00:03This is Apropos. It's a key artery for around a fifth of the world's oil and LNG supplies.
00:09With tanker traffic in the Strait of Hormuz near a standstill, there are no easy options to keep oil and
00:15gas flowing.
00:16Tankers set to load liquefied petroleum gas from the Middle East are now being redirected to fill up in the
00:23United States.
00:24Charlie James has more.
00:27A ship ablaze in the Strait of Hormuz, one of several attacked by Iranian drones in the days since the
00:34U.S. and Israel launched their joint operation.
00:37On Wednesday, Iran's Revolutionary Guard said it now has full control over this narrow mouth of the Persian Gulf.
00:44No ships are passing through.
00:46It is a body of water through which around 30 percent of global crude supplies are transported.
00:54And that is why it is considered to be so crucial.
00:58So the threat of setting ships ablaze that was levered by a senior commander in Iran's Revolutionary Guards has sent
01:07fresh shockwaves through the markets and seen crude prices rise yet again.
01:14A prolonged blockage of the strait would also cause delays in imports of raw materials and consumer goods, negatively impacting
01:21the global economy.
01:23In an attempt to avoid such a scenario, France is trying to organize a response.
01:29What President Macron announced is that we will propose to a number of partners that they form a coalition to
01:36secure the movement of ships in this region of the world, which is a key hub of international trade.
01:44In other words, France wants to be able to intercept drones and missiles that could threaten oil tankers.
01:51It's an idea echoed by U.S. President Donald Trump, who said Tuesday he's ready to use the U.S.
01:57military to escort tankers.
01:59No one wants to see a repeat of the global crisis caused by the Iran-Iraq War in the 1980s.
02:07Dubbed the Tanker War, more than 500 ships were destroyed or damaged in the Strait of Hormuz.
02:15For more, we're joined now by Michael Tamavakis, Professor of Commodity Economics and Finance at the Bayes Business School, City
02:23University, London.
02:24Thanks so much, Michael, for being with us on the programme.
02:27Let's start perhaps where that report ended.
02:30Donald Trump offering U.S. Navy escorts and insurance in a bid to restart shipping flows and curtail energy prices,
02:38of course, very important for Donald Trump.
02:41Is this likely to be effective or are deeper production cuts here inevitable?
02:48I have the feeling that for the time being, it might be a little bit of overstretching of the U
02:55.S. forces in the Gulf.
02:57I think they have to split their time between attacking Iran or defending from attacks from Iran and then escorting
03:03ships.
03:04So I cannot see this happening unless there's even more military action, if you like, in the region, perhaps with
03:12the aid of other fleets.
03:14So I think for the time being, the only thing in their mind is as quickly as possible to stop
03:20Iranians from attacking altogether.
03:22Yeah, because Israel is saying as well that it's going to make it harder for Iran to disrupt vessels in
03:28the Strait in the coming days.
03:29What do you actually expect it and the U.S. to do about that?
03:35I would say that they will probably try to take out their drones somehow.
03:40There were reports today in the press about engaging even Ukrainian anti-drone drones to do that.
03:48Possibly also attack any missile silos in order to, at source basically, to cut the ability to be able to
03:57send any further missiles towards tankers.
04:00Having said that, I think the world right now, the markets rather, are reacting with, I wouldn't say calm, but
04:08they are not panicked yet.
04:09But I think we need a few more weeks of this going on.
04:13We don't need it.
04:13But if a few more weeks are actually going to be ahead of us, then we may start to see
04:21prices really climbing up.
04:23Yeah, obviously, we're just six days into the war.
04:25As you suggest, Michael, there could be a long way to go here.
04:28But what kind of toll do you think this disruption could end up having on energy prices?
04:33If transit holds perhaps almost completely and more production is being shut off?
04:41I think the problem starts with oil, clearly, because this is the biggest commodity.
04:48I think an earlier commentator said that about a third of the world supplies of oil come from the Middle
04:55East Gulf.
04:55I would add a little bit more than that.
04:58The Middle East Gulf produces about a third of total production.
05:01But if you take it down to export, it actually generates about close to 40% of exports, global exports.
05:09Out of the Middle East Gulf, probably about 14 to 15 million barrels per day are exported.
05:15And I think at a conservative estimate, I think we might be losing perhaps about six of those, which is
05:23about 40% of that.
05:25There are some alternative options.
05:27If the tankers won't move, then some supplies can come out of Saudi Arabia via the pipeline, petrol line, the
05:34pipeline that connects the East with the West in the Red Sea.
05:37Not all of it can necessarily go towards Asia Pacific because there is, of course, the Gulf of Aden and
05:44the Houthis who may start attacking as well.
05:46There is also the pipeline that goes from the Emirates, Abu Dhabi, in particular, down to Fujaira.
05:53But again, this is a relatively small pipeline, about one and a half million barrels per day.
05:58So we may seek curtailment of exports from the Middle East Gulf.
06:02And I think the main region that is going to be affected is going to be Asia Pacific.
06:07So collectively, it should be India, China, and also the OECD economies of Japan and South Korea.
06:16Beyond crude oil, there is also products.
06:19In recent years, in the Middle East, particularly the Emirates, Abu Dhabi, but also Saudi Arabia, have ramped up their
06:26refining capacity.
06:27So they aim to export a lot more refined products.
06:31And as a matter of fact, Europe has been a recipient of these products, and some of this supply may
06:36be curtailed as well.
06:37But once again, the main target of these product exports is the Far East.
06:43And finally, natural gas, which I think is probably going to be the most affected because there aren't any other
06:50alternatives.
06:51There aren't any pipelines that can transfer this gas to the final markets.
06:56LNG is the only solution.
06:57LNG coming primarily from Qatar and going primarily into Asia Pacific, especially China.
07:04There are alternative sources.
07:06There is Australia.
07:07There are the United States, etc.
07:09Eventually, this deficit of LNG exports from the Middle East Gulf is going to filter through to international markets.
07:18It hasn't filtered through to U.S. prices of natural gas, but prices in Europe as well as in Asia
07:26are already on the rise.
07:28And Michael, you mentioned China and the EU.
07:31We've seen Beijing.
07:32It's already been concerned seeing energy sanctions, all this geopolitical uncertainty.
07:37It's built up its reserves.
07:39Is that something that the EU should have been doing?
07:41Is it possible for the EU to have done something similar to what China has been doing to try and
07:47protect itself from such a shock?
07:50It is possible, but it's very difficult because China is one command and control economy.
07:56The EU likes to think that they can operate all together, but they are 27 different countries with different priorities.
08:03Some of the EU countries do not rely that much on either gas or oil.
08:08Others do a lot more.
08:11So, clearly, I think some of these countries are going to put forward their national interest rather than the collective
08:17EU interest.
08:19I think one example of how you can stock up on these commodities are the storage of natural gas.
08:28The storage of natural gas right now in Europe is quite low because we are at the end of the
08:33winter, which in a sense is also good
08:35because consumption of gas for heating spaces is not going to be that high.
08:40But it also poses a problem of if you replenish the stocks right now, this is going to be expensive,
08:46whether it is gas or whether it is oil.
08:49So, it's a difficult question because if the EU buys any more oil and gas, it is going to start
08:58pushing inflation up,
09:00which is another problem with which we have fought in a few recent years.
09:04And I don't think they want to start funneling the flames of inflation once again.
09:10And, Michael, we're obviously very early into this conflict.
09:13We don't know how the situation is going to escalate over the coming weeks.
09:18What kind of impact, though, is it possible to say at this point is this likely to have on consumers?
09:23Presumably, all the additional costs that we're seeing piled on here, are they going to be eventually passed on?
09:30Absolutely.
09:31Right now, the price of the commodities have increased, but consumer goods have remained stable simply because there are already
09:39stocks available.
09:40I think once we go beyond the one month in the conflict, if we go that far forward, some of
09:47these prices are going to start filtering through.
09:50Oil, of course, is extremely important for transportation.
09:52We may have not seen the prices at the pump increasing, but already the prices for jet kerosene for aviation
09:59have skyrocketed.
10:01So transport, travel in general, is going to be more expensive.
10:06Ultimately, oil is used in a number of different goods, including, of course, petrochemicals, plastics and so forth.
10:14Natural gas is particularly important as well because it is used extensively not only in heating spaces.
10:20It is also used for electricity generation.
10:23So expect higher electricity prices, especially where gas is used to produce the last kilowatt hour in an economy.
10:31And also in all sorts of other industries, including chemicals, fertilizers, food processing, smelting metals and so forth.
10:40So if this conflict goes on, eventually give it perhaps a quarter and all these higher prices for gas and
10:48oil are going to start filtering through the economy and eventually inflation and possibly an economic slowdown.
10:54And just finally, Michael, do the Gulf states, do they have a buffer here thanks to the, you know, their
11:00geography, obviously, the fact that many of them are oil producing themselves and they've made investments in this area?
11:08Buffer in terms of energy supplies, you mean, or in terms of any other consumer goods?
11:13In terms of the energy supplies?
11:17In terms of the energy supplies, well, they do have stocks in the ground, pretty much.
11:23I think the key question there is, if they get hit, if their production facilities get hit, then they have
11:30a problem.
11:31As long as the production facilities are intact, then they can keep on pumping and storing.
11:37The worrying thing is that the Iranian missiles are also targeting refiners, refineries, like the one in Rastanura.
11:45This is a problem because it means the supply of what we actually use in terms of oil, the refined
11:51oil products may be disrupted, but also, as I said, natural gas before.
11:56Natural gas is still used extensively in the region, together with oil, to generate electricity.
12:03You know, it's probably almost 50-50 the two commodities are used to generate electricity.
12:09So, hopefully, there are enough reserves of both in order to maintain some sense of normality in these economies.
12:19Michael, thanks so much for being with us on the programme.
12:21We'll have to leave it there for now.
12:22That's Michael Timvakis, Professor of Economics and Finance at the Bayes Business School, City University, London.
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