Ambrose Evans-Pritchard
The magical thinking continues. Donald Trump’s blockade of Iranian shipping has zero chance of forcing the military-clerical regime to capitulate before the pain becomes intolerable for the world economy and ultimately for America too.
The confidence trick of tweets on Truth Social is losing its efficacy. The oil price goes up and down like a yo-yo – it hit a four-year high of $US126 last week before plunging again on no meaningful news but is on the rise again.
The trading band of Brent crude is ratcheting ever higher as we near an accumulated one billion barrels of missing oil and exhaust the last usable reserves on land and water.
“Every month that passes, the price increases by around $US30 a barrel. We’re reaching a point where it not only destroys demand but starts to trigger economic recessions,” said Thierry Bros, the former head of energy security for France’s economy ministry.
We are heading for $US180 by mid-year but global prices could spiral much higher if Trump imposes export restrictions on US crude, diesel and jet fuel, the trio currently being sucked into world markets and driving up prices in America.
“He’d justify it by saying, ‘NATO hasn’t been nice to me, so no more oil for NATO.’ I see a 50 per cent risk of this happening and if he does that, everything will go mad,” Bros said. You can forget about flying anywhere this summer.
Europe and large parts of Asia already have one foot in recession. The longer the Gulf stays closed, the greater the danger that this mother-of-all commodity supply shocks will set off secondary convulsions in equities and credit, morphing into something akin to the traumatic bear markets of 1973, 2000, 2008 or 2020.
To my surprise, not even the Keynesian turbo-boost of German military spending has prevented a crash in the German Ifo business climate index to 84.4, lower than it was at the nadir of the global financial crisis.
France was already in a slow-motion slump before the war and has no ammunition left for counter-cyclical measures, an affliction shared with Britain.
“Recession is here. The risk of a social explosion in France is very high, but the risk is rising for the eurozone too,” said Marc Touati, a French economist, who added that today’s angry mood had a pre-revolutionary character.
Italy’s Giorgia Meloni has called for an immediate suspension of the EU stability pact to allow bigger fiscal deficits and an emergency bailout, with a rising clamour from her coalition to defy Brussels and go it alone. The usual intra-EU fighting has begun.
The EU authorities are in a horrible bind. S&P’s composite survey of eurozone manufacturing and services dropped into contraction in April even as the inflation rate spiked to 3 per cent, a tame figure compared to what is coming next.
The policy threat to Europe is that the European Central Bank (ECB) will again rise to this inflationary bait, ignoring the Bernanke Rule that central banks should “look through” oil shocks. The ECB’s proclivity is to make matters worse by tightening into recessionary headwinds and credit contractions.
The bank committed this cardinal sin in July 2008 by raising interest rates at the peak of the last commodity shock.
By then, Germany and Italy were already in recession and the housing pillars of Fannie Mae and Freddie Mac in the US were already collapsing. That rate rise had cross-border ramifications and played its part in the collapse of the global banking system two months later.
The ECB did it again with impeccably bad timing in 2010 in conjunction with austerity overkill by Brussels.
The combined monetary and fiscal errors aborted the fragile post-Lehman recovery and led to a) the eurozone debt crisis, b) 1930s levels of unemployment, c) the lost decade, d) military disarmament, e) technological relegation, f) Brexit and g) diminished European credibility in the eyes of the world.
As far as I can tell, the ECB still thinks it did nothing wrong and is all too likely to rinse and repeat.
Credit demand in the eurozone has already fallen to recessionary levels.
Simon Ward, a monetarist at NS Partners, said the ECB ought to be cutting rates pre-emptively to head off a crunch but may instead tighten because it worships at the New Keynesian altar of inflation expectations, a measure that gave no early warning of the inflationary spike in 2021-2022 and which is an equally false lodestar in the very different circumstances today.
“An opposite mistake may be brewing,” he said.
As for the Bank of England, if the Monetary Policy Committee really thinks that we might need six rate rises to cope with sustained $US120 oil prices through to the end of year, it is time for a wholesale purge of the institution.
The notion is monetary lunacy.
We might still avert a recession in Europe, the UK and Japan if there is an immediate peace deal in the Gulf. But that requires an end to wishful thinking in the Oval Office.
Trump seems to believe that a blockade will achieve in a matter of days what 24,000 air strikes and the assassination of the regime’s top tier failed to achieve.
“If they don’t get their oil moving, their whole oil infrastructure is going to explode because they have no place to store it … They have just a matter of days before that event takes place,” he said.
The claims are fantasy. Robin Mills, from Columbia’s Center on Global Energy Policy, said a few marginal wells with a “high water-cut” will suffer bad damage, but Iran will probably be able to restore 70 per cent of its pre-war output almost immediately and most of the rest within a few months.
Donald Trump’s blockade of Iranian shipping has zero chance of forcing the military-clerical regime to capitulate before the pain becomes intolerable for the world economy and ultimately for America too.
The blockade will force Iran to cut gas output, leading to internal gas rationing and reduced pipeline exports to Turkey. But that alone will not force the Revolutionary Guards to halt their asymmetric war of guerrilla resistance.
As Danny Citrinowicz, an Israeli intelligence analyst, writes in a devastating piece for Foreign Affairs – How the War Saved the Iranian Regime – Trump’s excursion has turned a dying clerical regime into a tight-knit military regime that has now tasted the enormous power of controlling the Strait of Hormuz.
Iran is not going to give up its new stranglehold or its missiles or its regional proxies and will henceforth demand better terms on nuclear enrichment than it offered before the war.
Citrinowicz said that once it is clear that the blockade is achieving nothing, Trump is likely to escalate to a “military quick fix”. Axios reports that military top brass will brief Trump on options for a “short and powerful” wave of strikes.
These strikes will also achieve nothing except retaliatory escalation and probably the closure of the Red Sea, endangering another six million barrels a day of world supply.
Wall Street is priced for perfection with a market capitalisation worth 228 per cent of GDP, just shy of its all-time high and 60 per cent more stretched than it was at the peak of the pre-Lehman bubble. Perfection is not on the menu.
