AYESHA RASCOE, HOST:
The trading week for oil starts this evening, and you can be sure investors are watching the Iran situation very closely. Mary Lovely is a senior fellow at the Peterson Institute for International Economics, and she joins us now. Good morning.
MARY LOVELY: Good morning.
RASCOE: Are you expecting any major disruptions to the global flow of oil or any shocks to the global economy?
LOVELY: Well, we have so much to see over the next 24 hours, but even the possibility of disruption can quickly affect production costs, prices, even what people expect the Federal Reserve to do in the future. So what happens over the next couple of days is going to be really vital for how the rest of this year is going to go in terms of U.S. economic performance.
RASCOE: Our last segment, a NPR correspondent said some experts are expecting the price of oil to go up by $20. That's a lot just in opening because of this uncertainty. What could that impact on the price of oil shooting up because of the uncertainty do to businesses and economies?
LOVELY: Well, the price effect and uncertainty about prices will travel through supply chains very quickly. The first ones to fail will be Asian countries, Asian importers. About 80% of the oil that goes through the Strait of Hormuz is destined for Asia - in particular, China, Japan, South Korea, India. So these countries will see - feel the effect immediately not only in prices, but there can be some supply disruptions for them.
Europeans will feel it. European refiners will face higher costs for crude. Markets for LNG or natural gas will tighten. So there's all these different effects that are going through supply chains, and that, of course, will have a upward pressure on the inflation rate in - particularly in fuel-dependent economies, economies that have to import their fuel. A lot of those are emerging markets. They were already under pressure with their debt service.
So there's a lot of things that can happen outside the United States. Within the United States, of course, we've seen a little bit of this before. For those of us who were around in the 1970s, we know that oil price increases travel quickly through food costs, education costs.
RASCOE: I mean, the 1970s was not a good time for energy...
LOVELY: (Laughter).
RASCOE: ...In the U.S. So if you're saying we're going back there, that's not - that's going to be rough. But I have to ask you, I mean, OPEC+ is saying it will increase production. Do they have the capacity to offset these disruptions?
LOVELY: Well, there is capacity. Right now, the supply actually exceeds demand. And there's lots of ways that - especially if this is short-run, short-term disruption, that governments can offset it. For example, we have strategic stockpiles. We have the possibility of increasing production more quickly, so - especially in the United States. So there's also more resilience in shipping because ships have gotten used to dealing with the war between - you know, Russia invasion of Ukraine and other things. So yes, this is very different from the 1970s, so particularly the way infrastructure works and our ability to deal with this kind of disruption.
RASCOE: You know, there's the uncertainty - geopolitical uncertainty, but there's also growing uncertainty over President Trump's tariff policy. The Supreme Court struck down most of the tariffs, but then the president introduced a new import tax, currently at 15%. Do you expect these new tariffs to stick, even if just temporarily?
LOVELY: Yes. I mean, they are being levied. There's a lot of what we call policy-induced uncertainty, and the U.S. - particularly the Trump administration - is changing a lot of things around. This is causing a lot of uncertainty. We know the Supreme Court struck down the emergency powers that he had used to implement tariffs that varied by country and good. Now they've replaced it with this 15% tariff, which he only has 150 days to levy those before he has to either go to Congress or do something else.
So, you know, importers are just looking at prices and saying, well, how much will I actually have to pay? I know for just my little frame shop around the corner has told me, we won't be able to get these goods anymore because our supplier has told us he's got a $40,000 bill sitting at - with Customs that he isn't able to pay. So it's already having an effect, particularly on small and medium-sized companies that just don't have the deep pockets to pay up. Now they just don't know what - if I do buy something from abroad for my business, how much is it actually going to cost me? And that overall just has a chilling effect on economic activity.
RASCOE: That's Mary Lovely of the Peterson Institute for International Economics. Thank you so much for joining us.
LOVELY: Thank you, Ayesha.
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