Countdown to a Global Energy Shock

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1:38Ziad Daoud:Bloomberg Audio Studios. Podcasts. Radio. News. We have the strongest and most powerful by far military in the world. And we will easily prevail. Well, we're already substantially ahead of our time projections, but whatever the time is, it's OK, whatever it takes.

2:10Stephanie Flanders:I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. One common element of that Trump-shaped economy is there's a wide range of possible outcomes. Recording this Wednesday morning in Europe, the range of potential consequences from the conflict underway between the US and Israel and Iran looks about as wide as it could be. And we're focused for the next 25 minutes or so on just the economic piece of that, the human and social impacts we leave to others.

2:52Stephanie Flanders:But since America's first strike on Iran on Saturday, oil and gas traders have watched as in many ways the worst case scenario unfolded for Middle East energy supplies. That critical Strait of Hormuz is effectively paralysed. Saudi Arabia's largest oil refinery is closed. and Iranian missiles and drones have shut down the largest liquefied natural gas refinery on the planet in Qatar. Predictably, oil and especially gas prices have jumped, stocks have taken a hit and long-term interest rates have jumped as traders see less chance of further cuts from central banks. All of that could deal a severe blow to the global economy at an already uncertain time.

3:35Stephanie Flanders:But what matters, of course, is what happens from here. As I record this, it still seems perfectly possible that Washington and Tehran will somehow find an off-ramp, oil will settle back to its pre-conflict average of around$65 a barrel, and the global economy will dodge a blow. But as you'll hear in this conversation I had on Tuesday with two of Bloomberg's sharpest analysts, there are some much darker scenarios out there which could be a lot more damaging, especially for countries without a lot of backup plans. That's one lesson I took from this discussion, that the negative impacts of this mess will not land evenly and may indeed land especially heavily on some key American allies, Europe for one, but interestingly also South Korea, Taiwan.

4:23Stephanie Flanders:Russia, by contrast, emerges as a big winner, both its budget and its war effort in Ukraine. Another lesson, it really matters how quickly the US can reopen The Strait of Hormuz. With me, I'm delighted to say Javier Blas is back, Bloomberg Opinion columnist covering energy and commodities for Bloomberg and the co-author of The World for Sale, Money, Power and the Traders Who Barter the Earth's Resources. Javier, thank you very much. There's almost smoke coming out of your ears because I know you've been working very hard the last few days, but I really appreciate you.

4:57Javier Blas:Thank you for having me.

4:59Stephanie Flanders:And in Dubai, Ziad Dawood, Chief Emerging Markets Economist for Bloomberg Economics, Mike's also a regular guest on this show. Ziad, lovely to see you.

5:07Ziad Daoud:Wonderful to be here.

5:10Stephanie Flanders:We're going to talk about the sort of shortish term economic impact for the sort of broader economy around the world and also for oil markets in particular, and then maybe get into some of the sort of longer term stuff. But Ziad, I know we have what we call this global shock model, which allows you to put different scenarios for the global economy into the model and work out what the impact is of, for example, this kind of increase in energy prices. What do we get if we just feed in what's happened in the last few days and assume that it sticks around for a while?

5:46Ziad Daoud:We published a piece on this with my colleagues, Jamie Rush and Bjorn from Roy, and actually spent some time before coming to the podcast playing some more of the shock model. And here's the conclusion. It is very, very hard to generate a significant recession in the US with oil prices alone. Yes, you can get two consecutive quarters of negative growth, but the magnitude is rather small. So for the US, the shock from oil is not a growth shock, it's more of an inflation shock. That is different to other countries. In the UK, in the euro area, in China, and possibly even in India, higher oil prices would mean slower growth and mean higher inflation.

6:23Stephanie Flanders:You almost sound disappointed in saying you just haven't been able to get a recession out of this, no matter how hard you try with the model. We're very glad, obviously, that we don't get a recession out of this. But what are we looking at in terms of inflation, say, in Europe and the UK as a result of this and the impact on growth?

6:39Ziad Daoud:So if I plug in an extreme oil price increase, which is$108 oil price, if you're thinking about the euro area and the UK, we're talking about a growth shock, which is like half a percentage point at peak, and an inflation shock of around one percentage point. And these are not negligible numbers, but, you know, for the US, it's much smaller than it used to be.

7:00Stephanie Flanders:So it's depending on where you are, it's a kind of half a percentage point on the inflation rate, maybe a little bit more in the US, and then a sort of somewhat less than that on the growth rate, at least if you're in the Europe or UK. And I do notice one immediate result, which is a bit closer to home, is investors were expecting, and economists, we were expecting, a second interest rate cut this year in the UK, which obviously would feed into a lot of people's mortgages. And as of today, there's almost no expectation that's going to happen in the next month. in the US is less affected because it might get the higher inflation, but then that would stimulate lots of those shale producers to get going?

7:43Yes.

7:44Ziad Daoud:So I think there's a lot of analogies to the Iraq war in 2003. People are comparing the 2026 war on Iran to the 2003 invasion of Iraq. One thing that has changed significantly in the US since then is position as a net oil exporter. In 2003, the US was a huge net oil importer. Today, it's a small net oil exporter. What that means is that when you get an oil price shock, some segments of the US economy benefit from this. Now, I know the shock in aggregate may not seem so big, but in economics these days, we think about inequality as well. So it doesn't spread out evenly. The segments of the US economy that benefit from our oil prices are energy companies.

8:27Ziad Daoud:But there's a whole segment of consumers in the US who will suffer from higher oil prices as fuel prices start to increase. So there is an inequality effect here. And it matters. It matters because President Donald Trump, when he came to office, if you think about his economic agenda, lower interest rates was definitely up there and lower oil prices were there. And this war puts a threat to both.

8:51Stephanie Flanders:And we have certainly heard some concerns around that in the US. Javier, Ziad has mentioned one of the big things that means that we tend to say oil price shocks are not what they used to be in their impact, namely that the US is now a big exporter of energy, is not nearly as reliant or at all reliant really on Middle East oil. But we are seeing a reaction in markets to the disruption on the Straits of Hormuz, which are still pretty important to the global economy. So what are the risks there? How are you looking at it?

9:21Javier Blas:So far, so good, all considered. I mean, you have asked me a decade ago to in mind the market reaction to what has unfolded over the last few hours since Saturday. I would have expected much, much higher oil prices, certainly about$100 by now. And I don't want to sound this as a celebratory that it has not happened. I mean, the price of oil has increased quite significantly already. We are talking about already a 10-15 % increase since the hostility started, and it's still early hours. I have kind of two scenarios on my mind. It's one that I'm not particularly concerned because we don't get to$100.

10:01Javier Blas:And if we get thereabouts, this is not like a long-lasting price shock. We are$80 to$100 for a couple of weeks. It's nothing for the global economy. I'm expecting still I get a lower mortgage rate this year. But this is a thing that the United States has four or five days to reopen the Strait of Hormuz before it gets really, really ugly. I mean, we can all make worst case scenarios and best case scenarios. I mean, the best case scenario is that by the end of the week, the oil market is lower because the Strait of Hormuz has reopened. The worst case scenario is that this lasts three months and we don't get a drop of Middle at least an oil on that period, in which case, I don't want to give ideas, but I think that Seattle needs to put an oil price on the shock model that starts with a two and probably followed by a five and then a zero.

10:54Stephanie Flanders:So I think lots of people are familiar with the shale revolution in the US and what that's done for the US. But a lot of people in the last few days have highlighted that China, for example, gets a significant chunk of its oil from Iran. And India, other countries, also potentially quite reliant on Straits of Hormuz for their oil, they also have more alternative routes for the oil and also alternative sources of energy. Is that the difference?

11:25Javier Blas:I think that we all have a skin on the game, on the Straits of Hormuz and what is happening just generally on the Middle East. Wherever you get the oil, it doesn't matter because it's going to be priced on a global market and therefore you are affected by the same price. even if you are importing all your oil, say, from Brazil, far, far away from the conflict across the Atlantic, you will be still paying a global price that is determined by what is happening on the Middle East. So effectively, everyone has a skin of the game. China is the largest buyer of crude oil from the Persian Gulf. So it has a lot of interest in that that remains open.

12:00Javier Blas:And it was interesting that yesterday the Chinese authorities were on the phone with the Iranian authorities. And this morning, Beijing has put a statement just basically reiterating, we want to see the Strait of Hormuz open. Of course, it was a Chinese statement. So it was on the one hand, on the other, just basically asked all the parties, including the United States, to stop bombing each other. But the focus on the shipping lanes from China was not missed. And I wonder whether at some point we are going to have, I think that rather quickly, and I believe that that's happening already behind the scenes, We have a conversation that is going to involve multiple navies, multiple regional players trying to keep the Strait of Hormuz open for the sake of the global economy.

12:45Javier Blas:Whether we can see something similar to Ernest Wild, which was an operation in the 80s where the U.S. provided escort to convoys of oil tankers in and out of the Persian Gulf. I think that that is one of the things that the industry is right now discussing with the U.S. government.

13:03Stephanie Flanders:Zia, I mean, you're sitting in Dubai. We've had quite a lot of discussion here. You know, of course, it's been a sore point for the UK government. There's a lot of talk, sort of anecdotal evidence of people moving to Dubai. And it's more than anecdotal from a Bloomberg standpoint, because we see clients, hedge fund investors, moving their accounts from London to Dubai. But part of that was that Dubai was felt to be not just very low tax or no tax, but safe and secure. What's at stake if economically for Dubai, which doesn't have, relative to its neighbours, doesn't have a huge amount of oil, if you have a lot of tourism and airplane disruption over the next few months, and people just generally stop thinking it's a safe place to go, or at least think it's a less safe place to go?

13:54Ziad Daoud:Yeah, I think in terms of the business model, I think Dubai and the rest of the GCC is trying to diversify away from oil, and Dubai has basically succeeded in this. And one sector where the whole region has succeeded is moving into logistics, having big airports, big airlines, big ports. That is obviously that model is under, that business model is under threat now. My hunch for Dubai is it's probably going to be, the business model is going to be more resilient than we expect. And it's more resilient because I think if you're a logistical hub, it's hard to change geography. You're sitting somewhere between Asia, Europe, and Africa.

14:29Ziad Daoud:you probably need somewhere in the middle to be a hub. I think a lot of Dubai's residents do like living here, and therefore they're more sticky than we think, although a lot of them are foreign. And I think also if the conflict ends, whenever that ends, Dubai does tend to benefit from conflicts and money that flows in from conflict zones. So I think the business model I'm less worried about. What I'm worried about is the security model of the GCC, not just Dubai, but the whole of the Gulf. You know, one pillar of the GCC is the American security umbrella. And that did fail in the past, and that's definitely failing now.

15:03Ziad Daoud:Let's remember, under the current Trump administration, the GCC hosted Trump for his first presidential visit, excluding the Vatican. They have pledged trillions of dollars to Trump in terms of investment and purchases. And even OPEC +, which is led by Saudi Arabia, started to increase oil output significantly shortly after Trump took office, after months of delay. And what did they get? Qatar got attacked directly by Israel back in September. When it came to lobbying between the GCC, which did not want a war to start with Iran, and Israel, which wanted to start a war with Iran, the GCC came second to Israel.

15:40Ziad Daoud:And now is the question about Iran. Whatever system ends up happening, ends up taking place in Iran, whether it's a current system or a new one, they know that if they want to lash out at the US, the GCC is sort of a soft spot that is nearby. And I think that security model will probably be revised in the GCC when this war ends.

15:59Stephanie Flanders:And we should just remind people, so the GCC is the Gulf Cooperation Council, which is basically all of the countries that you would think would be in a group of countries in the Gulf. Javier, there's a few other pieces that we should unpack that are also perhaps a little bit less familiar to people. and gas was the one I wanted to ask you about because a liquid natural gas, a liquefied natural gas has obviously been sort of one of the big newish players in the energy scene and it seems like certainly from reading our coverage was much less prepared for what's happened in the last few days than the oil markets.

16:34Stephanie Flanders:So just talk us through why did we get that significant response and what's potentially the impact for countries that are quite reliant on this gas?

16:43Javier Blas:LNG is dominated by Qatar. They produce 20 % of the world's LNG. And with oil, we have a couple of bypass routes where oil can get out of the Persian Gulf. There is a pipeline that runs from the eastern coast of Saudi Arabia into the west coast, so effectively from the Persian Gulf into the Red Sea. That is a deep bottleneck in some oil will continue leaving the area. There is a pipeline effectively from Abu Dhabi area to Fujairah, which is in the Arabian Sea outside the Strait of Hormuz. So that kind of provides some relief for the oil market. It's not like shutting down the Strait of Hormuz doesn't shut down completely the export capacity of some of the countries.

17:28Javier Blas:With LNG, we do not have that advantage. Everything has to go by tanker through the Strait of Hormuz. And I think that also there is a lot more concern about the facilities themselves. I mean, these are very concentrated facilities in one single point in Qatar. We have oil facilities all around the Persian Gulf, multiple oil fields, multiple oil refineries, multiple oil ports. If one is attacked, we still have some resilience. Here we are talking about something that is an area of 50 by 50 miles where 14 huge LNG trains concentrate in Qatar. You attack that and it's goodbye for 20 percent of the world's LNG capacity for years, not weeks, not months, but years.

18:15Javier Blas:So that is what the concern is. I mean, good news is we are in the shoulder season for natural gas. You are going to have a problem with natural gas supply. Right now, it's about the best time of the year because in the northern hemisphere, we are getting out of the winter into the spring. So demand is literally dropping by the day. And in Asia, it's not yet the summer. So the air conditioning needs are not really great. And we use natural gas in Asia to fire power plants that produce electricity to run air conditioning. So we have a bit of time. And perhaps that's the reason why the market has not reacted as much as you will expect.

18:54Yes, prices went up 50 % yesterday, 20 % today, but we are around 50 euros per megawatt hour.

19:01Javier Blas:We reached 350 during the crisis in 2021, 2022. So it's not as bad, but it can get really bad on LNG. And again, it's the duration of the disruption. A few days, the system can manage. There is enough buffer everywhere. where if by kind of end of week, say Friday, the market starts to get convinced that actually we are really hitting into a four or five week period, then I think that things change a lot. What if this is actually four or five weeks, we are talking about 40 days rather than 12? That materially changes things. And in LNG, it will be dramatic. And in a few days, it should be said,