Schrödinger's Strait and the New Energy Order | Daniel Yergin

0:00Demetri Kofinas:What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Daniel Yergin, a Pulitzer Prize-winning author and leading authority on energy, geopolitics, and the global economy, who also serves as vice chairman of S &P Global and has previously taught at Harvard Business School and the Kennedy School of Government. Dan and I recorded this conversation on Monday, June 29th amidst ongoing talks between the United States and Iran to reopen the Strait of Hormuz and restore commercial shipping through the world's most important energy choke point.

0:47Demetri Kofinas:Despite those disruptions, the straits closure has proven far less catastrophic than many oil analysts and decades of nightmarish scenario planning had predicted. The question then is why? Why, in the case of both the ongoing war with Iran and the Ukraine war, have disruptions to energy markets proved far more manageable than many expected? And what does their resilience and that of the global economy tell us about the changing nature of global supply chains, energy diversification, inventory management, and the roles of the United States and China as the world's largest swing producers and consumers of energy.

1:23Demetri Kofinas:From there, we examine how this crisis has served as a catalyst for a series of ongoing transformations to the global order and regional geopolitics, beginning with China and the lessons it continues to draw from this conflict and from America's entanglements in the Middle East. Iran's bid to turn the Strait of Hormuz into its own private waterway, the recalibration of Gulf security as American commitments to and interests in the region grow less certain, and the shifting alignments among the Gulf states, Iran, China, and the United States that will define the regional balance of power in the years ahead.

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2:36Demetri Kofinas:And I, or someone from our team, will get right back to you. And with that, Please enjoy this incredibly timely and informative conversation with my guest, Daniel Yergin.

2:52Demetri Kofinas:Daniel Yergin, welcome to Hidden Forces. Glad to be with you today. Thanks. It's my pleasure having you on. I must have reached out to you years ago. I'm sure I did. I've wanted to have you on the podcast for a long time and fortunate circumstances have made that possible today. And it's actually a timely opportunity because we're going through another war with another series of energy disruptions that also feel like they haven't shown up. It hasn't been as severe. The impact to the global energy system doesn't appear, at least on the surface, to be as severe as some of the more dire forecasts had anticipated.

3:27Demetri Kofinas:And in that sense, it reminds me of the Ukraine war. There were a lot of dire predictions and the global economy is more resilient and supply chains adjusted faster than I think people anticipated. I want to ask you about that and I have another series of questions to ask as well. But before we do, just for those who aren't familiar with you, you're famous for having written The Prize, you've written The Quest, you've written The New Map. You're one of the most recognized commentators and writers on oil and energy markets. But just give us a little bit of a background on who you are. Oh, as you say, it starts with the books and I've certainly didn't set out to do this, but I've ended up being a chronicler of world energy and how it changes and the interaction between energy and geopolitics, the two seem inseparable.

4:11I started off as an academic. I did a PhD at Cambridge University. I taught for a little while at the Harvard Business School and the Harvard Kennedy School, and then started a company really with one other person. And that company is now merged and merged and merged and merged. And now I'm vice chairman of S &P Global, which is, people know it as the S &P because they follow that every day, but it's a 42 ,000 person company that covers a range, including a big part of what it does focuses on the energy sector. So I've been able to combine this kind of writing books that are accessible, but really bring the picture together at the same time while being also active continually around the world in the energy sector.

4:58Demetri Kofinas:And you started your most recent business at the same time that you published the prize, if I'm not mistaken, correct? Well, no, it was even more loony than that. I started the business the same year. I signed a contract to do the prize. So I was really working kind of all the time. The way I would relax at night would be by working on the book or weekends. And of course, I signed a contract to do the book in two years, but I was a little late. It took seven years. Did you find that that helped you, that doing those two things together was a net benefit? Yes. I think it did because it helped me understand that not to make the mistake of looking at events and thinking that you know the outcome and so therefore it's logical what happened and not recognizing the contingency.

5:45And of course, business decision makers never have enough time. And government decision makers, they don't have all the information and they don't know how things will come out. And I think I captured one of the things that I think has made the prize so enduring. I captured that sense of that it's not foreordained what happens. And there's a lot of contingency in the world and surprises come again and again. So I think I did gain from it. It made it a harder task doing two things at the same time. But I think the book, the prize and the subsequent books are richer because I understand what it's like to be inside and watching where things are happening.

6:27Demetri Kofinas:I love that point. I just recorded an episode with Yale political scientist Ian Shapiro to discuss his book After the Fall. And that was one of his points that although we, well, he didn't say this, but I'll go ahead and say it. We have a tendency, and this is certainly true with the fall of the Soviet Union, to come up with all sorts of explanations post facto for why XYZ was inevitable. And yet, at the time, things were often a great surprise and individual human beings who had agency in those moments played a bigger role than I think we really are prepared to admit or acknowledge, I think. I think that's right.

7:03I mean, there are the larger forces, but I was thinking about it. We're now at the age of what I call easy globalization is over. And you have somebody who's probably the next prime minister of Britain talking about nationalizing British steel, to take an example. And of course, the book I did, Commanding Heights, was about how things went in just the opposite direction. The greater confidence that people had in markets and that state-owned companies often tend to be very inefficient and a drain on budgets. but I was thinking about that. If there hadn't been the conjunction of Ronald Reagan and Margaret Thatcher, they really kind of opened up an era.

7:44So there were forces at work, which was economies were becoming more integrated, technology was changing and so forth, but personalities really made a difference and people making decisions and following through on them. Or if I may say that, unexpected things happening and then they have to cope with it.

8:02Demetri Kofinas:I failed to mention The Commanding Heights. I haven't read the book, but I did watch the documentary in 2002, if I'm not mistaken. I think that was the year I watched it, or 2003. Amazing documentary describing a very different time in the world. Yeah. It's still, if you watch it, it's still, I think people said, oh, you can't make a TV series about economics, but we did and we captured the drama of it. And again, the contingency of it. And I think we see it again today. One of the things at the end of the book said, that this frontier between state and market is never fixed. It's always shifting.

8:35And we sure see that happening today.

8:37Demetri Kofinas:I should mention the date that we're recording this. It is Monday, June 29th, because things were in the midst of a war. Even though we keep being told that we're all also on the verge of peace, it's kind of like I've heard it described as Schroediger's Strait, the Strait of Hormuz, because you don't know whether it's open until you actually pass through it. So those are some questions I have for you in terms of where are we exactly in this entire affair. But the question I started the interview with was, why haven't things been as bad as people expected. Well, so let me compare Ukraine, Russia's brutal invasion of Ukraine, and people thought, well, that was going to be disruptive.

9:17But what it really did was what you said, is really the supply chains were reconfigured. So we had a global oil market on February 23rd, 2022. The US was importing 600 ,000 barrels a day of oil from Russia. That ended and we now have a partitioned world oil market and a confusing world oil market. Here, for decades, the nightmare scenario when people did scenarios about that region was a closing of the Strait of Hormuz. It is, to be clear, the most important maritime choke point in the world. Over 20 % of world oil, 20 % of liquefied natural gas passed through it. We learned, by the way, that a lot of other things too, like a third of the world's traded fertilizer, aluminum, helium, which you need for making semiconductors, you need it for chips.

10:13So it's a region very integrated in the world economy. And then your question is a very good one. Why was it not a nightmare? Obviously, it was partly where the impact was because in economic terms, the Strait of Hormuz pointed to Asia because 80 % of the oil, 90 % of the gas went there. So Asia really did get hit much harder than Europe and much, much harder than the United States, where it's mainly about gasoline prices. The reason is, it turned out there were pipelines. The Saudis had built pipelines because of a previous war called the Iran-Iraq war and a tanker war. So you could get some of the oil out that way.

10:51The second thing, the big change is the position of the United States, which went from bringing the world's largest importer to the world's largest producer of oil and gas and was able to export jet fuel and gasoline to make up for what was not coming from the Gulf. There's a thing called the International Energy Agency, and it coordinated releases from kind of like what are called strategic stocks. The US has something called the Strategic Petroleum Reserve. That helped. And then there was demand went down. You know, in some of the Asian countries, they actually rationed gasoline because they were running out.

11:25But I think the big thing that people didn't see coming was China, because China has built up enormous reserves of oil. And China is the world's largest oil importer. Largest oil importer, they managed to cut their oil imports very substantially. So we never saw the kind of$200 barrel oil that people thought would happen. But we still have, we're not going to go back to what things were before this crisis.

11:53Demetri Kofinas:So there's been a prevailing view among strategists that the United States, in the event of a conflict with China, would be able to exercise asymmetric leverage over key strategic choke points. Now, the Strait of Malacca is obviously the most important for China specifically, but the Strait of Hormuz is up there. It's number two or number three, depending on whether you want to count Taiwan. Given the resiliency of the Chinese economy in the face of this most recent crisis. Do US strategic planners need to rethink some of their priors about just how much leverage they could exercise through the use of the US Navy to blockade such choke points?

12:34Demetri Kofinas:Or is comparing the Strait of Malacca to the Strait of Hormuz really comparing apples to oranges? Well, I think China, in the new map, in the paperback, I have an appendix called the Four Ghosts Who Haunt the South China Sea. And I think that's a very important essay actually, because the Chinese basically have set out to claim the South China Sea not as an international waterway, but as their own territorial waters. And they've built a number of islands and they've fortified the islands because they're very conscious that during World War II, the US, particularly starting in 1944, US submarines sank the tankers that were carrying oil to Japan.

13:18And as a Japanese admiral said during the war, we were going to become scarecrows because we're not able to get oil. And so I think the Chinese know that. And so that's why they've focused. And they did talk about things to talk about the Malacca dilemma about dependence. So they have expanded their military footprint. And the US, Australia, the other countries in the region, the British, et cetera, et cetera. The Japanese, none of them recognize the Chinese claim of sovereignty over the South China Sea, but the Chinese have backed it up with their military fortifications. The other thing they've done is they've built up incredible storage of oil, far larger than anybody else has.

14:00And there's been this question, why do they have such large storage of oil? And why do they have such large storage of so many other things? And maybe it does have to do with potential conflict. But I think in terms of warfare, a lot of what's happening now is really rethinking, partly because of the experience first of the Ukraine war and now the Gulf, that it's a different world in terms of technology, in terms of drones and AI. And I think that's what military planners, I think, are struggling with right now.

14:32Demetri Kofinas:So in the new map, you covered alternative forms of energy storage and transmission. How important were those in buffering the effects of this crisis, in particular for China, where most of those investments have been made? Well, I think the storage was very important. I think that's what enabled them to draw on their inventories, their storage, rather than importing oil. They also told their refineries, which exported, would get Middle East oil, process it and export it as jet fuel and other things. They told them to stop doing that for a time. So I think that's important. Clearly, China is also the leader in terms of deploying renewable energy.

15:13I mean, what is it produces? About 90 % of the solar panels in the world. It has a dominant role in batteries and of course, a dominant role in EVs. And so I think those, particularly on EVs, I think they're a longer term beneficiary. Already, people don't recognize this because in the US, of course, when I last looked at the numbers, about 7 % of new car sales in the United States are EVs. But in the world last year, one out of every four new cars sold was an EV. And most of them were Chinese.

15:47Demetri Kofinas:As far as advertisements go, would you say that this is the best PR that China's electric vehicle manufacturers and more broadly really any Chinese company that benefits from alternative energy production, transmission, and storage could hope for? And is this going to accelerate, do you think, both electrification and Chinese technological adoption in the global South and Asia? Yeah. I hadn't thought about it as an advertisement, but maybe a message. Yeah. I think that this is a boost for that. I think in Southeast Asia, it means they'll look more at renewables. It also means they'll use coal for a longer period of time.

16:27But of course, you need electricity and reliable electricity if you're going to have EVs. But I think China has a very aggressive export campaign now. And it's a strategy. They realized they could never overtake internal combustion engines from Japan, Germany, US, South Korea, but they could leapfrog. And I think to sort of follow from what you said, I think this has really accelerated that leapfrog.

16:55Demetri Kofinas:So let's double back a second here because I want to discuss the memorandum of understanding that was signed a few weeks ago in Switzerland. What is your understanding of the contours of that agreement and how much stock should we be putting into it? Well, I've read it a few times now. I think lawyers would find it very ambiguous in a number of points, even where the commas are, actually. I think the Iranians think that it solidifies their position as the dominant power in the Gulf. And in particular now, they're saying, we're in charge of the Strait of Hormuz, we'll decide who goes through. It's not even clear.

17:34It says they won't charge tolls or fees for a 60-day period. There's a funny comma in there, but I think they made it clear that they intend to, to some degree, turn the Strait of Hormuz into an Iranian canal. And if they don't call them tolls, they might call them environmental fees, navigation fees, insurance. They've set up the Persian Gulf Strait Authority and the Persian Gulf Insurance Company, and they see their control as both political leverage, which absolutely Arab countries in the Gulf completely reject, and they also see it as a money-making deal.

18:12Demetri Kofinas:Does that ambiguity in the MOU benefit one side more than the other in your view? And what is it that the Iranians are gaming at? Because it does seem from all the experts I've spoken with and conversations I've had and things I've read, and understandably by the way, that there's deep cynicism in Iran around the potential for any kind of peace agreement with the United States. And so, it seems that they approached these negotiations with the mindset that we're going to get something up front right now that's going to compensate us for whatever it is we're going to enter into. And we're not really betting on a long-term resolution to this conflict.

18:50Demetri Kofinas:So, how do you think that the Iranians are seeing it from the conversations that you've been having? Well, I think a couple of things. They have pointed out now that twice when the U.S. was negotiating with them, the U.S. also attacked them. And that came up again in the last few days with this upsurge in violence. I think first, they're expert negotiators. And everybody who's dealt with them say one of the things, the negotiation never ends. It's a very important factor to keep in mind. You talk to companies, you talk to governments, they said nobody negotiates in the way they do. And they have a series of objectives to dominate the region.

19:30I saw a comment from one of their mouthpieces saying that security arrangements now will center on Iran. So they want to dominate. And remember, they have the population and they've shown their resilience. From the beginning, this regime, anti-Americanism, death to America, has been central to the whole ideology of the regime. Why would that go away? They're economic actors, but they're also ideological actors. And they're also, we saw, What's the number that often gets cited that they had no compunction killing 40 ,000 people in those protests earlier this year? So I think your term of deep cynicism and strategic objectives are there.

20:19There's certainly, you know, so often, I think it's in the prize. I have a comment. There was an Iran-Iraq war that went on for about eight years in the 1980s. And there's a quote in there. Iraq started the war. They thought it'd be over quickly and the Iranian regime would collapse. And there's a quote in there from an Iraqi official saying, you know, things don't go the way you thought they would. Putin thought the war in Ukraine would be over in five days. People brought their victory uniforms for the triumphant parade. It's now going into its fifth year, longer than World War I. So I don't think when this began, there was a thought this would be over quickly, but it isn't.

21:01Iran has proved to be more resilient and probably had also been preparing for this for some time in terms of decentralizing decision-making so that they could withstand a shock. I'll be going over in the region in a few months. I think it's very key to see how the Arab countries now see the world and how the international community responds to if Iran really does say it's controlling the strait, which President Trump says will not be the case, but what this means for other choke points in the world as well. But I think the two sides interpret that memorandum, which may well be overtaken by events in any event, they interpret it quite differently.

21:51Demetri Kofinas:I'm glad you brought up Ukraine. Do you think that's the best analog for thinking about this conflict and where we end up? I don't think it'll be a... I mean, going back to our initial discussion, contingency, things go in ways you don't think. I don't think it's a five-year war, but is it going to be some sort of gray zone in which there's just less sense of security. And it's really going to be critical over the next few months to see what kind of regime is set in place to manage the strait. Now, things change day to day. We see the Iranians talking to the Omanis. It's a country on the other side of the strait.

22:32And a lot of ships have been trapped in the Gulf. There was like over a thousand have been getting out by hugging the Omani coast. But that's when the Iranians a couple of days ago fired on a ship to basically say, we're in charge here. And everything the Iranians say is that they are in charge. And I think that's going to be a great unresolved question here.

22:57Demetri Kofinas:Speaking of unresolved questions, another question that seems unresolved is, no pun intended, American resolve. The Middle East is no longer as vital to American national interests as it once was. And if the US is receding from its imperial commitments to its allies in Europe and Asia, then really what incentive do the Americans have to continue spending money and risking lives in that part of the world? Something you wrote about magnificently in the new map is that America has gone from being the largest importer of oil and gas in the world to now being its largest exporter. And countries in the Gulf know this, and it gives them cause to question America's commitment to the region and to what lengths they should be prepared to go to reduce their own dependency on American arms sales and military commitments.

23:55Demetri Kofinas:And so my question is, when you take all of this into account, coupled with the resiliency that the Iranian regime has shown and its geopolitical imperatives. It's there to stay. It doesn't have the luxury to pack up its stuff and leave like the US does. How does that change the calculus of regional actors and how will it influence the balance of power and the contours of regional alliance structures and negotiated settlements in the years to come? That's a very important question. I've been trying to wrap my mind around it to think through and you only start to do it in terms of scenarios. But I remember when it became about a decade or so ago, when it became evident that the position of the US was radically changing from the world's largest importer to the largest producer, an energy minister, one of the countries said to me, don't leave us, don't forget us.

24:50And there's always been that because it was the oil that was so, independence on oil, dependence on the global market. It is different today. The US still has this leadership role and the US has an enormous stake with battles over tariffs in a well-functioning global economy. And we have this big naval base in Bahrain, which the Iranians had made a particular point of attacking. We have basis really throughout the region. But I think there's a big rethink coming, and so much will depend upon what the Soviets used to use this phrase, correlation of forces, how these balance out. And I think that some of the thinking has been that Iran is mainly, the regime is mainly economic and interested in economic development.