A shock to the oil system
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What impact is the war in Iran having on global oil supply?
All right, what if, and just hear me out now, what if the markets are an idiot? From American Public Media, this is Marketplace.
In Los Angeles, I'm Colin Risdell. It is Monday. Today, this one is the 23rd of March. Good as always to have you along, everybody. All right. It was perhaps a little bit harsh to characterize the market's reaction to the news of the day, as I just did, because it does make some sense, after all, for traders and their algorithms to react to presidential promises that things are going to get better, whatever the actual facts might show. But one cannot help but wonder whether the markers of market based capitalism that we use might be just a bit too focused on the short term. That is that they haven't priced in the long run economic challenges that this war is going to bring. Robin Brooks is a senior fellow at the Brookings Institution.
Robin, it's good to have you back on the program.
Great to be back, Kai.
All right.
How does the current oil shock compare to the oil crises of the 1970s?
Test my premise. Do you think markets are not, as I said, pricing in the long term challenges no matter what the president happens to say on any given day?
So I think there's two big questions. And I think the question you're asking is totally valid. The first question is, is what just happened? On Friday, we were de-escalating. On Saturday, we were escalating. We were going to bomb power plants in Iran. This morning, we're de-escalating again. And I think it's worth thinking about how much weight should the market put on any one pronouncement. The whole thing reminds me of the tariff standoff with China a year ago when tariffs went to 150%. And for a while, the president was almost negotiating with himself, escalating, de-escalating. And ultimately, that ended up with China kind of winning that standoff. And perhaps... That's what's going to happen here, too.
Iran will kind of emerge with the upper hand. And I think that's kind of what the market is betting on, that Trump is backing off and kind of doing a taco, as people say. The other question, obviously, that you're also getting to is, you know, is there not enough lasting damage to the economy for the stock market to rally today? So we can discuss that next, maybe.
Well, let's go ahead and go there. What do you suppose the lasting damage factor might be? Because for every day this thing goes on, it will take, I don't know, I'm making this number up, but it's going to take a week, 10 days to unpack it, you know?
What are the long-term economic challenges posed by the war in Iran?
Oh, totally. So I think there's two things going on, right? Oil prices, which obviously impact prices at the pump, and that's incredibly important for the U.S. consumer. You know, oil prices are a function of two things, a physical shortfall in the market now and So that's the de facto closure of the Strait of Hormuz or severe encumberment. And then second of all, there's a big expectations component, which is basically the market guessing how long will it take for the Strait of Hormuz to reopen tomorrow, the week after, the month after, three months from now. And today, the market basically said, okay, This pronouncement from the president means this conflict is going to be a lot shorter. And so therefore, my expectations component, I'm going to rein that in.
And so that's the reason that the market rallied today.
One hates to bring Jay Powell into the conversation seemingly unnecessarily, but the word that comes to mind here is transient, right? Powell got in trouble in the post-pandemic period and in the pandemic period saying that inflation was going to be transitory. And it does seem to me... that people writ large are expecting the economic fallout from this war to be transient. You know what I mean? That it's not going to endure. And I wonder if you agree, because, you know, once prices go up, whatever the cause, they're really slow to come down.
Yeah, Kai, I think that's a really important point. I think we all have a little bit of trauma from 2021 and 2022 when inflation rose so much that after a decade when inflation was almost written off. And of course, the Federal Reserve also was slow to recognize that inflation shock.
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Chapters
8 chapters
1
What impact is the war in Iran having on global oil supply?
0:02–1:14
2
How does the current oil shock compare to the oil crises of the 1970s?
1:14–2:58
3
What are the long-term economic challenges posed by the war in Iran?
2:58–7:07
4
How are skyrocketing natural gas prices affecting U.S. data centers?
7:07–10:27
5
What are the implications of the natural gas market changes for AI industries?
10:27–14:37
6
How is Beaver County, Pennsylvania adapting to its economic challenges?
14:37–17:58
7
What role do small businesses play in local economies like Beaver County?
17:58–22:22
8
What lessons can be learned from the economic shifts in Beaver County?
22:22–25:11