There’s a reason why energy analysts see the conflict in the Middle East as “the greatest global energy security threat in history,” as Fatih Birol, the head of the International Energy Agency, told the Financial Times. Not only has Iran blockaded the Strait of Hormuz, through which a fifth of the world’s crude and natural gas normally passes every day, but it has also, along with Israel, damaged some regional energy infrastructure, reducing production. The price of Brent crude, the main benchmark for oil, is up by three-fourths this year alone. And as always, poorer countries are already suffering the most, with Pakistan asking its universities to go remote and Laos reducing school days from five to three.
How bad could the energy crisis get? What scenarios should countries prepare for, and what kinds of longer-term shifts should we expect once the war ends? On the latest episode of FP Live, I spoke with Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University. Bordoff served in the Obama administration as a senior director on energy and climate change in the National Security Council. Subscribers can watch the full discussion on the video box atop this page or download the free FP Live podcast. What follows here is a lightly edited transcript.
Ravi Agrawal: Iran has effectively shut down the Strait of Hormuz. Why is this one passageway so important for energy?
Jason Bordoff: It’s by far the most critical chokepoint for global energy flows: 20 percent of the world’s oil and 20 percent of the world’s liquefied natural gas (LNG) goes through it. That’s not the full amount that’s been disrupted because we have figured out some workarounds, but still, there’s no real workaround or policy intervention that can cope with the loss of 20 percent of the world’s supply.
So this is, both in total volumes and as a percent of global consumption, the largest disruption in energy supply we have ever seen.
RA: And of course, a lot of the ships, for example, that were carrying crude out of the Strait of Hormuz before the war began are just reaching their destinations in Asia. And so we haven’t even seen the full effects of the ships currently stuck there and not reaching their destinations.
JB: That’s right. As we’re talking, Brent is about $107 a barrel. That’s not that high. Closing the Strait of Hormuz, war in the Middle East, missiles flying across Gulf oil-producing countries has been the mother of all nightmare scenarios that energy security policy wonks like myself have planned around for decades. And these are the scenarios with $200 oil prices.
So it is quite striking that oil is only at this level. There are a couple of reasons for that. One is that, at a certain point, the physical reality of the market catches up to the traded price of oil, which also reflects investor expectations. Right now, traders don’t quite know what to do with this situation. And second, the president of the United States has been pretty effective at so-called verbal intervention, commenting that this is going to wrap up any second now just before the market opens. And then people want to hedge their bets. The truth is, if this comes to a resolution, there has yet to be significant physical damage to most of the energy infrastructure in the region. So it’ll take some weeks or even a couple months, but supplies can come back. And before this started, the oil market was oversupplied. So prices could come down again.
But there’s only so long you can keep the Strait of Hormuz closed before the physical reality of the lost oil supply catches up. There’s nothing to replace those flows. And in some of the product markets—jet fuel, heating oil—you’re starting to see prices quite a bit higher than would be suggested by the current traded price of crude.
RA: You mentioned attacks on energy infrastructure. How damaging have those been so far?
JB: Israel’s strike on the South Pars natural gas field was the most significant instance of damaged infrastructure in Iran. Tehran retaliated and hit about a fifth of Qatar’s Ras Laffan, the world’s largest LNG export facility. QatarEnergy LNG says that will take about three to five years to repair.
Saudi Arabia is using their pipeline from the Gulf to the Red Sea, which was built as an insurance premium in case of a scenario like this. It can move some 5 million barrels a day. They exported about 7 million before this conflict. Another pipeline can go around the Strait of Hormuz via Fujairah in the United Arab Emirates. You have huge oil facilities in the region like Abqaiq [in Saudi Arabia]. The Iranians have shown, “If you punch us, we’ll punch back.” If we see further escalation, and they choose to attack some of those softer energy targets—not to mention desalination plants that the region depends on in a humanitarian way—then it takes years to recover in terms of the barrel disruption.
RA: Just to add to this now, hypothetically, if the United States ends up invading Kharg Island, through which 90 percent of Iranian crude goes, what kind of energy impact would that have?
JB: First, Iran still exports about a million and a half barrels a day of oil through Kharg Island, so you would lose that supply on the global market. But the price impact would be even more significant, because people would assume some degree of Iranian retaliation against key Saudi or other oil infrastructure in the region. That could cause an outsized impact in oil markets.
RA: If this war continues, what’s the energy outlook like two weeks from now or two months out?
JB: I’ve been saying since this started—we haven’t seen anything yet. And we’ll see if I’m right. At some point, the physical reality of the loss of this much supply has to catch up to the so-called paper markets, the trading expectations. Twenty million barrels a day flowed through the Strait of Hormuz before. And you have some additional ways that oil is coming to the market. The release of strategic stockpiles from the petroleum reserves is the largest ever: 400 million barrels. But I’m guessing only 2 million or 3 million barrels can get into the market every day. And the disruption is between 10 million and 13 million barrels a day right now. No policy intervention can cope with a disruption that large.
So, at some point, prices need to rise high enough to destroy millions of barrels a day of demand. This means prices go high enough that airlines choose to fly less and consumers choose to drive less and industrial activity and businesses shut down. Closing schools, working from home a few days a week. The Pakistani cricket league is playing to empty stadiums because they told people to conserve fuel by watching from home. But you need prices to rise high enough to force consumers, businesses, and countries to take those measures. And we’re nowhere close to what that would be.
RA: Yes, and these are effectively recessionary measures that you’re describing.
Talk about the measures to lift sanctions on Russian and Iranian oil. How impactful is that? And then also, doesn’t this just make Russia a big winner of the conflict so far?
JB: Russia is a big winner from the conflict. High oil prices are obviously good for Russian President Vladimir Putin, and easing of sanctions and waivers allows other countries to buy more Russian oil. As has been written in Foreign Policy for a long time, a whole shadow economy has been developed to bypass sanctions. So Russia has been able to export despite sanctions for some time but at a pretty big discount because only some buyers, those who were less exposed to the risk of sanctions, were willing to buy Russian oil. India jumped in and bought a bunch of Russian oil as soon as those waivers were issued, and the price of Russian oil went from a huge discount to a small premium to the global price. So they’re able to export more barrels a bit faster and, most importantly, for a higher price.
RA: And India also purchased some Iranian oil recently.
JB: Right. The U.S. Treasury Department issued a 30-day waiver for people to buy Iranian oil, so-called “floating on the water” oil. Again, Iran has produced a lot, which they store and then try to find ways to sell into a global market, evading sanctions. Maybe some of that would have struggled to find buyers. But Iran, too, will probably sell a bit more, a bit faster, and, again, for a much better price because it’s legal now.
RA: The Treasury Department has been making the case that these measures end up hurting Iran. Where do you fall on that?
JB: It’s hard to see that. I understand their rationale [of using Iranian barrels against Iran to keep the price down]. But you’re not talking about such a large volume of oil that it would be a difference between $200 a barrel and $100 a barrel. If that were the case, maybe it hurts them, but it’s not having an enormous impact on price. The biggest result is more revenue for Iran, which seems at odds with the intended goal of weakening Iran as quickly as possible to force capitulation or negotiation.
RA: Indeed.
What about China? China has begun to limit exports of energy now. But how do these higher global costs of crude impact China’s strategy more generally?
JB: I wrote a piece in Foreign Policy just after the conflict broke out about that because conventional wisdom immediately after the conflict was that high prices are bad for China—and they are; China imports about half of its oil and a third of its LNG through the Strait of Hormuz. It is, of course, like many oil-importing and large consuming countries, harmed by higher prices. But I wanted to think longer term about ways in which they benefit as well.
This is a validation of an energy security strategy that China has pursued for at least two decades to prioritize energy security and reduce oil and gas imports. They’re still heavily import-dependent but less than they would otherwise be because of their electrification strategy. They want to be less connected to a global market that is exposed to geopolitical risk and volatility.
That’s as much about an energy security strategy as it is an environmental or decarbonization one because then you can produce that electricity with domestic sources. For them, that’s coal, renewables, and, to some extent, nuclear power. About a third of their energy system is electrified, versus a little more than 20 percent for the global average. Half the new cars sold are electric. They built an enormous reserve, a billion-and-a-half-barrel strategic stockpile, while the United States has been selling off huge amounts of our strategic petroleum reserve—unwisely, as I’ve testified several times in Congress. Both sides of the aisle have been doing that. So their energy security strategy puts them in a slightly better position and points to how global policymakers are rethinking the geopolitical risk premium of connection to an integrated global oil market in today’s collapsing world order (which Foreign Policy has written so well about).
RA: I want to get to other parts of the world, but I just want to contrast China with the United States for a minute because as you look at how China has transformed its energy security over the last 20 years, it is essentially an electrostate, and the United State has become more of a petrostate over the past 20 to 25 years. Some of this is because of fracking and shale, but talk a little bit about how the U.S. position has changed since you were in government. Part of this as well is linking back to what we were discussing earlier about the price of oil not being higher than it currently is, as some of us might have expected.
JB: It’s quite stunning and hard to put in context—and for people to remember—how dramatic the U.S. change in position has been in the global energy system. Two decades ago, George W. Bush warned in his State of the Union address that the United States was addicted to oil. Energy affordability was a key priority for economic competitiveness. Our problem was dependence on the Middle East; we were importing 60 percent of our oil at the time.
And then the shale revolution came along, and we now export something like 3 million to 4 million barrels a day on a net basis. We’ve gone from producing 5 million barrels of crude to nearly 14. We’ve never seen a country grow oil production that quickly and to that extent. The United States is by far the largest producer of oil in the world and one of the largest exporters. It is also the largest producer of natural gas and the largest exporter of LNG. So it’s a stunning change in position.
Now this administration, I think it’s fair to say, has a view that this provides dominance and security. If you’re the biggest petrostate, what are you buying clean energy, electric vehicles, and solar panels from China for? We can be independent by producing our own energy. We’re learning in this crisis that there are limits to that. In a global oil market, whether you’re a huge producer or not, you still feel pain at the pump because the global price of oil rises and the price of the pump is set by the global market.
The market is better able to cope with disruption today because supply has grown so quickly. The United States alone has met more than 90 percent of the growth in global oil demand over the last decade. So we put a lot of additional oil in the market, which provides a cushion. Before this crisis started, people thought the world would produce more than it consumed this year, and that was weighing on prices. The consequence is even greater for natural gas because the price of natural gas is not set in the same way in a global market. The U.S. price of natural gas remains very low, even when it breaks in Europe or Asia.
RA: Let’s talk a little bit about the rest of the world now—not great powers but smaller countries. What happens to a massive net importer of energy, like Pakistan or Vietnam or even India? And then there’s the double whammy because not only do you have energy prices going up, but the dollar has gone up too, which then makes it even more expensive for all of these countries to buy their energy.
JB: It’s a real crisis. It is economically painful. Remember, the 2022 energy crisis in Europe caused real hardship in the lower-income countries that got priced out of the market altogether. So high prices in energy, as in other things, hit the poorest harder. (That’s true in the United States as well—low-income households can spend as much as 20 percent of their disposable income on energy.) But poorer economies like Thailand and Namibia spend more than 7 percent of GDP on fossil fuel imports. Oil alone is about 3 percent of the GDP in India and 5 percent in Thailand. You see countries having to make hard choices where people are unable, depending on what they do for a living, to afford fuel for basic livelihoods, for their fishing boats.
RA: Is this crisis going to accelerate a shift toward alternative energy for countries that really feel freaked out by this moment, or will countries in fact make the opposite choice? Are they going to turn to the fastest, dirtiest fuel available to them, which is likely coal?
JB: We’re seeing some of it already with countries—even Japan—announcing that they’re restarting some coal plants. In the immediate crisis, you do what you have to do to meet energy demand and keep prices as low as you can. For many parts of the world, that’s going to be a switch to coal when natural gas gets too expensive.
The question is whether this leads countries to build some additional coal plants for resiliency and redundancy or whether, like China, their strategy for energy security will be domestically produced energy. If you’re in Indonesia or other countries like that, coal can be an attractive source of domestic, cheap energy supply, and we will see some of that in a world that prioritizes energy security more. But it also means, in other parts of the world, it’ll look quite different—certainly in Europe. A strategy to electrify more is going to be accompanied by more renewables and by rethinking Europe’s approach to nuclear energy.
The problem with energy crises is there’s not a lot you can do in the immediate term, especially with oil prices. You can waive the gasoline tax, but there aren’t many good options. The U.S. economy is in a much better position today, not just because we’re the largest producer but because we are much less oil-intensive. GDP has roughly quadrupled since the Arab oil embargo [in 1973-74], and oil demand hasn’t changed very much. So we feel the pain of an oil price shock less than we otherwise would. It’s important to remember that the best thing you can do in the long run is use less, not just produce more.
This has the potential to be the kind of shock to the system that the 1970s were and that, frankly, 2022 wasn’t. But the question is whether it shakes countries from complacency to do something meaningful. Meaningful means trying to reduce exposure to global energy markets, reduce imports, and produce more at home. And on the one hand, it might give you security, but it comes at a price, too, exacerbating this breakdown in global cooperation we’re already seeing. It is also inflationary—it’s more expensive to produce everything at home than to depend on global trade. That’s why economists like trade.
RA: Once the war ends, what kinds of assurances do you think anyone who goes through the Strait of Hormuz is going to need?
JB: You need confidence, first and foremost, in things like insurance. I was at CERAWeek, the huge energy conference this week in Houston, and the head of one major shipping company said, “We’re not going to be the first ones.” That’s part of the answer to your question: Even if the Trump administration says, “We’re done, mission accomplished, let’s go back to normal,” Israel has a say in this. Iran has a say in this. People are going to be looking for what signals other countries are sending. You’re going to need, I presume, some military presence and some signal from Iran that it’s safe to pass now. Who would they do that for? We’ve already seen some countries, like India, trying to do bilateral deals, trying to maybe pay a few million dollars to let their ships go through. Is Iran going to try some tolling structure like that? We don’t quite know yet what will emerge from this.
