Oil rise: Trump gets the jitters

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1:05The Economist. Hello and welcome to the intelligence from the Economist. I'm your host Rosie Bloor. Every weekday, we provide a fresh perspective on the events shaping your world. The war in Iran continues to dominate the headlines. Strange thing is, one of the world's most important countries has said little about it. Our correspondent asks why China stays mute on the Middle East. And it started life as a humble hippie grocery store in LA. Now it's America's trendiest and priciest supermarket frequented by celebrities and Instagrammers. Not a place to go for peas and quiet. But first...

2:12When America launched its joint operation on Iran, the White House said the conflict could last for four to six weeks. Yesterday, Donald Trump suggested the end may in fact come very soon. We're achieving major strides toward completing our military objective. And some people could say they're pretty well complete. Shortly after that, though, he insisted America was going to go further, threatening Tehran with death, fire and fury if it continued to block oil supplies. Nevertheless, Trump's comments did calm stock markets and the price of a barrel of Brent Crude, the global oil benchmark, which hit nearly $120 yesterday at its peak, fell to $90. So, is there now clarity on the course of events or confusion? Yesterday was a really remarkable day in the oil markets, Rosie with Brent Crude going up to almost double its pre-war price.

3:13Edward Carr is the economist deputy editor. And that was beginning to infect markets more generally. I saw yesterday's remarks by Trump as a signal to reassure investors that he will not wreck the economy for the sake of this war. So, it really is oil prices that are rattling Trump and not anything else? I believe that's right. Yes, except it was more complicated than that as it always is with Donald Trump. Because in the same breath, he also said that they were winning the war. It was almost complete. We're going to see this thing through. We're going to do a fantastic job here. So, I don't think he's completely collapsed. The ambiguity about how far this war goes. What he's done is sent investors a signal that he will not wreck everything. And the relief goes beyond the oil markets. It's really noticeable how in Asia where stock markets had had a terrible day on Monday, have recovered with careers up about when I last looked about, about 5% and Japan was up 2.6% and the S&P reacted in America very well to Trump's remarks.

4:20So, the sense that this was spreading out of oil into the economy is sort of reflected in those improvements. It's quite interesting to compare how Trump has operated last night over the oil markets with his response to market pressure over tariffs. If you remember, last April after Liberation Day, the markets reacted extraordinary badly. And Trump was quite quick to show that he was going to backtrack here and make deals there and back off, which gave rise to the nickname of TACO. Trump always chickens out. I think this is somewhat different. He's constrained. One is because Iran has to say in this war too. And although I don't think Iran would want to fight on in any sense in a major way after America decided to stop, it could far sporadic. Rockets prolonging the damage in the oil markets. And the other is that there are real things going on here. You know, there are real oil fields that are beginning to be shut down. There is a real LNG facility in Qatar which has shut down and takes time to restart.

5:23And there are real shadows hanging over this infrastructure now that Iran has shown it's willing to attack it if it has to. Those things don't just sort of go up in a puff of rhetorical smoke when Trump tries to change direction. So on the narrow goal of oil prices, we have actually seen a fall since Trump's comments. Is that enough? It's a dramatic fall. It's gone down to about $90 a barrel just as I came in to talk to you early this morning in London. So it's now pretty much exactly halfway between the pre-war price and the peak price. And from that, I take that the price is incredibly sensitive to what happens next in the war. Trump has tried to talk down the price, but there are projections from Goldman Sachs overnight that if 50 million barrels of oil a day are kept out off the market of Gulf oil. That's about three quarters of what the Gulf exports. If that happens for 30 days, they see oil prices at the end of the year, about 76.

6:25If it's for 60 days, they see oil prices at 93. And if the war stops pretty quickly, they see oil prices in the mid-60s. The numbers don't matter as much as the variation of the numbers. And it tells you that the oil price is very, very sensitive to what's happening now. And this probably won't be Trump's last attempt to try and talk the price down. It's pretty clear from what you're saying, Ed, that you don't expect the war to end soon then. Well, I think there's a trade-off. A trade-off that Trump tried to evade yesterday by saying he could have it all in standard or Trumpian fashion. You could both have a fantastic economy and also get your war ends. But I think what those Goldman numbers tell you, there's a real trade-off between pursuing this war and keeping oil prices low. And the question to me is, what does the Trump administration want? How insistent is it that it gets a compliant Iranian regime in place? And how much does it want to be able to really set back the Iranian nuclear program?

7:28On the first of those, if you don't have a compliant Iranian regime, this war is broken and set a number of precedents. And the most important of those is that Iran has attacked oil infrastructure of its neighbors. Well, with a hostile regime and with the threat of a nuclear program, that premium, that sense that that infrastructure which was thought to be safe, is now a target. And if there has to be another war to stop a hostile Iranian regime from pursuing a nuclear program yet again in the hope that becoming North Korea makes it safe, more that infrastructure becomes a potential target. So there is a change of state in the Gulf. So if Trump really wants to stop that, he has to have a compliant regime. But how long does the war have to go on in order that Mosh Taba Kamenay, who has just been named the Supreme Leader in his very hostile to the United States and has seen his father assassinated by the United States and Israel? How do you ensure that? And then on the nuclear side, remember, there's still something like over 400 kilograms of

8:31highly enriched uranium somewhere in Iran underground at nuclear sites where it was buried. Israel and their states have eyes on that. But for as long as that material remains, someone sometimes can dig it out. And it's a head start to bot 10 or 12 nuclear bombs. Leaving the war goals aside, if the US decided, right, it wants out, could it pull out? Yes, I think it could. I think it could. It's done a lot of damage. It's set back the regime. But the thing is, if it does stop very soon, then I think the chances that a very hostile regime remains in place with the possibility of laying its hands on highly enriched uranium in the future, that remains. So I do think that there is a tension between pursuing these war aims to their end, as the America sets them out and ensuring that oil prices don't get very high. And I think that's the tension that Trump was evading last night.

9:33And if the US was to stage a prompt exit, where would that leave Israel? Well, I think Israel would have no choice but to go along with Trump's decision. Benjamin Netanyahu, the Israeli Prime Minister, has an election fairly soon. And he would much rather to go into that having comprehensively defeated Iran. But I don't think he has an enormous choice. I think he can really defy Trump on this. So I think he would reluctantly have to go along with it. And where would an exit leave Iran? Well, Iran has suffered quite extraordinary damage. It's economy was already in huge trouble. And you shouldn't underestimate the extent of that. But the country is still functioning. Our correspondents have told us the streets have still been cleaned. There are still groceries on the shelves. Before Ali Hamane was killed at the beginning of the war, he devolved command and control out to the regions so that commanders could continue. But there's still a certain amount of central control, however weak and that is. And for this regime, I think the mere

10:39fact of survival is a kind of victory in itself. Ed, thank you very much. Always a pleasure, Rosie. The war in Iran should never have happened and benefits no one. That statement was made by Wang Yi, China's foreign minister on Sunday. Over a week after America and Israel launched their joint operation. Some years ago, China looked like it was wrangling to become a mediator in the Middle East. A new role for an emerging power. Yet its recent coverage of Iran reveals a broader truth. The Chinese Communist Party's called calculus about how to present other autocratic regimes and a reflection of its own role in the region. The big thing is that China has vast economic and especially energy interest in the Middle East to get nearly half of its oil, about a third of its gas from the Middle East.

11:41Much of that passes through the strait of Hormuz, which obviously has been closed because of the current conflict. Simon Rabinovich is our Beijing bureau chief and Chagwan columnist. Beyond that, though, there had been a time where people thought that China was beginning to be much more of a diplomatic power in the Middle East. It had helped to bring Iran and Saudi Arabia together three years ago to restore their official ties. I think what we've seen last couple of years, but especially with the war in Iran, is that actually, although China is an economic power in the Middle East, it really is a political weakling. It's not that involved and it does not want to get that involved. Simon, the Iran conflict is the biggest story in the world right now. How has China responded? China has denounced America's actions and Israel's actions. They've called for restraint. They've called for a restoration of peace and stability for countries not interfering in others sovereign affairs. But most strikingly, beyond rhetoric, it has not done much

12:46of anything. It has stayed on the sidelines. For several years, people had been looking at the Chinese Iranian relationship as potentially some kind of new access and global politics. But I think what we've seen in the last week is that it really is not that. It's similar in a way to what we saw in January when American troops snatched Nicholas Maduro from Venezuela. People thought, well, Venezuela was a close partner of China's would China do anything and it stayed on the sidelines. There, once again, here with Iran, it has stayed on the sidelines. This is despite the fact that both countries were deemed to be close Chinese partners, despite the fact that China relied on both of them for a substantial amount of its oil imports. And despite the fact that in both cases, I think China viewed them not as ideological allies, but as useful foreign in America's side with their proxies targeting America and American allies around the world and especially in the Middle East. Simon, as you say, China had been trying to market itself as something of a power

13:47broker in the Middle East. So why has it been so passive now? Well, I think China uses this kind of partnership to talk with a lot of countries, not just with Iran and Venezuela. And as a general rule, China does not view itself in the same way as America as a country with lots of foreign entanglements. So it might describe countries as partners, but they're not American style allies. And then I think if you get into the specifics of Iran, you actually come away with the conclusion that Iran matters a lot less to China than many people had presumed. There's a big asymmetry between China and Iran. Iran depends on China. China was buying more than 80 percent of its crude exports, but for China, Iran was supplying somewhere about a tenth of its crude. I think one of the things that we're going to see now is that as it gets more difficult to get crude out of Iran or from other parts of the Middle East, China will turn more heavily towards Russia. Over the years, China has sold Iran vital technology, including digital surveillance tools, but actually,

14:49despite promising a lot of investment into Iran over the years, it's delivered relatively little. And in fact, China has grown quite wary of Iran's violent outbursts of its unpredictability. Over the years, China, in fact, has built up stronger relationships with countries that are Iranian rivals, with Saudi Arabia, with the UAE. So I think for all those reasons, Iran, never mind not being a Chinese ally, it wasn't as close of a Chinese partner as many people thought that it was. And will this take some heat of the US-China relationship, do you think? So I think this is another important element. Historically, go back to the Iraq war in the early 2000s. That was seen by many people as an important strategic opportunity for China. America and the early 2000s had begun to pay a bit more attention to China, and then suddenly it was significantly distracted in the Middle East and in Afghanistan for a long period of time, which happened to coincide

15:49with a period that China really prospered and became more of a military force. Once again, you look at where things are right now. We've had a period of America becoming more hostile towards China's rise around the world and trying to rally other countries to come into the American camp, and lo and behold, we potentially are on the precipice of America once again getting bogged down in the Middle East. So I don't think China wants to see this war continue. They do still rely on the Middle East extensively for their energy security, but if America does end up being dragged into the Kragmeyer in Iran and beyond, that is not something that will hurt China's interests. So it in fact would benefit to a certain extent from America once again having to look away from China to other problems that are presenting more clear and present dangers. And Simon, do you think there's anything that could drag China into this conflict, or is it going to be able to continue its sort of isolationist stance?

16:51Well, I think the short answer is no. I think the pattern as well that we've seen is that China is very good at staying out of these conflicts when they're occurring. What they then do is that after peace is restored, they offer something which America doesn't, which is a really, really big interest and expertise and reconstruction. So we've seen that after America pulled out of Iraq, it was Chinese contractors that came in more aggressively to help to rebuild the country, to help to secure oil contracts. And I would expect something similar in Iran. And China is basically ruthlessly pragmatic. They will work with whoever ends up being the government in Iran. It's a profoundly unsentimental way to approach foreign affairs, but it's also relative to the American approach is a much lower cost way of doing things. So I think we can basically expect that kind of playbook from China. The only question is, is this going to be a

17:52matter of waiting for a few days, a few weeks, or sometimes significantly longer than that? Simon, thank you very much. Thank you, Rosie. And you can hear more on Iran this evening on The Insider, our new video offering, when economist editors will be dissecting the recent events. A anatomy of an oil shock will be available later today. You'll need to be a subscriber. Uncovering value and partnering alongside clients to shaped maro's economy today. Brookfield own what's next. Learn more at Brookfield.com. This is not an offer to sell or

18:55investment advice, investing of all risks, including loss of capital. There's one place for the newest drops in wellness and performance and the biggest sale of the year. It's the drop by GNC, curating the best of what's new, handpicked by the pros who know what works. And right now, get it all by one, get one 50% off during the semi-annual live oil sale. From crushing workouts to leveling up to nutrition and everything in between, get the best deals on the latest innovations. All the newness is all on sale right now during the live oil sale on the drop by GNC. So, I am in what I think is East Hollywood. It's a road sign that says Santa Monica and it all feels very LA. Recently, while I was in sunny Southern California, I made a pilgrimage to a supermarket. Avantika Chilcotty is our global business writer. Even outside, it doesn't feel like a normal supermarket. There is loads of very nice outdoor seating

20:01and just crowds and crowds of people in designer sportswear just sort of hanging out, you know, just having a coffee, having lunch. It looks more like a restaurant so far, but in a supermarket as far as I can tell. That's because this wasn't just any supermarket. For those who haven't heard of it, everyone is basically a microchain of very, very posh supermarkets. It's become the grosser of choice for all of the famous beautiful people who live in and around Los Angeles. Lots of celebrities have been spotted at Eroon, including Haley Bieber and McCardashians. When I was there, I met a 27-year-old named Paul who described it as somewhere he wants to be seen, because I quote,

21:02it says, I have taste. And inside the store, you could see why that's the case. And this is so incredibly Instagram friendly. There's a deli aisle, but it's not your regular supermarket deli aisle with, you know, some pizza and a couple of burgers. There is apple and farro salad. There's a kale salad. I mean, it looks a bit like octolenging in London, you know, octopus, ceviche, farmers, market, roasted, vegetable salad. Rewind to the beginning and this is absolutely not how Eroon began. The store was founded in the 1960s, actually on the east coast in Boston, by a Japanese couple. They were very into the macrobiotic movement, and they started essentially a humble hippie super market where volunteers work. Its name is actually an anagram for nowhere, and it comes from a utopian novel by Samuel Butler. Since then, Eroon has been sold to a Californian couple, and the vibe

22:03has changed totally. These days, Eroon is a supermarket in as much the same way that Scientology is a book club. Sure, there's reading involved, but that's not really why anyone's there. It's decorated sort of like a private member's club rather than a supermarket. There's this blonde wood felving and, you know, big coffee table books. It's a status symbol. In fact, the store has a membership program. It gives you discounts and free smoothies for a fee of a whopping $200 a year. I've already seen green juices, $12 for a clean green juice, and lots and lots of these shots. A good gut shot, or there is a life force, golden eye, mostly struggling to understand what a lot of this stuff is. But there is another trend amongst young people that Eroon's jumped on, and that's wellness. Youngsters seem to want to, or at least

23:06appear to want to, be healthy. At Eroon, that means that the centre of the supermarket isn't necessarily where you pick up a snack or a coffee. It's actually the wellness aisle. Okay, here we go. We've got kind of beauty and vitamin. We've got all kinds of things that I didn't even know about. There's gas and bloat relief, loads and loads of butt support, which I do think is pretty trendy right now. Cod liberal, there's a whole section of just jars of what looks like jam, but it's bright blue and purple and yellow and green, and it says CMOS gel. I don't know what you use CMOS gel for, but it's full spectrum and mineral rich. To me, as retail correspondent, Eroon might be the world's first luxury grocer. And there's one defining feature of luxury, exclusivity. Though lots of people gulp at Eroon products on social media, it's only those in and around LA that can visit one of its ten stores. I spoke to a senior executive and he was pretty clear. There are only a few cities in America where it would make sense to

24:11open Eroon. The price point is likely part of the reasoning. 21 dollars for a not even full to the top jar of trail mix. Choco plant protein that's $44.99. One dollar per pound for these pumpkins. 20 dollars for a jar of tomato sauce here. 56 dollars for some flowers. 25, 50 for turkey bonnets. Heatsers. $12.50 for a slice. Bright blue CMOS gel for $32.99. Luxuries for the few, not for the many. That's all for this episode of The Intelligence. See you back here tomorrow.

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