Why Oil Prices Are Decoupling From Geopolitical Threats
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I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. Welcome to Trumponomics, a 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 17th of June, hours before the official end of the 51st G7 summit 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 is not really his thing, nor is sharing the spotlight. Why stick around, arguing over a stupid communique when you can 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-band approach to ending foreign wars hasn't been going very well at all. ♪

As I mentioned, we're recording this on the Tuesday, the 17th of June. The conflict between Iran and Israel 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 delighted to say is not always the case, Ziad Daoud, 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's 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 the U.S. National Security Council under the Biden and old Trump administrations. Thanks so much, Stephanie. An honor to be here. Thank you.

Jenny, you're someone who's, I know, spent a fair bit of time preparing notes for G7 summits. And I was remembering that Donald Trump, in his first term, he left the last G7 that was also held in Canada in a huff about Canadian milk quotas. Is there any point having them, these G7 meetings, in the age of Donald Trump?

Well, interestingly enough, I think we're going to get an answer to that question today on what the remaining G7 leaders and other guests at the summit accomplished now that President Trump has departed it. They were able to put out yesterday a statement on the ongoing Israel-Iran conflict, but even then they had to do a lot of backroom dealing to get President Trump to sign on to it.

Otherwise, the expectations for the summit 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 than on what the leaders themselves are going to accomplish. 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, he had to leave. But did he get anything done before he left in any of these meetings?

Well, we got additional progress. I say progress because there's still some unsolved elements of the U.S.-U.K. 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 to come out of it with any major announcements. All of this, by the way, in just under a month until the deadline for reciprocal tariffs coming back in at those higher rates. Another leader who also wasn't able to have a meeting with

President Trump was President Zelensky, who was a guest at this year's G7, as he has been in years past, and was probably very interested in having that conversation in light of negotiations with Russia continuing to stall out, concerns about U.S. aid continuing not to come through, and kind of the broader conversation

gain plan for Russia-Ukraine under President Trump.

I'm sure people listening will have been following most of the twists and turns, but just in terms of the markets and the sort of potential economic impact, just talk us through briefly how markets have responded to all intense purposes outbreak of war since the end of last week. Right. So the main market that we're talking about that's relevant for the global economy is obviously the oil market. Oil prices did go up or have gone up since Friday 13th.

Before the conflict, oil was around $67 per barrel. Now it's around $75 per barrel. It did go up. There were some attacks on refineries in Israel and Iran.

but no major disruption. They're up because of worries about potential disruption in oil supply. And there are 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 production is about 3% of global supply. And there is the second risk, which is potential Iranian retaliation on oil facilities in the Gulf, in the Arab Gulf countries, in Saudi, in the UAE, 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 Hormuz, through which goes one fifth of global oil supply. So large quantities, and that will have implications for oil prices. We looked at the scenarios. If you get the first scenario in which you get just a disruption in Iranian oil supply and you lose 3% or most of the 3% of global oil supply, we're talking about oil prices in the mid 70s, which is roughly where they are now.

If we get a major disruption and then shutdown of the Strait of Hormuz and the world loses one fifth of its global oil supply, which is something based, by the way, is unprecedented, never happened. We're talking about a major oil shock that could take oil prices to $130 per barrel. Okay. And if in the past we've had oil shocks, I know you've also looked at what history shows on that front. What does that look like for the broader economy?

Let's just talk about recent history and then we'll talk about the longer history. The recent history, past 12, 20 months.

We've had every imaginable geopolitical risk has materialized. A war in Gaza and devastation in Gaza, that has happened. An expansion of the war into Lebanon and Syria, that has happened. Regime change in the Middle East. Look at who is 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 oil prices. In fact, even after the increase in oil prices over the past week, oil today is lower than October 6th when it was $85 per barrel. So this decoupling between oil and geopolitical risks is something that we have witnessed over the past 20 months. Let's now look at the longer time horizon over the past 50 years. There's been, I think,

seven major turmoils in the Middle East from the 1973 war all the way out to 2023 October 7th attacks. Of these seven turmoils, three of them have had little impact on oil 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 a lasting impact on oil prices. These were the 1973 war, Arab-Israeli war, and the Iranian revolution of 1979. These also happen to be the oldest two events in our sample. So it seems that recently oil is getting decoupling from geopolitical trends.

and escalation, but it's also something that has been happening over the past few decades as well. This is an administration that has talked more about oil than most. I mean, it's been very keen on

expanding US energy production. Donald Trump has also talked about, and his Treasury Secretary 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 and geopolitical conflict from the oil price, do you think that is changing the way the administration will look at the risks of this situation? They will feel sort of a

It does strike me that we don't see the same sort of sense of urgency

urgency to act and diffuse tensions this time around that we might have expected a few years ago when the U.S. 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 would have been unthinkable a decade ago, certainly, you know, 20 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 G7 last night was a rather unusual step that had a lot of folks worried in combination with the movement of military assets out to the region, some very concerning true social posts. And yet we woke up this morning in Washington to seeing U.S. hasn't acted yet in

What exactly is the next step? I think is something that we're continuing to watch keenly. Maybe by the time this podcast airs, we'll have an answer to that question. But at the moment,

a lot of uncertainty about exactly what the US strategy is here. We've had the most sort of extreme examples of that decoupling of geopolitics from the oil price in the last two years. But the implication 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 East, if there's conflict that becomes much more regional in scale, do you think that would be 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? 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 Tehran getting bombed or Tel Aviv getting bombed. 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 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 1970s, 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 East share is still important, but it's not just the 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? You get 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 Jamie Rush brought a piece this week saying,

And he looked at the reasons. Now, there are a couple of reasons. First, there has been inflation in the world. So $100 oil today is not $100 oil a decade ago. There is more supply that is actually coming from US shale, which is more responsive to higher oil prices.

And there is also, we need less oil to produce $1 of GDP. The energy intensity or the oil intensity of our economies have fallen in recent decades, and that's reducing the responsiveness of the global economy to oil prices. But also we have reasons why oil prices are also less responsive to geopolitical risks.

Jenny, it seems as though, at least to some degree, the fear of sort of economic blowback from conflict in the Middle East or from 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 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, you know, goes to the point of really just wanting to pull back from US involvement. Depending on how things go in the next few days, what kind 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?

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 of a better term, this team of rivals dynamic of having multiple voices within his administration, but

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. And this time around, except this time around,

It is complicated by this dynamic that he has also staffed 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 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 around 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 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? Or is it some part he going to walk away from the table and say, I can achieve my goals through other means?

albeit military means. This is slightly a process question, but I think it also matters because it affects how the decision's being made. You were in the 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 their principals.

That is a skeleton operation now and barely exists at all. And as far as one can see, all the policy planning or at least the preparation for policy 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? I think there's two aspects.

simultaneous truth 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 principal, for the president and his 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 today.

At the same time, I think there has been a tendency 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 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. The desk's officer's worst nightmare is when all these unofficial conversations happen that they can't control. Zian, 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, seemed to go down pretty well, and they played their part with their commitments of investments in the US and other things. If the US unexpectedly actually comes in behind Israel on this effort quite aggressively, it

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? 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 calming the region now and not escalating with Iran.

And he sat next to the Emir of Qatar saying, I'm talking to Iran because my friend, the Emir of Qatar, is getting 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 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 and is probably feeling nervous about this.

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 peace. He wasn't going to get involved in what he would call Democrat wars. How much will they be concerned in the administration about the broader impact on the MAGA coalition of

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 presidents kind of stumble in and then can't get out, how much does that hurt him? How much do you worry about that? It's a fair question, especially because right now we're observing the MAGA movement does seem quite divided on this issue. And we even saw 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 decides that making sure that Iran doesn't have a nuclear weapon is very much about making America great again. But I think ultimately, and this is a bit of a bold claim as a foreign policy expert, I

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 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 Americans.

Tax 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 his ability to come through on major promises that he's made. I think it's a whole host of other issues that are at play. We'll be down not to Iran, but the IRS. Yeah, maybe. Jenny, Ziad, thank you very much.

Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Jennifer Welch and Ziad Daoud from Bloomberg Economics. Trumponomics is produced by Samer Sadi and Moses Andam with help from Chris Martlew and Amy Keene. With special thanks to Rachel Lewis-Kriske. Sound design is by Blake Maples and Brendan Francis Newnham 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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