What a $100-Per-Barrel Oil Spike Does to the Global Economy

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1:36Javier Blas:Bloomberg Audio Studios. Podcasts. Radio. News. We could call it a tremendous success right now as we leave here, I could call it. Or we could go further, and we're going to go further.

1:51Stacey Vanek Smith:President Trump began to signal on Monday that the U.S. had already achieved victory in Iran, saying in a press conference that evening that the war will end, quote, very soon. But soon. I think soon. Very soon. The comments triggered a 25 percent drop in crude oil prices, bringing some relief to the global economy after oil had surged to a four-year high of nearly$120 a barrel overnight, Sunday into Monday.

2:17Javier Blas:The more that we spend on energy, the less that we spend on something else.

2:21Stacey Vanek Smith:Even though the spike in oil prices was brief, Bloomberg Opinion's Javier Blas says that sustained high oil prices can quickly become an issue for the U.S. and for global economies.

2:31Javier Blas:If it's a few days, no problem. If it's a few days, a few weeks, it starts to be a problem. If it's a few months, certainly it is a problem. It's not just gasoline, but the bigger impact, the more potentially damaging for inflation, is that everything else needs to be repriced at a higher level because everything gets transported. The Uber driver is spending more money into gasoline. Their fares need to go up. Jet fuel goes higher. Every airline in the world increases their fares. But also think about the supermarket. If the cost of transportation of groceries go up, that means that at some point, the grocery costs have to go higher.

3:11Stacey Vanek Smith:The jump in oil prices is due to a near standstill in the Strait of Hormuz, a crucial shipping lane off the coast of Iran where 20 percent of the world's oil is transported. Now, Trump has suggested the U.S. can offer oil tankers safe passage through the strait, but oil supply will likely be constrained for as long as the conflict drags out. That's in part by design, as that's one of Iran's major points of leverage.

3:35Javier Blas:Unless the traffic on the Strait of Hormuz restart, the prices are going to go creeping higher and higher. And that's bad news for the economy, but it's also bad news politically. President Trump doesn't want to be fighting mid-term elections with those kind of prices because the price of gasoline is also very visible. And it has this kind of magnifying impact.

4:03Stacey Vanek Smith:I'm Stacey Mannick-Smith in for Sarah Holder and David Gora. And this is The Big Take from Bloomberg News. Today on the show, why the global economy is so sensitive to oil hitting$100 a barrel and how long the impact of even a brief spike could last.

4:23Stacey Vanek Smith:Javier, you watch The Price of Oil a lot. and you spend a lot of time thinking about the implications all over the world. When you saw oil go up over$100 a barrel, what went through your head?

4:34Javier Blas:My day is ruined. What do you mean?

4:38Stacey Vanek Smith:What do you mean, your day is ruined?

4:41Javier Blas:Well, the market reopened on Sunday at 10 o 'clock at night in the evening here in London where I'm based. So I was watching the market reopen. I was expecting more or less$100 oil almost immediately because I was talking to traders. I knew more or less where everyone was going to go into the opening. I mean, what is the difference between$99.50 and$100? Well, it's not a triple digit. It's completely psychological. But I know that the moment that we hit$100 is on every news bulletin at night on television. Everyone is worried. My dad is phoning me and saying, to buy more gasoline for the car. Everyone is talking immediately about oil, and that means that the stock market probably is going to go down.

5:28Javier Blas:The bond market is going to also suffer. Just$100 oil puts oil absolutely center of the global economy. You think about the last time that we have high oil prices was in 2022 after Russia invaded Ukraine. I was checking before I came to the studio how many days in 2022 the price of oil closed at the end of the day about$100 a barrel. 110 days. We so far on this crisis have yet to get, at the time that we are recording this, we have yet to see a closing price above$100. You know, we need many, many, many days of$100 plus to really damage the economy. So we are really at the beginning of this. If three months from now we are still talking about this, then certainly we have a problem.

6:22Stacey Vanek Smith:Why is this conflict and this little passageway between the Persian Gulf and the Arabian Sea, why is that able to have such a huge impact on global prices?

6:35Javier Blas:Well, there are three reasons why the crisis is having such an impact on the market. One is that around that body of water, we have some of the world's largest oil producing countries. Saudi Arabia, Cuba, Iraq, Iran, Qatar, the United Arab Emirates, Bahrain. These are the kind of countries that are associated with oil productions. Then it's a very narrow strait. The channel on the water where the vessels, the big oil tankers can go is only two miles wide. It is really, really narrow. Have you seen it? I have seen it. I've been in the Strait of Hormuz. I have been with a small boat going in and out.

7:11Javier Blas:And, you know, the tankers are humongous. I mean, we are talking about 350 meters long tankers. I mean, each tanker carries about 2 million barrels of oil, which is enough to supply for a full day a country like France. So it's narrow. And then you cannot really bypass in size. It's 20 million barrels a day of crude oil and refined products. We have some bypass options, but they give us about 7 million barrels a day of bypass at best. So even if you get all the bypass working, you can bypass about a third, but you still have two thirds of problem. Typically, when we have a problem with oil production anywhere in the world, we say, OK, can we tap the spare capacity?

7:57Javier Blas:So say that we have a hurricane hitting the Gulf Coast in the United States and we lose production. We lose a million barrels a day. It has happened in the past, over the last 20 years, a couple of times. So Saudi Arabia ramped production and offset that loss. The main problem is that all the spare capacity is concentrated inside the Strait of Hormuz. Now, you cannot go to Saudi Arabia because they cannot get the barrels out. And that's really what is exacerbating the crisis.

8:29Stacey Vanek Smith:I wanted to run some basic math by you. So I spoke over the weekend with Christopher Kniddle. He's an energy economist at MIT, and he gave me this kind of useful equation that I wanted to run by you. So a good rule of thumb is every$10 increase in the price of oil raises our gas prices by about 20 cents.

8:49Javier Blas:Yeah, that's about right. That's a very well-known back-of-the-envelope mat that you could use in the industry. As always, this is a rough estimate.

8:58Stacey Vanek Smith:Oil before the conflict, I think, was it around$65-ish a barrel? Is that right? Yep. What is it now?

9:04Javier Blas:We are at$88, actually.

9:05Stacey Vanek Smith:Okay. So$88, that's roughly$20 a barrel more than it was before the conflict. So that would be roughly$0.40 a gallon more?

9:14Javier Blas:Yeah, that's about$0.40 a gallon more. And that's more or less what we have seen already happening on the market. And the U.S. gasoline price, it just goes immediately. There are other countries, particularly in Europe, where taxes are very important on price formation for gasoline. But in the U.S., they really, the drivers feel the impact of the oil market literally the following morning.

9:37Stacey Vanek Smith:Well, it's interesting because when I spoke with Knittel, he was actually driving and he was actually thinking about gas prices while he was mapping out his trip.

9:45Javier Blas:I got it in Tootsbury, Massachusetts, and it was$3.99 a gallon.

9:54Stacey Vanek Smith:Whoa. What did you think when you were filling up your car?

9:59Javier Blas:I actually didn't fill up all the way because I know I'm going to be stopping later where I'm in New Hampshire, where I'm expecting it to be much lower.

10:08Stacey Vanek Smith:So this is this is apparently happening all over the country. People are kind of mapping out their trips and thinking about gas prices all the time. What other prices might we see go up in addition to gas prices?

10:21Javier Blas:If the conflict lasts, and I think that that's the big if, I mean, if we were to be in a situation of many, many, many weeks, I will start really getting worried about diesel. Diesel is important because of the freight industry, transportation, all those big trucks, servicing everything else. So groceries, that will go up over time. Inside the Strait of Hormuz area, we have not only lost production of crude oil, we have also lost production of refined products. There are a number of refineries.

10:54Stacey Vanek Smith:That would be jet fuel, gasoline, like all the things that come from oil.

10:57Javier Blas:All those kind of things that come from the barrel. But we rely a lot in certain parts of the world. We rely a lot on that region refining capacity for jet fuel. So I'm expecting the first impact that we are going to see, all of us, The price of gasoline, second impact, traveling around, holiday summer, airfares, they're going to go up.

11:19Stacey Vanek Smith:Take Asia right now. What is the situation there? Is their situation the same as we're seeing in the U.S. or is it different?

11:26Javier Blas:It's worse, much worse than the United States because Asia relies on the Middle East a lot for their oil. In the oil market, we talk about being priced out from the market. We have less supply. So we need to destroy some demand. And typically that demand destruction happens in poorer countries that they don't have. The citizens don't have exactly the same money to keep up with every other person in every other country that is happy. It's not happy. It's unhappy paying the high price, but they can't afford it. So places like Bangladesh, Pakistan, other places, Vietnam, Philippines in Asia, we are beginning to see demand destruction via, you know, there is less oil, there is less gasoline, diesel, etc., etc.

12:15Javier Blas:Some governments have to announce some measures like, you know, asking citizens not to travel too much, etc., etc. So in Asia is really where this crisis is hitting harder.

12:27Stacey Vanek Smith:How have the markets been reacting to these kind of increases in all this volatility in the price of oil?

12:34Javier Blas:It has been a wild period on the market. We have seen trade range in one single day where the price of oil at the lowest point of the day compared to the highest point of the day will be more than$30. That is very unusual. I have been covering this market for 25 years. I have seen that a couple of times in my career. I mean, there's a lot of tension on the market. We see the price at times reacting 5%, 6%, 7%, 8 % using like two, three seconds because a headline has flashed on the screens of oil traders saying that, you know, Iran has done that or the United States is saying that.