The Widening Middle East Conflict and Its Impact on Energy

**Richard Nephew** (0:04)
The longer this goes on, the much higher likelihood it is that a car gets attacked by the United States or by Israel, and that Iran in turn attacks far more oil and gas infrastructure in Gulf Arab states.

**Karen Young** (0:17)
I think the Trump administration has not decided what it means to finish the job and what would be acceptable as an exit strategy.

**Jason Bordoff** (0:25)
This past Saturday on February 28th, the United States and Israel launched a campaign against Iran, targeting military infrastructure and the regime's core leadership. Supreme Leader Ayatollah Ali Khamenei and several senior officials died in the attacks, which triggered a leadership crisis and inflamed tensions across the Middle East. In the immediate aftermath, Iran launched extensive barrages of drone and ballistic missiles aimed at Israel, US military bases and other targets in neighboring Gulf states. This regional shift carries immediate and enduring consequences for global geopolitics and of course for the stability of international energy flows. The outcome of the conflict and the ultimate fate of the Iranian regime remains deeply uncertain. Even with these open questions, the trajectory of this escalation will likely redefine the future of Middle East security, global power dynamics, and have long lasting impacts potentially on the world's energy markets. So how is this conflict evolving and how might it end? We've seen energy prices soar already both oil and gas. What lays in store for the outlook for energy prices? What are the impacts on Gulf states and what are some of the possible paths forward? And how is all of this impacting oil and gas markets across the globe?
This is Columbia Energy Exchange, a podcast from the Center on Global Energy Policy at Columbia University. I'm Jason Bordoff.
Today on the show, and in response to the conflict in the Middle East and the escalating energy crisis, I'm really pleased to be able to talk with four of the Center on Global Energy Policy's leading experts in this area. Anne-Sophie Corbeau, Richard Nephew, Daniel Sternoff and Karen Young. Anne-Sophie is one of the leading experts on global gas markets. Richard is an Iran and sanctions expert. Daniel is a leading expert on global oil markets and geopolitics of OPEC and the Gulf oil producing states. Karen is a long time scholar on the Middle East focusing on geopolitics and the political economy of Gulf states. We talked about the early impacts of the attacks and their reverberations on energy markets and infrastructure. We discussed how this might play out politically and economically in the coming weeks. I hope you enjoy our conversation. Daniel Sternoff, Karen Young, Anne-Sophie Corbeau, Richard Nephew, the whole cast of characters, the whole gang. We have half the Center on Global Energy Policy with us today. Given the scale and magnitude and importance of the last few days events for the world, for geopolitics and certainly for energy, which is probably what we're going to focus on in this podcast. So thanks to all of you for making time to join us. I know you've been spending a lot of time over the weekend and today trying to track what's happening, trying to explain it to the world. So let's jump into that right now. People, of course, will have at this point read No End of Stories, listen to No End of Podcasts explaining the broad situation, the attack on Iran from the United States and Israel and how uncertain things are as they play out. But since we have already seen energy impacts, which at least in the first 24, 48 hours were uncertain until markets opened, maybe we can start there. And then we'll come to the broader conflict and what might lie ahead, also of course relevant to energy. Daniel, let me start with you. I guess we saw oil prices jump around $10 to around $80, maybe come off slightly since then. So talk about what has happened to the price of oil, what actual physical disruption we have seen, and what risk factors are driving that oil price higher. Thanks, Jason. Yes, so we jumped about $10 a barrel on the open today, and cumulatively Brent is up about $20 a barrel since Iranian protests began to intensify in January and President Trump first threatened intervention. We traded about $82 at the peak, and now we've pulled back to about $77. You could argue that facing the big one of kinetic war across all major producers and disruptions in the Strait of Hormuz to be trading at only $80 a barrel is quite amazing, but nonetheless, here we are. But just say another word about that, because I have been really struck by that. If you were to have gone back a couple of years and said, what's the mother of all disastrous scenarios for the global oil market? It would be the Strait of Hormuz. It would be bombs falling on Iran and in the Persian Gulf. And oil is in the 70s. This is like historically not a super high oil price. 100%. Don't forget, we had a five handle on WTI at the start of this year, and we came into a year with projections for historic oversupply in the oil market. I think many of the projections from the IEA or the EIA and others about how big that surplus is are off the mark. But nonetheless, you've had a market with people expecting it to be two to three and a half million barrels per day worth of oversupply and building significant inventories. And coming in at probably the most comfortable time of the year, if you had to have a big contingency given where we are as far as crude demand from refinery starting to wind down going into the spring maintenance period. So there has been a buffer in an oversupplied market. So obviously that helps explain some of the absence of a forecast. And most people have been trading crude oil, have been looking for opportunities to get short on this fundamental oversupply situation. So that has created, arguably it's created room for President Trump to be as assertive as he has been geopolitically in Venezuela and in Iran because the oil price has been moderate and supplies have been adequate. And so that gives us a little bit of cushion going into this crisis. And can you say a little more about other sources of cushion? You talked about how the market was already projecting oversupply this year, supply exceeding demand by a not-insubstantial amount. Spare capacity in OPEC, they announced a production increase, a small production increase yesterday. The Strategic Petroleum Reserve and strategic stocks elsewhere. How do you think about how much of a buffer the system has right now? So there's definite buffers from a number of different sources. I wouldn't put too much weight on OPEC. Kind of their spare capacity is irrelevant if they can't get it to market. So if we have disruptions in Hormuz, raising production in the Middle East isn't going to help. I mean, OPEC's spare capacity is located in the Middle East, not in Midland, Texas. So it's hard to deploy at this point in time. But there are buffers. I mean, one of the reasons why oil markets have been, have had some cushion, there's been a big buildup of oil on water in recent months. A lot of that has been Russian crude. Some of it has been Iran. That is, as we've seen, tightening sanctions that are affecting the shadow fleet or the sanctions on Rosneft and Luke oil. So we actually have significant volumes of those barrels that are currently on tankers floating around, and those could be absorbed. So Indian refiners, for example, who've been staying away from taking Russian crude, could easily go back to taking that. So there are some buffers, and there's maybe 30 million barrels of Iranian crude that's floating offshore Asia that Chinese private refiners could absorb. So we have kind of significant amounts of oil on water. And then China built up strategic inventories last year by a huge amount. Obviously the estimates are all over the map, but something like 400 million barrels worth of increase in Chinese strategic inventories last year are some estimates. And which is an amount last year that rivals kind of what exists in the US SPR. So obviously there are those inventories that are there. And heading into this, the Saudis, the Emiratis, everyone could see the buildup that is coming and the potential for kinetic action. And so you actually had some preemptive filling of inventories by Saudi Arabia. They keep inventories close to the market in Okinawa and in Egypt. It looks like there may have been more production that was pushed out by both the UAE and Saudi, maybe half a million or a little more barrels per day over the last month. So all of which gives a little bit of cushion, at least as prompt, availability if we are looking at extended disruptions. So let me stay with oil for another minute or two and appreciate your colleagues' patience. And we'll come to various other topics as we keep moving forward. But what actual physical disruptions have we seen in oil markets, damage to facilities? And then talk a little bit about the straight-of-the-form moves, which most listeners will know is critically important to roughly 20 percent of world supply. As a precaution, lots of tankers and ships not moving through and perhaps not being insured to do so. How long can that persist before you really start to see outsized impacts on the market? And potentially does that even trigger shut-ins in the region if they can't access the water? Yeah, all excellent questions. Obviously, the straight-of-the-form moves is irreplaceable and indispensable to the flow of crude oil and oil products to the world market. It's about roughly 20 million barrels per day, 15 million barrels per day worth of crude, and about 5 million barrels per day worth of oil products. A significant amount of LNG, which Anne-Sophie will talk to shortly, and call it a fifth of world oil supplies, and there aren't enough buffers and inventories to deal with a really lasting disruption. So obviously, what matters here is the duration of disruption and whether there's damage to production and export facilities. And right now, what we've mostly been seeing are disruption in flows, as opposed to significant infrastructure damage.