257. Iran War: Are investors getting it wrong?

Markets are just getting this wrong. If it continues, then it will have huge consequences for the global economy and for the UK. Although we gotta hope that the view of markets that this could lead to some kind of stability relatively quickly is correct, there are a enormous catastrophic risks around that.

Hello and welcome to The Rest Is Money with me, Robert Peston. And with me, Steph McGovern. Now the unrest in the Middle East continues uh to play havoc. We want to look today at the latest on what that means in terms of Yn ymwneud â'r cymdeithasol, beth ymwneud â'r cymdeithasol, beth ymwneud â'r cymdeithasol, ac yn ymwneud â'r cymdeithasol ymwneud â'r cymdeithasol ymwneud â'r cymdeithasol ymwneud â'r cymdeithasol ymwneud â'r cymdeithasol. So I was really struck by a data point that um

Quite an influential investment manager sent me this morning. And it is that in the futures market. Price of oil for delivery in December is only up three percent. This week, right? Which basically says that investors believe that there will be um a relatively stable end to this conflict in terms of shipments of oil and presumably potentially of gas as as as well. And that that

stability will come sooner than you know many people think. And so I thought that what we should at least start by doing is Look at whether that kind of relative optimism is well founded or whether, which is often the case. Markets are just getting this wrong and getting it wrong in particular because there are some really big uncertainties out there. So just talk us through staff.

What has been happening to oil and gas production facilities in the Middle East? What's been happening to that extraordinarily important shipping lane, the Straits of Humus? You know, since we did our last episode at the beginning of the week.

So as things stand, there are still hardly any ships going through the state of Hormuz. The only ones really getting through were Chinese and Russian ones, and that's very much largely to do with the pressure that China's putting on around and the US around.

oil and gas through there. This tiny bit of waterway is where a lot of ships go through, um, carrying liquefied natural gas, carrying oil. You know, it's it's a fifth of the global oil supplies going through there. And this is a real chalk hold because ships not being able to get through there is a real problem in terms of oil and and gas getting out to where it is is sold.

And so at the moment that there's there's basically no movement there. Trump's come out and said, Well, hang on, I I'm gonna help ships get through there. I'm gonna send warships to support you so that they don't get attacked. Uh he's also on about trying to

be at the insurer as well for these ships because that's another problem. We've had the big insurance firms say we're not gonna insure these ships trying to go through there because it's just too dangerous. There's just too much a threat of an attack.

So you've got that problem there, that choke. And and that essentially is temporary in a way, because if they can sort that out and get those ships moving, that is the a temporary problem. However, I think the bigger problem, and it's the one you made in the last podcast, Robert. Is these attacks by Iran on really key producers of things like oil and gas and fertilizer. So if you look at what's happened so far, you've got, for example, in Qatar.

The biggest refinery, Raslafan. They're the biggest liquefied natural gas producing terminal. They've paused production of that. They've also paused production of what they call downstream production. Now that is things like fertilizer, which is obviously really important for food production. So at the minute they've paused production there, but then you've got facilities. that have been hit in the UAE like

oil installations that have been attacked by drones. And and and so I guess in terms of what this means for oil prices is how long is that production paused for? How much damage is being done by these drone attacks by Iran? Will that continue? At the moment, as you say, oil hasn't gone up that much. Gas has. I think you know, if you're looking at goals wholesale gas prices, they've shot up.

in the last couple of days. If you look at how much the UK is now paying for wholesale gas, it's the it's the highest since twenty twenty two. So it's not as as high yet as uh when it was the Ukraine war. But The r it's the rate of change that I think is quite scary there, because we've seen like the biggest two-day increase in UK wholesale prices we've ever seen. So it's more the rate of change. But Robert, as you say, this is the question around all of this is.

How long is it gonna go on for? And and if it's only a short blip. mae'r blip yn ymwneud yn ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny'n ymwneud hynny then we'll be able to recover from it. But if it continues, then it will have

We're delighted to say that this year the rest is money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big city? You know what? We've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition.

You've got differentiation, you know, we thought the market was stable, then Aldi and Little turned up. Competition is not about reinventing the souk with dozens of identicate uh companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction. Well cheers Greg and thank you for powering this episode of The Rest is Money.

So look on the data points. Um there's no question that Israel and America have degraded Iran's uh missile ballistics drone firing capabilities to an extent. The number of missiles and ballistics and and and and drones coming out of Iran has fallen. Uh I mean they're still posing a very serious threat to the region, the wider Middle East, but the but the sh the volume has come down a bit.

Um and that's a another reason why investors are a bit more optimistic, but then there are counter arguments that one should make. I mean you know I mean for example you you talked about fertiliz fertilizer out of Qatar. Iran is a very big exporter of fertilizer. None of that is leaving the country at the moment.

Th and there is a risk, if you know, farmers food producers can't get fertilizer, that the price of food is gonna go up quite significantly. And we've seen uh in the very recent past our rises in food prices massively uh reduce living standards, particularly uh and they have a direct that has a direct impact on on more th th the more general growth picture. And of course

when you've got uh uh conditions which we have at the moment of energy prices going up and potentially food prices going up. Again, we're in this situation where central banks become more pessimistic about the outlook for inflation. And even if we think in these conditions of an economic slowdown

that over the next year or two interest rates will still come down. They will come down slower, right? And and and and and that is uh certainly, you know, in terms of the growth outlook, that is a negative. Uh because, you know, in the end central bank's primary responsibility is to curb inflation. So Uh you know, th that that that that will be painful. It's also painful for governments like the UK. Um you know, one of the things we have seen is the price of UK government debt.

falling uh a bit. And the reason for that is again because uh, you know, when the price falls, that's the interest rate That the government pays going up and that interest rate is linked to the U.S. to what central banks do. So if central banks are cutting interest rates slower, then th th th you know, sadly for the British government, um, that means its interest rates are falling more slowly and at a time when they're shelling out a hundred billion pounds

uh plus on interest. That is painful for for Rachel Reeves. I I think the biggest Worry and the reason why I'm not persuaded that investors' optimism is well placed. is i i it stems from two factors. I mean, I was talking to a very, you know, senior member of the government today, and, you know, they repeated something we all know, uh, which is that Donald Trump does not apparently have a plan, a roadmap for what happens

uh, you know, after Iran is significantly weakened by this war. You know, there is a a genuine risk of long running chaos. Uh which would be terrible for the people of Iran. And I think, you know, one of the things we should point out when we're focusing on markets and the global economy, we shouldn't underplay the absolute misery for the people of Iran, for people throughout the Middle East.

It since this is now a very wide conflagration. This is a Middle East conflict. This is not just Israel. America and Iran, the whole of the Middle East has now been drawn in in a way that is deeply worrying and, you know, causing all sorts of humanitarian

problems. But the absence of a plan is obviously v you know sign significant. I was quite struck that in the Financial Times Martin Wolfe paints a scenario which he thinks uh forecasting it that ultimately something happens here that is not completely different from what Trump did in Venezuela, which is he he he's assassinated you know, Khamanae the i the Ayatollah, and ultimately some other dictatorial person takes over in Iran, with which with whom Trump does some kind of a deal.

that brings a bit of stability to the region. He gets a deal on no nuclear weapons development. He may even get a deal that somehow America gets some of Iran's oil uh Uh uh uh sort of old style imperialist, colonialist solution, but the poor people of Iran are still subject to an appalling dictatorship. Freedom is not enhanced um in in in Iran. Um is just the worst kind of strong man Geopolitical politics. And I have to say, you know, that is not, it seems to me, a completely unrealistic.

scenario, you know, uh essentially given what we know about Trump's instincts, which is in the end what he mostly cares about, is what's good for America and what's good And what's good for him? Um and so all this talk initially of this leading to significant regime change and the the and and the flowering of some kind of democracy in in Iran would be

would be for the birds. So so that that would be a potential, I mean, depressing but more stable outcome and I suspect that is the one that markets and investors are focusing on. But I just w wanna f make th the the the the countercase of what one's gotta be anxious about, which is when you have a flailing regime which we've got in Iran at the moment. under so much pressure, we cannot r rule out that Iran does something

desperate and terrible. We don't you know, we don't think they've got the capacity to do anything terrible with their stockpiles of nuclear material. But you know, is it possible that they could launch some kind of strike that leads to very widespread deaths of civilians? I think that's possible and then all hell breaks loose. So I I do think that You know, although we gotta hope that the view of markets that this could lead to some kind of stability relatively quickly is

uh catastrophic risks around that. Yeah. I mean, and and as you say, in i in that period, it it's the chaos it causes, it's the instability. But I do wonder, given we've talked about this before, about the the you know, the tackle Trump Trump chickens out.

Trump does care about, especially with the midterms coming up, is is the promises he's made to American people, like the point on oil reserves. And, you know, when he came in for the second term, he talked about um wanting to make sure that he the oil reserves were I think he called it right to the top.

And yes, they have got big oil reserves in the US, as has China, but they're gonna deplete, aren't they? The longer this goes on for, it's gonna really impact that and that will put up oil prices for Americans. And that is one of the things, you know, you'll know this, Robert, whenever

I was ever sent out to cover the budget for the BBC and and the years since then, one of the really tangible things for people is how much they are paying for fuel. You know, we we talk a lot about energy costs, but it's also filling up a tank. you know, using if y if you're using heating oil or whatever, those types of things really matter to people. It's really tangible. And so there is p potentially what might stop Trump carrying on this. conflict is what happens to

oil prices to oil reserves to energy prices, that could be the thing that could be what pulls him back from the brink on this. I mean, what do you think, Robert? So historically in the last, well Uh uh you know, actually uh in both his terms as president, w what he often looks at is the stock market.

It is interesting to me that although we've seen I mean, yesterday in particular in the UK stock market, we saw a fairly sharp fall. Actually the US market has been much steadier than I thought it might be. But um in the Far East overnight as you know, today as we as as as we record, we saw sharp falls in Korea, we saw sharp falls in Japan, these are economies

much more dependent than America is on flows of oil and gas from the Middle East. I think it's important to note that America is largely because of the m massive fracking revolution that there has been. It's largely independent when it comes to its all its its oil and gas needs.

Um, you know, it it's it's got significant reserves and significant production. You could see a world in w or or a scenario with Trump that if the world price of oil and gas rises and that would have force up the price in America, that he would either regulate that price down in America, because he has the you know, he is somebody who um uh is incredibly focused.

on how, you know, voters feel in in in in respect of the more explicit prices that they're paying. So you could see a situation in which to go back to your uh original point. He intervened you know, very directly in American oil and gas markets to make sure the price doesn't rise. too much. If there were we haven't seen it yet, you know, a a very big stock market.

uh negative reaction, and I still think that is a real possibility. I think at that point the chances of him chickening out are much greater. The problem is that even if he were to try and expedite some kind of solution faster. He has opened a can of worms, a Pandora's box. You know, this is this is a terrible mess that he's already created. Um and and it is quite hard

um to make rational, confident forecasts about as you know, essentially where we will end up. The only thing that we can be confident of is that the world is a much more unstable pr place. It's a much more dangerous place. And that brings all sorts of consequences for the British economy and also for where th and how the British government allocates its resources, in particular how it gets its defence spending up, and m maybe after the break that is what we should unpick.

Hey, it's me from Riksby here. Har du svårt att fokusera på en Måste fixas i BRF-styrelsen. Ja, du vet, budget där som ska hålla. Standbyten som ska planeras, energikostnader som sticker i höjden och allt det. Fastighetsförvaltning från Riksbyg. Welcome back to the rest is money with me, Steph McGovern. And with me, Robert Pasteur. Now in a minute we will um unpick what in the Chancellor's

spring statement remains relevant in these turbulent times. But you had a couple of thoughts you also wanted to add on what households and businesses in the UK will be paying for gas in the coming months. Yes. Um because obviously as we've just been talking about, the the you know, the wholesale price of gas is mae'n llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r llawer o'r

a a big deal for us in terms of our energy usage. Now, y you know, you'll remember Yn ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r ymwneud â'r hynny. for energy from going up. And they yes, for now it's not gonna change anything, but it the point is this Price cap gets reviewed every three months.

So if this continues, if we continue to see the wholesale price of gas going up, then that is inevitably gonna mean that that cap's gonna be lifted. And that's one of the big things that the you know, the Labour government have built their, you know, built their manifesto on was bringing down the cost of living and and energy prices is absolutely key to that. And you know, we we had the spring statement this week, which I know you're gonna talk about, Robert, but that forecast.

of what's going to happen in terms of inflation and in terms of growth was based on the assumption that the gas price would stay pretty stable. And if it's temporary, what's going on in the Middle East? then hopefully that will be the case, then it'll be more stable. But if it isn't, then that's gonna potentially throw all these forecasts out the window. Robert, what what's your take on it? So I didn't think that the spring statement was Irrelevant.

There were some genuinely quite useful forecasts in there. One of those that was most important for me was that the OBR the Office of Budget Responsibility is more pessimistic about the outlook for growth this year than it was only a few months ago. It's expecting only you know it's expecting lower growth, only one point one percent this year, uh which is definitely not the UK. off to the races if you you know think about

We live the kind of growth we had before the financial crisis of nearer three percent and actually the fact that Kir Starmer and his colleagues are desperate to get growth back up above two percent. Well we're a country mile from that. Now It is expecting slightly higher growth. Um in subsequent years.

But you know, one has to have even less confidence than normal in those s in those subsequent year forecasts because of the uncertainties now. What we know is that growth is unsatisfactory now. Now in living standards, actually because of d of direct action that the government is taking, right? So abolishing the two child limit on universal credit, upping the rate at which that universal credit is paid. If you are on lower incomes, if you are in receipt of universal credit, you will be

S significantly better off this year. Um that's got nothing to do with the growth rate. That has just got to do with the fact that benefits. um are going up. But then there are all sorts of uncertainties about whether that rise in living standards will reverse in subsequent years. And I guess the most important statistic given the shock that we are experiencing is that the so called fiscal resilience of the UK

has improved a bit. We've got this enormous debt burden, a hundred percent of GDP, three trillion pounds worth of of debt you know, a hundred billion of interest rate being shelled out every year.

you know, su you know, worries around investors uh uh you know, worries of investors that You know, our debt burden is not sustainable for the long term, but we have a Chancellor who th that is th that that uh uh has said and it to an extent in in public is committed to trying to manage the debt so that at least it doesn't increase in a terribly significant way and the OBR did say that in terms of one important measure of resilience, which is the headroom.

The extent t uh to which the c the Chancellor is meeting her own fiscal targets in five years time, um to make sure that the debt burden is not increasing um excessively, that that headroom has increased a tiny amount. Right. Um you know, it was a bit over uh twenty billion pounds uh th uh the last budget, which was double the headroom as a result of her higher taxes that she'd had in the previous

uh budget. Um i it rises on the current forecast by another well just less than two billion pounds. Now, truthfully, two billion pounds a against the co you know, against the backdrop of three trillion pounds of debt is a rounding error. It's trivial, but at least The public finances on the basis of this forecast are not getting worse at a time when we are experiencing this global this global shock.

So I didn't emerge from the autumn statement thinking, Wow, we're safe I but I at least I emerged thinking, Okay, you know, some of what she did in raising taxes At the last budget.

possibly put you know, puts us in a slightly stronger position to weather this storm. But for me, I think it's unemployment that's worrying me because Yes, if your, you know, tax receipts are higher, partly because you've been Rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n rwy'n

this year. But my big concern is youth unemployment. You know, we've got another rise in minimum wage coming up again soon. It's going up by eight and a half percent in April. That's another big cost for business. are businesses gonna start looking at who they're employing and thinking, well, hang on, they used to be they used to be cheaper to employ young people.

let's not bother let's just work with what we've got and so i do worry about yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna, yna.

I mean that's such a strong point, such an important point. And you know, opinion polls sh at the moment show that what worries uh British people more than anything else is the rise in im uh i in unemployment. There is i in my view quite a good chance that the Office for Budget Responsibility

is being a bit naive and a bit over optimistic in assuming that unemployment will peak this year. Um, you know, w we are experiencing, as you say, it's particularly acute for young people, but we are experiencing um very troubling trends in the labour market and particularly if the confidence of businesses is undermined by what's going on in the Middle East.

Um and particularly uh in the you know, uh this is something actually funny enough we're gonna be talking about in our next episode when we interview um Mark Warner of faculty AI, but at a time when th there are all sorts of rational forecasts that says that the AI industrial revolution is going to eliminate v very large numbers of jobs. Um you know, w one has to be very anxious about the outlook for unemployment in the UK. And I think you also wanted to highlight another risk.

Which is what it means this breakdown of relations between Donald Trump and Keir Starmer, the fact that this very cosy, friendly relationship has now turned really quite nasty. Yes. The fact that, you know, Trump has come out saying Um that he's no Winston Churchill, you know, this is all about not letting the US use its the UK air bases straight away when we have now, but that delay has obviously pissed off Trump.

That is, I mean, there's a sense that Trump might just get over it because there's just too much going on and he'll just kind of, you know, i i eventually we did let them use the bases, so maybe he'll just forget about it in the longer term. But he's been like pretty hard on Spain saying

on the basis they won't let him use uh their bases there. They're not gonna do any trade whatsoever with Spain. And he is so irrational that he might if if the UK do anything to you know, if Starmer does anything else, he might go stuff you no more trade. Um and there is that danger there, isn't there? And so th th Rachel Reeds has also been delivering that statement in the context of a a bit of a fractious relationship with America again.

Yeah, look and the thing that worries me most given the breakdown of relations between Trump and Keir Starmer is You know, we talked at length about how the cozying up by Trma to Trump, which, you know, quite a lot of people on the left and right in this country didn't like. Um because, you know, so many British people

don't like the sort of semi-autocratic way in which Trump has been managing America and has been intervening in countries all over the world. Uh and, you know, there's quite a lot of people who thought that Starbuck could have been tougher with uh, Trump. Nonetheless, the prize was to get better

tariff terms, better trade terms than many of our competitor countries. And that seemed to work. If you if you know you'll you'll recall that when it came to steel and auto uh and and car manufacturers, we did get preferential terms. Now the thing that worries me, particularly in the wake of the Supreme Court's ripping up of the uh of of of the central plank of Trump's powers to raise tariffs.

Um That um Trump could basically decide to take his revenge on Starmer who he's decided has let him down by not letting him initially use British airbases for the attacks on on Iran. uh president and you know there is a genuine risk that he will um impose higher tariffs

on important exporters in the UK. And if I you know, frankly, if I were an exporting business with big trade in the US, car manufacturer, steel manufacturer, any kind of of of uh supplier of goods uh to America, I would be very anxious. Um, because, you know, uh i particularly in the light of as you say, the extraordinary rhetoric which you pointed to that uh he used against Spain.

that, you know, he will simply say uh you know, i i b you know, perhaps even in a best case, that the UK will now get the terms that the rest of the world gets. And so all that sucking up to Trump will have been for nothing. Yeah. Although it's improving his popularity potentially, isn't it? Maybe Well, it won't I don't think it will improve his popularity You know, if in the end the collapse of uh any kind of trade deal with the with with the US damages people's living standards.

Yeah, yeah. Okay, we should probably wrap things up. And as you mentioned, in our next podcast, we're gonna be interviewing uh Mark Warner, who is really fascinating, set up a London-based AI. um done really amazing stuff with the company actually. And so Robert, that's going to be our next podcast, isn't it? It is. So much to chew over with Mark. That's it from us for now. Bye-bye. Goodbye.