How an energy crisis unfolds

To market volatility. There's always more than one side to a story. Cushkin!

If you're listening to this here podcast, you're maybe driving your car or walking the dog or just generally going about your life as usual. Happy days. But in large parts of the world the energy crisis coming from the war in Iran is really starting to bite. In the Philippines, people are being asked to work from home. Thailand is asking residents to turn down their aircon. Zambia has declared a fuel emergency.

Pakistan has kicked off its cricket league to empty stadiums as people try to save on super pricey fuel. In Europe, airlines are warning they may have to cancel flights in the summer. It's everywhere and it's pretty grim, especially for poorer countries. And even in a best In a case scenario where world peace breaks out tomorrow, you can't just flip a switch and get supplies back to normal. Today on the show, who's really feeling the pinch and how bad is this gonna get?

This is Unhedged, the Markets and Finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets chronic. Here at FT Towers in sunny London. About to get out of here for four whole days of a super long holiday weekend. And joining me in the studio, it's another Brit Takeover, folks. We have Malcolm Moore, the FT's energy editor. And a very busy man.

Taking time away from the fire hose of energy market news to tell us muggles what's what. Malcolm, thanks for coming. Our pleasure to be here. We know you've got a lot on your plate. No so

One thing that I keep mentioning on on this pod is that when I talk to people in stock markets, they're like, La la la, taco trade, everything's fine, I'm sure this is gonna work out. When I talk to people in the energy market, they're like Holy moly, I cannot overstate how bad this situation is. How much are people in your world freaking out right now?

Yeah, I mean I think that they've been freaking out for probably a month now, let's say. You're absolutely right. The energy world sees how much we all depend on the Middle East. for our oil and for our fuel and actually for a whole range of other things. Um, you know, some of which have been mentioned but but some of which are kind of being ignored a little bit. You know, helium, for example, very important for chip making. A lot of that comes from the Middle East.

So we depend on the Middle East for all sorts of things and the energy world can see it because they're trying to manage getting hold of these supplies. Uh, in a world where, you know, a fifth of them have just been knocked out. Yeah, because it can't get through the Strait of Hormuz and that's just that. Exactly. So I was reading your story today that you did with our colleague Leslie Hook about how oil traders went into this situation. Basically just like the rest of us.

They called this totally wrong, right? They they were all expecting oil prices to fall further over the course of this year, and whoops, that did not work out. So let's just go back to the beginning of this year. At the beginning of this year, everybody was saying there was a glut in the oil market. Right. If you remember around the turn of the year, um the Brent oil price, so Brent is the is the sort of international benchmark. The Brent oil price uh was around sixty dollars a barrel. Mm-hmm.

And everybody was saying, Okay, it's gonna be sixty dollars a barrel all year and uh oil companies gonna really struggle. Um, how's anybody gonna make any money in th this environment? Um, in the US, you know, you had people in the shale patch saying, Well, you know, we're gonna shut down, we're we can't, you know, we're not gonna produce any more. You know, the world was supposed to be a wash with oil. Mm-hmm. And then of course we had little taste of uh unpredictability with Venezuela.

Yeah. Uh and so that but that was pretty brief, right? You know, the the Venezuela episode didn't last very long and everyone's like, Oh okay. We've all forgotten about that. Yeah, yeah, yeah. It's it's fine. These things you know, and and if anything else happens, maybe that will also be brief.

And I think the expectation there was obviously a lot of signalling going into the Iran war that the US was gonna do something, right? They were moving aircraft carriers, they were m they were moving troops into position, so everybody could kind of see stuff. But I think there was still an assumption that, okay, what's the worst case scenario? The worst case scenario is maybe it's it's it's gonna be a short, quick thing. Nobody thought, oh my god, this is gonna go on for months.

And the main export route for Middle Eastern oil and gas is gonna be knocked out and the world's biggest uh liquefied natural gas facility was gonna be hit by missiles. Nobody nobody had that on their bingo card. Yeah, yeah. Even the pros.

And so, you know, in the UK everything looks pretty normal, right? You go fill up your car like perfectly normally. It's expensive, but you go and fill up your car perfectly normally. There are parts of the world though that we we've done some really good coverage on this, I think, at the FT. There are parts of the world that are really feeling the pinch. Now, are are they running out of the stuff? What is going on here?

So let me take you through the numbers very quickly. Right. And everybody's got slightly different numbers, but I I'm just gonna use the numbers from a company called OilX just because they're the first ones that I looked at this morning. Fine. That's a good enough reason for unhedged. So Oil X reckons that in this month in April. The amount of oil the world has is gonna fall by seven and a half million barrels a day. That is the oil that's trapped inside the gulf that cannot get out, right?

They also are seeing and forecasting that that some of the demand for that oil is falling away. So as you say in Asia, which is the the main customer for Middle Eastern oil, those countries have already just stopped doing things, right? They've turned off air conditioners, they're working four day weeks, you know, in India lots of restaurants have closed because they can't get hold of the gas canisters, the propane that they need to cook with.

So so there's been a fall, but the fall is only around Two and a half million barrels a day. So you then have a five million barrel a day gap, right? So that oil has just disappeared off the market. So two reactions to that prices go up and they go up everywhere. But then some people who had contracts and and were hoping for tankers to pull up and deliver stuff Those tankers have now stopped, right? I mean they were at sea when the war began, so there's a little bit of a lag.

But in Asia, the last deliveries of Middle Eastern energy have ceased. Because while a tanker is at sea, it can get a better offer, right? And Uh and change direction. Yeah, well so that that's that also is happening. I mean it depends on the contract. Sure. The lawyers always win. The lawyers are gonna win big time. Because of course people are looking at their contracts which may have been priced Before the war.

And they're looking at the prices they could get for the same fuel now and thinking, Oh well, you know, is it worth the legal cost of breaking that contract? Can I get away with declaring force majeure right and saying it's out of my control, it's the war? And therefore I won't have to compensate people. Can they can they get away with that? People are definitely trying to do that. Of course, lots of people are.

you know, quite entitled to be declaring force measure, I should say. If you are Qatar and your gas plant's been blown up, it it seems fair enough that you can say I can't supply That seems reasonable. But there will be a lot of legal wrangling even over that as well, tight definitions. You know, a lot of the contracts say, you know, I'm buying a tanker of oil from a specific location or or a gas cargo from a specific location.

If they're saying that, okay, maybe that location's out, I can declare force majeure, if it just says I have to supply you with this cargo, then you may have to make it up from somewhere else. Right. The cargoes that are going to Asia have all arrived and you are seeing shortages.

The cargoes that are coming to Europe, those are now beginning to come to an end. So Europe is now in a position where it's having to think where can I get stuff to to substitute? Mm-hmm. Uh and we're seeing lots of interesting routes emerging around the map. You know, there are there are now tankers that are making the journey from the US Gulf Coast

To Australia. That's a long way. It's I think it's thirteen thousand miles. It takes a really long time to go there, uh, in a tanker. But Australia, which unfortunately had actually closed down a lot of its refineries, Is in a very difficult position because it's a long way away from everywhere and and so it's kind of difficult to plan ahead. Places like Europe.

You can plan ahead a little bit more easily. You're rich so you can afford to pay a little bit more. Um, you're unlikely to see the sort of things that we're seeing in Asia replicated in Europe. Depends how long this crisis goes on for. Obviously in the United States. you know, is the world's biggest oil and gas producer, so they're not gonna run out of oil and gas in the US.

But they're gonna have to pay market prices, right? Why is the price of gasoline four dollars a gallon in the US? Well, it's because the US could be selling the same gasoline to people who are desperate for it in Europe or even in Asia at this point. Um

And making a lot more money. So obviously the prices are gonna have to rise. So this is going to affect different countries and different industries in different ways. So for example, one thing that stuck out from the piece that we've got today on our website about this sort of like energy rationing is if you're Singapore, you are completely reliant on energy imports. I think you you rely on it for something like ninety eight percent of your energy needs or something ridiculous.

But you're a very rich country and you can afford to pay up. If you're Morocco, you're very reliant on on energy imports and you just don't have the same cash at hand. So which countries do you think are really gonna get it in the neck here? Well, I mean we've already seen obviously South Asia, Pakistan, Bangladesh, India, there are some issues there. And we've we've also seen in Southeast Asia, um, you know, countries like Thailand, Vietnam, uh Philippines.

um, declaring emergencies, taking steps to kind of reduce their demand. I think after this you're likely to see probably some places in Africa. I mean i it's partly Um, these are not big markets anyway. Right. So they're not huge customers for people. So if you're if you're thinking about prioritizing customers at this point of time You may not prioritize the customers who don't buy as much from you to start with. Mm-hmm. They also don't have the sort of strong logistics network.

that the UK or France might have landlocked and yeah. The UK is blessed with having two huge oil majors, um, Shell and B P, right? Those guys can source fuel. Yeah. So the UK is going to be relatively shielded just by logistics. But if you're Uganda or you're Zambia and you're at the end of a

you know, a a a sort of long logistical chain, that's a problem. Yeah. The other problem, of course, is that uh and this is a particular problem in jet fuel, right? So we was gonna ask, yeah. So Switzerland, for example. They like to say that they've got loads of jet fuel. And they do. They've got huge reserves of jet fuel. Which is great for Switzerland. If your flight is leaving from Switzerland though, it still has to ref Refuel wherever it gets to.

Right, so so if you want to fly within Switzerland, which would be a strange thing to do'cause it's got quite good trains. Then y you'll be fine. But yeah, no, that's a good point. You just have to worry that you're taking a flight somewhere. Are you going to a place where they're likely to have fuel to get you back?

Yeah, and so we s we've got Ryanair, for example, saying, Yeah, we might have to cancel some flights in in the summer and I think that's just an interesting thing about this whole crisis is that by the summer, hopefully, this whole thing will will be over. But

Malcolm, give us something to to hope for. What what's the what's the best case scenario here? How how can this work out and kind of be okay? The best case scenario is that we wake up from a dream. Yes. And everything is fine and the Strait of Hormuz is open and Iran isn't going to assert any sort of sovereign control over it in the future. And then in a few months' time energy flows will get back to normal and we'll pretend even in that situation it stretches out.

Uh oh, even in that situation, we're looking at high prices to the end of the year, I I think. Right? But that's the best case scenario. So that's as good as also it's not a hugely realistic scenario. No, no, that is also true. So that's the best case scenario. Realistically, like not being a show off just to kind of get headlines in a newspaper, what are people saying to you is is the is how bad could this get?

Well the worst case scenario is really a continuation of the situation that we find ourselves in, which is total uncertainty about how long this goes on for. Right, the market has consistently priced this as being a short term event and is still hoping against all hope that it's a short term event. But if we grind forward

month by month there's basically a mechanical line that goes up and prices will just continue to rise and there'll be more disruption and more shortages and some countries will absolutely run out of various types of fuel. And then we'll see, you know

A lot of demand destruction, some of which you've already mentioned, but you know, everything's gonna get more expensive, there's gonna be more inflation, so on, so on. I mean, that is all a worst case scenario. And it's really it's as ever, it's the uncertainty that kills us. Yeah. Yeah.

What a happy thought there, Markham, for everyone to take into their long weekend. Thank you for infecting our listeners with your with the enthusiasm and joy of the FT's energy desk. Well you have to laugh or you will cry. With long short. Innovation. a story. Listen to the flip side.

It is time for long short that part of the show where we go long a thing we love or short a thing we hate. Malcolm Moore, whatchain? Well at this point you could go long on any form of energy you wanted to, but the one I'm gonna choose is cold. Because coal is cheap. Yes. And it's abundant in in a lot of places. And um the places that have it will be digging it up and burning it. And, you know, th instead of burning gas, they're basically gonna switch to coal. Are there any potential downsides?

Uh I mean the world's gonna heat up a little bit, but you know the US President will be very happy. He's very long coal himself. Right. Cool, Long Cole. I am sure how gullible Markets are, especially stock markets, right? So every time Trump says something along the lines of peace in our time, Iran are desperate for for a deal, uh you know, uh we're gonna we're gonna bring this to a close, every time the stock market jumps and it's like Guys, like knock it off. Like why do you keep doing this?

It's been wrong every time he said it over the past month. It is still wrong now. The taco trade is dead. Just just stop it. Yeah, I mean I have to say even the Iranians are correcting him online at this point and and so you know if if the Iranians are ahead of you in the trade then you're on the wrong side of the trade. Yeah, when when Trump says something and then you wait for a confirmation from Iran, something has gone quite quite skew if but yeah, I just wish people would like knock it off.

Right then. Lovely long weekend, Malcolm. I hope you get a long weekend too, and you're not working for the whole of it. I'm certainly out of here. So, listeners, we will be back in your ears on Tuesday. If you celebrate it, happy Easter. If you don't, but you get a long weekend, enjoy that. And if neither, just be happy on our behalf.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Cheryl Brumley is a very good one. Global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free, and a 30-day free trial is available to everyone else. Just go to Ft.com. com slash unhedged offer. I'm Katie Martin. Thanks for listening.