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We have the strongest and most powerful by far military in the world, and we will easily prevail. We're already substantially ahead of our time projections. But whatever the time is, it's okay, whatever it takes.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. One common element of that Trump shaped economy is there's a wide range of possible outcomes. Recording this Wednesday morning in Europe, the range of potential consequences from the conflict underway between the US and Israel and Iran looks about
as wide as it could be. And we're focused for the next twenty five minutes or so on just the economic piece of that. The human and social impacts we leave to others. But since America's first strike on Iran on Saturday, oil and gas traders have watched us in many ways, the worst case scenario unfolded for Middle East energy supplies. That critical strait of Hormus is effectively paralyzed.
Saudi Arabia's largest oil refinery is closed, and Iranian missiles and drones have shut down the largest liquefied natural gas refinery on the planet in Katar. Predictably, oil and especially gas prices have jumped, stocks have taken a hit, and long term interest rates have jumped as traders see less chance of further cuts from central banks. All of that could deal a severe blow to the global economy at an already uncertain time. But what matters, of course, is
what happens from here. As I record this, it still seems perfectly possible that Washington and Tehran will somehow find an off ramp, oil will settle back to its pre conflict average of around sixty five dollars a barrel, and the global economy will dodge a blow. But as you're hearing this conversation I had on Tuesday with two of Bloomberg's sharpest analysts, there are some much darker scenarios out there which could be a lot more damaging, especially for
countries without a lot of backup plans. That's one lesson I took from this discussion that the negative impacts of this mess will not land evenly and may indeed land especially heavily on some key American allies Europe for one, but interestingly also South Korea, Taiwan. Russia, by contrast, emerges as a big winner both its budget and its war effort in Ukraine another lesson, It really matters how quickly the US can reopen the straight of home.
Moves with me.
I'm delighted to say Javier blast is back Bloomberg opinion columnists covering energy and commodities for Bloomberg and the co author of the World for Sale, Money Power and the Traders who barter the Earth's resources. Have you? Thank you very much. This almost smoke coming out of your ears because I know you've been working very hard the last few days, but I really appreciate you.
Thank you for having me and did.
Dubai Zi Daoud, chief Emerging market's economists for Bloomberg Economics, also a regular guest on this show, So yeah'd love you to see you.
Wonderful to be here.
We're going to talk about the sort of shortish term economic impact for the sort of broader economy around the world and also for oil markets in particular, and then maybe get into some of the sort of longer term stuff. But zied I know we have what we call this global shock model, which allows you to put different scenarios for the global economy into the model and work out
what the impact is. For example, this kind of increase in energy prices, what do we get if we just feed in what's happened in the last few days and assume that it sticks around for a while.
We'd publish a piece on this with my colleagues Jamie Russi and Beyond fa Envoy and actually spend some time before coming to the podcast playing some more of the shock model.
And here's the conclusion.
It is very, very hard to generate a significant recession in the US with all prices alone.
Yes, you can get.
Two consecutive quarters of negative growth, but the magnitude is rather small. So for the US, the shock from oil is not a growth shock. It's more of an inflation shock. That is different to other countries in the UK, in the Euro Area, in China and possibly and even in India, oil prices would mean slower growth and it'd mean higher inflation.
You almost sound disappointed in saying you just haven't been able to get a recession out of this. No, matter how hard you tried with the model. We're very glad obviously that we don't get a recession out of this, But what are we looking at in terms of inflation, say in Europe the UK as a result of this and the impact on growth.
So if we plugging an extreme ore price increase, which is one hundred and eight dollars all price, if you're thinking about the euro Area and the UK, we're talking about a growth shock which is like half a percentage point at peak, and an inflation shock of around one percentage point. These are not exigible numbers, but you know, for the US is much smaller than what used to be.
So it's depending on where you are. It's a kind of half a percentage point on the inflation rate, maybe a little bit more in the US, and then a sort of somewhat less than that on the growth rate,
at least if you're in the Europe or UK. And I do notice one immediate result, which is a bit closer to home, is vestors were expecting and economists we were expecting a second interest rate cut this year in the UK, which will obviously would feed into a lot of people's mortgages, and as of today, there's almost no
expectations that's going to happen in the next month. In the US is less affected because it might get the higher inflation, but then that would stimulate lots of those shale producers to get going.
Yeah, so I think there's a lot of analogies to the Iraq War in two thousand and three. People are comparing the twenty twenty six war in Iran to the two thousand and three invasion of Iraq. One thing that has changed significantly in the US since then is positioned as a net oil exporter. In two thousand and three, the US was a huge net oil importer. Today is a small exporter. What that means is that when you get an all price shock, some segments of the US
economy benefit from this. Now, I know the shock inaggurgate may not seem so big, by in economics these days we think about inequality as well, so it doesn't spread out evenly. The segments of the US economy that benefit from how all prices are energy companies. But there's a whole segment of consumers in the US who will suffer from how all prices. As fuel prices start to increase,
there is an inequality effect here, and it matters. It matters because President Donald Trump when he came to office, if you think about his economic agenda, lower interesturation is definitely up there, and lower oil prices were there, and this war that's a threat to both.
And we have certainly heard some concerns around that in the US, have you. A Ziah has mentioned one of the big things that means that we tend to say all price shocks and not what they used to be in their impact, namely that the US is now a big exporter of energy, is not nearly as reliant or at all reliant really on Middle East oil. But we are seeing a reaction in markets to the disruption on the straits of forem moves, which are still pretty important
to the global economy. So what are the risks there? How are you looking at it?
So far?
So good or considered? I mean, you have asked me decay the goo tomind the market reaction to what has unfolded over the last few hours since Saturday. I will have expected much much higher oil prices, certainly about one hundred dollars by now. And I don't want to sound this as a celeboratory that it has not happened. I mean,
the price of oil has increased quite significantly already. We are talking about already a ten to fifteen percent increase since the hostility started, and it's still early hours.
I have kind of chwer scenarios on my mind.
It's one that I'm not particularly concerned because we don't get two one hundred dollars, and if we get thereabout that, this is not like a long lasting price shock. We are eighty to one hundred for a couple of weeks. It's nothing for the global economy. I'm expecting still I get a lower mortgage rate this year. But this is a thing that the United States has four or five days to reopen the Stralia hormos before it gets really really ugly. I mean, we can all make worst cases
scenarios and best cases scenarios. I mean, the best case scenario is that by the end of the week the oil market is lower because the Australia hormos has real The worlst case scenario is that these last three months and we don't get a drop of Middle East and oil on that period, in which case I don't want to give ideas, but I think that Siad needs to put an oil price on the shock model that it starts with a two and probably followed by a five and then a zerial.
So I think lots of people are familiar with the shale revolution in the US and what that's done for the US, But a lot of people in the last few days have highlighted that China, for example, gets a significant chunk of its oil from Iran and India. Other countries also potentially quite reliant on straight to form moves for their oil. They also have more alternatives, alternative roots for the oil and also alternative sources of energy.
Is that the difference.
I think that we all have a skin on the game on the straight of hormones and what is happening just generally on the Middle East. Whatever you get the oil, it doesn't matter because it's going to be priced on a global market, and therefore you're affected by the same price. Even you are important or your oil say from Brazil far far away from the conflict across the Atlantic, you will be still paying a global pride that is determined by what is happening in the Middle East.
So effectively everyone has the skin of the game.
China is the largest buyer of crude oil from the Persian Gulf, so it has a lot of interest in that that remains open. And it was interesting that yesterday the Chinese authorities were on the phone with the Iranian authorities and this morning Beijing has pood estainment just basically
reiterating we want to see the street hormones open. Of course it was a Chinese statement, so it was on the one hand, on the other just basically as all the parties, including the United States, to stop bombing each other. But the focus on the shipping lanes from China was not missed. And I wonder whether at some point we are going to have I think that rather quickly, and I believe that that's happening already behind the scenes.
We have a conversation that is going to.
Involved multiple navies, multiple regional players trying to keep the hormones open for the sake of the global economy. Whether we can see something similar to Ernest World, which was an operation in the eighties where the US provided escort to convoys of oil tankers in and out of the Persian Gulf. I think that that is one of the things that the industry is right now discussing with the US government.
So yeah, I mean you're sitting in Dubai. We've had quite a lot of discussion here, you know. Of course it's been a sore point for the UK government. There's a lot of talk, sort of anecdotal evidence of people moving to Dubai, and it's more than anecdotal from a Bloomberg standpoint, because we see clients hedge fund investors moving their accounts from London to Dubai. But part of that was that Dubai was felt to be not just very
low tax or no tax, but safe and secure. What's at stake if economically for Dubai, which doesn't have relative to its neighbors, doesn't have a huge amount of oil, if you have a lot of tourism and air plane disruption over the next few months, and people just generally stop thinking it's a safe place to go, or at least think it's a less safe place to go.
Yeah.
I think in terms of the business model, I think Dubai and the rest of the GCC is trying to diversify away from oil, and Dubai has basically succeeded in this, and one sector where the whole region has succeeded is moving into logistics, having big airports, big airlines, big ports.
That is obviously that model is under That business model is under threat. Now my hunch for.
Dubai is it's probably going to be the business model is going to be more resilient than we expect. And it's more resilient because I think if you're a logistical hub, it's hard to change geography. You're sitting somewhere between Asia, Europe and Africa. You probably need somewhere in the middle to be a hub. I think a lot of Dubai's residents do like living here and they're for the more stick event than we think, although a lot of them
are foreign. And I think also if the conflict ends, whenever that ends, Dubai does tend to benefit from conflicts and money that flows in from conflict zones.
So I think the business model I'm less worried about.
What I'm worried about is a security model of the GCC, not just to buy, but the whole of the Gulf. You know, one pillar of the GCC is the American security umbrella, and that did fail in the past, and that's definitely failing now. Let's remember under the current Trump administration, the GCC hosted Trump for his first presidential visit. Excluding
the Vatican. They have pledged trillions of dollars to Trump in terms of investment and purchases and even O PET plus, which is about said the Arabia started to increase all apps significantly short shortly after Trump took office after months of delay.
And what did they get.
Other got attempt directly by is roll back in September. When it came to lobbying between the GCC, which did not want a ward to start with Iran and which wanted to start the World Iran, the GCC came second to Israel. And now it's the question about Iran. Whatever system ends up happening ends up taking place in Iran, whether it's a current system or a new one. They know that if they want to lash out of the US, the GCC is sort of a soft spot that is nearby.
And I think that security model will probably be a revised in the GCC when this war ends, and which.
Just remind people.
So the GCC is the Golf Cooperation Council, which is basically all of the countries that you would think would be in a group of countries in the Gulf have you, there's a few other pieces that we should unpack that are also perhaps a little bit less familiar to people, and gas was the one I wanted to ask you about because a liquid natural gas, a liquified natural gas has obviously been sort of one of the big new newish players in the energy scene, and it seems like,
certainly from reading our coverage was much less prepared for what's happened in the last few days than the ore markets. So just talk through why do we get that significant response and what's potentially the impact for countries that are quite reliant on this gas.
LNG is dominated by Qatar. They produce twenty percent of the walls LENG. And with oil, we have a couple of bypass routes where oil can get out of the Persian Gulf. There is a pipeline that runs from the eastern coast of Saudi Arabia into the west coast, effectively from the Persian Gulf into the Red Sea that is a deep bottled neck in some oil will continue living
the area. There is a pipeline effectively from Abu Dhabi area to Fujia which is in the Araby and c outside the Strada hormos, so that that kind of provides some relief for the oil market. It's not like shutting down the strait of hormones does in shutdown completely the sport capacity or some of the countries with LNG we do not have that advantage. Everything has to go by tanker through the straight of hormones. And I think that that also there is a lot more concern about the
facilities themselves. I mean these are very concentrated facilities in one single point in Katar. We have oil facilities all around the person Gulf, multiple oil fields, multiple oil refineries, multiple oil poorts. If one is attacked, we still have some resilience. And here we are talking about something that is an area of fifty by fifty miles where fourteen huge.
Allergy trains concentrate in Katar.
You attack that and it is goodbye for twenty percent of the world's allergic capacity for years, not weeks, no months, but years.
So that is what the concern is.
I mean, good news is we are in the shoulder season for natural gas. You're going to have a problem with natural gas supply. Right now is about the best time of the year because in the northern hemisphere we are getting out of the winter into the springs, so the money is literally dropping by the day and in a yeah, it's not yet the summer, so the air
conditioning nies are not really great. And we use natural gus in Asia to fire power plans to produce electricity to run air conditioning, so we are we have a bit of time, and perhaps that's the reason why the market has not reacted as much as you will expay yes prices when I have fifty percent yesterday, twenty percent today.
But we're around fifty euros per megab the hour.
We reach three hundred and fifty during the crisis in twenty twenty one, twenty twenty two, so it's not as bad. But it can get really bad on LNG. And again it's the duration of the disruption. A few days the system can manage. There is not buffer everywhere. If by kind of end of week, say Friday, the market starts to get conveniced that actually we are really hitting into a four or five week period, then I think that
things change a lot. What if this is actually four or five weeks, we are talking about forty days rather than twelve, that match really changed things. And in LNG it will be dramatic.
And in a few days it should be said We've had a lot more ordnance fired and I'm sure a lot more damage on the ground in Iran and of course human implications of that than we had in the war last year. We're not going into that because that is not the focus of this podcast. But it is always a lesson these times in the connectedness of the global economy and in some unexpected ways. So reading your piece and reading some of the other analysis haveavier, you
discover it's not just China that is pretty dependent. China's important about a third of its lerg from Katar last year, but places like Pakistan ninety nine percent of its gas came from Katar. You have Pakistan, India, Bangladesh. They're in the frame. I mean, I take your point. Havevier that timing wise is not heating up in those countries yet, but are they potentially more significantly affected short term? They don't have the same kind of buffers that China has.
They're gonna be very effective. In China has a lot of buffers. First of all, in terms of lergy. It can just literally shut down any use which is not very large, any use of gas in the electricity system, go to col can do call to chemicals to replace one of the gas in the chemical industry. India can do a bit of that, but I think that countries like Pakistan Banglades, they do not have many other options.
And if this crisis last, it is going to be really felt in Asia in terms of leng where where things are gonna get very ugly.
You allow me.
There are two other commoities that I think that they're going to be critical that we have not talked about, and they're going to be inside the Persian Gulf. One just generally is food. The region produces very little food. A lot of it comes imported by ship and air, and those supply chains have been disrupted. Yes there are stockpiles, but this goes down four or five weeks. Some food items will not be on the menu in the Persian Gulf region.
The other one that I am.
Extremely concerned and can't really make a huge escalation that I don't wish to see, but it's to me the most important commodity in this world, and it could make it and in hours is water. The region relies on the salinization. Some countries ninety percent of their drinking water come front plants that process seawater into drinking water. Shut down those by attack, and it's three or four days before the countries really get very thirsty.
They will not be water.
In Kuwai Bahrain, the eastern coast of Saudi Arabia, the uie Katar READD itself relies ninety percent of its water supply on a single desalinization plan.
In the course of the Persian Gulf.
Those are absolutely critical items. If Iran moves to attack that, I will expect a massive retaliatory action by the Persian Gulf countries and also the United States. But that to me is something that has not been really as spoke so far because it's almost taboo. No one one to address that because it will really change the dynamic.
We tend to think about big cities in Europe and elsewhere being very vulnerable in the modern world to a power cust or not getting food for a few days because of how tightly wired our economies are now. But I get that seems even more true at a very basic level.
For the golf, yeah, absolutely.
I mean a reductive model for the golf is that it exports oil and gas and imports everything else.
Including food location.
The joke in the oil industry has been always that the Middle East esports hydro carbons and imports carbohydrates. That's the equation.
And we've seen a sample of this. I mean, it's not a secret.
Every single Gulf country has a food security program, usually part of this several wealth fund. We've seen a sample of this when there was the blockade on Katar in twenty seventeen and supply chains moved, except that was much simpler. Then Ata had to import the dairies from Turkey and Iran instead of getting the stairies from Saudi Arabia. You know, if the straight performance is shot and you can't get your input from anywhere else in the world, that's a
much tougher problem to solve. I guess emergency airlines would be the solution, but it's obviously no ideal given the size of the population.
Amazing.
Have you remember you when we talked about Venezuela a few months ago, you also highlighted the importance of food and the lack of food in that country. So I appreciate that you're not always the thinking about oil. You've also got your right to the other potentially more important commodity. But another thing you said on that show was you made the point that that operation in Venezuela, along with the other policies in Latin America, were potentially greatly increasing
the US effective control over the energy market. I mean, if there's a world in which the US is quote unquotes running Iran in the way that it's running Venezuela, how much does that increase that kind of that control over the energy market.
It's quite funny, if I may put it that way. I was talking to European a diplomat this morning who said to me that the White House must be one of the luckiest organization in this planet, because every time that they go to our country to liberated it, they find oil. And I thought that the diploma had a point. I hesitate to make a parallel between Venezuela and Iran.
Oil is always part of American foreign policy, but maybe the first time that I say this, but this war in the Middle East is not about oil this time. I do think that it's about the influence of Israel in the US administration, and it's about the policies of the Iranian regime or missiles and nuclear et cetera.
Et cetera.
I mean, obviously, will the US care about Iran the same way that it cares if then't have oil.
No.
Will Iran be able to finance a nuclear program and a missile program the way that has been able to withow oil. No, absolutely impossible. But I don't think that this is a war where the US wants the Iranian oil.
That's a fair point.
I mean, I think at the basic level, they clearly want a change in the regime, in its policy. It's interesting that even in that long sort of shopping list of changes they want from the government, it doesn't talk about who they're sending the oil to or anything up. So I think you're probably right. You can't help thinking, though, have you? And one of our columnists, Mark Champion, made
this point in a slightly different way this morning. Longer term, one of the winners from this policy could be President Putin. I mean, we've tended to see him as a loser because Iran was an ally. He's been unable to support that ally, So it sort of sends a message that it's not so great being friends with Russia. It also potentially could strengthen its hands and selling oil to places India, China that are not able or don't find it run
a reliable source anymore. And crucially having more resources in Ukraine at a time when the US is going to be even less keen to provide things that can go to Ukraine.
So is Russia a winner from this? I think that Rassia is a winner.
You see some of the commentary emerging from the Kremlin on social media. They barely can hide their satisfaction to see the oil price going up. The traditional said an American foreign policy has been that that Rasia is a gas station mascaradeing as a country, and I think that's largely true, at least the financing of the country. All of a sudden, the price of oil is much higher, and it was only a few days ago ten fifteen
to twenty percent higher. At the price of Russian oil is even much higher because Russia was really struggling this time to sell his oil in the black market, because a number of countries the market, the global oil market was so well supplied that some countries were able to switch from Russian oil blacklisted oil to say the mainstream market.
India was a case in point.
Russia was keeping up his production, but it was filling up loading tanker after tunker, and those tankers were sitting in the high seas unable to dis charge because they didn't have a client. They didn't have a customer for that oil. All of a sudden, we are going to see that oil that is floating around near the coast of China, near the course of India's going to find a home.
India and China are going to be taking those barrels, and.
Russia is going to be able to set a price that is going to be much higher than a few days ago where it had to be really salinated at these stress levels because only by for in huge discounts, it will entice the Indian refiners to buy and risk the potential blowback from America and the White House. Now I will expect that the White House is going to be turning a blind eye to any Indian or Chinese
refiner buying Russian oil. Therefore, the Russian field that they have been on a stronger hand, those discounts are no longer there, and it's just basically I Yuana, weare oil, which by the way, is the only oil of a label right now to you Indian refiner. The price is the market price, take it or live it, and they are taking it.
And I guess last word to you, going back to that global model, I mean one thing that is pretty striking when you look at the way the impacts, the economic impacts of this war are being distributed. It feels like the biggest costs are often going to be felt, or at least the risks are potentially being felt by some of America's biggest allies, and the Gulf. In Europe, the UK householders who aren't going to get their rake cart, and Russia's one of the winners, and the US economy
overall relatively unaffected. Or do you think still you should need to keep an eye on that gasoline price.
I think you need to keep an eye on the gasoline price.
You know, if you think about the winners and losers in the US, you have a few companies that are winning and a large number of consumers who are losing. And you know, in terms of if you're going into elections, the numbers are not equal. There's a larger number of consumers then there is a number of companies. And I think even if you think about the winners in Russia as economically a winner, every old producer is a winner in this case if you're not part of this region.
Of course, I think also US remember that Russia shares borders with Iran. It's already lost influence in Syria, and it US applies it with Drunze for as war in Ukraine and losing that government if it ends up losing it, and that sort of ally might be a political loss, which partly of says the economic game bag guests from higher oil prices.
Well, I can imagine that we will have plenty more to talk about on this in the coming weeks, at least if it does carry on for those five or six weeks that have been talked about. But z Dode, Javier Blast, thank you so much for making the time on a very busy day. Thank thanks for listening to Trumpnomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined this week by Bloomberg opinion columnist Javier Blass and Zia Dold, chief Emerging Market's economists for
Bloomberg Economics. Trumpnomics was produced by Summer Sadi and Moses, and we've helped this week from Stephen Carroll, Andrew Gavin and Amy keen sound design by Blake Maples and Kelly Garry, and to help others find the show, Please rate and review us highly wherever you listen