Growth and Geopolitical Risk

From Goldman Sachs Research, this is Alison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're taking a look at geopolitical risks around the world and their impact on the global economy and markets. As recession fears loom, some of these geopolitical risks are fueling growth worries. The major example of this is, of course, the ongoing US China trade war, a topic we've explored in several recent episodes. On the other hand, one of the largest geopolitical shocks in recent memory, namely the unprecedented attack on S

It was huge. It is the single largest production disruption in the oil market in level terms at 5,700,000 barrels per day. In percent terms, it's just shy of the invasion of Kuwait by Iraq in the nineteen nineties. So

if it was the largest disruption ever, why haven't we seen markets responding more strongly?

First, Saudi has been able to provide a timeline on a recovery that is relatively quick. Second, we went through this exercise last year around the Iranian disruption, so we better knew the adjustment mechanism. And third, in a backdrop of weaker oil demand and relatively high inventories, we had immediate buffers to cope with such a large shock. So there are three elements to that lackluster response. The duration of the outage, the demand backdrop, and what we learned last year when we went through the same exercise. So duration is key. Right? Here we're talking about a disruption that can l

More broadly, Damien explains that US shale oil production, which has increased dramatically in the last decade and even within the last five years, has reduced the economy's vulnerability to oil outages and has substantially changed the way we look at oil supplies globally. We used to think about oil supply disruptions as being one of the major causes of recessions historically. What's changed from a production and supply standpoint that's put us in a more comfortable position today?

We now have a source of supply shale, which is significant in scale, which is short cycle, and which can respond to prices relatively quickly. And so instead of the old framework of sustained outages creating significant price spikes to get demand to correct the imbalance, now we have a supply factor, which on a three to four month horizon can create a significant increase in production and help balance a deficit. So this is new. Right? This is what shale creates. Now we shouldn't overstate the ability of shale to make up for shortages. Right? You still have logistical constraints. And increas

But while global oil supplies are more resilient today, Damien also thinks they're more vulnerable to disruption than we ever imagined. I

think after this attack, the risk of another disruption is materially higher than perceived over the last six months. Right? Last year, we were simply solving for Iran going offline, which you knew would happen. It was a matter of time line. Now another 5,000,000 barrels per day disruption is conceivable in a matter of months. The probability of that risk is much higher than it was last year. We've learned that the Saudi assets are more vulnerable than ever expected. And second, the catalyst for the attack is still there. There has been no resolution to the Iranian situation in the Middle East

So just how likely is another attack that further disrupts global oil supplies? We turn to Richard Nephew, a professor at Columbia and former US lead sanctions negotiator for the Iran nuclear deal, to better understand the motivations of Iran, who the US government