<v Speaker 2>however they intervened, there was going to be a price,

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<v Speaker 2>and the price potentially was a recession in America because

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<v Speaker 2>of high inflation, high interest rates, and that always acted

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<v Speaker 2>as a break. I think that for the first time,

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<v Speaker 2>President Trump perhaps is the first American president that doesn't

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<v Speaker 2>really to worry as much. Yes, the oil price can

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<v Speaker 2>be still painful, and I don't think that President Trump

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<v Speaker 2>enjoys anything close to seventy five dollars a barrel.

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<v Speaker 3>But he can intervene in.

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<v Speaker 2>The US without almost be certain that the country is

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<v Speaker 2>going to go into recession.

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<v Speaker 1>Well, it's interesting. This morning Donald Trump posted on True

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<v Speaker 1>Social Drill, Baby Drill, telling the Department of Energy to

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<v Speaker 1>start drilling more to keep oil prices down. What did

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<v Speaker 1>you make of that? What did that mean?

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<v Speaker 2>So President Trump wants two things at the same time

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<v Speaker 2>that they cannot happen. Either you have fifty dollars oil

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<v Speaker 2>and not much drilling, or you have seventy five dollars

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<v Speaker 2>oil and a significant amount of drilling. And I think

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<v Speaker 2>seventy five dollars is about right. It is good enough

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<v Speaker 2>for the shale industry in places like Texas New Mexico,

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<v Speaker 2>oil companies are going to be doing well. They're going

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<v Speaker 2>to be drilling, but the price is not high enough

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<v Speaker 2>to be a problem for the economy, and certainly not

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<v Speaker 2>high enough that this summer driving season people are going

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<v Speaker 2>to be complained in about high castleine prices.

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<v Speaker 1>So you think Trump should be happy with seventy five

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<v Speaker 1>dollars a barrow.

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<v Speaker 3>Let me put it this way.

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<v Speaker 2>I think that many other presidents in the White House

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<v Speaker 2>facing a Middle East crisis will have been happily take

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<v Speaker 2>seventy five dollars a barrel. I mean, every other time

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<v Speaker 2>the president will have been facing one hundred dollars oil,

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<v Speaker 2>which is really painful for the economy.

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<v Speaker 3>Seventy five is just fine. Take the win move on.

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<v Speaker 2>One of the most amazing things that is happening right

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<v Speaker 2>now in the market is that if you look at

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<v Speaker 2>the price of regular gas in the United States today,

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<v Speaker 2>with all what has already happened in the Middle East,

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<v Speaker 2>is lower that it was on the last period of

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<v Speaker 2>heavy driving in America around the Easter holiday. Three dollars

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<v Speaker 2>a gallon three two three, Three dollars a gallon is

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<v Speaker 2>a quite reasonable price if you consider the experience that

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<v Speaker 2>we we have in past years when Russia in Ukraine,

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<v Speaker 2>the price of gas in the United States when all

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<v Speaker 2>the way to five dollars. I don't see that happening

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<v Speaker 2>again during this crisis, and I would expect that prices

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<v Speaker 2>stay around this level for the next few weeks.

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<v Speaker 1>After the break. What leverage Iran still has over global

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<v Speaker 1>oil markets and why the Strait of Hermos isn't the

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<v Speaker 1>biggest concern So far, the war between Israel and Iran

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<v Speaker 1>hasn't dramatically increased the price of oil, even after the

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<v Speaker 1>US bombed Iranian nuclear facilities this weekend. But as the

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<v Speaker 1>conflict has escalated, so too have fears that Iran might

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<v Speaker 1>try to up the ante by closing the Strait of

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<v Speaker 1>her Moves. So I asked Bloomberg opinion columnist Javier Blass

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<v Speaker 1>to tell us about this unique waterway that transports so

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<v Speaker 1>much of the world's oil.

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<v Speaker 3>The Australia Hormos is.

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<v Speaker 2>It's very important for the oil market for one reason.

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<v Speaker 2>It is the chalkpoint, the waterway for which twenty percent

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<v Speaker 2>of the world's oil flow into the international market. All

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<v Speaker 2>the oil from Iran, most of the oil from Idak,

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<v Speaker 2>significant portion of the Saudi oil, Emidiati oil, all of

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<v Speaker 2>the oil from Kubait. They need to go through the

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<v Speaker 2>Straight of Hormus to reach global oil refineries.

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<v Speaker 3>If the Straight the.

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<v Speaker 2>Hormos was to be closed, oil prices will rise significantly

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<v Speaker 2>because we will lose a significant chunk of supply. And

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<v Speaker 2>as I said, it's twenty percent of the world's oil

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<v Speaker 2>goes through it. These are huge tankards, so you cannot

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<v Speaker 2>miss them.

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<v Speaker 1>How could a run shut down the Strait of Hormose?

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<v Speaker 1>Does it need UA's buying.

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<v Speaker 3>Now They can do it alone.

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<v Speaker 2>If Iran wanted to shut it down the strait for

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<v Speaker 2>a brief period, they can't do it. They need to

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<v Speaker 2>turn to violence. So it will involve probably firing meatiles

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<v Speaker 2>against oil tankers, which will prompt every other oil tanker

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<v Speaker 2>to turn around and avoid the strait. They can mine

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<v Speaker 2>use sea mines to mine the waters of the Strait,

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<v Speaker 2>So there are a number of elements that they could

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<v Speaker 2>deploy to try to close it. But obviously every other

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<v Speaker 2>country in the region, and significantly the United States and

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<v Speaker 2>perhaps China, will react to that and try to reopen

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<v Speaker 2>the strait right away.

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<v Speaker 1>On Sunday, Iranian State TV reported that Parliament has approved

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<v Speaker 1>a measure to close the strait. That doesn't mean it's happening.

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<v Speaker 1>They need more than just parliamentary approval. But can you

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<v Speaker 1>game it out for us? What would shutting down the

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<v Speaker 1>straight mean for global trade? Even short term?

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<v Speaker 2>Every day that we were to lose twenty percent of

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<v Speaker 2>the global supply will increase the price of oil significantly.

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<v Speaker 2>And if we were to be only a few days

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<v Speaker 2>of the shutdown, there will be panic buying, particularly for

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<v Speaker 2>countries that depend on Middle Eastern oil for a lot

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<v Speaker 2>of the supply. I'm thinking about China, India, Japan, South Korea,

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<v Speaker 2>ta one. So those countries will go into the market

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<v Speaker 2>that will buy oil from whatever other origin, whatever other price,

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<v Speaker 2>and the price will go up a lot. Will the

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<v Speaker 2>price is stop at one hundred dollars, No, I don't

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<v Speaker 2>think so. I think that will go significantly higher than

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<v Speaker 2>one hundred dollars, but we get.

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<v Speaker 1>Our triple digit oil prices.

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<v Speaker 2>Yeah, we will have absolutely, we will have triple digit

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<v Speaker 2>oil prices. But how likely is that very very unlikely?

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<v Speaker 1>Just so I understand what are Iran's incentives to close

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<v Speaker 1>the straight up her moos right now in the middle

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<v Speaker 1>of this conflict, and what's the main incentive not to

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<v Speaker 1>close the straight?

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<v Speaker 2>The main incentive for Iran to close the straight that

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<v Speaker 2>her mooves will be to weaponize oil, to turn oil

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<v Speaker 2>into part of the conflict, potentially to force the United

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<v Speaker 2>States to tall to Israel so Israel stops the bombing

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<v Speaker 2>and the United States thing twice in the future about

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<v Speaker 2>bombing Iran is just using oil as a weapon and

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<v Speaker 2>force probably a diplomatic negotiation around the world. That is

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<v Speaker 2>the biggest upside for Iran to close the straight of hormones.

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<v Speaker 1>So saying you thought you were insulated from oil supply,

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<v Speaker 1>but you're not, like you really need us.

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<v Speaker 2>Yeah, and it just generally the United States, even if

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<v Speaker 2>the United States suffers not a lot, the United States

0:13:22.480 --> 0:13:25.679
<v Speaker 2>has an interest on a healthy global economic growth. So

0:13:25.840 --> 0:13:29.080
<v Speaker 2>other allies will suffer. Japan will suffer, Korea will suffer.

0:13:29.120 --> 0:13:31.960
<v Speaker 2>The European countries will suffer, and typically that's not in

0:13:32.000 --> 0:13:35.560
<v Speaker 2>the interest of the United States. The biggest downside for

0:13:35.640 --> 0:13:38.239
<v Speaker 2>Iran is that if you close the straight of hormones,

0:13:38.880 --> 0:13:42.320
<v Speaker 2>no one can esport oil, and that includes Iran. And

0:13:42.360 --> 0:13:46.000
<v Speaker 2>for the Iranian regime, oil is really the cash coke,

0:13:46.760 --> 0:13:50.360
<v Speaker 2>that's where the money is coming. So yes, Iran will

0:13:51.200 --> 0:13:53.920
<v Speaker 2>close the straight of hormones and it will create trouble

0:13:53.960 --> 0:13:56.719
<v Speaker 2>for everyone else, but they will shut themselves on the

0:13:56.760 --> 0:13:59.840
<v Speaker 2>food because they cannot sell their oil. It will also

0:14:00.920 --> 0:14:04.680
<v Speaker 2>heard some of the biggest allies of Iran, like China

0:14:05.040 --> 0:14:07.400
<v Speaker 2>and China will not really enjoy that, and I don't

0:14:07.400 --> 0:14:11.240
<v Speaker 2>think that Iran can afford losing diplomatic support from China

0:14:11.320 --> 0:14:14.600
<v Speaker 2>right now. My personal view is that Iran will not

0:14:14.720 --> 0:14:17.040
<v Speaker 2>close the straight of her moos. I don't think that

0:14:17.120 --> 0:14:20.520
<v Speaker 2>they have when you put everything on balance, a good

0:14:20.600 --> 0:14:23.040
<v Speaker 2>incentive to do it.

0:14:23.120 --> 0:14:23.840
<v Speaker 3>Can it happen?

0:14:24.400 --> 0:14:29.240
<v Speaker 2>I suppose that one should not say never, but I

0:14:29.400 --> 0:14:30.360
<v Speaker 2>don't see it.

0:14:31.200 --> 0:14:34.000
<v Speaker 1>So maybe this closing the straight of her moves isn't

0:14:34.160 --> 0:14:36.560
<v Speaker 1>the biggest concern that we should be thinking about right now.

0:14:36.760 --> 0:14:39.720
<v Speaker 1>Are there other major risks that were in the Middle East?

0:14:39.800 --> 0:14:43.680
<v Speaker 1>Raises for the global oil trade or energy markets overall.

0:14:44.360 --> 0:14:46.240
<v Speaker 2>I do think that there are other big rays, and

0:14:46.320 --> 0:14:49.240
<v Speaker 2>perhaps they don't get as much attention, but they are

0:14:49.240 --> 0:14:53.600
<v Speaker 2>more important. The Saudi oil fields are within range of

0:14:53.640 --> 0:14:58.320
<v Speaker 2>Iranian missiles and a proxy of Iran. The hooties of

0:14:58.440 --> 0:15:03.800
<v Speaker 2>German attack saw the oil fields in twenty nineteen disrupting

0:15:03.880 --> 0:15:09.520
<v Speaker 2>supplies significantly, even for a brief period of time. Do

0:15:09.600 --> 0:15:12.240
<v Speaker 2>I think that that's likely? Again, I don't think so,

0:15:12.800 --> 0:15:16.200
<v Speaker 2>But that would be far more devastating that anything happening

0:15:16.240 --> 0:15:19.360
<v Speaker 2>in the industry or hormones, And to me, that is

0:15:19.680 --> 0:15:23.400
<v Speaker 2>perhaps the worst case scenario that you are talking about.

0:15:23.640 --> 0:15:27.200
<v Speaker 1>So we've been talking about some hypotheticals what might come next,

0:15:27.640 --> 0:15:30.840
<v Speaker 1>But right now we're still sort of processing what happened

0:15:30.840 --> 0:15:33.680
<v Speaker 1>over the weekend. What do the events of this weekend

0:15:33.760 --> 0:15:36.920
<v Speaker 1>and potential further involvement from the US and this conflict

0:15:37.040 --> 0:15:40.800
<v Speaker 1>mean for American oil production going forward.

0:15:41.240 --> 0:15:44.960
<v Speaker 2>What we know is that American oil production was heading

0:15:45.040 --> 0:15:49.680
<v Speaker 2>down because prices have dropped significantly. The US oil benchmark

0:15:50.240 --> 0:15:55.600
<v Speaker 2>a few weeks ago was changing hands dues around sixty

0:15:55.640 --> 0:15:59.400
<v Speaker 2>dollars a barrel. At that price point, American oil production

0:15:59.520 --> 0:16:02.680
<v Speaker 2>goes down since then because of all what has been

0:16:02.680 --> 0:16:05.120
<v Speaker 2>happening in the middle is prices have recovered to around

0:16:05.160 --> 0:16:08.280
<v Speaker 2>seventy five dollars a barrel, and that has allowed shale

0:16:08.360 --> 0:16:12.320
<v Speaker 2>companies to lock in future prices. And that means that

0:16:12.400 --> 0:16:15.680
<v Speaker 2>probably American oil production is going to be higher that

0:16:15.760 --> 0:16:18.800
<v Speaker 2>we were expecting a few weeks ago, both in the

0:16:18.840 --> 0:16:21.720
<v Speaker 2>second half of twenty twenty five and also into twenty

0:16:21.760 --> 0:16:22.320
<v Speaker 2>twenty six.

0:16:23.520 --> 0:16:26.280
<v Speaker 1>But shale is not an infinite resource, right and Trump

0:16:26.320 --> 0:16:30.040
<v Speaker 1>has been very resistant to invest in green energy sources.

0:16:30.520 --> 0:16:35.760
<v Speaker 1>What happens if oil production doesn't keep going at the

0:16:35.880 --> 0:16:39.000
<v Speaker 1>rate that's expected. What's the long term plan here?

0:16:39.560 --> 0:16:44.680
<v Speaker 2>Shale is a great resource, and America is extremely lucky

0:16:44.760 --> 0:16:48.600
<v Speaker 2>with his geological endowment, but it doesn't last forever, and

0:16:48.640 --> 0:16:52.400
<v Speaker 2>you cannot increase production year after year and expect that that's.

0:16:52.240 --> 0:16:54.760
<v Speaker 3>Going to continue for a very long time.

0:16:55.080 --> 0:16:57.720
<v Speaker 2>At some point, American oil production will reach at senate

0:16:58.320 --> 0:17:02.640
<v Speaker 2>and it means that perhaps if the demand remains at

0:17:02.640 --> 0:17:06.840
<v Speaker 2>the current high level, that will imply that the United

0:17:06.840 --> 0:17:09.679
<v Speaker 2>States will need to start importing a lot of oil

0:17:10.000 --> 0:17:12.960
<v Speaker 2>as it did twenty years ago, perhaps not as much,

0:17:13.280 --> 0:17:17.600
<v Speaker 2>but potentially it could go back to the old Days

0:17:17.640 --> 0:17:22.840
<v Speaker 2>of twenty twenty five years ago.

0:17:23.640 --> 0:17:26.520
<v Speaker 1>This is the Big Take from Bloomberg News. I'm Sarah Holder.

0:17:26.840 --> 0:17:29.200
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0:17:29.200 --> 0:17:32.800
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0:17:32.840 --> 0:17:36.520
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0:17:36.640 --> 0:17:39.040
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0:17:39.080 --> 0:17:41.920
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0:17:42.359 --> 0:17:44.440
<v Speaker 1>Thanks for listening. We'll be back tomorrow.