257. Iran War: Are investors getting it wrong?

0:00Robert Peston:Markets are just getting this wrong.

0:02Steph McGovern:If it continues, then it will have huge consequences for the global economy and for the UK.

0:07Robert Peston:Although we've got to hope that the view of markets that this could lead to some kind of stability relatively quickly is correct, there are enormous catastrophic risks around that.

0:20Robert Peston:Hello and welcome to The Rest is Money with me, Robert Peston.

0:23Steph McGovern:And with me, Steph McGovern. Now, the unrest in the Middle East continues to play havoc. We want to look today at the latest on what that means in terms of the global economy, what's happening with the stock markets, how are investors reacting to this, and in turn, how that impacts the forecasts we've had this week in terms of what is going on here in the UK. Robert, just kick us off on where things are at the minute then.

0:46Robert Peston:So I was really struck by a data point that quite an influential investment manager sent me this morning. And it is that in the futures market, the price of oil for delivery in December is only up 3 % this week. Which basically says that investors believe that there will be a relatively stable end to this conflict in terms of shipments of oil and presumably potentially of gases as well. And that stability will come sooner than many people think. And so I thought that what we should at least start by doing is look at whether that kind of relative optimism is well-founded or whether, which is often the case, markets are just getting this wrong and getting it wrong in particular because there are some really big uncertainties out there.

1:59Robert Peston:So just talk us through, Steph, what has been happening to oil and gas production facilities in the Middle East? What's been happening to that extraordinarily important shipping lane, the Straits of Hormuz, since we did our last episode at the beginning of the week?

2:19Steph McGovern:So as things stand, there are still hardly any ships going through the State of Hormuz. The only ones really getting through were Chinese and Russian ones. And that's very much largely to do with the pressure that China's putting on Iran and the US around keeping that movement of oil and gas through there. This tiny bit of waterway is where a lot of ships go through carrying liquefied natural gas, carrying oil. You know, it's a fifth of the global oil supplies going through there. And this is a real chokehold because ships not being able to get through there is a real problem in terms of oil and gas getting out to where it is sold.

2:57Steph McGovern:And so at the moment, there's basically no movement there. Trump's come out and said, well, hang on, I'm going to help ships get through there. I'm going to send warships to support you so that they don't get attacked. He's also on about trying to be the insurer as well for these ships, because that's another problem. We've had the big insurance firms say, we're not going to insure these ships trying to go through there because it's just too dangerous. There's just too much of threat of an attack. So you've got that problem there, that chokehold. And that essentially is temporary in a way, because if they can sort that out and get those ships moving, that is a temporary problem.

3:34Steph McGovern:However, I think the bigger problem, and it's the one you made in the last podcast, Robert, is these attacks by Iran on really key producers of things like oil and gas and fertilizers. So if you look at what's happened so far, you've got, for example, in Qatar, the biggest refinery, Ras La Fan. They're the biggest liquefied natural gas producing terminal. They've paused production of that. They've also paused production of what they call downstream production. Now that is things like fertilizer, which is obviously really important for food production. So at the minute they've paused production there, but then you've got facilities that have been hit in the UAE, like oil installations that have been attacked by drones.

4:20Steph McGovern:And so I guess in terms of what this means for oil prices is how long is that production paused for? How much damage is being done by these drone attacks by Iran? Will that continue? At the moment, as you say, oil hasn't gone up that much. Gas has. I think, you know, if you're looking at wholesale gas prices, they've shot up in the last couple of days. If you look at how much the UK is now paying for wholesale gas, it's the highest since 2022. So it's not as high yet as when it was the Ukraine war, but it's the rate of change that I think is quite scary there because we've seen like the biggest two day increase in UK wholesale prices we've ever seen.

5:02Steph McGovern:So it's more the rate of change. But Robert, as you said, the question around all of this is how long is it going to go on for? And if it's only a short blip, then I mean, blip feels like an understatement given what is actually happening out there. But if it's only a short stop in oil and gas being able to get through and this fertilizer being made and everything else, then we'll be able to recover from it. But if it continues, then it will have huge consequences for the global economy and for the UK as well. We're delighted to say that this year, The Rest is Money is being powered by Octopus Energy.

5:40Steph McGovern:So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, Are we just back to the big six?

5:47Robert Peston:You know what? We've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable. Then Aldi and Little turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.

6:15Steph McGovern:Cheers, Greg, and thank you for powering this episode of The Rest is Money.

6:45Robert Peston:way on Carvana. Delivery fees may apply. When you want your spring break to feel like and your kids pool day to feel like and your hotel bed to feel like oh and room service to feel like because at Hilton hospitality feels like your cabana's Ready? Would you like fresh towels? It matters where you stay. Book now at Hilton.com. Hilton, for this day. So look, other data points. There's no question that Israel and America have degraded Iran's missile, ballistics, drone firing capabilities to an extent. the number of missiles and ballistics and drones coming out of Iran has fallen. I mean, they're still posing a very serious threat to the region, the wider Middle East, but the volume has come down a bit.

7:51Robert Peston:And that's another reason why investors are a bit more optimistic. But then there are counter arguments that one should make. I mean, for example, you talked about fertilizer out of Qatar. Iran is a very big exporter of fertilizer. None of that is leaving the country at the moment. And there is a risk if farmers, food producers can't get fertilizer, that the price of food is going to go up quite significantly. And we've seen in the very recent past, our rises in food prices massively reduce living standards, particularly for those on low incomes. And they have a direct, has a direct impact on the more general growth picture.

8:42Robert Peston:And of course, when you've got conditions, which we have at the moment, of energy prices going up and potentially food prices going up, again, we're in this situation where central banks become more pessimistic about the outlook for inflation. And even if we think in these conditions of an economic slowdown that over the next year or two, interest rates will still come down, they will come down slower. Right. And that is certainly, you know, in terms of the growth outlook, that is a negative because, you know, in the end, central bank's primary responsibility is to curb inflation. So, you know, that will be painful.

9:27Robert Peston:It's also painful for governments like the UK. You know, one of the things we have seen is the price of UK government debt falling a bit. And the reason for that is, again, because when the price falls, that's the interest rate that the government pays going up. And that interest rate is linked to what central banks do. So if central banks are cutting interest rates slower, then sadly for the British government, that means its interest rates are falling more slowly. And at a time when they're shelling out 100 billion pounds plus on interest, that is painful for Rachel Reeves. I think the biggest worry and the reason why I'm not persuaded that investors' optimism is well placed is it stems from two factors.

10:22Robert Peston:I mean, I was talking to a very senior member of the government today and they repeated something we all know, which is that Donald Trump does not apparently have a plan, a roadmap for what happens after Iran is significantly weakened by this war. You know, there is a genuine risk of long running chaos, which would be terrible for the people of Iran. And I think, you know, one of the things we should point out when we're focusing on markets and the global economy, we shouldn't underplay the absolute misery for the people of Iran, for people throughout the Middle East. since this is now a very wide conflagration, this is a Middle East conflict.

11:09Robert Peston:This is not just Israel, America and Iran. The whole of the Middle East has now been drawn in in a way that is deeply worrying and causing all sorts of humanitarian problems. But the absence of a plan is obviously significant. I was quite struck that in the Financial Times, Martin Wolf paints a scenario which he thinks is the most likely scenario, although he's not forecasting it, that ultimately something happens here that is not completely different from what Trump did in Venezuela, which is he's assassinated Khamenei, the Ayatollah, and ultimately some other dictatorial person takes over in Iran, with whom Trump does some kind of a deal that brings a bit of stability to the region.

12:05Robert Peston:He gets a deal on no nuclear weapons development. He may even get a deal that somehow America gets some of Iran's oil. And it's very much a sort of old-style imperialist, colonialist solution. But the poor people of Iran are still subject to an appalling dictatorship. Freedom is not enhanced in Iran. It's just the worst kind of strongman geopolitical politics. And I have to say, you know, that is not, it seems to me, a completely unrealistic scenario, you know, essentially given what we know about Trump's instincts, which is in the end what he mostly cares about, is what's good for America and what's good for him.

13:02Robert Peston:And so all this talk initially of this leading to significant regime change and the flowering of some kind of democracy in Iran would be for the birds. So that would be a potential, I mean, depressing but more stable outcome. And I suspect that is the one that markets and investors are focusing on. But I just want to make the counter case of what one's got to be anxious about, which is when you have a flailing regime, which we've got in Iran at the moment under so much pressure, we cannot rule out that Iran does something desperate and terrible. We don't think they've got the capacity to do anything terrible with their stockpiles of nuclear material.

13:59Robert Peston:But, you know, is it possible that they could launch some kind of strike that leads to very widespread deaths of civilians? I think that's possible. And then all hell breaks loose. So I do think that, you know, although we've got to hope that the view of markets that this could lead to some kind of stability relatively quickly is correct, there are enormous catastrophic risks around that. Yeah.

14:27Steph McGovern:I mean, and as you say, in that period, it's the chaos it causes, it's the instability. But I do wonder, given we've talked about this before, about the, you know, the taco Trump, Trump chickens out. Trump does care about, especially with the midterms coming up, is the promises he's made to American people, like the point on oil reserves. And, you know, when he came in for the second term, he talked about wanting to make sure that the oil reserves were, I think he called it right to the top. And yes, they have got big oil reserves in the US, as has China, but they're going to deplete, aren't they?

15:06Steph McGovern:The longer this goes on for, it's going to really impact that. And that will put up oil prices for Americans. And that is one of the things, you know, you'll know this, Robert, whenever I was ever sent out to cover the budget for the BBC, and the years since then, one of the really tangible things for people is how much they are paying for fuel. We talk a lot about energy costs, but it's also filling up a tank. If you're using heating oil or whatever, those types of things really matter to people. It's really tangible. And so there is potentially what might stop Trump carrying on this conflict is what happens to oil prices, to oil reserves, to energy prices, that could be the thing that could be what pulls him back from the brink on this.

15:56Steph McGovern:I mean, what do you think, Robert?

15:57Robert Peston:So historically in the last, well, you know, actually in both his terms as president, what he often looks at is the stock market. It is interesting to me that although we've seen, I mean, yesterday in particular in the UK stock market, we saw a fairly sharp fall. Actually, the US market has been much steadier than I thought it might be. But in the Far East overnight, as you know, today, as we record, we saw sharp falls in Korea. We saw sharp falls in Japan. These are economies much more dependent than America is on flows of oil and gas from the Middle East. I think it's important to note that America is largely because of the massive fracking revolution that there has been.

16:45Robert Peston:It's largely independent when it comes to its oil and gas needs. It's got significant reserves and significant production. You could see a world or a scenario with Trump that if the world price of oil and gas rises and that would force up the price in America, that he would either regulate that price down in America because he is somebody who is incredibly focused on how voters feel in respect of the more explicit prices that they're paying. So you could see a situation in which, to go back to your original point, he intervened very directly in American oil and gas markets to make sure the price doesn't rise too much.

17:37Robert Peston:If there were, we haven't seen it yet, you know, a very big stock market negative reaction. And I still think that is a real possibility. I think at that point, the chances of him chickening out are much greater. The problem is that even if he were to try and expedite some kind of solution faster, he has opened a can of worms, a Pandora's box. You know, this is this is a terrible mess that he's already created. And it is quite hard to make rational, confident forecasts about, you know, essentially where we will end up. The only thing that we can be confident of is that the world is a much more unstable place.

18:20Robert Peston:It's a much more dangerous place. And that brings all sorts of consequences for the British economy and also for where and how the British government allocates its resources, in particular how it gets its defence spending up. And maybe after the break, that is what we should unpick. LinkedIn is pretty amazing at helping you grow your small business. We cannot make your email response time faster. We can help you sell, market, and hire in one place. We cannot help you find space for your three desk drinks. Why do you have three? And while we can't help you find the perfect volume for your presentation video, LinkedIn can help you find the perfect audience for your business.

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20:15Steph McGovern:Welcome back to The Rest is Money with me, Steph McGovern.

20:18Robert Peston:And with me, Robert Pester. Now in a minute, we will unpick what in the Chancellor's spring statement remains relevant in these turbulent times. But you had a couple of thoughts you also wanted to add on what households and businesses in the UK will be paying for gas in the coming months.

20:37Steph McGovern:Yes, because obviously, as we've just been talking about, the wholesale price of gas is, well, it's shot up. So how much the UK pays for this gas and gas is a prime driver of UK electricity prices as well. So this is a big deal for us in terms of our energy usage. Now, you know, you'll remember this in the last week or so, we had the latest energy price cap announcement. So some of you might be going, well, hang on a minute. Won't that stop the unit price that we pay for energy from going up? And the yes, for now, it's not going to change anything. But at the point is this price cap gets reviewed every three months.

21:19Steph McGovern:So if this continues, if we continue to see the wholesale price of gas going up, then that is inevitably going to mean that that cap's going to be lifted. And that's one of the big things that the, you know, the Labour government have built their, you know, built their manifesto on, was bringing down the cost of living and energy prices is absolutely key to that. And, you know, we had the spring statement this week, which I know you're going to talk about, Robert, but that forecast of what's going to happen in terms of inflation and in terms of growth was based on the assumption that the gas price would stay pretty stable.