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- [00:06]
A
There is a concept very famous, called the fog of war. It comes from the German Carl von Clausewitz's book on the Napoleonic wars about 200 years ago. And it refers to this idea that during a military conflict, each side has to make decisions with imperfect and constantly changing and often downright, completely wrong information. Now, one might think that 200 years later, 200 years after the Napoleonic wars, with the Internet and with computers and with analytics and with cameras in our pockets and with cameras all over the world, the fog of war might have lifted a bit. You would be wrong. And to see just how wrong that idea is, to take one very small and tangible example, look at the price of oil. In the midst of the Iran war, this conflict has reportedly all but shut down the Strait of Hormuz and caused the largest shock to global oil and natural gas supplies in many decades. Kuwait has cut production. So has Iraq. Qatar has declared force majeure on liquid natural gas exports. And in the last two trading days, crude oil prices first rose faster than any time in modern history and then fell by more faster than any time in modern history, rising essentially from about 70 to 110 in a day and a half and then falling back down into the 80s. Prices are still significantly higher than they were the day before these bombings started. And it's not just the price of oil that concerns economists. This narrow body of water is critical for the passage of fertilizer materials and chip parts. Nobody knows where this war will be in five hours, much less five weeks. But I wanted to have a conversation about what? This tiny little body of water, the Strait of Hormuz, why it has served as essentially a choke point on the global economy. Today's guest is Rachel Ziemba. She is an analyst on geopolitics, risk and energy markets at Ziemba Insights and an adjunct senior fellow at the center for a New American Security. Today we talk about the chokepoint of the Strait of Hormuz in this Iran war and how the explosive events surrounding this tiny body of water are reverberating around the world. I'm Derek Thompson. This is Plain English. This episode of Plain English is presented by Audi. We all know that feeling a change of plans, a new opportunity. Instead of overthinking, what if you just said yes with the all new Audi Q3? The answer is easy. It's made for the yes life, which with the power and room to handle whatever pops up. Yes to adventure, yes to right now. Because saying yes without hesitation, that's real luxury. The all new Audi Q3 made for the yes life. Learn more at audiusa.com Rachel Ziemba, welcome to the show.
- [03:31]
B
Thanks for having me.
- [03:33]
A
You and I are talking at 12:38pm Eastern Time on Monday just to give people a sense of where we are in the span of space and time, because this is a, this is a story that's moving very, very quickly. And, you know, in the general picture, we've got a situation where on one side, Iran has announced that the new leader of that country is going to be the son of the assassinated religious fanatic Khamenei. That's an unpredictable situation. On the American side, you've got Donald Trump as president. That's an unpredictable situation. So my general sense even going into to this interview is that anybody who has a high degree of confidence that they know what's going to happen in the next few days, much less the next few minutes, is completely crazy. Nonetheless, given that sort of preamble of epistemic humility, we're going to try to talk a little bit intelligently about what's going on here in oil markets, fertilizer markets, global energy markets, to make sense of how serious an energy crisis this is and where its effects could effectively or ultimately be felt. Let's start with a really simple question. Tell me about the Strait of Hormuz. Sure.
- [04:49]
B
And before we get into that, I think the one thing we'll know for certain is that in the next few days we're unlikely to see the Strait of Hormuz reopen. That's the one thing I feel fairly confident on. It might open after that, but in the next couple of days, looks the damage done might be more difficult. But yeah. The Strait of Hormuz is a narrow strip of water in between the United Arab Emirates and Iran through which more than 20% of global oil transits, 20% of seaborne liquefied natural gas, 30% of seaborne fertilizer, and a growing amount of global container traffic. So this is I've been tracking energy markets for about 20 years now and tracking the Middle east for that amount of time. And even before that, as a grad student, we would study choke points and physical risks to energy markets. And the strain of Hormuz has been always number one. Right. But this is the first time that it has been effectively blocked and that there hasn't yet been a way to reopen it.
- [06:07]
A
One thing that I see some people saying is that everybody looking at this story from a sort of casual or innocent perspective says this is a story about oil. And the idea is that, no, this isn't just a story about oil. This is a story about what oil becomes. Can you begin to give us a sense of what oil becomes so that we understand how the closure of this strait could ripple into parts of the global economy that people might not think of necessarily as crude oil?
- [06:36]
B
Sure. I mean, the first thing is at the end of the day, we as consumers don't use oil. We use, you know, we use gasoline, we use diesel. We might get onto a flight and hope that it has jet fuel on board. We also use, you know, you know, we're doing a massive build out of electricity because of AI. We use copper. Sulfuric acid, which is a byproduct of oil refining, is a major input into processing copper. And then of course, in our daily life, we use so much plastics, even those of us who are trying to phase out microplastics use. And what do plastics come from? They come from oil via petrochemicals. So it really touches so many aspects of our lives. And oil and natural gas can be precursors for fertilizer, nitrogen based fertilizer in particular, which then can add to the cost that we face in our food supplies. So those are just many. And then think about, I just placed an Amazon order this morning and the sort of car that's going to get it that last mile, the flight it's on. All of those factors involve companies who are thinking and scrambling about do their costs increase. And even the very ships that the oil being carried on, they themselves are having to pay more for their fuel. So it really has quite a number of ripple effects in the global economy. And of course, there are other goods as well that are also trapped. It's just that the global linkages are much more through oil and its downstream channels.
- [08:28]
A
I think most listeners have a pretty good sense of how rising prices for crude oil will affect the cost of, say, driving from their home to work. I'm really interested in you going a little bit deeper into two products that I think most people aren't making this connection, fertilizer and computer chips. First, let's talk about fertilizer. I've read that up to 40% of global urea shipments from the Middle east are currently stranded outside the Strait of Hormuz. Why is that a big deal? What's the connection between the straight oil and fertilizer use throughout the world?
- [09:03]
B
Sure. So urea is one of the formats in which fertilizer that can be converted into fertilizer can be a byproduct from natural gas, from oil that then is converted into nitrogen based fertilizers. And so it's one of several sources of fertilizer along with phosphates and potash. And both major supports of phosphates and urea are trapped in the straits with the producers of Saudi Arabia and Qatar respectively. Now we're already seeing a price impact even here in the United States. I looked at the prices out of the Port of New Orleans today and they're Now, I think $270 a ton at least this morning. And that's up 77% since December. Right. And so if you're a farmer and who is thinking about what's the cost of my fertilizer versus what I can sell corn for, you know, Josh Linville, one of my fertilizer go tos said that we're now at a point where you need to sell 126 bushels of corn for one ton of urea versus a little less than half of that in December. So, so that is a big shift at a time when American worker farmers have also been struggling from buyer strikes in China and lots of other factors there. Now, from the US perspective, this is one of the ways in which price is increased, but the risk of physical supply shock is lower than in other countries. Here in the US most of the fertilizer we import comes from Canada. About 45% is potash coming in from Canada. There are no supply shortages there. Another about 20% comes from Russia. It is at this point our only primary import from Russia in the context of sanctions, at least for now. We'll see what happens later this week. But still, this is a case of this is fertilizer costs will be going up. And this comes also at a point where other inputs going into farm products may be impacted by the tariffs and the uncertainty around tariffs.
- [11:23]
A
We're going to get back to fertilizer when we talk about the global effects of this war. Right now I really want to get a clean picture of what is passing through this narrow body of water. The last bit that I wanted to emphasize is inputs to computer chips. So Taiwan makes about 90, 95% of the world's most advanced chips and Qatar ships about 30% of their liquid natural gas through the Strait of Hormuz. So already you have that as an input that could threaten the manufacture of computer chips. I've also read that South Korea is making noises about fearing that helium shipments could be slowed. And helium is a major input for memory chips that they make in South Korea. So no gas, no helium, no power, no, no chips. This is A huge problem for potentially the most important contributor to US GDP and growth throughout the developed world, in many cases, which is software and artificial intelligence. Give me a deeper sense of how freaked out commodity analysts are about the degree to which this shutdown could affect global chip manufacturing.
- [12:31]
B
Yeah, and this is coming. So people are rightly worried about this shortage of helium. Someone would point to the fact that the US Was among countries that sold off their helium reserve, in part because we don't do as much semiconductor manufacturing in the United States, though that is shifting. And so there are alternate sources, but they all take time. And so what you're seeing here for a country like Taiwan is like a double or triple sort of whammy of that concern about power supply and power being more expensive, but also other inputs. And I would note this is happening at a time where memory chip prices have already been going up sharply in the last couple of months. We've started to see memory chip prices showing up on earnings calls and other things. Now, that was partly a story of really strong demand. Right as AI related inputs and imports have been going up in the United States and around the world. You've had companies stockpiling memory chips, so you could. And that's good for producers of memory chips, but not so good for consumers and not so good. It's not only a data center issue. Memory chips are used downstream in creating cars and the like. And we saw in the pandemic that if auto manufacturers canceled their orders for chips, they might end up at the back of the line because they weren't as large orderers. And so we could see this factoring filtering through into a range of other manufactured products. But ultimately you're also pointing to this question of which products are stockpiled and how easy is it to have stockpiles. I mean, anytime you have a stockpile, that means buying a product that you're not going to use and having it ready in case there is a shortage. This is the at the opposite of just in time manufacturing or the like. And when we look around the world, some countries like China and even the United States have large oil stockpiles, but very few countries have large natural gas stockpiles. And that is something that I anticipate will be rethought looking ahead.
- [15:03]
A
I definitely want to recircle that point because it's really critical. We're going to get back to it a little bit in a second. But it's really critical, which is that if you're trying to figure out how these shortages are going to affect different populations in different countries. It's not going to be an evenly distributed effect. One big factor is, all right, what is the resiliency of that country? Do they have something stockpiled in reserve? Can they substitute one product for another? And that's something that we're going to return to in just a second. I want to round out this first section about the Strait of Hormuz itself, because I think when most people look at this crisis, they say crude oil prices are going up, that means gas prices are going up, the end. And your point here is that that's not the end, right? When the shutdown of the straits means, yes, oil prices are going up, but also the stuff we get from oil is going up. Sulfuric acid is how we extract copper. Copper is what we use to make transformers and EVs in all parts of the green energy economy. We've got plastics in the picture. We've got helium that's stuck behind this closure. So you've got fertilizer. And so the agricultural economy, the chips economy, the plastics economy, the green energy economy, all of these different sectors of the U.S. and global economy are being impacted by this closure. And so it's not, yes, gas prices will probably go up, but in a way that's like, that's the tip of a much larger iceberg is the big picture that I hear you painting.
- [16:30]
B
That's spot on. And that's where I know in a political context, gas prices going up tends to be this political trigger and warning sign. But if we look at it, the impact on the US and global economy is much greater. And if anything, it's really going to drive differentiation between countries. So there may be countries like China, which, as I said, has a very large stockpile they've been adding to in times when prices were low that might be able to subsidize parts of their plastics or petrochemical production that then might make them even more competitive even as they hold off on exporting refined oil products. I mean, we'll see how that plays out. But that's where I think we could see differentiation on competitiveness that might further challenge on shoring and reshoring goals that are underway here in the United States and elsewhere.
- [17:33]
A
I would love you to explain how exactly this war is disrupting the flow of oil and other commodities through the Strait. Because the dumb obvious way is just direct attack. Like Iran launches a drone, the drone attacks a liquid natural gas facility in Kuwait. And so that liquid natural gas facility has to slow down or shut down because it's literally being bombed. But there's other, maybe more indirect and more significant ways in which this war is slowing down commerce. Can you explain that?
- [18:02]
B
That's right. We're now at a point where it's not just a transit issue of supplies being blocked, but one where the lack of ability to export means that producers are starting to slow production, shut in production because they're running out of storage. And Iraq was the first country to do this last year week. Iraq has very little storage and once you don't have a place to store the fuel, you have to stop producing. And that raises questions about. That creates an actual supply shock as opposed to just a transit shock. But it also raises questions of how quickly and how well things could be brought back online. And what we're seeing across the region is either slowdowns in production or full on precautionary closures. Now that's amplified by the fact that some of these energy facilities are under attack and we don't know what the damage has been. The public statements of many of the producing of the operators, the national oil companies has mostly been to say this is precautionary. Yes, there were drone attacks or missiles diverted near our facilities. We are shutting. You know, this is not that it's been destroyed, but this war isn't over. Right. And we could see escalations there. And so to some extent precautionarily closing reduces the risk of explosions and further damage. But ultimately, and I think that's why we saw this slow motion responsed by in the global oil markets over the last week, week, because at first it was a well, maybe this is just blocked for a couple of days, maybe it will reopen. And then it really turned into as we say, a supply shock. Now I think the global markets are really focusing on how much oil and other products can be exported through other channels. Pipelines that avoid the strait of hormones that maybe accounts for about a third of the oil from the region. It's better than nothing, right? But it's not the full amount. And they're also watching for whether there might be military off ramps or military escorts that get it, sort of get it reopened. The US government has made an argument that it was more of a financial issue, insurance contracts being canceled. Maybe that was an argument in the first days of the war. And we'll see. The US government is experimenting with new insurance backstopping. But at the end of the day, as long as an Iranian drone could blow up a tanker, it's not going to make a difference yet if the Iranian Military or navy is destroyed, it's going to be that question of how asymmetric warfare might impact these supply chains.
- [21:24]
A
I think there are some folks out there who on the more optimistic side say, well, not only could this war end very soon because of the US And Israel's overwhelming military advantage, but also isn't there some general rule of macroeconomics that if things get really bad, the market just figures something out? Like either by say, maybe we'll take advantage of oil pipelines that exist on the Arabian Peninsula to move commodities across Saudi Arabia into the Red Sea or to move commodities straight into the Sea of Oman. And so you bypass the Strait of Hormuz, which is connecting the Persian Gulf to that sea and then ultimately the Indian Ocean. Other people are looking at insurance companies and saying that, you know, if this is ultimately a matter of price, maybe some insurance companies are just going to come along and find some prevailing price that allows the tankers to move. How do you feel about these? I don't want to disparage them necessarily, because I'm certainly not an expert, but how do you feel about these sort of optimistic hopes that the market will simply find some solution that gets us around this little elbow shaped piece of water that's holding up the global economy right now?
- [22:39]
B
So I think those workarounds, especially the alternate pipelines, are a partial solution. They're better than nothing. And especially Saudi Arabia and the UAE have invested in pipelines that skirt, sort of skirt the Strait of Hormuz. But the market can't do a workaround and pick countries up and put them in a different body of water. Right. So that is part of the problem. Now the UAE can divert maybe almost a half of its production to Fujairah, which is on the Gulf of Oman. They have to hope that the Iranians won't attack that pipeline and any of that infrastructure. And they're doing some of that. Saudi Arabia is making changes to its east west pipeline that goes to the Red Sea and then through, that can connect to the Suez Mediterranean Pipeline. But that has capacity limitations too. And while all this is going on in Hormuz, the whole question remain of the, of the Suez Canal safety and access to the Red Sea is still in question. The Houthis are sort of on, off, you know, sort of disrupting some of that travel. So I think it helps, but it doesn't, it doesn't solve the whole problem. Now, look, I'm a believer that the markets do find ways when they can. I've spent a lot of the last 10 years studying sanctions and sanctions evasion and how that changes oil markets and the parallel markets created. But there can be some physical infrastructure issues and geographic issues that mix that. Now one of the other stopgaps, in a sense that the US Government is turning to, is also relaxing partial sanctions on Russia for a period, for a period of time. They looked around and said, well, there's a strategic reserve that is piling up in Asia as Russia can't sell this fuel. And they have issued a temporary license to India in India alone to buy up some of these barrels to capture the stranded ones. We're looking at, you know, 30 million barrels that are already not far From India, maybe 100 million barrels in total. So this is not nothing. I mean, India consumes 5 million barrels, let's say a day of domestically and through exports. But this is probably not a long term solution if the straits remain blocked. And then it also raises other questions about US foreign policy, US commercial policy, and even questions of US alignment with traditional allies in Europe who not only continue to try to have tougher sanctions than the U.S. i say try because enforcement is a challenge, but also have a new ban on any refined products that started out as Russian crude oil. The Europeans are going to have some difficult questions ahead because they are one of the regions that is more vulnerable, is more vulnerable here. The good thing maybe for Europe is that they already had to adjust to some higher, higher energy costs as they shifted around their energy sources in the last several years, in a sense because of the Russia Ukraine conflict.
- [26:29]
A
Right. You mentioned this. Someone complicates our foreign policy. We are, and I'm trying to describe this in a way that's objective and not overly judgmental, but we are, I think it is fair to say, funding a war against Russia, a geopolitical adversary, while declaring war on Iran, a move that is forcing us to relax the sanctions that we're using to squeeze Russia, the nation we're funding a war against. And so it's, it's the, you're, you're, I don't know if it's like a robbing Peter to pay Paul situation, but you're certainly finding it difficult to wage wars on both fronts in an optimal way because waging one war is requiring a softening of the measures of economic warfare that we're using to fight the first war. So it's, it's, it's, it's a mess. It's, it's a mess. I want to move on to effects of the world in a second, but why don't you get the last word here before we flip the page?
- [27:19]
B
Yeah, and look, I think it just reinforces the fact that it can be difficult to put significant economic pressure on big producers all at the same time. It also may have been a miscalculation. Jury's still out on that. About the degree of collateral damage to Iran's neighbors production. Right. Iran itself, we're talking about 3 to 5% of global oil supplies. And in fact, to the extent that there are vessels transiting the Strait of Hormuz right now, maybe 10% of what they used to be, more likely they're actually carrying Iranian supplies rather than others. But indeed, there is a question mark about how we unwind different policies. And the Trump administration, I think, saw limitations about policy objectives like the oil price cap and would like to be in a position of normalizing relations with Russia. But that's a topic. That's a different topic in a way. I think this one off sanctions exemption is partly trying to bring back onto official channels something that would have happened in this environment anyways, which is that as oil prices skyrocketed, Indian refiners and others would start buying up using illicit channels, using cryptocurrency, doing things. But at the end of the day, I think we're just still sitting here without a real clear vision about what brings the war to an end and what unlocks this key supply chain. And in my mind, the longer this disruption goes on for, the greater the costs will be, both because they, they grow, but also it might be more difficult to start back up production, either because of physical damage or just because of what was done to put production on hold when export was not available.
- [29:30]
A
I want to talk about the effects that this is going to have on the US and the world. And typically, I think I'd, in a typical episode, I think I'd start with the U.S. i'm an American. The biggest audience for the show is, is overwhelmingly American. But, but just looking at the shape of this crisis and the shape of past energy crises, it just really feels to me like energy crises tend to have larger effects on the rest of the world, especially in a case where, as we have today, the US Is a net energy exporter. So thinking about these global effects, the Wall Street Journal reported that in just the last few days, Myanmar's junta launched a rationing system for cars. Thailand supported fuel exports in order to control the fuel that they actually had. The Philippines has now told government offices to turn off computers at lunch to spare electricity and set air conditioning no lower than 75 degrees again to spare electricity. Thinking about this question broadly, if traffic at the Strait stays frozen, what breaks first in the global economy? Where is the pain felt most acutely?
- [30:41]
B
Yeah, so the hierarchy of pain in the global economy is really countries that are quite reliant on imports, imports of fuel and these other products, and don't have reserves or stockpiles, and of course, whose share of GDP from that consumption is high. Now, I will say that for some fuel products like lng, the relatively high costs have actually prompted use of other power sources, clean energy. I mean, this is a good sign to some extent. Some of South Asia and the like, LNG was too expensive. They either went to coal or they went to solar, sometimes both. We've seen countries, sort of countries in Africa sort of do the same. So that trend may continue. Maybe that's the good news story before we get to the hierarchy of pain.
- [31:43]
A
But just to step, just to slow you down there before you get to the hierarchy of pain. It's funny, I remember I was talking to energy analysts a few years ago while we were writing Abundance, and I was asking a question, something like, how would you advocate for green energy to a MAGA conservative? And one thing this person said was this is a little bit of a tendentious argument, but when you buy oil, when you power your car with gasoline, you're participating in a global market that enriches theocratic states in the Middle east that are in many cases are geopolitical adversaries. And wouldn't it be just nicer if your car and home were powered by your neighbor's solar panels on their roofs? In many ways that there's like a make America great again argument for just like powering the world with sun that's beating down on our roofs and our neighbors roofs, rather than participating in global markets that enmesh us in countries we want nothing to do with. And it's funny now to hear like the flip side or to think about the flip side of that argument that now that there's a potential oil crisis burgeoning, that many countries overseas and maybe including the US might rediscover the virtues of renewable energy in this context. So just like a thought bubble, as you were giving that explanation before, you go on to the proverbial hierarchy of pain.
- [33:08]
B
Yeah, I mean, the challenges I think in a crisis moment like this is that the cost of, of alternate fuels can also go up.
- [33:21]
A
Right. And you can't build a nuclear power plant in two weeks. Right. So this, it's a, it's it's a, it's a long range plan rather than a short term swap. But it's just interesting that I'm hearing some, some echoes of that argument.
- [33:31]
B
I think that's right and I think one of the lessons learned, we're too early to learn too many lessons, but is the risks of supply shocks for net importing countries. I do think that may be one of the directions. But based on this country, Asia is the primary buyer of fuel and all products coming out from the Strait of Hormuz. Countries without sort of stockpiles and quite reliant include India. Makes sense. They're actually quite proximate. It's right next door Southeast Asia. And then there are the downstream effects also of a country like China that theoretically should be vulnerable because China spent many years diversifying their energy supplies and saying, well, we're not going to buy more than 10, 10 to 15% from any one country. Now the problem is if there are four countries that are all behind the same physical choke point and you're probably not quite as diversified as you thought. Now the global economy in the same way also a bit made that choice where OPEC spare capacity almost all sits behind the Strait of Hormuz. So it's great that Saudi and the UAE and Kuwait could increase capacity. But as we've just said, we spent a lot of time saying well they can't do that right now. So China looked and I think this has several drivers of this, including the dynamics of the dollar, also the lessons Learned from the 12 Day War. And China has been taking advantage of cheap oil prices and super cheap oil prices via sanctioned fuel and has been building up implicit and explicit stockpiles. So they're vulnerable, but less so than the past. Another reason why China's a little less vulnerable than it used to be is that it's much more powered on electricity rather than on sort of oil as a share of GDP has come down very dramatically. And of course China's been quite willing, despite all my talk about diversification, to become more reliant on Russia, which we've just said is sort of a beneficiary of these dynamics. So they are a sizable importer. There is pain there. Then I think you look at Europe, which you know, which has done a lot to reduce its reliance to become more efficient, perhaps at the expense of losing some power intensive manufacturing. So there are always trade offs here, no free lunch. And the other factor for Europe and to some extent for the United States has been the shift in where refinery production is based There's a lot of refining capacity now in Asia, West Asia, the Middle east, but also in East Asia. Swing refinery production is effectively in China and India now. And by and large, especially in the Northeast and in the, and in the US Pacific coast, we've seen shuttering of refineries. And so that, that, that can leave relative vulnerabilities there as there are in Europe. And then when you broaden it out beyond oil, you think about the countries in Asia who were big buyers of the fertilizer inputs, they're coming from the Gulf. Same thing with African countries. And so these are some of the vulnerability points as I see it. But of course there are relatively more resilient or relative winners, energy producers, those that are more self sufficient. But I get this question a lot in the last few weeks. Isn't this really great for oil producers that aren't in the, in the Gulf? Whether that's the US or Nigeria or Russia, maybe Russia aside, very few producers want the reason why their product is expensive to be a supply shock that either could reverse or could be so great that it actually destroys demand. So while I think there's some financial engineering that US oil producers, for example, are doing right now, hedging out their production or using financial markets to lock in higher prices and improve their balance sheets, I still think it's the kind of environment this is not a strong demand signal that would make them say, oh, let's just keep drilling and the demand is going to be there. I think there's a lot of risks and vulnerabilities here.
- [38:28]
A
As I was saying in the open to this podcast, there are a lot of examples in history of countries who ramped up their petro production economies in response to some supply shock like the oil crisis, the 1970s, only to find that when oil prices suddenly started falling in the 1980s is they are shit out of luck. It's really, really difficult if you've expanded production dramatically and then suddenly the price of the thing that you've poured your entire economy to suddenly starts to fall because OPEC decides to pump a lot of gas or pump a lot of oil. So I see the point that it's not necessarily the gift to these oil exporters or net exporters that one might innocently think turning to the US specifically. The US has had many periods of skyrocketing oil prices. The 1970s, most famously just before the Great Ukraine War. I don't think there's ever been a period when we've had a spike in oil prices at a time when The US Was a net exporter of oil. We are, however, now in the last few years, for the first time in modern history, a net exporter of oil. How does that change the picture for
- [39:40]
B
the U.S. yeah, so I think it widens the divides between the producers and the producing regions in the US and the consuming regions because there can be more revenues flowing in to the wide range of parts of the United States that are producing fuel and maybe will also lead to some additional investment. But U.S. consumers do still face the impact of global prices, and that's something where, where the pipeline networks, how energy is delivered have an impact. One of the, you know, and one of the dynamics for the, for the west coast of the US Is that jet fuel, which we mentioned, is one of the products in shorter supply right now. Where does that come from? Some of it was coming from the Gulf, some of it comes from Asia. If Asian countries say, you know what, we don't know how long this is going to last, we're going to cut back on exports. Well, that could mean they have to source that fuel from other places. But the US Shift to being a net exporter has dampened some of the other trade risks. Where the US does import oil, it's typically from Canada, which is not only a stable source of supply, but also because of the pipeline structures and the nature of the oil, it's actually relatively cheaper than global cost for oil, even as prices go up. So there are a number of ways in which the US Is in a relatively good position. The challenge is no country is an island here. And if the US Were to start thinking about export bans and the like, it would probably actually backfire in the sense that it might actually reduce future investment in the United States and it might cause as many problems as it maybe politically solves. I mention that because I'm sure we're going to start to hear politicians arguing for that. And I think the real game changer, as they see it, is less on the oil side and more on the natural gas side side. We've recently just passed the 10th anniversary of the export of LNG from the United States, and it really is one of the biggest producers now and one that is adding capacity. And so that is something that is both helping drive data center rollout and a variety of energy dynamics at home, but also is a source of revenue abroad. So I think the US Is in a better position. But I worry that the rhetoric about being a net exporter and all of that energy resilience may have. Actually, the risk is it can lead to more adventurism internationally in ways that might undercut other goals. For example, you know, countries that might fear that sort of, you know, might. Might be rethinking their, you know, sort of to what degree the US Is investable or whether they have money to invest in the United States. I think there's a lot. I don't want to be alarmist in any way, but I think there's going to be a lot of lessons taken away from this military, you know, this military episode, the greater use of US Kinetic military power, just as there has been in the U.S. unilateral and coordinated use of financial sanctions over the last decade.
- [43:51]
A
Some questions to point us toward the future. When do you see this ending, if you feel brave enough to make a prediction? And what does end even look like here? Because I can imagine a scenario where there's a ceasefire. It's broadly understood that Iran has lost the conflict, but also the regime remains in power. And there is a lingering fear that with another Khomeini in power in Iran and the rest of the Arabian Peninsula against Iran, and the US still upset with, and Israel still interested in punishing Iran, the fear that this could just happen again in six months, nine months, 18 months, which theoretically is going to affect insurance rates and the likelihood of tankers to continue to pass through that strait. So when do you think this will end? And what does end look like?
- [44:51]
B
Yeah, And I think you're right. There could be many ends. Right. And that's where the analyst part of me is trying to be humble. So I think we could see an end in a couple of weeks. Maybe there will even be a US Desire for off ramps sooner than that. Right. This sort of volatility in oil prices that we've been seeing over the last couple of days is clearly part of Iran trying to put pressure on the United States, or that's part of it. Sorry. So you could see some dynamic of off ramps and maybe enough military, quote, success in undermining that the US Military turns its attention towards reopening the Straits of Hormuz. But the issue here is, in a world where drones can attack energy infrastructure can attack tankers, and we see this not just in the Gulf, we see this in the Russia, Ukraine theater. We see this elsewhere. I'm not a military expert, but I think there's a real game changer here. This could be a renewed source of instability. Unless we have choices from Iran itself, itself, to elect a leader, to refocus attention on domestic economic issues and trying to rebuild and rebuild in a way that is not as military dominant. So there's this sort of like Pollyanna ish Goldilocks upside scenario. But I think we've seen enough either domestically created sort of regime change situations and externally forced regime change situations in the region and globally to know that it rarely turns out in that kind of Goldilocks scenario. So my fear is that you end up with occasional recurrences in that circumstance. I think you end up with Gulf countries that need to really securitize their infrastructure even more that maybe a global economy that says, well, let's discount the value of having spare capacity locked inside the Strait of Hormuz. You probably see a lot more effort in trying to build alternate transit networks here in the United States or in North America. When there weren't enough pipelines, we started putting oil on rail, which had its own challenges environmentally and otherwise. That's not something that's really possible today in the Gulf, in part because they don't have, have extensive high capacity rail networks. I mean, not that we do either, exactly. But we could start seeing more effort to build out and think about those alternate corridors. So, you know, but look, we'll see. I mean, you think you started this out saying we have uncertainty at the level of the leaders and a point where President Trump himself will probably move on to something else. But I think any end that materializes, we have to look at whether it's a stable situation or whether it's something that is a weakened and potentially splintering Iran. And this is where I think the war aims of the United States and Israel may diverge, where the interests of the US and its Gulf neighbors may diverge. And of course, there are a lot of choices from the Iranian people if they're able to sort of articulate them. So all of it is just to say that there's definitely been a lot of damage. There's been damage to a regime that was awful in many ways. And so I have no love lost sort of for them in any way. But this question of do we get to a stable situation, a lot of people have been asking me over the last few days, is this the end of the Gulf states and their diversification? Is this the end of Dubai? I don't think it's the end of Dubai. It might settle into a different level of growth and the like, but there's been a lot of infrastructure built there, key hubs, other things like that. But it's definitely dented and will, will shift. And we're clearly at a time where we Have a US President that is quite willing to remake geopolitical pathways and linkages. Some of that can have some upside. But I think there's a lot of uncertainty around and a lot of questions also about what's going on here in the Gulf. Might even impact other US long term goals like building out critical mineral supply chains which are not a short term dynamic and one that I know you think about a lot. But I mentioned this as sort of parting thought. The UAE and Saudi Arabia in different ways were sort of key partners for this development. The UAE in deploying capital together in Africa, will they be as interested to do that? Saudi Arabia and using US technology to be a rare earth processing location, is that still something that's viable? I'm not ready to say it's not viable. It's out the window. But I just think there's a lot of relationships that there's a lot of. There's a lot of questions ahead and then there are all the questions also around, you know, that are impacted by the US use of tariffs and the like. So I think it's a time of flux and if anything, our takeaway here is partly that geography and infrastructure matters. Right?
- [51:23]
A
Yeah. And to me it just seems like it's very, very difficult to predict exactly how the ripple effects of energy crisis are going to flow outward. I mean, the open that I gave was about how in the 1970s, I mean, the reverberations of the oil crises of 1973 and 1978, 1979 were just completely global. They affected the future orientation of the Soviet Union, the economies of Japan, the political parties of the United States, the debt crises of Latin America. It's like so many things unspooled from this, from the energy crisis. That was an energy crisis that on and off lasted a decade. This is 10 years. This is a crisis that on and off has lasted about 10 days, 11 days. So I am in no way trying to draw some kind of direct connection between a crisis that lasted all the 1970s, a crisis that has lasted all of the young mundra of March. But I am already interested in trying to figure out exactly how some of our international relationships and how some of our economic partnerships are going to change here. And one thing that's just possible is that in the aftermath, I mean, this is an optimistic way to round up the episode. But in the aftermath of a crisis that is centered on oil and liquid natural gas, that maybe there will be a renewed come at Jesus moment for certain renewables for various countries who recognize that, yeah, it would be really nice to have an energy source that wasn't reliant on this tiny little body of water just south of a theocratic regime that gets into it with Israel and the United States every few years or every few decades. It'd be nice to have that kind of relatively more geopolitically resilient energy source so that we aren't afraid of the price of electricity doubling just because some people and governments that we can't control decided to bomb the capital of Iran. So it would be nice if this turned out to be some kind of stimulus for solar batteries and wind globally. But I have no idea what happens in the next few days, the next few weeks. And I appreciate you very expertly sort of laying out all the possibilities on the table for us to look at. So, Rachel, thank you very much.
- [53:35]
B
My pleasure. Thanks for having me.