Why Oil Still Runs the World — ft. Daniel Yergin

0:01Love don't cost a thing, but weddings sure do. I would say every single person I go to and I'm like, so how much over budget are you right now? And I've never heard someone say they were under budget. Matrimony's rising price tag. That's this week on Explain It To Me. Find new episodes Sundays wherever you get your podcasts.

0:30Should the U.S. start bringing troops home from Europe? I worry a lot that this is where we were headed. Trump sort of signaled it a lot during his first term. And in my conversations with European friends, I have been telling them, be ready for this because I do not think we get through four years without the United States reducing its European footprint. I'm Jake Sullivan. And I'm John Feiner. And we're the hosts of The Long Game, a weekly national security podcast. This week, we debate whether the U.S. should draw down its true presence in Europe and we break down the latest developments in the Iran War.

1:02The episode's out now. Search for and follow The Long Game wherever you get your podcasts. Megan Rapinoe here. This week on A Touch More, I'm talking to my good friend, former soccer player and current soccer analyst Lori Lindsay about all things NWSL, the past, the present, and the future. Plus, I'm taking a look at the athletes who crushed at the Met Gala and Angel Reese's firm boundaries with the media. Check out the latest episode of A Touch More wherever you get your podcasts. And on YouTube.

1:36Listen to me. Markets are bigger than us. What you have here is a structural change in the wealth distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. Welcome to Prof G Markets. Scott is off today, but we have a big episode for you nonetheless. We will be talking in this episode about oil, specifically the oil markets, which have now endured more than two months of disruption from the Iran war. Given all of this news, we wanted to take a step back and help make sense of oil's role in the world and what this extended disruption means for our global economy, also for global energy and where everything is going next.

2:17So we decided to bring in someone who has spent decades studying all of these topics, the intersection of energy, geopolitics, global markets. And we spoke with him earlier this week while I was in Florence. He is essentially the man who wrote the Bible on the history of oil. At least that is what a lot of people have said. He is regarded as one of the world's leading experts on oil. His Pulitzer Prize winning book, The Prize, is considered the definitive work on how energy shapes global power. So without further ado, here is our conversation with Daniel Jürgen, vice chairman of S &P Global and author of The New Map, Energy, Climate, and the Clash of Nations.

2:59I would love to start with just a brief history from you on Iran and Iran's place in the world of oil. And then we'll get into what's happened over the past few months. But for those who aren't aware, give us sort of the Iran and oil 101. What is their role in the world of energy? Well, that's a very good question because I've been thinking about the fact that the blockade against the export of Iranian oil demonstrates the degree to which Iran as a country for well over a century has been a country that has been made possible by oil. Iran, like in the 1960s, was competing with Saudi Arabia to be the largest Middle East oil producers, much more oil than it's producing today.

3:48And that oil wealth was channeled by the Shah of Iran into trying to turn Iran into an industrial power. He overplayed his hand, was overthrown, and the Islamic Republic came in. And Iran has continued to produce oil, but often under sanctions. which have limited the amount of oil that it can export. And in the last few years, it's been really exporting oil at a discount to countries like China. So it's not a big player in the way that it historically had been. I still think back to when Iran and Saudi Arabia were almost in a battle to see who could produce more oil. But those days are long past.

4:33what Iran recognizes by shutting the Strait of Hormuz gives it enormous leverage on the world economy and really shutting off a significant supply of oil in which the world depends. So would you say then that Iran's real power isn't necessarily the actual oil, but the fact that they are situated in a place where a lot of oil goes through? In other words, they're sort of the gatekeeper to global oil? Well, there's certainly the gatekeeper. 20 % of world oil normally would go through the Strait of Hormuz. We've also learned, you know, if we had been talking on February 27th and I said to you, oh, the Strait of Hormuz is going to be closed, you would have said, well, that's probably going to affect oil.

5:16You might have said it's going to affect natural gas, but you wouldn't have said it's going to affect petrochemicals, helium, fertilizer, metal exports. because really those Gulf Arab countries have become so integrated into the world economy on a much bigger scale than was anticipated. But right now what Iran is doing is by shutting, trying to change the Strait of Hormuz into an Iranian canal for which you pay tolls, what they are trying to do, what they're doing is, if this continues for another month, will create shortages that will be felt all across the world, will affect air travel, will affect agriculture, will affect the production of semiconductors.

6:00So they have a lot of leverage as long as they control the strait. Is it the case then that the Strait of Hormuz has become more powerful or more important in recent years? I mean, clearly it has been a significant passageway for oil, but you mentioned that if we had discussed this a few months ago before the invasion, if we were talking about petrochemicals. We would not have talked about petrochemicals. We would not have talked about helium. And we would not have talked about fertilizer, which is really a big impact around the world, is being felt in the United States. Does that suggest then that this is a new development, that the Strait of Hormuz has become increasingly more central to global trade, not just in terms of oil, but in terms of many other materials?

6:45Absolutely, because those Arab countries have established themselves as players in many different ways in the world economy, providing essential sources. Right now, there is an LNG project in the United States that is worried as to whether it can go forward because it depends upon steel from Abu Dhabi. Who would have thought that? So I guess the question then becomes, did we know this when we invaded? Or more importantly, did Trump and did the administration know this when they decided to invade? Did they understand that by doing this, you would disrupt not only the global supplies of oil, but also the global supplies of everything else?

7:30You mentioned fertilizer, which was, of course, necessary to grow crops, which is, of course, necessary to put food on shelves and then feed people. I mean, to what extent were we actually aware of how important the Strait of Hormuz actually was? I think in general, there was not that awareness on a global basis about how the world economy had changed. And also, by the way, those countries export one other thing that's very important, and that's money. They have among the largest sovereign wealth funds in the world, so they play a very important role in that regard as well. So I don't think it was on the agenda, and I don't think it was necessarily envisioned that we'd be in the position that we're in today.

8:14When you saw the invasion, when you read the headlines that the U.S. had struck Iran, what did you think and what did you predict would be coming next? I thought Iran is not Venezuela. Venezuela was remarkably successful. You got one guy out and his wife, and it's a whole different game there now. But Iran, you have an IRGC, which is not only a military force, but an ideological movement as well. and that the whole basis of that government has been based on their chant of death to America, the animosity of the U.S. And that they, in a sense, for many years, the U.S. has war-gamed what would happen in the Strait of Hormuz with Iran.

9:01Iran clearly was war-gaming as well and built up very considerable missile capabilities and indeed, I think, was quite, It was a shock when they realized that the Iranians could send a missile 2 ,500 miles, so that they have really built themselves as a resistance state. And for them, this war is existential. Did this strike make sense to you in terms of timing, in terms of reasoning? Well, I didn't think about it one way. In those ways, I thought that in a sense that this war had been brewing for 47 years. is the way I thought. Was it going to take this form? And this, you know, I think that probably the administration, having seen the decimation of the Iranian proxies in the Middle East and so forth, that this seemed timely to do.

9:56And there was that congregation of senior leaders all in one place, a target of opportunity. But I do think of this quote from Winston Churchill, say once a war begins, policy and plans go out the window, and it becomes unknowable and unexplicable in terms of what happens. And I think we're in that state today. And I was just talking with some people in the Gulf today. For them, on the Arab Gulf, it's absolutely intolerable to have a situation where Iran remains in control of the Strait of Hormuz. It's their highway. So it sounds like your view is that this has been boiling for a while, and then we kind of reached a boiling point this year.

10:43Was that boiling point the conflict that we saw within Iran, the persecution of their own citizens? Was that the moment, or was there something else? I think that certainly contributed to the sense that the regime's hands were really weakening, that there was popular uprising opposition. But the notion that they also killed perhaps 30 ,000 people or more is very sobering because all the guns are with the IRGC, with the militias and with the military. It may have been read that the regime was weak because of the scale of these demonstrations and the degree to which the rulers have ruined the economy.

11:27Iran today could have been a great force in the world economy. The basis was there before 1979, and they've ruined it. It's a country where people have been impoverished. They don't have enough water. It's just, you know, it's been very badly ruled. I mean, you know, there were so many talented Iranians who were studying in American universities, getting PhDs in economics and engineering who would have gone back. And, you know, some of them did go back when the Shah fell, but now many of them are in exile again. When you think about how the invasion has gone down so far, it seems as though we keep on semi-claiming victory, or at least the administration continues to semi-claim victory in various ways.

12:20but ultimately the result seems to be the same, which is that the Strait of Hormuz is still blockaded. The regime remains somewhat intact, or at least it's now led by the old leader's son. It still seems that the situation is extremely volatile on the ground, extremely radicalized. when you look at how it's unfolded so far two months into this war what do you make of it do you think that it's going to plan or is it not of course there's been a war but it was an aerial war it was air power so there has not been a land invasion i think it's thought that any boots on the ground is very precarious.

13:08It's the thing that Trump criticized everybody else for. The scale would have to be very large. Will there be a more focused military option to sort of regain control of the strait? Everything is more difficult now. Of course, we're in an age of drones where an inexpensive drone can do a lot of damage and there are a lot of drones. You know, the way I think about it, Ukraine was really the test bed or the beta test for 21st century warfare in terms of both traditional warfare but also drone warfare. And that is, you know, in terms of securing the Strait of Hormuz, unless you can also take out the drone problem, it's going to be harder.

13:59But I guess I find it hard to believe that the situation we see now with Iran in control of the Strait of Hormuz will continue.

14:15But how that gets resolved, we're still going to see, and it may be in surprising ways. Why do you find that hard to believe? Is it because they are too weak in comparison to American military forces? I mean, just as an observer, I look at it and I'm like, well, they still, I wouldn't have thought that they could last this long in control, but they seem to be somewhat having the upper hand. They prepared for this, you know, and it looks like, you know, in companies, they always talk about succession planning. It sure looks like the Iranians did succession planning in terms of who would step in.

14:54And maybe they'd seen this pattern of assassinations. They saw what happened in Lebanon. And, you know, so they seem to have devolved authority to new leaders. Some people talk about moderates, but I think people who know Iran well don't think there are any moderates there. I mean, there may be pragmatists, but they're not the same as moderates. They're all, for them, this regime is who they are and what they're defending and what they believe in. And martyrdom is part of the ideology, actually. But to say, I just think that at the end of the day, all those Gulf countries cannot you know cannot abide this control so that there will have to be something something worked out you're not going to just be able to fix it with new pipelines so in other words we're still in the middle of it and it is it is the classic situation where you know people will make decisions you know one decision or another but Trump does always go back to his favorite word, a deal, you know, and it's deal.

16:07But then the question is, who are you negotiating the deal with? You know, and do they, and we can see that there were clear tensions between, it appears, between the negotiators and the people of the IRGC, which is the real power in the country now. This is, I mean, the big question, and this is a markets show. We're interested in the price of oil, but we're also interested in other things. But the big question for investors, it seems that there is a consensus among investors that the prices of oil is going to come down at some point. That seems to be a given. But the question is when? For how long will oil prices remain elevated?

16:49And will they remain elevated for such a long time that it starts to have a real impact on the economy. You got to say which economy, because in economic terms, the Strait of Hormuz flows east, 80 percent of the oil, 90 percent. So Asia is already feeling it. Restaurants shut down in India because they can't get the fuels they need. Rationing, gasoline stations closed, business is not operating, air flights being canceled, European gasoline air flights. You can see European inflation going up. The U.S. is insulated because of the shale revolution in the United States. It's put us in such a different position.

17:30So there's already a big market effect. But I think the other part, the heart of your question, is at our CIRA Week conference, again and again, I heard the CEOs of major companies saying, the risk is not being reflected in the price of oil. And the market price of oil, as you know, has sort of fluctuated up and down with pieces at hand. No, there's no deal. But if you look at the price for prompt delivery of oil, you see there that that's a higher price. So our own view is at this point, and change it if circumstances change, is we're going to see high prices at least for quite a number of months to come because even if this miraculously ended tomorrow, it's going to take months and months to unwind what's happened.

18:27And some production will come back. Some of the countries, a lot of the production will come back. Some, it won't come back at the same extent. So there'll be still shortfalls. So I would think that for the people following this podcast, what's really critical is to watch what unfolds in the next month and to watch not only crude oil, but watch jet fuel, watch diesel, and watch LPG, those prices, because those are the prices of products that people use. Yeah, the point that which economy are we measuring is an important one. I was referring to the U.S., but yes, the impacts are far greater abroad.

19:12And that's something that I think both U.S. investors seem to forget a little bit and also just U.S. consumers of news. could you tell us more about how impactful this has been to other economies Asia being an example I mean to what extent will this have long-term impacts on Europe or Asia or any other market outside of the U.S. well I think for Asia this is a it is a real very painful shock what's happening and you know it's really almost a desperate situation for those countries because they were so dependent on those supplies. I think for Europe, this accentuates what is this chronic problem of the weakness in the European economy because of the policies it's pursued, it's throttled investment, it's burdened businesses with so many regulations.

20:08We had the German economic and energy minister at Sirwick at our conference this year, and she was complaining about the European Union. She says they manufacture a new regulation every day, and it's so hard to do business there, which is why you see the deindustrialization of Europe going on. This will affect travel. Even here, I'm talking to people before I left the United States. They were saying, oh, I'm buying my air tickets for the summer now because they're going to be 20 % more expensive. We will see flights canceled, And the U.S. will not be as insulated as those other markets. Very bad news for Africa, which basically East Africa got all of its jet fuel.

20:52It came from the Gulf. So, you know, and for farmers in Africa, in Asia, the fertilizer issue is a huge issue. I wonder what this means for those economies' relationship with the U.S. Because if you think about it from Europe's perspective, Asia's perspective, East Africa's perspective, they weren't doing anything. They were minding their own business, doing their thing. Maybe they got their regulatory processes wrong. But ultimately, it was the US that caused what is now their pain, and potentially very serious and long-term pain. I just wonder what you make of what that will do to the U.S.'s relationship with those regions.

21:39This adds to pressure in the relationship. You know, they know where this came from. You see polls showing that the U.S. is not seen in the same light as it was a few years ago. And it's also to follow from what you've said. But this crisis in the Gulf has also really become a crisis for NATO, for U.S. relations with Europe. We've seen President Trump announcing U.S. troops being pulled out of Germany because Chancellor Mertz said that the Iranians are humiliating the United States and humiliating President Trump. And he got really mad about that. And so with very little notice there. So there's already a lot of tensions on NATO.

22:24But this is really highlighted. And the NATO countries are saying what the Gulf countries are saying, too. You didn't tell us you were going to do this. And now we're left with the consequences of it. I mean, we're more dependent. A very significant part of Europe's jet fuel was coming from one refinery, this big modern refinery called Zur in Kuwait. And they're not getting that jet fuel. So Lufthansa is canceling flights. We really have two energy shocks. We have the energy shock of what's happened in the Gulf. Then we have the other energy shock, which is electricity in the United States and the data center and the AI build-out and the$700 billion that is going into it.

23:08And so you look at the U.S. economy and when you see more than half or 75 % of U.S. economic growth is coming from the data center, from AI, that's the huge offset in the United States to the economic costs of pains that's come from this biggest disruption in the history of world energy. But no other country has the hyperscalers spending money on that scale. So, you know, one energy shock is a negative. The other energy shock, you know, about electricity and data centers is a positive, a big positive for the economy. We'll be right back after the break. And if you're enjoying the show, come join us on tour.

23:58We will be going live at the end of May. You can get your tickets at ProfGMarketsTour.com. The link is in the description.

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25:17I'm Maria Sharapova, and I'm hosting a new podcast called Pretty Tough. Every week, I'm sitting down with trailblazing women at the top of their game to discuss ambition, work ethic, and the ups and downs that come on the path to achieving greatness. We'll dive into their stories and get valuable insights from top executives, actors, entrepreneurs, and other individuals who have inspired me so much in my own journey. Follow Pretty Tough wherever you get your podcasts. So we are 250 years into this American experiment, and I'd say it's going okay. I give us like a C+. There is no perfect past, but there is also no exclusively negative past.

26:02Because humans are going to human. That's what we do. I think the story of America is the struggle of people who have not been included in the promise of America to expand those principles to include more people. What's going to determine the next 250 years of America? And how do we write a new social contract that can give us the democracy we deserve? OK, so I'm just going to be a jerk here because I'm a historian. So we have to have a prologue explaining, you know, we the people. OK, you know, I do still remember it from Schoolhouse Rock. We the people, anointed the former Warped Perfect Union, established justice.

26:39What is it? Ensure domestic tranquility. So you're talking about a foundational document. So I'm building a document that will protect American democracy. That's this week on America Actually.

26:56We're back with Prof G Markets. Just to go back to our relationships with other nations and other regions, another interesting one is the Gulf, because it seems as though this administration had developed quite a close relationship with the Gulf regions, especially Saudi Arabia. There was, of course, the announcements of these multi-trillion dollar investments that that were supposed to come into the pipeline at some point for the US, between the US and Saudi Arabia. But at the same time, it does seem as though we have massively destabilized that region. And there were the issues with desalination plants in Saudi Arabia.

27:40And just the fact that we've basically created a huge amount of instability in their backyard. Now, you mentioned earlier that there's also, at the same time, the fact that a lot of these Gulf regions don't want Iran, or at least the current regime in place. So I guess the question becomes, are they grateful for what has happened? Are they angry about what's happened? What does this do to America's relationship with the Gulf states? Well, I was in Saudi Arabia just a year ago when President Trump was there at this big investment conference where I think they pledged$600 billion of investment in the United States.