The Iran Shock Is Not Over: A Conversation With Jason Bordoff and Meghan L. O’Sullivan

22:02Jason Bordoff:it's going to be more of Iran exerting itself in an institutional architecture over flows out of the state of hormones, which is not going to, you know, give confidence to global markets. So I think, you know, we're really looking at this sort of disruption for some time.

22:21Meghan L. O’Sullivan:And is that the best the Trump administration can hope for, given all that's trapped in the last six months? Or is there some other policy option you think would be preferable? Well, I think the real issue with the Trump policy right now, from my perspective, I'm putting actually on my sanctions hat rather than my energy or Middle East hat, but they're all kind of the same hat in some way, is that right now we

22:45Jason Bordoff:have a policy where we're using lots of different tools and we're pursuing lots of different objectives, but it's not clear how those tools are aligned to make a strategy towards a particular objective. And that's the only way that economic pressure ever translates into strategic gain. And so it's very common, we've seen it across administrations for decades, that administration will put an economic pressure strategy in place and assume that, well, if it doesn't achieve regime change, maybe it will achieve behavior change. And if it doesn't do that, at least it will do containment. But the reality is that you need very different strategies for each of those objectives.

23:24Jason Bordoff:So I feel the Trump administration's best option right now is probably something that looks like a containment strategy where it would marshal, you know, military force would be in support of economic sanctions, which would be, you know, really imposed in order to try to isolate Iran until something changes and a different outcome is possible, either through a negotiated solution or through internal change in Iran. And that's not a quick victory. That's not an agreement. That's not a collapse. It's something that looks a lot less satisfying to the Trump administration. But I think it's the most practical solution that could be achievable now.

24:08Jason Bordoff:And a lot of that gets to whether or not this administration is going to be willing to put more pressure on China or there's some kind of arrangement that President Xi and Trump can come to that that leads to a greater understanding on Iran amidst all the other bilateral issues in the relationship.

24:27Meghan L. O’Sullivan:And I have to say that seems fairly unlikely watching the least initial signals around the Trump-Xi summit and in a couple of weeks. Jason, one of the other warnings that you issue, both in the piece from last spring and the piece from last month, is that countries will kind of learn the wrong lessons or overlearn one particular lesson from recent months. And that's about the kind of dangers of globally connected energy markets, which the two of you see as actually one of the sources of resilience in the last six months. To what extent do you see early moves suggesting that that concern is an urgent and valid one?

25:03Meghan L. O’Sullivan:And as you assess the lessons of this, what would you be urging policymakers to do to prepare for future such shocks and to put themselves in a better position down the road? Yeah. Megan and I have written over many years and in several places that integrated energy markets have been a source of security that have made countries better off. It's one of the positive developments of the last half century since the Arab oil embargo. There's often rhetoric around energy independence. But in fact, one of the things that came out of the Arab oil embargo was an effort to create more cooperation, more interdependence, cooperation through things like the International Energy Agency and integrated global energy markets.

25:47Meghan L. O’Sullivan:Oil was not a fungible globally traded commodity back in the 1970s. It was sold in long-term contracts between buyer and seller. over time, transparent, liquid, deep, well-functioning markets created security for countries. So when there was a hurricane in the U.S. Gulf Coast that took out offshore production, or a tsunami hit Japan, or Russia cut off gas supply to Europe, countries were more, not less resilient because in response to price signals, prices would do what prices do, and supplies would shift around. They could pull supplies in from other sources. I think a variety of factors, and Hormuz is certainly exacerbating those, but a broad reversal of an era of, as Megan put it in one of the things we wrote, copacetic geopolitics toward an era of competition and conflict and the sense that the global order is collapsing, is causing countries to look inward, causing countries to think that being connected to global markets and connected to other countries is a source of risk, not of security.

26:51Meghan L. O’Sullivan:and countries are looking inward as a result. They're defining security by reducing or eliminating imports by being self-sufficient. And there's some benefit that comes from that, for sure. We wrote about why the United States is in a stronger position in this conflict because it is a much larger producer. It is now a net exporter rather than a huge net importer of oil and gas. But it is simply implausible to think that every country is going to be able to produce all the energy, all the critical minerals that it needs within its own borders. It is going to have to work with other countries. It's incredibly expensive, inflationary, for countries to try to make everything at home.

27:29Meghan L. O’Sullivan:And so we lay out in the piece a number of steps we think that would make sense for countries to take. These are longstanding lessons of energy security, but they're all emphasized, put a spotlight on them by this conflict in Hormuz, which include maintaining a commitment to those well-functioning markets and then putting other buffers in place to make yourself resilient in the process. More domestic production, more buffers like strategic stockpiles or bypass routes for pipelines. Energy security sort of you can think of as an insurance policy. What premium is society willing to pay for extra redundant infrastructure that, you know, like the large pipeline moving oil across Saudi Arabia right now was not fully used before, but it was built just in case for a scenario like this.

28:20Meghan L. O’Sullivan:In a world of more energy security risk, countries are going to need to be willing to invest more in those sorts of security buffers. And as Megan said, one of the challenges will be lower income, middle income countries that are more vulnerable to those shocks may lack the resources to do that. And then the last thing we point out is using less in the first place. Energy efficiency has long been job one of energy security. The U.S. economy is much less energy intensive today than it was a half century ago. And that means the impact of energy price shock is lower today on the U.S. economy than would have been the case several decades ago.

28:57Meghan L. O’Sullivan:So all of those are lessons that countries should take to make themselves more resilient. We'll return to my conversation with Jason Bordoff and Megan O'Sullivan after a short break.

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30:07Meghan L. O’Sullivan:Jason, do you see any sign that countries are committing to clean energy in new ways as a result of the shock? Or is that a kind of fanciful hope at this point, just given how the politics of that issue have shifted? There are signs of that. EV sales have been increasing. Solar deployment is increasing in different parts of the world. We saw some of that in Europe after Russia invaded Ukraine, where Europe invested more in energy efficiency, in electrifying some parts of energy consumption, like heating and also vehicles. A desire to reduce import dependence and then get more, if you're an import dependent region, reducing imports of oil and gas means electrifying more of your economy and getting that electricity from domestic sources.

30:53Meghan L. O’Sullivan:and most of those would be pretty clean. Solar, wind, geothermal, battery storage, nuclear power. Many European countries are rethinking their approach to nuclear in this era of energy security and affordability challenges. Coal is also a domestic energy source, and we saw an increase in coal consumption in Asia. So that's a big caveat to the story that many would hope would be true, that we would move in a cleaner direction because of energy security concerns. And the other caveats to that story that we lay out in the piece, one is that while I do think it will give a boost to forms of clean energy like electric vehicles, it is also absolutely the case that countries are going to want to invest more in the resilience of their oil and gas system.

31:36Meghan L. O’Sullivan:If the mother of all nightmare scenarios for oil supply disruption, cutting off 20 % of the world's oil supply, resulted for at least six months so far in an oil price shock that was not nearly as bad as people thought, it was pretty manageable. A lesson many countries could take is that this oil and gas system is pretty resilient after all. And maybe if we invest in its resilience through more strategic stockpiles, more diversity of routes in pipelines, more domestic refining capacity, that our energy. So there'll be more investment in oil and gas in the name of resilience. And I do wonder whether, as we wrote in the piece, it is possible that countries could also, in the relative scale of energy security risks, you're worried about oil and gas import risk, but people are also worried about the integration of global supply chains.

32:23Meghan L. O’Sullivan:And nearly, if you want to move more in the direction that China has moved in the last 20 years, electrifying more of your economy, solar, batteries, electric vehicles, right now you have to buy most of that kit from China. And the question is how concerned countries will be about depending on China for those clean energy supply chains. And I wonder whether the fact that the first thing China did in this crisis was look out for China by restricting exports of refined petroleum products might make people a little worried about being fully dependent on China for those clean energy products. I want to go back to the China dimension of this.

32:56Meghan L. O’Sullivan:but first just to stay on the Middle East and Megan to ask you to once again bring together the Middle East policy and energy policy parts of your work. The other fascinating dynamic has been watching the range of reactions from regional players. The rift between Saudi Arabia and UAE, the United Arab Emirates, precedes this war, of course, but it's been kind of playing out in fascinating ways since the war started and in the varied responses. Then, of course, the UAE left OPEC, the Organization of Petroleum Exporting Countries, a few months ago. How do you understand those regional dynamics and as they intersect with the energy dimensions of this, especially when it comes to OPEC, how do you imagine that shaping both energy politics in the Middle East, but also the Middle East more broadly?

33:44Jason Bordoff:It's a big question, but it's the right question. I think we went into this war period with a Middle East that looked increasingly bifurcated, you know, where you had the UAE moving in one direction and Saudi Arabia and a few others moving in another direction. And I feel that by and large, that distinction or that cleavage has probably been reinforced by the war, in part because Saudi Arabia and the UAE have been kind of not affected at all in the same way. In fact, the Saudis up until this morning were relatively insulated from some of the negative effects. And in fact, probably, I haven't done the numbers recently, but it was looking like their revenues were doing pretty well because you had higher oil prices and you had them able to export a lot of their oil through this alternative pipeline.

34:40Jason Bordoff:Whereas in contrast, the UAE has suffered pretty significantly, not just in terms of revenues and things, but also in terms of just infrastructure damage and physical damage, you know, receiving more missiles than Israel has received in this conflict. And so you do see a divergence of those interests there. That could change over the course of time, but it's rooted not just in the way the war is played out. It's rooted, as you allege, to a number of different things about, you know, the orientation of the region and where the future should be, and also which direction the world is headed in terms of the energy transition.

35:19Jason Bordoff:Is this going to be something that you need to monetize your resources quickly, in which case the UAE has kind of moved in that direction? Or are we looking at a much slower energy transition where that's not the priority and therefore keeping prices higher for longer is the priority. So you have a divergence of interest across a number of things. I wouldn't, however, rule out circumstances in the future in which Saudi Arabia and the UAE do find ways to cooperate together that might be in their self-interest. So I'll just give you one scenario that people are thinking about, although it seems distant now, it will happen at some point, and that is when the strait does open, You know, whether that's in a month, which I think is unlikely, or whether that's much further down the road, if you suddenly have a lot of oil dumped into global markets, the price could go down dramatically.

36:15Jason Bordoff:So suddenly the world could see a dramatic drop in the price, and this would have implications for all the world's producers. So you could imagine in that scenario that they might actually find a way to cooperate again. More generally and briefly on the region as a whole, I think what we are seeing is this desire to build resiliency from the Strait of Hormuz is creating all kinds of new and interesting opportunities. So if we look at Iraq, the idea of a pipeline taking oil from the Gulf through Syria or expanding the oil that flows from Iraq through Kurdistan, through Turkey, these things seemed like fairly remote possibilities not too long ago.

37:03Jason Bordoff:But now you see big companies taking the possibility of building that infrastructure very seriously. And if that does happen, that could be a game changer for places like Iraq. Because of the imperative of not relying on the strait, there could be interesting political and economic developments in other parts of the Gulf, which could be quite positive.

37:28Meghan L. O’Sullivan:Jason, if that's a potential positive effect, I want to look at one of the other negative ones. You referred to that piece from last year, the return of the energy weapon. Where, if you're being a bit paranoid about this, do you see risk of the energy weapon being deployed in aggressive ways as countries have watched both China's weaponization of some of its clean energy supply chains and now Iran's use of the Strait of Hormuz as a weapon? And where else would you imagine that we might see similar kinds of use of energy as a weapon in coming months and years? Well, as you said, we have seen it with China and its dominant position in clean energy supply chains, particularly critical minerals and heavy rare earths where there were restrictions imposed over the course of last year in response to escalating tensions with the United States.

38:23Meghan L. O’Sullivan:This is a weapon that China used with Japan over a decade ago, a decade and a half ago, in response to a conflict with Japan. So China has not been unwilling to use leverage where it has it. And right now, China has a much more dominant position in not just clean energy, but including clean energy, many technology supply chains, batteries, electric vehicles, not just the mining, but especially the refining and processing of so many of the critical minerals that are not just important for clean energy, but for defense and other important industries. But it's not just that. We see the United States now take an equity stake in a private company for the development of Venezuela's resources.

39:12Meghan L. O’Sullivan:We saw how the United States government, when it tried to put pressure on Venezuela before the removal of Maduro from power, used not just economic sanctions, but a physical military blockade to prevent the export of crude oil and the import of some of the lighter oils that Venezuela needs to produce its very heavy oil. It did the same with Cuba to try to put pressure on the Cuban regime. And of course, you know, one of the most prominent examples since the 1970s was just a couple of years ago with Russia cutting off most gas pipeline exports to Europe after the invasion of Ukraine. So we're seeing around the world that integration between companies with all the benefits Megan and I have written about can be weaponized as well.

39:57Meghan L. O’Sullivan:And that's why it is important for countries to think about diversification. As Winston Churchill famously said, security in oil lies in diversity and diversity alone. It's one of the reasons why China's dominant position of 70, 80 or 90 percent in many of these supply chains is much more concentrated. The largest oil producers in the world are 10 to 20 percent of global supply. So there's less concentration there. You want diversification. You want to diversify your sources of energy, more electrification, more domestic energy production, all of which makes you more resilient. We had a statistic in the piece which came out of a Dallas Federal Reserve paper that looked at what the adverse economic impact in the United States would be of a roughly 15 % disruption to global oil supply.

40:41Meghan L. O’Sullivan:That was about what we saw this year. And they estimated that in 1980, that would have reduced US real GDP 5.6 percentage points. And today it was 0.3 percentage points. So roughly 20 fold difference. And that is because the US both is a much larger producer, we import less, but also because we are so much less oil intensive, we use a lot less oil as a share of our economy, all of which makes you more resilient in this new returned era of energy weaponization.

41:09Jason Bordoff:So if I could just add to that, to your question of where might we see energy being used as a weapon in the future, sort of a provocative answer, is potentially the United States. And that we heard an interview with Secretary of Energy Chris Wright just a couple of days ago where he was asked about, you know, what are the ways in which the United States is looking to help manage the prices that American consumers are experiencing? And he said, we consider all options of how we can move prices that are favorable for American consumers. But right now, we're leaning in on maximum production. And that, you know, says exactly what it says, but it also doesn't rule out the possibility that the U.S.

41:52Jason Bordoff:could look at export controls on refined products or things to help manage, help Americans, American consumers have better prices at the pump, but this could have very significant impacts for others around the world. So, you know, whether Americans would call that energy weaponization, there will certainly be big parts of the globe that will, if in fact the administration decides that's what's in its economic and or potentially even political interests.

42:22Meghan L. O’Sullivan:Megan, sticking with U.S. policy, Jason referred to this staggering Venezuela deal that has been rolled out in recent weeks. You wrote a piece for us in January warning about some of the mistakes that the United States could make in Venezuela based on past interventions. One of the warnings that came through most clearly in that is that the U.S. had to prepare for the, quote, inevitable toxicity of the narrative that it is only after oil. That warning seems to not just be unheeded, but, you know, almost kind of flagrantly defied in this oil deal. It's so kind of staggering that I'm having a hard time even formulating a question here.

43:02Meghan L. O’Sullivan:I'm just curious what you make of it, what it means for both Venezuela's oil production, but what you think it might mean for the success of this project in Venezuela, you know, of potential for a kind of stable political transition going forward in that country, given what this means for the oil sector. Yeah.

43:22Jason Bordoff:Well, you're right to be a little bit flabbergasted because it is an extraordinary deal. It's almost a concession-like deal going back, you know, many, many decades since we've seen anything like this, where you actually have the U.S. government will have an equity stake in Venezuelan oil and will have the right to buy a significant percentage, I think about 20 % of it, at cost, and then will have the right of refusal to purchase the rest. This is a very, very unusual deal. This is already having a political backlash in Venezuela as Venezuelans and I would say Americans look at this deal and see it as extremely kind of reminiscent of almost colonialism.

44:08Jason Bordoff:And this, I think, bodes poorly for the prospects of Venezuelan political stability. And of course, ironically, it is that political stability upon which the benefits of this deal rest. So, you know, I think many people have been looking forward to seeing how the Trump administration is going to advance its stated objective of helping Venezuela return to a democratic system. I feel that this deal makes it highly unlikely that this will be in the interest of the Trump administration or the Del C. Rodriguez administration or even potentially the investors who might become involved in this deal because it does not look like it will necessarily be politically durable with a change of government in Washington or in Caracas.

44:59Jason Bordoff:So I think there's a lot to be concerned about. Is there a scenario under which this deal works out? This deal is beneficial to global markets, is beneficial to the American consumer and to Venezuelans? Sure. But I think a lot of that rests on having some kind of long-term political stability in which American and other international investors would be comfortable making these very long-term investments in Venezuelan oil and turning those equity investments into actual production. Right now, we're talking about 17 fields, only a few of which are actually producing right now. So we're looking at something that would only have implications for global oil markets many years down the road.

45:47Meghan L. O’Sullivan:Yeah, and I would just add to that, Dan, that I'm skeptical about the durability of this deal on either side. If you see political change in the United States, also if you see political change in Venezuela, as Megan said, has generated backlash from people there. And there's a reason, I think, that you didn't see this deal with something like a Chevron or an ExxonMobil, but with a somewhat more obscure company, North American Blue Energy Partners. There's some historical precedent for this. In 1943, Harold Ickes proposed U.S. government ownership of the concessions with Saudi Arabia, and the companies were the ones that pushed back on that and said, this is not how we're supposed to go about doing this.

46:27Meghan L. O’Sullivan:The idea that there can be a positive role for the U.S. to play in rebuilding Venezuela's battered oil industry makes all the sense in the world. Venezuela will benefit from the revenue from recovery of its oil industry, a once great oil industry. In the 1990s, Pedevesa was one of the most respected oil companies in the world. But the way to do that, as Megan said, is stabilization and economic recovery, strengthening the rule of law to attract private capital rather than what seemed to be not fully transparent, somewhat opaque schemes for government equity stakes in smaller companies in Venezuela.

47:00Jason Bordoff:And in fact, just tying it back to something that Jason just mentioned in his previous response, what we've learned over these many decades is that interconnected global markets is the best form of resiliency in a situation of supply shocks. And, you know, these kind of concession-like agreements actually move things in the opposite direction. So it's not ownership of other countries' oil that's going to bring energy security. It's actually well-functioning global markets rather than ownership of oil that is actually going to bring about energy security.

47:43Meghan L. O’Sullivan:Megan, let me stick with you on one other place where energy intersects with top-tier global security challenges, and that's in Russia, in the context of the Ukraine war and Ukrainian efforts to batter the Russian oil industry and take Russian oil offline with real economic consequences for Russia. How do you assess the effectiveness of those strikes by the Ukrainians, and do you see it starting to have the kinds of economic effects on Russia that Putin will not be able to ignore that this really will affect its decision-making in Ukraine.

48:21Jason Bordoff:So I think there are a number of ways in which you could measure or some metrics that you might say would indicate the economic impact of those strikes. And some of them are manifest in the long lines that are in multiple cities throughout Russia for oil, for gasoline, for refined product. Another metric is just simply that the Russians continue to restrict the export of refined product and, in fact, are even going to private refineries in Kazakhstan to try to acquire some refining capability. So all of those things suggest real impact. But in talking about sanctions or military force, we have to distinguish between impact and then effectiveness.

49:07Jason Bordoff:So the real question is, does that impact, which I think is now visible to us, even those of us living far from Russia, does that impact translate into impact on Putin's goals in his conduct of the war in Ukraine? And there, I'm less confident, just because of the existential nature of this war from Putin's perspective. You know, I think it's not a coincidence that now is the time where members of the Trump administration or Jared Kushner and Steve Woodcoff are trying to reinitiate a diplomatic track because perhaps there is some more openness because of the economic pressure. But just as in Iran, I mean, Iran is another place with a severe economic crisis underway, but we can't automatically assume that that economic crisis changes or impacts the conduct of the war.

50:02Jason Bordoff:It could, but it's not necessarily a straightforward relationship.

50:07Meghan L. O’Sullivan:And Jason, to close, I want to go back to the issue of the clean energy transition. This was part of the focus of the first piece the two of you did together in foreign affairs, Green Upheaval, shortly before the outbreak of the Ukraine war. That piece was in part about the geopolitical complications of that transition and the kinds of instability that we might see. And we certainly have seen plenty of instances of that in the subsequent years. Whether the transition itself is proceeding as we expected it to in 2021 is a separate question. How have you seen the arc of the transition change in Roosiers.

50:42Meghan L. O’Sullivan:There's a lot of reason to be pessimistic. Is it right to be so? How far off target are we as you assess changes in the last few years? Well, we're very, very far off track from goals that countries around the world committed to, informed by, we should say, the science of what we know about climate change, which those impacts are here and now, and they are going to worsen and intensify over time. One and a half, well below two degrees, is two degrees Celsius of warming. We are not on track for goals like that by any means. And at the same time, there is a lot of progress. We are seeing, for all of the headwinds of the Trump administration's policy in the United States, rolling back clean energy tax credits in the United States, making permitting in some cases, particularly offshore wind, harder, where there's a focus now on energy affordability and energy security, a race to build more energy generation, particularly electricity.

51:40Meghan L. O’Sullivan:We often talk about energy prices. Typically, that was oil and gasoline prices. We're talking more about power prices now, which have been roughly flat over the last two decades or so, along with power demand. It's rising again. Most of the growth in power generation in the United States is going to be met by solar and batteries because it's pretty cheap and it can be done quickly. A lot of natural gas, too. So when you look around the world, we're seeing dramatic cost declines in many forms of clean energy. And that means that with a reset in the conversation about the energy transition, which is clearly going on, where issues of energy security, affordability, reliability are front and center now, along with questions about the energy transition.

52:22Meghan L. O’Sullivan:There is a possibility, and we wrote about this too in an article where we looked at the flip side of green upheaval, the idea that a clean energy transition could help facilitate cooperation between countries, could reduce conflict and the role of energy as a weapon. I still believe that that is possible, but there are a lot of challenges and tensions there, including the concerns people have about many of those clean energy supply chains we just talked about before and how some of those can be weaponized from nuclear fuel to dependence on China for batteries and critical minerals and all the rest.

53:02Meghan L. O’Sullivan:So there's a lot of progress in clean energy, but energy security concerns have the potential to give a push to a lot of clean energy technologies. But that's not going to happen by itself. You're going to have to address the energy security concerns that are legitimate and do exist for clean energy. And we haven't done that well enough yet. And you're still going to need policy, whether it's a carbon price or something else, regulations. you're going to need policy to sort of account for the fact that there are a lot of social benefits, a lot of benefits to people in the form of reduced pollution and otherwise, to set a level playing field between oil, gas, and coal and all the forms of clean energy that we need to grow much faster than they are today.

53:42Meghan L. O’Sullivan:Thanks so much to you both for doing this today. We've had occasion to go back to the two of you many times over the past few years, and I don't exactly look forward to this because it probably means that something grim will be happening in the world, but I'm sure we'll have opportunity to pick up these questions as we continue to see these developments, both in Iran and elsewhere in months ahead. So we'll look forward to that. And for now, thanks so much.

54:04Jason Bordoff:Great. Thank you very much, Dan. Great to be with you.

54:07Meghan L. O’Sullivan:Thanks for having us on, Dan. Thanks, Megan.

54:14Meghan L. O’Sullivan:Thank you for listening. You can find the articles that we discussed on today's show at foreignaffairs.com. This episode of the Foreign Affairs Interview was produced by Adelaide Parker, Adrian Feinberg, Ben Metzner, and Conish Thoreau, with audio engineering by Todd Yeager and original music by Robin Hilton. Special thanks as well to Irina Hogan. Make sure you subscribe to the show wherever you listen to podcasts. And if you like what you heard, please take a minute to rate and review it. We release a new show every Thursday. Thanks again for tuning in.

55:02Meghan L. O’Sullivan:We hope you enjoyed this episode of the Foreign Affairs interview. Don't forget to visit foreignaffairs.com slash spotlight to sign up for Dan Kurtz-Felan's free weekly newsletter featuring more of the clear-headed analysis that you enjoy here on the podcast. Sign up today at foreignaffairs.com slash spotlight.