The Week in Breakingviews: Living without oil

LONDON, March 22 (Reuters Breakingviews) - Welcome back! Jerome Powell has a new catchphrase: the Fed chair says “nobody knows” about the economic effect of the U.S.-Israeli conflict with Iran. Other central banks appear more decisive. Who’s right? Let me know, opens new tab what you think. If this newsletter was forwarded to you, sign up here to get it in your inbox every weekend.

OPENING ​LINE

“Ask investors what they fear most, and they’ll probably mention a prolonged Iran crisis or a popping of the artificial-intelligence bubble. Yet the scariest possibility, which looks increasingly likely, is ‌that the former will lead to the latter.”

The Reuters Iran Briefing newsletter keeps you informed with the latest developments and analysis of the Iran war. Sign up here.

Read more: How the energy shock could derail the AI boom.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. Companies are listing financial PR advisers alongside banks and law firms on M&A deals. (Public credit is hot.)

2. Wage growth for Chinese factory workers has turned negative. (Is this deflation or robotics?)

3. Chip darling Nvidia (NVDA.O), opens new tab trades at a lower multiple of earnings than AMD and Microsoft. (Despite attention-grabbing forecasts.)

4. The probability of the Fed raising rates this year has risen to around a third. (Markets are braced.)

5. Drone software maker Swarmer (SWMR.O), opens new tab is ​trading at more than 2,000 times trailing revenue after its IPO. (Look out below.)

BARRELS OF FUN

One of my earliest childhood memories is of an energy crisis. I grew up in the Netherlands, which was ​hit hard by the Arab oil embargo of 1973. In an attempt to reduce petrol consumption, the government banned citizens from driving on Sundays. These “autoloze zondagen, opens new tab” only ⁠lasted for a few months but left a deep impression. Years later my parents still talked about watching people rollerskating on the deserted motorway near our house.

As the war in the Middle East enters its fourth ​week, it’s time to once again prepare for shortages of oil and gas. Iran’s chokehold on the Strait of Hormuz means about 14 million barrels of oil per day – roughly one in seven produced globally – are stuck in ​the Gulf. The International Energy Agency calls it the largest supply disruption, opens new tab in history.

Oil prices are only slowly adapting. That’s partly because the global market is an intricate patchwork of different variants of the black stuff, delivered in multiple places at different times. The most widely quoted price, the Brent crude futures contract for delivery in May, was hovering just below $110 a barrel on Friday. But crude in Dubai is changing hands for almost $60 more.

Quickly scaling back demand will be a challenge. At the height of ​the pandemic in the second quarter of 2020 the world still consumed 83 million barrels of oil per day – a decline of 17 million barrels from the end of 2019. In other words, it would take ​another Covid-style global lockdown for consumption to shrink in line with reduced supplies.

Governments therefore face what Jennifer Johnson calls an impossible balancing act. Capping or subsidising energy prices can cushion the blow to consumers, but is expensive and may lead to ‌shortages elsewhere. ⁠The menu of unpalatable alternatives includes rationing and restricting exports. Encouraging people to work from home or limit flights, as the IEA suggests, opens new tab, seems unlikely to do the trick.

In the longer term, though, the conflict may lessen the world’s thirst for oil. As Rob Cyran shows, the crises of the 1970s kick-started a multi-decade energy efficiency drive. The amount of oil required to support $1,000 of GDP has halved since 1973. Unless the war ends quickly and shipments resume, the energy shock of 2026 may mark another painful turning point in reducing the world’s dependency on oil. And maybe more car-free Sundays.

CHART OF THE WEEK

The slow puncture in the market for private credit is no ​surprise to readers of The Week in Breakingviews. Even ​so, it’s striking how quickly stock market investors ⁠have fallen out of love with alternative asset managers like Blackstone (BX.N), opens new tab, KKR (KKR.N), opens new tab and Ares Management (ARES.N), opens new tab. A year ago, these firms collectively commanded a price-to-earnings multiple of twice their mainstream fund management rivals like BlackRock (BLK.N), opens new tab and Amundi (AMUN.PA), opens new tab. As Liam Proud points out, that premium has entirely disappeared.

THE WEEK IN PODCASTS

Is the artificial intelligence craze running out of ​puff? That’s the question Breakingviews columnists debated on the Viewsroom, opens new tab this week. Aimee Donnellan and Jonathan Guilford quizzed Karen Kwok about Anthropic’s battle with the U.S. government, ​the small print of OpenAI’s ⁠latest mega fundraising exercise, and the strange ways that AI startups report revenue.

Over on The Big View, opens new tab, I was joined by Barry Eichengreen, the legendary Berkeley economist and expert on exchange rate systems. We explored the factors that led to the rise and fall of global currencies, from the Roman denarius and the Florentine florin, and what lessons that history holds for the future of the U.S. dollar.

PARTING SHOT

Russia’s invasion of Ukraine introduced us to the brutal economic logic ⁠of drone warfare. ​Now the U.S. and Israeli conflict with Iran has opened up a new front. In the early days of the war, Gulf ​states launched Patriot missiles to shoot down rockets fired by Iran. But when those missiles, which cost $4 million each, are used to disable Iranian “Shahed” drones costing around $35,000 apiece, the financial mismatch is hard to sustain. George Hay argues that demand for cheaper interceptors will boost European ​defence startups.

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Editing by Aimee Donnellan; Production by Oliver Taslic

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Peter Thal Larsen

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Peter is Global Editor of Reuters Breakingviews, based in London. He was previously EMEA editor, and before that spent four years in Hong Kong as Asia Editor, where he oversaw the launch of Breakingviews’ Asian edition. Prior to joining Reuters in 2009, Peter spent 10 years at the Financial Times, including five years as the paper’s banking editor, leading its award-winning coverage of the credit crunch. Between 2000 and 2004 Peter reported for the FT from New York, where he covered a range of stories including the 9/11 attacks and their aftermath. A Dutch national, Peter has degrees from Bristol University and the London School of Economics.

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