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The Global Economic Fallout: Week 5 Iran War | EYES ON GEOPOLITICS
00:54:53
In this episode, Nick Trickett, an energy market expert, discusses the current geopolitical and economic impacts of the ongoing energy crisis, including oil, natural gas, and renewable energy trends, and their implications for global markets and US...
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- [00:01]
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- [00:32]
Nick Trick
Help is always ready before, during and after your stay. We've planned for the plot twists, so support is always available because a great trip starts with peace of mind.
- [00:45]
Demetri Kontakos
Hey everybody. Welcome to another episode of Eyes on Geopolitics. I'm Demetri Kontakos. I'm here with Jonathan Hackett, Jack Murphy and Nick Trick. Trick it our very special guest. He's the. An associate director at S P Global Energy. He knows his stuff basically when it comes to this. And we always talk, all of our shows we talk about, you know, the, the bullets and the bombs and like John said before we started, we got to start talking about the beans too because it all, you know, you can't talk about one without talking about the other. So I figured let's have a smart guy come on and like teach the, teach the troglodytes what, you know, what's going on. Besides, it's me and Jack are the trogolites. John's actually pretty, pretty intelligent, so I'll keep him out of this.
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Jack Murphy
Depends how many crayons you feed me.
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Demetri Kontakos
That's true too. Yeah, he was a marine for a long time, so don't hold that against them. Yeah. Nick, thanks for coming on. Really appreciate it.
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Nick Trick
Yeah, thank you for having me.
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Demetri Kontakos
Of course, my first thing as I was like we've seen, you know, the S and P for one. Like because there's so many factors that we, you know, we try and judge like what's going on in the economy. The S P really hasn't taken a huge hit. I think it's down like 6% ish. Since the war started, which is like it's at an all time high. So you know, the 6% can be gained quickly back. I want give us kind of a lay of a land of what we should kind of expect in the next coming few weeks.
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Nick Trick
Oh God, that's tough.
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Demetri Kontakos
Okay, so sorry, I know it's pretty broad. Sorry.
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Nick Trick
No, no, that's fine. So I mean just, just to start off, just to be clear, like I think I'm saying It's kind of in a personal capacity. So I'm not going to try to represent like my company's views and all that. But you started by mentioning The S&P 500 is kind of this way that we think about assessing the relative effect of the crisis. It's incredibly unhelpful. There are a couple reasons for that. One is equity markets aren't always the real world, right? There's this disconnect. But I think the bigger thing to think about here is that a huge portion of the market's concentrated in tech. And that story for now is still relatively resilient. I mean, obviously there have been sell offs and people are finally cooling on it. But in general that a lot of those gains and the hope that this is going to be short term is sustaining that kind of relatively surprisingly okay performance, given how scared people are. So first I start by just saying the equity market doesn't yet understand what they're in for fully because people can't accept it because it's just really, really, really bad. So I think the easiest way to think of the scale we're talking about losing in the range of 10 million barrels a day of oil supply in a market that's kind of consuming somewhere in the range of 102 million barrels a day and there's enough inventory on the water or in storage for crude oil specifically that you can manage that for a bit, you know what I mean? But every single day that that supply is not reaching the market, that's 10 more million barrels you got to find to source somehow, right? And it's not just the loss of the physical supply that matters. And I'm in metals now, so I'm going to speak in generalities as opposed to specific, you know, refineries are not universal, right? They're designed for specific blends of crude oil. Like any given crude oil that you see traded like a benchmark, it's kind of like a way of maintaining quality control. You have a specific brand that blends like specific crude oils from specific oil fields, right. That then gets packaged into this kind of benchmark price when you start getting interruptions of the kind of delivery of the crude oils that your refineries are optimized for. You know, when you, if you buy alternatives that aren't quite what you need, the products that you yield from refining them aren't quite the same in terms of like the balance. So that's one thing. Right? So, so that, that. So, so the point is that like the, the kind of oil supply chain for lack of a better word, is a bit more fragile and complex than, than, you know, we might think over the last five years, given how many shocks we've gone through where it seems to have been resilient. Right. The second point is that, you know, unlike say the 70s, you know, there's also a lot, a lot of natural gas that's been disrupted from liquefied natural gas, in particular from Qatar. But just that's then that, that's a hugely important market because that's, that provides, you know, mostly power in this case for like Asia Pacific, but also, you know, the heating needs and you know, goes both the Europe and Asia Pacific because the Middle east kind of is this ideal swing supplier between the two. Right. And you know, in the 70s when we had the last oil shocks, yes, the world technically speaking was more dependent on oil because we were less efficient at using it. But we didn't use gas the same way. Other commodities weren't as affected. So for instance, about somewhere in the range of 10% of the world's aluminum supply right now is affected by what's happening in the Strait of Hormuz. So the longer this goes on, the likelier it is that Arizona iced tea is going to cost like four bucks a can.
- [05:22]
Demetri Kontakos
Unacceptable.
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Nick Trick
It's like that kind of. And there's already problems there because US Tariffs and stupidity with Canada means that we are having a harder time sourcing aluminum than for imports and all that. Long story short, you know, it's not just the gasoline, the price of the pump, it's a broader energy complex that's affected and that power complex that's affected. And so what's happening first is, you know, what we're seeing in Asia already is markets basically preparing for just real scarcity. And we already have governments imposing rationing to some extent. You know, we have governments moving to four day work weeks where they can. The EU is telling people now, for example, not to travel as much. And that's going to get worse and worse. I mean the UK where I know where I'm living, basically, I think yesterday or today accepted the last kind of cargo of jet fuel from the Middle east that it's going to get. And so when people talk about the oil price, especially online and like American finance, Twitter and like kind of the New York Tech Bros. And Wall Street Bros. Who think that it's going to be okay, they're referring to Brent typically. And Brent is the kind of global benchmark crude price because Brent oil, crude oil is like, it's a blend from The North Sea in Europe. It's like your ideal, like platonic ideal of a barrel of oil in terms of the products you get out of it because of its qualities. That's a physical market, right? Like, like, like that, that benchmark is referring to physical barrels that are being delivered and priced. And there's, there's some other stuff in the US now involved in that. But like, bottom line, that physical market has not been disrupted yet. So that price is not actually accurate to the physical markets elsewhere. If you look in Singapore, the price of oil is basically somewhere between 160, 180 barrel dollars a barrel already. You know, the price for jet fuel is still going vertical in Singapore. I think it's higher than $230 a barrel right now. And like, and this is, but so, so, so, I mean, we're gonna be flying a lot less the second half this, the year if, if we don't sort this quickly. Right? And that's before you factor in lng. You have governments across the Asia Pacific scrambling to get coal back up, you know, restarting nuclear reactors. So you have that conversations kind of Taiwan, South Korea and Japan, you know, because they've relied on lng, so quite natural gas to kind of keep their, you know, the lights on, right? And that's disrupted. And then all these things are being felt first in the Asia Pacific, then they'll be felt in Europe and kind of emerging markets in Africa in tandem. And then, and then it spreads to the US and the Americas. So it's like a slow rolling wave where we don't really fully see the effects in the US yet, but we will eventually. But I mean, if this goes on for a couple more weeks, I mean, we're already in a world where rationing is now a thing that governments have to do. I mean, it's not the scale of it could be reversed if this was to suddenly open tomorrow. But the reality is, if, you know, even if the US somehow manages to reach a situation where Iran agrees to just let stuff pass freely, there's going to be a new premium for all those prices baked in that people will have to pay because they don't know what's going to happen. And the market's going to also create a premium for people to just buy security. You know what I mean? Anything you can get your hands on, you want to stockpile. Right now, I think we're heading towards the worst energy crisis the last 60 years. We're already kind of in it, but it's still regional in terms of the most Obvious effects, but it's kind of spreading. Australia's only got about three weeks of fuel left. You know, like New Zealand's got similar concerns. China's been, China has, you know, excess capacity to refine oil and also massive reserves like, like strategic reserve of oil. And they've been banning exports. So that's kind of crimping some of the supply, not all of it. They're still sending a little bit out. But all the, all that's already happening and we just haven't realized it yet. And so to take, take this back to where you opened with The S&P 500, you know, if you run out of LNG and you run out of power long enough, you're going to have a lot of semiconductor fabs in the Asia Pacific that have to get power somehow. And the government has to decide do we keep making chips and holding the global economy up or do we keep people's lights on? And on top of that, Qatar provides about a third of the world's helium. And you need helium to make chips. And it's not the gas kind of, you need liquid helium. And basically that's, that boils off when it's in storage. So you can't really store it from usually like more six and six to eight weeks. Is my understanding that that's kind of the inventory you're working with. And so yeah, this is all stuff that like the market just isn't pricing because everybody's convinced Trump has to back down somehow and nobody, nobody knows how to price assets in a world where like that level of a shock is happening.
- [10:00]
Jack Murphy
Nick, I'm curious, like we have these shocks that we're currently inside of now. What do you think? Like, look, I'm thinking back to Covid, you know, the shift from in person work to remote work is an example. What do you think economically will persist after this conflict changes? I see some talk about EVs. Perhaps demand might increase, but it's not really increasing. What do you think might be the residue that kind of comes out of this?
- [10:21]
Nick Trick
Oh, EV is absolutely increasing a lot. It's not, it's not slow. The reason why people don't think it's increasing is because the US is basically an increasingly insular market where people think that US is the world and don't really pay attention to what's happening elsewhere. I mean, if you look globally, like we're basically a tipping point, right? If you include hybrids and plug in electrics and looking at the kind of range of non pure combustion engine vehicles this year, is probably the year where a majority of global light vehicle production is already not just purely combustion engine, you know what I mean? And like a country like Indonesia for example, like the market penetration rate for like battery electrics, not even plug in hybrids, is going to hit like 100% sometime in like 2027 at the current rate. Vietnam is already probably is already a majority EV market. China is in a majority EV market and that's the biggest auto market in the world. Right? I mean Japan's been kind of further behind, but I think we'll probably pick up the pace. The EV story is there. So this shock in my opinion is probably going to accelerate peak oil demand. The exact timeline is up for debate, but I think significantly faster than we were probably assuming. Even though I'm also kind of bearish on demand. So I'm probably not the best representative from my industry. So that's locked in. You know, I think renewables are skyrocketing right now, like even in the uk like demand for solar panels in the last month is up something like over 50% because people are just like, look, I need to make sure that I have some kind of power, right? So like they're just, they're just reacting to the shock. If they can afford it, they'll do it. And with solar specifically also it's important, I think people have kind of missed this, that like in the last 15, 18 months, two years, it's increased significantly and there's a real uptick in the last half of last year. But people living in emerging markets and kind of developing countries in general, they're just going for solar off grid. It's cheap enough that it is the best option they have. And if they don't have access to reliable power, they'll do it at home. If they can afford it in the more middle class, they'll buy a battery as well. But that's locked in, you know what I mean? Obviously that doesn't solve all the problems you might have. If you want to build heavy industry, you still need reliable power. So that's still probably natural gas, coal or something else like that with nuclear if you can manage it. But I mean that's, I think that's a given. So that's probably going to accelerate because people are going to be so afraid of not having power and it's just cheap. Right? And China, and China has also slack capacity to produce these things, is in a better position to weather the shock that we're undergoing at the moment than most. And on top of that, you know Even though clean tech is affected by what's happening in these markets. So, for example, like aluminum goes into solar panels, right? So but it's a relatively small share of aluminum demand. So. And that market is flexible enough that you can probably work around these disruptions to keep making stuff as long as you keep the lights on and the power you need, obviously for everything. So I think that's a given. Work from home is certainly a possibility, but I don't think it's going to be that affected. I think people will see it more as an emergency measure. And you see governments already using it actually as a way to try to save fuel. But I think that's less relevant. I think the bigger thing is simply that we're entering a period of no longer living in a world where we really rely on the US to preserve freedom of navigation and in that world for energy. Because of how interconnected all these markets are, everybody's going to want to make their power at home. And it's much more rational to want to have to import a clean technology from China and pay for it once than have to pay for a molecule that you have to burn every single time you have to burn it. And so that's just the basic economic rationale. It doesn't mean that people are just going to drop fossil fuels like coal, I think is going to have a longer lifetime life kind of span for peak demand than we expected because of this, just because they hit the gas. But I don't think oil and gas are ever quite going to recover their kind of expected demand in the future because everybody's going to want to basically make power onshore, diversify their options for it for where they get their energy from and where they can accelerate processes that use electricity, especially clean tech, to basically make replacement molecules. So you'll use hydrogen in a process instead of natural gas where you can. Or you'll try to make fertilizer without the input. So, for example, over 40% of the sulfur that's exported globally transits the Strait of Hormuz. And without that sulfur making fertilizers a lot more expensive. It actually also affects metals because for some metals production techniques, you basically use sulfuric acid to extract metal from a body of Oregon. And so all these things are kind of are compounding right now. No one really quite knows how they're going to settle. But it's, it's in a world where you have, where you no longer can, like people keep. I think in the US at least often talk about fossil fuels as like a Pragmatic solution, you know, like, we have to be pragmatic and not rely too much on renewables because it's woke. Like, look, I live in Europe. Like, obviously there's an ideological component to what's gone wrong with European energy policy, but I don't. But the reality is that it was just really cheap to install. Clean tech renewables got really cheap. People, people installed. I mean, and then the batteries got cheaper and people started putting batteries on stuff. The problem is this narrative about the reliability of fossil fuels is reliant upon just having reliable trade. And we don't live in that world anymore. So I think that that's kind of dying in real time as an assumption people have.
- [15:40]
Jack Murphy
I wondered too, you're talking about maritime security. We talked on the show a few times about insurance. How these vessels, even if it was actually safe in the Straits of Hormuz, the insurance companies might still hesitate despite their assurances that they're safe. And I'm curious what you see as the effect of this conflict on insurance long term, especially maritime insurance.
- [15:58]
Nick Trick
See, I mean, I'm not like a specialist by any stretch, but it's safe to say it's going to bake in a larger premium and it's going to, it's going to significantly raise the cost of insuring these vessels. You know, this will go from like, like a tiny tail risk event that people, you know, had to insure for but didn't really affect your overhead to like, you know, insurance like a payment equal to like 5% of the value of what you're shipping. You know what I mean? Like, it's like that level of shock from like a marginal, like point, however much percent to that, and at that point, that passes through to consumers. So commodities are getting more expensive. That's just, I think, going to be. But I don't think that's a forever thing. I think actually that people are over exaggerating the inflation side of that problem. But I do think that structurally there's going to be an increase in prices, at least for a while, because the market just has to accommodate risks it never had to before. I think of it as kind of whiplash from last year. The Trump administration already kind of showed us how crazy they could be, and we just took it at face value that it was mostly talk. But living in Europe, it's like once Greenland was on the menu, it wasn't like anyone could think, oh, he's just saying that we had to plan as if that was a possibility. You know what I mean? You had to assume that it was possible. And once you have to assume it's possible, even if it's less than 1% chance, it happens, it just radically changes the way you think about risk.
- [17:11]
Jonathan Hackett
I think it's fascinating. When we used to talk about peak oil, people were talking about us running out of oil, like the world was just going to run out of oil. And that obviously hasn't happened. But now we're having this conversation. I've never. I mean, I guess I have heard it, but, you know, it's interesting to hear you talk about it. The concept of peak oil demand, that it's not that we're running out of fossil fuels, it's just that the dynamics of energy politics are changing so dramatically. And the technology.
- [17:39]
Nick Trick
Yeah, yeah. I mean, people debated, I think realistically, pre war, most assumptions probably had demand peaking around 2030-2032 as kind of like a safe, cautious, like nodding towards the transition while also making sure the fossil fuel people are happy. That's probably been blown up. We don't exactly know, but that's probably been blown up. Because one of the. I think the most difficult parts of the forecasting is for a very long time it was assumed that developing countries had to kind of pick up the slack for demand because China really drove a lot of the marginal demand the last quarter century in terms of the growth of imports. And it's China, obviously, that's going electric fastest. They're the ones building EVs. They're, they're exporting them. They're, you know, they're putting out the market. And that kind of assumption collapsed in the last three years because it got so cheap for an emerging market to buy imported EVs. I mean, you could buy like a decent Chinese EV model for $10,000. They're never going to sell that price to you if you live in the US or in Europe, ever. Yeah, because they can. You know what I mean? They can. Obviously they can ask for more, but. But you can. And so like, like these cars are just better tech, they're better experiences to drive, and they're cheap. And I think that really disrupted a lot of assumptions about where demand growth would come from. Because the hope was that once China peaks or matures, whatever the phrase you want to use is, India will pick up the slack, and then Africa, over time, even though it's from a very, very low base, will pick up the slack. Latin America might have some more and the Middle east will have more. And that's just not visibly the case.
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Jonathan Hackett
Over time, the Industrial revolution happened unevenly, and some countries just skipped right over it and got right into the digital age and they didn't have the same evolution as other countries did.
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Nick Trick
Yeah, for sure. And on top of that, I mean, look, there are massive problems with what China's done economically for its kind of global. The global side effects it has for other countries trying to industrialize or manufacture things. I mean, look at the U.S. but that said, if you think about the way that the current shock is changing the energy market, you know, a lot of the narrative the US has leaned on the last five years was basically like, well, okay, Russia wants to weaponize gas, we'll sell you gas. You know, like, Iran wants to close the street. We can sell you, we can sell you hydrocarbons, right? We can sell you oil, gas, whatever. And it's like, why would anyone go for that now when the price could be so wild? Because, because a guy wakes up, tweets, and then suddenly we're bombing targets. Like, it's just not. That's not like a rational strategy. You might, you might rely on it in the short term, but you wouldn't plan for that long term. And so the irony is that like, China is at now for like, developing countries that are really, really sensitive to price and the cost of imports because they basically have to spend their hard earned kind of foreign currency on imports, right? Like, and so they have to, they have to export something to be able to earn dollars, whatever it is, to buy that import. You know, for them, it's more rational to use EVs or to use clean tech because it minimizes the money that's outgoing towards buying energy. And so China is like an ideal energy security partner for these countries, not the U.S. that's just the reality. The U.S. can definitely do stuff that China can't when it comes to like a lot of financing and specific, specific instruments that Chinese companies can, can do. But it's not like the way that they typically go about developing. But the reality is that like, like we, we basically ceded the field to China. Unclean tech. And then we. And then we decided to do something so disastrously shortsighted that it makes, it makes them like the ideal partner coming out of this conflict for anybody who wants to kind of improve their own energy security.
- [21:08]
Demetri Kontakos
Hey, what's up, guys? This is D. Do us a favor and check out our patreon page. It's patreon.com teamhouse. You get both Teamhouse episodes and Eyes on Geopolitics episodes completely ad free. You get them early too. You can ask us questions. You can also watch the Team Ass episodes live as we shoot them. So. And you help support the show and support what we're doing here. It's patreon.com theteamhouse those links are in the description or if you're listening, it's in the show notes down below. So you can click it real quick and easy and it helps us keep the lights on. So we appreciate it and we appreciate you guys listening. Thanks a bunch.
- [21:49]
VRBO Announcer
With Verbocare, help is always ready before,
- [21:53]
Nick Trick
during, and after your stay. We've planned for the plot twists, so support is always available because a great trip starts with peace of mind.
- [22:05]
Jonathan Hackett
I think the question that a lot of people who watch this are going to have, of course, is what is the effect this is going to have on America? And, I mean, I think you touched on it a bit, but if you could go a little bit more in depth, I mean, my understanding is most of the oil coming from the Persian Gulf ends up in Europe and Asia, not so much the United States. But how is it affecting us? And what do you foresee the effects being in the coming weeks and months?
- [22:29]
Nick Trick
Sure. So first off, the idea that because the US Is an exporter now of crude oil that it's kind of insulated is just not true. It's comforting. It's true that the scale, obviously, of the price shock might be different because we have a bit more of a buffer and we produce more than we consume. But just because the crude oil from the Middle east typically goes to the Asia Pacific or Europe doesn't really. It's still a global market. Right. Like, products still have to flow globally. And it's important to also remember that nobody actually consumes crude oil as a consumer. They consume something that's been refined from crude oil. So the issue is not so much the barrels of crude, even though they're obviously the key supply choke point. It's like once you run out of jet fuel in Asia, you got to go somewhere else to buy it. So you're going to start buying it from Europe, and then Europe's short, and then Europe has to buy it from the US So our airfare kind of takes up massively because obviously jet fuel, I think, is like a quarter of the cost of any given flight. The same thing for gasoline and diesel. Right. I mean, gasoline. Americans actually are uniquely sensitive to gasoline prices because Europeans don't drive as much or as far. So that has an impact, but it's not felt the same way. I think, psychologically, for Americans, when they see gas prices go above 450 a gallon, it's just like a break glass kind of a moment. We're going that, that, that's the world we're living in. I think, I think, you know, it's going to go significantly higher than that, at least during the kind of initial phases of the shock, like as it's more deeply felt. But like it just takes weeks for that stuff to kind of clear through the system, you know what I mean? So I think right now you're already seeing a tick up in like California for example, because California basically imports its products from Asia Pacific. So that specific market is like totally screwed. Like they, they are, they're effectively in Asia, an Asian market in terms of how they get their oil products. It's different in the Gulf, it'll be different in the Northeast. It varies a bit regionally in the US but we are all heading for a world where this stuff's really expensive. And the flip side is that the irony is that when you're a major exporter of a good, your economy is actually more exposed to a price shock than if you're just an importer. Because also the people producing it are affected by that shock and that changes their own economics. Think of it this way, like, diesel is a great, it's probably the most important lever for how to think about how the inflation filters into what you buy every day. Because diesel is used for trucking. It's used for trucking, it's used for power generators at mines and kind of like other industrial sites, etc. And that's going to get significantly more expensive in the next couple of weeks to month, maybe a little bit longer in the US but it'll take time for companies to raise prices to reflect that, but that's immediately going to happen. So you're going to see this kind of price increase be slightly delayed because companies will want to delay as long as possible how much they're passing on to their customers. Right? Because they always want to hope for better and they want to kind of not piss people off too much. But by the time we get to May, I mean, April is when a lot of it's going to unfold. By the time we get to May, I mean, it's going to be felt, you're going to visibly see it, it's going to be really expensive to fill up your gas tank. Prices for goods will start going up. And so I would not, I think the US Is in much better shape when it comes to gas. So the gas Price for heating or power in the US Will stay relatively low compared to global prices, but it's still going to increase because we do export a lot of gas, right? So that still will actually filter into the system some. So I would probably say we're not going to see the same kind of level of shortages. You're not going to see people like being forced to ration and then rioting as if it's COVID lockdowns again. But you are going to see the kind of scale of price increases that are really, really bleak politically in the US but also just socially, people just really, really feel it. I can't really put a hard number on it, but I would not be shocked if national gas prices break $5 to $6 a gallon, depending on how bad the shortages get elsewhere.
- [26:30]
Jonathan Hackett
Nick, I got a question on kind
- [26:31]
Jack Murphy
of price efficiencies, like looking at Iran. Let's say we solved the Iran problem today, suddenly Iran is on our side, all the sanctions are removed. What do you think are kind of the global macroeconomic effects of something like that happening, where all the things that Iran has had as true in the economy for the past 47 years are suddenly dissolved? And I'm sure there would be efficiencies gained, obviously, but do you think there would also be inefficiencies anywhere within the market now that Iran is allowed to play basically unrestrained?
- [26:58]
Nick Trick
That's a great question, and I'm unfortunately an Iran specialist, but in general terms. So first off, it'll still take a couple months for the current shock to filter through the system. You know what I mean? So even if it opened tomorrow, we're still talking about two months of pain, maybe even three months of pain. It might not be as extreme, but it's still kind of. That's baked in. But if Iran was suddenly allowed to basically freely trade and freely produce and could attract foreign investment and so on, I mean, you're talking about lower oil prices materially. I mean, expectations are going to obviously come down. So you probably talk about lower interest rates in terms of people's expectations. So central banks don't feel as much pressure on oil and gas, which is the net positive globally, right? That's probably positive for growth. I mean, Iran makes a lot of steel. It could probably export some of that, but steel's oversupplied globally because of China. They're probably some other metals I could export. I mean, I think it would mostly be like an Iran story, right? I mean, the commodity side would matter. But the thing is, if you think of it this way we were really oversupplied coming into this year without the conflict. And so if that supply all returns to market, then it's a crowded market and Iran can't just necessarily ramp up as easily. I mean it could, but something tells me that OPEC would be really pissed at it because there's still a level at which you need some price stability, right? And in real terms, because of how high inflation's been in dollar terms in the U.S. you know, oil is worth like a third less in nominal terms, you know, or real terms than it was like in 2020, you know what I mean? Like it's, It's a massive, so 60 bucks today for a barrel is way different than it was in 2020. And I mean that said, American producers have gotten way more efficient. So you know, it's not all doom and gloom. But I just think that like it would more be like an Iran specific story as to how that that change goes. I also, I'm very skeptical of sanctions relief fundamentally changing things because countries, I mean, Russia is a great example, economies that are sanctioned that heavily for that long, they tend to become more autarkic and they have to kind of develop an economic model that is just not necessarily concordant with exploiting free trade. You have domestic lobbies you have to make keep happy. You probably want to protect your domestic industries where you can. And also typically experiencing sanctions is a lot like experiencing a big financial shock. Like if there's a run in your currency, for instance, the response typically is to just stockpile foreign currency. So you have to export more than you import. You have to have a relatively conservative kind of fiscal policy for your budget to make sure you're not spending too much, you're not borrowing too much because you just want to maintain confidence in your currency at all times. And sanctions have a similar effect, you know what I mean? And that redundancy itself actually leads to lower growth rates and has its own kind of knock on effects that I don't, I can't speak to Iran really. I mean I'm a Russia specialist but ultimately by training. But I imagine that that those structures can't really be undone very quickly. And there's a lot of political kind of pressure to maintain that system. Even if you have stations relief.
- [30:02]
Jonathan Hackett
When do we get to the point where this is going to do permanent damage to the economy? I mean you kind of made reference to, you know, this is going to change or speed up some of the existing dynamics. But will there come a point where if we reopen the straits, even by military force down the line, that it's just too late. It's not really going to matter or it won't matter.
- [30:23]
Nick Trick
I think the damage is actually done structurally because the market will start to price in a premium. Obviously, the scale that premium is up for debate, but it's going to be pretty high for a while. So the oil prices won't be like, so, so destructive that the entire global economy goes into recession, which is like the flight path we're on right now, you know, in terms of energy. Right. But, but that said, you know, once you've lived through a shock this extreme that no one can make sense of, like, no American ally right now is like, oh, we were consulted and this makes sense. Right. You really have to basically adopt an economic approach, an energy security approach that's built on resilience. And resilience is expensive. Resilience requires redundancy, and it requires a lot of investment into capacity that isn't actually going to be used necessarily. So you basically, you're talking about like a net increase of the share of GDP that energy takes up by necessity, to basically protect yourself from a future shock like this. And that world is one where we grow more slowly. Things are less efficient from a pure market perspective, not that I think that's necessarily always bad. There's a lot more policy intervention to shape markets. And you have what was already happening really since last 2016, but last year on trade that got supercharged. You have that applied to energy. What I mean, you just have a very, very different working model going forward for how much money you're going to spend to make sure you feel safe. And so in that sense, I think the damage is done. I think that imposes its own costs that maybe not as bad or as extreme as just running out of jet fuel and diesel, but still add up and still ultimately are kind of a net negative. I do think that'll end up having a more negative impact on the US Actually over time than even Europe. Not that I'm super, super bullish on Europe, though. I think people are kind of unnecessarily negative about it. But a lot of the US Growth stories also benefited from being an energy exporter, and that's going to come under threat over time because of this kind of shift in people's behavior as consumers of energy.
- [32:27]
Jonathan Hackett
Another question that I wanted to ask you, since we have you here. I've heard from certain people in the, you know, national security space who have told me that they see that what's going on right now that going after Venezuela, then going after Iran is a way of strategically choking off China's access to energy, that it's this sort of part of a larger strategy arraying against China. And I was wondering if, you know, from your perspective, from someone who studies the economics of global energy trade, does this make sense strategically to you? I mean, does, does that pan out at all?
- [33:09]
Nick Trick
I mean, does the Pope shit in the woods? Like, I don't think, like, well, it's from Chicago now, so I should probably ask. No, but, but like, no, like I, I think that like it's, it's absurd to me that people think that and say that it is so irrational and hard. It's, it's like the 40 chess argument is we've already seen so many other things that have happened from US policy in the last 15 months that just prove that we have no idea what we're doing, what's going on anymore, that I just don't understand how someone can credibly claim this. But setting that aside, first off, the energy shock does hit China, but it hits Everybody. And the U.S. caused it. So who are people going to blame? The U.S. and there's obviously the Israeli component, but ultimately the U.S. is kind of backstopping it, right? So the U.S. gets the blame for it. The U.S. doesn't escape the damage. Ultimately, ultimately, even though the U.S. is a net exporter of oil gas, it doesn't fix the problem that you're still exposed to these global markets and China has the world's largest strategic inventories of oil, it's not going to totally bail them out. But for example, I was in Houston for the work conference last week and you talk to people, colleagues who are based in China, and they'll say, people feel calm in Beijing or in Shanghai. People are not panicking. And if there's any country that exists right now that could find a way to engineer its way around this problem, it is literally China. And they're doing it right. Like they, I mean the entire basis of their energy security approach has been to try to reduce their exposure to, you know, the Strait of Malacca. And they've done it successfully. Right? And I mean, EVs like, have taken off. You know, they are electrifying trucks faster than everybody else. So and trucks obviously consume diesel. They've built high speed rail that is actually effective. So people don't fly all the same trips. There are so many ways in which they are still well positioned. And on top of that, because they have these inventories of oil and so on and they have the capacity to refine lots of oil. They can also do things, at least in the near term, I'll say medium term, in terms of months, not years, that allow them to offer, not bailouts, but help to cut people to countries that are struggling. Right. Or in trouble if it benefits them politically. And it puts pressure on people to cut deals with them. You know, I mean, like, if there's one thing that could push the US out of the Asia Pacific, it's literally doing this where we basically incentivize everybody to turn around and try to partner with them because they, they have to make sure that like people's homes are lit and heated. You know, choose your strategic partner. Yeah. So like, you know, so the kind of strategic argument about 40 chess with China, just to me, it's just dumb. It's, it's like trying to reverse engineer some sort of cause for this insanity when you literally cannot find like a single win. Especially when even the administration's own stated goals, which change every day anyway, have, you know, when they were to reopen the Straight of Hormuz, it's like the strait was only closed because of what we did. So like, in what world does this make sense as a rational endgame that benefits us? Right? So like, like, yeah, like, I mean, fair enough that it is a problem for China, but I wouldn't really bet against their ability to build other stuff to get power they need and also to act ruthlessly to make sure they get what they need. Obviously, Iran has a relatively small share of their actual net imports, or at least a manageable share. People also forget this. There's still oil going to China because if they can control who's transiting the strait, they can also let stuff through. There are limits to that. But if they're going to let any ships to anywhere through, it's going to be to China. Right? I mean, China's helping them defend themselves right now.
- [36:59]
Jack Murphy
They're actually earning more in exports currently to China since the war started than before the war started.
- [37:04]
Nick Trick
Yep. Yeah, exactly. So the other thing is that if the argument that this is 40 chess is that the strait is closed, the irony is that that argument would have to assume that the U.S. navy is the one closing the strait and we're actually not. And we can't even reopen it with the US Navy based off our own assumptions. I mean, you know, if they can fire like a missile at a ship off A technical within 100 miles of the coast, in what universe is the US Navy going to expose itself to fire from three sides from mountain range, like, and actually hold that thing open like it's not going to happen. So.
- [37:36]
Jack Murphy
But Pete Hexa this morning said that their navy is completely obliterated and they're like 90% destroyed.
- [37:42]
Nick Trick
Yeah, and Ukraine ran the Russian navy out of the Black Sea without a navy. So, like, I don't think that that argument, like, makes sense anymore, you know, like,
- [37:52]
Demetri Kontakos
Nick, talk to me a little bit about bond markets. How does this affect bond, like a bond. The bond markets.
- [37:58]
Nick Trick
You a fan of bonds?
- [37:59]
Demetri Kontakos
Is that a. Yeah, like I dabble
- [38:04]
Nick Trick
at least.
- [38:04]
Jonathan Hackett
This is poly market, guys.
- [38:08]
Nick Trick
Yeah, well, I'm a US national, so the stuff I can actually buy without massive IRS liabilities in the US are in the nightmare. So, like, I end up getting shafted on the stuff over there. But anyway, I mean, rates go up. Rates go up initially, obviously. I actually don't think it's a given that that's true later in the year. I think the U.S. the irony is that because the U.S. has more energy that it can produce, but also is like letting its own labor market on fire over time by deporting, you know, like, like people who aren't here legally, unnecessarily and so on, you're going to see a higher kind of inflation effect in the US than you would in Europe, where the initial effect is incredibly inflationary because the prices skyrocket, but then nobody has a job. So then obviously the central banks have to cut rates. So the irony is that if the damage was more acutely felt faster in the US Rates would actually probably go lower faster. But because it's not, the rates actually stick higher for longer. Whereas in other parts of the world, what might start with a rate hike might end up actually leading to rate cuts late in the year. Because people realize the scale of the shock is so immense that they just need to do it to be able to finance and to pay for keeping things alive. You know what I mean? Just like keeping companies afloat and so on in a crisis situation.
- [39:22]
Demetri Kontakos
Good God, Nick, is there any silver lining in this at all?
- [39:26]
Nick Trick
No, dude, this is the end of burn after reading. Like, that's, that's, that's, this is, that's what we're experiencing right now.
- [39:33]
Demetri Kontakos
Oh my God.
- [39:34]
Jonathan Hackett
What do we learn from all of this? Nothing, I guess.
- [39:37]
Nick Trick
Yeah, that's literally it. Like, like it's. From an economic perspective. There is, there's basically a rationale and it's all, it's all downside, you know, so like, I, I, you know, I'M sure there's literally a world in which we could see some kind of more positive outcome if, you know, a flowering Democratic Iran was a reality. But I don't really see that happening. Right. And I don't think that even if. Even if that was happening, we're still talking about months of issues before this stuff gets uncorked and kind of resolved, assuming that it ends, like, tomorrow.
- [40:10]
Demetri Kontakos
And, like, the latest out of the White House was that we're thinking about just, like, declaring victory and leaving, even if the straight is closed, so leave it to somebody else's. You know, somebody else's problem, even though we've destroyed.
- [40:23]
Nick Trick
And that could, obviously, I mean, that. That could, theoretically, 3. Free up some supply. But, like, if you're. If you're. Tehran, you just won, so you're going to keep pressing, so why wouldn't you. I'm trying to get.
- [40:35]
Demetri Kontakos
Yeah, go ahead. I'm sorry.
- [40:36]
Nick Trick
No, say, like. Like, why wouldn't you just be like, all right, all right, dude, you want to cut a deal over Hormuz, fine. You better leap Bahrain, too.
- [40:42]
Demetri Kontakos
Yeah, like, we want our $2 million toll for every ship that comes through.
- [40:46]
Nick Trick
But, like. But, but, like, at that point, like, like, why. Why would you stop? I mean, and I know. I know that we had the speaker, whatever, recently, just earlier today, say that, you know, they're. They're open to negotiating, but, like, he hasn't led negotiations at any point in the process. So, like, see, I mean, if I'm them, like, I would just keep. I would. I would. I would see this indication that they're winning, and then you just keep pressing your advantage when you're winning in a situation, because ultimately their goal is to kick the US out of the Gulf. Like, that's the. That's the ball game, right?
- [41:16]
Demetri Kontakos
Thanks. Good God, man. Yeah, I'm all right. I'm fine. I'll make it. My portfolio is. No, just kidding. Jack, do you have anything else? I'm, like, stunned.
- [41:31]
Jonathan Hackett
I mean, I think that's about it. What else haven't we covered that's important to this, to the Persian Gulf?
- [41:37]
Demetri Kontakos
I mean, Nick, what are you tracking in terms of economics? You know, I did, just for the record, for everybody to know. I had helium and aluminum and other commodities on my notes to talk to you about, but you brought it up, so just want to make sure everybody knows that.
- [41:51]
Nick Trick
I mean, it's not as directly affected, but I do keep an eye on copper, obviously, cover that for work. But basically, the short version of it is, basically that a Lot of production in the drc, which is kind of one of the main countries that's driven supply growth the last five years, relies on sulfuric acid. So if that market gets tight that can affect production negatively. So it can take off copper supply. But also copper is historically the best commodity to give you a sense of how healthy the economy is doing. And compared to oil for instance, actually I think it's actually a little bit down compared to when the conflict started. And I actually think the market doesn't really know how to price it right now. But it's kind of is assuming that the demand destruction is coming. So like there's, there's, there's already a signal there, right? It might be a strong one, but it's there. But yeah, I mean the most important stuff right now is to focus on the physical markets for oil. So don't just look at Brents, look at like what's clearing in Singapore and like, like the, you know, different, different blends, you know what I mean? Like you have to kind of look market by market. Henry Hub is the name of the US kind of natural gas benchmark. Look at the non US benchmarks for natural gas. So like TTF in Europe, AKM for the LNG contracts going to like Japan and the Asia Pacific. Track that helium isn't really transparent. It's a small market but yeah, aluminum for sure. But I mean the other thing too to keep an eye on, to get a sense of the scale of the, if not the damage, the expected damage is look at the announcements about EV sales and solar installations, battery installations, not Even in the U.S. but in Europe, across Africa, in poor countries, in the Asia Pacific. That's actually a really useful indicator for how much stress people are feeling. And I think that actually is a better way of understanding how structurally significant the current shock is that people in the US can take for granted the reliability of fossil fuel power and so on. But that's not going to be the case for a lot of people in a lot of the world.
- [43:49]
Jonathan Hackett
Nick, are you still writing on Substack?
- [43:54]
Nick Trick
I'm starting it up again slowly. It's just like the last month was the worst possible time to restart. So I had one piece out and I was like, I was like, I'll do this. And then because Iran it's like this is not happening. But right now you had some really
- [44:04]
Jonathan Hackett
good, good, really good Russia centered stuff on there as I recall. Tell people where they can go to find that.
- [44:10]
Nick Trick
Yeah, so the, the new substack name is Sick Transition. Gloria. So you know, like, like playing off the Latin phrase, but it's just, it's upstack.com. it's going to be a bit more open. So it's going to be some personal stuff. It'll have some stuff on just like metals. But it's, you know, I'm going to make sure that there's Russia content in there and that it kind of comes back to Russia because I am what
- [44:31]
Jonathan Hackett
we all going to also going to get some nightlife.
- [44:35]
Nick Trick
Well, I've got to promote the book that I'm still finishing hopefully for late summer on the Russian economy. So it's nice. It's called Empire of Austerity. That's with Hearst Publishers and yeah, I mean, but we'll see exactly when it comes out. I have to go through the kind of last rounds of the editing process at the moment, but it covers the evolution of the kind of political economy of the regime from the 90s up to last year through the lens of fiscal policy as like the main character, like the kind of the, the original sin, for lack of a better phrase, of like how everything came together.
- [45:09]
Jonathan Hackett
We want to hit that real quick before we get going. Just the Russia stuff.
- [45:13]
Demetri Kontakos
I was gonna ask, I was gonna ask a specific question about Russia. Like I've seen that due to the war, like parts of segments of the economy have like sparked up again, right? Like they're manufacturing and building weapons and stuff like that and shells. Is there. Have they built up to the point where there are lobbying like the government to like keep it going? Because we're making a ton of money and like money's being, you know, injected into certain areas that didn't have it for a long time.
- [45:41]
Nick Trick
So the unfortunate answer is yes and no. It's big enough that if you are a military manufacturer, you're obviously saying give it, keep giving us money, but your costs are increasing so quickly that you're not actually seeing a higher profit necessarily.
- [45:53]
Demetri Kontakos
Okay.
- [45:55]
Nick Trick
But the reality is the Russian economy right now is probably already in recession. I mean it was, it was officially, officially contracted year on year as of January. But the civilian economy has been in recession basically since late 2024. And initially it was very mild. You know, I mean it was more like stagnation, kind of a tiny take down. But it's, it's speeding up over time and there's no like relief in sight. I mean, the higher oil price isn't really helping them. First off, they've lost 40% of their export capacity for crude oil because Ukrainian strikes on Baltic ports Whereas you know, Ukraine, Twitter will say, you know, you know, Ukrainian sanctions, like, you know that. But like now that Ukraine has its own ballistic missiles, they can do a lot more damage to refineries into these targets. And Russia is also just running out of ad. Like, like the, the, the irony is that Russia's size is its biggest liability when it comes to this stuff, right? Ukraine can have a much denser air defense network than Russia can. And so I think that's finally having a bit more of an impact. But like the wartime boom as people kind of thought of it, was mostly a myth. And it was really the first half of 2023 that people saw their wages grow in real terms because of some kind of quirks of the Russian economy, like the way the labor market structured. And so the short version of it to be nerdy is that in the way that the budget system works, when you have a procurement contract for like a federal project or with like a kind of a state owned company, typically you, you're limited to pay 30 to 50% of that contract upfront and the rest is paid on delivery. But in the beginning of 23, because they really had to get mobilization going and getting more, more stuff to the front, they allowed people to pay 90% upfront. So you just had this flood of money hit, hit the market all at once, which created this kind of catalytic effect where suddenly all these, you know, all these factory workers see their wages start rising because there's like a lot of demand for their labor and that spills over, right? And then on top of that you have the wartime bonuses. So guys get, I mean literally if you, if you sign up and serve the front, die the front, your family gets the equivalent of like 35 years of like the average salary pay. So you're, you're literally worth more dead than alive in a lot of parts of the country to like your loved ones in terms of how like, like the way the economy structured. So they didn't, they didn't use like mass conscription. They're, they're bribing people to die. That's basically the way that the regime is doing it. And that has some positive effect because obviously that money goes into people's pockets and they do spend it. But you can't escape the fact that virtually all the production increases in the economy are military since the war began. And you have high inflation domestically from a lack of labor and also sanctions, but increasing lack of labor because every single day more working age men are dying and you're not replacing them. It's not like, massive, but they are cracking down a bit on immigrant labor. So they're squeezing that more because the regime has become a lot more nativist populist in the way that it approaches the rhetoric of these things, even if it acknowledges that it needs them. So, yeah, I mean, I also wouldn't trust official inflation data at this point, because if you look at what people actually consume and pay for food and staples account for about 40% of the average household's budget. The price of. For food and staples has grown at like, twice, three times, sometimes five times the rate of, like, official inflation in a given year since the war began. You know what I mean? So clearly something's going on there. You know, services for, like, tourism got really expensive because people couldn't fly abroad as easily. So, like, all the Russian domestic tourism got a lot pricier. Like, it just. You name it. Basically, there's. There's a. There's a price issue of some kind. Even if, like, officially inflation's not too high because interest rates are really high and they've come down some, but, like, not enough to meaningfully change the game. I mean, if you're still talking about an interest rate at like, between 12 and 15% as low. Yeah, you know, that's not. That's not good. So. So, yeah, I mean, I think if you were to lift sanctions tomorrow, Russia would probably still contract economically for several years.
- [49:56]
Jonathan Hackett
Yeah.
- [49:57]
Demetri Kontakos
I mean, I want everyone to check out Nick's substack. I want to put a link in the description as well. And when your book comes out, we'd love to have you back on to deep dive and give it a good push, actually. Of course. Jack, do you have anything?
- [50:12]
Jonathan Hackett
No, no, I think this is great. Thank you, Nick.
- [50:15]
Demetri Kontakos
Yeah, I mean, there's. Every time you do a show like this, it's like, never good news. It's like never good news. I need. I need like a good news show or something like that. Or just give me some tips or something.
- [50:25]
Nick Trick
Nick, you know, I think you got a crowdfunded bunker.
- [50:29]
Demetri Kontakos
That's it.
- [50:30]
Nick Trick
Yeah. I mean, no, look, I mean, right now, cash is king. Like, stocks are probably going to lose value, so you want to have cash to deploy once things kind of settle a bit more. Commodities are obviously safe to hold in the sense that they're a hedge. So, like, if you. If you know what you're. What you're buying. But the problem is that, like, the scale of demand destruction will be so big late in the year that that's. You can't always you can't timing that's going to be a bit of a mess, you know what I mean? So you can. So buy, buy an etf, go ahead. But like it's going to be a bumpy ride.
- [51:01]
Demetri Kontakos
So we're short and stuff is what you're saying.
- [51:03]
Nick Trick
Yeah, I mean, I would, I would definitely, I go long on food. I mean think if you, if you, if you like, if you prepare for food, prices go up and that's that. That takes longer to feed into the system because fertilizer obviously is planting season, right. So it takes months, but it shows up. Get ready for that. You know, that's probably safe. You know, if you, if you have any exposure. Maybe a timber reit.
- [51:26]
Demetri Kontakos
No.
- [51:27]
Nick Trick
As people start burning more of the stuff at home, I mean, I'm obviously kind of exaggerating, but like the point is going to be really weird stuff that is like a safe haven in the kind of current shock.
- [51:37]
Demetri Kontakos
Good God, man. All right, so the end of days is coming. What happens if the AI bottom falls out while this is going on?
- [51:47]
Nick Trick
Well, I mean, when do you want to retire?
- [51:50]
Demetri Kontakos
I don't know. I mean, at some, I mean, I just want team house revenues to continue to grow. That's what I want.
- [51:55]
Nick Trick
Yeah. No, well, I mean AI was already a bubble. Everybody knew it. So the scale of the bublock is debatable. And when I say bubble, I don't necessarily mean catastrophic because obviously there could be a breakthrough of sudden productivity gains or whatever that leads to a surge of revenue. But physically it's really clear that the scale, the data center build that people are assuming is on shaky ground. It can still literally materialize. But getting that much power to grid that fast in the US is really hard and not really happening. There is definitely people like over egging the kind of the assumptions about need because there's still going to be efficiency gains, there's still going to be other stuff that kind of shows up. But if that bottom falls out and The S&P 500 is going to take a massive dive. And I think that it would really be a reset on the narrative. Maybe not the reality at least, but on the narrative around power and energy stuff. Because a lot of the energy conversation the last two years has been like, how do we physically build the grid and the power we need to power these data centers? And if Taiwan, South Korea and Japan, et cetera, maybe even China, though China would be different. Are making fewer chips later in the year or aren't making chips because they're running out of energy or helium or whatever. That also is going to be an issue because these data centers burn through chips very quickly. The high end ones. If you're talking about the highest end part of the market, it's a couple of years or whatever that they depreciate. It totally changes the way we'd have to think about the next couple of years for the investment plans. And I think that ironically, that might actually be healthier. You know what I mean? It might actually be a better market in that sense, but it would definitely take a big chunk out of the S&P 500 and people's, I think, expectations for growth.
- [53:46]
Demetri Kontakos
All right, you heard it here first. Short everything, guys, just about everything. Nick, again, really appreciate it, man.
- [53:55]
Jonathan Hackett
Yeah, thank you.
- [53:56]
Demetri Kontakos
The link to your substack is down in the description, so please everybody check it out. Everything else, all our stuff is down in the description. Check it out there and we'll see you next time.
- [54:06]
Nick Trick
Great. Thank you so much for having me.
- [54:11]
Jonathan Hackett
Hey guys, I want to take a moment to tell you about the Teamhouse podcast newsletter. If you go and subscribe, it's totally free and what it will do is aggregate all of our data, all of our content that we put out, the things that are on the team house, on our Geopolitics podcast, eyes on things that I write journalistically with Sean Naylor on the high side, anything else that we have going on, books, we recommend, upcoming guests that we have coming on the show and also, you know, filtering in some fun stuff in there as well. If you go and check it out, we send it out just once a week. We don't want to spam you guys. It's just a kind of roll up of all of our content on a weekly basis. You can find our newsletter@teamhousepodcast.kit.com join again, the website for that is teamhousepodcast.kit.com join. So we hope to see you there. The link will be down in the description.