How an energy crisis unfolds

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0:38If you're listening to this here podcast, you're maybe driving your car or walking the dog or just generally going about your life as usual. Happy days. But in large parts of the world, the energy crisis coming from the war in Iran is really starting to bite. In the Philippines, people are being asked to work from home. Thailand is asking residents to turn down their aircon. Zambia has declared a fuel emergency. Pakistan has kicked off its cricket league to empty stadiums as people try to save on super pricey fuel. In Europe, airlines are warning they may have to cancel flights in the summer. It's everywhere and it's pretty grim, especially for poorer countries.

1:21And even in a best case scenario where world peace breaks out tomorrow, You can't just flip a switch and get supplies back to normal. Today on the show, who's really feeling the pinch and how bad is this going to get? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets economist here at FT Towers in sunny London, about to get out of here for four whole days of a super long holiday weekend. And joining me in the studio, it's another Brit takeover, folks. we have Malcolm Moore, the FT's energy editor, and a very busy man, taking time away from the fire hose of energy market news to tell us muggles what's what.

2:03Malcolm, thanks for coming.

2:05Malcolm Moore: Our pleasure to be here. We know you've got a lot on your plate. Now, so one thing that I keep mentioning on this pod is that when I talk to people in stock markets, they're like, la la la, taco trade, everything's fine, I'm sure this is going to work out. When I talk to people in the energy market, they're like, holy moly, I cannot overstate how bad this situation is. How much are people in your world freaking out right now? Yeah, I mean, I think that they've been freaking out for probably a month now, let's say. You're absolutely right. The energy world sees how much we all depend on the Middle East for our oil and for our fuel and actually for a whole range of other things.

2:46Malcolm Moore: you know some of which have been mentioned but but some of which are kind of being ignored a little bit you know helium for example very important for chip making a lot of that comes from the Middle East so we depend on the Middle East for all sorts of things and the energy world can see it because they're trying to manage getting hold of these supplies in a world where you know a fifth of them have just been knocked out. Yeah because it can't get through the Strait of Hormuz and that's just that. Exactly. So I was reading your story today that you did with our colleague Leslie Hook about how oil traders went into this situation.

3:19Basically, just like the rest of us, they called this totally wrong, right? They were all expecting oil prices to fall further over the course of this year. And whoops, that did not work out.

3:30Malcolm Moore: So let's just go back to the beginning of this year. At the beginning of this year, everybody was saying there was a glut in the oil market. If you remember around the turn of the year, the Brent oil price, so Brent is the sort of international benchmark, the Brent oil price was around$60 a barrel. And everybody was saying, okay, it's going to be$60 a barrel all year, and oil company is going to really struggle. How's anybody going to make any money in this environment? In the US, you had people in the shale patch saying, well, we're going to shut down. We're not going to produce anymore. The world was supposed to be awash with oil.

4:09Malcolm Moore: And then, of course, we had little taste of unpredictability with Venezuela. Yeah. And so that but that was pretty brief, right? You know, the Venezuela episode didn't last very long. And everyone's like, oh, OK, OK. We've all forgotten about that. Yeah, yeah, yeah. It's fine. These things, you know, and if anything else happens, maybe that will also be brief. And I think the expectation, there was obviously a lot of signaling going into the Iran war that the U.S. was going to do something right. They were moving aircraft carriers. They were moving troops into position. So everybody could kind of see stuff.

4:43Malcolm Moore: But I think there was still an assumption that, okay, what's the worst case scenario? Worst case scenario is maybe it's going to be a short, quick thing. Nobody thought, oh my God, this is going to go on for months. And the main export route for Middle Eastern oil and gas is going to be knocked out. And the world's biggest liquefied natural gas facility was going to be hit by missiles. Nobody had that on their bingo card. Yeah, yeah, even the pros. And so, you know, in the UK, everything looks pretty normal, right? You go fill up your car like perfectly normally. It's expensive, but you go and fill up your car perfectly normally.

5:21There are parts of the world, though, that we've done some really good coverage on this, I think, at the FT. There are parts of the world that are really feeling the pinch. Now, are they running out of the stuff? What is going on here?

5:33Malcolm Moore: So let me take you through the numbers very quickly. And everybody's got slightly different numbers, but I'm just going to use the numbers from a company called OilX just because they're the first ones that I looked at this morning. Fine. That's a good enough reason for unhedged. So OilX reckons that in this month in April, the amount of oil the world has is going to fall by seven and a half million barrels a day. That is the oil that's trapped inside the Gulf that cannot get out. right? They also are seeing and forecasting that some of the demand for that oil is falling away. So as you say, in Asia, which is the main customer for Middle Eastern oil, those countries have already just stopped doing things, right?

6:16Malcolm Moore: They've turned off air conditioners, they're working four day weeks. In India, lots of restaurants have closed because they can't get hold of the gas canisters, the propane that they need to cook with. So there's been a fall, but the fall is only around two and a half million barrels a day. So you then have a five million barrel a day gap, right? So that oil has just disappeared off the market. So two reactions to that, prices go up and they go up everywhere. But then some people who had contracts and were hoping for tankers to pull up and deliver stuff, those tankers have now stopped, right? I mean, they were at sea when the war began, so there's a little bit of a lag.

6:56Malcolm Moore: But in Asia, the last deliveries of Middle Eastern energy have ceased. Because while a tanker is at sea, it can get a better offer, right? And change direction. Yeah, well, so that also is happening. I mean, it depends on the contract. Sure. And there's going to be a huge legal mess at the end of all of this. The lawyers always win, right? The lawyers are going to win big time because, of course, people are looking at their contracts, which may have been priced before the war, And they're looking at the prices they could get for the same fuel now and thinking, oh, well, you know, is it worth the legal cost of breaking that contract?

7:32Malcolm Moore: Can I get away with declaring force majeure and saying it's out of my control? It's the war. And therefore, I won't have to compensate people. Can they get away with that? People are definitely trying to do that. Of course, lots of people are, you know, quite entitled to be declaring force majeure. I should say, if you are Qatar and your gas plant's been blown up, it seems fair enough that you can say, I can't supply. That seems reasonable. But there will be a lot of legal wrangling even over that as well. Tight definitions. You know, a lot of the contracts say, you know, I'm buying a tanker of oil from a specific location or a gas cargo from a specific location.

8:09Malcolm Moore: If they're saying that, OK, maybe that location's out. I can declare force majeure. If it just says I have to supply you with this cargo, then you may have to make it up from somewhere else. The cargoes that are going to Asia have all arrived and you are seeing shortages. The cargoes that are coming to Europe, those are now beginning to come to an end. So Europe is now in a position where it's having to think, where can I get stuff to substitute? And we're seeing lots of interesting routes emerging around the map. There are now tankers that are making the journey from the US Gulf Coast to Australia.

8:47That's a long way.

8:48Malcolm Moore: I think it's 13 ,000 miles. It takes a really long time to go there in a tanker. But Australia, which unfortunately had actually closed down a lot of its refineries, is in a very difficult position because it's a long way away from everywhere. And so it's kind of difficult to plan ahead. Places like Europe, you can plan ahead a little bit more easily. You're rich, so you can afford to pay a little bit more. You're unlikely to see the sort of things that we're seeing in Asia replicated in Europe. Depends how long this crisis goes on for. Obviously, in the United States, it's the world's biggest oil and gas producer.

9:26Malcolm Moore: So they're not going to run out of oil and gas in the US, but they're going to have to pay market prices, right? Why is the price of gasoline$4 a gallon in the US? Well, it's because the US could be selling the same gasoline to people who are desperate for it in Europe, or even in Asia at this point, and making a lot more money. So obviously the prices are going to have to rise. So this is going to affect different countries and different industries in different ways. So for example, one thing that stuck out from the piece that we've got today on our website about this sort of like energy rationing is if you're Singapore, you are completely reliant on energy imports.

10:03I think you rely on it for something like 98 % of your energy needs or something ridiculous. But you're a very rich country and you can afford to pay up. If you're Morocco, you're very reliant on energy imports and you just don't have the same cash at hand. So which countries do you think are really going to get it in the neck here?

10:23Malcolm Moore: Well, I mean, we've already seen, obviously, South Asia, Pakistan, Bangladesh, India. There are some issues there. And we've also seen in Southeast Asia, you know, countries like Thailand, Vietnam, Philippines, declaring emergencies, taking steps to kind of reduce their demand. I think after this, you're likely to see probably some places in Africa. I mean, it's partly these are not big markets anyway. Right. So they're not huge customers for people. So if you're thinking about prioritizing customers at this point of time, you may not prioritize the customers who don't buy as much from you to start with.

11:04Malcolm Moore: They also don't have the sort of strong logistics networks that the UK or France might have. You might be landlocked. The UK is blessed with having two huge oil majors, Shell and BP. Those guys can source fuel. So the UK is going to be relatively shielded just by logistics. But if you're Uganda or you're Zambia and you're at the end of a, you know, a sort of long logistical chain, that's a problem. Yeah. The other problem, of course, is that and this is a particular problem in jet fuel. Right. I was going to ask. Yeah. So Switzerland, for example, they like to say that they've got loads of jet fuel and they do.

11:43Malcolm Moore: They've got huge reserves of jet fuel, which is great for Switzerland. If your flight is leaving from Switzerland, though, it still has to refuel wherever it gets to. Right. So if you want to fly within Switzerland, which would be a strange thing to do because it's got quite good trains, then you'll be fine. But yeah, that's a good point. You just have to worry that you're taking a flight somewhere. Are you going to a place where they're likely to have fuel to get you back? Yeah. And so we've got Ryanair, for example, saying, yeah, we might have to cancel some flights in the summer. And I think that's just an interesting thing about this whole crisis is that by the summer, hopefully this whole thing will be over.

12:22but Malcolm give us something to hope for what's the what's the best case scenario here how can

12:29Malcolm Moore: this work out and kind of be okay the best case scenario is that we wake up from a dream yes and everything is fine and the Strait of Hormuz is open and Iran isn't going to assert any sort of sovereign control over it in the future and then in a few months time energy flows will get back to normal and we'll pretend even in that situation it stretches out oh even in that situation we're looking at high prices to the end of the year i think right but that's the best case scenario so that's as good as it's not a hugely realistic scenario no no that is also true so that's the best case scenario realistically like not being a show-off just to kind of get headlines in a newspaper.

13:15What are people saying to you? How bad could this get?

13:19Malcolm Moore: Well, the worst case scenario is really a continuation of the situation that we find ourselves in, which is total uncertainty about how long this goes on for, right? The market has consistently priced this as being a short-term event and is still hoping against all hope that it's a short-term event. But if we grind forward month by month, there's basically a mechanical line that goes up and prices will just continue to rise. And there'll be more disruption and more shortages. And some countries will absolutely run out of various types of fuel. And then we'll see, you know, a lot of demand destruction, some of which you've already mentioned, but you know, everything's going to get more expensive, there's going to be more inflation, so on, so on.

14:03Malcolm Moore: I mean, that is all a worst case scenario. And it's really, it's as ever, it's the uncertainty that kills us. Yeah, yeah. What a happy thought there, Mark, and for everyone to take into their long weekend. Thank you for infecting our listeners with the enthusiasm and joy of the FT's energy desk. Well, you have to laugh or you will cry. This is true. We are going to be back in just one second with Longshore.

14:39dialogue and scenario-based analysis, our leading experts analyse key market themes each week. So, whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.

15:02It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Malcolm Moore, what are you saying?

15:11Malcolm Moore: Well, at this point, you could go long on any form of energy you wanted to. But the one I'm going to choose is coal. Because coal is cheap. Yes. And it's abundant in a lot of places. And the places that have it will be digging it up and burning it. And, you know, instead of burning gas, they're basically going to switch to coal. Are there any potential downsides to that? I mean, the world's going to heat up a little bit, but, you know, the US president will be very happy. He's very long coal himself. Right. Cool. Long coal. I am sure how gullible markets are, especially stock markets. Right. So every time Trump says something along the lines of peace in our time, Iran are desperate for a deal.

15:58You know, we're going to we're going to bring this to a close every time the stock market jumps. And it's like, guys, knock it off. Like, why do you keep doing this? It's been wrong every time he said it over the past month. It is still wrong now. The taco trade is dead. Just stop it.

16:15Malcolm Moore: Yeah, I mean, I have to say even the Iranians are correcting him online at this point. And so, you know, if the Iranians are ahead of you in the trade, then you're on the wrong side of the trade. Yeah, when Trump says something and then you wait for a confirmation from Iran, something has gone quite skew-iff. But yeah, I just wish people would like knock it off. Right then, lovely long weekend. Malcolm, I hope you get a long weekend too and you're not working for the whole of it. I'm certainly out of here. So listeners, we will be back in your ears on Tuesday. If you celebrate it, happy Easter.

16:50If you don't, but you get a long weekend, enjoy that. And if neither, just be happy on our behalf. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. And a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.