Crude awakening: Iran oil shock

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0:22Jason Palmer:The Economist.

0:30Jason Palmer:Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer.

0:34Rosie Blau:And I'm Rosie Bloor. Every weekday we provide a fresh perspective on the events shaping your world.

0:44Jason Palmer:As Britain has moved from a model of free university education to one that's reasonably pricey, its student loans model hasn't changed quite so much. We look at what many think has become a regressive tax on grads.

1:00Rosie Blau:And it used to be the preserve of far-flung cowboys or provincial grannies. Now the latest choreography craze is line dancing. Our correspondent explains the step change.

1:21Rosie Blau:First up though.

1:31Rosie Blau:America says it's struck more than 2 ,000 targets in Iran since its joint campaign with Israel began on Saturday. Iran has responded with a barrage of missiles on military and economic targets across the Middle East. Until a few days ago, it seemed a remote idea that it would both lash out at its oil-rich neighbors and block the Strait of Hormuz. But Iran knows that the region's strength is also its vulnerability. Millions of barrels of oil travel through the Strait of Hormuz each day, prompting Donald Trump to say that, if necessary, US Navy vessels would escort the tankers.

2:10Jason Palmer:If we have a little high oil prices for a little while, but as soon as this ends, those prices are going to drop, I believe, lower than even before.

2:21Rosie Blau:Yesterday, he sounded almost relaxed at the jump in energy prices. Markets have been less sanguine. Trading in South Korea and Thailand was paused temporarily overnight to avoid panic selling. The question now is what damage is being done to the global economy and how much worse it could get if the conflict continues.

2:43Rachana Shanbhogue:The war in Iran is sending energy prices higher, both oil and natural gas prices, which is a problem for the parts of the world that rely on fossil fuels for their economy. Rachel Shambog is our business affairs editor. The consequences will be a hit to activity, higher inflation. The impact is still uncertain. A lot depends on how long this conflict lasts for.

3:08Rosie Blau:OK, so let's take that piece by piece. What's happened to oil exports and oil prices so far?

3:15Rachana Shanbhogue:So, Rosie, we've seen sharp jumps in the past couple of days. The increases are coming because, number one, traffic through the Straits of Hormuz, through which 15 to 20 % of oil travels has been blocked. Tankers don't want to travel through a war zone, basically. And so the delay in the traffic is making traders nervous. The other thing that's going on is attacks by Iran on energy infrastructure in Saudi Arabia, which again is causing fears that the supply of oil might be curtailed. And what about gas, which has also been hit, right? Yes, that's right. So natural gas is another casualty here.

3:53Rachana Shanbhogue:Qatar is a huge producer of natural gas and Iran hit one of the liquefied natural gas facilities in Qatar, which is responsible for about a fifth of the world's supply. And again, that's been shut down for precautionary reasons. And so natural gas prices in Europe have surged over the past week.

4:12Rosie Blau:So what impact does that end up having on the global economy?

4:17Rachana Shanbhogue:Although the global economy is becoming less reliant on oil over time, it still needs energy to function. And the consequence of these higher increases in oil prices and gas prices will be an increase in the cost of doing business, an increase for consumers going about their daily lives. And we've seen in the past that that does have a chilling effect on what they do, on their activity, on GDP. and it will also raise inflation. Now, a lot depends on how long the shock lasts for. It may be a fleeting impact. There is a chance that prices could go higher still. People in the industry are talking about$100 oil price per barrel of Brent crude.

4:59Rachana Shanbhogue:They're talking about gas prices going further still. And so there is a chance that the shock could get bigger. That's not great news for Donald Trump. Midterms are approaching in November. The price of gas that the pump is very salient for Americans, for voters generally. And so the higher the oil price inches up, the more that could become a political problem.

5:21Rosie Blau:It's not just about oil prices and gas prices though, is it? Aren't there other sectors that are also going to be hit?

5:28Rachana Shanbhogue:Yes, well, we've seen in particular the airline industry being hit. The Gulf is a very big hub. Dubai is one of the biggest hubs for passenger traffic and air freight, a huge logistics hub for ports as well. And so all of this disruption has translated into a shock for airlines. We've seen their stock prices falling in recent days. We've seen disruptions and passengers stranded around the world, really, because of the location of the war. So airlines have been a big victim thus far. That said, some people do benefit from such as the nature of markets. And we've seen defence stocks surging.

6:06Rosie Blau:So what does all this mean for places in the Gulf that really banked on being stable oases?

6:13Rachana Shanbhogue:It's a really good question, Rosie. And I think we should start with Dubai in particular, a place that for years has attracted people and businesses to trade there, to live there. The idea is that it's hassle-free, that geography doesn't matter. It doesn't matter that it's in a troubled region. And it's really thrived. And in fact, it's been a model that others have sought to follow, for example, Saudi Arabia. And what we saw over the weekend was that this illusion that geography doesn't matter was really shattered with a hotel in Dubai going up in flames. And so a lot depends now on how long the conflict lasts for.

6:52Rachana Shanbhogue:So perhaps the memory will fade soon enough, or perhaps if the conflict goes on, and if a more unstable Iran emerges, then people will start to attach kind of a geopolitical risk premium to being based in Dubai and doing business in Dubai. And that would be a blow to Dubai's business model.

7:11Rosie Blau:Of course, we don't know how long this war will last. When will we know if this is a shock or if this is going to have a profound impact on the global economy?

7:22Rachana Shanbhogue:I think one of the key questions that industry analysts will be looking at is how long you see disruption along the Straits of Hormuz? Does Iran keep lashing out at its neighbours? And the longer it goes on for, the bigger the uncertainty, which is not helpful for the global economy, and also the greater the chance that prices stay higher, that traders start building in a kind of risk premium because they just don't know what's going on. Ratchna, thank you very much. Thank you, Rosie.

7:54Rosie Blau:And for more on the history of Iran's relationship with oil and how that's playing into the war today, listen to tomorrow's episode of Money Talks, our weekly business and finance show. You'll need to be a subscriber.

8:32Jason Palmer:them.

8:46Josh Roberts:For an awful lot of graduates in England and Wales, their student debt is rising faster than they can pay it off.

8:53Jason Palmer:Josh Roberts is our capital markets correspondent and a formerly indebted former student.

8:59Josh Roberts:So most of them are going to be paying a significant percentage of their salaries until they're in their 50s to pay it down. and people are very angry about this, some have taken to calling it a punitive and regressive graduate tax.

9:12Jason Palmer:Is that a fair characterization? Is it a graduate tax?

9:15Josh Roberts:Well, not quite. There are a couple of features of student loans that make them different to a graduate tax. So one is if you pay the whole thing off, you can stop paying. You don't get to do that with tax. And the other feature is after a set amount of time, you stop making repayments whether you've paid it off or not.

9:32Jason Palmer:But there is some substance to what it is that has people so worked up that they feel they're getting the short end of the stick. How do we get here?

9:39Josh Roberts:That's right. It used to be that a small number of people in the UK went to university and for them, university was free, which means the costs were borne by the general taxpayer. As more and more people started going to university over the years, that model stopped being viable. So from 1998, tuition fees went up to£1 ,000 a year. From 2006, they went up to£3 ,000 a year. And then in 2012, they went up to£9 ,000 a year. Most people can't pay those costs up front when they're 18 and might not have parents who can pay them either. So they fund it using a student loan from the government that they then subsequently repay when they start earning.

10:19Jason Palmer:Okay. And how do the loans work? How do the repayments work?

10:22Josh Roberts:There are lots of different plans depending on when you started university and what your fees were. But the general model is that after you earn above a certain threshold, so for people who went to university between 2012 and 2022, the threshold is after you're earning about£28 ,000 a year, you repay 9 % of your earnings above that level until either your student loan is written off or you've repaid it. And it gets written off 30 years after you start paying. By the way, this is coming up in the news everywhere. Why is this so much in the news in Britain right now? So recently, the terms have changed for the cohort that went to university between 2012 and 2022.

11:05Josh Roberts:And what's happened is that the threshold at which they start paying back their loans, the threshold of earnings, has been frozen for three years. Because of inflation, people's earnings tend to naturally rise over time. So the effect of that is to drag more people into repaying more of their loan than they would have done otherwise. and this was a change that was made at the last budget in the UK.

11:29Jason Palmer:This still doesn't sound like terrible terms to me as loans go.

11:33Josh Roberts:No, it's not. And there are actually countries where the terms are much worse. So for example, in the US, people who need to take out student loans often take out mortgage style loans where it's not a set amount of your salary you repay, you just have to make certain repayments. And if you don't, you go into default and that hurts your credit rating and it hurts your ability to get a credit card or an actual mortgage in the future. The UK system isn't like that. It's not really treated like normal debt. It won't hurt your credit rating. If you're not earning enough, then you won't be paying it down.

12:02Josh Roberts:But what's making people angry now is not so much the system itself, but that people are having to now pay that back for longer. They're having to pay higher interest rates than they used to. And really at the root of this is that the recent crop of students has just had to face much higher fees than older crops did. For example, when I went to university, my fees were only£3 ,000 a year. Now they're£9 ,000. So people are just racking up much more debt, which means that the repayment terms get worse. Just for clarity, do you have student debt still? Because mine was lower and I'm in my mid-30s, I have actually paid mine off.

12:37Josh Roberts:If I had been to university a bit later than I did, I started in 2010, almost certainly I wouldn't have paid my loan off by now because it would have been many multiples bigger and I would have been paying more interest than I actually did. Right.