Is China the Winner of the Iran War?

Summary

Plain English with Derek Thompson — “Is China the Winner of the Iran War?”

Episode Date: April 3, 2026
Host: Derek Thompson
Guest: Alex Turnbull, financial analyst and writer

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Episode Overview

This episode explores the sweeping global repercussions of the ongoing Iran war, focusing on unexpected winners and losers in the aftermath of massive energy disruptions. Through a historical lens, host Derek Thompson and guest Alex Turnbull analyze how energy crises reshape economies, politics, and geopolitics, with special attention to second-order consequences. Center stage is the question: Is China emerging as the main beneficiary from the chaos?

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Key Discussion Points & Insights

1. Historical Echoes: How Energy Crises Reshape Worlds

• Derek opens by linking the 1970s oil shocks to transformative events—the fall of the Soviet Union, the rise of Japan’s electronics industry, and the ascent of the modern Republican Party.
• Just as the oil crises of the 1970s produced enduring effects beyond gas lines and inflation, the Iran war’s closure of the Strait of Hormuz is triggering ripples across the globe.

“The Strait of Hormuz… is a little bit like the global economy’s ACL.” (Derek, 05:39)

• Immediate effects: Extreme energy shortages, price spikes, and governments urging citizens to “use less” worldwide (Australia, EU, Thailand, Egypt, Philippines, Sri Lanka, Laos).

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2. Pacific Islands: Strategic Dots and Diesel Crisis

[07:54–13:42]

• Pacific islands (Fiji, Tonga, Vanuatu, New Caledonia) face an acute diesel shortage.
• Their vulnerability is not just economic but geopolitical: If the US cannot support these islands, China can step in with fuel—potentially securing new ports and military presence.

“They will face the choice of either collapse or sourcing diesel from say China. And China will have an ask there.” (Alex, 08:55)

• Loss of these islands jeopardizes America’s ability to project power and support allies, especially regarding Taiwan.

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3. Taiwan’s ‘Aircon vs. Chips’ Dilemma

[13:42–16:38]

• Taiwan relies heavily on LNG for electricity, juggling surging summer demand for air conditioning with massive industrial need (notably in semiconductor production).

“We're very quickly going to get into a not so much guns and butter, but aircon or chips type scenario in Taiwan.” (Alex, 14:21)

• Taiwan, and potentially Korea, must ration energy between consumer comfort and economic output (semiconductors vital for US and global AI industries).

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4. Allies’ Silence and Political Fallout

[16:38–19:06]

• Despite dire consequences, US allies are not publicly denouncing US actions, likely due to diplomatic protocol.
• The ongoing crisis could permanently shift allegiances in the Pacific, possibly tilting power toward China.

“So we're starting to go through a process which may not be reversible easily or perhaps ever. So… the longer this goes on, that becomes a possibility.” (Alex, 19:08)

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5. Europe’s Energy Sorting—from Renewables to Crisis

[19:49–24:00]

• Europe is enforcing demand reduction (remote work, cutting travel).
• Resilience varies: Spain, France, Scandinavia (nuclear/renewables) are “orderly,” while Germany and Italy (gas-dependent) are “back in the bad place.” (Alex, 21:22)
• Crisis may accelerate renewable energy buildouts—ironically benefiting China, the dominant solar equipment supplier.

“This will lead to more demand for Chinese products… But in the short term, I think they will go bananas.” (Alex, 23:38)

• The war also exposes the vulnerability of the fossil fuel supply chain to drone and missile attacks.

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6. The Strategic Shift: Insecurity of Global Fossil Fuel Markets

[24:00–31:39]

• The war demonstrates that global fossil markets—long protected by assumptions of safe maritime passage—are now exposed to persistent drone threats.

“If you move a very large crude carrier, you assume the insurance is cheap, that it's going to turn up on time and that it can be unmolested in the open ocean. And now the problem we have is that you are under threat…” (Alex, 26:20)

• Insurance costs and supply risk are likely to rise, accelerating the move toward locally sourced energy (renewables, nuclear) for security reasons.
• Derek draws a parallel: “We should want the solar panel that powers our car to be on the roof of our neighbor who we love in our good old Republican town.” (Derek, 30:23)

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7. Winners in the New Energy Geography

[34:24–36:30]

• Surprise winners: Latin American and West African oil producers, who can export without traversing geopolitical chokepoints.
• China, as the world’s chief supplier of renewables and beneficiary of shifting Pacific allegiance, stands to gain strategically and economically.
• Middle East oil/gas producers are weakened; the risk calculus for importing countries fundamentally changes.

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8. Drone Warfare: Flattening Global Military Power

[37:40–42:12]

• Drones empower smaller states to threaten or deter major powers—undermining traditional US force projection.

“You can have the citizen drone pilot and within that range… you can have a very functional kind of territorial army.” (Alex, 39:10)

• The rise of drone warfare creates “a deep flattening of the field” (Alex, 39:58), shifting focus to societal resilience in food, power, and decentralized defense.

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9. Policy Responses: Beyond the Federal Reserve

[42:12–49:31]

• The old model—using the Federal Reserve to fight inflation—isn’t enough in the face of persistent energy shocks from war and supply chain attacks.
• Strategic reserves are one answer: The US and Australia have both legislated measures to build large reserves of critical commodities.

“What's really good is if you have these tools and your enemy knows that you cannot be hurt severely by their ability to withdraw supply or block trade… then they're not going to do it because it won't work.” (Alex, 48:30)

• These policies sit on the boundary between globalization and protectionism—they don’t reject trade but provide buffers against supply disruptions.

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10. AI Sector at Risk: Chip Supply Chain Turmoil

[49:31–52:31]

• AI progress is threatened: Energy and petrochemical shortages (notably helium, key for chip manufacture) are already disrupting production.
• Constraints will hit “lower value” chips first, but if the war persists, even high-end production (e.g., Nvidia’s AI chips) will slow.
• China, with domestic supply and access via Russia, could circumvent these shortages—another advantage.

“This could very seriously slow US Data center expansion and AI development. At the same time is China is probably going to source helium from Russia and will not have any of these material constraints…” (Alex, 52:15)

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Notable Quotes & Memorable Moments

• On the big picture of energy geopolitics:
  “This is a war with very few winners. But one of those winners might be China.” (Derek, 06:56)
• On pure consequences:
  “If this goes on for a month or two, politics here will change in a way that will be very hard to change back.” (Alex, 10:55)
• On policy adaptation:
  “You don't give someone an advantage willingly. Do you want to give your enemy a vote on things like your country's inflation rate?” (Alex, 31:39)
• On new military realities:
  “The paradigm… where you could have a B2 take off and then flatten stuff… I think that's over now.” (Alex, 41:52)
• On shifting industrial winners:
  “Winner, China. Winner, Solar. Winner, Latin America. Winner, future drone warfare… Loser, artificial intelligence.” (Derek, 52:31)

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Timestamps for Key Segments

• Historical context & 1970s oil crisis: 00:07–06:56
• Pacific Islands diesel crisis & strategic stakes: 07:54–13:42
• Taiwan’s energy crunch / "Aircon vs. chips": 13:42–16:38
• Why US allies aren’t complaining publicly: 16:38–19:06
• Europe’s energy response & renewables shift: 19:49–24:00
• Vulnerability of seaborne fossil supply: 24:00–31:39
• Winners in new energy geopolitics: 34:24–36:30
• Impact of drone warfare: 37:40–42:12
• Strategic reserves & policy responses: 42:12–49:31
• AI chip shortage threat: 49:31–52:31

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Final Takeaways

• The Iran war has acted as a catalyst, exposing the world’s energy vulnerabilities and shifting strategic, economic, and technological power balances—most notably toward China.
• Second-order effects may long outlast the conflict: New supply lines, the acceleration of renewables, empowered mid-size powers, and a more “in-sourced” world economy.
• The AI sector, so vital to the current and future economy, may ironically be among the biggest losers, while China—adapting and exploiting these shifts—emerges well positioned for the next phase of global competition.

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For a detailed, firsthand dive, listen to the full episode.

Transcript

[A]

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Terms and conditions apply. Need a hiring hero? This is a job for INDEED Sponsored Jobs Today Thinking about the long term consequences of the Iran war, what do the following things have in common? The death of the Soviet Union, the rise of the modern Republican Party, and Nintendo. The answer is an energy crisis. In October 1973, Arab members of OPEC launched an oil embargo against the US and its allies. Within months, the price of a barrel of crude quadrupled in the us. The immediate effects that you surely know from looking at photographs or having lived through it, were gas lines and a national speed limit. A second shock followed during the Iranian Revolution of 1979 and gas prices surged again. The combined effect of these two energy crises was the toxic union of stagflation and inflation, two things that economists had previously said suggested were practically incapable of coexisting. Those immediate effectsgas lines recession were actually the least interesting consequences of this historical moment. The arms of the 1970s oil crisis truly reached around the world. In the USSR, oil shocks were a windfall for the Soviet petroeconomy and oil money allowed Moscow to paper over the dysfunction of its planned economy for years. But in the 1980s, oil prices fell and Gorbachev's petro economy collapsed, contributing significantly to the demise of the Soviet empire. In Japan, heavy industry relying on cheap oil had powered that economy in the 1960s, but expensive oil threatened that model of growth. In the 1970s, industrial policy was rerouted towards smaller manufactured goods that required less energy. Things like computer chips, circuits, robotics. The famous consumer electronics revolution of the 1980s. In Japan, the Walkman, the VCR, Nintendo was an echo of the 1970s oil crisis in the U.S. the historian Gary Gerstel has described how stagflation shattered the New Deal consensus that had ruled American politics since the 1930s. Americans lost faith in the sort of activist government associated with Roosevelt, Truman and Lyndon Baines Johnson. The political order that emerged from the 1970s prized individualism, celebrated markets, and even outwardly mocked the idea of effective governance. The election of Ronald Reagan and thus the rise of the modern Republican Party is very hard to imagine in a world where the economy of the 1970s was as copacetic as the economy of the 1950s. So there you go. The fall of the Soviet empire, Nintendo, Reagan. None of those things were entirely caused by the energy crises of the 1970s. I'm not saying that, but in each case, the oil shocks of the 70s reshaped the political and economic environment in a way that increased the odds of these world historical developments. The vast and sprawling tentacles of past energy crises have been on my mind recently during this Iran war, which has already shut down most commerce passing through the thin Strait of Hormuz, through which pass 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. The Strait of Hormuz, as I've said, is a little bit like the global economy's acl, a small and vulnerable connective tendon that you don't have to think about when it's working perfectly, but causes very loud anguish when normal functioning is ruptured. By some measures, this Iran war is already the largest sudden disruption of oil supply in modern history. And the aftershocks of its closure are truly global. Governments around the world are telling their citizens to use less. In Australia, the Prime Minister gave a rare national address to ask his citizens to stay out of their cars. Please, he said, take public transit, bikes, trains. In Europe, the EU's energy commissioner called on governments to encourage remote work and cut highway speed limits. In Thailand, the Prime Minister wore short sleeves to work and asked others to do the same to avoid using air conditioning. In Egypt, shopping hours have been cut to five days a week. In the Philippines, civil servants were asked to stop using the elevator. In Sri Lanka, Wednesday is now a public holiday. In Laos, the school week is now three days. Each one of these measures is, at bottom, the same measure. Use less. Because there is less to use, demand is being destroyed, and those are just the first order consequences. As the 1970s taught us, energy crises are notable not only for their effects, but for the effects of of their effects. Today's show is all about trying to understand these second order consequences which are now billowing throughout the world. Today's guest is the financial analyst and writer Alex Turnbull. We talk about how the Iran war is already remaking the planet and in particular we talk about how this war is reshaping America's showdown with its number one geopolitical adversary. One way to see this war is that the US decapitated Iran's leadership. But that bullet passed through the Iranian theocracy and hit the Gulf energy producers in the arm, ricocheted off and struck the Pacific islands in the foot, bounced up into Japan and ripped through their plastic manufacturing industry and then swung around the world until it landed on an American gas station, turning the 3 in $3 gas into a 4. This is a war with very few winners. But one of those winners might be China. I'm Derek Thompson, this is plain English. Alex Turnbull, welcome to the show.

[B]

Thank you very much, Derek. Good to be on.

[A]

So if an American television viewer or a newspaper reader or podcast listener tunes into the Iran war, they're overwhelmingly likely to hear about the price of gas. The price of gas. The price of gas. What they're very unlikely to hear about are the Pacific islands. And that's precisely why I want to begin with the Pacific Islands. Alex, what's happening in the Pacific islands?

[B]

Well, to most Americans they're random dots on the part of the globe they don't really look at and understandable. However, they are places where if for example, China were to establish a permanent military presence, it would severely undermine the US's ability to do much in Thai on with regards to Taiwan or other countries in the Pacific which are a high priority. And so if these islands cannot get diesel and they run on diesel for their power for their transport because there's a lot of it's shipping, then they can potentially collapse and they will face the choice of either collapse or sourcing diesel from say China. And China will have an ask there. And if China were to ask them, hey guys, I'd like to build a deepwater port and put some stuff there. Just don't ask too many questions about it. They're probably going to say yes at the point at which they're facing complete economic collapse. And that would severely undermine the US's ability to project power to defend its allies, to secure its supply of critical inputs from countries like Korea, Taiwan and others. So they look like small dots on a map, but they absolutely matter if they go to the other side and things get hot.

[A]

And how severe is the diesel crisis in these islands today?

[B]

Already quite acute. There is an overall shortage in Asia. These are not the wealthiest places in the world. So where, you know, people have to pay up for a smaller supply of diesel. The places that are going to be able to afford it are Korea, Japan, Singapore, Taiwan. These places will not be able to pay that and they will get desperate and I think there will be consequences to that.

[A]

And just to be clear, what islands are we talking about here?

[B]

And Fiji, Tonga, numerous others around that area, Vanuatu and New Caledonia. I mean, that they could vote for full separation from France and become a quasi Chinese client state. They're also a big producer of nickel, which is quite important for batteries. So there's a lot of things that could go wrong here, even if these places look like they're in the middle of nowhere. And Derek, I just want to say Asia's a long way away. It's a lot of Americans, it's easy to ignore, but I don't think people realize how acute the crunch is getting and how quickly it is here. There are. Korea is already going towards language and savings on fuel that we last saw in the 1970s. There is a horrific crunch in the poorer countries in the region, some of which hosts the US military, like the Philippines. There is an acute level of pain in the Pacific islands. I think if this goes on for a month or two, politics here will change in a way that will be very hard to change back. And for US's strategic interests, I think that will. Things will go away that no other administration would have let go away in their right mind. And it's quite scary that I'm watching it happen day by day.

[A]

So if you're the American State Department or the Pentagon, why is this concerning?

[B]

Because particularly in the case of some sort of Taiwan or any other security contingency, China could essentially put a blocking presence between Australia and the us. And I'm Australian, I care about that. They could also prevent US force projection or resupply to Taiwan in some sort of conflict there. They would essentially be able to prevent the US having free or unmolested operations anywhere in the Pacific or pretty much all the way to Hawaii.

[A]

So the idea is that the US wants a presence in the Pacific, a military presence in the Pacific to protect its interests, in particular to protect Taiwan. And we're going to get to Taiwan in just a second. And one thing that makes a lot of sense is for the US to help out these Pacific islands so that they allow the US to keep bases, keep a military presence on their land. But in a world where the US is creating an enormous pain point, a crisis for these countries, suddenly China can come in looking like the good guy. And, and are we foreseeing a world in which the US military presence essentially gets booted out because China proposes a kind of quid pro quo. We will give you islands energy in exchange for you being more favorable to Chinese military interests rather than American military interests.

[B]

It's entirely possible. This crunch is now getting very severe in Asia. You are saying China allow select cargoes of diesel fuel oil to places like the Philippines and Vietnam. I'd be shocked if there wasn't an ask on the other side of that.

[A]

Turning to Taiwan, Taiwan is going into the summer, the summer cooling season. They have a gas dependent grid, they have really heavy exposure to the Middle East. Paint the picture. Now of course, what kind of a crisis is facing Taiwan in the next few months?

[B]

So Taiwan's grid relies very heavily on gas fired power, all supplied by lng. Summer is when it's really hot and humid in Asia and that's when you know the household and non industrial demand is very high. The other large sources of power demand in Taiwan, of course are things like petrochemicals and that goes into things like the semiconductor sector. So we're very quickly going to get into a not so much guns and butter, but aircon or chips type scenario in Taiwan. And that's going to lead to some very hard choices in a democratically elected government as to whether you support your voters who want airon or support US interest to do a massive AI build out.

[A]

Just to be clear for listeners, aircon here is air conditioning, right. And chips is computers. I just want to make sure. No, no, no, that's right. The finance lingo is totally fine here. But I mean, you're saying that, right? There's only so much energy to go around and the energy, if it is scarce, can either give you full air conditioning when it's 95, 100 degrees, I don't know in Taiwan and also quite humid, or you can use that same scarce energy to not cool people's apartments, but rather to make the most valuable computer chips, some of the most valuable inputs in the global economy. So just unpack that a little bit because I do think that this is like one of the more important aspects of the global energy crisis that people in America aren't quite talking about.

[B]

Sure. So you get into the summer and you essentially have to cut your energy demand by 15% maybe. And you will have to essentially choose between running your industries for the export sector, so producing silicon chips from the likes of TSMC and others, you know, memory and of course AI is very memory intensive as it is currently designed. Or you can, and you'd have to somehow go into a massive crunch in household energy demand and commercial energy demand, or you can somehow curtail the output of chips and frankly the supply of chips might be curtailed anyway. Because if you have a lack of petrochemical supply, because of a lack of oil supply, then you might not be able to make the chips, whether you're restricted on helium or other compounds that are required in the manufacturing of semiconductors. And that's where it would hit the US Quite hard in terms of the AI buildout for sure.

[A]

One thing I'm not sure I understand is that if Taiwan is facing an imminent crunch where the country, a democracy, has to choose between keeping our people comfortably chilled and running the industry that powers our economy, and other countries like Korea that are making ships might also be facing similar choices. Why aren't we hearing these countries scream publicly at American leadership, end this war right now. You don't realize what you're doing to your allies. Like why aren't we hearing about this screaming in public news?

[B]

It is generally uncommon in most countries to conduct your diplomacy over truth social. So maybe they've been very forceful. I've heard they've been very forceful. But they're doing it behind closed doors or on, you know, private lines or sources of manners of communication.

[A]

Let's connect a few dots here. One of the most exposed parts of the world are the Pacific islands that rely on diesel fuel. Diesel fuel prices are skyrocketing because of a war that America chose to start with Israel in the Middle East. That could tip leadership in the Pacific islands from thinking of the US as an ally to thinking of the US as a kind of rogue superpower that they can no longer trust. And as that balance shifts toward maybe we should, in exchange for receiving diesel or energy from China, allow China to have a larger military presence in these Pacific islands. That allows China to build a kind of military shell in the Pacific. At the same time, you have this dual sided crisis in Taiwan where essentially they're having to choose between using scarce energy for air conditioning or chip manufacturing. I mean, let's allow ourselves to get a little bit speculative here. To what extent do you think what we're seeing right now in the news of April 2026 is the beginning of a shifting balance of power in The Pacific. That could end with China essentially just taking the Pacific and Taiwan in particular as its, as a kind of military vassal.

[B]

It's possible. I mean, this can go on for a short period of time, but not a long period of time without incurring serious pain and suffering on the man in the street in a lot of these countries. And they're democracies, these things will not be, essentially will not be ignored or easy to forget. So we're starting to go through a process which may not be reversible easily or perhaps ever. So I would say the longer this goes on, that becomes a possibility.

[A]

You're saying the longer this goes on, the larger the possibility essentially that China is the declarative winner of this contest in the Pacific.

[B]

For sure.

[A]

I want to turn to Europe because what's happening in Europe also really interests me in terms of its long term effects. You've seen the EU energy commissioner announce that they're encouraging people to not drive, they're encouraging people to work remotely. Those are the first order effects. Right. That's just Europe essentially saying we don't have enough energy coming in. We're going to do sort of government induced demand destruction. Right. We're going to ask people to demand less energy. Why don't you describe the situation there as you see it? And then there's sort of some second order effects in Europe that I want to talk to you about.

[B]

Sure. I mean, well, in power markets, it depends on the country. So Spain has a lot of renewables. Kip didn't shut down its nuclear. Their power prices have been pretty orderly so far. France also, plenty of nuclear, also a lot of renewables, very orderly places like Germany, which still prices on the margin on gas and Italy, which is very gas heavy, are back in the bad place for all intents and purposes. And then in terms of liquid fuels for driving for diesel, it's not quite as apocalyptic as Asia, but it's quite bad already. And it's already starting to hit certain parts of the barrel. For example, aviation fuel is already getting very tight and very expensive there, though it's not quite as dire as Asia just yet.

[A]

Just to give me the clearest picture, who in Europe is getting hurt the most right now?

[B]

People who? People use a lot of gas in their power grids. So Italy is getting hit very hard. Germany because they don't have enough storage and they shut down their nuclear. Scandinavia is fine, lots of nuclear, lots of hydro. Spain mostly fine. Portugal fine. France mostly fine so far.

[A]

So there's a handful of countries that are really, really struggling. And there's others that are more resilient, either because they have nuclear or because they have renewables, which is solar batteries, hydro. One thing I wondered is whether you talked about one possibility of China winning in the Pacific In a world where more European countries realize that the global fossil fuel economy has this very weak ACL in the Strait of Hormuz that can crack, that can rupture. They might think we need to accelerate the rate at which we are adding renewables, adding solar and batteries in particular. And you look around the world and you think, okay, who's making the most solar panels? Who's really the number one global manufacturer of solar technology? It's China. Is there a way in which one outcome of this war could be a re acceleration of renewable consumption, that is buying up solar panels in a way that also helps China because they're the biggest guy in town when it comes to selling this stuff?

[B]

I think that, yeah, I mean, you'll almost certainly see that everywhere. I think in the short run, to attenuate this shock, you install solar and batteries with your ears pinned back. And in Asia in particular, they're now restarting a lot of nuclear. So in Korea, and Japan's got an enormous amount of nuclear they can restart, and they've already started. Been doing that for a few years, but I think that will accelerate. Taiwan is finally taking that seriously. So I think there'll be a massive response there. But, yeah, I mean, this will lead to more demand for Chinese products. The interesting question for Europe is past the immediate crisis. Do you then want to ensure you have the industrial capacity to produce these goods? Because otherwise you've traded one dependency for another. And I would think it would be wise to not leak from the frying pan into the fire. But in the short term, I think they will go bananas. Yeah.

[A]

Alex, I want to hold on this topic of the way that the Iran war could ironically shift the global energy picture toward renewables, that is solar and batteries, wind, hydrogen, nuclear, which is not renewable, but low carb. It seems to me like one lesson of this war has to be the degree to which seaborne fossil fuels in particular, are incredibly fragile, not just because of the initial bombardment of this war, but maybe also because of the fact that we're seeing Iran and the Houthis, like, launch drones that can fly hundreds of miles away from that country and threaten the ships that are carrying these fossil fuels. So before we continue to tell the story of how this war could accelerate the shift toward renewables, can we just talk A little bit about the possibility that this war has revealed an enormous vulnerability of the global fossil fuel market.

[B]

Certainly I think the underlying assumption of what made fossil fuels work was that they were the cheapest thing going for the longest time and you could assume away the security in the open ocean either by dint of the U.S. navy or by dint of there was no such thing as drones and they couldn't travel 500 miles readily and hit a ship at that distance and they didn't cost the price of a mid sized car. All those assumptions are wrong now. And so one thing that I think we've underappreciated is how seeing what has happened in the Ukraine, war with Ukraine, a mid sized power under assault, being able to hit Russian tankers all over the place, that capacity can be developed by America's enemies, by non state actors, by other threats. And this should change how one considers the overall price versus risk calculus of fossil supply everywhere. If you move a very large crude carrier, you assume the insurance is cheap, that it's going to turn up on time and that it can be unmolested in the open ocean. And now the problem we have is that you are under threat through certain bodies of border due to current geopolitical conflicts. You could be longer term under threat from non state actors. And the result of that is that that's a very risky source of supply. And so you need to consider the risk associated with depending signing an offtake from a place where that supply could get shut down for an extended period of time. And the problem with geopolitical shocks is they tend to drag on. I mean, wars tend to not last a week. If you have a storm in the Gulf coast or Australia, okay, not great, but life goes on, it's over in a week. You fix things, but with these sorts of shocks they are persistent and can do extraordinary long term harm. And this changes the calculus of is that really a stable source of supply? Many people say, okay, solar's not good when the sun's not shining or wind's not blowing, but the sun rises again the next day, right? If you have a war kickoff over critical straits, whether it's in the Red Sea or in the Persian Gulf, those problems tend not to go away the next morning. And I think this is something which is a deep change which people need to internalize and think about.

[A]

Tell me if I'm summarizing what you just said accurately, that the Iran war did not just introduce risk into the global transport of fossil fuels, it also illuminated risks that might last longer than the war itself, because it's created this situation where now you've got drones flying around, attacking ships. And now everybody knows that. Everybody knows that drones have the capacity to do this. And so even if the war ends tomorrow, in a week, in a month, in the months and years that follow, maybe people in the global energy community are going to think we just learned how incredibly vulnerable global fossil fuels are to drone attacks. Maybe we should price insurance higher. Maybe the cost of this overall source of energy is just going to be higher and that is going to, on balance, shift energy from fossil fuels towards something that is more local, that doesn't travel on the open seas, that are vulnerable to drones. And that sort of thing is, I mean, it seems to me, all things equal, renewables and nuclear. Is that a fair analysis to sort of layer onto your analysis?

[B]

Absolutely, yeah. I think that is where it will invariably have to go. You will insource energy because there are risks that have been underpriced for a long time. And if you do price them, it kind of looks like a security cost, which looks a lot like a carbon cost, but it doesn't really matter. That's just the better risk adjusted source of supply.

[A]

Yeah, it's interesting. I remember talking to another Aussie, Saul Griffith, about the case for solar and making the case for solar to MAGA conservatives in America. And he said something that started in a very different place but somewhat arrived at the same conclusion that you're reaching. He said, one thing I might tell them MAGA conservatives who are anti nuclear is when you drive a car that uses gasoline or you power your house with whatever.

[B]

Oil.

[A]

Natural gas. Yes. Maybe that oil or natural gas came from the US which is a huge energy exporter, but it's participating in a global market of oil that often enriches theocratic tyrannies in the Middle east or Russia. We don't want our energy markets to enrich our geopolitical adversaries. We should want the solar panel that powers our car to be on the roof of our neighbor who we love in our good old Republican town. And so there's a way in which solar and renewables are kind of small C conservative. It's local. Right. I think you said we're insourcing our energy. And so it's kind of funny, like he was making this somewhat tendentious but clever argument for getting Republicans to see the benefits of solar as being something that didn't rely on these sort of global networks. And you're making a similar argument from another perspective. You're saying this war is teaching us that global energy markets might be riskier and therefore more expensive in the future. And a lot of countries might make the decision to say, you know, what we can count on the price of. And that is very unlikely to be disrupted by a war. In the Strait of Hormuz is a solar farm in Arizona or, you know, hydropower in, you know, the Netherlands. And so it's kind of interesting to think that global events might be re accelerating this shift toward nuclear. It's, it's an, it's an interesting second order consequence here.

[B]

I mean, I look, I used to do a lot of jiu jitsu and judo. You don't give someone an advantage willingly. And I think we've got to think of our energy systems in the sense of do you want to give your enemy a vote on things like your country's inflation rate, which is a great way to kick your government out in a democracy? And so having this insecurity is something they can lever. And it is abundantly clear by all the compulsive tweeting of the Iranian government, they are trying to lever this and they are saying, I will inflict pain on you and that's how I'll get rid of you.

[A]

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[C]

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[A]

All right, Alex, I feel like we've talked about two potential second order consequences of this war, both of them quite ironic. Number one, the strengthening of China, right? Donald Trump attempts to assassinate the theocratic leadership of Iran. The bullet passes through Iran's leadership and then ricochets and somehow hits us, strengthening China. A second consequence that we've discussed is the irony of Donald Trump, ironic champion of solar and batteries everywhere, that this war could increase risk premia on seaborne fossil fuels in a way that encourages many countries around the world to say, I'm not sure I want to rely on the Strait of Hormuz the way that I have for the last few years or decades. I would much rather build a local energy source. That local energy source is more likely to be solar batteries, wind, hydro, nuclear. Let's talk about a third second order consequence of this war that you're looking at. It seems to me that if the Middle east oil and gas producers are going to be weakened by this war, other countries that have the capacity to produce oil and gas are going to be strengthened. Who else do you think could be a winner here, an ironic winner of this war in the Middle East?

[B]

I think anyone with the capacity to produce fossil who has access to open ocean doesn't have to transit any geopolitical hot zones. And so that would be Argentina, Brazil, probably Venezuela at some point, and also a lot of West African countries which have offshore oil developments right now. So I think that's where people will go to diversify to have uncomplicated supply lines where they don't have to worry about drones and other such things.

[A]

So it could potentially strengthen some of the central South American fossil fuel producers. I want to make sure that we touch on Russia as well, because in the 1970s oil crisis, Russia's petro economy really took off and there's some geopolitical analysts who say that it was a little bit of a Pyrrhic victory because Russia's petro economy took off in the 1970s. But then when the price of gas fell in the 1980s, that weakening of the Soviet petro economy contributed to the collapse of the Soviet Union. They sort of went all in on this commodity that then depreciated and that contributed to the fall of the Soviet Union. Let's hold on Russia a bit because people following the news closely probably know that Russia has now been allowed to sell commodities to India, which previously was forbotan as we were trying to squeeze the Russian economy to allow the Ukraine's army to win against Putin. But where are we right now with Russia?

[B]

Well, they're not actually. Certainly the price has gone up, without a doubt. The problem is, is that their oil loading ports are increasingly and frequently on fire because they are getting hit by Ukraine. All across Russia, even in the Baltic, there have been numerous hits on Primosk, Osloga and so on. So they are struggling to really benefit in volume terms. And they're also struggling with a internal domestic refining system due to all these hits by Ukraine, which are just ongoing. And this is the central fact of all this, is that the tools of warfare have changed. That changes a lot. So I think we need to consider that as sort of a paradigm shift which has a lot of downstream impacts and geopolitics and needs to be contemplated very deeply.

[A]

Well, let's talk about those consequences right now. What do you think are the most important ways in which the rise of drone warfare, which is clearly a major feature of this war, is going to change not just global fossil fuel markets, but the global economy and geopolitics in the future?

[B]

There's a great book by a historian called Carol Quigley which is about how weapons systems drive history. It was published in the 70s, actually posthumously. And I think looking at what these platforms do, it's a little bit like the emergence of the Rifleman and the sort of citizen army in the sense that you can have the citizen drone pilot and within that range of those drones you can have a very functional kind of territorial army which doesn't lean as hard on the centralization and force projection that allowed the US to project military power so effectively for so long. So provided you have the industrial capacity to produce these platforms, you as a mid sized power get a much bigger vote in geopolitics going forward. So I think this is a challenge to the US certainly in the Middle east, right now, but I think it's also going to be a challenge to China if they were to get expansionist elsewhere, much as it has been extremely challenging for Russia and Ukraine. So I think this is kind of, to a certain extent, it's a deep flattening of the field. And I think that it becomes more about is your society resilient, can you provide food power on a distributed or more resilient basis and then you can fight and then it's very hard to get rolled as a country. And I think that's not a terrible thing coming from a mid sized country myself. But it does really, I think it's a very challenging thing for the US to take on that this change has occurred because it is a structural break with everything the US has learned since really the 1930s.

[A]

Are you suggesting that drones should therefore have a kind of deterrence effect the way that atomic weapons clearly do? Clearly that deterrence effect wasn't enough to stop the US from bombing Tehran. But you're saying perhaps in the future, looking at the Ukraine, Russia war, looking at the Iran war, major powers in the next few years, notwithstanding some major development, superintelligence that again changes the landscape of war. Future major powers might say this military campaign is not going to be as easy as it would be without drones because drones allow for this flattening of leveling of the battlefield such that a smaller or weaker country can nonetheless do enormous damage in a way that messes up the calculus of beginning a war.

[B]

Yeah, I think currently that is the state of play and I think it is neither good nor bad. It is simply a change in what the strategy set is and the tool set and that will lead to new strategies. But I think at this point the sort of, the sort of paradigm in the US where you could have a B2 take off and then flatten stuff and then fly back and then not have to worry about your local bases being attacked in Iraq or UAE or what have you. I think that's over now and it is what it is.

[A]

I want to round things out here in the open. I talked about how the 1970s energy crises had these enormous tendrils, these tentacles that wrapped around the world that you can attach the 1970s oil crisis to the rise and fall of the Soviet petro economy that led to the downfall of the Soviet empire. You can associate it with the economy of Japan, which switched from energy, expensive heavy machinery to less expensive robotics. And so ironically, things like the Walkman, Nintendo are part of the legacy of the 1970s oil crisis. I also talked about how the oil crisis of the 1970s might have birthed the modern Republican Party. The stagflation that resulted in the US economy in the 1970s destroyed the new Deal order that Democrats had relied on for the previous 30 to 40 years. And in the aftermath of that destruction, the anti New Deal order became Reaganite neoliberalism, which was the political order of the next 20, 30, 35 years. So those were the three long term implications of the 1970s oil crises. Soviet Union, Japanese electronics, Ronald Reagan. Today we've talked about, I think, to my recollection, at least four second order effects of this Iran war that we're looking at. Number one, an enormous extension of China's military projection in the Pacific that could have major implications for, like, the big kahuna that everyone's thinking about in terms of geopolitics, which is what's the future of Taiwan? Number two, Donald Trump, ironic global champion of solar power, that this war could accelerate a shift toward renewables. Number three, another shift of fossil fuel production from the Middle east to Latin America. And number four, you just talked about the fact that this war has again, in addition to the Ukraine war, demonstrated just how powerful drones are as a military technology of the future and how it could level the balance between a major military superpower like the US And a less major military superpower like Iran after its missile systems have been demolished. Let's think about one final second order effect. And here we land in the realm of policy when historically the US has faced inflation. It's been the role of the Federal Reserve to apply the medicine. I mean, this was the end of stagflation, early 1980s, it was the Federal Reserve that jacked up interest rates, cooled off the economy, led to a recession, and ultimately led to the boom of the 1980s. But in a world of rolling energy shocks, the Ukraine war, the Iran war, who knows what kind of drone nonsense comes next? The Houthis. It doesn't seem like the Federal Reserve just by like, raising interest rates is a very good medicine for the disease of these energy shocks. And I know that you've worked with my friend Arnab Datta on coming up with a new policy response to this new age of energy shocks. In addition to just asking the Federal Reserve to like, raise interest rates a little bit, what else can we do to dampen the inflation bite of these kind of conflicts?

[B]

Yeah, so the Strategic Petroleum Reserve and the legislation around it was developed in the 1970s as, as a response to these inflation shocks. And in 2022, I started working and

[A]

explain what that is. Some people might not know what the Strategic Petroleum Reserve is, but let's make sure they really understand. It's sort of right there in the word. But I want people to understand how this works.

[B]

Sure. So in the 1970s, the US developed Strategic Petroleum Reserve, which is now close to 800 million barrels of capacity of oil storage to deal with these kinds of shocks. So that in the event you had tanker wars in the Gulf or some other kind of cessation of supply, you could gradually attenuate that acute shock which has very significant inflation implications, and smooth that shock out. Now, a lot of the work I did with employee America from 2022 has with others led to the creation of the Secure act, which has been introduced to Congress on a bipartisan basis. And we've actually just passed a bill in Australia, a strategic reserve where the government can enter into, you know, stockpiling, get plants up and running by offering them caps and floors and essentially run a. Within a banking, within a banking entity like Australia's Export Finance Agency or, or for example US exn to put these capacities of almost a commodities trading desk to act on behalf of the state to ensure that you can ensure that supply is available in a bad state of the world and that your enemy or some event somewhere else don't blow up your economy and force your central bank into a corner.

[A]

Are these policies pushing against globalization or pushing for globalization? Because I can imagine an answer to both that. On the one hand, if the US is exporting less of commodities that we produce here, well, we're trading less with the world in order to fortify our position in the event of a crisis. But also if countries that aren't producers of that commodity want to build their own strategic reserve, well then they have to trade more to get more of that commodity. And so I guess that is theoretically trade. That's globalization.

[B]

Yeah.

[A]

Do you Arnab folks at Employ America have a view on whether these policies, the necessity of these strategic reserve policies are fundamentally anti globalization or pro globalization?

[B]

I think of it slightly differently. You've got totally the ideal of free trade. Everyone's a reliable supplier. You don't have to worry about anything. Nothing ever happens. It's a nice world. And wouldn't that be nice? Then you've got the full on wartime economy paradigm. And what these things do is they ensure you have mechanisms to ensure you can exist on a continuum there and adjust accordingly to the state of the world. But what's really good is if you have these tools and Your enemy knows that you cannot be hurt severely by their ability to withdraw supply or block trade or block a straight or launch a thousand drones at you, then they're not going to do it because it won't work. So you want these things not just because it actually provides you security, but because it also changes the behavior of people who might try to leverage these opportunities.

[A]

Alex, I'm going to let you go because I know it's late where you are. But it occurs to me that I'd be remiss to not mention that one of the most famous and commonly discussed aftershocks of this war is whether this war could decimate the artificial intelligence industry. We've already seen an enormous price shock in the manufacturing of memory chips. And I would love for you to just take this final beat to the interview to explain as you see it, how this war exactly could raise the cost of, or is already raising the cost of computer chips that are relied on by the artificial intelligence industry.

[B]

Certainly. So, first of all, making chips is incredibly complicated. There is a very long list of materials that go into them. One thing that is very important is helium, which is used mostly as a conductive gas. But then there's an enormous range of other, especially petrochemicals, that come from Korean refineries which might not have crude to run in a month and, or Singapore for that matter. And there is a real risk that not just on the power demand constraints, but also on the inputs. We are going to have some serious issues. What's interesting about this war is it started during a quiet period before earnings when a lot of companies can't tell investors what their exposures are. But that if you talk to unlisted, midstream chemical distributors, this is starting to become very tense. And it will become extraordinarily tense over the next couple of weeks. So we've heard. Seen a force mayure at Formosa Petrochemicals in Taiwan. I have no doubt there are going to be more and more of them over time. And so this will cause constraints in chip production. It won't be the whole sector will come to a halt at once, but it will start to impact lower value things. Then it will eventually start to bleed through to the really high value, important stuff, Nvidia and so forth, the longer this goes on. So it's not that this is going to be very consequential. And even if you install, even if you can produce the Nvidia chips, if they require certain power electronics or other cheapest stuff to construct the rack to go in a data center and you can't get the cheap stuff, then you can't put it in the data center. And this could very seriously slow US Data center expansion and AI development. At the same time is China is probably going to source helium from Russia and will not have any of these material constraints because they have all their supply of oil and a lot of domestic petrochemical production. So that's also not helpful.

[A]

So, winner, China. Winner, Solar. Winner, Latin America. Winner, future drone warfare. I'm not sure if that's a real winner situation, but I mean, guess someone has to win or lose. Winner, arguments for strategic reserves of critical commodities. And finally, loser, artificial intelligence. Alex Turnbull, thank you very much. Thank you so much.