Oil rise: Trump gets the jitters

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0:42Rosie Blau:The Economist

0:49Rosie Blau:Hello and welcome to The Intelligence from The Economist. I'm your host, Rosie Bloor. Every weekday, we provide a fresh perspective on the events shaping your world.

1:04Rosie Blau:The war in Iran continues to dominate the headlines. Strange thing is, one of the world's most important countries has said little about it. Our correspondent asks why China stays mute on the Middle East. And it started life as a humble hippie grocery store in LA. Now it's America's trendiest and priciest supermarket, frequented by celebrities and Instagrammers. Not a place to go for peace and quiet?

1:41Rosie Blau:But first...

1:49Rosie Blau:When America launched its joint operation on Iran, the White House said the conflict could last for four to six weeks. Yesterday, Donald Trump suggested the end may in fact come very soon.

2:01Simon Rabinovitch:We're achieving major strides toward completing our military objective. And some people could say they're pretty well complete.

2:10Rosie Blau:Shortly after that, though, he insisted America was going to go further, threatening Tehran with death, fire and fury if it continued to block oil supplies. Nevertheless, Trump's comments did calm stock markets. And the price of a barrel of Brent crude, the global oil benchmark, which hit nearly$120 yesterday at its peak, fell to$90. So is there now clarity on the course of events or confusion?

2:41Avantika Chilkoti:Yesterday was a really remarkable day in the oil markets, Rosie, with Brent crude going up to almost double its pre-war price.

2:50Rosie Blau:Edward Carr is The Economist's deputy editor.

2:53Avantika Chilkoti:And that was beginning to infect markets more generally. I saw yesterday's remarks by Trump as a signal to reassure investors that he will not wreck the economy for the sake of this war.

3:08Rosie Blau:So it really is oil prices that are rattling Trump and not anything else.

3:13Avantika Chilkoti:I believe that's right. Yes. Except it was more complicated than that, as it always is with Donald Trump, because in the same breath, he also said that they were winning the war. It was almost complete. We're going to see this thing through. We're going to do a fantastic job here. So I don't think he's completely collapsed the ambiguity about how far this war goes. What he's done is sent investors a signal that he will not wreck everything. And the relief goes beyond the oil markets. It's really noticeable how in Asia, where stock markets had had a terrible day on Monday, have recovered with careers up about, when I last looked, up about 5 % and Japan was up 2.6%.

3:53Avantika Chilkoti:And the S &P reacted in America very well to Trump's remarks. So the sense that this was spreading out of oil into the economy is sort of reflected in those improvements. It's quite interesting to compare how Trump was operated last night over the oil markets with his response to market pressure over tariffs. If you remember, last April after Liberation Day, the markets reacted extraordinarily badly and Trump was quite quick to show that he was going to backtrack here and make deals there and back off, which gave rise to the nickname of Taco, Trump always chickens out. I think this is somewhat different.

4:31Avantika Chilkoti:He's constrained. One is because Iran has a say in this war too. And although I don't think Iran would want to fight on in any sense in a major way after America decided to stop, it could fire sporadic rockets prolonging the damage in the oil markets. And the other is that there are real things going on here. You know, there are real oil fields that are beginning to be shut down. There is a real LNG facility in Qatar, which has shut down and takes time to restart. And there are real shadows hanging over this infrastructure now that Iran has shown it's willing to attack it if it has to. Those things don't just sort of go up in a puff of rhetorical smoke when Trump tries to change direction.

5:13Rosie Blau:So on the narrow goal of oil prices, we have actually seen a fall since Trump's comments. Is that enough?

5:22Avantika Chilkoti:It's a dramatic fall. It's gone down to about$90 a barrel, just as I came in to talk to you early this morning in London. So it's now pretty much exactly halfway between the pre-war price and the peak price. And from that, I take that the price is incredibly sensitive to what happens next to the war. Trump has tried to talk down the price, but there are projections from Goldman Sachs overnight that if 15 million barrels of oil a day are kept out off the market of Gulf oil, that's about three quarters of what the Gulf exports. If that happens for 30 days, they see oil prices at the end of the year about 76.

6:02Avantika Chilkoti:If it's for 60 days, they see oil prices at 93. and if the war stops pretty quickly, they see oil prices in the mid-60s. The numbers don't matter as much as the variation of the numbers and it tells you that the oil price is very, very sensitive to what's happening now and this probably won't be Trump's last attempt to try and talk the price down.

6:23Rosie Blau:It's pretty clear from what you're saying, Ed, that you don't expect the war to end soon then.

6:28Avantika Chilkoti:Well, I think there's a trade-off, a trade-off that Trump tried to evade yesterday by saying he could have it all in standard Trumpian fashion. You could both have a fantastic economy and also get your war reins. But I think what those Goldman numbers tell you, there's a real trade-off between pursuing this war and keeping oil prices low. And the question to me is, what does the Trump administration want? How insistent is it that it gets a compliant Iranian regime in place? And how much does it want to be able to really set back the Iranian nuclear program? On the first of those, if you don't have a compliant Iranian regime, this war has broken and set a number of precedents.

7:13Avantika Chilkoti:And the most important of those is that Iran has attacked oil infrastructure of its neighbors. Well, with a hostile regime and with the threat of a nuclear program, that premium, that sense that that infrastructure which was thought to be safe is now a target. And if there has to be another war to stop a hostile Iranian regime from pursuing a nuclear program yet again in the hope that becoming North Korea makes it safe, all that infrastructure becomes a potential target. So there is a change of state in the Gulf. So if Trump really wants to stop that, he has to have a compliant regime. But how long does the war have to go on in order that Moshtaba Khamenei, who has just been named the supreme leader and is very hostile to the United States and has seen his father assassinated by the United States and Israel.

8:01Avantika Chilkoti:How do you ensure that? And then on the nuclear side, remember, there's still something like over 400 kilograms of highly enriched uranium somewhere in Iran underground at nuclear sites where it was buried. Israel and the United States have eyes on that. But for as long as that material remains, someone sometime can dig it out and it's a head start to 10 or 12 nuclear bombs.

8:25Rosie Blau:Leaving the war goals aside, if the US decided, right, it wants out, could it pull out?

8:33Avantika Chilkoti:Yes, I think it could. I think it could. It's done a lot of damage. It set back the regime. But the thing is, if it does stop very soon, then I think the chances that a very hostile regime remains in place with the possibility of laying its hands on highly enriched uranium in the future, that remains. So I do think that there is a tension between pursuing these war aims to their end as America sets them out and ensuring that oil prices don't get very high. And I think that's the tension that Trump was evading last night.

9:09Rosie Blau:And if the US was to stage a prompt exit, where would that leave Israel?

9:16Avantika Chilkoti:Well, I think Israel would have no choice but to go along with Trump's decision. Benjamin Netanyahu, the Israeli prime minister, has an election fairly soon and he would much rather to go into that having comprehensively defeated Iran. But I don't think he has an enormous choice. I don't think he can really defy Trump on this. So I think he would reluctantly have to go along with it.

9:38Rosie Blau:And where would an exit leave Iran?

9:42Avantika Chilkoti:Well, Iran has suffered quite extraordinary damage. Its economy was already in huge trouble and you shouldn't underestimate the extent of that. But the country is still functioning. Our correspondents have told us the streets are still being cleaned. There are still groceries on the shelves. Before Ali Khamenei was killed at the beginning of the war, he devolved command and control out to the regions so that commanders could continue. But there's still a certain amount of central control, however weakened that is. And for this regime, I think the mere fact of survival is a kind of victory in itself.

10:20Avantika Chilkoti:Ed, thank you very much. Always a pleasure, Rosie.

10:33Rosie Blau:The war in Iran should never have happened and benefits no one. That statement was made by Wang Yi, China's foreign minister, on Sunday. over a week after America and Israel launched their joint operation. Some years ago, China looked like it was wrangling to become a mediator in the Middle East, a new role for an emerging power. Yet its recent coverage of Iran reveals a broader truth. The Chinese Communist Party's called calculus about how to present other autocratic regimes and a reflection of its own role in the region.

11:08Simon Rabinovitch:The big thing is that China has vast economic and especially energy interest in the Middle East. It gets nearly half of its oil, about a third of its gas from the Middle East. Much of that passes through the Strait of Hormuz, which obviously has been closed because of the current conflict.

11:26Rosie Blau:Simon Rabinovich is our Beijing bureau chief and Chaguan columnist.

11:30Simon Rabinovitch:Beyond that, though, there had been a time where people thought that China was beginning to be much more of a diplomatic power in the Middle East. It had helped to bring Iran and Saudi Arabia together three years ago to restore their official ties. I think what we've seen the last couple of years, but especially with the war in Iran, is that actually, although China is an economic power in the Middle East, it really is a political weakling. It's not that involved, and it does not want to get that involved.

12:00Rosie Blau:Simon, the Iran conflict is the biggest story in the world right now. How has China responded?

12:06Simon Rabinovitch:China has denounced America's actions and Israel's actions. They've called for restraint. They've called for a restoration of peace and stability, for countries not interfering in others' sovereign affairs. But most strikingly, beyond rhetoric, it has not done much of anything. It has stayed on the sidelines. For several years, people had been looking at the Chinese-Iranian relationship as potentially some kind of new access in global politics. But I think what we've seen in the last week is that it really is not that. It's similar in a way to what we saw in January when American troops snatched Nicolas Maduro from Venezuela.

12:45Simon Rabinovitch:People thought, well, Venezuela was a close partner of China's. Would China do anything? And it stayed on the sidelines there. Once again, here with Iran, it has stayed on the sidelines. This is despite the fact that both countries were deemed to be close Chinese partners, despite the fact that China relied on both of them for a substantial amount of its oil imports, and despite the fact that in both cases, I think China viewed them not as ideological allies, but as useful thorns in America's side with their proxies targeting America and American allies around the world and especially in the Middle East.

13:18Rosie Blau:Simon, as you say, China had been trying to market itself as something of a power broker in the Middle East. So why has it been so passive now?

13:28Simon Rabinovitch:Well, I think China uses this kind of partnership talk with a lot of countries, not just with Iran and Venezuela. And as a general rule, China does not view itself in the same way as America, as a country with lots of foreign entanglements. So it might describe countries as partners, but they're not American-style allies. And then I think if you get into the specifics of Iran, you actually come away with the conclusion that Iran matters a lot less to China than many people had presumed. There's a big asymmetry between China and Iran. Iran depends on China. China was buying more than 80 % of its crude exports.

14:05Simon Rabinovitch:But for China, Iran was supplying somewhere about a tenth of its crude. I think one of the things that we're going to see now is that as it gets more difficult to get crude out of Iran or from other parts of the Middle East, China will turn more heavily towards Russia. Over the years, China has sold Iran vital technology, including digital surveillance tools. But actually, despite promising a lot of investment into Iran over the years, it's delivered relatively little. And in fact, China has grown quite wary of Iran's violent outbursts, of its unpredictability. Over the years, China, in fact, has built up stronger relationships with countries that are Iranian rivals, with Saudi Arabia, with the UAE.

14:47Simon Rabinovitch:So I think for all those reasons, Iran, never mind not being a Chinese ally, it wasn't as close of a Chinese partner as many people thought that it was.