00:00Let's start with where we are, recognizing the fact that all this is changing very quickly.
00:03But when you look at the Strait of Hormuz and the state of play in the Middle East,
00:06what are you thinking? What are you watching right now?
00:09Well, I think all eyes right now are on the Strait of Hormuz.
00:12The conflict, which had originally been about Iran and Iran's nuclear capabilities,
00:17has really necked down to being primarily about the Strait of Hormuz.
00:21If you think about it, the agreement that was reached in mid-June
00:25was an agreement just on managing the Strait in order to get to talks on nuclear capabilities.
00:32We never even got there.
00:33There wasn't even really time for product markets and crude markets and LNG markets to normalize.
00:39And we're back to a situation, as you know, the U.S. announcing that it's going to have a new
00:44blockade
00:45on Iranian exports and imports that is poised for more escalation in the Hormuz Strait
00:52and clearly not a path to normalization there in the near future.
00:56How do you look at this? Is it intractable?
00:58Do you think we're kind of stuck, for lack of a better word?
01:01You know, I guess it depends on stuck in the short term.
01:05I think it's very hard to imagine that in the next few days, in a week or so,
01:10that we'll be at a place of credible normalization.
01:14I think even if there is an agreement between the Trump administration,
01:18the Iranians, the Omanis, the Pakistanis, which, of course, people are trying to get to,
01:22we are attuned to the fact that Iran is going to try to enhance its position
01:28through sporadic disruption of the Strait.
01:31And that is something that I think is going to have to be accommodated by markets over the medium and
01:37long run.
01:38We're already seeing that in the sense that you have Gulf countries announcing new investments
01:44in infrastructure, ports, pipelines, over time, the Strait will become less important
01:50because people are adapting to the reality that this is a choke point,
01:54which is going to be problematic, which doesn't mean catastrophic, but problematic for quite some time.
01:59What does the time horizon look like for that adaptation?
02:02So I know that there's been a separate to build more east-west pipelines.
02:06When is that going to be something that's a viable kind of competitor to using the Strait to get energy
02:09out?
02:10In terms of infrastructure, I mean, the infrastructure can be built maybe quicker than you think,
02:14but still we're talking a year or two years.
02:17And in that interim period, there still is the opportunity for the redundant infrastructure,
02:23the infrastructure that is currently taking Saudi oil out of the Gulf,
02:28not through the Strait or Emirati oil, that could be disrupted.
02:32So that's been one of the most important buffers in the crisis going from February, March until today,
02:38is getting a significant amount of oil out of the Gulf through that alternative infrastructure.
02:43We have to hope that infrastructure doesn't become targeted in subsequent rounds.
02:50We did see the Houthis kind of come back into the conflict or at least remind us that they're still
02:55potential actors.
02:56That, of course, could create new constraints on a market that is very, it's less well-positioned,
03:06if that's not terrible English, than it was in February to manage a prolonged disruption.
03:12No doubt you've heard the president asked about higher oil prices and something he says is it could have been
03:16much worse,
03:16that going into this conflict he was told it could be oil at $200 a barrel.
03:20And, well, we never got to that point.
03:21Why is that the case?
03:23Why have we seen, yes, oil prices spike, but kind of stabilize around the $75 level?
03:28Sure.
03:28And he's right.
03:29It could have been much worse, and many people expected it to be much worse.
03:33And the reality is that we had a massive disruption.
03:38The International Energy Agency has called it, rightly, the largest supply disruption in history.
03:43And what is striking is that that didn't translate into an economic, massive, global disruption
03:51because the system was more resilient than many, including me and many other analysts, expected.
03:59And there were a whole number of reasons why that was the case.
04:02I would say there are three that are very, very important.
04:05The first is the redundant infrastructure,
04:07the fact that there were ways of getting a significant amount of the disrupted oil out of the Gulf without
04:13using the strait.
04:14That was very important.
04:15Secondly was the use of strategic oil reserves.
04:18So, of course, as you know, in the 1970s, after the big disruptions on Middle Eastern oil,
04:24then you had the establishment around the world of global strategic reserves.
04:29And the IEA, the International Energy Agency, coordinated the largest ever release of those reserves,
04:36so 400 million barrels.
04:37And that really helped ease some of the pain.
04:41About five or six million barrels of oil a day were brought on global markets from those reserves.
04:46And then lastly, most surprisingly, is the role that China played.
04:50So China actually curbed its demand for oil on the global market.
04:56It didn't stop consuming oil, but it stopped building its reserve,
05:01which it had been doing for some time, and started using its reserve.
05:05It put a restriction on the export of product markets.
05:10So it had more product inside of China.
05:13And overall, Chinese demand for globally traded oil came down by almost 4 million barrels a day.
05:20So those three things were really important,
05:23along with the fact that the market was oversupplied.
05:26When this all started.
05:28Now, I'll end on an important point, which is that I am nervous that because the global system managed
05:37the disruption of the last five months better than I think almost any of us could have expected,
05:43there might be a complacency.
05:45Thinking, well, we can continue to manage it that way.
05:48The oil market is in a different situation today in July than it was in February, March.
05:54And some of those buffers have been whittled down to the point where, you know,
05:58we can't be so confident that we can manage a similarly sized disruption for a prolonged period of time.
06:06Explain that a bit more.
06:06So reserves are lower.
06:07I imagine that's one huge factor.
06:09Reserves and inventories are lower.
06:11That is certainly the case.
06:13The strategic petroleum reserve of the United States is at its lowest point since 1984.
06:20So that's very significant.
06:21That's the strategic reserve.
06:23There's also commercial reserves.
06:25And in the United States, the combination of these two kinds of reserves are, again,
06:29at their lowest point since the 1980s.
06:31And this is true in other parts of the world as well.
06:34So we don't have that buffer to the same extent as we might have.
06:40There's still, you might say, there's still hundreds of millions of barrels in reserve.
06:43That's true.
06:44But the market gets very nervous when that gets lower and lower.
06:47And that oil isn't always in the right place.
06:50But I'd say the other thing that may not be making it onto people's, you know,
06:57you know, radars quite as much as it could be,
07:00we're all watching the price of crude.
07:02But it's really the refined markets that have been more problematic
07:05and that are likely to be more problematic.
07:09Again, I'm not saying we're going to be into a new long-term disruption.
07:13But if we are in something, you know, quite up and down over the next several weeks or months,
07:22the refined product, the diesel, the jet fuel,
07:25all of that is much more threadbare than it was before.
07:28And you have Gulf refineries and Russian refineries that have been disrupted.
07:33And that's putting pressure on global markets and the refined products.
07:37So this is the so-called crack spread.
07:38Exactly.
07:39And the president claims that gas companies are not lowering their prices in tandem with the price of oil.
07:45Explain why that's not really what the culprit is in this circumstance.
07:48As you say, there's been infrastructure that's been destroyed.
07:50Why is there such a yawning gap now between the price of oil and these refined products?
07:55Well, it's part because refined products need to be, they need to be refined, right?
08:01So you have to have the refineries import the product and then refine it.
08:06And it's a whole other supply chain.
08:10So it's, we've got the upstream, which people tend to focus on, which the president is sort of focusing on.
08:15And then there's the downstream, which is a whole different set of actors in many cases.
08:19And they have been, you know, useful in modulating how much demand they have had.
08:24But they come off and online depending on seasonal variables and depending on, in this case, things like conflict.
08:32I mentioned the Gulf and Russia, like those refineries are coming off because of unanticipated consequences.
08:39So I think that's part of the reason why these are two different markets that need to be understood separately.
08:43Let me close by asking you about alternative energy and sort of how that conversation may be changing as a
08:49result of what's happened in the Middle East.
08:50And you've written a lot about how there won't be kind of a radical immediate shift to these forms of
08:55alternative energy.
08:55We'll see them kind of continue in tandem.
08:58How has it changed the conversation surrounding alternative energy?
09:00Yes, in the U.S., but around the world.
09:02I think, you know, the impact on the energy transition or the movement towards a cleaner global energy supply is
09:10really right now ambiguous.
09:11We can see it cutting in both ways.
09:14In some places, well, I'd say in every place, there's a new premium on energy security.
09:19You know, we've been reminded these choke points still matter, that even if you're integrated into the global market, there's
09:26still the potential of disruption.
09:27And while it has been managed very nicely in OECD economies, in many parts of the world, in the global
09:33south, this has been much more severe.
09:37So in many economies, the desire is going to be to focus on energy security.
09:43In some cases, that will mean alternative energy.
09:45The best way of insulating yourself from the global market is to produce the energy that you're going to consume.
09:52And so electrification makes a lot of sense.
09:54Electricity is generally produced and consumed in the same geography.
09:58And often, electricity can be produced by clean sources.
10:03Not always.
10:04Coal is also used to produce electricity.
10:06But you may get a push towards electrification, and that could benefit the energy transition and the move towards clean
10:13fuels.
10:14On the other hand, you'll have countries, and we're seeing this now, they've had the second shock to LNG markets
10:20in the last two years.
10:22Outside of the United States, where the price of gas has been, natural gas has been low.
10:27So in those places, they're saying, maybe this LNG fuel, it's too volatile, it's too expensive, it leads to potential
10:36product shortages.
10:37Coal is more reliable.
10:39We need to focus on that.
10:40If you look at many of the policy changes that governments around the world have made over the course of
10:45this recent disruption,
10:46they have been towards subsidizing fossil fuels and other policy measures that actually entrench fossil fuels in the global energy
10:56mix.
10:56So it is a bit of a mixed bag.
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