1 00:00:00,320 --> 00:00:03,320 If you look at the stock market today, you might naturally 2 00:00:03,320 --> 00:00:07,120 conclude that the global energy crisis has been permanently 3 00:00:07,120 --> 00:00:10,880 resolved. The S&P 500 recently hit another 4 00:00:10,880 --> 00:00:15,160 record high, climbing past where it was before the fighting began 5 00:00:15,160 --> 00:00:18,320 in late February. Equity traders seem to have 6 00:00:18,320 --> 00:00:22,000 decided that a war in the Middle East, one that has closed the 7 00:00:22,000 --> 00:00:25,960 world's most critical energy choke point, is simply a great 8 00:00:25,960 --> 00:00:29,640 opportunity to buy the dip. But if you talk to the people 9 00:00:29,640 --> 00:00:33,560 who actually move physical barrels of oil, the mood is 10 00:00:33,560 --> 00:00:37,640 considerably darker. Futures markets are pricing in a 11 00:00:37,640 --> 00:00:42,080 swift diplomatic resolution, while physical commodity traders 12 00:00:42,280 --> 00:00:45,640 are staring at a completely different reality. 13 00:00:45,840 --> 00:00:49,120 There's a massive gap between the optimistic news flow that 14 00:00:49,120 --> 00:00:53,160 drives stock prices and the actual cost of a physical barrel 15 00:00:53,160 --> 00:00:56,240 of oil sitting on a ship in northwest Europe. 16 00:00:56,680 --> 00:00:59,920 For weeks, we've seen a bizarre cycle play out. 17 00:01:00,200 --> 00:01:03,600 A ceasefire or diplomatic breakthrough is announced, the 18 00:01:03,600 --> 00:01:07,680 stock market spikes and the price of crude plunges by 10%. 19 00:01:07,960 --> 00:01:11,720 Then almost immediately, the Iranians announced that they've 20 00:01:11,720 --> 00:01:15,000 not agreed to anything and prices reverse. 21 00:01:15,560 --> 00:01:18,960 Just this week, despite the announcement of a three-week 22 00:01:18,960 --> 00:01:23,000 ceasefire extension between Israel and Lebanon, Iranian 23 00:01:23,000 --> 00:01:27,240 forces boarded and seized 2 MSC container ships. 24 00:01:27,480 --> 00:01:31,680 President Trump responded by ordering the US Navy to shoot 25 00:01:31,680 --> 00:01:35,000 and kill any boat caught laying mines in the water. 26 00:01:35,320 --> 00:01:38,760 This is not what a functioning trade route looks like. 27 00:01:39,200 --> 00:01:42,640 Investors seem to be suffering from a bad case of muscle 28 00:01:42,640 --> 00:01:44,840 memory. They're sitting at comfortable 29 00:01:44,840 --> 00:01:48,760 desks in New York and London, assuming that the administration 30 00:01:48,760 --> 00:01:52,000 will eventually experience what investors have been calling a 31 00:01:52,000 --> 00:01:55,000 Taco moment. Where Taco stands for Trump 32 00:01:55,000 --> 00:01:58,320 always chickens out. They expect the president to 33 00:01:58,320 --> 00:02:02,000 look at the upcoming midterm elections, look at the rising 34 00:02:02,000 --> 00:02:06,280 price of gasoline, and simply walk away from the conflict much 35 00:02:06,280 --> 00:02:09,840 like he did when he retreated on his liberation, say tariffs, 36 00:02:09,840 --> 00:02:12,640 last year. The fatal flaw in this 37 00:02:12,640 --> 00:02:16,520 assumption is that a trade war is fought with Administrative 38 00:02:16,520 --> 00:02:18,840 Inc. You can cancel a tariff with a 39 00:02:18,840 --> 00:02:22,920 weekend post on True Social. A shooting war in the Strait of 40 00:02:22,920 --> 00:02:27,560 Hormuz is fought with drones, naval barricades and anti ship 41 00:02:27,560 --> 00:02:30,680 missiles. You cannot unilaterally back 42 00:02:30,680 --> 00:02:34,840 down from a conflict where the other side has their own agenda. 43 00:02:35,120 --> 00:02:38,840 The Iranian regime has survived the initial strikes and 44 00:02:38,840 --> 00:02:42,680 discovered covered that holding the global economy hostage is an 45 00:02:42,680 --> 00:02:46,560 incredibly powerful piece of leverage, and unlike a nuclear 46 00:02:46,560 --> 00:02:49,480 weapon, it's one that they can actually use. 47 00:02:49,480 --> 00:02:55,160 As I've said before, it takes 2 to Taco, and right now the other 48 00:02:55,160 --> 00:02:58,720 side of the table is busy seizing container ships. 49 00:02:59,200 --> 00:03:02,160 For the commercial ships currently trapped in the Persian 50 00:03:02,160 --> 00:03:06,320 Gulf, the situation is devolved into something resembling a high 51 00:03:06,320 --> 00:03:10,280 stakes maritime prison break. Captains are turning off their 52 00:03:10,280 --> 00:03:13,840 tracking equipment and sneaking through the water in the dead of 53 00:03:13,840 --> 00:03:16,840 night just to get their crews out safely. 54 00:03:17,280 --> 00:03:21,480 About 45 ships have entered or exited the straits since a 55 00:03:21,480 --> 00:03:24,960 temporary ceasefire was first agreed on April 8th. 56 00:03:25,280 --> 00:03:30,840 Yesterday, over a 24 hour period, only 5 through at least 57 00:03:30,840 --> 00:03:34,240 22 other ships have been attacked and several others 58 00:03:34,240 --> 00:03:37,480 seized by the Iranian Revolutionary Guard since the 59 00:03:37,480 --> 00:03:40,760 conflict began. The situation is now being 60 00:03:40,760 --> 00:03:45,440 described as a dual blockade. Iran has restricted passage to 61 00:03:45,440 --> 00:03:49,840 hostile vessels from unfriendly countries, while the US Navy 62 00:03:49,840 --> 00:03:55,040 began its own counter blockade on April 13th, specifically 63 00:03:55,040 --> 00:03:59,120 targeting ships bound for are departing from Iranian ports. 64 00:03:59,600 --> 00:04:03,200 The reality of trying to navigate the Strait of Hormuz 65 00:04:03,200 --> 00:04:07,280 right now sounds less like global logistics and more like a 66 00:04:07,280 --> 00:04:10,800 heist movie. Just this past weekend, a Greek 67 00:04:10,800 --> 00:04:15,480 owned tanker called the Acta carrying 300,000 barrels of 68 00:04:15,480 --> 00:04:18,880 diesel managed to make a run for it in the dark. 69 00:04:19,079 --> 00:04:22,720 It lined up at the head of a snake of ships and slipped out 70 00:04:22,720 --> 00:04:26,240 just hours before the Islamic Revolutionary Guard sent 71 00:04:26,240 --> 00:04:30,600 gunboats back into the channel that are being actively 72 00:04:30,600 --> 00:04:34,600 targeted, like those tied to the MSC group are attempting to 73 00:04:34,600 --> 00:04:38,520 sneak through with their GPS transponders completely turned 74 00:04:38,520 --> 00:04:41,240 off. Some are hiding behind Omani 75 00:04:41,240 --> 00:04:43,960 flags. Others are navigating demands 76 00:04:43,960 --> 00:04:47,320 from the Iranian regime to pay safe passage tolls in 77 00:04:47,320 --> 00:04:51,960 cryptocurrency, which major trading houses vehemently deny 78 00:04:51,960 --> 00:04:55,560 paying as doing so would breach U.S. sanctions. 79 00:04:56,000 --> 00:04:59,480 The resulting backlog has created what 1 Executive 80 00:04:59,480 --> 00:05:04,880 described as a car park of 3 to 400 ships desperately waiting to 81 00:05:04,880 --> 00:05:07,840 get out. It's not just oil tankers that 82 00:05:07,840 --> 00:05:11,080 were trapped. 6 cruise ships were stuck in the Gulf but 83 00:05:11,080 --> 00:05:15,160 managed to make it out with skeleton crews and no passengers 84 00:05:15,160 --> 00:05:19,280 on board in late February. One of these was owned by MSC 85 00:05:19,280 --> 00:05:22,480 Group, which has business partnerships with Israel. 86 00:05:23,000 --> 00:05:26,840 What's perhaps most striking about the whole situation is the 87 00:05:26,840 --> 00:05:30,640 complete abandonment of these merchant vessels by Western 88 00:05:30,640 --> 00:05:33,440 governments. Larry Johnson, the global head 89 00:05:33,440 --> 00:05:37,120 of freight at Mercuria, expressed his frustration this 90 00:05:37,120 --> 00:05:40,800 week, saying that politicians are simply burying their heads 91 00:05:40,800 --> 00:05:44,720 in the sand. State owned vessels might have 92 00:05:44,720 --> 00:05:48,960 access to naval escorts or back channel communications with the 93 00:05:48,960 --> 00:05:53,280 Iranian regime, but pure merchant traders are entirely on 94 00:05:53,280 --> 00:05:57,440 their own. the US Navy's barricading the coastline and 95 00:05:57,440 --> 00:05:59,640 has turned around dozens of ships. 96 00:05:59,920 --> 00:06:03,240 Iran is firing on the ones that try to squeeze through. 97 00:06:03,480 --> 00:06:07,280 There's no concerted effort to formalize a safe transit 98 00:06:07,280 --> 00:06:10,360 mechanism. Instead, the people tasked with 99 00:06:10,400 --> 00:06:13,760 moving 1/4 of the world's seaborne oil are essentially 100 00:06:13,760 --> 00:06:16,840 being told to turn off their headlights and hope for the 101 00:06:16,840 --> 00:06:19,480 best. While investors might assume 102 00:06:19,680 --> 00:06:23,400 that this blockade is just a temporary glitch in the supply 103 00:06:23,400 --> 00:06:27,880 chain, the physical reality is that the world has now run out 104 00:06:27,880 --> 00:06:30,880 of its safety cushion. In the early weeks of the 105 00:06:30,880 --> 00:06:34,480 conflict, the market was insulated by the fact that a 106 00:06:34,480 --> 00:06:38,360 near record amount of oil was already at sea when the war 107 00:06:38,360 --> 00:06:42,040 started. But by April 20th, the last few 108 00:06:42,040 --> 00:06:46,480 tankers that managed to cross Hormuz before the fighting began 109 00:06:46,600 --> 00:06:49,720 finally reached their destinations in places like 110 00:06:49,720 --> 00:06:54,080 Malaysia and California. That seaborne buffer is now 111 00:06:54,080 --> 00:06:58,240 completely exhausted. Physical commodity traders are 112 00:06:58,240 --> 00:07:02,360 warning that a lot of long term damage has already been done. 113 00:07:02,640 --> 00:07:07,200 Saad Raheem of Traffic Eura told The Economist earlier this week 114 00:07:07,360 --> 00:07:11,720 that a cumulative loss of 1 1/2 billion barrels of Gulf crude, 115 00:07:11,880 --> 00:07:17,120 roughly 5% of annual global output, is almost unavoidable at 116 00:07:17,120 --> 00:07:20,800 this point. Traders are noting that even if 117 00:07:20,800 --> 00:07:24,880 a ceasefire holds today, the market might not return to 118 00:07:24,880 --> 00:07:29,880 equilibrium until 2030 due to this permanent loss of supply. 119 00:07:30,320 --> 00:07:34,480 Normally, an American president might expect the domestic oil 120 00:07:34,480 --> 00:07:38,160 industry to simply drill the country out of an energy shock 121 00:07:38,160 --> 00:07:41,840 like this. After all, the US is now energy 122 00:07:41,840 --> 00:07:45,280 self-sufficient. The administration has strongly 123 00:07:45,280 --> 00:07:49,280 urged oil executives to increase production to bring gasoline 124 00:07:49,280 --> 00:07:54,080 prices down, but US shale bosses are actively resisting those 125 00:07:54,080 --> 00:07:57,400 calls. According to a recent Dallas Fed 126 00:07:57,400 --> 00:08:01,280 survey, energy executives are refusing to significantly 127 00:08:01,280 --> 00:08:05,040 increase production, pointing to the absolute chaos of the 128 00:08:05,040 --> 00:08:07,680 current market. While this may not make the 129 00:08:07,680 --> 00:08:11,160 president happy, it's a perfectly rational capital 130 00:08:11,160 --> 00:08:15,360 allocation decision made by executives who've been burned by 131 00:08:15,360 --> 00:08:19,080 over drilling before. The extreme volatility between 132 00:08:19,080 --> 00:08:23,560 physical prices and futures prices sends conflicting signals 133 00:08:23,560 --> 00:08:27,440 to operators. They can't responsibly plan long 134 00:08:27,440 --> 00:08:31,320 term capital budgets or rigged deployments when the price of 135 00:08:31,320 --> 00:08:35,280 their products swings wildly. Based on presidential tweets, 136 00:08:35,600 --> 00:08:40,000 most companies are taking a do nothing approach to their 2026 137 00:08:40,000 --> 00:08:43,200 budgets. They know perfectly well that if 138 00:08:43,200 --> 00:08:47,480 they spent billions to over produce now and Trump secures a 139 00:08:47,480 --> 00:08:51,360 sudden peace deal tomorrow, they'll be left holding the bag 140 00:08:51,360 --> 00:08:55,000 in a crashed market. If you want to understand how a 141 00:08:55,000 --> 00:08:58,440 geopolitical energy shock actually trickles down to the 142 00:08:58,440 --> 00:09:02,040 real economy, you'll have to look beyond the headline price 143 00:09:02,080 --> 00:09:06,200 of crude oil and examine the specific refined products that 144 00:09:06,200 --> 00:09:09,120 keep the world moving. Take jet fuel. 145 00:09:09,400 --> 00:09:12,440 Europe does not produce enough enough of it to meet its own 146 00:09:12,440 --> 00:09:15,120 demand. According to Politico, it's 147 00:09:15,120 --> 00:09:20,280 refining capacity can cover at most 70% of what airlines need. 148 00:09:20,640 --> 00:09:23,760 Any prolonged disruption to tanker traffic through the 149 00:09:23,760 --> 00:09:27,160 Strait will leave carriers scrambling for supply. 150 00:09:27,680 --> 00:09:31,360 Europe is currently sitting on about 50 days of jet fuel 151 00:09:31,360 --> 00:09:34,680 reserves, which is their typical operating level. 152 00:09:34,920 --> 00:09:38,000 But according to modelling by the data firm Kepler in 153 00:09:38,000 --> 00:09:41,960 association with The Economist, those stocks are going to fall 154 00:09:41,960 --> 00:09:47,160 precipitously if flows through Hormuz don't normalize by June. 155 00:09:47,520 --> 00:09:51,320 the United States could theoretically help by exporting 156 00:09:51,320 --> 00:09:54,840 refined products, but if the administration decides to 157 00:09:54,840 --> 00:09:59,440 prioritize domestic prices and bans refined fuel exports, 158 00:09:59,640 --> 00:10:03,200 Europe's aviation sector will be staring at a brick wall. 159 00:10:03,600 --> 00:10:07,200 Then there are the esoteric commodities that most people 160 00:10:07,200 --> 00:10:09,560 don't think about until they run out. 161 00:10:10,120 --> 00:10:14,680 Qatar is not just a dominant player in liquefied natural gas, 162 00:10:14,880 --> 00:10:18,240 it's also one of the world's largest producers of helium, 163 00:10:18,400 --> 00:10:21,560 accounting for roughly 1/3 of global supply. 164 00:10:21,960 --> 00:10:26,600 Helium is a byproduct of natural gas extraction, and you can't 165 00:10:26,600 --> 00:10:30,520 safely ship it on a plane. It has to move by sea. 166 00:10:30,760 --> 00:10:34,600 When the Strait of Hormuz is barricaded by gunboats, the 167 00:10:34,600 --> 00:10:37,800 global supply of helium is effectively choked off. 168 00:10:38,000 --> 00:10:40,520 This isn't just about party balloons. 169 00:10:40,720 --> 00:10:44,440 Helium has the lowest boiling point of any element, along with 170 00:10:44,440 --> 00:10:48,080 an extremely high thermal conductivity, which makes it 171 00:10:48,080 --> 00:10:51,360 irreplaceable as a coolant for sensitive equipment. 172 00:10:51,600 --> 00:10:54,880 It's used to cool the superconducting magnets in MRI 173 00:10:54,880 --> 00:10:58,920 machines, as a carrier gas in the chemical vapour deposition 174 00:10:58,920 --> 00:11:03,240 process, is used to manufacture semiconductor chips, and as a 175 00:11:03,240 --> 00:11:08,200 purge gas in clean rooms. There is no synthetic substitute 176 00:11:08,200 --> 00:11:10,440 for helium. If you're running a chip 177 00:11:10,440 --> 00:11:15,080 fabrication plant or a hospital radiology department, you cannot 178 00:11:15,080 --> 00:11:19,600 swap it out for something else. The logistical nightmare of this 179 00:11:19,600 --> 00:11:23,280 blockade doesn't stay confined to the Middle East, either. 180 00:11:23,600 --> 00:11:27,200 The global shipping industry operates as a closed loop. 181 00:11:27,440 --> 00:11:30,840 Because ships can no longer safely pass through the region, 182 00:11:31,040 --> 00:11:34,280 they're being forced to take a massive detour around the Cape 183 00:11:34,280 --> 00:11:37,440 of Good Hope. This significantly extends 184 00:11:37,440 --> 00:11:41,640 journey times, which effectively removes a huge chunk of shipping 185 00:11:41,640 --> 00:11:46,200 capacity from the global market. Congestion at the Panama Canal 186 00:11:46,320 --> 00:11:50,600 has intensified too, as Asian buyers have turned to purchasing 187 00:11:50,600 --> 00:11:54,240 crude oil from the Gulf of Mexico to replace their Middle 188 00:11:54,240 --> 00:11:57,800 Eastern supplies. The canal was already dealing 189 00:11:57,880 --> 00:12:01,560 with severe transit restrictions due to historic drought. 190 00:12:01,840 --> 00:12:06,240 Now, with oil tankers outbidding bulk carriers for scarce transit 191 00:12:06,240 --> 00:12:10,440 slots, the knock on delays are rippling through supply chains 192 00:12:10,600 --> 00:12:14,440 that have nothing to do with energy, according to the FT. 193 00:12:14,560 --> 00:12:18,280 Ships carrying lower value cargoes like grain are being 194 00:12:18,280 --> 00:12:22,120 pushed to the back of the queue as oil tanker operators pay 195 00:12:22,120 --> 00:12:24,560 millions of dollars to skip to the front. 196 00:12:24,880 --> 00:12:29,280 Wait times at the canal have stretched to around 40 days, and 197 00:12:29,280 --> 00:12:33,200 some grain routes have already seen shipping rates increase by 198 00:12:33,200 --> 00:12:38,040 50 to 60%. Grain is now moving slower and 199 00:12:38,040 --> 00:12:40,640 costing significantly more to transport. 200 00:12:40,880 --> 00:12:44,520 Which brings us to perhaps the most alarming knock on effect of 201 00:12:44,520 --> 00:12:48,160 this crisis, the threat to global food security. 202 00:12:48,440 --> 00:12:51,480 People tend to think of the energy market and the food 203 00:12:51,480 --> 00:12:55,320 market as two separate things, but modern agriculture is 204 00:12:55,320 --> 00:12:58,840 essentially a very efficient system for converting 205 00:12:58,840 --> 00:13:01,440 hydrocarbons into edible calories. 206 00:13:01,880 --> 00:13:05,920 Natural gas is the primary feedstock for nitrogen based 207 00:13:05,920 --> 00:13:09,960 fertilizers like ammonia, and the Strait of Hormuz handles 208 00:13:09,960 --> 00:13:13,640 roughly 1/3 of the world's seaborne fertilizer trade. 209 00:13:14,160 --> 00:13:19,000 When the Strait closes and gas prices spike, agricultural input 210 00:13:19,000 --> 00:13:22,560 costs explode. Before the hostilities broke out 211 00:13:22,560 --> 00:13:26,880 in late February and hydrous ammonia cost US farmers around 212 00:13:26,880 --> 00:13:32,040 $800 a tonne. Today it's sitting at $1050 a 213 00:13:32,040 --> 00:13:35,440 tonne. But fertilizer is only one part 214 00:13:35,440 --> 00:13:38,880 of the equation. To run a modern farm, you need 215 00:13:38,880 --> 00:13:42,000 massive amounts of diesel to operate the tractors, the 216 00:13:42,000 --> 00:13:45,640 combines and the trucks that transport the harvest. 217 00:13:45,880 --> 00:13:50,280 The agricultural sector was already operating on razor thin 218 00:13:50,280 --> 00:13:55,160 margins, and this dual spike in both fertilizer and diesel costs 219 00:13:55,360 --> 00:13:58,760 represents a massive unbudgeted expense. 220 00:13:59,240 --> 00:14:03,400 A recent survey by the American Farm Bureau Federation found 221 00:14:03,400 --> 00:14:07,560 that around 70% of farmers report being unable to afford 222 00:14:07,560 --> 00:14:10,920 all of the fertilizer they need for this crop cycle. 223 00:14:11,200 --> 00:14:14,760 And even if they could afford it, the supply chain is working 224 00:14:14,760 --> 00:14:18,000 against them. The chief risk officer of Louis 225 00:14:18,000 --> 00:14:21,840 Dreyfus pointed out this week that there's growing competition 226 00:14:21,840 --> 00:14:26,280 for other critical agricultural inputs like sulphur, the fourth 227 00:14:26,280 --> 00:14:30,040 major nutrient after nitrogen, phosphorus, potassium. 228 00:14:30,240 --> 00:14:34,200 Because of the crisis, sulphur is being diverted to higher 229 00:14:34,200 --> 00:14:38,000 value industrial uses like copper smelting, leaving 230 00:14:38,000 --> 00:14:41,040 fertilizer producers waiting at the back of the queue. 231 00:14:41,640 --> 00:14:45,360 Zippy Duvall, the president of the American Farm Bureau 232 00:14:45,360 --> 00:14:49,200 Federation and the man with the most American sounding name I've 233 00:14:49,200 --> 00:14:53,880 ever come across, told the FT that the farm outlook is bleak 234 00:14:53,880 --> 00:14:56,680 right now and farm country needs help. 235 00:14:57,280 --> 00:15:01,080 Look, it's not necessarily the best quote ever, but I included 236 00:15:01,080 --> 00:15:03,840 it just because I wanted to say Zippy Duvall. 237 00:15:04,560 --> 00:15:08,240 Pablo Escobar, yes, that's his real name too. 238 00:15:08,480 --> 00:15:13,120 The head of LNG at Vital warned this week that we're living on 239 00:15:13,120 --> 00:15:16,840 borrowed time, saying that if this continues, the energy 240 00:15:16,840 --> 00:15:20,600 crisis will rapidly become a global food crisis. 241 00:15:21,040 --> 00:15:24,920 But of course, the term global catastrophe means different 242 00:15:24,920 --> 00:15:28,760 things to different people. While agricultural traders are 243 00:15:28,760 --> 00:15:33,040 worried about crop failures and food security, Bernard Arnault, 244 00:15:33,040 --> 00:15:37,400 the billionaire head of LVMH, has his own concerns. 245 00:15:37,640 --> 00:15:41,440 He warned his shareholders this week that the war could spiral 246 00:15:41,440 --> 00:15:45,720 into a global catastrophe with extremely negative economic 247 00:15:45,720 --> 00:15:48,720 developments if it isn't resolved quickly. 248 00:15:49,320 --> 00:15:53,400 His definition of catastrophe, however, appears to be that 249 00:15:53,400 --> 00:15:56,920 sales of Louis Vuitton and Dior handbags in Middle Eastern 250 00:15:56,920 --> 00:16:01,880 shopping malls have fallen by as much as 70% since the war began. 251 00:16:02,400 --> 00:16:06,440 1 sector is preparing for famine and the other is lamenting a 252 00:16:06,440 --> 00:16:09,840 drop in high end spirits, clothing and luxury leather 253 00:16:09,840 --> 00:16:12,560 goods. While the US deals with 254 00:16:12,560 --> 00:16:16,800 expensive diesel and unsold handbags, Europe is facing a 255 00:16:16,800 --> 00:16:21,160 much more structural squeeze. Right as the Hormuz crisis 256 00:16:21,200 --> 00:16:25,680 reached its peak, Russia decided it was the perfect time to turn 257 00:16:25,680 --> 00:16:29,560 the screws on Germany. Moscow has announced that it 258 00:16:29,560 --> 00:16:33,480 will suspend the flow of Kazakh oil through the Soviet era 259 00:16:33,480 --> 00:16:38,040 pipeline that supplies the PCK refinery, the facility that 260 00:16:38,040 --> 00:16:43,000 provides 90% of the petrol, kerosene and heating fuel to the 261 00:16:43,000 --> 00:16:46,520 German capital. By cutting off this alternative 262 00:16:46,520 --> 00:16:49,960 supply line right as seaborne imports are choked off in the 263 00:16:49,960 --> 00:16:54,520 Middle East, Russia is ensuring that Europe feels the maximum 264 00:16:54,520 --> 00:16:56,920 possible pain from this conflict. 265 00:16:57,160 --> 00:17:00,320 Whenever an energy crisis breaks out in the Middle East, 266 00:17:00,480 --> 00:17:03,440 financial commentators inevitably start drawing 267 00:17:03,440 --> 00:17:08,079 comparisons to the 1970s. We're immediately bombarded with 268 00:17:08,079 --> 00:17:12,200 black and white footage of cars lining up at gas stations and 269 00:17:12,200 --> 00:17:16,160 warnings about a return to the stagflate that defined the era 270 00:17:16,160 --> 00:17:22,400 of the 1973 Arab oil embargo and the 1978 Iranian oil workers 271 00:17:22,400 --> 00:17:25,119 strike. In certain ways, the current 272 00:17:25,119 --> 00:17:29,640 situation is a lot worse than what we saw in the 1970s. 273 00:17:30,000 --> 00:17:33,040 As Daniel Juergen pointed out recently on the Odd Lots 274 00:17:33,040 --> 00:17:36,800 podcast, the absolute volume of the disruption we're seeing 275 00:17:36,800 --> 00:17:41,560 today is the largest in history. Global oil production and 276 00:17:41,560 --> 00:17:45,640 consumption are roughly twice what they were 50 years ago. 277 00:17:45,960 --> 00:17:50,840 However, major economies are structurally much more resilient 278 00:17:50,840 --> 00:17:53,960 to oil shocks today than they were back then. 279 00:17:54,280 --> 00:17:58,680 The metric economists used to measure this is called the oil 280 00:17:58,680 --> 00:18:02,480 intensity of GD P. It measures how many barrels of 281 00:18:02,480 --> 00:18:06,920 oil it takes to produce a single inflation adjusted dollar of 282 00:18:06,920 --> 00:18:10,920 economic output. Since the 1970's, the oil 283 00:18:10,920 --> 00:18:15,640 intensity of the global economy has declined by more than 70%. 284 00:18:16,040 --> 00:18:19,480 Our factories are more efficient, our cars get better 285 00:18:19,480 --> 00:18:23,640 mileage, and our power grids rely much more heavily on other 286 00:18:23,640 --> 00:18:26,320 sources of energy than they do on petroleum. 287 00:18:26,680 --> 00:18:30,520 But while the physical economy might be less vulnerable, the 288 00:18:30,520 --> 00:18:34,320 financial economy is standing on much shakier ground. 289 00:18:34,600 --> 00:18:39,280 Paul Krugman noted recently that in 1978, the price to earnings 290 00:18:39,280 --> 00:18:43,600 ratio of the S&P 500 was sitting at historic lows. 291 00:18:43,880 --> 00:18:47,960 Today, equity valuations are stretched to near record highs, 292 00:18:48,160 --> 00:18:52,600 supported by a highly complex, interconnected private credit 293 00:18:52,600 --> 00:18:55,560 market that didn't exist in the 70s. 294 00:18:55,960 --> 00:19:00,520 We have an economy that requires less oil, but a financial system 295 00:19:00,640 --> 00:19:04,520 with a much lower margin of safety for a prolonged inflation 296 00:19:04,520 --> 00:19:07,200 shock. This crisis is also 297 00:19:07,200 --> 00:19:11,080 fundamentally rewiring how governments think about energy 298 00:19:11,080 --> 00:19:14,480 infrastructure. For the last two decades, the 299 00:19:14,480 --> 00:19:18,240 push towards wind, solar and electric vehicles has been 300 00:19:18,240 --> 00:19:20,880 driven primarily by climate policy. 301 00:19:21,200 --> 00:19:24,960 The closure of the Strait of Hormuz has rebranded the entire 302 00:19:24,960 --> 00:19:29,520 green energy transition into a matter of national security. 303 00:19:30,080 --> 00:19:35,200 You can't fix a 20% drop in global hydrocarbon supply with 304 00:19:35,200 --> 00:19:39,680 wind turbines in the short term, but the realization that an 305 00:19:39,680 --> 00:19:44,000 entire continent can be held hostage by cheap Iranian drones 306 00:19:44,200 --> 00:19:47,800 is rapidly changing capital allocation decisions. 307 00:19:48,000 --> 00:19:51,840 In Asia, where countries are heavily dependent on imported 308 00:19:51,840 --> 00:19:55,360 seaborne oil, the transition is accelerating. 309 00:19:55,640 --> 00:19:59,880 Electric vehicles now make up over 50% of new car sales. 310 00:20:00,040 --> 00:20:03,400 In China and 40% in Southeast Asia. 311 00:20:03,680 --> 00:20:07,960 While the US tries to drill it's way out of the crisis, Asia is 312 00:20:07,960 --> 00:20:12,040 looking to nuclear power and electric vehicles as tools for 313 00:20:12,040 --> 00:20:16,720 long term energy sovereignty. All of this structural shifting 314 00:20:16,720 --> 00:20:20,360 will take time. In the immediate present, the 315 00:20:20,360 --> 00:20:24,320 western world is dealing with the harsh reality that inflation 316 00:20:24,320 --> 00:20:27,240 is back and it's going to be sticky. 317 00:20:27,800 --> 00:20:31,840 The economic fallout from this war has already started showing 318 00:20:31,840 --> 00:20:34,880 up in the data. Both the United States and the 319 00:20:34,880 --> 00:20:40,320 United Kingdom saw inflation accelerate to 3.3% in March. 320 00:20:40,600 --> 00:20:44,760 In the UK, the Bank of England is now facing a central bankers 321 00:20:44,760 --> 00:20:49,040 worst nightmare, an external energy shock that raises the 322 00:20:49,040 --> 00:20:52,560 cost of living while simultaneously killing economic 323 00:20:52,560 --> 00:20:55,840 growth. In the US, the political panic 324 00:20:55,840 --> 00:20:59,520 is becoming palpable. President Trump has dispatched 325 00:20:59,520 --> 00:21:04,000 his top lieutenants, including Interior Secretary Doug Burgum, 326 00:21:04,240 --> 00:21:07,240 to beg oil executives to increase production. 327 00:21:07,520 --> 00:21:11,560 Meanwhile, Treasury Secretary Scott Percent has resorted to 328 00:21:11,560 --> 00:21:15,640 threatening retail gas station owners, warning them that the 329 00:21:15,640 --> 00:21:19,880 administration is watching to ensure they slash prices at the 330 00:21:19,880 --> 00:21:24,400 pump the moment crude oil drops. If that rhetoric sounds 331 00:21:24,400 --> 00:21:28,440 familiar, it should. It's almost a word for word copy 332 00:21:28,440 --> 00:21:31,800 of the Biden administration's complaints about the price 333 00:21:31,800 --> 00:21:35,680 gouging at the pump. Back in the summer of 2022, 334 00:21:36,040 --> 00:21:38,680 President Biden tweeted at gas stations. 335 00:21:38,880 --> 00:21:42,400 Bring down the price you're charging at the pump to reflect 336 00:21:42,400 --> 00:21:45,680 the cost you are paying for the product and do it now. 337 00:21:46,200 --> 00:21:50,720 It turns out that yelling at gas station owners is a bipartisan 338 00:21:50,720 --> 00:21:53,200 tradition. Regardless of who's in in the 339 00:21:53,200 --> 00:21:55,800 Oval Office. The political response to an 340 00:21:55,800 --> 00:22:00,520 energy supply shock is exactly the same panic ignore the 341 00:22:00,520 --> 00:22:03,920 underlying market dynamics and threaten the guy who owns your 342 00:22:03,920 --> 00:22:07,640 local gas station. The problem is that you can't 343 00:22:07,640 --> 00:22:10,200 yell at inflation until it goes away. 344 00:22:10,880 --> 00:22:14,920 The IMF warned earlier this week that short term inflation 345 00:22:14,920 --> 00:22:19,160 expectations in the United States have already moved up and 346 00:22:19,160 --> 00:22:23,280 that the economic fallout from this conflict will not evaporate 347 00:22:23,280 --> 00:22:26,960 overnight, even if a ceasefire is signed tomorrow. 348 00:22:27,560 --> 00:22:31,360 The increased costs of fertilizer, diesel and rerouted 349 00:22:31,360 --> 00:22:34,760 shipping have already been baked into the supply chain. 350 00:22:35,040 --> 00:22:39,600 Those costs will inevitably be passed on to the consumer at the 351 00:22:39,600 --> 00:22:42,920 grocery store and at the hardware store over the coming 352 00:22:42,920 --> 00:22:46,000 months. While politicians focus on the 353 00:22:46,000 --> 00:22:50,480 price at the pump, macroeconomic analysts are looking at how this 354 00:22:50,480 --> 00:22:54,920 crisis is fundamentally rewiring the flow of global capital. 355 00:22:55,160 --> 00:22:59,080 When the price of energy spikes, the balance of global trade 356 00:22:59,080 --> 00:23:02,120 shifts. Brad Setzer, an economist at the 357 00:23:02,120 --> 00:23:06,240 Council on Foreign Relations, pointed out on the FT Economics 358 00:23:06,240 --> 00:23:10,280 podcast last week that you would be wrong to expect an energy 359 00:23:10,280 --> 00:23:14,080 shock of this magnitude to wipe out the massive trade surplus. 360 00:23:14,160 --> 00:23:16,240 Surplus is held by countries in Asia. 361 00:23:16,920 --> 00:23:21,160 China's surplus in manufactured goods is so structurally 362 00:23:21,160 --> 00:23:25,760 enormous that even paying record prices to import seaborne oil 363 00:23:25,960 --> 00:23:29,640 barely makes a dent. While this energy shock is a big 364 00:23:29,640 --> 00:23:33,600 deal, it won't magically rebalance the global economy. 365 00:23:33,840 --> 00:23:37,080 It simply redirects a portion of the dollars that were 366 00:23:37,080 --> 00:23:41,160 accumulating in Beijing towards alternative oil and gas 367 00:23:41,160 --> 00:23:44,640 exporters. Some of that money will go to 368 00:23:44,640 --> 00:23:49,440 Saudi Arabia, which has an East West pipeline and can still get 369 00:23:49,440 --> 00:23:52,800 some oil out. But most of it will flow to the 370 00:23:52,800 --> 00:23:57,520 world's other exporters, Kazakhstan, Tajikistan, Norway, 371 00:23:57,520 --> 00:24:00,400 Russia and some South American producers. 372 00:24:00,680 --> 00:24:05,280 The US and Canada collectively export about 5 million barrels 373 00:24:05,280 --> 00:24:09,680 of oil a day, So what Setzer expects to see is a general 374 00:24:09,680 --> 00:24:13,400 shrinking of the big Asian and European surpluses, with the 375 00:24:13,400 --> 00:24:17,360 money flowing instead to certain oil producing economies, a 376 00:24:17,360 --> 00:24:21,280 reshuffling of who holds the world's dollars rather than a 377 00:24:21,280 --> 00:24:25,600 fundamental rebalancing. Because the United States is now 378 00:24:25,600 --> 00:24:28,880 the world's largest oil producer, a position it's held 379 00:24:28,880 --> 00:24:33,360 since 2018, you might assume that this shock would ultimately 380 00:24:33,360 --> 00:24:36,280 be a net positive for the American economy. 381 00:24:36,920 --> 00:24:40,840 But the windfall at the wellhead doesn't necessarily reach the 382 00:24:40,840 --> 00:24:44,480 kitchen table. American oil and gas exporters 383 00:24:44,520 --> 00:24:47,800 are benefiting from higher prices, but the American 384 00:24:47,800 --> 00:24:52,040 consumer is absorbing the pain on the other side, paying a 385 00:24:52,040 --> 00:24:56,120 geopolitical tax on everything from agricultural products to 386 00:24:56,120 --> 00:25:00,120 transportation, leaving them with less money to spend on the 387 00:25:00,120 --> 00:25:04,840 rest of their needs. the US trade deficit isn't shrinking. 388 00:25:05,000 --> 00:25:07,560 Life is just getting more expensive. 389 00:25:08,280 --> 00:25:11,600 This brings us to the ultimate lesson of the crisis. 390 00:25:11,880 --> 00:25:15,280 As I mentioned in my video on Europe's financial nuclear 391 00:25:15,280 --> 00:25:19,040 option back in January, the financial markets have spent the 392 00:25:19,040 --> 00:25:23,800 last 30 years operating under the Great Illusion, the belief 393 00:25:23,800 --> 00:25:27,840 that economic interdependence naturally prevents conflict. 394 00:25:28,160 --> 00:25:32,960 We assumed that because an open Strait of Hormuz was essential 395 00:25:32,960 --> 00:25:37,360 for the survival of the global economy, no rational actor would 396 00:25:37,360 --> 00:25:41,480 ever try to close it. But the interdependence that was 397 00:25:41,480 --> 00:25:45,600 supposed to be our safety net is framed from both ends. 398 00:25:46,240 --> 00:25:50,720 On one side, Iran has discovered that holding the global economy 399 00:25:50,720 --> 00:25:54,440 hostage with a fleet of cheap drones is a highly effective 400 00:25:54,440 --> 00:25:58,200 negotiating tactic. On the other, the world's major 401 00:25:58,200 --> 00:26:02,080 economies have spent the last two years actively reducing 402 00:26:02,080 --> 00:26:05,400 their dependence on each other through tariffs, export 403 00:26:05,400 --> 00:26:09,440 controls, and onshoring, dismantling the very web of 404 00:26:09,440 --> 00:26:12,960 trade relationships that was supposed to make a crisis like 405 00:26:12,960 --> 00:26:16,200 this irrational. When you control a vital 406 00:26:16,200 --> 00:26:19,920 geographical choke point, you don't need a trillion dollar 407 00:26:19,920 --> 00:26:23,560 military to exert massive geopolitical leverage. 408 00:26:23,800 --> 00:26:27,520 And when your adversaries are already pulling apart the system 409 00:26:27,720 --> 00:26:31,680 that was supposed to deter you, you have even less reason not to 410 00:26:31,680 --> 00:26:34,560 try. For decades, the global supply 411 00:26:34,560 --> 00:26:37,760 chain has relied on the unwritten assumption that the 412 00:26:37,800 --> 00:26:41,920 United States Navy would act as the ultimate guarantor of free 413 00:26:41,920 --> 00:26:46,240 trade, safely escorting merchant vessels from one side of the 414 00:26:46,240 --> 00:26:50,080 globe to the other. That assumption is now obsolete. 415 00:26:50,320 --> 00:26:54,640 The Navy is no longer acting as a neutral guardian of open sea 416 00:26:54,640 --> 00:26:57,760 lanes. It's an active combatant running 417 00:26:57,760 --> 00:27:01,320 its own blockade. The merchant marine is on its 418 00:27:01,320 --> 00:27:04,080 own. We've moved from a world of 419 00:27:04,080 --> 00:27:09,120 global cooperation to a highly transactional era where historic 420 00:27:09,120 --> 00:27:13,480 alliances are significantly less meaningful and negotiated. 421 00:27:13,480 --> 00:27:17,520 Diplomatic de escalation might eventually provide a sigh of 422 00:27:17,520 --> 00:27:22,000 relief, but it cannot undo the realization that the plumbing of 423 00:27:22,000 --> 00:27:25,280 the global economy is incredibly vulnerable in this new 424 00:27:25,280 --> 00:27:29,080 transactional era. The stock market might be buying 425 00:27:29,080 --> 00:27:32,840 the peace trade today, assuming that a weekend of strongly 426 00:27:32,840 --> 00:27:36,400 worded Truth Social posts can fix the supply chain. 427 00:27:36,680 --> 00:27:41,240 But the physical world moves at its own pace, directed by ships, 428 00:27:41,240 --> 00:27:44,920 pipes, and turbines rather than market sentiment. 429 00:27:45,520 --> 00:27:47,800 Thanks for tuning into this week's podcast. 430 00:27:47,960 --> 00:27:51,280 The podcast is entirely supported by viewers like you on 431 00:27:51,280 --> 00:27:54,920 Patreon, where supporters can contribute as little as they 432 00:27:54,920 --> 00:27:57,280 feel like to keep the podcast going. 433 00:27:57,520 --> 00:28:00,560 If you'd like to support it, I'll leave a link in the show 434 00:28:00,560 --> 00:28:02,440 notes. Have a great week and talk to 435 00:28:02,440 --> 00:28:03,960 you again soon. Bye.