259. BONUS: Trump's War - why it's making us poorer

0:00Robert Peston:All I'm hearing from them is taco, taco, taco. You know, Trump always chickens out.

0:16Robert Peston:Hello to The Rest Is Money. It's a special edition with me, Robert Peston.

0:20Stephanie Flanders:And me, Steph McGovern. Yeah, so a special episode for you to update you on the economic ramifications of what is a very fast moving situation with the Iran war. We talked in our last episode on this about investors potentially underestimating the impact this war could have on the global economy. And it felt like this week that they woke up to the impact because we suddenly saw oil go over$100 a barrel. The stock market started to drop as well. And then yesterday, Trump came out with some very vague statements about the war being very complete, whatever that means. And we saw a big reaction again from the market.

1:04Stephanie Flanders:So, Robert, just bring us up to speed on it.

1:06Robert Peston:Yes, it was an absolutely hair raising day yesterday. I mean, obviously, since 2007, you and I have lived through some hair raising market days. There were some extreme ones during the global financial crisis. And yesterday, quite a lot of that sort of just feeling of chaos and mayhem just came flooding back. I mean, just on oil, you know, at one point yesterday, Brent crude, one of the benchmark measures of the oil price, you know, touched one hundred and twenty dollars. And yesterday that was a sort of massive 20 percent surge. But actually, the thing that was most extraordinary was the way that it yo-yoed, because after Trump said that his war aims, you know, were almost complete, whatever that means, it then plunged $30.

1:58Robert Peston:Right. So actually, as we speak, it's it's around$90, which is still way higher. It's about 50 percent higher than it was before this war started. started. And, you know, that was that's still going to have pretty significant economic consequences if that price for oil is sustained at that level. But, you know, when you get volatility of that sort, you know, some people will have made a fair amount of money. Some people will have lost a ton of a ton of money. And it wasn't just the oil price where we saw volatility. I mean, we saw astonishing moves also in the price of government debt. I mean, if you just look at this British government's short term borrowing, that's when it borrows on the gilt market for two years.

2:49Robert Peston:There was an increase in the yield. That's the interest rate it effectively pays for that debt of more than 20 basis points. That's not more than, you know, point two of a percentage point, which is an enormous, an enormous swing in the bond markets. It represents a very big fall in the price of government debt. And we saw not quite so big, but it's very significant moves in the price of five year debt, 10 year debt, 30 year debt. And again, you know, one of the things that is a concern for the government is although guilt prices, bond prices have recovered a bit this morning, the rate that the government, the interest rate that our government pays to borrow is significantly higher than it was before this war broke out.

3:39And we'll go on in a minute or two to discuss what that means for the interest rates that all of us pay, because, you know, what's been happening has very significant implications, both for the inflation rate and for

3:54Robert Peston:the interest rates on mortgages, on business borrowings and all the rest of it. So we'll come on to that.

4:04Stephanie Flanders:we're proud to say that the rest is money is powered by octopus energy this year greg jackson is back to answer another question now this is something that we see a lot that i wanted to ask you about when you start in something new how do you think about risk and momentum i think people

4:22Robert Peston:think entrepreneurs love risk but i'm not sure they do i hate it i never buy individual stocks and shares on the stock market. I don't gamble. I think the thing about an entrepreneur for me is I've got more control. When you're working for a company, every day you're at risk of what that company chooses to do with you. If you're an entrepreneur, actually you've got far more say

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5:54Robert Peston:I'm just going to make the big and obvious point that we've talked about often. You know, I'm talking to sort of big investors in the market yesterday who, some of them genuinely sort of shocked by the magnitude of the swings they're seeing. And all I'm hearing from them is taco, taco, taco. You know, Trump always chickens out that phrase that says when the going gets tough for the for the president in markets, when markets massively move against him, he tends to do a reverse ferry, a U-turn on whatever it is that he's been doing that's causing the markets to move against him. And it was absolutely, I mean, again, we have been talking about this on the podcast.

6:36Robert Peston:You know, we always thought that if it looked likely that US drivers would be, you know, car owners would be paying a lot more for what they call gas and we call petrol. That, you know, that is always so politically unpopular a rise in the gasoline price that he would do a U-turn. And then, you know, absolutely true to Trump form, he then decides to get a message out by having a telephone conversation with a CBS journalist and then declares to this journalist in a telephone call that he thinks the war is almost over. markets see this as the taco moment. And at that point, oil plummets, bond prices recover, the stock market recovers a bit.

7:24Robert Peston:Now, we need to unpick whether or not actually, you know, the war is almost over and whether this is a chickening out moment or whether it is still messy. But it was nonetheless for markets a very big moment.

7:39Stephanie Flanders:Yeah, I know. And it just shows you, doesn't it, how sensitive markets are to every development in the Middle East at the moment. I think it's worth then just looking at what is going on in terms of, you know, are the markets right to have this positive reaction to what Trump's saying? Because I've become now quite obsessed with how things are moved around the world with shipping and everything else and what the alternatives are to it. Because what we have seen is, I think it's something like between 15 and 20 % of global crude oil and gas supplies have been disrupted or suspended as these producers struggle to reroute the flows.

8:19Stephanie Flanders:And on previous podcasts, we've talked about that that has been because of that chokehold of the Strait of Hormuz, which is still a problem. We've talked about the ships being attacked in that area. We've talked about major oil facilities being hit as well. there's also other things going on you've also got the electronic warfare that is really impacting shipping in that area at the moment so this is gps being jammed i've actually got mates in the middle east have been telling me about how this is on a trivial level but it shows what's happening is there when they go out for a run with a gps it's now showing that they've done like 5 000 kilometers on a run instead of what they might normally have done so it is all going on that electronic warfare is also causing chaos for all these ships that are trying to do their job of, you know, taking major energy supplies around the world.

9:16Stephanie Flanders:And I've been looking at what is the alternative here? Because there is, you know, is the Strait of Hormuz, it's still a problem. There's still very limited movement around there. We've heard Trump talk about, well, he's going to send naval ships to help get them through and offering insurance because insurance of these ships is another a big problem. In the meantime, obviously, everyone's trying to work out are there other ways to move this stuff around. And there are two interesting pipelines. So there's a Saudi pipeline, which is an east to west pipeline. It's about 740 miles in length. And it kind of criss

10:01Stephanie Flanders:to the Red Sea in a minute because I think that's probably still problematic too. But the Saudis built it about 45 years ago on the worry that one day Tehran would manage to do what they have done and halt shipments through that narrow waterway. And if you look at how much goes through the Strait of Hormuz, it's about 20 million barrels a day. This Saudi pipeline, if they get it all, the ships in the right places at either side of the port is about five million barrels a day that they can get through. So that might help too. It's not going to obviously do what the Strait of Hormuz is doing, but it might help a bit.

10:39Robert Peston:Can I just ask you before we go to the other pipeline, is the problem when it gets to the Red Sea that there's a risk that the Houthis are going to fire at shipping? Because the Houthis obviously in alliance with Iran. So are there worries that that the shipping, the tankers won't be safe even there.

10:55Stephanie Flanders:Yes. So that's the other thing that's going on. So we've talked on this podcast before about the Red Sea. So that's on the other side of Saudi Arabia, on the Africa side. And it's also a major shipping route connecting the Mediterranean and the Indian Ocean. And it's actually the shortest route by sea between Europe and Asia. And about 15 % of global sea trade goes through it. And what we've seen recently is major shipping companies like Maersk have pulled some traffic from the Red Sea because of the fears that the Iran-aligned Houthis, the Houthi militants in Yemen, could resume attacks on the commercial vessel.

11:34Stephanie Flanders:So that had been a problem. We talked about it last year. They'd only just started to use that route again. And now, MERS, given the concerns about what's happening with Iran, have been rerouting some. And the rerouting would now divert the ships around the Cape of Good Hope to reach Europe. And that is about 10 more days to do that route than it would have been to go through the Red Sea route. And when I remember when we were talking about this last time I was looking up the cost of this, that's something like three million dollars more per ship to go that way because it takes longer. So these are all like the smaller things which could have a major knock-on effect in terms of the cost of these goods because it's an inflationary problem.

12:23Robert Peston:So what's the other pipe?

12:24Stephanie Flanders:So the other pipe is owned by the United Arab Emirates and it's another separate bypass option to the Gulf of Oman. And it's about one and a half million barrels of oil that can travel through that. But again, this all involves getting enough tankers into the ports where the oil ends up. And right now, you've got quite a few of those tankers, super tankers. I think it's something like 25 super tankers who are capable of loading 2 million barrels are being diverted from their original destinations and are heading towards these new pickup points. So they are trying to use this new superpower, which hopefully might buy a bit of time and mean the prices don't go up as fast.

13:09Stephanie Flanders:But, you know, if it all works.

13:12Robert Peston:Yeah, but we're talking about, you know, nonetheless, even if it does all work. Well, not small, but, you know, we're still talking about a reduction in the overall supply. And therefore, we can assume that the oil price would stabilize still at a level much higher than it was before the war. And, you know, one of the things that's striking about what you've said is none of that addresses the, you know, the problem, the gas, particularly from Qatar in its liquefied form, you know, that, as I understand it, has to, you know, could only come out in these super tankers that go through the Straits of Hormuz.

13:53Robert Peston:And so, you know, although there's been a little bit of a recovery or sorry, a little bit of a fall in the liquefied gas price today in the wake of Trump's, you know, it could be over soon remarks. The gas price is still and this is very material for the UK and Europe is still a lot higher than it was because there has you know, there's already been both a reduction in production of gas in the region as a result of the Iranian threat. And, you know, as far as I'm aware, almost no gas is getting through the Straits of Hormuz. This is why Trump reinforced yesterday's message. I mean, not only the point that you were making that there's this 20 billion dollar emergency insurance fund that is made available to provide war cover to shippers who currently can't get war cover from private insurers.

14:55Robert Peston:But, you know, truthfully, insurance is one thing. You're not going to ship through. You're not going to take your ships through the straits if you think the Iranians are going to hit you with missiles, even if you are in in short, which is why Trump is talking about sending, you know, you know, aircraft carriers and American ships into the straits to protect it. At the moment, this is talk rather than action. But, you know, I think we have to assume he would probably do that at some point. But the thing about the disruption to the gas market is, you know, it's not just what it means for the gas that we pay to heat our homes.

15:44Robert Peston:homes. And, you know, at the moment, unfortunately, there does seem to be quite a big risk that the next resetting of the price that we pay for power, you know, in a couple of months or so, that price will go up really quite a lot for British consumers and British businesses. But there's already been quite a big impact, hasn't there, Steph, on businesses around the world that rely on shipments of liquefied natural gas and other products coming out of the region. I mean, talk me through the use of so-called force majeure by some very big companies that basically force majeure is when you basically say, I don't have to honour a contract because I can't get the materials.

16:29Robert Peston:And obviously, if there's a war going on, that's quite a standard trigger for ripping up contracts. But explain what, you know, tell us which companies have been doing this and why.

16:41Stephanie Flanders:Yeah, this is interesting because you're seeing for corporates, the immediate issues are obviously energy costs, input prices, shipping delays, anyone with energy intensive operations or petrochemicals or airlines, logistics, or anyone moving consumer goods around. And now thinking about how it's going to impact them. And as you say, this force majeure now has been used by several big companies. So we've got in the Middle East, it's people like Qatar Energy. They have declared this force majeure on all their LNG shipments, so this liquefied natural gas, because they've been attacked. They have actually physically had attacks.

17:19Stephanie Flanders:Also, you've got petrochemical giants like South Korea's Yirchen NCC, which is the country's largest ethylene producer. Anyone involved in using petrochemicals and gas and energy, the national oil companies in Kuwait, so Kuwait Petroleum Corporation, they've declared force majeure on their exports because they're unable to guarantee delivery. But then if you look outside of the region, this isn't just hitting the Middle East. So you've got it manifesting in other ways. So like insurance no-go zones. So marine insurers now have withdrawn war risk coverage for areas we've just been talking about.

17:58Stephanie Flanders:So the Persian Gulf and any waters near or adjacent to that. So the shipping rates for those Middle East to Asia routes are now at very expensive six-year highs. And some ship owners, as you pointed out, are just refusing to even do it. Then you've got specific material shortages as well. So semiconductors, we talk about them all the time on this podcast. And Qatar produces about 40 % of the world's helium, which is critical for making these chips. So you're then thinking, well, that's going to hit the high-tech sectors in the US and Taiwan, we're everywhere really. Then there's agriculture. We mentioned last time about fertilizers and how important they are and the substances and the chemicals that go into them made in the Middle East.

18:45Stephanie Flanders:And so they're looking at the fact that they can't deliver the chemicals for that. And then construction as well. There's specialist materials used in steel and heat reflective glass, which are being used in major projects around the world. And they're having to freeze construction of those because of the supply chain links. It re-emphasizes the point, which I don't think we talk about enough in life. I always think this about when kids are learning about careers and stuff at school is the supply chain. The supply chain is absolutely crucial to everything. So we can talk about big name companies, but behind the scenes are all the smaller companies who are absolutely critical to the production of things that we use every day.

19:30Stephanie Flanders:And that's where we're seeing the volatility now is because these supply chains are being hit, not being able to be insured or just not even able to move stuff or not be able to make stuff. And that is having a huge impact already.

19:44Robert Peston:So there's tons more to discuss about what this mayhem all means for us after the break.