A new toll on global energy: Can Iran permanently control the Strait of Hormuz?

Door one is humiliating and a loss. Door two is politically impossible and extremely risky. So if neither door one or door two looks good, you kind of just fumble around and shuffle your feet and don't go through either door. We have not seen yet the actual disruption in the physical market. My feeling is whatever it is that you're describing, Ed, is actually about to happen if If the strait doesn't open, back up. Can the IRGC remain defiant longer than the world economy can stay solvent? That's kind of the debate we're into now. We saw a handful of LNG ships do that, where the ships went dark at a certain spot, and one showed up on the other side of the world a couple of weeks later. every reliable, scalable source of power available, including nuclear. Bechtel has been at the forefront of nuclear energy for more than 70 years, helping design, build and deliver projects that have shaped the industry around the world. From the first generation of reactors to today's advanced nuclear technologies, Bechtel continues to help bring complex energy projects online safely and reliably. As momentum grows around nuclear power, Bechtel is helping customers move from ambition to execution, delivering the expertise needed to build at scale. Learn more at Bechtel.com. That's B-E-C-H-T-E-L dot com. Hello and welcome to The Energy Gang, a discussion show from Wood Mackenzie about the fast-changing world of energy. I'm Ed Crooks. And on this show, we're going to be coming back to the subject of the war with Iran. It is, of course, a very fast-moving situation. At the moment, we're speaking right now on Friday, May the 8th. The ceasefire is still officially holding, but there have been several attacks on ships and installations around the Gulf. So it's a confusing situation, but we're going to try and make some sense of it and explain what it might mean for the future of energy. To do that, I'm joined by Amy Myers-Jaffe. Amy is the director of the Global Energy, Climate and Sustainability Lab at New York University. Hi, Amy. How are you? I am great, Ed, but it's starting to get tiring having to watch this war flip this way, that way, this way, that way. I have a little bit of a neck pain from all the gyration. Yeah, no, it certainly is a stressful situation, isn't it? Even for those of us watching it at a distance. It's also a pleasure to welcome back my Wood Mackenzie colleague, Chris Avasano, who's our director of Maritime Partnerships. Hello, Chris. How are you? Hi, Ed. Hi, Amy. Hi, Eddie. Thanks for having me once again. And yeah, to concur with Amy, it's, you know, every day is different. Just don't look at your phone between the time we start and the time we stop because it could all change. No, absolutely. And certainly we are going to try and take that into account as we're talking today and try and look at some of those longer term things that can be said with certain amount of certainty because we don't want to be caught out too badly by events changing. But on to that in a moment. Before we get into our discussion, I also want to introduce our other guest. It's a great pleasure to welcome for the first time a new guest of the show, who's Eddie Fishman. He's a senior fellow and director of the Morris R. Greenberg Center for GeoEconomics at the Council on Foreign Relations in New York. Hello, Eddie. Welcome to the show. Thanks so much for having me. I appreciate you letting me crash your party. Well, you are very welcome. Eddie's also the author of an excellent new book, Choke Points, which was just published last year. more on that in a moment. But I have to say, certainly very timely publication of that book. Among other things, it's a fantastic backgrounder for understanding what's going on with Iran right now. So I guess, Eddie, when you published that book last year, you probably didn't expect things to play out in quite the way they have just to make the book as relevant as it is right now. You know, I think the only industry that has had consistent tailwinds from Trump's tariffs and the closure of the Strait of Hormuz is probably books about economic warfare and choke points. So I did not plan it. But, you know, I will say that we have been seeing more and more economic warfare over the last couple of decades. So it doesn't surprise me in some ways that it's gotten this bad. But, you know, I have to say, because Eddie's book is really brilliant. Listers, you know, it's usually Melissa Lott, who's making a book recommendation, but this is like a high, like buy it today. But let me just say, Eddie, right at the beginning of the book, you make the point that all this economic warfare, for the United States anyway, has often not avoided the next stage of kinetic attack where we go military. And I thought that was like a brilliant takeaway because we're thinking that this stuff is preventing us from having, you know, wars where people get killed and terrible things happen and we have all kinds of negative consequences. But actually, when you go through the history of economic warfare, not only are you showing that that hasn't really been 100% successful in the United States, avoiding the wars on the people we did sanctions or took out of the banking system, but even in history, it has backfired. So it was just a great read. Just have to throw that out there. That is a great point. And as you say, Amy, that is one argument the book makes very strongly that has 100 percent been borne out by the events we've seen this year. I want to come back actually and talk about that specifically a bit later on. Before we do that, before we get into our kind of general discussion about the war, something we always like to do when we get new people on the show is get them to talk a little bit about their careers, what got them started on the path they took, how they got to the roles they now hold. Looking at your CV, you've had a very interesting and varied career in the public and the private sector. Can you just talk a little bit about what you've done and perhaps also particularly to explain to people your particular expertise in discussing this question of, as you say, economic warfare? Sure. And actually, it ties into Amy's point, because my interest in this area really originated when I was in university in the 2000s. So if you were studying history and international relations in the years, you know, sort of in the aughts, I guess we call it the first decade of the 21st century, you were focused on the wars in Afghanistan and Iraq. Right. The United States was fighting two wars and neither was going particularly well. In fact, both of them were quagmires. And at that same time, Iran started supercharging its nuclear program. So right around when George W. Bush was reelected in 2004, the next year, the Iranians elected a populist hardliner, a gentleman named Mahmoud Ahmadinejad. And one of the first thing he did was to sort of accelerate their nuclear enrichment. And so there was sort of this quandary that U.S. policymakers had, which is we just invaded Iraq to try to get rid of a nuclear program that proved not to exist. But the country right next to Iraq, namely Iran, which was multiple times bigger, more powerful than Iraq, actually was building an industrial scale nuclear program. And so when I was sort of observing this, I was like, well, what are we going to do about it? Right. We're not going to fight another war. Is there another sort of lever of American power we might be able to use to try to nonviolently contain Iran's nuclear program? And it just so happened that the wonderful journalist Robin Wright wrote a profile of a U.S. Treasury Department official named Stuart Levy. I think this was in 2008. And it was called Stuart Levy's War. It was basically about how this effectively unknown Treasury official was creating new ways of pressuring Iran by manipulating its access to the U.S. dollar. And I found this to be fascinating. And so I was like, this is what I want to work on. I want to find a way, be part of this effort to try to create new ways of using American power more effectively than what I had seen going on in Afghanistan and Iraq. And so literally a week after graduating from college, I moved down to Washington, D.C. and started working for Stuart Levy's successor at the Treasury Department. So that was my sort of first foray into government. I eventually wound up moving over to the State Department where I worked on the Iran sanctions, sort of the pivotal oil sanctions on Iran in the 2013 period and implementing the first Iran nuclear deal, the Joint Plan of Action. And then when Russia invaded Ukraine in 2014, we didn't have a Russia sanctions team or program at the time. And so I found that that was a good opportunity for a relatively early career person to raise their hand and say, hey, I'll take this on. And I became the first Russia sanctions lead at the State Department. So helped design and negotiate all of the original Russia sanctions in 2014, 2015. And then spent the last couple of years of the Obama administration working for John Kerry on the policy planning staff where I covered all international economic issues, plus a few other items that Secretary Kerry wanted me to handle. When Trump was elected, to your point, Ed, wound up serving or pivoting and working in the private sector for a number of years, but always was very focused on economic statecraft and had been teaching a class at Columbia on the issue. And it really was when Russia invaded Ukraine the second time in 2022 when I realized, you know, there's got to be some definitive book on economic warfare. And I might as well be the person that writes it. And so I left my job at a tech company called Via that actually just went public last year after I was running one of their business lines. And I said, you know, I'm just going to write. And I spent the next couple of years writing choke points. And I guess that's the path that led me to where I am today. Good. Thanks very much. Well, great that you're on here to share your expertise with us and our listeners. So as I was saying, I want to come on to talk about that book and some of the lessons from it and the lessons from that whole experience of sanctions. in a moment. Before we do that, I want to talk about where we are right now and what is happening in the Gulf, what is happening in the strait. As I was saying earlier, we're recording this on the Friday the 8th of March. It's a confusing situation. The ceasefire is supposed to be holding, but there are these persistent attacks. Just recently, I think we've had news about Iran attacking three American destroyers heading out of the Gulf through the strait. Iran's also launched missiles and drones at the UAE, doing some damage at the Fajera oil facility, which is the one outside the Strait of Hormuz that the UAE uses to export oil to the world. So it seems, I mean, if we are in a state of ceasefire, it seems like quite a fragile one and certainly an uneasy and tense one. I mean, Chris, in terms of what that means for the Strait of Hormuz, what are you seeing in terms of this crucial question then? Is the Strait open or not? Are we actually seeing energy being able to flow from the Gulf to the rest of the world? What's the position there? Well, I think, you know, let's just start with what we've seen this week, right? Because if we go back to our last chat about two months ago, obviously a lot has happened. As we've alluded to, it is a moving target. But looking at this just in the last week, you know, you've had some news that everything from a couple of U.S. flag merchant ships have left the area after being inside, including one under escort earlier in the week. On the other hand, you also saw this morning from the Chinese government that they put out that actually one of their ships, which clearly said Chinese ship on their AIS transponder, was attacked by Iran. So you kind of have this situation that is just, you know, it is very much an evolving and almost case-by-case situation. So, Chris, so give us the ship owners and the ship operators and the ship crews perspective on this. Given this complex situation, how are people responding to that? I mean, you know, just looking back, going back again to when we started talking about two months ago, you know, right after I think when we were on, we were seeing about 10 ships. We have set up on our little polygon on our on our AIS tracker what we could see. And basically, we were seeing about 10 ships that started to creep up a little bit in April. Maybe right. I think the time frame was right after the first ceasefire. We started to see things creep up. The average got into the low 20s, high teens. So, again, commerce not moving. I think ship owners are playing it day by day. And now this week, after we've seen these attacks and French container ships, the company CMA CGM had one of their ships attacked. And I don't think there was any casualties. At least that's what I saw earlier in the week. So saying that, all of a sudden, everybody stops. So I think that their view, looking at shipping and ship owners and coming from my background, the word that sticks out is practical. These are practical people that deal with problems every day. As a matter of fact, when there's a day without problems, that's an interesting day. There's always a problem. Is it a valve? Is it a six-seater sailor? Is it a bill of lading that doesn't match? There are thousands of problems. And now what I think has happened in the shipping community, now that once we've gotten past this initial kind of shock to the system, now it's just part of the system. And that includes things like making sure that the seafarers have food, making sure that they're doing seafarer swaps, which I've read someplace that the Indian seafarers, which are a pretty sizable chunk, they're kind of swapping out. People who want to leave the ships can leave. People who want to go home can go home and be replaced. And the other big question, and I've tried to talk to some folks in the community, is coming down to insurance. You know what they call the protection and indemnity insurance. So not necessarily what the insurance is on the hull and the machinery of the ships because you know what generally it would cost to replace. But what happens if there's a spill? There is some early reports that there may be some a satellite picked up some spill in the water near Carg Island. I read it about two hours before we came on. I'm not sure what that means, if it's a spill, if it's something else. But certainly that's the type of protection and indemnity that ship owners up until recently couldn't get. You can get covered now. But but asking it's I think it's a case by case basis like everything else. So I think that that's where the shipping community is. And I think at this point, Ed, we can get to this later on. It's now what are the what else are they doing? How else are the ships meeting the demand for energy or for building or what have you in the world? now that we know that this choke point, to kind of quote Eddie's book, is now more of a choke point. How does shipping deal with it? And I think once we've kind of gotten past the initial shock, now it just becomes routine. OK, this is how we're going to deal with it. Again, never to minimize the seafarers at risk, of course. Hey, Chris, I'm hearing from people that I'm friendly with from the shipping side that people are sort of taking this strategy of turning off their responders and kind of hoping for the best for some things that they want to get in and out of the straight. Are you hearing that? Yeah. So if you look at it, I mean, we saw three, a handful of LNG ships do that where, you know, where the ships went dark at a certain spot and one showed up on the other side of the world of, you know, a couple of weeks later. So, yeah, I think it comes down to risk. I think it comes down to talking to the crew. I'm not sure how insurance works or any of those sort of things. I think maybe they just took a risk and they went for it I think you saw more of that when it got a little bit quiet but I would imagine that going to go that will now cease a little bit as things have gotten a little bit hotter here Right So the other thing I heard which was kind of interesting I have a close friend who transports like a big bulk, big bulk, dry, dry materials. And they said that, They have. Yeah, right. And they said that one of the things that's interesting is that people are still kind of covered by the insurance for not having made the delivery yet. But that at some point that insurance is going to, you know, say it's 45 days or whatever gets past that. I don't know the exact numbers, but we might get to a moment in time when the shipping industry is under more pressure because the insurance on delivering the cargo to the customer is going to start to run up. I think what I learned in my 18 years of commercial negotiations, everything's up for negotiation. And remember, too, I truly believe that the shipping industry is extremely pragmatic, that I don't think you're going to have this abandonment of cargoes with no insurance because people also have long memories. And it is an extremely relationship-driven industry. So that's kind of my feedback on that. If, you know, just kind of not knowing all the details or exactly what type of cargoes, that's kind of how I feel about that. So question then, what does it really take to get shipping flowing back to normal again? I mean, so as you're saying, if we're at this level where there have been maybe 10 ships a day at the low point, rising to maybe 25 a day at the best traffic volume that we've seen since the war started, That's still down from, what, 150, 170 transits a day in peacetime. So it's still a very small proportion of the traffic that we've seen, very small proportion of essentially what the world needs to get those essential supplies of oil and gas and chemicals, fertilizer, aluminum, everything else, out of the Gulf to the world. So, as I say, given that we're still operating well below those levels, How do we get it back there? What does the industry need to see to be confident to start moving back again at kind of peacetime rates? I just don't see, you know, a silver bullet here. Right. And I think what's going to happen is it's going to be incremental. You know, I think it'll if they peace holds, you'll see more and more ship owners do things a little bit more publicly. The other kind of question is, is this free trade? In other words, are the Iranians charging a toll or not? That becomes a question. So I think there are going to be ship owners who will kind of stick their toe in the water, maybe try to make one. Now, I think people will leave. I think the big question is, when will people start to do free trade? So I think the first part of it is getting the ships that want to leave and are fully loaded to get out of that area, because there's a whole other question of operational issues like inspections and underhaul cleaning, all these sort of things that you're going to have to take care of, which is going to effectively reduce. Those ships will be minimally or potentially longer out of commission to kind of do some service that they can't. Saying that, you know, I don't know, Ed. I think it's going to be a long time, and I think it's going to be kind of incremental. And then ultimately, at the end of the day, does the insurance market go back to quote-unquote normal? Even though if they're paying higher premiums, you could pay that because you could pass that on. But I think we're a little ways away from that. Even if tomorrow everything on paper looks good, it's going to have to hold for a little bit. 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Hey, Eddie, can you give us a perspective as a former policymaker and someone who's looked in depth on things like, you know, you've talked about freedom of navigation in history in early times as opposed to even now. So what's at stake for the U.S.? And can you kind of like walk us through what people must be saying behind closed doors inside the U.S. government? Well, there's quite a bit at stake. I mean, if you think about the U.S. role in the world and to the extent we still have an international order, it's really one of the core pillars of it is that the United States is guaranteeing open sea lanes. Right. That's the whole idea of having this large blue ocean navy that the United States has. And that's why, I mean, and I think this also helps maybe address Ed's question about, you know, when is this going to end? When are things going to go back to normal? I mean, look, Trump has a conundrum on his hand because he really has two options, right? Option one is cut some kind of a deal with the Iranians that, you know, probably looks a whole lot like the 2015 nuclear deal. So it's not going to be substantially better than that, which maybe he could sell politically. But, you know, I think there are going to be some who are skeptical about that. And then probably leaves Iran as the gatekeeper of the Strait of Hormuz. Right. Iran is going to be controlling the world's most important maritime choke point. That's option one. Right. Option two is you escalate substantially militarily. Right. You basically run back the Iraq 2003 playbook. You put a whole lot of boots on the ground and you remove the Islamic Republic of Iran's government from power and you go for regime change. That obviously, if it goes well, the Strait of Hormuz maybe does go back to the status quo ante. The problem with that is it's extremely costly and risky and there's zero political support in the United States for that kind of a military commitment. So if you think about it, door one is humiliating and a loss. Door two is politically impossible and extremely risky. So if neither door one or door two looks good, you kind of just fumble around and shuffle your feet and don't go through either door. That's what we're dealing with right now. I think that's what we're going to be dealing with for quite some time, because there's not a third option. To Chris's point, there's no magic bullet politically, just like there's no magic bullet for the shipping industry. Right. So that then raises the question of what that means for global energy. So as you say, you have your two doors. you don't want to go through either door one or door two, but you can't just stand on the hallway forever because while you do, that hallway is kind of catching fire, right? For as long as the world is deprived of maybe 10% of global oil supply, let's say, is roughly the oil that's not being rerouted through other routes, through Saudi Arabia, out through the UAE, about 3% of global gas supply, 20% of the LNG, 3% of global gas in total is missing, whatever it is, 30% or so of global urea. All these things are not reaching the world market, and they are absolutely essential for the world economy. And I'm still, I feel like I've been slightly, what's the word, over pessimistic early on about what would happen to oil prices. You'll see the people who are essentially oil price bears who are kind of like, ah, nothing to worry about. Everyone's got overexcited. You've all kind of been catastrophizing about this. Look, here we are. Brent crude is still around only $100 a barrel, which is true. However, it is also still the case, which I fundamentally believe, that if you want to bring supply and demand into balance, if the strait remains closed for a period more of months, let's say six months more, however much it might be. If you want to bring supply and demand into balance in those circumstances, you will need oil prices that are very much higher than they are today, and you will need maybe $150, maybe $200 a barrel, maybe more than $200 a barrel. That's just, it's impossible to see any other way that the oil market balances, and that inevitably then implies very serious consequences for the world economy and a global recession. And as I say, I feel like there's a bit of triumphalism from the kind of the don't panic crowd to say everything's fine. I would accept things have not been as bad as we might have expected so far, but the clock is ticking. I have a colleague who likes to use the term, the frog is boiling. The frog is in some hot water. Eventually, the frog is going to get cooked. And it is going to happen at some point in the not too distant future, even if it hasn't happened now. So, Ed, I want to defend your position with some basics, like just factual information. Okay. We went into this crisis. people were predicting there was like 3 million barrels a day of excess supply per demand, right? Then we had these shadow cargoes that were under dual sanctions, and so they were in distress and they were just floating around from Iran and from Russia, right? And then we had this IEA stock release at a time, March, April, when the refining system, at least in the United States, but also in other markets, goes into annual maintenance and switches from, you know, winter grade to summer grade and so forth. So demand for crude oil at that time of year tends to be a little lower because, you know, you have this maintenance. So my opinion is that you are right in the following way. We haven't actually experienced the crisis yet because we had the release barrels. We sold all the shadow cargoes, right? We had the surplus, which was already on the water. So it's, you know, takes 45 days to go from the Middle East to Western markets. It takes 30 days to go to Asia. So that oil that was produced before the shut-in has now arrived and it takes six weeks to go through the refining system. So we have not seen yet the actual disruption in the physical market, Right. And to me, the real test is going to be, in my opinion, sort of post Memorial Day. Like when we start really seeing and I've talked to refiners in the U.S. and others, we're seeing a lot of customers now arriving in the U.S. with ships to take U.S. petroleum products out of the United States system. We export a lot. We've had periods during the Biden administration where exports were as high as crude and products combined of 14 million barrels a day. I think we're going to see those kind of numbers again. So my feeling is whatever it is that you're describing, Ed, is actually about to happen if the straight doesn't open back up. And then the question becomes, you know, how does that affect things? and have countries been able to make what I call other arrangements? Are we seeing demand destruction? Are people moving to other kinds of fuels? Are people going to do more biofuels? Are people going to do different things? Are the economic hit so bad that they don't even need the oil anymore because there's such a tight relationship in many countries between oil demand and GDP, right? Or, you know, in a lot of places, not the United States, because we don't think like this, but, you know, China's sales of electric cars back on an upswing. So, you know, how those two things balance out, I think now is the time we're going to actually start to see it as we get to the end of this month, if Hormuz doesn't open back up. So, Eddie, how do you think about this? Are we heading towards some really serious global economic catastrophe? Look, I mean, in some ways, you have to credit President Trump, right? If there's one thing that he's done well so far in this crisis, he successfully talked down the market, right? That's true. Good point. The oil market, you mean? So you talked down the oil market, I guess, talked down the stock market. Talked down the oil price, and the stock market is hitting record highs, right? And I do think, having talked to a number of large institutional investors, I think a lot of this is investors who have felt burned betting against Trump in the past, right? Basically, with Liberation Day, folks who were short on the market wound up losing their shirts and many of them losing their jobs. And I think if we take a broader perspective for commodities, look at 2022. There are a lot of commodities traders who lost money in the second quarter, thinking that oil prices were going to stay very high when we didn't have a real physical disruption. I think to your point, Amy, one thing we're learning from this crisis is that even when you're losing huge amounts of oil on a daily basis, right? I mean, we've probably at this point, what, a cumulative 600 million barrels probably that otherwise would have been exported. I've seen even higher numbers floating around. I think while someone at Shell was talking about it the other day, I think his number was 900 million barrels of oil. Yeah, it's a lot of oil. But I think what we're seeing is like there are buffers and they're working and the stocks are being drawn down and emergency stocks are being released. And I think the question is, when do we get to the point where like actually it's the oil that's being exported that's being consumed right now and there's nothing else, right? I don't know when that date is. I don't think anyone really does. But certainly if we get there, we're going to have an absolutely massive spike in oil prices that will probably lead to a very, very substantial recession. One final point just to make, because this quote's been on my mind. There's this great John Maynard Keynes quip where he said, you know, the market can stay irrational longer than you can remain solvent. And I think we're seeing that. Oh, I love that. Yeah, we're seeing that play out right now, right? I mean, there is some irrational elements in this market, probably partially because of Trump talking down oil prices and people learning from experience. But what that means is, you know, those who are betting going long on oil right now, you know, they may not. It depends when those trades are going to finalize. You know, timing is everything in commodity markets in terms of when something. And the fact that something hasn't hit doesn't mean it won't hit. So, you know, that's the great lesson of commodities. I think the interesting fact, which was debated, and I'm on the other side of everybody on Twitter, so maybe the listeners are going to attack me on Twitter for saying this. But here's the deal. The New York Times actually finally interviewed people from Iran's oil sector, and some of them said what I'm about to say, which I've been saying. So I feel like I'm in a little bit safer ground, but it's very murky. Okay. Iran's uses natural gas uplift. So what do I mean by that? They re natural gas into their aging fields in some locations because the fields have poor natural drive You know oil fields when they start out they have a lot of natural pressure When you start to lose that pressure, then you can't recover the barrels. And so the Iranians inject 300 million cubic meters of gas a day, so that's 110 BCM a year, just to produce their oil. and they need South Pars to do that. And what the Times was reporting and kind of what, I mean, I'm not like I have any contacts in the Iranian oil industry at this moment in time, but what makes sense to me based on history and knowing what I know about the fields, they're saying that if the blockade were to really continue for a lengthy period of time, like we stay in this stalemate state, then the expense that the Iranians would have to bring their fields back online, if they start having to really shut them in, could be quite large. And there could be, in some cases, some damage to the fields. Again, just to give you a number, South Pars, back before we thought we were all going to be in a war, where Iran had estimated that they were going to have to spend $17 billion to halt the decline in the South Park's natural gas field, which they need to provide the gas to produce the oil. So one question is, what happens when the Iranians start to really like this impact that's going to happen on the long-term health of their industry? does that change the picture at all? Or does the other thing I said earlier in the show about there not being such unity and brotherly love among the people running the country makes that like it doesn't matter kind of fact? Because at least it provides a motivation. Agreed. I do think that's an important point. I think it's a point which is quite often overstated. I don't know if you saw President Trump talking about it the other day where he said within a few days, you know, their fields are starting exploding. And yeah, that is clearly not true. But as you say, there is something there about damage to the formation, what happens to production in the long term. But I guess then, I mean, it comes back to your point about resilience. I'm trying to adapt that Keynes quote, but it's kind of, you know, can the IRGC remain defiant longer than the world economy can stay solvent, right? That's kind of the debate we're into now. Right. That's the question of the moment. 100 percent. Eddie, I'm interested what you think. What do you think? Well, Ed, first of all, you've coined a great, you know, you're going to go down with Keynes now with these famous, famous sayings. I like that one. Look, clearly the blockade, the U.S. blockade gives the Iranians an incentive to negotiate. So I'm very much in favor of the blockade. If you think about the status quo before the blockade, Iran had shut down the Strait of Hormuz for everybody's oil besides their own. And so they had spiked prices by virtue of their actions, and then they were benefiting from it by virtue of being able to sell their oil at higher prices. That was a terrible scenario. If the Iranians could live in that world forever, they would, right? I mean, that's fantastic. And they were collecting a toll from the few people who were really desperate. Yeah, 100%. It's a fantastic world for Iran. So look, I'm glad that we have this blockade on Iran because they shouldn't be able to selectively close the strait. And it at least gives them some incentive to come to the table. But to your point, Amy, and Ed, I'm glad you brought up some of these forecasts previously, I know, by the Foundation for Defensive Democracy saying, you know, Iran's oil sector is going to collapse in two weeks. I mean, I've been around economic warfare for a little while. And there are a few things I can say. One is I've never seen a magic bullet like that, where, you know, if only you stop them from selling oil for a few weeks and everything goes to hell. We've heard that said before. I mean, look at Iran in March of 2020, right? Post maximum pressure strategy at the peak of covid. They were selling what? 200000 barrels a day. But they're effectively selling nothing. And they rebounded very quickly. And their fields rebounded very quickly. So I'm always a little cautious to mention that they might be under some structural pressure. Exactly. But then I think there's a broader point, though, sort of going above sort of just the oil, you know, the oil geology and dynamics is that if you look at countries that have been under really dramatic economic pressure. So in recent history, like late 2010s, Venezuela, their economy contracted by 75 percent, right? There's no way Iran's economy is going to contract by 75 percent this year. And what happened with Venezuela? Maduro stayed in power, right? These authoritarian regimes are really hard to dislodge. Same with Assad, right? I mean, during the Syrian civil war and all the sanctions in the 2010s, their economy is completely obliterated. And he held on to power in both cases, in both the Maduro and Assad case. What did it take to get those guys out of power? It took military force, right? In the case of Assad, you had armed groups that took Damascus and pushed him out of power. In the case of Maduro, it took a special operations raid that arrested Maduro and his wife and brought them a couple of miles from my apartment in the Metropolitan Detention Center in Brooklyn. I have to read a quote from Eddie's book. It's the most brilliant sentence I've read in a long time. It says, the United States must prepare for this future where we're having this problem that Eddie's now describing, end quote. America's economic arsenal has demonstrated that it can inflict tremendous damage, but that has not proven that it can reliably advance U.S. strategic goals. Well, I wanted to go back to something Eddie was saying earlier about his working assumption being that the Strait of Hormuz will remain under Iranian control. Let's ask you, Eddie, that question because that struck me as a very significant statement. You think this is kind of it now that in the long term, the international community is just going to have to accept that Iran has some kind of control over the Strait of Hormuz? Yes. And a few points to sort of justify why this is my perspective. One, how have the Iranians closed the strait? They've done so by using inexpensive drones and missiles. Some of these cost $10,000, $20,000, $30,000 a pop. And by hitting a very small number of ships, only maybe two dozen commercial vessels that have been actually hit by the Iranians. And that's been enough to close the Strait of Hormuz. So they're doing it at extremely low cost. And there's really no scenario where you could actually completely destroy Iran's ability to manufacture drones and missiles. I mean, it's a huge country, right? We're talking about the 15th or 16th largest country in the world, I mean, in terms of landmass, there's no way that you could eliminate those capabilities. And I'm told that they could produce these drones in a facility about the size of my office if they need to. So there's no chance that we're eviscerating that. So they certainly will maintain the capability. Then there's a question of, you know, sort of, why do I think this is likely? I think with any of these issues, you just got to think about the incentives, right? From the Iranian standpoint, if they're charging $2 million a ship, which they've said for some of these oil tankers carrying 2 million barrels of oil, from the vessel, that's $1 a barrel. From a margin destruction perspective, it's not that high. Whereas from the Iranian perspective, you multiply it out, and they're making somewhere between $30 and $100 billion of additional revenue every single year. I mean, that's like if they were able to double their oil export revenue. And it's even better than oil exports because it's an annuity, right? I mean, it doesn't fluctuate with the price. And it's everything that has to go in and out of that way. Totally. So the Iranians have a huge incentive to keep it. The private sector, I think, has an incentive to accept it because it's actually not that costly. And I've talked to a number of folks in the private sector who said, look, we'll pay the toll if that's the cost of reopening the strait. If we can get traffic flowing, I don't care. We'll pay a toll. So I think the commercial sector has an incentive to accept the toll, if that means that they can actually get out of the Persian Gulf and get back into it. And then if you think about who's going to be upset, sure, the U.S., you know, the Gulf countries. But what are they going to do about it? I mean, the only country that really could stop this would be the United States. But to our point earlier, you know, door number two, Iraq-style 2003 invasion, I just don't see that happening. So I think the Iranians are going to be able to keep this just because I don't I think there's a huge incentive for them to keep it. I don't see anybody stopping them. I don't see anyone undoing it. And then there's a question about China, because I want to preempt that because people say, well, aren't the Chinese going to say don't do this? Well, look, I mean, I think we talked earlier. Apparently, they just, you know, seized a Chinese vessel or, you know, struck a Chinese vessel. but even so okay fine maybe you give a discount to the chinese or maybe you don't charge uh you know you don't charge a toll to the chinese but i don't say see the chinese restoring an open straight for everybody maybe for themselves let me tell you something about this this other theory i have on the chinese and i'm particularly excited about throwing this really outrageous idea out to you eddie having read your book so you're china and you know you have this rivalry with the United States, which, you know, on some particular months of the year in different administrations would look pretty negative. And maybe everybody agrees that, you know, a real conflict would be geoeconomic suicide for both countries. So I'm not saying that the United States and China is going to go to war or anything. But if you think about going back to like the Reagan administration and that philosophy, we did force the Soviet Union to spend a lot of money on defense at a time when they were bogged down in Afghanistan. And it did help bring down the Cold War because the Russians, it's not that they ran out of money, but they just got to the point where the burden was just really overwhelming. So if you're the Chinese and you want to convince the United States for whatever reason, because they're an economic rival, because of whatever. What a great strategy would be is to bog the United States down trying to keep the Strait of Hormuz open, right? And then we're spending billions of dollars doing that, which is increasing the deficit, means that the administration is going to have a tough time reversing the deficit, right? It's making our treasury bills look kind of not great to other players because you can't present a scenario under which you think that the United States will turn the deficit around. And you're China, right? That's like a Cold War, China, U.S. strategies that just kind of weaken the United States influence, which, Eddie, you write about, because we control so much of the global economy through our economic infrastructure. You can put a dent in that economic infrastructure, right, by just letting the Iranians go, by letting Putin drain Europe, by doing these different things. And then you don't have to do anything. It's hands free. you're just making the pain of our being the global superpower really, really expensive for the average American. And I'm interested in your comment. I mean, I read your part on the dollar. Eddie makes this point in the book, Ed and Chris, that foreign exchange trading today is $7 trillion, dollars, which is 80 times the value of world trade in the 19, prior to the 1990s. Well, in the 1950s, there was barely any foreign exchange trading. And Eddie makes the point that 90% of those foreign transactions involved the dollar. So when people talk about de-dollarization, that sounds a little bit impossible given that statistic. But Eddie, you know, if you're China, maybe you could stomach having your oil supply cut off and having some of your economy, you know, a little bit under pressure from imports you can't get from the Middle East, because it wins this other place where it weakens the United States economic power as a global currency, as a global system, as a global banking head. How do you see that? Sorry, before you answer that, Eddie, I do just want to touch on something else, which because I think that's a great point, Amy. And I think That whole question of the dollar and de-dollarization is really important and dealt with brilliantly well in your book, Eddie. But I think there is this separate issue about the status of the U.S. as the world's policeman, effectively, as the guarantor of shipping through these various vital shipping lanes around the world. And I thought it was really interesting. we've heard a couple of times now people from the administration, US administration, essentially reflecting that concern about do we really want to take on that role? And I just in the past few hours saw Marco Rubio, the Secretary of State, talking, and he said something about it's obviously unacceptable if Iran has control of the Strait of Hormuz and the world needs to decide what the world is going to do about that. in other words basically you know we as the us are not going to fix this problem this again i think it's a line in the book that great that famous line about the dollar which is you know it's our currency your problem um clearly as you say eddie there's not a massive amount of appetite in the united states for full-scale invasion of iran and whatever it might be whatever it might take, whatever might be needed to reopen the strait. Absolutely certain there's even less appetite in Europe or in Japan or China or anywhere else to take that same kind of military action. So is that part of what's going on as well, that essentially there is, you can't build a consensus internationally that although, as you say, it pretty clearly is bad for the world if Iran controls this strait, you're just not going to get people together to actually take action on it. And could there be a coalition like we saw in Iraq? I mean, there was a coalition and, you know, people started. Because like I said, I don't think the pain of the cutoff has hit a lot of Asian countries pretty strongly. But there could be more pain to come. So, Eddie, you're the big picture guy. Fabulous book. What do you think? I don't see it. I think there's some in the U.S., including in the Trump administration, who are sort of hoping for a deus ex machina, whether it's the Chinese or the Europeans or an international coalition. I just don't see it for a few reasons. One, just to touch on your initial point, Amy, what's the Chinese disposition on this? I think their mantra right now is don't interrupt your enemy while they're making a mistake. They see that the United States has caused a whole lot of problems in Iran. They realize that neither door one nor door two is attractive to the U.S. And this is bogging down the United States and Iran. I mean, the costs of this war just in two months are staggering. Tens and tens of billions of dollars. We don't have an accurate forecast. I think the Pentagon said $25 billion was sort of the baseline, but it's substantially higher than that. Also, when you factor in the damage that's been done to U.S. military facilities and diplomatic facilities, plus sort of our expenditure of munitions. So, look, I don't see the Chinese doing anything to help us get out of this problem that we caused. And then I think when you think about the idea of a coalition, I mean, I would love to see that, right, if you could get some sort of a coalition. But, you know, having just being in close contact with people all around the world. I mean, this whole U.S. message of, you know, we broke it, you own it, just doesn't really resonate, right? I think even countries that are typically sympathetic to the United States and don't like Iran blame the United States for this circumstance We caused a war This is a war of choice Iran retaliated by closing the strait We not going to help you get out of it And even if there were individual leaders in some of these countries who said actually I do want to help Donald Trump where the political support? I mean, you think like Italians or Brits or Germans are going to support their leaders for sending their own people into harm's way to reopen the Strait of Hormuz when the world's most powerful navy, the U.S. Navy, won't even go through the strait because our sophisticated naval platforms are completely in harm's way of these $20,000 drones? So I don't know if you heard on the show the last time we talked about Iran. We had on Amos Hochstein, who I think was a colleague of yours in the Obama administration for a while. And essentially, he was talking on rather similar lines as you about Iran kind of permanently having this kind of control of the strait, the right of veto over who passes through the strait. And his suggested solution essentially was that all the infrastructure that is currently oriented to export oil and gas, other crucial materials out through the Strait of Hormuz, is going to have to be rebuilt so that you don't need to use the Strait anymore. And so you would have more pipelines across Saudi Arabia, maybe pipelines across Jordan to the Mediterranean, maybe more pipelines across to Gulf of Oman through the UAE, increasing the capacity on that pipeline that exists already. in other words a massive multi-billion multi-tens of billion possibly multi-hundreds of billions of dollars of investment being needed just to make sure that the world in general will never be reliant on the Strait of Hormuz again and he framed it as saying again to this point about this being an international global interest actually maybe if the world doesn't support military action together. If there isn't a military coalition, there might at least be a kind of an investment, an economic coalition that could be put together to help finance all this infrastructure investment. Do you see that as plausible? Is that a possible solution? I admire Amos's creativity. And I think that it is at least somewhat plausible. I think it's probably the best solution for the Gulf countries like Saudi Arabia or the UAE, because again, absent regime change. They're living in a world in which Iran can do this again, kind of whenever they want. I think the challenge is that it's going to take a lot of time, right? It's not like these pipelines and this new infrastructure is going to be built overnight. And so let's say even in an optimistic scenario, it takes five years, right? I mean, what's going to change in those five years, right? Are we going to see countries substantially start relying on Chinese electric vehicles and start relying on renewables, right? I just don't think the timescale works out as well as probably some of the Gulf countries hope. And then one other point too, is that in order to build all this infrastructure, what are you going to need? You're going to need steel, you're going to need all manner of commodities that are going to come in through the Strait of Hormuz, right? So theoretically, even Iran has a veto power over building this infrastructure, at least building it in the most expeditious way possible. So I do think it's a good bet that you're going to see a lot more efforts to divert oil away from the strait. And I'm sure that that will come online in the five to 10 year period. I just don't know if it's soon enough to make a huge difference. You know, I also think that it brings us, well, two things there, Eddie and guys. I think one is that we're seeing a little bit of this already. Obviously, just to give some reference, you know, you have Yambu, which is the terminus of the East-West pipeline across Saudi Arabia. Before the war, we were about 735,000 barrels per day. that terminal is handling right now, the month of April, sorry, the month of May, we're about four and a half million barrels. So about two and a half VLCCs a day difference, most of that going south and then going out to the east, be it India or further east. I think the other thing, and we're starting to see this in the commodity side, you talk about demand destruction, we can talk about demand destruction for a specific commodity. So potentially there could be demand destruction for LNG, but that's going to be replaced by coal or potentially by other renewables. And that's what we're going to see. We're starting to see a little bit of that already, especially with coal, where in the Far East they're looking to replace, I think, Taiwan looking to restart one of their big generating plants and so on. So I think it's going to be – to Amos' point, OK, we're going to do all these things. And to your point, Eddie, it'll take time. I think what countries are going to come back to is something that we've heard in the past as far back as Jimmy Carter. And that is energy independence. Right. Whether that is reducing demand. And, you know, I always opine on this. You know, Jimmy Carter basically said and he lost the election for and part of the reason because he said put a sweater on. Imagine if we would all worn a sweater in 1978 when I was a certain age. I think about that, right? And that's where the long-term thinking of the Iranians outlives some of the short-term political thinking that our leaders have to go through in order to stay and maintain being elected or at least a party in power. So from a shipping point of view, I think we're already starting to see these reroutings, as well as in the hydrocarbon side of things. You know, places like – talking about good timing, places like West Coast Canada has come online and feeding the Far East. And they're just continually banging stuff that way. So I think it's a timing issue. Countries have already been thinking about it. But what I kind of see from where the rubber hits the road, so to speak, although there is no road and there's no saying that sounds cool with shipping because it just wouldn't make the same sense where the hole meets the water. That's like boring. No, disagree. I think that does sound rather cool. I like that. Yeah, well, where the keel hits the water. You know, we're starting to see those sort of trades and we're starting to see people do energy independence to avoid choke points. That's why coal can move. Where coal leaves Brazil, Australia, and to a lesser extent the United States, there's not a choke point unless you're going to have Maryland and Virginia start to decide to have a toll at the end of the Chesapeake Bay. It could happen, but I don't think so. So that's kind of where the shipping lives in this because we're starting to see this reality with one last point. Shipping is built on efficiency. And right now ships are inefficient in the sense they're not doing the optimal route. And that, to Eddie's point, where you're saying we'll just live with the toll, we'll just live with not getting the crude out of the UAE or the AG. We'll just live with it coming out of Brazil or Nigeria. It's longer. It's not the perfect grade, but we'll live with it. And I think you'll see some of that play out as well. Well, you know, the lesson of the 1970s is that, you know, people drilled and the oil appeared in different places. Right. And the other lesson of the 1970s is that people started to use different fuels for different purposes in the United States. Natural gas moved into power in a big way into petrochemicals. So, but the thing I would add to that is that with AI, you know, one of the things that AI really enables is energy efficiency. Whether that's we had a show with Uber, whether that's routing people's transportation, whether that's building systems, which would be another great show to have, you know, reducing the need for fuel. I mean, there's all kinds of things that can be done more easily now with the digital world than when you could do it in the 70s. But unless all of this AI infrastructure uses all the energy that's needed elsewhere. So I see that being a little bit of a double-edged sword. I don't know. Maybe I'm contrarian. Yeah, that is a great point. And then I did just want to come back to this question about the dollar, Eddie, because I do think that's critical. It plays a big role in your book. A very important feature of the international trading system as it exists today is that the dollar plays a critical role. Could you just very briefly just explain what that role is and why it matters? Because I think, again, in terms of the global influence of the U.S., it's very important, right? So it's sort of commonplace to call the dollar the global reserve currency. And that's true, right? I mean, even today, central banks around the world hold roughly 60% of their hard currency reserves in dollars. But I actually think that short changes what the dollar's role in the global economy is. The dollar is the dominant currency across all use cases of money. It's the dominant store of value. It's the place where you invest your money if you have it. It's the dominant unit of account. If you're pricing a commodity or product, generally speaking, you're pricing it in dollars. and it's critically the dominant medium of exchange. If you're making a cross-border payment, most of the time you're doing so in dollars. I think Amy earlier invoked this statistic about foreign exchange transactions. The foreign exchange market's a bit wonky. You don't think about it. $7 trillion in turnover every single day. It is by far the world's biggest financial market because it captures all of this activity, cross-border payments, investment across borders. It captures it all. And 90% of those transactions are in dollars. What that has given the United States is the ability to impose significant economic pressure on any other country without blockading their ports, right? When I was involved in the Iran sanctions in the early 2010s, we didn't have a blockade of Iran, right? We weren't interdicting their oil tankers. We literally just went to refineries in China and India and Turkey and their banks as well, places like Dubai, Hong Kong, Singapore, and said, if you continue buying Iranian oil at the same volumes that you're doing today, we're going to cut you off from the US dollar. And that was enough. This is why we are able to have this nonviolent form of economic warfare. But China has witnessed that, and they've done everything in their power to try to erode America's leverage, particularly when it comes to payments, because China is the world's biggest exporter. They're the number one trading partner of two thirds of the world. And you would think that given their systemic significance in trade, that they could say, well, at least pay us in our own currency. They've made some progress. They've gone from settling about 15% of their own trade in RMB about five or 10 years ago to settling 30% today. So they've doubled it, but still 30%, 70% reliance effectively on the dollar. Eddie, just to re-explain for people who might be in clean energy or some other system, but they don't actually track the dollar as economists, basically what you're saying is that you could be an African country doing trading with a European country or an Asian country or a Latin America country, and the way you settle your accounts, I'm giving you goods and you're giving me back a currency, is we all use the dollar as the barometer. In the old days, we used to use gold as the barometer. So now we use the dollar as the barometer. And so I do think it's hard in trade, even when you're trading with the China. You know, sometimes the Chinese are taking payment in kind. In Iran, for example, they're taking the oil as payment in part for services provided, including Chinese oil workers in the oil fields, which I note have not been evacuated like they were in Libya. You know, I think that's really the interesting piece of the puzzle, which is it's a pretty big undertaking to try to think of a different way to do your settlements. And is that cryptocurrency? Is that something which is really going to make a difference? I know that, for instance, when the IRGC has been asking for payment for ships to go through the strait, they've been saying they want to get paid in crypto. and then there have been crypto scammers out there kind of pretending and saying, if you want to get your ship through, sending emails to ship owners saying, if you want to get your ship through, pay us. And I think a couple of people at least have been caught that way. But is that going to be the thing which is then going to sort of take away that role for the dollar? Yeah, look, I expect China to continue making progress, chipping away at the dollar's dominance as a medium of exchange. And what that means is, It doesn't mean that the RMB is going to replace the dollar as the world's dominant currency. But it does mean that at least when it comes to economic pressure, that China would have a degree of insulation, right? So that if they were to, say, try to invade Taiwan, they would feel a little bit more comfortable that they would still be able to get paid for their exports. Ed, to your point on digital currencies, digital currencies are clearly part of the strategy for all the countries around the world that worry about the U.S. control over the most important choke point of the global economy, which frankly is not the Strait of Hormuz, it's the U.S. dollar. And digital currencies can, to a certain extent, evade U.S. reach. It's why China has launched their own central bank digital currency. But if you actually look at the digital currencies right now that are used primarily for cross-border payments, they tend to be these stablecoins. They're digital currencies that are pegged to a fiat currency. And 99% of all stablecoins are pegged to the dollar, which means that even if you're, say, Tether, which is the world's biggest stablecoin, it's based in El Salvador, they're not a U.S. company, they are now one of the top 10 biggest buyers of U.S. treasuries because they have to peg, they have to back all of those stable coins with liquid U.S. assets. And so I actually got a bit of a laugh when I heard that the Iranians might be asking for tolls in U.S. dollar peg stable coins because I thought, well, maybe they think that this is making them immune to U.S. sanctions, or maybe this means that we're undermining the petrodollar, when in reality, they're actually just entrenching US dominance of the financial system. You know what, they're trading one kind of dollar for another kind of dollar, basically. That's right. Yeah, that is really fascinating. That whole question about, and then is there a petrodollar? And what does a petrodollar mean? What is the future of a petrodollar? It's all really interesting things to discuss. A lot more to be said, but we're not going to be able to say it now. And clearly, we're going to have to come back to this situation, I'm sure, many times in the future. For now, though, we're going to leave it. Many thanks, Amy. Thank you, Ed, for a great, great, great conversation. Many thanks, Chris. Thank you once again, Ed, for having me on. Appreciate it. It was enlightening. Pleasure, as always. Looking forward to talking to both of you again soon. Also, I should say, check out Chris's podcast. If you've enjoyed this one, check out Chris's podcast, The Last Dinosaur, wherever you get your podcasts, as I say, like and subscribe. And many thanks to you, Eddie. As I was saying earlier, if you're interested in these issues, please do go ahead and check out Eddie's book, Choke Points. It's really great. As I say, just fantastic background explaining how we got to where we are today. Thanks to our producers, Molly Mowen, Stuart Duffy and Toby Biggins-Gilchrist. And above all, as ever, many thanks to all of you for listening. We really value your feedback. Please do keep that coming. And we'll be back very soon with all the latest news and views on the future of energy. Until then, goodbye.