183. Will Trump’s Bombing Lead To Oil Price Surge?

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1:18hello and welcome to the rest is money with me Robert Paxton and me Steph McGovern um so Robert As you predicted, Trump waited until the weekend to cause this, what he's calling monumental damage to the nuclear sites in Iran. You were saying at the time you thought this might happen because Trump would wait when the markets are not open. So therefore it gives the financial markets a bit of time to assess what's actually happened rather than do some mad reaction sell-off. it's a hell of an escalation and one where obviously now the consequences will be felt um and you know we'll get the reaction from the markets today and also um just work out what to run's going to do next but what's your thoughts on it all i'm not sure i'm feeling um particularly smug that my forecast uh no in the sense that you know The consequences for the world are significant and worrying, and it'll take us a bit of time to assess whether or not the world is a safer place as a result of Trump's bombing or a much more dangerous place.

2:36I mean, it is interesting that as we speak early on Monday, there has as yet not been Iranian retaliation. And it's difficult to assess whether the reason that there's been no retaliation either by Iran directly or by its proxies is simply that over the last 18 months, their capability, their military capability has been so depleted by Israel. and so as of this moment it's difficult to know whether or not Trump's calculation has been a reasonable one in the sense that he's done it at the moment of maximum Iranian weakness and they simply don't have the capacity to retaliate or whether we're now in a sort of waiting game for something potentially serious.

3:37It has been one of those extraordinary moments in history. I don't know where you were when you heard the news of the bombing. I'd just been to, believe it or not, a solstice party and got back at sort of, I don't know, one in the morning to see the confirmation of the bombing. and it was a real heart in mouth moment. Yeah, I mean, I did that thing of I was in bed, but I woke up just as the news alerts were coming in and it wasn't because the news alerts woke me up. I just had this sense of like, and woke up and then saw the news. And I mean, it's terrible. But also there's a question about whether actually this is really going to make any difference to Iran's nuclear capabilities because although we know that there's been damage to these three sites, we don't know that they've destroyed in any way the uranium.

4:39Like the uranium might not be there. And so this might just hold them back a couple of months rather than cause any permanent damage to their capabilities and what they're doing in terms of developing these nuclear weapons. That's a very important point. I mean, I was talking to intelligence experts yesterday, one in particular who's actually steeped in Iran, And he says you can degrade a country's uranium enrichment capabilities from the air in this way. And one should not downplay the extraordinary technological achievement of America, flying in seemingly without detection, launching these enormous bombs.

5:26and, I mean, not quite hitting a target the size of a postage stamp, but hitting a very small target, I think it's 16 times, at the Fordow facility, which is the sort of mountain facility where conventional bombs don't work, and then flying out again without a single missile being fired by Iran or without Iran being able to scramble any jets or anything in terms of retaliation. an astonishing technical achievement. But as this intelligence expert said to me, you cannot, he said, completely eliminate this kind of nuclear weapons threat totally from the air. And the reason for that is sort of obvious.

6:09You've commented partly that we don't know whether or not in the last few days, given the risk that this was going to happen, whether or not, Iran has moved some of the enriched uranium somewhere else, which hasn't been detected. I was quite struck that the Americans, the leader of the Joint Chief of Staff, said that obviously they've been monitoring and they don't detect any sign of the Iranians moving uranium. But if they've got, for example, underground tunnels, you know, it's impossible to be confident that they haven't moved it and then secondly there's i mean the sort of most blindingly obvious point which is although israel itself has assassinated some scientists involved in the program you cannot uh from the air destroy human knowledge of how to make nuclear bombs and we know that iran has that knowledge because those humans those human scientists will still be alive and there There is this risk that whoever you are, whether you're in intelligence, whether you're a politician, whether you're in the markets that will be of concern is that this will accelerate plans by the Iranians to develop a weapon and perhaps some sort of crude, dirty bomb.

7:38But nonetheless, something that spreads radiation on impact is a pretty terrifying prospect. What we talked about the other day as well was what Iran could do in retaliation in terms of how they can get, I guess, the world back for this. And, you know, we talked about the regional oil infrastructure and how important that is that, you know, we talked about the Strait of Hormuz, which is this key pathway for the oil created in the area to get to the rest of the world. and it's about 20 % of global oil supplies travels through that area. And at any one point, if you look at the ships moving in that area, there are hundreds of ships travelling through there every day.

8:23And so this is a key concern now is will part of the retaliation involve bringing down the Strait of Hormuz so that you can't actually get ships through there, so therefore oil cannot travel through. And that will obviously impact oil prices sharply, which, as we know, and as we've talked about millions of times, can really impact everything globally in terms of prices, in terms of energy prices, in terms of, you know, just general inflation across the world. so there's obviously that has been some of that has been factored into the price of oil recently but it's still we're seeing it head upwards now and and there is a real concern that part of this retaliation will be to hit us all where it hurts and often where it hurts what you know aside from the human cost is economically and they do have the power to do that don't they Robert?

9:17They do. And I mean, let's go to the extreme case first. I mean, the extreme case is that they release very, very large numbers of mines into the Strait of Hormuz and they use drones and they use missiles of various sorts to deter tanker movements through the Strait of Hormuz to prevent tanker movement through the Strait of Hormuz. And as you say, that would lead, if it were blocked completely, that would lead to a massive increase in the oil price of a magnitude that would be similar to the kind of impact we had when or after Russia invaded Ukraine, where we saw an enormous increase in the price of energy that not only fueled inflation, but also crippled living standards.

10:15Yesterday, we saw the Iranian parliament voting in favour of closing the Strait of Hormuz. It's very important, however, to point out that they don't have the power to order that to happen. That rests with, effectively, the Supreme Leader Ayatollah Khomeini and his most senior colleagues. So in the end, it is very much his personal decision whether to do that or not. I am struck that as we speak, although there's been a modest increase in the oil price, 2 % or 3%, it hasn't surged. And at the moment, analysts and investors are taking the view that certainly in the short term, there will not be that closure and that shock to the market.

10:59This comes after a 10%, 11 % increase over the last few days. so there has been an increase in the oil price in the run-up to this attack but to this morning's surge not that great and to an extent if the timing as i said earlier was motivated by wanting to do it when markets were closed to that extent trump's uh gamble or judgment has paid off in the sense that the few hours that have were given to our markets ahead of markets opening to assess these risks mean that you didn't get that sort of cataclysmic market reaction in the short term. And it is interesting to me that right now, the view of the investment community is that Iran will not take such dramatic action to massively slow the supply of oil.

11:50We've talked before about Polymarket, which is this gambling website where you can bet on all sorts of political outcomes. Do you remember we talked about it in the context of that French whale who made an absolute colossal sum of money by betting that Trump would win the election? On Polymarket, which is probably the best gambling website for assessing investors' assessment of the risks, the money there says there's a sort of 40 % risk of the Strait of Hormuz being closed in the next few weeks. Now, 40 % is not a negligible risk, but it is not 100%. I think the reason for that is you've got to think about the associates of the Iranian regime, the two most important being Russia and China.

12:36And China in this context, absolutely vital. China takes the majority of Iran's oil to feed its industrial base. And there is a belief that China would not want the oil price to surge massively and would not want flows of oil to be massively restricted and will be saying that to the Iranian regime. Now, this is, let's be clear, this is speculation rather than known fact. But you can see the logic of it. you can see why China would be saying to the Iranian regime, just keep calm, keep steady, don't go in for sort of knee-jerk reactions of that sort that would cause an economic shock that would, you know, damage everybody, would certainly damage the UK and damage growth, but would also damage China's economy.

13:32There's also, I mentioned last time that Iran has threatened to shut this street before, and there's also a sense from analysts that they might not actually be able to do it yes they could cause a lot of damage you know they might potentially attack ships going through there and try and attack some of the infrastructure but it would be difficult for them to close it completely for longer than a couple of days so Iran might be thinking okay we might be able to cause damage but we might not be able to do anything longer term and therefore it isn't worth it as well for as you say the grief they would get from China and other countries that they export oil to because if you look as well at where this oil is coming from and going to it's about two million barrels of it a day is um from iran but then you've got about 21 million barrels which is coming from iraq uate saudi arabia qatar the united arab emirates so it's all of these countries who would be hit by any kind of damage or stopping of this important waterway between these countries and to the rest of the world.

14:35And then the other important relationship is obviously with Russia and Moscow. And it's really, again, striking that the Iranian foreign minister, Abbas Araki, is set to be seeing President Putin today. To be clear, you could see it being in Russia's interest to have the Strait of Hormuz closed because an oil price surge would potentially benefit its economy. This is an economy that's massively dependent on, in Russia's case, its enormous reserves of oil and gas and anything that lifts the price of oil and gas and lifts demand for Russian oil and gas would be a good thing as far as Russia is concerned, even in a world of Western sanctions and even in a world where the West has tried to limit the price that Russia can receive.

15:30So, as I say, the economic interests for Russia are rather different than for China. And intelligent analysts assume that Aragi is asking Russia for military help. Again, the prevailing view, but we'll see whether this is correct, is that in the end, Russia probably won't give that military support to Iran and wouldn't, for example, encourage it to close the Straits of Omuz because Russia's got its hands full with its conflict in Ukraine and wouldn't want to be seen directly to escalating another incredibly damaging conflict. and it will be important to see how in the coming hours and days Russia responds to the request for help.

16:23Yeah. After the break, we might want to also just talk a little bit about the impact of all this on the UK. I guess to conclude, it's the waiting game now, isn't it? And that's often what can be scarier than the actual thing that does happen is just trying to work out all the potential things that could happen. And right, let's go to a quick break. And as you say, we'll think about and talk about the UK when we come back from it.

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17:54Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. So we've talked a bit there about the oil price and the impact that this might have, this geopolitical nightmare could have on the oil price. But there's something else interesting we just wanted to talk about. And you'll remember not that long ago, although it feels like 100 years ago now, when the Trump trade tariffs came in, this mad liberation day, what we saw was obviously the stock markets react to this, but not necessarily in a way that they would have done in the past. an interesting phenomena in that when you get periods of chaos with geopolitics, with economics, you will find that investors will put their money in what we call safe havens.

18:41And often these are dollar backed. So it pushes the dollar up. And in that time of Trump's chaotic tariffs, that didn't happen. It was really interesting. You'll remember we were talking about this, how actually the dollar fell because investors weren't necessarily putting their money where they used to in these safe havens, in these dollar assets. However, Robert, this is again turned on its head a little bit, hasn't it? What's happened? Yes, in sort of marginally better news for Donald Trump, despite all the damage to America's economic credibility. People at times of this kind of geopolitical crisis still want to own the dollar.

19:29So it's not all bad news in an economic sense for Donald Trump. Yeah, it's interesting though, isn't it? That sense of like, he's doing so many different things that actually it's like you quickly forget about, like Liberation Day feels like that was a distant memory now. And yet it was such a you know such a big day and even the fact that we had just last week you in canada watching the prime minister sign this deal um for you know a trade deal essentially with the us to reduce the tariff we pay on um cars which we sell to america and you know that coming down from that 27 and a half percent down to 10 all of that feels a little bit like insignificant now doesn't it given what we've seen.

20:15And also, and I know you want to talk about this, Robert, where does all this leave the relationship between the UK and the US? It's been really remarkable to watch the relationship between the UK and the US over the last few days. And I'm wondering whether as the dust settles, there will be a sense of sort of bruising and soreness on both sides. It was only a few days ago. It was on Tuesday. I interviewed the prime minister and I put to him all the evidence that President Trump was set to bomb Iran. And he absolutely, I mean, his words to me were, you're wrong, that he just spent hours with the American president.

21:07And he said he was confident, that the American president wanted a settlement with Iran. And then we get other statements from both sides over the coming few days. So President Trump, or the White House, says in the days after that, that they would make a decision whether to bomb within two weeks. Now, again, talking to very senior people in the British government, they interpreted that as meaning he would not make the decision for two weeks. It's just a fact. I've talked to very senior people in the British government, and that's what they thought Donald Trump had said. And they actually said, look, we actually asked for this two-week window, and we've been given it, and we're very relieved by that.

22:02And on the basis of that so-called two-week window, I mean, I have to say throughout all of this, I'm thinking to myself, maybe the British government's being a bit naive about what's going on. But on the basis of that so-called two-week window, David Lammy and his counterparts from France and Germany meet on the Friday with the Iranian foreign minister. And they have talks about the importance of a negotiated settlement. Those talks break up without any path to further negotiations and the Iranians saying that they would not negotiate with America while Israel continued to bomb. As I say, once I saw the breakup of that meeting, I did think to myself, oh, crikey, we probably are going to get bombing this weekend.

22:53But I don't think that, you know, at that point, Britain realized the imminence of the attack. Now, the Prime Minister has said that because of the close alliance with America, at some unspecified point before the bombing, the UK was alerted to it. But it's probably the case that we were alerted to it as a country minutes before it happened. There is an argument for saying that actually the UK was used to slightly fool Iran about the imminence of a strike because, you know, Britain was fully signed up to saying, we think we've got two weeks to sort this out in a way that makes us look, you know, as though we were slightly duped.

23:36And then I think it's also possible that President Trump may emerge from all of this feeling, possibly slightly let down, shall we say, by the UK, in the sense that, you know, you will have seen that not once since the strike has the British Prime Minister Keir Starmer or his foreign secretary once said that they approve of the bombing. they haven't once endorsed it. And so given that we know how thin-skinned Donald Trump is, you have to wonder whether the absence of Keir Starmer saying to President Trump, well done, means that on that side, fractiousness will creep into the relationship. So this does feel not like a great rift between the UK and the US, but at a moment which we always thought would come at some point where you know the great friendship that starmer has tried to construct with trump might unravel does it matter if the optics here of of kia not looking like he's really in as you know a closer friendship as they might want us to think because i don't think trump any of trump's relationships are real are they you you do you know you're musk and you're his best mate and then all of a sudden one minor thing happens and you're not and so does it matter if we don't have this special relationship does it matter i think it does matter i mean the iranians think it matters because after uh david lammy had a conversation uh on the phone yesterday with the iranian foreign minister they spun they put out a line in in in their readout of the meeting that the foreign secretary had expressed his sort of sadness and disappointment that the bombing had happened.

25:27Now, the foreign office immediately put out a statement saying that was untrue, that David Lammy had said nothing of the sort, criticizing America. But Iran obviously wants to sow division between the UK and the US. It does matter to have frank and open dialogue between Starmer and Trump. For example, we've mentioned that our very vulnerable steel industry still has a 25 % tariff on it. The ambition of the British government is to get that down to zero because those exports of steel to the US matter to our very, very weak steel industry. And obviously, you know, the scope for those negotiations to go well would diminish if the relationship between the UK and the US were damaged.

26:14And then there is the other security and economic point because these things are related which is that Europe is still enormously dependent on America's huge military resources when it comes to getting any kind of stability peace deal for Ukraine because in the event and we still look as though we're some way from this that we get some kind of ceasefire in Ukraine and Starmer's coalition of the willing is then becomes a practical reality in terms of maintaining the peace. And this would be the combination of British and other European forces actually on the ground in Ukraine as a guarantor of that ceasefire and peace.

27:03That can only happen with US air cover. And so it really does matter. The thing that was genuinely a break, it felt to me, from other recent American dramatic interventions on the world stage is the extent to which Trump just did this totally unilaterally. He kept the world in the dark about his timing. You know, this was purely US planes, no attempt to get any kind of help from the UK or other European powers or any other power across the world. And it just shows you the astonishing sense of independence when it comes to taking military action that Trump feels he has. Very, very different from George Bush more than 20 years ago in the run up to the Iraq invasion.

28:03Many would people say that was a disaster, not only for the UK, but for the world, that we were alongside America as it invaded Iraq. But nothing of that sort happened on this occasion. Trump just took the view that America can do this alone. It's the last of the great superpowers, he believes. And this, again, poses enormous challenges to the UK diplomatically and indeed in a defense sense. If America is going to do this alone, and it has done it alone, it shows you the extent to which he is of the view that Europe has to take total responsibility for its security and defense capabilities. It's going to accelerate pressure for us to massively increase our defence spending.

28:51But despite all of those new security realities in a Trump world, we still need US support for that transition to defence independence, a transition that will take years. So just to repeat the point, it really matters that the UK-US alliance holds. and this is a challenge to him. I don't envy Starmer in terms of working out what to do then next in all of this. It's complicated, isn't it? Yeah, really complicated. Okay, we should probably wrap things up there. Just so much to talk about at the moment. We could go on for hours, but we should let you get back to your lives. We'll be back with more analysis on everything as and when it happens.

29:38But thank you very much for listening. That's it from us and the rest is money. Bye-bye. All the best. Goodbye. you