MacroVoices #551 Michael Every: Decoding The Global Geopolitical Puzzle

Macro Voices

In this episode of Macro Voices, Michael Every analyzes how escalating conflicts in the Middle East and Ukraine are being used to weaponize

Key takeaways

• The Middle East conflict is escalating through proxies, threatening critical infrastructure like the East-West Pipeline and Aramco facilities.
• A global diesel crisis is a realistic risk due to the destruction of 40% of Russian refining capacity and potential US export bans.

Main topics

• Middle East escalation
• Russia-Ukraine diesel crisis

Notable quotes

The joke at the moment is if you're an interest rate trader or an FX trader at the moment, you have to be an oil trader.

Conclusion

The episode highlights how energy security is becoming the primary lev

Transcript preview

Speaker 3 (0:00) The joke at the moment is if you're an interest rate trader or an FX trader at the moment, you have to be an oil trader. You've got to look at that to understand what bond yields are Speaker 2 (0:07) going to do. That was Michael Every. I'm Eric Townsend. This is Macro Voices. And boy, this episode's going to be a doozy. We're going to talk about the entire world of geopolitics, all the way from what's going on with Iran to what just happened with this escalation in the Ukraine conflict and the strikes on the Russian diesel refineries. And what happens if we have a diesel crisis, diesel exports from the United States, China. Greenland, Denmark, stablecoins, and much more. So put your seatbelt on and stay tuned at the end of this interview for a special announcement that you're really going to love because we've been listening to listener feedback and we're going to do a format change to make sure you get a double dose of Michael Every this week on Macro Voices. And I'm Patrick Ceresna. Let's dive straight into this interview. Joining me now is Michael Every, global strategist in economics and markets for Rabobank or Rabobank or something like that. Depends on which language you're speaking. Michael, it's great to get you back. Boy, geopolitics is your specialty. There's no shortage of that. So let's dive in. The Iran conflict is probably first on people's minds. Something that is surprising to me in the news flow and just other people I talk to seems so clear to me that a major. escalation campaign. You started with Trump saying that he was making threats, then Iran says we're not going to escalate symmetrically anymore, and then you see East-West Pipeline, then you see Yanbu, then you see Bab el-Mandeb. Wait a minute. When the first airplane hit the World Trade Center, you weren't sure what happened. When the second one hit, the question was, how many more planes are coming? So it seems to me like we're beginning a big escalation, but oil straight. down because of why again? Because it's like 38th time that we're declaring victory. I'm not buying it. What do you think? The Speaker 3 (2:04) movement in oil in the last day and a bit has a couple of different drivers, but I think hope, which is not justified by the reality around us, is one of them yet again. To add my two cents worth to what you just said, I'd argued that when you looked at the economic blockade that the US was imposing on Iran, finally, after having experimented with other formats, if it worked, Iran's incentive would be to escalate militarily elsewhere. And that's exactly what you've seen. Whether it's either direct or whether it's via proxies, you know, with an element of deniability, but we all know who is really behind it. And boy, has it worked. If you see the kerfuffle around the Red Sea, you know, the Houthis in Yemen, that East-West pipeline, Yambu, et cetera, et cetera. You know, oil was up to 110 bucks, Brent, for a while on the back of that. But I think the really important point is what you just made clear, that we now have a situation where Yambu can be attacked all the time. Riyadh can be attacked all the time. Aramco can be attacked all the time. And that east-west pipeline, having already been hit, is imminently hittable. What makes anyone think that can't be repeated again and again and again? So unless we are now pricing for peace in our time. which is as true in the Middle East as it is in Russia with Ukraine, unless you have discrete and distinct knowledge of when these wars will end, you are just hoping if you're going to try to start to price in the fact that everything is going to get better. Speaker 2 (3:37) Now, we recorded this interview before MarketSoup on a Wednesday, so a day and a half or so before our listeners will hear it. The latest thing from the Trump administration was, look, it's pretty darn clear after meeting with Iran. that they're going to agree to a peace agreement right after the U.S. election, because it would be foolish of them not to, and it only makes sense. I'm missing the logic, Michael. It apparently makes sense after the U.S. election, but not before it. Help me with the math here. I Speaker 3 (4:06) think what we are seeing there is that the American administration is finally starting to understand how to mirror the Iranians in the absolute BS that they come out with internationally, because that doesn't make any sense whatsoever. Our view, or my view specifically, has been the complete opposite. That once the election is out of the way, if Trump's won, fantastic. If Trump's lost, well, then he still has to escalate anyway, whether it's via executive orders at home or military action abroad. That is our base case, that you will see escalation once the election's out of the way. Of course, if Iran escalates more in the interim, you can see the US have to strike back even before then. And if diesel prices are going to be where they are right now, You could even argue the distraction of saying, well, at least we're bombing them might play better with some voters than saying we're doing nothing. But we promise you there'll be a peace deal like, you know, five weeks from now when you've just been suffering at the Bowser for the past five weeks. So it doesn't make any sense. It isn't what we expect. That doesn't mean that there's zero possibility of suddenly some miraculous deal being struck. But if you look what the starting position and what the finishing position of both the US and Iran are, we are still where we were. in the very early days of this, which is saying that they're two irreconcilable positions and that that blockade is working well for the US. And I'm sure you are as cognizant as I am that in the background, we have lots and lots of wheels turning to make sure that if and when we get a US escalation, it's going to have a lot more people attacking alongside it. It won't just be the US. It's more likely to be the US and Israel and a coalition from the GCC to try and really finish the job. That's what I expect instead. Speaker 2 (5:47) It seems to me, Michael, that if you are any of President Trump's enemies around the world, whether that's Iran, whether that's Putin in Russia, anyone who is not wanting President Trump to stay in power, you have an incredibly strong incentive to do everything possible to keep oil prices elevated through the U.S. election. Because if you can somehow caused the U.S. election to not go in Trump's favor to the point that the Republicans lose both houses of Congress, then it's very likely that most of what Trump wants to do next is probably going to be interrupted by yet another impeachment trial and so forth. So am I right to think that there's a lot of people, obviously people who are Trump's allies would have the opposite, but it seems to me like there's a lot of motivation around the world to escalate and make this worse through the U.S. election. Speaker 3 (6:43) Yeah, I agree completely. And that's something one needs to be cognizant of at all times. All I will throw in on top of that is something which is an adjunct to it. It's very important to consider that we have in the past spoken on this issue. And I've said that obviously Trump went into Iran hoping it would be like Venezuela, which it wasn't, which has been in geopolitical terms and oil terms a fantastic success. Let's be clear. So he was hoping to replicate that. But I said to you that if that were not possible, it isn't necessarily the disaster that it looks for him. And I'm including that even within the context of what you just said, which is correct, that it's painful for the US, it's painful for him politically. Because if you look at the US Inc, rather than just the current occupant of the White House, and if you look at global energy as a strategic asset, rather than a market where you buy and sell and trade, whose energy production Speaker 3 (7:42) and refineries in their totality would you want to hold if you were an alien looking down from outer space about to invade the earth? Well, it would be the Americas, plural, and it would be the Middle East. And I'm sure you have those numbers or those data immediately to mind when you're thinking about that. It's nobody else. Everyone else is important in different areas, but they're not the whole story. So if Trump goes into the Middle East and can manage to defeat Iran, as we've spoken about before, which is why I think he will escalate with others. then he's got both of those in hand and that gives him a fantastic amount of leverage over everybody else, China and others. But, and here's the real takeaway, I know Anas Al-Hajji has said similar things from very early on and I was always open to the idea. If he goes in and he can't manage to topple Iran, rather than retreating and saying, oh dear, energy prices are high, right, okay, here are the keys to the Middle East. All that energy block now shifts towards China, towards Russia, towards North Korea, towards Iran, et cetera, et cetera. You just keep at it one way or another. You ensure that one way or another, the Middle East remains destabilized, which isn't hard to do because there are a lot of people who are very keen on destabilizing it. And at that point, the collective energy in the Americas still look really, really good from outer space. And you still have, in relative terms, a very strong hand and leverage against others, even if in nominal terms and in electoral terms, coming up to the midterms, you suffer. Speaker 2 (9:05) Is there a risk that... If this does not go the president's way and we get to the point where the election is rapidly approaching and it seems like there's just no way to get the cost of energy prices back down, is that then the opening where the Trump administration throws the Hail Mary pass to say, OK, we're going to massively escalate and send the message to the voters that. Okay. He really did end it this time. He did the big thing and we had the gigantic escalation militarily that both reignited some patriotism among the American people to support the president and also created maybe a better claim he could make that he finished it. I would not rule Speaker 3 (9:52) that out. You were very, very judicious in your choice of vocabulary in terms of what you were implying. I think I get your drift. And all I would say that... Serious people who take this matter seriously are having serious discussions about the serious likelihood of that happening. Speaker 2 (10:07) Let's move on to that other war that is going on. It's particularly interesting to me that it almost seemed scripted for Hollywood that President Trump was unusually vocal and publicly vocal in issuing a warning almost to President Zelensky saying, look. the world needs diesel right now. Go ahead and have your war with Russia, but do not hit their refineries because it's going to shock the global market. Don't do that. It was days later that Ukraine did exactly that, almost seemingly in an intentional, I mean, the way I read it was an intentional act of defiance, like, no, Mr. Trump, you're not going to tell us what to do. Maybe I'm reading that wrong. How did you see it? Speaker 3 (10:58) No, I think that's a very valid way of reading it. All I can say is that there are different ways to interpret it, depending on whether you look at this first order, second order, third order, et cetera. And I'm not implying that the other views are correct. I'm just saying that you have to look at a matrix of potential outcomes and possibilities. So one of them is that, yes, Trump says things and people just defy him now. That's not particularly good for the global security order. It's good if you don't like Trump, you know, which... It puts a smile on some people's face and a scowl on others. But it's not good in terms of global security. And it's certainly not good in terms of diesel prices for the global economy. That's one. The other one is, if you think second, third order, that if that's going to happen, you are starting to see record diesel prices, not just in the US, which is, of course, where American voters are looking at it, but right the way around the world. You are seeing serious signs of political stress, economic stress, and even social unrest. in some countries on the back of that now. And the longer this goes on, the worse it's going to get. Now, as an adjunct to that, and maybe we'll open that discussion in a second, you have had Republican politicians and now even Trump himself and Besant investigating the idea of ceasing US diesel exports. And before we unpack that and how that may or may not play out, were that to happen, and again, this is purely hypothetical, were that to happen, What do you think the impact would be Russia, Ukraine and Europe? There are different ways to look at it. But one of them is that Europe, which is potentially in the firing line to not get as much diesel in that particular environment, would have to be the ones who clip Zelensky's ear and say, we've told you not to hit Russian oil refineries. Didn't you listen to the man talking about Trump? Because they would be the ones who suffer more. So then that would actually force them to be tougher with Ukraine and actually get them. to try and force some kind of settlement rather than an escalation, which seems more likely at the moment between Russia, Ukraine, and Europe behind Ukraine. So that's one very cynical second order way of looking at it. Equally, and the data on this are not conclusive, but some of the whispers that you hear and the stories that you hear from oil traders don't rule out the fact that there's actually arbitrage happening. refined products are still flowing from Europe to Russia itself. And by that happening, you would then put pressure on them to stop doing that. So there are different ways to interpret it. But as is often the case when we're looking at geopolitics and the intersection of geopolitics and geoeconomics, don't always fall for the first order Trump-related headline. And just as an adjunct, one last point before we go back to the diesel thing. Just a few months ago, for example, we had panic after panic in Europe that Trump was going to invade Greenland. serious people saying, well, there's a risk that we'll actually be at war with America. And I think nine of 13 soldiers from Europe actually went to Greenland. He's just signed that security agreement with Greenland and Denmark, which is pretty much everything that he wanted from the beginning. And so there's been an enormous climb down from the European side on that, despite the fact that all the first order headlines were doom, gloom, catastrophe, and very much a simplistic way of looking at it. Speaker 2 (14:04) I promise to come back to the diesel export policy in a minute. But before we talk about diesel, Let's talk about diesel, because I want to talk about just the global shortage aspect before we even get into U.S. policy. In the escalation of all this, a lot of us were really talking about blowout $200 crude oil prices. Our friend, Dr. Anas Al-Hajji, who you mentioned earlier, was the voice of reason, saying, Guys, you're misreading it. Yes, there is a spike. It won't be in the benchmark products. There will be $200 oil prices. There have already been $200 oil prices in local markets, but it's not going to come to the benchmarks. The same guy who was Mr. Voice of Reason is in the last couple of days post the Russian strike that I think took out something like 40 % of Russian diesel refining capacity. Anas, who is the never escalate man, is saying. diesel is the crisis. He's tweeting all over the place. It seems like we really do have a very serious risk of this thing mushrooming. So to what extent is that risk? And I want to make sure we put it in perspective for people that when you run out of diesel fuel in a country, it means your farmers can't deliver food to people. It means that the rest of things, whether it's groceries or necessities, if the trucks can't. drive down the road because they can't refuel, nothing gets anywhere. So a diesel crisis could be a really big deal. It could lead to rationing and so forth. Are we headed to that extent of potentially a global diesel crisis, or is this just a bunch of propaganda that's been exaggerated on X? Well, first of all, I have Speaker 3 (15:44) to reiterate again, as a global strategist, I have to look at cross-asset, cross-geography, and frankly, cross-disciplinary. but that doesn't make me an energy expert. I speak to many of them and our own energy expert, Arabo Bank, Joe DeLaura, who just does a fantastic job on oil, he's deeply concerned. If you look at the supply demand, if you look at where inventories are, if you look at the fact that in most parts of the West in particular, we haven't built a refinery for a very long time and have been busily closing them down. And if you look at the disruption happening in the Middle East, which is easing for the moment, but as I said, could come roaring back in again alongside what's happening to Russia. you can make a realistic prognosis that a genuine, really serious diesel crisis is possible. But at that point, I have to steer it back to something I said early on, and which I've said repeatedly in the past couple of weeks, and even the past couple of days to people, which is when we are looking at these things, the joke at the moment is if you're an interest rate trader or an FX trader at the moment, you have to be an oil trader. You've got to look at that to understand what bond yields are going to do, for example. Fair enough. I think that's a valid comment. But the oil traders, okay, they tend to be much more realpolitik because of the way the market is and the industry is. You've got to understand global strategy. You've really got to understand who's more likely to win the war, who's more likely to escalate or deescalate, who's bluffing, who isn't. That's a very, very different set of skills that you're having to