Crude awakening: Iran oil shock

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The economist. Hello and welcome to the Intelligence from the Economist. I'm Jason Palmer.

1:47

And I'm Rosie Blore. Every weekday we provide a fresh perspective on the events shaping your world.

2:00

As Britain has moved from a model of free university education to one that's reasonably pricey, its student loans model hasn't changed quite so much. We look at what many think has become a regressive tax on grads,

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and

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it used to be the preserve of far flung cowboys or provincial grannies. Now the latest choreography craze is line dancing. Our correspondent explains the step change. First up, though. America says it struck more than 2,000 targets in Iran since its joint campaign with Israel began on Saturday, Iran has responded with a barrage of missiles on military and economic targets across the Middle East. Until a few days ago, it seemed a remote idea that it would both lash out at its oil rich neighbors and block the Strait of Hormuz. But Iran knows that the region's strength is also its vulnerability. Millions of barrels of oil travel through the Strait of Hormuz each day, prompting Donald Trump to say that if necessary, US Navy vessels would escort the tankers.

2:26

If we have a little high oil

3:36

prices for a little while. But as soon as this ends, those prices are going to drop, I believe

3:38

lower than even before yesterday.

3:44

He sounded almost relaxed at the jump in energy prices. Markets have been less sanguine. Trading in South Korea and Thailand was paused temporarily overnight to avoid panic selling. The question now is what damage is being done to the global economy and and how much worse it could get if the conflict continues.

3:46

The war in Iran is sending energy prices higher, both oil and natural gas prices, which is a problem for the parts of the world that rely on fossil fuels for their economy.

4:08

Rachela Schanbog is our business affairs editor.

4:21

The consequences will be a hit to activity, higher inflation. The impact is still uncertain. A lot depends on how long this conflict lasts for.

4:24

Okay, so let's take that piece by piece. What's happened to oil exports and oil prices so far?

4:34

So, Rosie, we've seen sharp jumps in the past couple of days. The increases are coming because, number one, traffic through the Straits of Hormuz, through which 15 to 20% of oil travels has been blocked. Tankers don't want to travel through a war zone, basically. And so the delay in the traffic is making traders nervous. The other thing that's going on is attacks by Iran on energy infrastructure in Saudi Arabia, which again is causing fears that the supply of oil might be curtailed.

4:40

And what about gas, which has also been hit, right?

5:11

Yes, that's right. So natural gas is another casualty here. Qatar is a huge producer of natural gas. And Iran hit one of the liquefied natural gas facilities in Qatar, which is responsible for about a fifth of the world's supply. And again, that's been shut down for precautionary reasons. And so natural gas prices in Europe have surged over the past week.

5:14

So what impact does that end up having on the global economy?

5:38

Although the global economy is becoming less reliant on oil over time, it still needs energy to function. And the consequence of these higher increases in oil prices and gas prices will be an increase in the cost of doing business, an increase for consumers going about their daily lives. And we've seen in the past that that does have a chilling effect on what they on their activity, on gdp, and it will also raise inflation. Now, a lot depends on how long this shock lasts for. It may be a fleeting impact. There is a chance that prices could go higher still. People in the industry are talking about $100 oil price per barrel of Brent crude. They're talking about gas prices going further still. And so there is a chance that the shock could get bigger. That's not great news. For Donald Trump, midterms are approaching in November. The price of gas at the pump is very salient for Americans, for voters generally. And so the higher the oil price inches up, the more that could become a political problem.

5:42

It's not just about oil prices and gas prices though, is it? Aren't there other sectors that are also going to be hit?

6:46

Yes, well, we've seen in particular the airline industry being hit. The Gulf is a very big hub. Dubai is one of the biggest hubs for passenger traffic and air freight, huge logistics hub for ports as well. And so all of this disruption has translated into a shock for airlines. We've seen their stock prices falling in recent days. We've seen disruptions in passengers stranded around the world, really because of the location of the war. So airlines have been a big victim thus far. That said, some people do benefit from all, such as the nature of markets, and we've seen defence stocks surging.

6:53

So what does all this mean for places in the Gulf that really banked on being stable oases?

7:32

It's a really good question, Rosie, and I think we should start with Dubai in particular, a place that for years has attracted people and businesses to trade there, to live there. The idea is that it's hassle free, that geography doesn't matter. It doesn't matter that, that it's in a troubled region and it's really thrived. And in fact, it's been a model that others have sought to follow, for example, Saudi Arabia. And what we saw over the weekend was that this illusion that geography doesn't matter was really shattered with a hotel in Dubai going up in flames. And so a lot depends now on how long the conflict lasts for. So perhaps the memory will fade soon enough or perhaps if the conflict goes on and if a more unstable Iran emerges, then people will start to attach kind of a geopolitical, political risk premium to being based in Dubai and doing business in Dubai. And that would be a blow to Dubai's business model.

7:39

Of course, we don't know how long this war will last. When will we know if this is a shock or if this is going to have a profound impact on the global economy?

8:37

I think one of the key questions that industry analysts will be looking at is how long you see disruption along the Straits of Hormuz. Does Iran keep lashing out at its neighbors? And the longer it goes on for the bigger the uncertainty, which is not helpful for the global economy, and also the greater the chance that prices stay higher, that traders start building in a kind of risk premium because they just don't know what's going on.

8:47

Rachna, thank you very much.

9:14

Thank you, Rosie.

9:16

And for more on the history of Iran's relationship with oil and how that's been playing into the war today, listen to tomorrow's episode of Money Talks, our weekly business and finance show. You'll need to be a subscriber.

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10:21

For an awful lot of graduates in England and Wales, their student debt is rising faster than they can pay it off.

10:56

Josh Roberts is our capital markets correspondent and a formerly indebted former student.

11:04

So most of them are going to be paying a significant percentage of their salaries until they're in their 50s to pay it down. And people are very angry about this. Some have taken to calling it a punitive and regressive graduate tax.

11:10

Is that a fair characterisation? Is it a graduate tax?

11:23

Well, not quite. There are a couple of features of student loans that make them different to a graduate tax. So one is if you pay the whole thing off, you can stop paying. You don't get to do that with tax. And the other feature is after a set amount of time you stop making repayments whether you've paid it off or not.

11:26

But there is some substance to what it is that has people so worked up that they feel they're getting the short end of the stick. How do we get here?

11:43

That's right. It used to be that a small number of people in the UK went to university and for them university was free, which means the costs were borne by the general taxpayer. As more and more people started going to university over the years, that model stopped being viable. So from 1998, tuition fees went up to £1,000 a year. From 2006, they went up to £3,000 a year. And then in 2012, they went up to £9,000 a year. Most people can't pay those costs upfront when they're 18 and might not have parents who can pay them either. So they fund it using a student loan from the government that they then subsequently repay when they start earning.

11:50

Okay, and how do the loans work? How do the repayments work?

12:29

There are lots of different plans depending on when you started university and what your fees were. But the general model is that after you earn above a certain threshold. So for people who went to University between 2012 and 2022, the threshold is after you're earning about 28,000 pounds a year, you repay 9% of your earnings above that level until either your student loan is written off or you've repaid it and it gets written off 30 years after you start paying. By the way, this is coming up in the news everywhere.

12:33

Why is this so much in the news in Britain right now?

13:07

So recently the terms have changed for the cohort that went to University between 2012 and 2022. And what's happened is that the threshold at which they start paying back their loans, the threshold of earnings, has been frozen for three years because of inflation. People's earnings tend to naturally rise over time, so the effect of that is to drag more people into repaying more of their loan than they would have done otherwise. And this was a change that was made at the last bud, the uk.

13:09

This still doesn't sound like terrible terms to me, as loans go.

13:40

No, it's not. And there are actually countries where the terms are much worse. So for example, in the us, people who need to take out student loans often take out mortgage style loans where it's not a set amount of your salary you repay, you just have to make certain repayments, and if you don't, you go into default and that hurts your credit rating and it hurts your ability to get a credit card or an actual mortgage in the future. The UK system isn't like that. It's not really treated like normal debt. It won't hurt your credit rating. If you're not earning enough, then you won't be paying it down. But what's making people angry now is not so much the system itself, but that people are having to now pay that back for longer. They're having to pay higher interest rates than they used to. And really at the root of this is that the recent crop of students has just had to face much higher fees than older crops did. For example, when I went to university, my fees were only £3,000 a year. Now they're 9,000. So people are just racking up much more debt, which means that the repayment payment terms get worse.

13:43

Just for clarity, do you have student debt still?

14:40

Because mine was lower and I'm in my mid-30s, I have actually paid mine off. If I had been to university a bit later than I did I started in 2010, almost certainly I wouldn't have paid my loan off by now because it would have been many multiples bigger and I would have been paying more interest than I actually did.

14:43

Right. I was just wondering about the prospect of just trying to get out from under it by paying it off faster.

14:59

Yeah. So that is an option. And interest rates recently have become so high that it's an option lots of people think about. I know people who at the end of the month, if they have any spare cash left over, they will use it to pay down their student loan. There are a couple of downsides to doing that, though. If you know you're earning enough that you will eventually pay off your student loan in full, it makes sense to make early repayments because overall you're going to take less interest. But if you're not earning enough to pay it off in full, if actually it's just going to get written off in 30 years time, there's kind of no point in making early repayments. Right. Because that was going to get written off anyway, and you're still going to be paying your 9% of your salary against it until it does. And once you've made an early repayment, you might have reduced your loan balance. But if you then get into difficulty, if you have an emergency, you can't get it back, you can't reborrow it. Whereas if you kept the money in your bank account in case there was an emergency, you obviously would be able to access it. The people for whom it makes sense to pay off these loans early are the higher earners.

15:04

So it is maybe fair to call it what some people call it, a regressive tax.

16:06

It's actually, I think, for a lower earner, in some ways worse than a tax. Let's imagine a different system. Let's imagine people don't take out debt to fund their degrees. Instead, all graduates pay a real graduate tax to fund the whole system. What would then happen is that whereas higher earners now at some point have paid off their student loan and stopped paying under this graduate tax system, they would carry on paying forever. That would mean that overall, everybody could afford to pay a lower percentage of their salary towards funding the system. So for lower earners, this is actually worse than a regressive graduate tax because it has some features that are like that, but they also end up paying a higher percentage of their earnings than they would under that system.

16:11

Okay, this does kind of hint at the question I think a lot of people would ask here about a price that graduates are right to pay in that they are more highly valued in the labor market, that being a student paying that off even over a long period of time is probably a fair deal.

16:59

Yeah. People talk about the graduate premium, right? The fact that you're likely to earn more if you went to university than if you didn't. There's a few things to say about that. The old model, which a lot of people park back to and say it was just better when 10% of people went to university, and university for those people was free. I have to say, to me, that doesn't sound particularly fair to have only a small proportion of the population that gets this amazing benefit while the rest of the population pays. Graduates themselves are probably the biggest beneficiaries of going to university. So I think a lot of people would think that they ought to pay something towards that. What's difficult now, and this is another feature of the number of people going to university having gone up so massively by the time state school leave is a 25, half of them will have started a university course. So the numbers have really gone up a long way. One feature of that is that the graduate premium has gone down. So whereas it used to make a big difference to your lifetime wages if you went to university, over time that difference has eroded. And for some courses in particular, they are typically creative arts courses or things like English literature, there's actually a graduate penalty for having studied those courses. You are probably going to earn less than you would have done otherwise.

17:14

Without wishing then to try to solve this problem in this room right now, what about the people who are stuck under these loans now, who are A grander cohort has just been created? They're being drawn in at a lower threshold.

18:30

Yeah.

18:41

Part of the reason they're so angry is that there aren't a lot of options for them. You don't get to decline making these repayments. You don't get to take a different decision. And for many, making extra repayments won't be a realistic or a sensible option either. There aren't that many options available to the government either because of the fundamental problem that this debt has been racked up. Going to university is costly and somebody is going to have to pay for it. Really the only options for the government are to either say the cohort themselves are going to pay it back and are going to have to pay more of it, or to say all taxpayers are going to pick up the tab, in which case everybody's taxes have to go up. And everybody's very aware that government finances are strained at the moment, that the government's struggling to borrow more. So that means not spending money on other things like the health service or defence or whatever. So there really aren't any easy options here.

18:42

Josh, thanks very much for your time.

19:39

Thanks for having me, Jason.

19:40

A couple of weeks ago, on a freezing midweek evening in New York City, I headed to Desert Five Spots, a western themed bar in Brooklyn.

19:56

Holly Berman is a news editor at the Economist.

20:04

Inside, it was packed full of 20 somethings twirling around in summer clothes and cowboy boots. I'm attempting to line dance right now.

20:08

Not. Not very well.

20:15

Two instructors were guiding the crowd through a series of line dances. They called themselves Spitfire and Sugarfoot, although to anyone outside of the bar their names are Rivka and Manon. The soundtracks varied from country music to pop songs.

20:17

I have no coordination.

20:31

How do you Line dancing is no longer the prerogative of far flung cowboys or disco dance floors gone by.

20:33

Oh yeah, when we open the doors

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at 6 o', clock, there's a line

20:42

of people waiting to get in.

20:43

Chase Manaten is the bar's Mustache entertainment director. We got a chance to chat or mostly shout at each other over the music, and he told me that when they began to host these line dances a year ago, only a handful of people showed up. And now tickets sell out. In New York City, there is now a line dance happening almost every night and across America. Google searches for line dancing have been steadily climbing since 2020, peaking last year. This Ain't Texas it's an unusual shift. A decade ago, the perception of line dancing was, well, not cool. But it helps that Americana is now in vogue. Country music is surging in popularity, boosted in recent years by albums from artists like Beyonce, songs like the one you're hearing now, Texas Hold' Em and Post Malone, whose latest album was recorded with some of the biggest names in country music. Last year the genre was streamed 122.5 billion times in America behind only pop rock and hip hop and R and B. Social Media has played a big part in popularity amongst younger people, and several first timers I spoke to around the bar said they discovered the event on Instagram and TikTok. The dancers themselves, which are quicker and shorter than other types of choreography, suit the pace of online short form video. Well, you can see something done twice and repeated in less than 30 seconds. Line dancing videos frequently rack up millions of views. Line dancing's distinct etiquette chimes with the habits of the young in other ways, too. Most events prohibit drinks on the dance floor to prevent party girls from slipping over. Now, that might seem counterintuitive for a bar, but potentially attractive to Gen Z patrons who are drinking less and less. Desert 5 spot charges an entry fee to its line dancers in anticipation of the this shortfall and lots of dance floors also discouraged phones, a rule that feels freshly resonant as young Americans report feelings of fatigue with the online world. Come here by yourself. It's like a third space in a way, Biley, a 24 year old regular at the bar, told me she sees Desert 5 spot as a third space, a sociological term that's been popularized on social media to describe offline locations beyond the home and workplace where people are finding community. She, like others in the crowd, comes to the bar alone. Some line dancing devotees even joke to me that they belong to a cult.

20:45

The crowd changed.

23:18

Yes, it's gotten too big.

23:19

Really?

23:21

It's too big. It's too crowded.

23:22

I used to be up.

23:23

Like now I can't move. Sometimes trending has its trade offs, but fans are likely to keep dancing one step at a time.

23:24

That's all for this episode of the Intelligence. See you back here tomorrow.

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