What Happens if 20 Percent of the World’s Oil Disappears? |
What Happens if 20 Percent of the World’s Oil Disappears?
Produced by Annie Galvin and Jack McCordick
How Bad Could the Iran Oil Crisis Get?
This is an edited transcript of “The Ezra Klein Show.” You can listen to the episode wherever you get your podcasts.
If you want to see just how bad this energy crisis can become, just read what President Trump and Iran are saying to each other.
On Saturday night, Trump posted a missive to Truth Social: “If Iran doesn’t FULLY OPEN, WITHOUT THREAT, the Strait of Hormuz, within 48 HOURS from this exact point in time, the United States of America will hit and obliterate their various POWER PLANTS, STARTING WITH THE BIGGEST ONE FIRST!”
Trump’s post was a brutal threat meant to make Iran back down. But it did the opposite.
In response, Mohammad Bagher Ghalibaf, the speaker of the Iranian Parliament posted: “Immediately after the power plants and infrastructure in our country are targeted, the critical infrastructure, energy infrastructure and oil facilities throughout the region will be considered legitimate targets and will be destroyed in an irreversible manner, and the price of oil will remain high for a long time.”
I’m recording this on the morning of Monday, March 23. As I woke up today, oil prices had fallen a bit because Trump had extended his 48-hour deadline by five days, citing positive talks with the Iranians. Iran is denying that any such talks have occurred. They say Trump is backing down out of fear.
Iran has already hit energy infrastructure in the region, so their threat is credible. But I don’t pretend to know the truth here. The news and the prices of oil and gas are changing by the hour.
But here’s a key fact that has not yet changed: The Strait of Hormuz remains mostly closed. If it stays closed and, even more, if the war expands — if Iran destroys more energy infrastructure throughout the region and the U.S. and Israel destroy it inside Iran — we are going to enter the kind of energy crisis we have not seen since the 1970s, or maybe even something much worse.
Jason Bordoff is the founding director of the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs and a co-founding dean of the Columbia Climate School. He served as a special assistant to President Obama and senior director for energy and climate change on the National Security Council.
I asked him on the show to walk us through what all this might mean for Iran, for America, for global energy prices and security — and also for America’s geopolitical competition with Russia and China, since both countries seem like they might come out a lot stronger from this.
Ezra Klein: Jason Bordoff, welcome to the show.
Jason Bordoff: Thanks so much for having me. It’s really great to be here.
Last week you and Spencer Dale wrote: “The scale of the current shock is extraordinary. The supply outage is the largest ever recorded, far exceeding prior disruptions not only in absolute terms but even as a share of global demand.”
The Strait of Hormuz moves about 20 million barrels of oil a day in a hundred-million-barrel-a-day market — so about 20 percent. And about 20 percent of the world’s liquefied natural gas supply, as well. And it’s mostly closed.
It’s the most critical global maritime choke point for the energy sector, and for lots of other things, too — petrochemicals and aluminum and fertilizer, which has implications on food production and food prices. But for oil and gas, it’s the most important choke point.
The Gulf — the Middle East — we all know, since the 1970s, is a huge energy producer: Iraq, Saudi Arabia, the United Arab Emirates, Iran, of course.
All of that oil, most of it, flows by tanker through this very narrow strait that juts like a little triangle around a corner, and it’s right where Iran is. So it doesn’t take that much with some drones or explosives in a dinghy boat racing out to a tanker.
You had something like a hundred tankers a day moving through before this conflict. You just have to take a few out for insurance to be canceled and for ships to just say: We’re not going to take the risk.
There are some workarounds. Saudi Arabia has been able to move some oil by pipeline. Iranian oil, ironically, is still flowing through. We’ve tapped strategic reserves. We’ve eased sanctions on Russia and Iran — we can talk about whether that makes sense.
But you’re talking about a disruption of about 10 million barrels of oil, maybe a little bit more — so more than 10 percent of global supply. During the Arab oil embargo in 1973, in contrast, you saw about 6 or 7 percent of world supply disrupted. So this is by far the largest energy supply disruption we have ever seen.
What has Iran actually done to close the strait?
The story of this conflict so far has been that the tankers, mostly as a precaution, are just staying in place. We have seen facilities in the region shut down production as a precaution.
We’re still not yet at the point where most energy infrastructure in the region has been physically attacked or damaged. We’re starting to be at risk of seeing that. Israel attacked a natural gas field in Iran last week. Iran retaliated by hitting a very important energy installation in Qatar.
It was to send a signal. It’s tit-for-tat escalation. This is mutually assured destruction: If you come after me, I can hit you hard, and you’ll hurt me, but I’ll hurt you in the process. So people have mostly been holding back from that.
And that’s important because if this conflict is somehow resolved and comes to an end and the strait is reopened, it might take a few weeks, maybe even a month or two, for some of that to come back online and for the energy to start flowing again.
But if we start to see those attacks where we really have physical damage — the Qataris are already saying it will take three to five years to repair the damage that was done to their facility last week. If you do that to many other facilities in the region, the consequences of this crisis are going to last much, much longer.
I want to hold on that attack on the Qatari liquefied natural gas plant, because at the beginning of this fight, when people would think about Iran and Israel and the United States, they would think about Iran maybe firing missiles at Israel. That would be how they would fight back.
But Iran has turned this conflict very asymmetric, and they seem to understand the vulnerability of Israel, and particularly the United States, as coming through the vulnerability of energy infrastructure and other kinds of infrastructure in other Gulf states.
So what kinds of attacks have they been launching? And what is both the threat that has already emerged to energy supplies — but also the implied threat that could emerge to energy supplies?
The point about the asymmetric nature of this is really quite striking. Of course, you have very powerful militaries like the United States, and even Israel, dropping enormous amounts of munitions on Iran. Iran has its own military, but it’s a much weaker power.
But again, it doesn’t take that much to throw the entire global energy market into chaos, and that’s what they’re doing. They’re not just hitting neighbors, although the neighbors — Iraq and some other countries — are being harmed.
If you run out of places to store the daily production of oil that you have and you can’t get it into the market and put it on a ship to sell it somewhere, you have to shut down production. You just have to stop producing.
We’ve seen about seven, eight, nine million barrels of oil a day, globally, just shut in, where people say: We’re going to stop producing.
So that hurts those countries. But we are in a global oil market. If there’s a disruption halfway around the world, you take one, two, 10 million barrels off, the global price of oil goes up.
And as we are seeing in the United States, for everyone listening who goes to fill up at the pump, the price at the pump is set by the global price of oil — even though the United States is now a huge net exporter and the largest producer in the world.
So the pain Iran is inflicting is global in scope because they can affect the global energy market. That’s true for natural gas, as well, which particularly hurts Europe and Asia, because that’s where those supplies go.
It is not a new question for the United States military to think about what would happen if we ended up in a war with Iran. And in every war gaming of that question I am aware of — and there have been many more that I’m not aware of — the closing of the Strait of Hormuz is an immediate possibility.
We seem to have been caught flatfooted by it. Why?
Well, I can’t speak to what kind of planning went on, obviously, in the Trump administration before this started. But you do have a sense that they thought this would be over much more quickly.
Other recent conflicts have been. We woke up on a Saturday morning and found out we had removed the leader of Venezuela, and that seemed to be over a few days later. There was conflict in the Middle East last year, the war between Israel and Iran, and it was only 12 days.
So there may have been excessive optimism that things would change in Iran quite quickly, whatever the objective of this action is — regime change or something else.
The other thing that I think you want to do in a situation like you’re describing — because you’re right, closing the Strait of Hormuz is the mother of all nightmare scenarios for global energy markets, not to mention for other military and defense considerations. So you want to pursue an effort with allies and in cooperation with other countries. And obviously, other countries did not know this was coming.
To the extent that the president of the United States is now taking to social media to ask both adversaries and allies alike to send their warships to the region to help reopen the strait, because they need that oil just as much as we do.
And most countries are saying: No thanks. This is not a problem of our making.
What makes it hard for the U.S. to reopen the strait by itself?
Well, those are probably questions for military experts. But like I said a moment ago, it doesn’t take a lot to create a risk perception.
You just have to hit one every couple of days or every week or two to create a fear about going through the strait. There are so many tankers. It’s not that hard with drone technology, with small boats that can race out to a tanker.
You could probably protect a couple of warships or a couple of vessels that need to transit. But if you’re talking about dozens or even a hundred or so tankers a day, it’s just hard to protect all of them from any risk.
So insurance has been canceled for a lot of these tankers. They’re not going to go through unless they’re insured, and they’re not willing to put these huge cargoes at risk.
Tell me about how the deprivation of this oil and natural gas compounds as it goes on.
Something I am seeing a lot of discussion about from energy analysts is how, if it’s another week, well, maybe that’s higher prices but not a huge deal. But there seems to be a sense that, as it compounds, the effects on the global economy are nonlinear. The economy is working through the reserves it currently has, but things can spiral into a very different kind of situation.
You understand the way energy flows through the economy in a way I don’t, so talk me through that compounding and how this might change if it goes on for another two weeks, another month, another two months.
It’s a good question. I think the impact of higher prices on the economy is nonlinear, and the impact of conflict and supply disruption on oil prices is nonlinear.
As I said a moment ago, this is the mother of all nightmare scenarios — closing the strait. If someone had said: We’re going to close a strait with 20 million barrels a day to most of its supply — you’d be talking about $150, $200 a barrel.
It’s striking that oil prices are just a bit over $100, which historically is not an excessively high price. It’s high, but it’s not crazy high.
I think there are a couple of reasons for that. One is a general market perception that this was going to result in Trump pulling back, declaring mission accomplished, as we saw with Greenland or with “Liberation Day” tariffs: We did not have the staying power, so we’d figure out how to get out of this pretty soon.
I think if this goes on, we haven’t seen anything yet in terms of how high energy prices are going to go.
Right now, the price of oil that you’re reading about in the newspaper is one that’s set by traders every day based on market expectations. At a certain point, physical reality has to catch up, and prices need to rise high enough to destroy 10 million barrels a day of global demand. We don’t exactly know what that price is, but it’s really high, a lot higher than the price is today.
You’re starting to see little signs of that, where the price of jet fuel, the price of heating oil, are much higher than would be suggested by a benchmark price of $100 a barrel.
People might have heard that President Trump said the U.S. is a winner when oil prices go higher because we’re the world’s biggest oil producer now.
Is that true? Is this good for us?
It’s true, and it’s not. It is the case that the U.S. is the largest oil producer in the world. And it is noticeable that when oil prices spike, Putin celebrates, but the United States does not, even though we produce more oil than Russia does. The reason, of course, is because we’re a superlarge consumer, as well.
So I’ve often heard the secretary of energy say that high oil prices might be good for oil producers, but they’re not good for consumers. And this administration cares about the 99 percent who consume oil and gas, not the 1 percent who produce it.
An oil price spike of this magnitude means a lot more money for producers, but consumers pay more at the pump.
And what’s different about the impact on the U.S. today is that an oil price shock is more of a distributional issue — meaning it’s affecting people who consume. It probably has a smaller impact on the macroeconomy on gross domestic product than it did before. That increased consumer spending is flowing to domestic producers and their shareholders, and they’re spending some of that money in our economy, too. It’s not flowing overseas the way that it used to.
Which means that the issue is that if you’re working class in the U.S., and you’re filling up your car at the gas station, you’re paying a lot of money. Whereas there are people who either own or are invested in U.S. energy companies who are making a lot of money.
Well, U.S. producers are making a lot of money, and we should remember some of those are global, too, and they own assets. But yes, U.S. companies, their shareholders, their workers, oil-producing states — of course, they all benefit from high prices.
I want to hold for a minute on the price here, because there is a disconnect between the price and the conversation I’m seeing among energy and military analysts that I don’t entirely understand.
As you mentioned, the price of a barrel of oil, or at least in the measure we tend to use, is a bit over $100 at the moment we’re speaking.
But if you just looked at the chart, and you had no narrative, you would not predict the conversation we are currently having, which is a once-in-a-generation geopolitical crisis that has created the nightmare scenario for global energy supply — the closing of the most important choke point for global energy supply. There are people like you who are saying the scale of the current shock is extraordinary.
Something seems off here.........