Strait of shock: Iran economic fallout

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1:08Noah Sneider:The Economist.

1:15Rosie 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.

1:30Rosie Blau:15 years ago today, a giant tsunami struck the coast of Japan, causing catastrophic damage to the Fukushima nuclear power plant. The country soon shuttered all such facilities, but now Japan is reviving its nuclear dreams. And one of the films competing for an Oscar this weekend is called It Was Just an Accident, made by an Iranian filmmaker who has spent time in jail. The war has only made the movie's theme of moral reckoning more urgent. Our correspondent met its director.

2:07Rosie Blau:First up, though.

2:15Rosie Blau:Overnight, the Pentagon claimed to have eliminated 16 Iranian mine-laying ships near the Strait of Hormuz. This morning, a cargo tanker was evacuated after being hit by a projectile. All news that once again raises jitters about the economic impact of the conflict in Iran. On a regular day, around$20 billion worth of oil, a fifth of the global trade, sails out of the Persian Gulf and through the strait. A similar share of the world's liquefied natural gas also takes that route. But with the American-Israeli war now in its second week, Iran has threatened to attack any ship that attempts to cross the strait.

2:54Rosie Blau:And oil prices are on a roller coaster.

2:58Rachana Shanbhogue:Oil markets have been desperately clinging on to any signs that the war is going to come to an end.

3:06Rosie Blau:Rachna Shanbhog is The Economist's business affairs editor.

3:09Rachana Shanbhogue:Early on Monday morning, they surged, reaching nearly$120 a barrel. Once it started to sink in, the Strait of Hormuz was closed. Then when Donald Trump said that the war was pretty much complete, there was jubilation and the oil price fell very sharply. And again, yesterday we saw gyrations when America's Energy Secretary tweeted that a tanker had gone through the strait together with an escort. Prices fell again. That tweet was deleted. The White House denied it. So they're stabilizing at around$90 a barrel. there's a desperation now that the war will come to an end soon. The problem is that disruption is likely to last longer than traders expect.

3:54Rosie Blau:So what are the options in terms of keeping supplies steady and in keeping markets steady?

4:01Rachana Shanbhogue:There are many things being discussed, Rosie. One of them, which is currently being discussed in talks hosted by the International Energy Agency, is releasing strategic stockpiles of oil. Members have about 1.2 billion barrels in emergency stocks that they hold. These could be released in order to offer temporary relief and to increase the supply on the market and bring down the price. In the past, when that's happened, it's had mixed results. In 2022, for instance, it sent the oil price rising because it sent a signal that officials thought that hostilities were going to last longer than markets had expected.

4:37Rachana Shanbhogue:But at other times, it's brought the price down. The other issue is, at best, only a drip feed of supply can be put onto the market because there are capacity constraints on how quickly piped oil can be put onto the market. America has to keep a minimum of 35 to 40 percent of today's stocks in the caverns where they're held to preserve the geological stability of them, for example. So at best, it might offer temporary relief. But if the war keeps carrying on, ultimately, it won't succeed in calming the market.

5:11Rosie Blau:As you said, there was discussion yesterday that maybe a ship had gone through the Strait of Hormuz. Is it a possibility that there may be some accompaniment, better protection of ships that they could then go through?

5:25Rachana Shanbhogue:The fundamental problem right now is that tankers do not want to cross the Strait of Hormuz because it's so dangerous. There have been reports of mine laying overnight, for example. And so a military escort could help in principle. Again, this is something that we've seen in the past. So in the 1980s, during the war between Iraq and Iran, there were naval escorts actually provided by America to Kuwaiti tankers. But the convoys were quite slow moving. There's so much traffic backed up in the strait right now that it would take years, actually, to get all of them through the strait if they were to proceed at the pace that we saw in the 1980s.

6:04Rachana Shanbhogue:And it may not be cost effective. The cost of providing an escort may actually be higher. This is something that I heard from an analyst yesterday than the cargo that they would be protecting. And these naval escorts would be sitting ducks if the Iranians wanted to target them. So what other options are there? The other thing that Donald Trump has already done, actually, is to make Russian oil easier for customers who want to buy it to buy. Now, Russia's oil is under sanctions. As you might remember, America had put a lot of pressure on India to stop buying a sanctioned Russian oil. Then as the war broke out, America issued a waiver so India can purchase some of that oil that's already at sea that's looking for a customer.

6:52Rachana Shanbhogue:And he's hinted that that waiver will remain in place for as long as the strait is closed. Now, there's a trade-off here, obviously. The intent of the West and of America has been to punish Vladimir Putin for his invasion of Ukraine and try and bring him to the table to talk peace. So allowing others to buy Russia's oil may offer relief to the market, but at the same time is going against a previous aim in the Ukraine war. So again, there's a trade-off here and Russian supply in any case can't fully solve the problem.

7:22Rosie Blau:So the war is already benefiting Putin. Are there other suppliers? America itself,

7:29Rachana Shanbhogue:of course, is a huge supplier of oil, the world's biggest producer, in fact. And its shell producers might have some ability to crank up output at very short notice. But these are private sector actors, and their investors have been burned before. Companies have over-invested in the past, oil prices have fallen, investors have taken a hit. So they're pretty canny, and they're not going to want to mandate huge increases in spending until they're sure that prices are going to stay high. And our colleagues calculate that the current supply problem because of the closure of the Strait of Hormuz amounts to something like 14 million barrels of oil a day when you include refined product.

8:10Rachana Shanbhogue:Shell producers, analysts estimate, can probably only increase their production by about 300 ,000 barrels a day.

8:17Rosie Blau:So we've already seen a huge effect of skyrocketing and volatile oil and gas prices. What about the other economic impacts of this war?

8:27Rachana Shanbhogue:What we know is that although since the 1970s economic activity is less oil intensive than it used to be, back then for example oil was used to generate electricity, now the demand for oil is much less elastic, by which I mean oil is used for things like driving and flying and those cannot be easily substituted away. So the only way to reduce that demand for oil is for prices to rise so high that it curbs people's activity. They decide they can't afford to drive, they decide they can't afford to fly. And so the knock-on consequences for people's daily lives and for economic activity is still big.

9:07Rachana Shanbhogue:We're seeing already that in Asia, for example, which has been hardest hit, governments are pushing four-day weeks. In Bangladesh, they've brought forward the Eid holidays just to reduce the consumption of fuel. So we're seeing the consequences of this already. And another thing to note is that the longer this disruption goes on for, the greater the consequences. So producers in the Gulf will have to cut back on their output. It's not easy to resume that output, even when hostilities end. It takes two to six weeks to get things up and running again. So it's not like things will go back to normal tomorrow.

9:42Rosie Blau:Rachna, we were talking yesterday to our deputy editor, Ed Carr, and he was talking about this trade-off between the war aims and the global economic impact. And we clearly saw Trump take fright at the global economic impact, or at least the US economic impact. How long is this disruption sustainable?

10:02Rachana Shanbhogue:The longer the disruption, the more it will feed through into gas prices, into the prices of everyday products that consumers buy. It will curb their activity and the things that they can do. The impact of the war in Ukraine on the Eurozone economy was something like 2.4 % of GDP over a year and a half. And the disruption to supply this time is much bigger. So you could start to see quite serious economic effects. And even before you get to that stage, we could see markets again start to freak out because once it sinks in that actually this disruption could last a long time, Donald Trump has said that he sees the war ending soon, but it's not only within his gift to end the war.

10:50Rachana Shanbhogue:And so expect Donald Trump to be presented with that trade-off again and again between the economic consequences on the one hand and achieving his aims on the other.

11:01Rosie Blau:Ratchna, thank you so much for talking to me.

11:03Rachana Shanbhogue:Thank you, Rosie.

11:06Rosie Blau:And you won't be surprised that our editors and correspondents have been discussing the economic fallout of the Iran conflict in many other forums too Do check out last night's episode of The Insider our video offering An Anatomy of the Oil Shock To watch that, you'll need to be a subscriber

11:48Andrew Miller:that. transactions. Eliminate the friction and start scaling with the proven choice. Visit bill.com slash proven to talk with an expert about automating your business finances and get a$250 gift card as a thank you. That's bill.com slash proven. Terms and conditions apply. See offer page for details. There's one place for the newest drops in wellness and performance and the biggest sale of the year. It's the drop by GNC, curating the best of what's new, handpicked by the pros who know what works. And right now, get it all, buy one, get one 50 % off during the semi-annual LiveWell sale. From crushing workouts to leveling up your nutrition and everything in between, get the best deals on the latest innovations.

12:33Andrew Miller:All the newness is all on sale right now during the LiveWell sale on The Drop by GNC.

12:46Rosie Blau:As we've been hearing from Ratchna, many countries in Asia rely on oil and gas from the Middle East. Prime among them is Japan. Two-thirds of Japan's power is generated from fossil fuels. 90 % of the oil it uses is from the Gulf, and 10 % of its natural gas, all of which makes a long-running debate about the use of nuclear power there particularly pertinent and poignant.

13:10Andrew Miller:The Kashiwazaki Kariwa nuclear power plant sits on Japan's northern coast, facing the Sea of Japan. When all of its seven reactors are running, it's the largest nuclear power station in the world. But for the last 15 years, it's been sitting idle.

13:28Rosie Blau:Noah Snyder is our East Asia Bureau Chief.

13:32Andrew Miller:And that's because 15 years ago, exactly today, a massive earthquake struck northeast Japan, sending tsunami waters flooding the reactors at the Fukushima Daiichi nuclear power plant and causing a catastrophic nuclear meltdown. That led all of Japan's nuclear power plants to be shut down. But now, Kashiwazaki Kariwa, like many other plants across the country, is stirring back to life.

14:04Andrew Miller:This February, the first of the plant's seven reactors restarted, and the company that operates it, the Tokyo Electric Power Company, hopes to begin full commercial operations, sending power to households in the capital of Japan later this month. And this might be just the beginning of a bigger revival of nuclear power.

14:29Rosie Blau:Noah, Japan's energy supplies have been debated hotly for the last 15 years. Just explain the full significance of restarting this plant.

14:38Andrew Miller:Yeah, this particular plant is especially symbolically charged. And that's because TEPCO, the company that operates it, is the same company that ran the Fukushima power plant. And Kashiwazaki Kariwa is its first nuclear plant to restart since then. So for boosters of nuclear power in Japan, it shows that this technology still has a future after Fukushima. This restart is a sign that there's a way forward for nuclear power more broadly. While for critics, for those who think the technology is simply too risky for an earthquake-prone archipelago, it marks an unwelcome return to an era of nuclear power.

15:19Andrew Miller:But I think mostly it speaks to the impasse that Japan's energy policy has come to. 15 years after Fukushima, we have a kind of a stalled build-out of renewables and an aging nuclear fleet that they're trying to get running again, an enduring dependence on imported fossil fuels. And the vulnerability of that has only become more acute and more obvious in the wake of the ongoing war in Iran and the ripples that's sending through global energy markets.