Could the Iran war trigger an global economic crisis? – The Latest

0:00Nosheen Iqbal:This is The Guardian.

0:09John Collingridge:Stock markets reacting really violently, steep falls around the world. Iran has basically said that anything that passes through the straits, fair game, they'll set it ablaze, I think was the phrase that they used. It's effectively like the world's gas station and there's a huge queue outside it. Nobody can get in, nobody can get out. It feels like a net result of all of this is you have a far more uncertain world. And all that feeds through to higher prices.

0:35Nosheen Iqbal:War in the Middle East is sending shockwaves through the global economy. But why does the price of oil and gas matter so much? From The Guardian's Today in Focus, this is The Latest with me, Nashi Nikbar.

0:51Nosheen Iqbal:Joining me today is The Guardian's head of business, John Collingridge. John, thank you so much for joining us. We are now on day five of this war. And from the perspective of the global economy, it doesn't look great, does it? Now, you're our head of business, so I'm hoping you're going to walk us through this in the most simplest terms. But how have the markets been responding to all the turmoil in the Middle East?

1:15John Collingridge:What we've seen over the last few days, since the attacks over the weekend, stock markets reacting really violently, steep falls around the world. So overnight, the Asian markets fell really sharply. In fact, in South Korea, they had to stop. They used a circuit breaker to stop the market temporarily because the falls were so steep. And then on the other side, you've seen commodity costs, particularly oil and gas, go through the roof. You've seen really sharp increases, particularly in gas, because this region is such a big exporter of oil and gas, and those ships are stopped from traversing through the Strait of Humus.

1:50John Collingridge:And then one other effect that has been really sharp in recent days or is starting to bite is the effects on governments and their borrowing ability around the world. Government borrowing costs are starting to go up. They had been coming down. Governments around the world thought that they had slayed the inflation dragon after the pandemic, after the war in Ukraine. has been a long steady slog to try and bring down those borrowing costs, try and ease the pressure on households and businesses. Now those things are starting to tick up because the fear is big spike in oil and gas becomes a prolonged spike and then that feeds through to higher prices for everybody and inflation.

2:28Nosheen Iqbal:So there is all this focus on the Strait of Homburis which is this sea of water which links the Gulf to the Arabian Sea and beyond. Why is it so vital to the global economy?

2:39John Collingridge:If you think about the Gulf, it is this vast repository of oil and gas reserves. The countries on the Gulf, the Irans, the Iraqs, the Kuwaits, the UAEs, the Saudis, they are some of the world's biggest producers of hydrocarbons and they export them around the world. So the gas particularly that goes from Qatar, one of the biggest exporters of liquefied natural gas. It goes to Asia, it goes to China, it goes to India, to Pakistan. Those countries need that fuel. And the only way they can get gas is in this form of freezing it, putting it onto large, super cool tankers and shipping it through this very narrow strait.

3:20John Collingridge:It's effectively like the world's gas station and there's a huge queue outside it. Nobody can get in, nobody can get out.

3:27Nosheen Iqbal:Well, that's what I was going to ask next. I mean, literally what is happening there right now? I mean, are these tankers all backed up? Is, like you said, is anything coming in? Is anything coming out?

3:36John Collingridge:Missiles have been fired. Drones have been fired from Iran. Some of their proxies, they've hit oil installations around the region. They've hit a Qatari gas plant. Those oil and gas producers are naturally saying, we're going to have to halt production. We're going to have to limit our production. Therefore, all these ships, which would normally traverse through the strait, are either backing up, they're sitting at the ports they can't get through, or if they're stuck in the Gulf, they can't get out. I've seen one estimate there are about 3 ,000 ships which are waiting to pass through the strait in one way or the other.

4:06John Collingridge:And there's usually about 80 vessels a day.

4:09Nosheen Iqbal:And that is now just all in a massive backlog. And you've got the US Navy offering to escort ships through. I mean, how's that gone down?

4:16John Collingridge:Iran has basically said that anything that passes through the strait, any ship that passes through the strait is fair game. They'll set it ablaze, I think was the phrase that they used. So if you're a shipping company, you own this very expensive vessel, you're an oil and gas producer, you don't want to take the risk with your people. You don't want to take the risk with your really expensive vessels to send them through. So it takes a lot of confidence to be able to say, I'll go against that threat from Iran and start traversing there, which is why Trump has said, oh, we'll provide the US Navy to provide a sort of defensive escort along there.

4:49Nosheen Iqbal:John, this is probably going to be really obvious to you, but why does the cost of oil and gas underpin and affect everything? Because it's not just petrol prices at the pump, is it?

4:59John Collingridge:No, oil and gas are the feedstock for the world's economy. You think gas and oil go into heating as well. But then the petrochemicals that are made from hydrocarbons, you've got fertilizer. The Gulf is a huge producer of fertilizer. These fertilizer ships are used around the world. They're one of the things which helps the miracle of modern farming and feeding the world's population. So what you're going to see there is potentially demand for fertiliser from elsewhere in the world goes up in cost. That starts to feed through to prices on the shop floor. You see the oil and gases used to make plastics.

5:35John Collingridge:So plastics are in every part of our lives. The big fear is that if this goes on and there's a prolonged blockade of the Strait of Hormuz, that then starts to feed through to higher prices for many, many, many things.

5:48Nosheen Iqbal:And you're explaining this when we're barely a week in. And as you've said, the markets have reacted violently in your words. But if we believe Trump and that his operation Epic Fury is going to take four to five weeks, or even if we take Pete Hegseth as his word, and it could go on for longer, just how bad do you expect this to get for the global economy?

6:10John Collingridge:The big question right now is how long is it going to go on for? Trump has said earlier this week, four to five weeks, which looked like he was trying to contain expectations. Because the fear on markets is if it goes on for much more than a month, all those oil and gas reserves start to dry up around the world. The supply demand gets out of kilter.

6:29Nosheen Iqbal:So there's like a four-week reserve.

6:31John Collingridge:It's effectively like this four-week window. But beyond that, then you get sort of unconstrained price expectations, inflation starts substantially up. Because I think it is worth pointing out, But the increase in the price of oil at the moment, whilst it is substantial relative to where it was, is not what we've seen in recent years. If you go back to the Ukraine energy price shock, we had for three months in a row, oil above$100 a barrel. It's still sitting like$82,$83 a barrel right now, but it is not where it was. Gas after Ukraine was several magnitudes higher than where it is right now. So it could be far, far worse.

7:09John Collingridge:It's quite strange. We're sort of looking at this. Traders around the world are thinking, how long will this go on for? There's a kind of phony war going on as people wait to see, will it get really bad? But they're waiting to see whether Trump finds an off ramp. And when it comes to Trump, I mean, he's approaching the midterms in a few months.

7:27Nosheen Iqbal:And I wonder what impact this has on the American people. When do they eventually start feeling this in their pocket? And how is that going to figure in his calculation of what he does next?

7:36John Collingridge:So I think it's worth pointing out that America is relatively insulated from energy price shocks because over the years, as we know, it's exploited shale gas. And so it's self-sufficient largely on energy, but it is not immune to energy price shocks around the world. And we've already started seeing prices at the pumps in the US start to creep up. Trump's a businessman. What does he care about? He cares about prices at the pumps, cares about how things look on telly, cares about stock markets.

8:05Nosheen Iqbal:Right.

8:06John Collingridge:Those sort of things. When he switches on Fox News in the morning and he sees leading on prices at the pumps, queues at the forecourts, if that starts to happen, stock markets falling, he makes a calculation. This is starting to look potentially bad for me as the president who wanted to bring down prices for Americans.

8:22Nosheen Iqbal:But presumably it would have always have led to some sort of inflationary cost. I mean, and you kind of wonder about how far he's willing to go and to take this war, given that, as you say, he's a businessman, he's into money and the bottom dollar and profit.

8:37John Collingridge:Yeah, we've been looking at it thinking, that's the big question, like how does this end? Where is the off ramp? It feels like a net result of all of this is you have a far more uncertain world, Trump has gone like a wrecking ball through global norms, hasn't he? He's upending rules around war, around trade, around the law, and all that feeds through to higher prices.

9:00Nosheen Iqbal:John, you've outlined just really clearly how much damage this is going to do to the global economy, the impact of which I guess we'll all feel trickled down at some point in some way. But there are winners in war, aren't there? And I just wonder who is coming out on top on this, and where are the profits being made on a US-Israeli war on Iran?

9:22John Collingridge:Yeah. If you're a defense company right now, particularly one which makes drones, you're probably thinking, you're starting to see this is potentially very good for my business. If you're a US liquefied natural gas shale exporter, it's very good for you as well, because they can continue to export. They've been a massive exporter. The UK takes a lot of shale, liquefied natural gas from the US. Right. Or if you're Russia, you'd been looking at the oil price. The oil price was, I think, around Christmas, it had come right down and it was proving a real problem for Russia and for its war machine.

9:54John Collingridge:These prices are helpful for Russia. And also, it's that sanctioned oil. The likes of India had been saying the pressure from Trump to stop buying sanctioned Russian oil. At what point will governments around the world start saying, well, actually, I just need the oil. And if it's Russian-sanctioned oil, so be it.

10:12Nosheen Iqbal:And do you think that's likely that might happen even here in the UK?

10:15John Collingridge:I don't think in the UK. I don't think Europe has been pretty vocal, unequivocal over the past few days about we're not going to go back to a world of Russian hydrocarbons. Another net effect might be the countries start burning coal more.

10:29Nosheen Iqbal:Right.

10:29John Collingridge:Can't get gas, burn coal.

10:32Nosheen Iqbal:Wow.

10:32John Collingridge:Which is a scary thought.

10:35Nosheen Iqbal:Volatile times. John, thank you so much for your time. Thank you. That's it for today My huge thanks again to John Collingridge Our Head of Business Thanks for listening to this episode of The Latest Today in Focus will be back with you as usual tomorrow morning And we'll be back tomorrow night This episode was presented by me, Noshi Nikbal The producers were Bryony Moore and Nicola Alexandru The senior producer was Ryan Ramgobin And the lead producer was Zoe Hitch

11:03Nosheen Iqbal:This is The Guardian

11:08Thank you.