Before the Iran war, a huge amount of the fossil fuel consumed around the world passed through the Strait of Hormuz, including 34 percent of the crude oil, 19 percent of the liquefied natural gas, and 16 percent of the refined petroleum. Whether the Persian Gulf region will remain so central to the global economy once the war ends is an open question. As the world struggles with the immediate disruptions, the long-term winners and losers of the war are only beginning to come into view.
Is the Persian Gulf’s economic model in jeopardy? Will China benefit from a broader global shift to renewable energy? And how is the U.S. economy affected overall by the war?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: Several countries in the Gulf have developed an economic model that depends on serving as a hub of international human capital, specializing in various types of high-end services. If this region isn’t secure, does that put this model into jeopardy? Is that the foundation of this entire economic concept?
Adam Tooze: You can see the force in that argument. Dubai appears as a tourist economy probably largely from a European point of view. It’s notoriously so in Britain. Apparently, there were a whole bunch of articles about how crazy the Brits are about Dubai, both positively and negatively. It’s both loved and hated. I think from the point of American listeners, they won’t think of Dubai necessarily as a tourist destination, but it is a popular spot for Europeans because of reliably warm weather in the winter, and it’s reasonably close.
But in terms of the economy, the highest figure I’ve seen for Dubai tourist share is less than 10 percent of GDP. So Dubai really is a commercial center: banking, trade, finance, insurance, all those kinds of things. And there’s no doubt, of course, that they will take a hit from the shock of the war. Real estate is another key component. The wealthy of the whole world like to have apartments there, very low-tax, kind of a haven status, if you like.
But I think there’s a tendency toward skepticism when we’re talking about services in general, sort of what’s its basic means of support. It doesn’t make anything. So sooner people feel insecure, somehow it’ll all evaporate. I’m not going to try and predict Dubai’s GDP 10 years from now. But one shouldn’t underestimate the resilience of hubs like this.
The sense that this is simply going to evaporate underestimates the central role the Gulf states play. Only in really, really bad scenarios does some form of relatively normalized traffic through the straits not resume at some point. This war is, after all, gratuitous. It should not have happened. There is no good reason for it other than Israeli geopolitics. At some point one has to assume that some kind of logic will be restored. And when it is, one would expect these centers to come back because they sit at really nodal points in the global economy. The demand for this oil and this gas is not going to collapse anytime soon. As soon as the straits open up, it’s cost-competitive. So absolutely, obviously, it is devastating in the short run. The people I’m most worried about, frankly, are the migrant workers who are there to service these economies. But I wouldn’t expect it to change the course of their development permanently.
CA: A new FP essay written by Nils Gilman describes what he calls a “metabolic” Cold War pitting a coalition of petrostates, basically oil economies, versus a coalition that he refers to as the “Green Entente,” countries that are aligned behind renewable energy. Could this war be seen as an intervention in coalition management within the petrostate bloc that he’s talking about? A way of getting Iran in line?
AT: Yeah, I mean, I think this distinction between electrostates and petrostates is interesting. In some ways, I’ve played my own part in popularizing the distinction, I think. But I also have to say I have some second thoughts about it, because I think we know what we mean by saying there are petrostates. And generally, what we mean is states that have a large share of GDP or state revenue that is to do with fossil fuels. And that’s clearly true for the Gulf states, and it’s true for Russia. It’s true to a limited extent for the United States, which is a petrostate in the sense it produces an awful lot of petrol and gas, but it’s not in any way heavily dependent on it. It’s just a huge producer.
But what also distinguishes the petrostates from each other, which is crucial, is the degree to which they actually can control demand for oil and gas. And the United States, with a huge domestic market for oil and gas, can, of course, do that. And so it becomes rational for diehard, last-ditch fossil fuel defenders in the GOP to imagine, I think, a kind of enclosed U.S. oil and gas world in which the American merrily goes on consuming oil and gas. And then, of course, it looks for buyers for surplus oil and gas abroad.
But that actually creates a conflict between American producers of oil and gas and American consumers, because the less that’s exported, the better from the point of view of American consumers. But in any case, the U.S. can shape a demand which is more or less adequate to the supply it can produce. And they’re both at a very high level. Russia is not in that position. It’s a substantial economy, 100 million-plus people, but its oil and gas production is far too big to be absorbed domestically. And if that’s the case for Russia, it’s even more the case for the Gulf states. So they aren’t petrostates in the sense that they can meaningfully imagine shaping a world through their own say-so in which oil and gas are still consumed. Their only real way of influencing that market is to be willing to offer oil and gas at very low prices, which means it becomes irresistible for some consumers.
Now, if that’s the case, and you’re a Gulf state, and your strategy longer term is to stay in the oil and gas game but to compete on price and quality, then you’ll have a very high interest in diversifying the rest of your economy, which is what the Gulf states are all doing. And to do that, you actually turn yourself into a progressive electrostate state. So if you look at the Saudis, the Emiratis, they both have highly ambitious green electricity build-out programs, like Texas, in fact, which also is the largest renewable investor in the United States with the biggest wind and solar program. And if you look at Texas’s electric grid, increasingly, during the daytime, it’s dominated by renewables. And the Saudis and the Emiratis have woken up into this.
I literally witnessed in Beijing this week a combined audience of Chinese and Arabs applauding the future of their collaboration between Saudi Arabia and China, because China is going to supply Saudi Arabia with the solar panels, the batteries that it needs to expand a green hydrogen, green steel, and desalination program all on the back of green electrification.
So these choices are choices, but only really for the United States does it make sense to imagine a fully enclosed, 1950s-style, fossil-fuel-forever kind of world. Not the Russians, not the Gulf states. They don’t either of them really have the option of projecting that into the future. The Russians will mess around, and they’ll try and find low-income consumers who want their discounted oil. But the Saudis are actually heading in this other direction entirely.
And this is even before we begin asking ourselves whether it’s really plausible, this is why the Trump administration did it. And I think the story we’re getting out of the Trump administration is so chaotic that the idea that somehow there was a grand strategy to corral all the oil and gas producers and somehow bang them into shape and get them under American control—I mean, would that it were the case that Washington was this concerted. Probably by far and away the most plausible interpretation is that they’re being instrumentalized by [Israeli Prime Minister Benjamin] Netanyahu.
And beyond that, I think it’s Trumpian cosplay geopolitics. Again, I just think he’s making it up as he goes along. And there are some hardcore interests in the U.S. which were keen on a war with Iran forever. And the Israelis, of course, actually have, at least in Netanyahu’s sense, something to gain from this. But that is the crucial point. I think the crucial thing to make is that this idea of a petrostate that is truly self-sufficient really doesn’t extend beyond the U.S.
CA: If we were to look at the other side of that Cold War setup, would it be possible to think of China as the beneficiary of this energy crisis now? Might oil-dependent countries, seeing how oil and access to oil is being weaponized, turn toward electrification and what China can offer in terms of access to renewable energy?
AT: I think in broad terms, the answer to that question is almost certainly yes. This crisis is not an advert for reliance on fossil fuels. The proviso is that you have to reckon with what economists call the J-curve effect. So you suffer a shock. In the long run, this causes you to change behavior, but in the short run, with the parameters of your existing behavior set, you pay the penalty up-front. And so fossil fuels bulk larger in the short run as oil and gas prices go up. Discourse centers around them, policy centers around, everyone’s focused on them. It doesn’t look like we’re in a world which is transitioning, because oil and gas are the news. But in the medium term, yes, I think that’s a very plausible scenario.
And it’s one that we’re already seeing working through. And it is one that the markets are betting on, because as much as the major oil companies, especially those which aren’t particularly exposed in the Gulf like Chevron, have done well out of this in terms of stock market price, the even bigger gains have been marked up by the champions of the green energy transition in China who are above all the battery makers. Because they really are the hub of green electricity transition as we are now understanding. They’re in the EVs; they’re the backup that the solar panels, in particular, need. So CATL, which is the most successful Chinese battery maker, has seen a substantial surge in its shares. Tens of billions of dollars have been added to the value of the major Chinese battery producers. BYD is not just a carmaker, it’s also a battery producer. So yes, we are seeing markets anticipate precisely that longer-term adjustment.
CA: There’s been some suggestion that the U.S. economy could benefit to some extent from this energy crisis and the war more generally, that the war could be good for American oil and fracking businesses, even as it’s bad for U.S. consumers and maybe most of its citizens. How should we predict that this war will affect the U.S. economy?
AT: I think that is the right way to think about it. It’s above all a distributional issue for America. Oil-importing parts of the world, whether rich or poor, when hit by big price shocks like this, suffer net losses. It’s called a terms-of-trade effect. Your exports buy you less imports, and it’s bad for your GDP. And in a really bad case, it can produce a net recession. So Europe in 2022, 2023, when the gas price just went through the roof, 2 percent to 3 percent hit to GDP, we think. So that’s real. If you’re a poor country, which is importing energy, it literally leads to shutdowns of activity like we’re seeing in Pakistan and other parts of Asia. In the U.S., it’s a distributional issue, first and foremost, because some people win and some people lose. On net, probably the United States economy, the GDP, may in fact benefit because America is a substantial fossil fuel producer and exporter as well. How large that effect is going to be is very uncertain, I think, because—and this is a point that’s been underlined in several different places—as with [President Donald] Trump’s tariff policy, you just don’t know what they’re doing. And so day by day, people are trying to guess.
There’s some truly scandalous action going on in the futures market for oil around presidential Truth Social posts and announcements. It’s quite clear that the Trump administration is leaking to insiders who are placing gigantic bets in the markets. But that’s not the basis on which to run long-term investment in the American oil industry. And so even in Houston, apparently, there isn’t exactly a kind of mood of celebration here, because it only matters if it’s for the long term. And when you put the question, does the American president actively support a long-term elevation in oil prices, the answer is kind of obvious. And it’s no, because as much as there may be some winners from a higher oil price in the United States, the majority of the population, the heavy oil consumers, definitely lose.
And they don’t lose as much as they would have once, right? Because as people have grown more affluent, and the oil price in real terms in relation to incomes has trended down, and people have become much more efficient in their energy use. And so energy is not the decisive factor that it once was in America’s budgets. It bulks rather larger in popular psychology than it does actually in the economy. It has an impact on American society which is perhaps out of proportion to its material consequences for people’s budgets. But it’s no doubt at all that the American presidential administration is not going to deliberately set about maintaining a high level of oil prices because it’s good for the fracking industry or whatever. That’s Trump windbaggery. That’s not actual policy.