This is an audio transcript of the FT News Briefing podcast episode: ‘Oil price surge risks upending global economy’
Victoria Craig
Good morning from the Financial Times. Today is Monday, March 9th, and this is your FT News Briefing. Iran names its new supreme leader and global oil prices rocket past a hundred dollars a barrel. Plus, worries are mounting about the Iran war’s impact on food supplies.
Susanna Savage
We’ll see the amount of food that is produced dropping and that’s a really big problem. We could really see this contributing to hunger.
Victoria Craig
I’m Victoria Craig, and here’s the news you need to start your day.
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Iran’s senior clergy have picked Mojtaba Khamenei as the country’s next supreme leader. He is the second son of Ayatollah Ali Khamenei, who ruled Iran for nearly four decades and was killed in US and Israeli air strikes last Saturday. The Assembly of Experts is the body responsible for the appointment. It said a majority of members voted for Khamenei in the early hours of Monday to become the third leader of the Islamic republic.
Khamenei is largely unknown to many Iranians, but he had backing of regime loyalists and had been a leading candidate to replace his father. Khamenei’s appointment is seen as an act of defiance against US President Donald Trump, who last week called him a “lightweight”. It’s also viewed as a signal that the Islamic republic will maintain its hardline policies towards the US, Israel, and the west.
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Global oil prices surged as much as 20 per cent in early Monday trade, topping $110 a barrel, as the Middle East’s largest producers curb their output while the war in Iran continues. It’s the first time both the Brent and West Texas benchmarks have hit triple digits in nearly four years. Goldman Sachs predicts oil could continue rising and exceed its 2008 peak above $140 if energy shipments do not resume through the Strait of Hormuz. That waterway moves a fifth of the world’s oil supplies. Last week, Qatar’s energy minister told the FT that disruption could “bring down economies of the world”.
Indeed, the biggest economy is already grappling with the impact of more expensive oil, which has pushed prices at US fuel pumps higher. The cost to fill up a car is at its highest level since the summer of 2024. So as the war enters its second week, what does all of this mean for the Federal Reserve, which plays a key role in keeping the US economy on an even keel? Claire Jones is our US economics editor, and she joins me now to dive into all of this. Hi Claire.
Claire Jones
Hi Victoria.
Victoria Craig
So just how big of a risk is it that the surge in energy prices could cause a fresh round of inflation here in America?
Claire Jones
So the usual kind of central banker logic on oil price shocks is that they have a shortlived effect, and even though prices of the pump have shut up a lot, the sense is that, you know, in a few months they could be back down below levels they were before the conflict with Iran began.
However, the longer the conflict goes on, the less certainty central bankers are gonna have at following that message, especially in a scenario such as the Fed’s in, where inflation is above their 2 per cent target. It’s been above that target for five years now, and there’s a big risk that if gas prices remain high, US consumers, US businesses are gonna think that inflation is gonna remain high too and that’s gonna make the Fed’s job very tricky indeed.
Victoria Craig
So for the US, as you mentioned, it’s not just inflation from the war that’s an issue. We got data on Friday that showed that the labour market contracted last month. So how is all of that also gonna play into the conversation about what to do next with interest rates in the US?
Claire Jones
It just really adds to the challenge that central bankers are under. You know, you’ve got a labour market that is really slowing down from where it was in the years that followed the pandemic, when it was a pretty strong labour market. Now, the Fed’s in a scenario where if oil prices remain where they are and the labour market carries on weakening, that’s a very, very tough place for US rate setters to find themselves in.
Victoria Craig
What about other global central banks? I’m thinking particularly of the ECB, which has to manage many European economies that are vulnerable to these energy price swings. How are they likely to deal with this shock?
Claire Jones
So the big advantage the US has is that it’s a net energy exporter. So, over time, if prices remain high, there will be some sort of lift to energy producers in the US. That’s not the case in Europe.
The risk to European central bankers is far more acute than it is to ones in the US. A lot of people have thought that the European economy is so exposed to this that we could even see interest rate rises by the European Central Bank this year. The sense that we got from comments by ECB executive board member Isabel Schnabel on Friday was that that is not on the cards yet, but there is a sense in which Europe is a lot more exposed to this shock than the US.
Victoria Craig
Claire, I’m just thinking back to Russia’s invasion of Ukraine in 2022, and I remember global central banks couched that risk as a transitory one to inflation. Is there a risk that with this war, there’s a similar expectation that the economic risk is not that great, but central banks could be caught on their back foot this time around as well.
Claire Jones
I think that’s the fear. I mean, at the moment, it does look like it’s gonna be a transitory shock still, but the fact that central bankers got it wrong in 2022 and that the inflationary shock endured far more than they initially expected, I think will be on rate setter minds and they’ll really not wanna make the same mistake twice because the credibility hit from that would be very, very damaging indeed, and that’d make it a lot more difficult to get inflation down if there’s not that trust in the central bank to be able to control price pressures.
Victoria Craig
Claire Jones is our US economics editor. Thanks so much for your time, Claire.
Claire Jones
Thanks, Victoria.
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Victoria Craig
Business owners in the Gulf have been flooding insurers with requests for coverage against political violence and terrorism. Brokers say customers are trying to limit their exposure to the escalating conflict in the region that might include everything from debris from intercepted missiles to protests, and even revolutions.
Solar energy projects in Saudi Arabia, hotels in Bahrain and Qatar and western businesses with operations in the Gulf are among those seeking cover. Brokers say before the war, some businesses already had insurance against terrorism, but now they’re telling clients to buy full coverage, which includes strikes, riots, civil commotion, as well as state-backed violence.
Before conflict broke out, such coverage for an energy project in Saudi Arabia or the UAE might’ve cost less than 1 per cent of the insured value, brokers said. But as of late last week, that price rose to as much as five times that level.
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The conflict in Iran could cause a global food shock worse than when Russia’s invasion of Ukraine in 2022 sent prices to record highs. That’s because this war is disrupting fertiliser production and exports in the Middle East. That could cause a cascade of problems for food producers in many parts of the world.
Susanna Savage is the FT’s commodities correspondent. She joins me now to talk about what’s happening and how countries are preparing. Hi Susanna.
Susanna Savage
Hi there.
Victoria Craig
So let’s start with fertiliser, because that seems to be at the heart of this problem. How important is the Middle East to that production?
Susanna Savage
So the Middle East is one of the world’s largest fertiliser producers. It’s one of the regions that’s most important for fertiliser production. And also the Strait of Hormuz is probably one of the most crucial shipping routes for exports of fertiliser in the world. So about 35 per cent of global urea exports pass through the Strait of Hormuz.
Now, urea is a type of fertiliser, but what really matters is that it’s the most widely used nitrogen fertiliser. And nitrogen fertiliser actually underpins around half of global food production. So this is incredibly important for us having enough food to eat.
Victoria Craig
So if farmers around the world are not able to get this fertiliser supply, as you say, that could hit food production, where will this be most acutely felt?
Susanna Savage
So I think it’ll be really acutely felt in Europe, in Asia, and also in Africa, especially as you know, in the northern hemisphere, farmers are just about to plant, they’re just about to put seeds in the ground, and they would normally use fertiliser at this time. So the application for fertilisers should be happening in the near future, and so the fact that prices are gonna shoot up or they’ve already shot up is a really big problem.
And further down the line, if this continues and farmers can’t get fertiliser, then it’s not just a question of prices, but also in poorer countries, they might just not apply it at all. They might not be able to get hold of it. And so this isn’t just a problem of input into food being more expensive and therefore food becoming more expensive. But we could see yields of crops decline and there being less food.
Victoria Craig
There are some similarities on this issue between this conflict and Russia’s invasion of Ukraine. Time of year in the disruption to planting seasons is one, but you report that this war could have even more severe impacts on global food prices. Why?
Susanna Savage
Yeah, so in 2022, when Russia first invaded Ukraine, that sent food prices soaring. And this was partly because Ukraine was one of the world’s grain baskets. And so as soon as that grain couldn’t get out, grain prices shot up. Whereas with the Middle East, it’s really important for fertiliser. So that’s one step further back.
So it takes a little bit longer for that impact to be felt because fertiliser is important for growing the grain, if you like. So it’s the fertiliser that can’t get through, so then farmers in other parts of the world can’t grow as much grain, or it costs them more to grow, not just grain, but everything. And then that pushes up the price.
So everywhere in the world that uses fertiliser and particularly that uses fertiliser that comes either from production in the Middle East or is exported via the Middle East, they’re gonna have to pay more for fertiliser or they’re not gonna be able to get hold of enough fertiliser. And so that’s gonna massively impact how expensive it is to produce food and also the amount of food that can be produced.
Victoria Craig
Are there regions of the world that are more exposed to this problem?
Susanna Savage
So, yeah, definitely, there are some countries that will be more exposed. As we saw last time, African countries or poorer countries in other parts of the world. If there’s gonna be a bidding war to get fertiliser, if there’s not enough supply, then they are less able to win that bidding war. And then we’ll see the amount of food that is produced dropping. And that’s a really big problem. We could really see this contributing to hunger, according to some of the analysts I’ve spoken to.
Victoria Craig
And is there any way for these countries to really prepare for this disruption?
Susanna Savage
I mean, that’s really difficult because we’ve seen fertiliser prices rise already for various reasons over the last few months or so, or a bit longer. And so in a lot of cases, no one was stockpiling ahead of this. People were sort of getting just enough to cover what they needed, and so I think the world isn’t really prepared for this. You know, there were signs that this might happen, but it was, to some degree, unexpected. So, no, I don’t think there’s been any preparation really.
Victoria Craig
Potentially far-reaching impacts then for countries around the world. Susanna Savage is the FT’s commodities correspondent. Thanks so much for your time, Susanna.
Susanna Savage
Thank you.
Victoria Craig
You can read more of our ongoing coverage of the Iran war and all of the stories in today’s podcast for free. When you click the links in our show notes, this has been your daily FT News Briefing. Check back tomorrow for the latest business news.