Syria: The Money Effect

The uncertain future of American military action in Syria is causing ripple effects in the world market. Host Michel Martin speaks with economic reporter Sudeep Reddy of The Wall Street Journal, about the relationship between the Syrian conflict and oil.

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MICHEL MARTIN, HOST:

We're going to take a look at the conflict from a different angle now. The uncertainty about U.S. intervention in the Syrian conflict is shaking up global markets. It is apparently driving up the price of things like oil. Sudeep Reddy is here once again. He's an economics reporter for The Wall Street Journal. Sudeep, welcome back. Thanks so much for joining us.

SUDEEP REDDY: Thanks, Michel.

MARTIN: So as, of course, most people know, the president said over the weekend, he's going to look to Congress to decide on continuing actions in Syria, which means that there's a delay, that there is some lag before anything is likely to actually happen. Is this already affecting the markets?

REDDY: It certainly is. The run-up to potential intervention in Syria was pushing up oil prices. It led to a fair amount of volatility in stock markets. It gives people another source of angst about the economy and about markets that they really don't need right now.

There are a lot of other problems on the horizon - the budget battles in Washington, problems in emerging markets. All of these things are serious enough on their own, without adding higher oil prices and the potential for big spikes in oil prices into the mix.

MARTIN: Now this might be puzzling to a lot of people because Syria does not export a lot of oil. So what's the connection between Syria and oil prices with major exporters?

REDDY: That's right. Syria's exports are negligible on the world stage, but the Middle East, every - its entire neighborhood is obviously so critical for oil markets. The Middle East produces a third of the world's oil, and people tend to get concerned about spillover effects. That's always the worry whenever you talk about the Middle East. It is such a volatile area of the world. You never really know when one group is going to lead a situation to spillover into the neighboring region. Iraq has obviously been hobbled for much of the last decade in its oil production, and it neighbors Syria.

You never really know whether it's going to spread and cause more problems in Iraq, and we've seen this in the entire region. Whenever you have extremist groups getting involved in a crisis, you never really know what's going to happen. That leads traders to start worrying about worst-case scenarios. Often, they're unfounded, and that's one reason you actually see, when military action begins, oil prices come down. There is a sense of relief in markets. People rest a little easier, but until that happens, you have to brace for worst-case scenarios.

MARTIN: Now, you know, we've been here before, haven't we? There was uncertainty around Libya, particularly back in 2011 when the U.S. was still debating - and other Western powers were kind of debating what their role should be. Is there any lesson to be drawn from that experience that's relevant here?

REDDY: The lesson is, when you're going to be beating war drums, to do it quickly, to get to the point quickly so you're not making people unsettled about what could be coming. If you look at Libya, oil was around $85 a barrel in the run-up to that intervention, and it spiked around $110 a barrel. That has some serious implications for gas prices, for the overall economy, and as soon as that - the airstrikes began in Libya, you saw oil prices come back and that actually provided a boost.

So getting to the action quickly - there are obviously a lot of very important political and military considerations you have to take into account here, but the economic ones, especially when the economy is so fragile - as it is now - those economic considerations are important, and we saw the same thing in the run-up to the Iraq War in 2003. I remember hearing from businesses back then, talking about uncertainties, saying they weren't going to hire, they're not going to invest until they're really sure that we're going to go into the Iraq War and not have some big crisis around it, hitting the United States at the same time. And so oil moved up very rapidly in advance of it, and really, in March 2003, started coming down pretty quickly afterward.

MARTIN: Is oil the main concern for the economy? Is that the main area that people should be thinking about if they need to be thinking about how to plan in this period of uncertainty?

REDDY: That is the first concern. It's not the only concern because markets have been so sensitive to a number of other problems in this month - in particular, we're talking about how the Federal Reserve is going to deal with this extraordinary intervention in the economy because we might be getting strong enough in the economy for the Fed to start pulling back. That has already created a lot of jitters, and the conditions are so tense right now that anything - any surprises in the Middle East could provide a spark that hits stock markets, bond markets, commodity markets, very quickly and that is the concern, is you don't want to provide any reason for a spark. When you look at what the White House does in its planning for these interventions - you saw this in 2011 around the Arab Spring.

There was a lot concern within the White House - how does this affect oil markets? What do we do? And that's because the region is so critical for oil and the U.S. economy is so dependent on oil that they're always taking this into account. What are the side effects of this action and how do we try to mitigate them?

MARTIN: Very briefly, Sudeep, is there a key measure that you're going to be looking at in the days ahead?

REDDY: I'm really going to be looking at not just oil prices, but how they pass through to consumers, and there are a number of gauges in the market about fear, about overall equity prices, to see how people are responding and whether they're getting past that.

MARTIN: That was Wall Street Journal economics reporter Sudeep Reddy, here in our Washington, D.C. studios. Once again, Sudeep, thank you so much for joining us.

REDDY: Thanks, Michel.

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