The Long-Term Global Economic Damage From the War With Iran

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1:56Stephanie 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 shaking the global economy, and what on earth is going to happen next. Events are moving fast in the US-Israeli conflict with Iran, but as of this recording, Wednesday afternoon in London, the ships in the Hormuz Strait are not. We have a ceasefire declared overnight, the implications of which policymakers, investors and anyone with a ship stuck in the Strait of Hormuz are all working in real time to understand. Meanwhile, Brent crude prices have fallen back below$100, but still about a third higher than before the start of the conflict.

2:40Stephanie Flanders:And some bombs are still flying, while a chunk of global oil and gas production is still offline. In fact, I saw Exxon reported this morning 6 % of its global production in the first three months of this year have been knocked out by events in the Persian Gulf. Well, if we just get to the Strait of Hormuz, 800 ships are stuck right now. There's usually around 130 passing through every day. They will not get cleared overnight. And it looks as though whatever happens, what used to be a relatively simple act, passing through that narrow strait is not going back to normal anytime soon, if ever. And whatever happens, the reputation of the US as the guardian of global shipping is going to be forever damaged.

3:28Stephanie Flanders:Indeed, of all the things Donald Trump has done to disrupt global commerce, from levying punitive tariffs to tearing up trade deals, this change in the US role with regard to global shipping may actually have the most lasting impact. That's what we're going to get into. Not exactly what's going to happen in this conflict, let alone gaming out who may have won this particular round, but unpicking the current state of play for shipping in the Gulf and the knock-on effects for every business everywhere that relies on fuel being put in a tank to get their products to consumers, but also what did ensure free passage of goods through the Strait of Hormuz and other shipping choke points around the world before the end of February?

4:15Stephanie Flanders:And what are the implications if that underpinning for free transit is now absent? So here in the London studio with me, I'm delighted to say we have Brendan Murray, our global trade czar, who coordinates all of Bloomberg's global trade, supply chain and geoeconomic statecraft coverage. Good to have you back, Brendan. Thanks for having me. And joining us from Nairobi is Peter Martin, Africa and Middle East correspondent, who tends to dabble in many other things, including defence and intelligence. Peter, it's great to have you. Thanks for having me. We know that there's a lot going on, and I want to have two parts to this in the sense of thinking about what we're seeing already, zeroing in on the sort of transportation, shipping aspect of the impact of the Iran conflict and specifically that effective closure or much constrained passage of ships through the Strait of Hormuz.

5:13Stephanie Flanders:I was also sort of interested in thinking more broadly of the US role in sort of underpinning the free passage of shipping through places like the Strait of Hormuz. Peter, you wrote about that recently. So we will get into that, But Brendan, let me check in with you first. If I ask you, as our trades are, what the impact of this conflict and the situation in the Strait of Hormuz has been on global transportation? How would you summarize that? Well, it's still mainly an energy crisis. The ceasefire that was announced presumably would allow some ships to start going through the Strait of Hormuz again.

5:55But that's going to be a long process. Many of the experts that we're hearing from say it could take many months. And so the knock-on effects are things like jet fuel prices and diesel prices and gasoline prices rising, not just in the region and in Asia where they are the most, the biggest buyers of Middle Eastern energy, but also in Europe and the U.S. So most Americans would be able to tell you what the price of a gallon of gasoline would be within a nickel of their local station, the current price. But they couldn't tell you what the price of diesel has been. And diesel has actually gone up much more steeply than the price of gasoline has.

6:39And so that's sort of the, you know, literally the thing that fuels the industrial economy in places like Europe and the U.S. So the knock-on effects were being seen fairly quickly, just not at the doorstep of the average American.

6:56Stephanie Flanders:Now we're learning there's usually a reasonably stable margin between the cost of the crude oil, and we always think in terms of Brent crude. But of course, no one buys Brent crude except refiners. Everybody else is dealing with refined petroleum products. That had always been quite a stable margin. And then what we saw was it sort of exploded as we not only saw an increase in Brent crude, but we also saw question marks about actual supplies of those refined goods and even some questions about ports potentially running out of this, the fuel that the container ships run on. Brendan, I mean, how much has that been a feature?

7:34Yeah, that has been a huge issue for, as you mentioned, the container shipping industry. One of the big carriers, a German company, said recently that this was costing them$50 million a week. So you start adding up a five-week-long conflict, and you're talking about billions of dollars. Delta Airlines recently said that the jet fuel surge is going to hit them to the tune of about$2 billion. And so we've seen a conflict that's been pretty contained in time frame have very significant and far-reaching impacts to companies that, as much as we like to think that we have gone green, they still rely a lot on fossil fuels.

8:21And this is really hitting their margins hard.

8:22Stephanie Flanders:I heard someone talk about the air in the pipe. If we normally have, whatever it is, 135 ships going through the Strait of Hormuz a day, these weeks where you haven't had that 135, many of those ships would not have arrived yet anyway. So people are only going to see the lack of them maybe in six weeks or a month's time. What is the delayed response, even if we start to see quite a lot of shipping go through as a result of this ceasefire? I think what you've seen, especially in Asia, at least initially, was governments saying to people that they should conserve their fuel use, turn their lights off when they're not using them, and to try to control exports so their domestic supplies wouldn't be run down so much.

9:09And so what we're going to see if the strait reopens is those vessels that have crude oil or LNG reach their destinations and basically replenish supplies back up to normal levels. And the question then will be, can that cycle continue to where we're not just in this back and forth of domestic inventories being run down and then just being refilled to normal levels? that's where you see the reverberations really spreading out more widely than Asia. You have, you know, it takes 30 or 40 days for a vessel to get from the Middle East to northern Europe. And so that's essentially the length of this conflict.

9:55And so there's a sort of bullwhip effect, if you will, that will kind of reverberate back and forth until supplies can be stabilized.

10:04Stephanie Flanders:Finally, just on this point, you mentioned, Brendan, that in the U.S. you wouldn't necessarily see it, although we have seen gas prices go up. But you did write a piece about how the trucking industry was being affected in the U.S. You compared it to some of the stresses that we saw following COVID and the war in Ukraine. So how is U.S. freight being affected? Well, at the moment, there's an indicator we look at that has three components to it. One of those is transportation costs and capacity. The other one is warehouse costs and capacity. And the final one is inventories. And all three of those measures, it's called the Logistics Index, all three of those measures are spiking higher at the moment.

10:51The latest reading in March showed that there's a real strain in the logistics capacity at the moment. And that just means higher prices for everything that needs to move from point A to point B, particularly imports that have a larger portion of their price being the transportation factor. So the reaction, especially to higher diesel prices, was pretty immediate. And the capacity this time around is tighter than it was before because we were in COVID and there was some excess capacity around. And so this time around, there may not be the slack that can absorb this particular shock if what we end up with is something that kind of muddles along here for months.

11:38Stephanie Flanders:I'm so glad we have you. I think of you as the kind of real world correspondent. You know, we often talk about these kind of, you know, grand terms about the global economy, but you spend most of your time thinking about physically how long it takes for things to get places and what they need in order to do that. And we've had to care about that more in recent years. Pete, stepping back from that, we're now looking at a very uncertain state of play in the Strait of Hormuz, with many claiming it's still that Iran has no right to be coordinating, constraining, maybe charging for passage through that very narrow strait.

12:15Stephanie Flanders:Just remind us, what was the situation before this conflict? Really in the decades since the Second World War, the US has seen itself as the guardian of safe passage for ships all over the world. So through the Strait of Hormuz, but also the Panama Canal, Suez, the Straits of Malacca. Sometimes the U.S. has felt that the burden has fallen unfairly on Washington in doing that. But in reality, the presence of the U.S. Navy around the world, anti-piracy operations of the kind that we saw off the coast of Somalia about a decade ago, those kinds of military operations have really kept trade flowing through the world and have been a crucial means of underpinning American power and also American prosperity.

13:01Stephanie Flanders:What's the international law that the U.S. was underpinning by ensuring that passage? The international law is the United Nations Convention on the Law of the Sea, which the U.S. helped to craft but never actually ratified. But it's the basis of free passage around the world. And the U.S. has really been the primary enforcer of that law, despite the legal technicalities. I mean, it's interesting because they haven't signed up to it and neither is Iran. And yet we'd somehow have a situation where one was securing it and the other was abiding by it. What's the practicalities of moving through a different system now if Iran is suggesting it's going to have a permanent role in controlling access to the Hormuz Strait?

13:52Stephanie Flanders:I mean, you know, what does that look like? I think in truth, no one knows, including Iran or President Trump. and it would be incredibly problematic clearly an increased cost for shipping companies looking to move goods energy etc through the strait and i think in the eyes of many also potentially illegal because uh this is not something that countries are supposed to do when the u.s talk about we can't be the world's policeman this sense of the underpinning freedom of navigation What's the broader implications of the US backing away from that? The implications are pretty profound. So I've spent a lot of the last week speaking to Asian officials, European officials about how they view this.

14:38And as you said, it's something that's often taken for granted, but really without the free passage of goods around the world, the global economy will come grinding to a halt. And I think that's seen most acutely in Asia, where the US has spent decades talking about the need to maintain freedom of navigation, the fact that China could pose a threat to that, the fact that the global economy would suffer if it did so. But the reality is now that lots of America's partners in Asia and in Europe too are looking at the US's actions and starting to wonder if really Washington does provide the kind of stable guarantee for freedom of navigation that they've always assumed it did.

15:32Stephanie Flanders:the u.s clearly wants to make sure it stays open or is reopened but if you're iran it's not clear that the u.s actually is minded to take the actions needed to do that i mean there's been no operation that's been undertaken in the strait of hormuz to underpin that you know it would be from a military perspective, incredibly complex to do so. Strait of Hormuz is extremely narrow. It's long. Ships have very limited maneuverability. The water is shallow, which means that it's easy to mine. It's also, it's surrounded by mountains, which makes it easy to hide missiles and drones. So all of these things mean that militarily, it would be very difficult for the US to secure the strait.

16:17The option that lots of people talk about is escorts of ships. But before this crisis, there were about 140 ships per day moving through the strait. And it's clear that the US, without Allied backing, doesn't have the ability to escort all of those vessels. So really what's required in the eyes of most experts is some kind of political solution, a ceasefire, or a peace deal, which allows safe passage to resume.

16:43Stephanie Flanders:I think if you're Iran, you have an interest in ships still passing through. But if you can make money out of that, that seems like quite a good and potentially constrain who goes through, but also charge people to go through. That seems something that they are contemplating even doing in some cases. We had some reporting last week about the details of negotiating potentially with cryptocurrency payments to the Iranian military in order to pass through. Do you get the sense that that is becoming more of an official process? It does seem like they're attempting to formalize it. And President Trump has even hinted that the U.S.

17:27may in some way be involved in some of those negotiations, although the details are extremely murky at the moment. I mean, I kind of think of it as a two-pronged advantage for Iran. There are economic benefits they can derive from the situation, but there's also the constant threat hanging over the US and the rest of the global economy that they could close the strait again, which I think has proved to be a very potent deterrent.

17:55Stephanie Flanders:Brendan, you spend more time than any of us talking to shipping companies, and I saw that one of the world's biggest shipping companies advised ships today not to do anything without talking to the US and the Iranians. I mean, there's no sense that it's a safe thing to do yet to go through. Do you have a sense of, are they now reconciling themselves to paying to go through the strait? How are they thinking about it? Yeah, I think they're going to react very slowly given the sheer financial value of what they're carrying and the people on board. It's very murky at this stage. We don't know how the Iranians are going to process the paperwork.

18:40Apparently they're looking at manifests and cargo history and sort of what your relationship is to the U.S. and Israel in the past. So if what we end up with is some sort of toll system, just to follow on what Peter said, the Iranians will wind up picking winners and losers to a certain extent. The Chinese own a lot of ships and so do European companies in European countries. So, you know, we could see this geopolitical struggle that the U.S. is in with mainly China, but, you know, more broadly kind of playing out right there in this waterway where Iran says, you know, the Chinese get the first five slots this morning and the European companies, you know, can go this afternoon.

19:27And you run into this situation where Iran dictating the terms of transit is going to get obviously very costly and unpredictable. And the shipping companies, their number one priority is can they get through safely? And, you know, that's going to be a very uncertain process if this is what we end up with going forward.

19:51Stephanie Flanders:So, and I mean, it's striking because it's one of the industries that the US was keen to get back into and try and build some kind of capacity. Because as you say, just in terms of global shipping, those massive container ships, they're pretty much all Chinese or maybe South Korean. But it's not going to be much good to be a US container ship if you're not going to be able to get through the strait. Still with you, Brendan, we had talked the other day actually on this show about, you know, okay, Iran has shown that it can use this as a very powerful bargaining chip. and you can't help thinking they'll use it again.

20:22Stephanie Flanders:But by the same token, you'd expect shippers, companies, businesses to all think about alternatives so that they're not in this position again. How do you think the industry will be thinking about avoid getting around the Strait of Hormuz in the future? Yeah, I think one of the lessons coming out of this is going to be a lesson that people learned after COVID and after the Russia full-scale invasion of Ukraine. And that's you can't have all your eggs in one basket. And that's not just, you know, having one supplier in one country. It's we have to be able to get goods in multiple different routes through multiple different transportation modes.

21:04And we need to build in that extra resilience that we already probably did after COVID and after, you know, the Russia-Ukraine war unfolded. So this is just going to be another lesson in self-reliance, independence when it comes to your supply chain, resilience in your supply chain. And now that this geopolitical cloud of uncertainty hovers over the global economy, how can we make sure our supply chains are robust enough to withstand a five-week closure of the Strait of Hormuz? or there are a lot of straits and a lot of waterways in the world, and a lot of them are in unfriendly places, not just in the Mideast.

21:48And so I think you're going to have contingency planners going back to the drawing board and saying, OK, this is now a new risk that we have to factor in, and it's going to be a costly one if we don't prepare for it.

22:02Stephanie Flanders:It does strike me that one sector that does very well out of all these developments is the insurance industry. Are you seeing the costs of premiums and even taking out of insurance going up? Yeah, definitely. Those are some of the key players in all of this. They will ultimately decide, the insurers will, whether a ship is cleared to go through. And if it's not, then those ships will not move through a zone that the insurers feel isn't safe. And so that just gets added into the overall cost of transportation and ultimately what importers and exporters pay. And so they have a pretty immediate surcharge that they can slap on the price of a cargo that factors that in.

22:48And so we'll have to see whether the risk goes down and whether Iran lets ships move through. But the insurance factor is definitely going to be one that we'll have to watch in the weeks ahead because not many people think that the risks are going to go away very soon.

23:08Stephanie Flanders:And if you even look at the statement from the Iranians today, the fact that you can now pass through the Strait of Hormuz in coordination with the Iranian military authorities doesn't, I'm sure, instill a great deal of confidence in the typical kind of container ship pilot. But Brendan Murray, thank you so much for talking to us. I know when you're dashing off to a flight, we really appreciate it. And Pete Martin in Nairobi, thank you so much. Thanks for having me. Thanks for having me.

23:49Stephanie Flanders:Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Bloomberg Global Trade Editor, Brendan Murray, and Middle East and Africa reporter, Peter Martin. Trumponomics was produced by Samasadi and Moses Andam with help from Amy Keene. And sound design was by Blake Maples and Kelly Gary. And to help others find and enjoy this show, please rate it, review it highly wherever you listen.

24:21Thank you.