Are we at the tipping point for global energy supplies?

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0:18Good morning from the Financial Times. Today is Monday, May 18th, and this is your FT News Briefing. Costs to ship goods around the Strait of Hormuz are hitting record highs. And there's a very real cliff edge coming for global energy markets this summer. Plus, an update for you on the UK's political turmoil. The instability in the UK, where we've now had more prime ministers than Italy since 2015, is worrying for anyone taking over and, well, frankly, anyone in the country. I'm Victoria Craig, and here's the news you need to start your day.

1:05When it comes to the U.S.-Iran war, there's been one question on the minds of politicians, company executives, and even consumers. For months, when will the Strait of Hormuz reopen? U.S. military officials say Iran laid some mines in the strait, but it's unclear how many and where they might be. And that has been enough to effectively halt shipping through the critical waterway. Now, though, defense companies and marine contractors are preparing to deploy uncrewed mine-clearing systems in and around the strait. The U.K. last week pledged to send autonomous Canadian-built vessels to help reopen the waterway, quote, when conditions allow.

1:45In the meantime, companies have resorted to shipping goods by land instead, but they're facing backlogs and extra charges. Freight rates for goods going from Shanghai to the Gulf and the Red Sea hit a record high last week, surpassing even pandemic peaks. All of the focus so far has been on how goods transit the strait, but there's an excellent piece on what life has actually been like for the seafarers who have been stuck on those stranded ships. You can, of course, find a link to that story in our show notes.

2:21Well, with shipping in the strait stagnant and very little oil moving out of the region, the world has been living beyond its energy means. To cover demand and to try to keep prices in check, governments have released strategic reserves, traders have drained stockpiles, and consumers have even tried to cut back where and when they can. But this summer, there is a real cliff edge coming for global supplies. Malcolm Moore, the FT's energy editor, has been looking into this for us, and he joins me now. Hi, Malcolm. Hi there. So the biggest question, I think, is, is there a sort of day for oil and gas supplies to run out if this war continues?

2:58That's a very difficult question to answer accurately, because the energy system is enormous and incredibly complicated and spans all sorts of different types of things that are derived from oil. Gasoline is different from diesel, from jet fuel, from all the other things that we make out of oil. Broadly, when you speak to people, what they say is that we're currently in the eye of the storm. Prices shot up at the beginning of this conflict, but then they stabilized. There's no panic, really, in the market at the moment. But over the summer, what's going to happen is that our stockpiles of all of these different things are going to hit critically low levels at which the system basically starts to buckle.

3:42And that's going to happen over the coming weeks, unless either this war comes to an end and the Strait of Hormuz opens up or prices go high enough that people just stop using this stuff. So, Malcolm, what does this mean exactly? Does it mean that if we go to fill up our cars at the gas station, there will be no more fuel that comes out of the nozzle? How severe could this get for consumers? The crisis has already arrived in large parts of the world, right? If you're in Asia right now, if you're in Africa, if you're in poorer countries, then you are already rationing your fuel, working from home.

4:23They're already in the crisis. The question of whether the crisis comes to the developed world, well, it will come. But economists say we're not looking at turning up at the gas station. There not being any gas. We're just looking at turning up at the gas station and the price is a lot higher than people are expecting. Nearly 80 countries have already introduced emergency measures to try to offset some of those price pressures for consumers. But if this continues long term, Malcolm, what could all of this mean for the global economy? What have economists been telling you? So everybody is already expecting global growth to take a hit this year.

5:02And the longer that this continues, the more likely the hit's going to get bigger. And what economists are saying, some of them are starting to use the R word, recession. So, you know, we're going to see potential recessions in a number of economies. If this continues, if prices shoot up, what we're going to see is jobs are going to be lost. Factories are going to shut down. People are going to stop traveling. The world still runs on oil and gas. And so if the economy can't get hold of that, then growth is going to get a hit. Is this the base case for a lot of these economists or are some officials really hoping that that doesn't come to fruition and we see an actual way out of this war?

5:47Yeah, that's a good question. Their base cases have all been, well, we expect things to end in the next few weeks. I would say that consensus is now starting to shift a little bit. I think where we've got to is we still think this will end quite soon because it's becoming clear that the economic consequences are dramatic. As it keeps going, I think economists will start changing their models. You'll see much higher prices being factored in, and then you will start to see some pretty dire warnings as the summer continues. Certainly not a cut and dry situation then. Malcolm Moore is the FT's energy editor.

6:24Thanks so much for your time, Malcolm. Thank you.

6:31Despite the war's effect on various industries, investment firms think that business disruptions will be short-lived. Asset managers and hedge funds want to continue expanding in the Middle East. State Street is going ahead with a pre-war plan to open an operating center in Abu Dhabi, and the UK's Partners Capital opened its first office there just last week. Those, too, are among a handful of asset managers who told the FT that decades of expansion planning will not disappear because of this conflict. The Middle East has been a hotbed for fundraising in recent years, so some of these firms see expanding there as a good way to build name recognition and attract capital from the world's deepest pockets.

7:19After a frenzied couple of weeks in UK politics, the focus is now shifting from London to Manchester. That's as we wait to see the results of a by-election in the north of England that could give the city's mayor, Andy Burnham, a seat in Parliament, and with it, the opportunity to bring a leadership challenge to Prime Minister Keir Starmer. Lucy Fisher, our Whitehall editor, joins me once again to chat about all this drama. Hi, Lucy. Hi, Victoria. So we're waiting to see if Andy Burnham can get back to Parliament. What can we expect if he does get that seat? And will he immediately challenge Starmer for the premiership?

7:57Well, look, it's a very big if whether Burnham can make it. This is a seat called Makerfield. It voted for reform for its councillors in the local elections earlier this month. so it's going to be a pretty frenetic month of campaigning but if he returns to the Commons we are expecting things probably to move pretty quickly once he becomes an MP again. Keir Starmer has made clear publicly that he absolutely plans to contest any challenge of his leadership. Privately there's been some briefing this weekend suggesting that he's weighing up his options and he might not take that course of action. We'll have to see.

8:35And of course there isn't a leadership contest yet To formally launch that, a challenger needs to amass the backing of 20 percent of the parliamentary Labour Party, which is 81 MPs. It's further complicated by the fact that Wes Streeting, the health secretary who dramatically resigned in the past week, has also indicated that he would stand in a leadership election. So it looks like there will be a leadership contest of some form. What I find so interesting, Lucy, is despite all of this outrage over Starmer sort of kicking off with domestic issues, including the cost of living and things like that, what we've ended up with over the weekend is a big conversation over the UK's relationship with Europe.

9:17What is the big issue facing Starmer and his challengers potentially? Well, the baseline is that Starmer wants to reset UK-EU relations, but within pretty narrow parameters. He went into the last general election with red lines that the UK would not rejoin the bloc and certainly would not have any return of freedom of movement, given that immigration is such a flashpoint issue in UK politics. What we've seen over the weekend is quite a devilish move from Wes Streeting. he's made clear that his pitch will be rejoining the EU. He said outright that Brexit has been, in his words, a catastrophic mistake.

9:58Now, the reason it's such a devilish move is it really puts Andy Burnham on the spot to set out his stall on Europe. He's tried to sort of fudge it this weekend, saying there's a case potentially for rejoining further down the line, but that's not what he's advocating in this by-election. But if he sounds too anti being much closer to the EU, you know, he could dent his chances in a leadership election. Now, this isn't just a political story. All of this turmoil has become a real source of concern for the markets, too. What does that mean for the government going forward? Well, it's really worrying.

10:34At the end of last week, we saw the cost of UK borrowing hit a 28-year high. The FTSE 100 fell 2%, and that's because there's lots of speculation that an Andy Burnham administration would see a far more left-leaning government agenda. It's a worrying time and the instability in the UK where we've now had more prime ministers than Italy since 2015 is worrying for anyone taking over and, well, frankly, anyone in the country. And it all sort of begs this question, as one of our headlines this weekend asked, is being UK prime minister now just an impossible job to do? I don't think so. I think that's a fairly lazy argument made by some apologists for Keir Starmer.

11:16I think to my mind, the original sin with the Starmer administration was the failure to plan. All the polling showed they would be able to get through a pretty ambitious program of reforms. And yet they came in with a very thin agenda. They've had to reverse so many of their sort of ill-fated schemes, starting with the plan to cut the winter fuel allowance for many pensioners. And that's one reason I think it's gone wrong so quickly for Starmer. We'll see how it all shakes out for him in the end over the next several weeks. Lucy Fisher, our Whitehall editor and Political Fix podcast host. Thanks so much for your time.

11:52Thanks for having me. Before we go, if you enjoy listening to the briefing as much as we like making it for you, we'd love it if you'd tell a friend about us. You can also tell us your thoughts on the show. We've got a spiffy new email address, which you can find in our show notes, along with free links to all of the stories in today's podcast. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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