Transcription
You've said if it does accelerate Iran's first move will be to destroy civilian infrastructure in the Gulf, uh, del energy. The rest, what are the effects at that point? Like, what are the, let's just start with the economic effects on the rest of the world.
Yeah, strangely enough, I came into my profession, which I've been a professor at, uh, universities for 46 years and advised well over a 100 governments around the world. I came into this profession writing my PhD dissertation on the oil shocks of the 1970s. I wrote the first model of what, uh, how they worked, why they had such negative effects after the '73, after '73 and '79. So, uh, I wrote the book, literally, and it's published in, uh, 1982, called "The Economics of Worldwide Stagflation." The results of those two oil shocks give us an idea of what would happen.
Uh, what happened in 1973-74 when there was an oil embargo, and then in 1979-80 when there was the Iranian revolution, was a big disruption of oil supplies. It sent oil prices soaring, and it sent the world economy into a tailspin. And it was a very, uh, particular kind of tailspin because people lost their jobs, incomes went down, uh, and inflation soared at the same time. And so you had an economic downturn and a rise of inflation, which at the time was viewed as a paradox because usually you have a recession and the prices come down, or you have a boom and the prices accelerate. But this was a contraction and an inflation.
>> So people had less money coming in and everything costs more to buy.
That's it. And that's what was called stagflation. Now, the difference of then and now is that the two shocks then were temporary stops of the flows of oil. One was a boycott by the Arab countries against the US and other buyers, like shutting down the straightforward.
>> Just to be clear, what were they mad about?
They, they were mad about this, the, uh, uh, 1973 war.
>> US support for Israel. Exactly.
>> Just to be clear, this goes, this has been the same issue.
I was four years old when that happened. This, this was, this goes back a long way. And then 1979-80 was the Iranian revolution. Um, and, uh, they were, the oil got turned off, but the oil fields weren't destroyed. There was no war in the oil fields. There was no physical destruction of infrastructure. Refineries weren't destroyed.
What will happen in the next few weeks if we don't choose the off-ramp is the physical destruction of a lot of the Gulf region and of the Middle East more generally, because the US will rain missiles and bombs on, uh, Iran, and Iran will launch what it has against targets in the neighborhood to show deterrence, and hoping that that deterrence will stop something. Often, instead, what you get is just both sides unleashing their arsenals. And what will happen in a short period of time is not a closure of shipping, but a destruction of the physical capacities of providing the oil and the gas and the fertilizers and the prochemicals and the other, uh, very core commodities for the world economy.
And it doesn't take that much to bring the world economy into a tailspin because, uh, you don't need to close down half the oil supply. Uh, you might need to, uh, shut off, uh, 20% of the world oil supply, and that by enough will send the prices soaring, make Americans really suffer across the board, because it's not only at the gas pump, and not only in the utility bills, but also in the cost of food, which will soar from this as well, because there will be a worldwide disruption of food supplies coming from this, because we're a very significant proportion of the urea which underpins the nitrogen-based fertilizers of the world come from this region.
>> From natural gas?
>> From from the natural gas production. Exactly. From from the oil and gas, um, fields, the, the hydrocarbon production and other prochemicals as well. I'm afraid that it won't take long for this to happen.
>> Well, fall if that happens.
>> Yes. One, one leader, uh, pulled me aside a few weeks ago. I don't want to say who exactly, but, uh, said, um, that, uh, that person was in a, uh, in a, uh, a country that has a lot of oil production, not, not from the region, and said, "Jeff, you don't understand. I governed our state oil company. These are complex, uh, systems. They don't get rebuilt so fast. Believe me." Right? This was a very authoritative figure, and, um, I really take that to heart.
>> Well, energy extraction, refining, petrochemicals, distribution, it's all about a million times more complicated than people understand.
Exactly. And these are very sophisticated plants, and they are not built for war. They are built for just normal, peaceful, complex, sophisticated operations. And a lot of that could be destroyed in a very, very short period of time. No, I, I appreciate that. And I think the view in the US seems to be like, if there's oil under the ground, you stick a straw in, it comes out. Then,
>> It's, if you ever, if you go and tour a petrochemical plant or oil refinery or any extraction facility, I mean, it is like highest level technology, smartest people, super hard to understand the market. I'll tell you, we had, uh, you know, one of a place you know well and I know well, one of the most sophisticated places on the planet, uh, the, the Emirates.
>> Yes.
>> Uh, asking, uh, the Federal Reserve a few days ago for emergency swap lines that may be needed in the event of a crisis. This is kind of shocking because, uh, first of all, the Emirates, you think of as super rich.
>> Yeah.
>> Uh, it's the, uh, it's the place where rich people go to put their money, uh, in the region. Of course, it's completely destabilized by all of this. It's a complete disaster for them, what's happened. But they are girding for the downstream effects of what I'm talking about, which is that first you get the physical destruction, then you get the real economy, so-called, the actual physical production of industrial products, of, uh, employment in the manufacturing sector, and cascading across the economy, having, uh, huge, uh, negative consequences. But then you get the financial effects because people say, "Is this place viable anymore? I'm, I'm withdrawing my money." Uh, but, uh, the, the Emirates operates on a US-backed dollar standard, and suddenly you have a run on your banks. You have a run on your financial markets. So they're already asking, "Can we have emergency lines of credit?" And, uh, maybe yes, maybe no, but that's the tip of the iceberg of the financial consequences that can come from all of this. So, you get a huge cascade of effects.
And then I want to mention, because I want to mention for completeness, um, it's more speculative, but the daily evidence is growing that the, what we call the interannual phenomenon of, uh, ENSO, which is fluctuations in, uh, air pressure and, uh, currents in the, uh, or sea surface temperatures in the Pacific, which cause El Niños, which people know about, and La Niñas. It looks like a very large, maybe what they're calling a super El Niño is building for later this year, and it may not happen, but the evidence is growing that it seems like that's the case. So people might be curious, what does that mean? It means that warm surface water over the Pacific would spread to, basically, the west coast of South America. When you get a very powerful El Niño, the temperatures and rainfall patterns and drought patterns and storm patterns in all of the tropical and subtropical regions of the world are hard hit.
One of the things, for example, that happened in the 1973-74 oil shock was that there was also an El Niño that year. It just, uh, I'm remembering, uh, and it was the combination that sent food prices soaring worldwide. Uh, and if we have that dual combination, I've been saying to myself for years, the next big El Niño or super El Niño is by itself going to be world destabilizing because there are a lot of countries on the edge right now, on the edge financially, on the edge socially. Uh, the world's an unstable place because it's been so perturbed by everything that's happened in the last years, that many places are just on the edge of solvency in their governments or financial stability and so forth.
But if you combine a mass, uh, destruction in West Asia, the Gulf, the Eastern Mediterranean, uh, with a super El Niño, I don't even know. Somebody's going to have to write the next book quickly about this because we would not have had a shock like that since World War II, certainly. And the effects on political destabilization, uh, on the effects of, uh, governments falling, the potential cascading of this war would be tremendous and uncontrollable.
Just think, in addition to everything else, uh, a naval fleet from China is heading towards the Gulf right now. It's heading towards the Gulf to escort Chinese vessels, or, uh, I don't know if it's only Chinese-flagged or chi vessels heading to China, uh, to give them military escort. Suppose there's a war going on. Suppose the United States says we have a blockade and we interdict, uh, a Chinese vessel. Suppose that a Chinese destroyer comes alongside. You know, we're not in self-control right now. Uh, sailors are not in self-control. Captains are not in self-control. Uh, we're living, uh, at, uh, at nanosecond speed. Maybe, uh, Palantir's Maven system will say, "Shoot." Who knows what will happen? But we're just lighting fuses that could blow up everything if we choose the ramp of escalation. And I think it will go faster than we imagine and without control.
We don't seem to have any real control in our government right now, even of basic processes. We don't have inter-agency reviews. We don't have expert intelligence that are guiding policy. We don't have anything that is systematic. I think in Israel, it's the same way. Uh, when you have a cascade of crisis, when missiles are at hypersonic speed, and you're making decisions, uh, at, you know, with a few seconds warning or, uh, a minute or two warning of incoming missiles. Oh, what are we doing with all of this gamble when the whole premise of this war was wrong, and when the tactical premise that this was a one-day operation was proved wrong by the second day? Why are we still facing this possibility of complete disaster?
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