The Energy Shock Is Here

0:00Hey everyone, it's Jess.

0:01David Uberti:And Ryan. We have a live event coming up that you do not want to miss. It's in Los Angeles on Tuesday, April 28th at the El Rey Theater. We'll have Emmy winner and Oscar-nominated actor Riz Ahmed. Who was in the Star Wars movie Rogue One. And TV and film producer Franklin Leonard. We'll be talking about the future of Hollywood and we'll have a few other surprises. Tickets are still available. Grab yours now via the link in our show notes. See you April 28th.

0:31So before the war in Iran started, how were things going with the U.S. economy?

0:37David Uberti:So at the start of the year, if you looked at surveys about business or consumer confidence, they were actually quite high relative to recent history. Our colleague Dave Uberti covers markets and the economy. Inflation was coming down, and consumer spending was pretty robust. You had an economy coming into the year where there was a lot of tailwinds. There was optimism that the uncertainty from the tariff turmoil of last year was dying down. There was optimism that President Trump's tax cuts would boost the economy in certain ways. And there was optimism that the U.S. consumer was pretty resilient after the last several years or so.

1:15Dave says back at the beginning of the year, there were some downward indicators. Stagnant job growth, for example. But overall inflation seemed to be mostly under control. Higher than in years past, but moving in the right direction. That is, until a new report dropped last week. New inflation numbers are not good, tripling in just a month, and driven by the biggest spike in gas prices in six decades.

1:41David Uberti:So year-over-year inflation through the CPI index, which is a broad measurement of inflation, is up 3.3 percent from a year ago. And the Federal Reserve uses 2 percent as a target for where it wants inflation to be. That's a significant increase. And a major factor, oil prices. So even before the war with Iran started, inflation was above that target level. And what we have now is an energy shock that is sending gasoline and diesel prices on one of their steepest climbs in decades, if not ever. So we are in an energy shock. We are in an energy shock. Okay. An energy shock is when there's a major disruption to supplies.

2:25David Uberti:And that could be because of a natural disaster. But more often than not, it's because of some sort of geopolitical conflict, most likely a war. Check, check and check. This, if you talk to people who follow the history of the oil industry, is the mother of all energy shocks. Welcome to The Journal, our show about money, business and power. I'm Jessica Mendoza. It's Wednesday, April 15th.

2:55coming up on the show a wartime report card on the u.s economy

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4:08Iran and the U.S. are in a ceasefire and are expected to start another round of negotiations. But the Strait of Hormuz, the most important choke point for oil trade in the world, is still closed. And on Monday, the U.S. began imposing a blockade on Iran's ports in the strait, further escalating the standoff. The millions of barrels of oil that have essentially been stuck there amounts to around 10 % of what the world uses on any given day.

4:36David Uberti:And while we can make up some of that gap because countries and companies have stockpiles. We can sort of like massage it a little bit here and there for the moment. The longer this situation goes on, the longer the tankers can't make it out of the Strait of Hormuz, the longer that 10 percent will continue compounding and the longer that the supply disruption will end up rippling through the global economy. So far, Americans are feeling most of the impact at the gas pump, with prices rising sharply. The situation echoes gas shortages of the 1970s, when disruptions to the oil supply in the Middle East led to Americans waiting in long, around-the-block lines for gas.

5:15David Uberti:There was an energy shock in 1973. There was an Arab oil embargo. We must act to ensure that the remaining gasoline available is used wisely and conserved to the fullest possible extent. There was an energy shock during the Iranian revolution in 1978 and 1979. Anger and bewilderment are growing as more and more Americans cope with gasoline lines and empty pumps. There's an energy shock during the Gulf War 1990 in 2022 with Ukraine war. The uncertainty in the region threatening to catapult already steep energy prices sky high. Nobody right now is projecting the type of actual shortages of gasoline that America saw in the 1970s.

6:01David Uberti:Like, no one's expecting to line up at the gas station. But at the same time, the price of gasoline has gone up almost$1.30 over the last five or six weeks. And the consequences are already starting to ripple through the economy. First and foremost, you have the hit to drivers. When they're going to work or taking a road trip or whatever, the price of gasoline is going to go up. The price of airfares has already gone up. Some airlines have already added additional baggage fees on top of that. The price of diesel that truckers rely on and rail operators rely on to take produce, goods, services around the country, that is all going up.

6:47David Uberti:Basically, every type of product you can think of is touched by oil in one way or another. Because so many goods and services move around using oil and gas, the price of oil drives the cost of most things, like food, manufacturing, and imports. On top of that, natural gas, which is a huge part of what the Middle East exports in terms of energy, that is key for global power generation. It's key for air conditioning. It's also a key input for manufacturers around the world. So if we're thinking about companies that build everything from chips to companies that create steel and need high heat to companies that produce fertilizer for farming, all of that requires an immense amount of natural gas.

7:33David Uberti:So that's why this energy shock has raised so many concerns. How have U.S. markets been reacting to all this? Mostly it's a shrug so far, which has been really perplexing for us. We watch the markets every day. And at various points, Wall Street has gotten pretty yippy about it. They've sold off stocks. They've sold off U.S. government debt. But if you just look at a chart of what the S &P 500 index has done, it's more or less flat since this conflict started. Where the concern will start coming in is if the shock is so big that it ends up hitting consumer spending. If gas continues to get more expensive, people may change their habits, like driving less or taking the bus.

8:18But Dave says many people won't have a choice but to pay the higher fuel prices, and they'd instead cut back on other parts of their budget.

8:27David Uberti:Say, Home Depot. If people need to spend more on gasoline, they might do less on home improvement. And so we've had some colleagues of mine recently who've done some interesting charting saying, you know, in some days where oil is dropping, Home Depot is rising. And it could be as simple as that. That said, consumers haven't actually pulled back on spending yet. Although, Dave says, there are signs that could start happening soon. There is a survey from the University of Michigan. They put a monthly survey of consumer sort of sentiment and expectations about what they think of the economy. The most recent version of the survey was published last week, right at the same time as those not-so-good inflation numbers.

9:12David Uberti:It was the lowest ever in 74 years of the survey taking place. Yikes. And so some of that might be an overreaction in vibes because the economy was pretty strong coming into this. But the direction of travel, how fast that plummeted in just one month as people were seeing those price increases in the gas station, that just goes to show that people hate this. So people just inherently sort of understand that if prices are going up, things are not getting better, right? If consumers go to the gas station and they start internalizing the fact that prices are rising, that could be something of a self-fulfilling prophecy.

9:46David Uberti:If inflation expectations rise, that could in effect boost inflation over the course of time. Okay, but doesn't the U.S. produce a lot of its own oil? Shouldn't that sort of insulate us from the rising prices? As someone who writes a lot about oil, this is one of the main questions that I get from readers coming in. It's, we are a net exporter of energy. We are the largest oil producer the world has ever seen. So why the heck am I paying higher gasoline prices when all of this is happening 7 ,000 miles away? And the reason why is oil is the most global market. So we are a huge exporter of crude oil, of gasoline, of jet fuel, mainly from the U.S.

10:28David Uberti:Gulf Coast. So that tethers us to the global market in a really big way. And if foreign buyers are pushing up the price of U.S. supplies, then U.S. buyers need to compete with those prices. So that's sort of the upshot right now. Okay, things are relatively mild here in the U.S. still. How are we seeing those impacts in other parts of the world? Well, it's much more severe. And they're wildly different depending on what's happening in that country. How the energy shock is hitting the rest of the world. And will it ever go back to normal? That's next.

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12:18Remember the millions of barrels of oil that are stuck in the Strait of Hormuz? Most of that oil was bound for places in Asia, which are now feeling the energy shock in big ways. India has cut liquefied petroleum gas for factories to 70 % of pre-war levels. Bangladesh has had to dial back production of plants producing critical fertilizer. And in Indonesia, they're rationing fuel for drivers. Shortages are also beginning to take their toll on other U.S. trade allies.

12:48David Uberti:If you're talking about major trading partners to the U.S., South Korea, Japan, Taiwan, we get a lot of our both consumer electronics from those countries, as well as the chips that are fundamental to the AI boom as well. And those chips, the plants that those chips are made in, require both a lot of natural gas for power, And they also require a lot of helium to help create the chips. Both of those sources of supply have been severely disruptive. Europe is next. Europe is a huge energy importer. You have economies that are quite industrial, like Germany and Italy. They require a lot of natural gas for those factories that build cars, widgets, and whatnot, in addition to the natural gas they need for power generation, the fuel they need for their cars and such.

13:37David Uberti:And then finally, it's the U.S. So the worst case fear is that what happens in Asia and then Europe will ultimately come back here. Impacts ripple quickly in a globalized economy. One example of that is jet fuel. Even if it's still affordable to buy fuel in the U.S., refueling elsewhere can be a big problem if gas costs too much or if there's a shortage. which is partly why airfares have gone up so much. Right now, oil futures are reacting well to the news of continued talks between the U.S. and Iran which suggests that traders are hopeful the conflict at the strait will resolve relatively soon.

14:20But even if the Strait of Hormuz were to resume normal shipping traffic tomorrow it will take a while for oil prices to normalize. That's because oil tankers move slowly. It could take a long time for supplies to get where they need to go meaning the real price of oil will stay high.

14:38David Uberti:And so the weird thing that's happened in recent days is the spread, the gap between those two prices of oil has blown out. And so while on the one hand, there's this news of a tentative, fragile ceasefire that's pushed down the price of oil in financial markets below$100 a barrel, on the other hand, the physical supply crunch is still very real. And the real price of oil is$130,$140, even in some cases more. So the story that that price is telling is much different. It's telling a story saying that the supply disruption is real, and in fact, it might only be beginning. Regardless of when oil supplies start moving again, almost nobody Dave has spoken to thinks prices will go back to where they were before the war.

15:25David Uberti:And part of that is due to the longer-term impacts of all these supply disruptions. different countries around the Persian Gulf have shut in oil production facilities. They've basically turned the spigot off, so to speak, which takes time to turn it back on. The other part of that is that everyone's going to be afraid that this might happen again. And so the risk that it might happen again might add a little bit to the top of oil prices, say maybe$5 or$10. People call this, it's called the geopolitical risk premium. But what it really means is people are worried the spigot's going to turn off again.

15:58David Uberti:And so they need to get paid to take that risk. Dave, we started this conversation talking about inflation going up in the U.S. since the beginning of the war. If things do start to cool down in the Persian Gulf, you said oil would take a while to normalize. But what about inflation? I mean, it could fall pretty quickly. It might not fall to where it was. And I think, I mean, there's two pieces of this, right? There's the inflation, which is economically tough, and it's likely to stay higher for longer right now. But then there's everyone's experience of inflation. And I think even if inflation comes down, everyone's going to be really mad that this happened.

16:38David Uberti:And if nothing else, what we learned since 2022 is that people really hate when prices go up. So even if inflation comes down itself, the sort of social or political impacts of that, I mean, who knows how long that lasts. So if you look at the moment that we're in, Dave, would you say, what, the worst is still ahead? The war has been really volatile and it has changed within hours, multiple times over the last month or so. And like what that would mean, economically speaking, the ceasefire is definitely positive. But the sort of wrangling over the ships. And I think if you asked anyone before this war started if they could envision a world where Iran effectively controlled the Strait of Hormuz and maybe even collected attacks on oil going through it, I think they would have laughed you out of the room.

17:32David Uberti:So that's less optimistic. But all that said, I mean, if you look at the U.S. over the last five or six years, like if nothing else, it has proven resilient, right? There was COVID. There was the inflationary shock of 2022. There was the tariff shock of last year. And through it all, the U.S. economy has proven much stronger in many cases than other economies around the world. So given everything that I said, all of those sort of bad omens on the horizon, we're still in a pretty good place. But it really all comes down to whether the ships start going.

18:22That's all for today, Wednesday, April 15th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

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