Tony Roth, Chief Investment Officer
Teddy Bunzel, Managing Director and Head of Geopolitical Advisory, Lazard
Tony Roth
Welcome back to Capital Considerations. I'm your host, Tony Roth, Chief Investment Officer for M&T Bank and Wilmington Trust. Today we'll explore the evolving political and geoeconomic backdrop, particularly as it relates to the war in Iran and what it means for markets and decision makers. To help us in this conversation, I'm very pleased to welcome back a guest who we had in the past who was really exceptional. Teddy Bunzel.
And it's funny I was talking to Teddy about ensuring that I appropriately credentialed him, given how present and focused we all are on the Iranian war right now. And of course, Teddy has worked at the Treasury Department. He had worked at BlackRock for ten years as their advisor for geopolitical affairs and now he's in a similar role at Lazard, but Teddy, there’s no better way that you could credential yourself, but speaking a little Russian to us because you were in the Moscow embassy for a while. And as soon as you said those sentences in Russian, even though I’d no idea what you were saying, I knew we were talking to the right guy.
Teddy Bunzel
Spasibo Vam Thank you.
Tony Roth
With that, let me start Teddy, today, by again thanking you for joining us. I think that it's going to be a very interesting conversation that we're, that our clients are going to listen to rapidly because it has such significance for all of us.
I'm going to start with a little bit of a, if you will devil's advocate type of perspective, which is to say that I do a lot of reading, I talk to a lot of people, and I think the conventional wisdom right now among people that seem to know the most is that the administration came into this, they made a decision predicated largely on events that happened, whether it be in Venezuela, whether it be in the attacks that happened last June, and the, the lack of a particularly problematic response in the part of the Iranians, if you will, and expected this to be a much shorter and successful engagement if you will, than it has turned out to be so far. And I think there is a widely a perception that the US is in a difficult position right now, the administration is in trouble and that the Iranians have the upper hand in their control over the straits. Now, there's a lot to talk about, and I'm hoping that you're going to tell us that there's another perspective.
That, what I've just articulated is not at all the full picture, but with that backdrop tell us what your take is, and you know where you think the situation's going.
Teddy Bunzel
Look, put aside what, what Donald Trump has said about, you know, whether or not there was an expectation that Iran would shut down the Strait of Hormuz through threats, through the use of force and attacking tankers.
And, you know, whether or not it was expected that Iran will lash out against gulf states. I think that military planners and analysts who have watched this situation did anticipate that if the United States and Israel went for another campaign at the beginning of this year, especially in the wake of the protests that erupted in January, right? Which were remember that was kind of the original catalyst that set this all in motion.
That because of the threat to the regime, given that, you know, when it's bundled up with these protests and calls for regime change, it becomes existential, and also the fact that, I think the Iranians to your point earlier rightfully saw that in the exchange last summer, the twelve day war, now they responded more cautiously and they didn't sufficiently deter the United States and Israel that this time their response would be more forceful and that the Gulf States energy and other infrastructure and also the shipping through the Strait of Hormuz would be threatened. Now, I'm not sure whether or not either US military planners or the Iranians understood just how effectively Iran would be able to effectively shut down, you know, all traffic through the Strait without having to lay a bunch of mines. And physically put it, you know, put obstruction in the way of tankers.
So, they were able really through saber rattling and through the occasional attack, you know, and through attacks on the Gulf States to shut down over 90 % of traffic. So maybe the effectiveness of their ability to do so was higher than anticipated, but I'm not sure, for the analysts watching this in the US government or in the military that the Iranian, the forcefulness and speed and breadth of the Iranian response was much of a surprise.
Tony Roth
So, what about the efficacy of their offensive assets? It seems as though, at least in the minds of the American public, it's a surprise that they've been able to after in the 5th week of the war now, continue to really project force, whether it be through drones or missiles. There was some reporting of last week that maybe the US assessed that they've gotten a 3rd of the missiles.
And then there's a question as to whether they're getting resupplied by Russia or whether they still are building things. I don't know but is that surprising to anybody at this point that they are able to project that force, and indeed, to your point, continue to threaten and shut down the Straits even this far into the conflict.
Teddy Bunzel
I'm not sure it's hugely surprising especially when we have the example of the Houthi, you know, kind of campaign where through asymmetric threats I mean not through a formal, you know, military like the Iranians have but through the thread of, you know, drones and fast ships, they were able to really disrupt shipping. I don't think it's a surprise that Iran with some of those tactics, even after their Navy has largely been, you know, put out of action, they've suffered tremendous damage of conventional military assets, even much of their ballistic missile and other shorter ranged missile capabilities both the missiles themselves, but also crucially, the launchers. I don't think it is a surprise that as, as long as you have some capability to continue to fire drones and fire missiles in the you know thousands of missiles of across a number of different ranges and, you know, it's also important to remember that during the twelve day war, most of the focus was on the ballistic missile capability. That's what the Israelis are most focused on in particular because that's what threatens Israel, but Iran has, you know, their shorter-range missile capabilities which are on display that were comparatively less hit.
They had thousands of missiles, they had thousands of drones which not only are very hard to kind of disrupt across the board or find and destroy all of them before their launch, but Iran has the ability to manufacture these things pretty cheaply and quickly. The Shahed drones in particular, so it's replenishing itself as this thing goes on. I don't think it is a huge surprise just that they are able to continue to fire capabilities off here and there. Now their ability to do so is being degraded by the US and Israeli military and a lot of those assets are being shot down, by our military, by Gulf state, air defense, and as the US military campaign continues over the coming weeks, their ability to continue firing these things, you know, in theory will be degraded even further, but it will be very hard to get to a point where they have nothing left to fire. And remember for tankers and for shipping, you know, they're going to be reluctant to go through the street with any sort of threat, without appropriate US military protection or escort.
Tony Roth
So, given that, it doesn't seem like we're getting our way, if you will, from a military standpoint, in other words, do you agree with the statement that the Iranians, given that they have the ability to send these drones and hit a ship a day, that's all it takes that would potentially going through there. They sort of have the upper hand here, as it relates to a president that is seemingly very, very keen to end this conflict and get the Straits open.
Teddy Bunzel
Yeah, so here's what I would say and here's how I would think about it. From a military campaign perspective, what the United States is, you know, focused on, it seems right now is essentially two big things. One is continuing to pound and degrade Iranian, you know, military capabilities, its ability to project force, but also to fire these missiles and drones. So, it would be very hard, you know, if not impossible to get to zero threat, but they're continuing to chip away the longer that this goes on.
And so, you know, in weeks from now, Iran's ability to continue this will be diminished, it won’t be zero, but it'll be diminished from where it is today. That's number one. Number two is the, you know, the military looks like they're going to, you know, they're focusing on trying to reopen the Strait of Hormuz.
So what that means is practically speaking, is going after a lot of the targets in and around the Strait, including a lot of the asymmetric capabilities that Iran has, the IRGC has with fast boats, you know, and other, and other ships that could disrupt traffic, you know, put aside the, the kind of regular Iranian Navy, but some of these asymmetric capabilities. They’re going after shoreline batteries and reducing Iran's ability to threaten the Strait. Likely with the goal of reducing the level so that the US is able to deploy naval convoys. To start to get some energy flow through the Strait, and that won't be free flow of you know like where we were pre 28 February, there will be likely an you know an US Navy escort that will only be able to do a number of runs a day. It will likely prioritize energy tankers over some of the other commodities that flow through the Strait but in some weeks’ time, you know, we may have a situation in which there is some traffic flowing through force from the United States government. And while that isn't something that the US can do just in perpetuity, it will change the dynamic from where we are today, where Iran has complete control and, you know, and leverage and shutting down the Strait. The US forcibly reopening it and beginning some energy supply will provide a little bit of a release valve on energy prices, maybe, you know, reduce some of the growing economic pressure, but also symbolically change the dynamic to say that the US, you know, can thwart Iran's ability to unilaterally shut down any traffic. And that may set the table if Iran is feeling enough military pressure from the intense bombardment from both the US and Israel, and we can't put aside just how much pressure they're under right now militarily, the Iranians, you know, that combine that plus the Strait opening, you may in the best case scenario that creates the conditions for some sort of cease fire that then allows this to slowly begin to normalize and traffic begin to resume.
Tony Roth
So, assuming that that we don't get a cease fire otherwise, what's the likelihood? Is this your base case scenario? And let's say by the end of April that we'll be able to get that kind of activity through or is it a pipe dream? I mean, how do you let's assume that a cease fire does not emerge between now and the end of April, what's the probability of what you're describing, Teddy.
Teddy Bunzel
It's very hard in this just because it's everything's moving around to sign probabilities of high confidence, but I would say as you get to the end of April, beginning of May, having a situation in which the US has continued to really degrade Iran's capabilities through going after its defense industrial base and military assets and also has forcibly reopened the Strait to allow for these convoys. I think that that is plausible. It won't be without risk that these convoys will go through. They'll still be subject to potential strikes, drones and missiles, but the US can help to take care of that with, you know, air defense assets, aboard, you know, ships that help to convoy energy tankers through the Strait. And so if that's the case, that again may create a dynamic that is more conducive to a cease fire, in which the US and Iran agree to guns down and that they respect the transit of the Strait, maybe in a best case scenario, the US, you know, there's some sort of an agreement on the nuclear program or other issues that have been part of negotiations, that would be really difficult to do under fire, but I think, you know, it's not impossible. And then you would, you know, from there you start to begin to have a normalization though that will take some time just given how many barrels are shut in right now in the gulf. It's something like 10 million barrels a day of shut in production.
Shippers are going to be a little hesitant to go through even the day after the declaration of some sort of cease fire, but I would keep in your mind, just given that you said end of April that Trump and Xi have rescheduled their meeting for 14 May and 15th and the administration and you know the president have been explicit that they hope to have things wound down by then, before that meeting. So, that's one timeline to keep in mind.
Tony Roth
Do you have a level of concern around the ability of the US to continue to prosecute this war given our own limitations of artillery or, you know, munitions, smart weapons, whatever it maybe?
Teddy Bunzel
Look, I am I'm not privy to any information and I'm not a, you know, air, you know, air defense or air interceptor kind of expert, but I will say, my mental model here is the US has the ability through existing stockpiles to prosecute this for the foreseeable future. The tradeoffs are just in how much it's depleting now, the longer it goes on and therefore how long it will take to replenish those stockpiles and that intervening period will potentially, 1st of all, it's expensive to, you know, replenish those stockpiles, but it also potentially leaves, you know, the United States a little bit more vulnerable and let's say the Asia Pacific. If they have to draw down resources that otherwise would be deployed in any sort of escalation there or maybe it cuts into the ability of the US to supply, air defense to the Ukrainians, even if the Europeans are paying for it. And so you start to get military tradeoffs, but I don't think that, you know, the US is likely at risk of running out anytime soon, if that's the question.
Tony Roth
Sure, yeah. Well, it was. So, thank you.
Teddy Bunzel
Both and by the way, both offensive, right? Offensive missiles, but also air defense, right? Those are the two different items that are most important Tomahawk missiles, you know, patriot, air defense missiles, that kind of thing.
Tony Roth
Okay, so it's very hard to evaluate with this president narrative from reality and intention. He talked most recently about if the Straits are not open immediately, so on. He's going to, and there's not a serious advancement of the negotiations. He was going to essentially take down the energy and electrical infrastructure of Iran. I guess there's two questions around that. Number one is, I'm perplexed on why he says things like that because he doesn't seem to follow through with them and it just seems as though he has own credibility is diminishing, but more fundamentally, am I misreading it, would he do that? And, and if he did that, would that make sense? Would that be a good strategic thing to do?
Teddy Bunzel
I would say that if he did that and went after energy infrastructure, then you're talking about from an economic perspective of kind of the worst case scenario where you have a real energy escalation because the response from Iran, they've been very clear in telegraphing this, is that they would go after Gulf State, energy infrastructure and production refineries, you know export infrastructure in ways that they haven't yet, and that would create a longer term impairment of supply that would cause an immediate spike in energy prices, but then also create a more enduring stagflation shock. So put aside whether that's strategically the right thing to do and whether that would help accomplish the military and political objectives, Trump may ultimately if he has maximalist you know intentions in mind in terms of crippling, you know, the regime economically, that would certainly go away toward achieving that goal, but it would carry a lot of economic risk. And that's not at least my own base case is that he'll follow through on that because of the, of the really negative economic effects and you can, you can tell the White House is already feeling some of the pressure from rising gasoline prices and energy prices generally. And so, what I would say is on just the tactics, this is the same playbook that Trump has used in, in all the different trade wars, over the last year or so. And there are many instances that you could point to in which he doesn't necessarily follow through. I would say the threat to do exactly this goes after energy infrastructure; that's one example. But given that he followed through on these strikes, given the twelve day war, given the operation in Venezuela, you can't completely dismiss the possibility that he will follow through, but it is a tried and true kind of Trump playbook to just maximally threaten escalation and hope to get a concession and you know, he's clearly using that approach now.
Tony Roth
Let's pivot to the idea of detente that may be underway as we, as we speak. Do you have a sense of whether or not when the president says that they're desperate for a deal and they are begging us for a deal, and that they've agreed to many of the, the demands within our 15 points, that they're even talking to us. My sense is from what I read that there's some message passing going on back and forth.
And at best, perhaps the more moderate constituency within Iran that does not control the real military assets, which is the president but not the Republican guard, maybe who is indicating some room for, for negotiation, but there's not a lot of reality around a negotiation right now with the people that are really controlling the military assets through Republican guard, which is what seems to matter, and that's why you're getting this potentially, almost schizophrenic set of statements from the president where in the one hand the negotiations are going great on the other hand, he's going to destroy everything if he doesn't get what he wants immediately.
Teddy Bunzel
It's hard to know exactly what's happening inside the Iranian regime right now. I would assume that communication among the different elements of the regime is pretty difficult under this intense bombardment. It does seem that the administration does have back-channel discussions going on, whether that's direct back channel or whether that's through intermediaries, you know, Pakistan obviously emerged as a key intermediary, but Turkey and Saudi Arabia seem to also be involved. Whether or not they're speaking directly, there does seem to be at least some sort of channel, and both sides are posturing. I mean, you heard Trump say the Iranians are begging for a deal. The Iranians say the Americans are begging for a deal. And look, obviously the United States is feeling economic pressure and Trump would like to find some sort of an off ramp that allows, for some declaration of victory and extraction of concessions on the nuclear program, ballistic missile program and obviously an overall degradation of the Iran's military capability and ability to project power, again I mentioned this before, it's important to remember the Iranians too are suffering a lot and they already suffered a lot in the twelve day war last year.
They've had their essentially a proxy network dismantled by the Israelis, and so they're also hurting. This, who's, you know, puffing up their chests the most and saying that they don't need a deal, the other side's begging for it. I think that there is truth that both sides would like this to end, they're just trying to figure out in the right, the right terms. I will say that on the substance of any sort of, you know, more comprehensive agreement around the missile program, nuclear program, opening of the Strait, sanctions, relief, all that stuff. It seems that the two sides are very far apart, so we're nowhere close to any sort of big comprehensive deal. But does that mean that, you know, in a few weeks’ time at the end of April, they can't come to at least some preliminary cease fire agreement? No, right? I think that they still can. Again it's, it is our base case. It's not a super high conviction, but it's our base case that that still is the most likely outcome is that after a month or so, you know, both sides will want to call it quits, the US will feel the pressure, they'll come to some sort of an arrangement and the US will declare victory and then we'll, we'll have this wind down. But there's obviously the risk of escalation that we all have to worry about.
Tony Roth
Sure, but what I haven't heard you talk about is any kind of serious without further military pressure and pain on both sides, any kind of serious agreement, detente, in the short term. It sounds like that's very unlikely.
Teddy Bunzel
Personally, I think that's unlikely.
Tony Roth
What about the Marines, the paratroopers that the US has now put in the region? It seems like it's a very small number that it wouldn't be material to the overall conflicts now again I'm a lay person, but when I hear about, you know, a million, a million, soldiers in Iran ready to attack anybody that says foot on the Kharg islands, it seems as though that wouldn't be very smart for us to do.
Or even to try to put some Marines into the coastal area around the Strait, but I don't know anything about this. Can you talk to us about why he's done this? Is it just posturing or do you think that there's some reality that they would be used and if they were used, is there a reasonable path for them to be used? Those assets, those soldiers where we could get some type of acceptable benefit relative to the, you know, risk of death that we create for those Americans.
Teddy Bunzel
Look, I would just say without being privy to anything here, seems to me, I mean I agree with you that the overall level, right, of US force is something like now 50000 that are in total in the region after the surge of marines, the 82nd airborne. I mean it's a far cry from the number of troops that went into Iraq in a country that's much smaller, you know, and less sophisticated than Iran, a country of 90 million people. And so any sort of major ground operation, like a regime change operation that does that’s not what these forces would be used for.
Instead, my assumption is that they are offering the president, you know, options on the ability to follow through on threats to see certain islands, whether Kharg or otherwise as a way to gain leverage, cut off Iranian exports, it would, you know, it would or neutralize potential military threats to shipment through the Strait. It wouldn't come without risk, obviously though they would become targets or they could be used to go after potential threats to the Strait, emanating from the shoreline of the Strait of Hormuz on the Iranian side. We don't know.
They also could be just used in a way negotiating ploy, right, to hold the spectrum out of a potential ground force incursion or escalation with troops as a way to put further pressure on the Iranian regime in negotiations or to or to agree to some sort of ceasefire. And so you know overall, I think it is more about providing optionality to the president than an indication of any sort of major imminent plans, though, you know, we don't know.
Tony Roth
But when you think about the optionality that it's providing, and I hate to put you on the spot here, do you think that there's a constructive, reasonable use within the context of the military conflict where, I mean, do you think that it would make sense for them to try to take care of island? And could they do it with this group of marines? I mean, if there's any view around that.
Teddy Bunzel
My assumption is that they're assembling the forces that would be necessary to take Kharg Island. I don't know whether these marines or the kind of constellation of assets around the region. I don't think that they've made a decision.
On any, on any of that. Look they could be used when you think about the, you know, the other ways beyond a seizure of Kharg Island can imagine if there's some sort of threat as I mentioned before on the, on the coastline of Iran hugging the Strait that they feel is most easily, you know, neutralized through a temporary ground incursion or to seize a certain piece of land maybe they're used for that purpose, but you know again I think that it may well be that if we're, if we're kind of reviewing this a month from now, two months from now, there are no ground forces deployed and this really was about creating more leverage and pressure and also just giving the president an option in case things did start to escalate and they needed the ability to deploy troops.
Tony Roth
Okay, let's pivot and move to the nuclear material. Do you given, you know, everyone you speak to et cetera, is there any reasonable concern that they have or are in the process of taking the 60 % material to 90 %?
Which is enough for a weapon, in terms of the richness of the, of the material, and even if they did have that material, and they had the means to deliver it through a missile, do they actually have the technological means to put it into the device? You know what's the imminence of all of that and what's the concern around that in the short term, you know, this year let's just say during this conflict?
Teddy Bunzel
So, I mean this gets back to the you know the aftermath of the twelve-day war and what their capabilities were. I mean, my impression, in reading you know the tea leaves and kind of all the same things that you are is that the 60% enriched uranium is buried under some of the rubble and in the tunnels of facilities that were destroyed last summer. And that it hasn't yet been recovered. That the Iranians probably know where it is. The, you know, IAEA has indicated that, you know, it thinks that that's where some of that highly enriched uranium is. And so, my assumption is they haven't yet made a move to recover that material in earnest. If they did, 1st of all, I would assume just given the penetration that especially the Israelis have had in the on the Iranian regime and the and the nuclear program that we would catch wind of that. And then number two, you know, in terms of getting it to then 90 % enriched uranium, you know, that's something that they would just, it would require further enriching it and you know Iran can manufacture its own centrifuges probably has still some left even after last summer's attacks, so I assume that if they really wanted to make a dash you know, that they could enrich it up to 90 % after they recover it, they'd have to do it in a facility that is detected by, you know, intelligence, which will be a challenge, but, you know, they have the know-how and, and the material ability to do it. And then there's the question of how long it takes to actually then weaponize it, right? And put it on a warhead of some kind. And it, it does seem that they are, you know, some of that activity was centered around facilities that were struck last summer, so you would have to reconstitute that, but you know the challenge is that a lot of the knowledge of the, you know, of the program, it's knowledge that's living in the in the heads and the kind of records of the individuals involved. So you can't just destroy all of it, right? Some of that knowledge will live on.
So, you know, while I don't know exactly how long it would take to weaponize, I mean, some of the estimates, you know, last time last time around or you know around the time of the strikes in June or the, you know, take, I don't know, six months to a year to weaponize the you know to highly risk uranium. So there still would be some lag. I don't think we're at risk of some imminent declaration that around is fully capable nuclear weapon, but they still have all the constituent parts, right? It would take some time to reconstitute and they've been set back. But if they determined that against the will of the international community in the US and Israel, they wanted to race to a bomb, they could. It doesn't seem likely that they get there within 2026, but they would ultimately have the ability to do so.
Tony Roth
Do you think that there's any line in the sand relative to the nuclear capability of the country for Trump and the administration? Do you think that they wouldn't accept a resolution that does not involve the removal of the material or very significant commitments as it relates to the, the International Atomic Energy Commission or do you think that at this point if Trump can get the Straits back open, and he'll declare victory no matter what happens. We all know that.
That, he would potentially accept some relatively unsatisfying you know outcome as it relates to the nuclear material.
Teddy Bunzel
I think that the preference would obviously be that whatever the closing is, there is some sort of a comprehensive agreement or some sort of resolution related to that, but it depends upon the economic pressure that the administration is feeling, and you could construct a scenario in which after the military campaign keeps going on for weeks, they, you know, they forcibly reopen the Strait. Energy prices keep creeping up and up. The pressure keeps continuing, and both sides agree to a ceasefire that allows, you know, the US and Iran to declare some sort of victory.
And then they leave the kind of resolution of the nuclear program to subsequent discussions. I mean I think that that's a totally feasible outcome, and whether or not that does lead ultimately to a comprehensive deal or not, is unclear, but it will at least create a path for resolution. And allow the Trump administration to kind of tout that they are, you know, not only have they opened the Strait and they've totally defanged Iran, but now we've got discussions with Iran on its knees about its nuclear program. And I would just note that it seemed that before the 28 February, you know Iran was pretty serious in nuclear talks. I mean, I think that the damage after the twelve day war in particular, it was pretty severe, and it seemed that there could have been a path towards some sort of an agreement and we'll see how this, how it goes with the new leadership in Tehran, which does seem to be very hard line. Even relative to the prior regime, but we may get to a point at the end of this where they feel really crippled and they feel that making a deal on the nuclear program giving up the right to enrich or having, you know, extracting the nuclear material to a 3rd country in exchange for some sanctions relief that will allow them to rebuild, maybe that is actually an attractive option, even for this leadership.
Tony Roth
I assume that the US would never actually pay quote unquote reparations to the state of Iran.
Teddy Bunzel
I think so.
Tony Roth
Okay
Teddy Bunzel
I think that they would have, they would allow for sanctions relief, which is part of that 15 point plan that was, you know, originally floated, which, you know, would in effect be not in effect be a net check from the US government to Iran, right, for reparations, but that would be an economic lifeline similar to what they got in the JCPOA.
Tony Roth
So let's talk for a moment about, and I do want to get to the economics in a moment, but I really want to ask you this question around the role that Putin and the Russian state plays in this because I worry that Iran is being enabled by the Russians, the hard, this hard line regime is actually getting material assistance, whether it's replenishment and or intelligence. There was a news story around Trump allowing some oil to go into Cuba, and that was something that the Russians were happy about, and I'm wondering whether or not, you know, the relationship between Trump and Putin is such that he can potentially get put into it you know be a little bit less involved if he either was less involved in Ukraine or backs off on Cuba or what, what it maybe. Can you give us your, your take on that? But preferably in English, please, rather than in Russia.
Teddy Bunzel
Da. So here's what I say, it's clear that Russia's one of, if not the biggest winner from this conflict. Given the sanctions relief and the evaporation of the discount of Urals crude relative to Bren I mean, they're making, you know, the combination of those two things at least.
$150,000,000 more a day than they were before the conflict. And then now you have questions around whether or not the United States going to be able to continue to provide, you know, air defense to the Ukrainians given the depletion of some of those munitions. And then there are reports on that front around, you know, the Pentagon becoming concerned around that or weighing a potential reduction in relief there. And the overall US adventurism for continued commitments may diminish you know in the wake of this conflict. And so Vladimir Putin gives him an economic lifeline, distracts the United States and given some of the assistance that he's providing to Iran, gives him some bargaining chips. Including on energy relief, but it's clear that the Russians are providing some targeting assistance. I think even Trump admitted that when asked about it by reporters. And so maybe Putin, you know, offers to be a kind of conduit for negotiations at some point or to, to apply pressure on the Iranians. So.
It gives him another chit in order to, to cash in on diminished support for Ukraine on the part of the United States. And so, I think that they're a clear winner. In you know in terms of what they're actually providing the Iranians and how essential, it's hard to tell, and I would assume that when it comes to some of the munitions that Iran is expanding in and around the Strait of Hormuz, and that they're firing at gulf states, e.g., that Iran is manufacturing and will continue to manufacture most of that and doesn't need Russia. Russia does have Shahed Drone factories within Russia that it's running to, you know, supply its war in Ukraine, but Iran has plenty of manufacturing capability for Shahed's at home.
Tony Roth
Even after all the bombing.
Teddy Bunzel
Yeah. I would assume that it is distributed, that some of it is fortified, you know, the Iranians have been preparing for this and it's relative to ballistic missiles and, you know, launchers and all that. It's relatively cheap and, you know, inexpensive and easier to manufacture. So I assume they're still producing.
Tony Roth
But at a very diminished level or not?
Teddy Bunzel
I would, I think it's fair to assume that it's diminished relative to 28 February, but they already had enormous stockpiles of thousands of these things and, and relative to missiles they can replenish more quickly.
Their Shahed Drone count, and I think that's the longer-term risk. This goes on for months and months, you know, it's not like they're going to necessarily run out of drones anytime soon, and that's what people are most fixated on, especially given the price mismatch between, you know, whatever it is, $35000 or $50000 Shahed drone and then a, you know, a million dollar plus US patriot missile.
Tony Roth
What about the strategic option for the president, maybe it's more tactical, but, to declare victory and to pull all the military assets effectively out of the region, not to shut the bases down, but to essentially say look, we've weakened this regime sufficiently that I can declare victory. We'll come back and deal with the nuclear stuff at another time, but for now, we're just going to pull out, declare victory, and let the rest of the world deal with the Iranians as it relates to allowing anything to go through the Straits of Hormuz. Is that a viable option for the president?
Teddy Bunzel
I think that that in many ways the administration would like to do that after they feel that they've sufficiently degraded Iran, just given some of the economic pressure, but I would assume that, if they just got up and you know one of the, one of the risks is if they just declared victory and walked away without any sort of agreement that Iran would then continue to disrupt flows through the Strait or seek to essentially extort countries who are looking to transit the Strait by having to pay Iran in order to, you know, get safe passage and it would be very hard for the administration to abide by that. So, the thinking would be that they keep up the pressure until Iran feels compelled to agree as part of a cease fire to allow for the reopening of the Strait rather than the US just completely walking away.
Tony Roth
I mean, it seems as though 98 % of the tankers that go through there, whether they're tankers or cargo or whatever, it all going to Asia. It's not coming to North America, and so the Chinese, the Japanese, the Indians, they're not the ones that start with the war, let them figure that out with the Iranians.
Teddy Bunzel
Well, you, you hear that, you hear that rhetoric, the challenge is that oil is a global market. And so, despite the fact that all that stuff is going, you know, 80 to 90 % of it is going to Asia, you still have gasoline prices in the US at four bucks a gallon on average as a result of this conflict. So the US is not insulated. It is insulated from a gas from an LNG perspective, right? I mean, US domestic you know natural gas prices haven't really changed much. So that reduces the kind of strain on the US, but it is affected like everybody else by the global nature of the, of the oil market and therefore all the refined products, right? And then that's not even to mention all the fertilizer and aluminum. 9 % of aluminum production comes from the Middle East. 30 % of helium production, which is essential for microchips, so all that stuff is going to be disrupted and matters ultimately to the United States as well.
Tony Roth
And while I appreciate there are certain types of hydrocarbon based material or actual hydrocarbons in raw form, like the very heavy crude that isn't that you need to put into tankers in order to move them around that we don't get in domestically because we know we have the light sweet stuff, which is overall more valuable, but we don't have the really heavy stuff, we don't have the helium, et cetera. Is there an option for the administration to in some way to become more self-sufficient so that we get the heavy stuff from Venezuela or we get the helium from elsewhere, but we essentially insulate our own energy supply in large part from the price shock that this conflict has caused. Is that even possible or not?
Teddy Bunzel
Again, on domestic natural gas prices it does seem like we're insulated. But in general, in these global, you know, markets and also these very complex supply chains, I think the idea of kind of autarky is really not feasible, especially anytime soon, right? So the US economy is going to be feeling the pain if this continues to go on in a couple different dimensions.
Tony Roth
So, let's pivot to the very short time we have left to talk about the economy. If we get a meaningful reopening of the Strait by the end of May, 50% of the traffic is reestablished, let's say by the end of May. 75 % by the end of June, is it a faits accomplis that we have a recession in the market is going to, in your mind, the market is going to reflect that or do you think that there's also a reasonable possibility that the, particularly the US economy is more resilient than that. We have gasoline is only three or 4 % of consumption in this country, and if the stock market doesn't see the recession and that continues to hold up the high end consumer and with all the fixed investment going on in AI et cetera, that it's reasonable that we might be able to sustain a few months of this, had a one month behind us and maybe another two months, and then we get to by the end of two months, you know, maybe 50-75 % of activity again. I mean, what's your take on all that?
Teddy Bunzel
I would say a couple things. One is that in that scenario, right, that this goes on for, you know, a month or two, remember, you know, one of the assumptions is that the US military is going to be focused on reopening the Strait and trying to get some traffic even if it's limited and it is it is you know navigated by convoy through the Strait to relieve a little bit of that of that energy pressure it's not going to get it up to the full flow that we had before 28 February, but that will provide maybe a little bit of relief. You also have some, you know, work arounds. It's interesting. The Strait, you know, accounted for whatever, 20 million barrels a day of crude, you know, refined products before 28 February and now you look at various estimates, it seems that the reduction in global supply is somewhere on the order of around 10 million barrels a day, maybe even a little bit less because there are some bypass options. The Saudi east west pipeline, you've got a little bit more capacity in UAE. Plus, you have Iranian ships still going through. That's almost 2 million barrels a day. You have safe passage of, you know, Pakistani Turkish flagships, so that's going to add a little bit of flow. And then you have all of the, you know, strategic petroleum reserve releases coordinated by the IEA, the 400 million barrels. Maybe you get some re-upped amount. Japan has already called for an additional release, and then you have the steady drawdown of all of the oil that's at sea from Russia and Iran that, you know, they have the sanctions license licenses, you know, added, to allow for the export of those barrels.
So, when you put together the like ancillary relief and some of the bypass, it's not a, it's not a 20 % of global supply shut off right now. And so if you add on top of that a, you know, little bit of traffic through the Strait with naval convoy, I think that in two months’ time, you know, you will have there will definitely be stagflation impact. I'm not sure you're in recession territory yet. Recession territory is you're between a $250-$200 a barrel.
Tony Roth
Yeah, and I guess there's probably also, I don't know how material it is, but there's got to be some, what I'm going to call healthy elasticity of consumption where there's going to be some conservation reduction without actually having a really negative impact on follow on GDP, right?
Teddy Bunzel
Yeah, I mean there will be some there will be we're, you know. As Javier Bloss is the great Bloomberg columnist, put it, you know, we're entering kind of the demand destruction phase of this conflict, right? And so you're going to have some of that come offline. The challenge is when you look at the scale, he pointed this out, which I thought was really interesting.
The 10 million barrels a day offline reduction in global supply is equivalent to essentially the COVID shock. So that gives you a sense of the scale of demand destruction required to bring the market in balance. So that's why, you know, the global economy that's just continues in perpetuity is in for, you know, a pretty serious pain. And it's why I would assume that pressure is going to catch up with the Trump administration and especially when, you know, married to the, to the military clock of continually degrading Iran's assets, they'll get to a point where they say, the pressure is high enough plus we've done enough of a job in degrading Iran. Plus, we've opened the streets. It's now time to bring this to a close.
Tony Roth
And I would have to say just to close, I'll ask you for the last word in response to this. You know, I can only imagine that clearly that administration is calculated. They didn't expect to be where they are today, but if they knew that there was a risk of this degree of miscalculation, they wouldn't have done this nine months before an election, a major domestic election a cycle.
Teddy Bunzel
Well, I you know, no comment on whether they necessarily miss calculated. Look, my guess is that there are some in the administration who would look at the costs of this and, you know, that you could play the parlor game of who are the factions right there are for this war versus not within the Trump administration.
There were probably some who think that this, you know, they anticipated this kind of an economic hit, they would have advised no, but look, there, you know, Iran was a threat. I think that there was a view, the Israelis had it there, you know, they're parts of the, you know, US, you know, administration and the ecosystem that believe.
That Iran is historically weak right now after the twelve-day war and if you're going to have this kind of an operation to really, you know, set Iran back by number of years, it's best to do it now. Whether or not it was a, it was a miscalculation, you know, I won't I won't make a judgment, but it certainly was, I think and this is a lot more extended and will have a lot more of a multidimensional and lasting economic effect than I think a lot of commentators anticipated in, you know, 27 February. That's for sure.
Tony Roth
Yep. Well, I don't envy the producers of our podcasts that will have to work on the editing because I think that there's not a word I would take out of the conversation, so thank you so much Teddy.
Teddy Bunzel
Oh, my pleasure always good to be with you and happy to come on again.
Tony Roth
Yes, well hopefully it's going to be a happier conversation next time we speak, but it may it maybe it maybe even a less rosy one we'll have to say thanks so much for being here.
Teddy Bunzel
Awesome. Thanks so much.
Tony Roth
Yeah, and for everybody that wants to listen to a full roundup of our thought leadership, please go to wilmingtontrust.com and we'll be back again soon with another episode. Thank you.
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