Lots More with Gregory Brew

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1:01of the supplier life cycle, helping you deepen merchant relationships. Start fast, grow strategically, and scale at your pace with a modular toolkit you can flexibly deploy. Discover how at mastercard.com slash commercial acceptance. I like to remain calm and collected during times of crisis. That seems to be a very rare trait for anyone. Yeah. Yeah. I mean, it's tough when things are happening so quickly. Yes. And when something like this happens that really nobody saw coming was the thing. I mean, we were having meetings. I was having meetings the week before the Hamas attack on Israel where the question of sort of Middle East tensions or Middle East crisis would come up.

1:46And the general feeling was like, no, things look pretty quiet. We've got Saudi, Iran normalization. You know, oil seems to be flowing, although there's always the U.S. OPEC problems. You have Saudis and Israelis kind of slowly moving towards normalization. Things seemed pretty quiet. And then, bam, something huge happens that nobody really anticipated. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, go. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

2:24Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lods podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have the perfect guest. Well, in the meantime, this is lots more. A weekly chat about whatever's on our minds.

2:52This is one of those episodes where I feel like we need to get the recording date right at the top, which is October 18th, because things are moving so quickly. And we are going to be discussing the Israel-Hamas conflict. And there's just new headlines every hour, it feels like. So we are here in the studio with Gregory Brew. He is an analyst at the Eurasia Group. We've had him on the podcast before. We talked about Guyana last time. We did, yeah. That was a happier story, I feel. Yes, the country with the fastest growing oil. But the current crisis that we're seeing, the war that's going on, this is right in your wheelhouse because it's geopolitical.

3:32And your background, other than studying oil, which is what we talked to you about last time in the history of oil, you have an expert on the history of Iran as well. Yeah, no, yeah. It unfortunately happens to combine the two things that I've done the most work on. And whenever that happens, it generally doesn't tend to bode very well because it means there's, you know, crises, there's disruptions, there's tensions. And yeah, I mean, the crisis right now does seem to be contained to Israel and the violence in Gaza. But everyone is concerned about how this could spill over into oil. You saw a very surprising reaction this morning from Iran's foreign minister making a wild claim about an oil embargo on Israel suddenly sending oil prices up, surprisingly.

4:13So I think there's a lot of I think there's jumpiness. I think there's there's concerns, broadly speaking, that this crisis could eventually spill over and start affecting oil. Wait, you said it was kind of a wild threat. Why? And also, how crazy is it that we're talking about an oil embargo like exactly 50 years after the Arab oil embargo that like contributed to 1970s inflation? I find that mind blowing, like almost to the day. Right. Yeah. I mean, history does seem to be rhyming, right? I mean, the attack, the Hamas attack happened exactly 50 years and one day after the outbreak of the Yom Kippur War in 1973.

4:50So obvious parallels. And I think, so yeah, turning things back a bit, you know, Iran's foreign minister, who is currently in Saudi Arabia, of all places, made kind of a wild claim in front of press. he said Iran was going to call on all Muslim countries, including countries like Saudi Arabia and the UAE and Kuwait, to embargo oil shipments to Israel, very clearly trying to replicate what happened in 1973, or at least a version of it. And the reason why it strikes me and I think a lot of other analysts who watch Iran and oil closely, why it strikes me as kind of a wild claim is that, first of all, Iran doesn't sell any oil to Israel.

5:27Iran and Israel are antagonists. They're of competitors, you know. And honestly, not many other Middle East countries sell oil to Israel either, or at least what oil that they do sell, it's a fairly small amount. And there really isn't any appetite, I think, within OPEC or the broader Middle East for another 1973, certainly not for another embargo. So I saw those comments. And also, it needs to be said, Iranian officials, including the foreign minister, the Supreme Leader Ali Khamenei, they've been talking a lot of tough talk over the last couple of days about how this crisis could escalate, about how Iran might have to get involved.

6:02So this kind of fits within that broader sort of rhetorical campaign that Iran's been running over the last couple of days that they haven't really followed through with in terms of direct action. So I saw the comments and I thought like, well, Iran's talking tough. There's not going to be an embargo. But markets seemed to react, right? Brent shot up from 91.50 to 92.50. It's come back down since then. But clearly there's wariness and jumpiness out there about how this crisis could start affecting the broader market.

6:38To reiterate for people listening, we are recording this on the 18th. And so, you know, who knows what will happen in this war, this crisis by the time people are listening to it. But this is why, you know, the oil perspective is obviously one that we're particularly interested. Brent is still below where it was like at the end of September. I mean, yeah, it's been a pickup in oil prices. I mean, first of all, could it be that the concern is not so much embargo, but that the more the rhetoric gets heightened up and perhaps something were to, you know, sort of broadening out of the war itself. I know there was a lot of talk about the Biden administration not having been particularly rigorous about sanctions enforcement.

7:20Can you fill us in what's going on with that? Yeah, totally. So I think, you know, as soon as the attack happened and this crisis started growing and started taking on the proportions that it has, the immediate thought was, how was Iran involved? How will the US and Israel respond, right? Iran backs Hamas, has for years. It's a major supporter of Hamas. It supplies it with weapons and funding and training. There still isn't any clear answer as to whether Iran was involved in the attack. And Iran has, as I mentioned, it's been talking tough, but it really hasn't been taking a direct role. But the bigger concern is, yes, will the U.S.

7:53and Israel decide to retaliate against Iran for its support for Hamas? And one of the major vectors that has been speculated on or discussed is this question of will the U.S. tighten restrictions on Iran's oil exports? It's been a big story this year, right? The recovery of Iran as a major oil exporter. Exports were, you know, around 700 ,000 barrels a day last year. They're now in the range of 1.5, 1.6 million barrels a day today. Yeah. I mean, and Iran is still technically under sanction. Right. So there's been a lot of discussion of has the U.S. eased off sanctions? Is this part of a bigger deal between the U.S.

8:28and Iran? And now that this crisis is broken out, will the U.S. respond by tightening sanctions? And to me, it's a lot more complicated than just, you know, President Biden having a big button on his desk, sanctions, no sanctions, and then pushing it. And suddenly Iran oil exports fall like the range of action that the U.S. could take to cut off the flow of oil. It's not quite as simple as just adding new sanctions to Iran. Iran is already under heavy, heavy sanctions. It's also a question of, you know, if the U.S. tries to do that, how will that affect the broader market? How will that affect prices?

9:02It'll certainly send prices up. And also, how will it affect the one country who is taking almost all of Iran's oil, China, right? We talk about have sanctions been lowered or reduced? Not really. What's been happening is that China and small Chinese refiners have been willing to take more and more Iranian oil at low prices, right? Iran is putting a big discount on its crude. And they're taking this oil through somewhat shady means, their ship to ship transfers, the oil is being disguised in Chinese customs data. China still technically doesn't take any Iranian oil, it all gets redirected through other venues.

9:37So there's a lot of shadiness to this oil trade, which makes imposing sanctions by the US a lot harder. But if you're cutting off the supply of oil to China, which is what, you know, tougher sanctions enforcement would do, the Chinese are bound to respond, right? They're not going to like that. And I think the Biden administration is wary of provoking China. And anything you do to disrupt Iran's oil exports is going to have an impact on the broader market, and it's going to send oil prices up. And that's also something that the Biden administration doesn't really want to do. So you have operational constraints on how sanctions would even work.

10:10You have provoking the Chinese, you have potentially provoking the Iranians, and everything that you do is going to increase the price of oil, something that this administration has really been trying to avoid. So I think it's in the conversation, right? Tougher sanctions on Iranian oil exports. I still think the risk is fairly limited. And I think if the US were to consider doing it, it would be deterred by some of these more negative knock-on effects. Yeah. What kind of response could you expect from OPEC here? Because like it feels like there's been a lot of I mean, there's always internal drama at OPEC, but it feels like there's been even more recently with regards to, you know, output and slack, extra capacity and things like that.

10:53But it's such a disparate group, like in any case, do you get a sense of like what they might do here? Yeah, I mean, that's a really, it's an interesting question, because of course, OPEC's been pursuing, you know, supply management, market management, they've been maintaining their cuts, the Saudis have been adding additional voluntary cuts to try to push prices upward. And, you know, curiously enough, this has been happening while Iran has been increasing its exports. And it's also been happening while Saudi and Iran pursue normalization. So there seems to be some cross purposes here. There does seem to be a certain paradox in how the Saudis particularly are approaching managing this market.

11:34But in terms of what OPEC might do if the U.S. suddenly cracked down on Iran in a way that would really reduce the flow, right? In a way that would create a change in the physical market to fundamentals. I don't know if OPEC or the Saudis would respond immediately. Because as I said, anything that the U.S. would do would send prices higher. And that's exactly what the Saudis want, right? They want a higher price floor. They want to rise prices maybe into the 90s, maybe close to 100. So initially, I don't think they would do a whole lot. Right. It feels like in the market, there's still an assumption that like, well, OPEC could ramp up capacity if it needed to.

12:09But like, to your point, Greg, I don't see why they would want to in that scenario. Yeah. Yeah. And prior to the attack by Hamas, as you mentioned, one of the big stories had been the sort of loosening in some sense of the physical market for Iranian oil. The other, I think it was a headline the day before the attack, I think it was from the Wall Street Journal about Saudi talking about maybe lifting its production as part of an Israel normalization. You had a very strong condemnation from the kingdom of Saudi Arabia towards Israel about the bombing at the hospital, which, of course, people don't really know what happened.

12:49But obviously, the public stance from Saudi and other Gulf countries is pretty strong. What is Saudi's position here? How does it affect where it was going with its talks on Israel and so forth? Yeah, I mean, you have to remember, even though we've seen a lot over the last year or so on Saudi-Israel normalization, and even with the so-called Abraham Accords that came together at the end of the Trump administration, Israel normalizing with a number of Arab states, you have to remember that formal relations between Israel and the rest of the Middle East, or specifically the Arab world, is still a very touchy, complicated issue.

13:23There's still a great deal of history, of sentiment that Arab leaders specifically, particularly in conservative Arab states like Saudi Arabia, they have to be sort of wary of managing. And I think the Saudi approach to this crisis has been trying to thread that needle, right? You've seen Saudi condemnations of Israeli actions in Gaza. You've seen the Saudis. I mean, MBS, Mohammed bin Salman, the crown prince of Saudi Arabia, he took a phone call with President Raisi of Iran last week, the first time they ever spoke. Right. And he did that in the context of this crisis. So Saudi Arabia has been trying to sort of maintain a middle line of not appearing too friendly with Israel while also, I think, largely staying on the sidelines of the crisis.

14:06Now, what does that mean for this Israeli Saudi normalization? You mentioned the piece that came out right before the crisis. It kind of got buried. This news that Saudi Arabia was opening up a little bit to this idea that it would try to lower oil prices as part of this grand bargain with the US and Israel. That news came out. It was greeted with a certain amount of skepticism because this, you know, generally speaking, that wouldn't really align up with how the Saudis have been trying to manage markets. But it did suggest that there was progress on this deal. Now, where is the deal now, given that the crisis is happening, the crisis is escalating?

14:40I would say that it's on ice, but it's not necessarily dead. I think MBS, the Saudi government, has to take the line that it's taken for political concerns, for domestic concerns. It's concerned about regional stability. But in private, I would imagine that there is still quite a lot of interest from MBS in this deal. Because remember, what were the terms of the deal being discussed? Saudi Arabia would get a security guarantee from the United States. It would get U.S. support for a civilian nuclear program. Israel and Saudi Arabia would form a sort of a united security front to contain Iran. These are all things that Saudi Arabia MBS is interested in getting.

15:21I think he's still interested in getting them now. He just maybe isn't willing to talk about them publicly, given the crisis that's happening. So I think the deal, yeah, the deal is on ice, but it's not dead. It will take some time to revive it, though. I mean, like this crisis could go on for weeks, it could go on for months. The worst things get in Gaza, the harder it will be for governments like Saudi Arabia to look friendly with Israel. And that all works against a deal in the short term. But I wouldn't say that it's dead. I mean, MBS is going to be in charge in Saudi Arabia for a long time.

15:52He can afford to wait for this crisis to subside or potentially even blow over and revisit a deal with Israel at some point in the future. But I don't think we're going to see much talk about it anytime soon.

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17:57I have a question, slightly off topic, but not really. Your research on Iran. I'm assuming you never actually got to go to the country given existing sanctions. But I'm just curious what the actual process was like of gathering that information. And did you travel? Did you talk to people on the ground? That sort of thing. I love these kinds of questions because it reminds me of, you know, being a historian, which is my training. Before I came to Eurasia Group, I was at Yale. I was mostly working on my next book. So I wasn't able to go to Iran. That's right. I'm an American national. And at the time that I was doing my research, this was 2017 or so.

18:34It was dangerous, I think, for researchers who were Americans to go to Iran. You ran the risk of physical harm. You ran the risk of arrest. There have been Americans who have gone to Iran to do historical research who have been arrested and have remained in prison for years. I mean, what we just saw, the recent prisoner exchange between the United States and Iran, some of those individuals, none of them were historians, but some of them had been held in prison for nearly 10 years for really no reason. So it wasn't possible for me to go to Iran to do research. But that being said, I was doing research on the 50s and 60s, you know, the Cold War.

19:04And there's actually quite a lot of information of documentary evidence in Farsi, in Persian, that's available in the US, in Europe. A lot of it is in the form of memoirs or interviews, but there are sort of collections of documents that you can find that have been published. So, you know, writing the book that I wrote, which was mostly about oil, the Cold War, U.S.-Iranian relations, I tried to use as many of those sources as I could, right? I really, really strove to incorporate an Iranian perspective as much as I could because I thought that perspective was important. Even if I wasn't able to go to Iran and do research there, I still felt that I couldn't write just another book about the US and oil.

19:42I had to incorporate to the Iranian side. What is your forthcoming book about? Well, it's very much in progress, Joe. But what I'm going to try to do... So my last book was about the US and Iran specifically in the Cold War. I co-wrote another book about the 1953 coup in Iran, which also celebrated an anniversary this year. But my next book is going to be about oil and the U.S. more broadly in the 20th century. What I'd really like to do is examine how oil has helped sort of form the foundation for American power in the 20th century and how the oil industry, companies like ExxonMobil, but also smaller companies that are operating in Texas and other places, how they served as tools of U.S.

20:23foreign policy and formed a part of the U.S. conception of national security. So oil national security in the 20th century is kind of the broad focus, but it's still, you know, in the early stages. So I'll let you know when I make more progress. All right. We'll have you back on for that. Seems topical, though. Yeah, I hope so. Speaking of going back to the market reaction, there's like a couple interesting things. I mean, in a way, I've been surprised that, you know, you expressed surprise oil popped on these headlines, which you didn't think had much teeth to them. In general, though, I've been surprised, Tracy, at most markets for the last 10 days, they're quieter than I might have expected overall across oil, across rates, across stocks, which are more or less flatter, actually slightly up over the last two weeks.

21:06It's not what I would have guessed given the intensity of the headlines and the just uncertainty of where all this is going. No, I know what you mean. Although I do think today, hold on, I'm just looking at this. It looks like today is like kind of the first day where we've seen a significant pop in gold, which is like a classic war reaction asset flight to safe haven kind of thing. So that's interesting to see. It does feel like today with that explosion, the deadly explosion at that hospital, it feels like things have like shifted a little bit, even though there's no certainty about what exactly just happened.

21:43Yeah, we're still trying to piece together precisely what happened, right? Whether it was a rocket misfire, whether it was something caused from the Israeli side, something caused from Hamas or another group active in Gaza. I think the evidence is still kind of coming together. But there was an immediate reaction to the explosion across the Arab world. There were spontaneous protests in places like Jordan, in the West Bank, even in Iran, where the struggle in Palestine, the issue of the Palestinian people is followed quite closely. And you saw, as Joe mentioned, quite quick condemnations of the Israeli action from governments across the region.

22:18And to some extent, that's for a domestic audience. The public protests and then the leadership feels it has to take a side. Totally. A lot of it is out of concern for how the public, how the so-called Arab street is how it's referred to. How the public will respond to violence in Gaza, you know, perceived attacks by Israel against Palestinians tend to have ripple effects across the public opinion across the entire Arab world. So you saw that quite quickly. And then you saw Arab governments issuing condemnations, I think maybe to get ahead of public opinion, even before the evidence could confirm exactly what had happened at the hospital.

22:57And that has caused a shift. I mean, you saw President Biden was supposed to go to Jordan to meet with various Arab leaders. That meeting apparently is now off the table. So he is flying to Israel to just meet with the Israeli government, which is not going to look good, I think, for the president, broadly speaking, as he tries to contain this crisis.

23:21So we have a question from our Discord. It is from MaterialsDan, which is, you know, a good name for it. A good Odd Lots listener name. Hi, MaterialsDan. And he's asking about materials. So he's asking, how does the conflict affect relative demand for different products like petrol, kerosene, distillates? Huh. That's a good question. We're going to make you do this in real time. One that I would expect from materials, Dan. Thanks, Dan. Right now, yeah, the market is kind of taking it in stride, the product market, I think. I think it's still important to look at the picture that was coming together in fundamentals and sentiment before the crisis broke out.

24:05There's been some signs that Chinese demand in the fall was a little stronger than some had thought. that's maybe encouraging a more bullish outlook for 2024 as far as products are concerned. The crisis hasn't really spilled out into markets quite yet. There hasn't been actual physical disruptions. There's been some movement in Brent, I think caused by positions shifting, although those came after the calamitous$11 plunge that Brent took right before the crisis happened. So you saw sentiment shifting there. The crisis hasn't really affected physical flows quite yet. It has caused, I think, a slight spike in some price indices.

24:39But I think the factors to still focus on are the fundamentals and the supply picture, the supply demand picture moving into 2024, where I still think there's a lot of uncertainty there, right? Could the US slip into a minor recession? Could demand fall off in the EU? Will China keep having the problems it's been having? This is pushing back against a little bit of the bullishness that OPEC, I think, was putting out for the end of this year about where prices were going to be. Joe, you know one physical disruption that has happened? It's actually not in oil, but our old friend Evergreen declared force majeure on a container ship in Israel, which I guess isn't really surprising.