June 18, 2025 • 22 mins
On this episode of Trumponomics, we ask what Israel’s war with Iran, Donald Trump’s public musings about sending America to fight again in the Middle East and a potentially soaring oil price would mean for the US economy—and the 79-year-old Republican’s economic plans. We also address why those high oil prices haven’t yet come to pass.
Host Stephanie Flanders is joined by Jennifer Welch, chief geoeconomics analyst for Bloomberg Economics and Ziad Daoud, chief emerging markets economist and senior fellow at the Harvard Kennedy School.
See omnystudio.com/listener for privacy information.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I want to just
thank you our great host Canada, but you'll probably hear
what I see and I have to be back here.
Speaker 2 (00:25):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to Trumponomics, the podcast that looks at the economic
world of Donald Trump, how he's already shaped the global economy,
and what on earth is going to happen next. We're
recording this on Tuesday, the seventeenth of June, hours before
the official end of the fifty first g seventh Summit
(00:47):
being hosted in Canada, but after the US President unexpectedly
departed a day early. Maybe we shouldn't be so surprised.
He's made no secret of his disdain for these official
gatherings of world leaders, I mean, collective decision making. It's
not really his thing, nor is sharing the spotlight. Why
stick around arguing over a stupid communicate when you can
(01:09):
steal all the headlines by jumping on a plane unexpectedly
and posting on truth social But headlines aren't the same
as results, and so far, the president's one man banned
approach to ending foreign wars hasn't been going very well
at all. As I mentioned, we're recording this on the Tuesday,
the seventeenth of June. The conflict between Iran and Israel
(01:30):
appears to be intensifying today, and obviously we don't know
what will happen in the region before you listen to this,
but we can ask what the crisis in the Middle
East and potentially a soaring oil price would mean for
the US economy and for Donald Trump. And we've got
two brilliant voices to speak to that from our Bloomberg
Economics team in London here with me, which I'm like
(01:52):
to say is not always the case. Diaddou, chief emerging
markets economist, who's also a senior fellow at Harvard Kennedy
School and a great friend of the show. We heard
him a few weeks ago in Qatar. It was great
to be here and in Washington. Jenny Welch, our chief
geoeconomics analyst. Jenny, who's also been on the show several times,
previously served as the director for China and Taiwan on
(02:14):
the US National Security Council under the Biden and old
Trump administrations.
Speaker 1 (02:19):
Thanks so much, Stephanie, an honor to be here.
Speaker 2 (02:27):
Jenny you're someone who's I spent a fair bit of
time preparing notes for G seven summits, and I was
remembering that Donald Trump in his first term, he left
the last G seven that was also held in Canada
in a half about Canadian milk quotas. Is there any
point having them these G seven meetings in the age
of Donald Trump.
Speaker 1 (02:48):
Well, interestingly enough, I think we're going to get an
answer to that question today on what the remaining G
seven leader is another guest at the summit accomplished now
that President Trump has departed it. They were able to
put out yesterday a statement on the ongoing Israel Ron conflict,
but even then they had to do a lot of
backroom dealing to get President Trump to sign on to it. Otherwise,
(03:09):
the expectations for the summer were pretty low heading into it.
I think there was a lot of focus really more
on Trump's bilateral meetings that he was due to hold
on the sidelines on the summit, then on what the
leaders themselves are going to accomplish.
Speaker 2 (03:22):
There is so much focus on who gets the bilateral
with Donald Trump, and I guess the ones who were
shortchanged have got an excuse. They say, oh, well, they
had to leave. But did he get anything done before
he left in any of these meetings.
Speaker 1 (03:33):
Well, we got additional progress. I say progress because there's
still some unsolved elements of the US UK trade deal,
but we didn't get progress on Japan, South Korea, India,
which were kind of the other major trade deals that
were building anticipation for some sort of announcement at this meeting.
But Japan had their meeting and was surprisingly not able
(03:56):
to come out of it with any major announcements. All
of this, by the way, and just under a month
until the deadline for reciprocal terrorists coming back in at
those higher rates. Another leader who also wasn't able to
have a meeting with President Trump was President Zelenski, who
was a guest at this year's G seven as he
has been in years past, and was probably very interested
(04:16):
in having that conversation in light of negotiations with Russia
continuing to sell out, concerns about us A continuing not
to come through, and kind of the broader game plan
for Russia Ukraine under President Trump.
Speaker 2 (04:31):
The reason that Donald Trump went back to White House
was apparently to think harder potentially respond to the intensifying
conflict between Iran and Israel over the last few days.
I'm sure people listening will have been following most of
the twists and turns. But just in terms of the
market and the potential economic impact, just talk us through
(04:53):
briefly how markets have responded to all intense purposes outbreak
of war since the end of last week.
Speaker 3 (04:59):
Right the main market that we're talking about that's relevant
for the global economy is obviously the oil market. All
prices did go up or have gone up since Friday thirteenth.
Before the conflict, oil was around sixty seven dollars per barrel.
Now is around seventy five dollars per barrel. It did
go up. There are some attacks on refineries in Israel
(05:19):
and Iran, but nothing major, no major disruption. They're up
because of worries about potential disruption and oil supply and
our two risks here. There's one risk, which is basically
Israel hitting Iranian energy facilities oil and gas and at
risk here we're talking about Iran's oil productions about three
percent of global supply. And there is the second risk,
(05:41):
which is potential Iranian retaliation on all facilities in the
Gulf and the arp Golf countries. In Saudi, in the Oe,
in Kuwait and so on, and at risk. Here we're
talking about one third of global supply or a closure
of the Strait of Hormus, through which goes one fifth
of global oil supply, so large quantities, and that will
have implications for all prices. We looked at the scenarios.
(06:03):
If you get the first scenario in which you get
just a disruption an Iranian all supply and you lose
three percent or most of the three percent of global
all supply, we're talking about all prices in the mid seventies,
which is roughly where they are now. If we get
a major disruption and then shut down of the Strait
of Humers and the world loses one fifth of its
global all supply, which is something based by the way,
(06:25):
is unprecedented, never happened. We're talking about a major oil
shock that could take all prices to one hundred and
thirty dollars per barrel.
Speaker 2 (06:33):
Okay, and if in the past we've had oil shops.
I know you've also looked at what history shares on
that front. What does that look like for the broader economy.
Speaker 3 (06:42):
Let's just talk about recent history and then we talk
about the longer history, the recent history, past twelve to
twenty months, we've had every imaginable geopolitical us has materialized.
A war in Gaza and devastation and Gaza that has happened,
an expansion of the war, and to eleven on, a
c area that has happened. Regime change in the Middle East.
(07:03):
Look at whos in the presidential palace in Damascus now
a different person to a year ago. A direct war
between Iran and Israel. It's not a one day it's
a multi day war, and that is happening right now.
So everything that we thought was remote and unlikely has materialized,
and yet there's no pass through to all prices. In fact,
even after the increase in all prices over the past week,
(07:25):
oil today is lower than October six, when it was
eighty five dollars per barrel. So this decoupling between oil
and geopolitical risk is something that we have witness over
the past twenty months. Let's now look at the longer
time horizon. Over the past fifty years, there's been I
think seven major turmoils in the Middle East, from the
(07:46):
nineteen seventy three war all the way out to twenty
twenty three. October seventh attacks. Of these seven turmoils, three
of them have had little impact on all prices. Two
did have an impact on oil, but that was short lived,
only lasted for a few months, and only the remaining
two have had the lasting impact on all prices. These
(08:07):
were the nineteen seventy three war, Arab Israeli War and
the Iranian Revolution of nineteen seventy nine. These also happened
to be the oldest two events in our sample. So
it seems that recently oil is getting decoupling from geopolitical
events and escalation, but it's also something that has been
(08:27):
happening over the past few decades as well.
Speaker 2 (08:30):
This is an administration that has talked more about oil
than most, I mean, has been very keen on expanding
US energy production. Donald Trump has also talked about and
his Treasury sectary has talked about wanting to get oil
prices down as one of the key parts of the
economic strategy. This sort of decoupling of what's going on
in the Middle East geopolitical conflict from the oil price.
(08:53):
Do you think that is changing the way the administration
will look at the risks of this situation. They will
feel sort of a sense of reassurance that none of
this is really going to come back to bite them
in terms of the price of the pump.
Speaker 1 (09:06):
It does strike me that we don't see the same
sort of sense of urgency to act and diffuse tensions
this time around that we might have expected a few
years ago when the US was more concerned about its
energy dependence on the Middle East. You know, for example,
President Trump's comments over the weekend that he was contemplating
just letting Israel and Iran fight it out, I think
(09:29):
would have been unthinkable a decade ago, certainly, you know,
twenty years ago. That being said, you know, it's very
difficult to see inside this administration's current calculus, for lack
of a better word, on the conflict. There's been a
lot of mixed signals, including you know, President Trump's early
departure from the G seven last night was a rather
(09:50):
unusual step that had a lot of folks worried, in
combination with the movement of military assets out to the regions.
I'm very concerning true social posts. And yet we woke
up this morning in Washington to seeing US hasn't acted yet.
What exactly is the next step, I think is something
that We're continuing to watch Keenlee. Maybe by the time
this podcast there as we'll have an answer to that question.
(10:11):
But at the moment a lot of uncertainty about exactly
what the US strategy is here.
Speaker 2 (10:17):
We've had the most sort of extreme examples of that
tea coupling of geopolitics from the old price in the
last two years. But the indication of what you were
saying is that this has been something that's been coming
for a long time. I mean, if we look at
the amount of instability across the world, but particularly in
the Middle Aged if there's a conflict that becomes much
more regional in scale, do you think that would be
(10:38):
the thing that would change the way markets were thinking
about this moment because it kind of brings into question
broader global stability, or you just think you can throw
anything at these markets.
Speaker 3 (10:50):
I mean, right now market seems quite relaxed and calm,
given the level of escalation that we're seeing now. It's
not normal to see Daranga and bomb tel Aviv gain bomb.
That's absolutely not normal. So I think it's important to
think why there is a decoupling between geopolitics and oil,
and also to think about the link between oil and
(11:11):
the global economy. So I think the reasons why geopolitics
seems to be decoupling from oil, I think there's multiple
factors here. There's a factor in which there is probably
more oil storage now than the early nineteen seventies, so
the world is better prepared for it. There is a
factor in which we do have more supply from the
rest of the world. The Middle eas share is still important,
(11:32):
but it's not just a supply of oil. It's general
supply of energy. We're talking about dirty energy like coal,
but also cleaner energy like renewables. And also typically when
you have an oil price shock, what happens to the world.
He gets slower growth, you get higher inflation, and you
get higher interest rates. That's the sort of rule of
thumb that we have in our global economic models. But
I think the pass through is weaker now. My colleague
(11:53):
Jamie Rush brought a piece this week and he looked
at the reasons, and now there are a couple of reasons. First,
there has been inflation in the world, so one hundred
dollars oil today is not one hundred dollars oil a
decade ago. There is more supply that is actually coming
from rshield, which is more responsive to higher oil prices.
(12:13):
And there is also we need less oil to produce
one dollar of GDP. The energy intensity or the oil
intensity of our economies have fallen in recent decades and
thus reducing the responsiveness of the global economy to all prices.
But also we have reasons why all prices are also
less responsive to geopolitical risks.
Speaker 2 (12:34):
Jenny, it seems as though, at least to some degree,
the fear of sort of economic blowback from conflict in
the Middle East failing to stop conflict in the Middle
East is less than it would have been in the past.
But we know this is an administration that has a
particular divide when it comes to the willingness of certain
(12:55):
members to be quite interventionist and to be imposing America's
will on the world, whether it's regard to China or
other things, and those who are really deeply isolationist, and
the America first rhetoric goes to the point of really
just wanting to pull back from US involvements. Depending on
how things go in the next few days, what kind
(13:16):
of conclusions do you think we should be drawing the
way that the administration approaches the situation in Iran. Do
you think that will hold some lessons about the underlying
dynamics of the administration.
Speaker 1 (13:29):
I think almost certainly it will, And I think at
the end of the day, what it's going to reveal
and what was true in the first Trump administration, but
I think has come into even sharper relief in his
second term is the idea that President Trump is ultimately
the decider, the man in charge. And we saw this
dynamic in his first term, where he liked, for lack
(13:50):
of a better term, this team of rivals dynamic of
having multiple voices within his administration that would cultivate different
options for him and he could kind of weigh them
and tease out the complexities of each of them and
then make ultimately the decision right. And that's what we
see in this time around. Except this time around it
is complicated by this dynamic that he is also staffed
(14:11):
his administration with people that, regardless of their different perspectives
on issues, are ultimately very loyal to him, and I
think that that has become especially an important influence on
how he's approached Iran. In his first term, he was
surrounded by people who were largely hawks on Iran and
who urged his sort of maximum pressure campaign with the
idea that there may ultimately be the second phase of
(14:33):
eventually getting to negotiations, but you have to start with
the pressure that was his first term play. Now in
his second term, he's clearly still has people hawkish on
Iran around him, but he is not necessarily following their
advice on going back to that maximum pressure campaign. First
he launched in with the negotiations, which I think was
a surprise to a lot of people who had watched
his first term policy. The question is now he seems
(14:56):
to be seeing this latest conflict as sort of giving
him leverage at the negotiating table, even though from Tehran's perspective,
it is not going to engage at the negotiating table
while it's involved in an active conflict. And so I
think the question is how does Trump see this playing out.
Does he really think that this is going to give
him leverage? Is he still ultimately focused on a deal
(15:18):
or is it some part he going to walk away
from the table and say I can achieve my goals
through other, albeit military means.
Speaker 2 (15:26):
This is slightly a process question, but I think it
also matters because it affects how the decisions being made.
Speaker 3 (15:33):
You were in the.
Speaker 2 (15:33):
National Security Council. There is almost no National Security Council
now in terms of your equivalent, the staff who are
expert in their field and are writing memos and advising
the principles. That is a skeleton operation now barely exists
at all, And as far as we can see, all
the policy planning, or at least the preparation for policy
(15:54):
and the option papers is all coming out of the
State Department. Is your sense that that expertise around the
Middle East is still there within the State Department, That
kind of knowledge of the region is feeding into some
of the deliberations, even if Donald Trump and the people
around him aren't themselves expert what's your sense of that.
Speaker 1 (16:13):
I think there's two simultaneous truths here. There is still
a tremendous amount of expertise in the United States government
on the Middle East that exists at various centers, the
intelligence community, the State Department, Defense Department. But part of
the function of the NSC was to coordinate and bring
up into a higher level those expertise opinions and formulate
policy options for the principle for the President and his
(16:36):
senior advisors. The NSC not playing that function as well
today because it's been so whittled down, and because even
at senior levels it's been whittled down, I think creates
questions about whether or not that expertise is still floating
up to the top, and whether there's the same sort
of very thought through options that are being presented at
the same time. I think there has been a tendency
(16:58):
in the Trump administration, even before the recent gutting of
the NSC, for decisions to be made outside what we
would call the normal policy process, for the President to
be making these decisions based on his conversations with individuals,
including people who are not in government, but he is,
for example, very much influenced by people outside of government
who are major voices in the MAGA community, and for
(17:20):
those conversations to be happening simultaneous and not necessarily taking
into stock some of the internal government expertise and policy
options that are normally the foundation of those conversations.
Speaker 2 (17:33):
The desks officers' worst nightmare is when all these unofficial
conversations happened that they can't control. Yeah, I'm just sort
of interested. I'm looking at you, because we were sitting
in Doha not long ago, just after Donald Trump had
been to the region. Donald Trump went to the region,
had all these conversations with the various leaders in different
countries seem to go down pretty well, and they played
(17:55):
their part with their commitments of investments in the US
and other things. The US unexpectedly actually becomes in behind
Israel on this effort quite aggressively. How will those same
leaders who saw him a few weeks ago be thinking
about that, and specifically how their own people will be
reacting to that.
Speaker 3 (18:15):
I think in terms of the leader, they're already probably
disappointed now when we sat down a few weeks ago
and we said that Trump's visit was a success for them.
It was a success because Trump was perceived to have
gotten funds from the region in return for common the
region now and not escalating with Iran. And he sat
next to the Amir of Qatar saying, I'm talking to
Iran because my friend, the Emir of Qatar is getting
(18:36):
me to do this, and I like him, and this
is why we're doing this. How do the leaders feel.
I think they feel a bit. Obviously all is high
and that's good for their economies, but the risk of
instability is much bigger, and the risk of instability is
that they're caught between the two fires, Iran and Israel.
There is a risk of retaliation from Iran on their
energy facilities, on their land or maritime borders. And there's
(19:01):
also the risk of the people, the fact that people
in the region are probably not happy with that, and
they may take out their anger on the leaders. So
I think everyone in the Middle East is watching, it's
probably feeling nervous about this.
Speaker 2 (19:14):
Many people who voted for Donald Trump will not particularly
care about the Middle East, but they had heard this
mantra from the president that he was either not going
to get involved in the rest of the world or
was just going to very quickly achieve piece he wasn't
going to get involved in what he would call Democrat wars.
How much will they be concerned in the administration about
(19:35):
the broader impact on the Mega Coalition of having this
very obvious involvement, because you can see Donald Trump wanting
to be the strong man in Middle East, wanting to
take big gambles and do things that people hadn't dared
to do before with Iran. But if the result is
kind of what it's been in the past, which is
American president's kind of stumble in and then can't get out.
How much does that hurt him? How much will you
(19:56):
worry about that?
Speaker 1 (19:57):
It's a fair question, especially because right now we're serving
the MAGA movement does seem quite divided on this issue,
and we even sol overnight President Trump taking aim at
someone who has been an ally in the movement, so
to speak for him, Tucker Carlson on this very point
of who is ultimately the decider of what makes America
great again? And President Trump saying he is, and he
(20:20):
decides that making sure that around doesn't have a nuclear
weapon is very much about making America grade again. But
I think, ultimately, and this is a bit of a
bold claim as a foreign policy expert, I think it
tends to be, with rare exceptions, that foreign policy is
not necessarily the major determinant of domestic political opinion towards
a president, unless they really botch things and we get
(20:42):
dragged into a major and very deadly war. It's probably
going to be other things, and namely the economy and
namely what happens, for example, with the Big Beautiful Bill
and how it affects DUX policy, in the coming years
and people's sense of how much money is in their wallet.
I think is probably going to be what drives more
of how people perceive the effectiveness of the President and
(21:05):
his ability to come through our major promises that he's made.
I think it's a whole host of other issues that
are at play.
Speaker 2 (21:11):
We'll be down not to Iran but the irs. Yeah. Maybe,
Jenny Sad, thank you very much, thanks for listening to
Trumpnomics from Bloomberg. It was hosted by me, Stephanie Flanders
and I was joined by Jennifer Welch and Ziad Daud
from Bloomberg Economics. Trumpnomics is produced by Sammasadi and Moses
(21:33):
and m with help from Chris Martlu and Amy Keen,
with special thanks to Rachel Lewis Krisky. Sound design is
by Blake Maples and Brendan Francis. Newnan is our executive
producer and to help others find the show, please rate
it highly and review it wherever you listen to podcasts.
Bloomberg Audio Studios, Podcasts, radio News. I want to just
thank you our great host Canada, but you'll probably hear
what I see and I have to be back here.
Speaker 2 (00:25):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to Trumponomics, the podcast that looks at the economic
world of Donald Trump, how he's already shaped the global economy,
and what on earth is going to happen next. We're
recording this on Tuesday, the seventeenth of June, hours before
the official end of the fifty first g seventh Summit
(00:47):
being hosted in Canada, but after the US President unexpectedly
departed a day early. Maybe we shouldn't be so surprised.
He's made no secret of his disdain for these official
gatherings of world leaders, I mean, collective decision making. It's
not really his thing, nor is sharing the spotlight. Why
stick around arguing over a stupid communicate when you can
(01:09):
steal all the headlines by jumping on a plane unexpectedly
and posting on truth social But headlines aren't the same
as results, and so far, the president's one man banned
approach to ending foreign wars hasn't been going very well
at all. As I mentioned, we're recording this on the Tuesday,
the seventeenth of June. The conflict between Iran and Israel
(01:30):
appears to be intensifying today, and obviously we don't know
what will happen in the region before you listen to this,
but we can ask what the crisis in the Middle
East and potentially a soaring oil price would mean for
the US economy and for Donald Trump. And we've got
two brilliant voices to speak to that from our Bloomberg
Economics team in London here with me, which I'm like
(01:52):
to say is not always the case. Diaddou, chief emerging
markets economist, who's also a senior fellow at Harvard Kennedy
School and a great friend of the show. We heard
him a few weeks ago in Qatar. It was great
to be here and in Washington. Jenny Welch, our chief
geoeconomics analyst. Jenny, who's also been on the show several times,
previously served as the director for China and Taiwan on
(02:14):
the US National Security Council under the Biden and old
Trump administrations.
Speaker 1 (02:19):
Thanks so much, Stephanie, an honor to be here.
Speaker 2 (02:27):
Jenny you're someone who's I spent a fair bit of
time preparing notes for G seven summits, and I was
remembering that Donald Trump in his first term, he left
the last G seven that was also held in Canada
in a half about Canadian milk quotas. Is there any
point having them these G seven meetings in the age
of Donald Trump.
Speaker 1 (02:48):
Well, interestingly enough, I think we're going to get an
answer to that question today on what the remaining G
seven leader is another guest at the summit accomplished now
that President Trump has departed it. They were able to
put out yesterday a statement on the ongoing Israel Ron conflict,
but even then they had to do a lot of
backroom dealing to get President Trump to sign on to it. Otherwise,
(03:09):
the expectations for the summer were pretty low heading into it.
I think there was a lot of focus really more
on Trump's bilateral meetings that he was due to hold
on the sidelines on the summit, then on what the
leaders themselves are going to accomplish.
Speaker 2 (03:22):
There is so much focus on who gets the bilateral
with Donald Trump, and I guess the ones who were
shortchanged have got an excuse. They say, oh, well, they
had to leave. But did he get anything done before
he left in any of these meetings.
Speaker 1 (03:33):
Well, we got additional progress. I say progress because there's
still some unsolved elements of the US UK trade deal,
but we didn't get progress on Japan, South Korea, India,
which were kind of the other major trade deals that
were building anticipation for some sort of announcement at this meeting.
But Japan had their meeting and was surprisingly not able
(03:56):
to come out of it with any major announcements. All
of this, by the way, and just under a month
until the deadline for reciprocal terrorists coming back in at
those higher rates. Another leader who also wasn't able to
have a meeting with President Trump was President Zelenski, who
was a guest at this year's G seven as he
has been in years past, and was probably very interested
(04:16):
in having that conversation in light of negotiations with Russia
continuing to sell out, concerns about us A continuing not
to come through, and kind of the broader game plan
for Russia Ukraine under President Trump.
Speaker 2 (04:31):
The reason that Donald Trump went back to White House
was apparently to think harder potentially respond to the intensifying
conflict between Iran and Israel over the last few days.
I'm sure people listening will have been following most of
the twists and turns. But just in terms of the
market and the potential economic impact, just talk us through
(04:53):
briefly how markets have responded to all intense purposes outbreak
of war since the end of last week.
Speaker 3 (04:59):
Right the main market that we're talking about that's relevant
for the global economy is obviously the oil market. All
prices did go up or have gone up since Friday thirteenth.
Before the conflict, oil was around sixty seven dollars per barrel.
Now is around seventy five dollars per barrel. It did
go up. There are some attacks on refineries in Israel
(05:19):
and Iran, but nothing major, no major disruption. They're up
because of worries about potential disruption and oil supply and
our two risks here. There's one risk, which is basically
Israel hitting Iranian energy facilities oil and gas and at
risk here we're talking about Iran's oil productions about three
percent of global supply. And there is the second risk,
(05:41):
which is potential Iranian retaliation on all facilities in the
Gulf and the arp Golf countries. In Saudi, in the Oe,
in Kuwait and so on, and at risk. Here we're
talking about one third of global supply or a closure
of the Strait of Hormus, through which goes one fifth
of global oil supply, so large quantities, and that will
have implications for all prices. We looked at the scenarios.
(06:03):
If you get the first scenario in which you get
just a disruption an Iranian all supply and you lose
three percent or most of the three percent of global
all supply, we're talking about all prices in the mid seventies,
which is roughly where they are now. If we get
a major disruption and then shut down of the Strait
of Humers and the world loses one fifth of its
global all supply, which is something based by the way,
(06:25):
is unprecedented, never happened. We're talking about a major oil
shock that could take all prices to one hundred and
thirty dollars per barrel.
Speaker 2 (06:33):
Okay, and if in the past we've had oil shops.
I know you've also looked at what history shares on
that front. What does that look like for the broader economy.
Speaker 3 (06:42):
Let's just talk about recent history and then we talk
about the longer history, the recent history, past twelve to
twenty months, we've had every imaginable geopolitical us has materialized.
A war in Gaza and devastation and Gaza that has happened,
an expansion of the war, and to eleven on, a
c area that has happened. Regime change in the Middle East.
(07:03):
Look at whos in the presidential palace in Damascus now
a different person to a year ago. A direct war
between Iran and Israel. It's not a one day it's
a multi day war, and that is happening right now.
So everything that we thought was remote and unlikely has materialized,
and yet there's no pass through to all prices. In fact,
even after the increase in all prices over the past week,
(07:25):
oil today is lower than October six, when it was
eighty five dollars per barrel. So this decoupling between oil
and geopolitical risk is something that we have witness over
the past twenty months. Let's now look at the longer
time horizon. Over the past fifty years, there's been I
think seven major turmoils in the Middle East, from the
(07:46):
nineteen seventy three war all the way out to twenty
twenty three. October seventh attacks. Of these seven turmoils, three
of them have had little impact on all prices. Two
did have an impact on oil, but that was short lived,
only lasted for a few months, and only the remaining
two have had the lasting impact on all prices. These
(08:07):
were the nineteen seventy three war, Arab Israeli War and
the Iranian Revolution of nineteen seventy nine. These also happened
to be the oldest two events in our sample. So
it seems that recently oil is getting decoupling from geopolitical
events and escalation, but it's also something that has been
(08:27):
happening over the past few decades as well.
Speaker 2 (08:30):
This is an administration that has talked more about oil
than most, I mean, has been very keen on expanding
US energy production. Donald Trump has also talked about and
his Treasury sectary has talked about wanting to get oil
prices down as one of the key parts of the
economic strategy. This sort of decoupling of what's going on
in the Middle East geopolitical conflict from the oil price.
(08:53):
Do you think that is changing the way the administration
will look at the risks of this situation. They will
feel sort of a sense of reassurance that none of
this is really going to come back to bite them
in terms of the price of the pump.
Speaker 1 (09:06):
It does strike me that we don't see the same
sort of sense of urgency to act and diffuse tensions
this time around that we might have expected a few
years ago when the US was more concerned about its
energy dependence on the Middle East. You know, for example,
President Trump's comments over the weekend that he was contemplating
just letting Israel and Iran fight it out, I think
(09:29):
would have been unthinkable a decade ago, certainly, you know,
twenty years ago. That being said, you know, it's very
difficult to see inside this administration's current calculus, for lack
of a better word, on the conflict. There's been a
lot of mixed signals, including you know, President Trump's early
departure from the G seven last night was a rather
(09:50):
unusual step that had a lot of folks worried, in
combination with the movement of military assets out to the regions.
I'm very concerning true social posts. And yet we woke
up this morning in Washington to seeing US hasn't acted yet.
What exactly is the next step, I think is something
that We're continuing to watch Keenlee. Maybe by the time
this podcast there as we'll have an answer to that question.
(10:11):
But at the moment a lot of uncertainty about exactly
what the US strategy is here.
Speaker 2 (10:17):
We've had the most sort of extreme examples of that
tea coupling of geopolitics from the old price in the
last two years. But the indication of what you were
saying is that this has been something that's been coming
for a long time. I mean, if we look at
the amount of instability across the world, but particularly in
the Middle Aged if there's a conflict that becomes much
more regional in scale, do you think that would be
(10:38):
the thing that would change the way markets were thinking
about this moment because it kind of brings into question
broader global stability, or you just think you can throw
anything at these markets.
Speaker 3 (10:50):
I mean, right now market seems quite relaxed and calm,
given the level of escalation that we're seeing now. It's
not normal to see Daranga and bomb tel Aviv gain bomb.
That's absolutely not normal. So I think it's important to
think why there is a decoupling between geopolitics and oil,
and also to think about the link between oil and
(11:11):
the global economy. So I think the reasons why geopolitics
seems to be decoupling from oil, I think there's multiple
factors here. There's a factor in which there is probably
more oil storage now than the early nineteen seventies, so
the world is better prepared for it. There is a
factor in which we do have more supply from the
rest of the world. The Middle eas share is still important,
(11:32):
but it's not just a supply of oil. It's general
supply of energy. We're talking about dirty energy like coal,
but also cleaner energy like renewables. And also typically when
you have an oil price shock, what happens to the world.
He gets slower growth, you get higher inflation, and you
get higher interest rates. That's the sort of rule of
thumb that we have in our global economic models. But
I think the pass through is weaker now. My colleague
(11:53):
Jamie Rush brought a piece this week and he looked
at the reasons, and now there are a couple of reasons. First,
there has been inflation in the world, so one hundred
dollars oil today is not one hundred dollars oil a
decade ago. There is more supply that is actually coming
from rshield, which is more responsive to higher oil prices.
(12:13):
And there is also we need less oil to produce
one dollar of GDP. The energy intensity or the oil
intensity of our economies have fallen in recent decades and
thus reducing the responsiveness of the global economy to all prices.
But also we have reasons why all prices are also
less responsive to geopolitical risks.
Speaker 2 (12:34):
Jenny, it seems as though, at least to some degree,
the fear of sort of economic blowback from conflict in
the Middle East failing to stop conflict in the Middle
East is less than it would have been in the past.
But we know this is an administration that has a
particular divide when it comes to the willingness of certain
(12:55):
members to be quite interventionist and to be imposing America's
will on the world, whether it's regard to China or
other things, and those who are really deeply isolationist, and
the America first rhetoric goes to the point of really
just wanting to pull back from US involvements. Depending on
how things go in the next few days, what kind
(13:16):
of conclusions do you think we should be drawing the
way that the administration approaches the situation in Iran. Do
you think that will hold some lessons about the underlying
dynamics of the administration.
Speaker 1 (13:29):
I think almost certainly it will, And I think at
the end of the day, what it's going to reveal
and what was true in the first Trump administration, but
I think has come into even sharper relief in his
second term is the idea that President Trump is ultimately
the decider, the man in charge. And we saw this
dynamic in his first term, where he liked, for lack
(13:50):
of a better term, this team of rivals dynamic of
having multiple voices within his administration that would cultivate different
options for him and he could kind of weigh them
and tease out the complexities of each of them and
then make ultimately the decision right. And that's what we
see in this time around. Except this time around it
is complicated by this dynamic that he is also staffed
(14:11):
his administration with people that, regardless of their different perspectives
on issues, are ultimately very loyal to him, and I
think that that has become especially an important influence on
how he's approached Iran. In his first term, he was
surrounded by people who were largely hawks on Iran and
who urged his sort of maximum pressure campaign with the
idea that there may ultimately be the second phase of
(14:33):
eventually getting to negotiations, but you have to start with
the pressure that was his first term play. Now in
his second term, he's clearly still has people hawkish on
Iran around him, but he is not necessarily following their
advice on going back to that maximum pressure campaign. First
he launched in with the negotiations, which I think was
a surprise to a lot of people who had watched
his first term policy. The question is now he seems
(14:56):
to be seeing this latest conflict as sort of giving
him leverage at the negotiating table, even though from Tehran's perspective,
it is not going to engage at the negotiating table
while it's involved in an active conflict. And so I
think the question is how does Trump see this playing out.
Does he really think that this is going to give
him leverage? Is he still ultimately focused on a deal
(15:18):
or is it some part he going to walk away
from the table and say I can achieve my goals
through other, albeit military means.
Speaker 2 (15:26):
This is slightly a process question, but I think it
also matters because it affects how the decisions being made.
Speaker 3 (15:33):
You were in the.
Speaker 2 (15:33):
National Security Council. There is almost no National Security Council
now in terms of your equivalent, the staff who are
expert in their field and are writing memos and advising
the principles. That is a skeleton operation now barely exists
at all, And as far as we can see, all
the policy planning, or at least the preparation for policy
(15:54):
and the option papers is all coming out of the
State Department. Is your sense that that expertise around the
Middle East is still there within the State Department, That
kind of knowledge of the region is feeding into some
of the deliberations, even if Donald Trump and the people
around him aren't themselves expert what's your sense of that.
Speaker 1 (16:13):
I think there's two simultaneous truths here. There is still
a tremendous amount of expertise in the United States government
on the Middle East that exists at various centers, the
intelligence community, the State Department, Defense Department. But part of
the function of the NSC was to coordinate and bring
up into a higher level those expertise opinions and formulate
policy options for the principle for the President and his
(16:36):
senior advisors. The NSC not playing that function as well
today because it's been so whittled down, and because even
at senior levels it's been whittled down, I think creates
questions about whether or not that expertise is still floating
up to the top, and whether there's the same sort
of very thought through options that are being presented at
the same time. I think there has been a tendency
(16:58):
in the Trump administration, even before the recent gutting of
the NSC, for decisions to be made outside what we
would call the normal policy process, for the President to
be making these decisions based on his conversations with individuals,
including people who are not in government, but he is,
for example, very much influenced by people outside of government
who are major voices in the MAGA community, and for
(17:20):
those conversations to be happening simultaneous and not necessarily taking
into stock some of the internal government expertise and policy
options that are normally the foundation of those conversations.
Speaker 2 (17:33):
The desks officers' worst nightmare is when all these unofficial
conversations happened that they can't control. Yeah, I'm just sort
of interested. I'm looking at you, because we were sitting
in Doha not long ago, just after Donald Trump had
been to the region. Donald Trump went to the region,
had all these conversations with the various leaders in different
countries seem to go down pretty well, and they played
(17:55):
their part with their commitments of investments in the US
and other things. The US unexpectedly actually becomes in behind
Israel on this effort quite aggressively. How will those same
leaders who saw him a few weeks ago be thinking
about that, and specifically how their own people will be
reacting to that.
Speaker 3 (18:15):
I think in terms of the leader, they're already probably
disappointed now when we sat down a few weeks ago
and we said that Trump's visit was a success for them.
It was a success because Trump was perceived to have
gotten funds from the region in return for common the
region now and not escalating with Iran. And he sat
next to the Amir of Qatar saying, I'm talking to
Iran because my friend, the Emir of Qatar is getting
(18:36):
me to do this, and I like him, and this
is why we're doing this. How do the leaders feel.
I think they feel a bit. Obviously all is high
and that's good for their economies, but the risk of
instability is much bigger, and the risk of instability is
that they're caught between the two fires, Iran and Israel.
There is a risk of retaliation from Iran on their
energy facilities, on their land or maritime borders. And there's
(19:01):
also the risk of the people, the fact that people
in the region are probably not happy with that, and
they may take out their anger on the leaders. So
I think everyone in the Middle East is watching, it's
probably feeling nervous about this.
Speaker 2 (19:14):
Many people who voted for Donald Trump will not particularly
care about the Middle East, but they had heard this
mantra from the president that he was either not going
to get involved in the rest of the world or
was just going to very quickly achieve piece he wasn't
going to get involved in what he would call Democrat wars.
How much will they be concerned in the administration about
(19:35):
the broader impact on the Mega Coalition of having this
very obvious involvement, because you can see Donald Trump wanting
to be the strong man in Middle East, wanting to
take big gambles and do things that people hadn't dared
to do before with Iran. But if the result is
kind of what it's been in the past, which is
American president's kind of stumble in and then can't get out.
How much does that hurt him? How much will you
(19:56):
worry about that?
Speaker 1 (19:57):
It's a fair question, especially because right now we're serving
the MAGA movement does seem quite divided on this issue,
and we even sol overnight President Trump taking aim at
someone who has been an ally in the movement, so
to speak for him, Tucker Carlson on this very point
of who is ultimately the decider of what makes America
great again? And President Trump saying he is, and he
(20:20):
decides that making sure that around doesn't have a nuclear
weapon is very much about making America grade again. But
I think, ultimately, and this is a bit of a
bold claim as a foreign policy expert, I think it
tends to be, with rare exceptions, that foreign policy is
not necessarily the major determinant of domestic political opinion towards
a president, unless they really botch things and we get
(20:42):
dragged into a major and very deadly war. It's probably
going to be other things, and namely the economy and
namely what happens, for example, with the Big Beautiful Bill
and how it affects DUX policy, in the coming years
and people's sense of how much money is in their wallet.
I think is probably going to be what drives more
of how people perceive the effectiveness of the President and
(21:05):
his ability to come through our major promises that he's made.
I think it's a whole host of other issues that
are at play.
Speaker 2 (21:11):
We'll be down not to Iran but the irs. Yeah. Maybe,
Jenny Sad, thank you very much, thanks for listening to
Trumpnomics from Bloomberg. It was hosted by me, Stephanie Flanders
and I was joined by Jennifer Welch and Ziad Daud
from Bloomberg Economics. Trumpnomics is produced by Sammasadi and Moses
(21:33):
and m with help from Chris Martlu and Amy Keen,
with special thanks to Rachel Lewis Krisky. Sound design is
by Blake Maples and Brendan Francis. Newnan is our executive
producer and to help others find the show, please rate
it highly and review it wherever you listen to podcasts.
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