When the United States and Israel started their attacks on Iran in February, the public narrative was largely about security. The global narrative is now about energy. With oil and gas prices soaring, countries are facing shortages and blackouts. Tehran’s leadership knows this and is holding the global economy hostage as a negotiating tool in discussions with the United States.

Over the past few decades, there was a growing belief that the connectivity of energy markets, an abundance of supply, and the growth of renewables would mean that countries would no longer try to use energy as a foreign-policy cudgel. Assuming so would be a mistake, argues Meghan O’Sullivan, a Harvard University professor and the author of Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power.

When the United States and Israel started their attacks on Iran in February, the public narrative was largely about security. The global narrative is now about energy. With oil and gas prices soaring, countries are facing shortages and blackouts. Tehran’s leadership knows this and is holding the global economy hostage as a negotiating tool in discussions with the United States.

Over the past few decades, there was a growing belief that the connectivity of energy markets, an abundance of supply, and the growth of renewables would mean that countries would no longer try to use energy as a foreign-policy cudgel. Assuming so would be a mistake, argues Meghan O’Sullivan, a Harvard University professor and the author of Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power.

I spoke with O’Sullivan on the latest episode of FP Live and explored why energy is back as a weapon and how countries should try to navigate this moment. Subscribers can watch the full discussion on the video box atop this page. The transcript that follows here is a lightly edited excerpt of our conversation.

Ravi Agrawal: Oil prices have jumped some 80 percent year to date. Jet fuel has doubled. There are blackouts in Asia, fuel rationing in Europe and elsewhere. All of this is because the Strait of Hormuz is responsible for carrying a fifth of all global crude and of natural gas. How does this current moment compare to previous energy shocks?

Meghan O’Sullivan: The obvious energy shocks to compare it to are the shocks of the 1970s. First, the 1973 oil embargo, when Arab members of OPEC declined to export their oil to the United States and other supporters of Israel in the 1973 Arab-Israeli War. Then there was the oil shock after the Iranian Revolution later that decade.

If we look at 1973, both the percentage and the physical number of barrels that were taken off the market is considerably less than is happening today. This is the biggest supply disruption that we’ve ever seen. We’re talking about 10 million barrels of oil a day that essentially are not on the market that would be on the market normally, as well as about 20 percent of the world’s liquefied natural gas (LNG) capacity.

This is a bigger supply disruption than in 1973. However, the market has not responded. The prices have gone up considerably, as you noted, but you might think that the price would double or triple or quadruple as it did in the 1970s. There are a number of reasons for that. The biggest reason is that up until now—and I expect this to change in the coming week or two—the market has really not priced in the geopolitical risk we’re facing. It has been very attentive to President [Donald] Trump’s claims that we are almost done, that the war is nearing an end, that the mission is largely accomplished. The idea that this level of disruption could go on for more weeks or even months has not really been internalized by the market.

There are other good reasons,........

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