“It’s Coming:” Energy Expert on Iran Oil Shock’s Impact on U.S.

BIANNA GOLODRYGA: Now, as we’ve mentioned, the U.S. military is attempting to guide ships out of the Strait of Hormuz. Iran’s blockade of this crucial waterway has been wreaking havoc in many countries with oil facing what our next guest calls the largest supply disruption we’ve ever seen in history. In his recent foreign affairs article, energy expert Jason Bordoff details how governments are reassessing their reliance on global energy markets and why the biggest impacts of this crisis haven’t quite hit America yet. He joins Walter Isaacson in this discussion.

 

WALTER ISAACSON: Thank you, Bianna. And Jason Bordoff, welcome to the show.

 

JASON BORDOFF: Thank you. So good to be with you.

 

ISAACSON: You know, two decades ago the United States imported, I think 60% of its oil and natural gas. Now we’re the world’s biggest producer. We’re an exporter. Has that helped cushion the blow of this Iran and the Strait of Hormuz closure?

 

BORDOFF: It has. And you know, a bit more than, to be honest, I had anticipated at the start of this. Of course, oil is still a global commodity. And whether you’re an importer or an exporter, if there’s a disruption halfway around the world, global prices will go up and consume — the price of the pump is set by the global price, and consumers will feel that pain. And that’s what’s happened so far. Gasoline has gone from below $3 to, you know, well over $4 at this point. But there’ve been a few factors that have insulated the U.S. more than would have been the case, say when I served in the White House 12, 13 years ago, and we were trying to figure out how to take Iranian oil off the market to impose economic pressure on Iran because of its nuclear program. And we were really concerned about what it would do to the U.S. economy.

 

First the impact on the macro economy is smaller when increased consumer spending flows to domestic producers and shareholders rather than abroad. There has been this really interesting dynamic with the time lag before the U.S. really feels the same pain the rest of the world does. The physical shortages of taking off up to 15 million barrels a day of global supply with the Strait of Hormuz closed, you really saw physical shortages in Southeast Asia. People shortening work weeks, airlines having trouble refueling. Eventually that make that pain kind of with the time lag to move cargo ships around the world makes its way to the U.S. But it’s taken two or three months. And so we had a little bit of a head start where we were feeling pain, but not as bad as the rest of the world. <crosstalk>

 

ISAACSON: And let me drill down, so to speak on that time lag. When’s it gonna hit us more in the United States?

 

BORDOFF: It’s coming. And, you know, oil prices already have kind of soared back to some of the highest levels we’ve seen since this crisis started. Around $110, $115 a barrel. Gasoline prices are gonna keep going up. Because it is a global market. And you know, at some point there’s dozens of tankers from, from Asia have headed to the United States ready to load up U.S. crude if we can. And the price in the U.S. is gonna have to rise high enough to keep those barrels here and meet domestic demand. So it is a global market. But we have seen an interesting disconnect where the physical price of oil started to be pretty disconnected from the so-called traded price that you tend to see on your screen. Usually they’re the same. But it was, we didn’t see that disconnect in the U.S. We saw it in Europe and we saw it in Asia. But if you keep the Strait of Hormuz closed, I don’t know if it’s two weeks, three weeks or six weeks, but we are headed to much higher oil prices. ‘Cause eventually if you have 15 million barrels a day of supply off the market, prices have to rise high enough to destroy 15 million barrels a day of global demand. And that’s — <crosstalk>

 

ISAACSON: But then wait, wait, wait. Why is it that the market hasn’t priced this in? I mean, you look at future prices, you’re talking about only $100, $110 a barrel for domestic oil here.

 

BORDOFF: Yeah, I think there’s a few answers to that. That futures price, you’re talking about, the sort of price of Brent or WTI that people tend to see as the headline oil price, that’s technically a one-month futures contract. So it’s kind of what people think the price will be — not at this very moment to buy a barrel of crude, but say a month from now. And I think what we’ve seen the market doing, and part of this is Trump’s own rhetoric, is betting that this is gonna be over soon. And you’ve seen the administration sort of set time lags. It’ll be over in two or three weeks or six weeks. We’re past all of those deadlines to be clear. And there doesn’t seem to be any end in sight. But I think generally people have been betting this will be over sooner rather than later. And then we had some cushions built in. We released a lot of oil from the strategic petroleum reserve. Inventories globally were quite high, so we’ve been drawing those inventories down. But there’s all these only so long — we were even taking, we eased sanctions on Iran and Russian oil that was floating in tankers on the water. You can argue about whether that’s a good idea or a bad idea. But we had some buffers in the system. But those buffers recede pretty quickly.

 

ISAACSON: Well, I have a counterintuitive question then. Even if you look at the futures for say, September, why are, is oil price so low?

 

BORDOFF: You know, before this conflict started, we had low, relatively low, oil prices, 60, $70 a barrel. And estimates were that the oil production in 2026 would exceed global demand for oil by two, three to 4 million barrels a day. Estimates varied, but there was a broad consensus we were gonna produce more oil than the world was going to consume. And that was weighing on prices. So that was the reality before this all started. And we struck the, shut the Strait of Hormuz. If the strait were to open tomorrow and within a few weeks or a month or two, you get that supply back online, we’re back to that scenario where we were before. So again, people are betting that if this ends relatively soon — and there’s not yet been significant physical damage to the oil infrastructure in the region that would take years to repair. So people think it could come back online, you know, relatively quickly. And then we’re back to that oversupplied situation.

 

ISAACSON: You say if it ends in two or three weeks, things go back to normal. It happens relatively soon. How long does the closure of the Strait of Hormuz have to last before we get to something that’s really bad and hard to reverse?

 

BORDOFF: It’s hard to know exactly. And oil markets tend not to move in a linear fashion. People kind of in a trading sense and a physical sense react in step changes. But I think in the next one to two months, at most if you continue to see 14, 15 million barrels a day of global demand, global supply off the market prices are gonna just continue to march upward. ‘Cause there is no policy tool in the policy toolkit to deal with oil supply disruptions large enough to cope with a supply loss this large. It’s by far the largest supply disruption we’ve ever seen in history, even back to the oil, Arab oil embargo.

 

ISAACSON: So it’s the largest disruption we’ve ever seen in history. And yet in some ways it hasn’t affected the economy of the United States. Are we more insulated than, say, Asia?

 

BORDOFF: I think we are. We’re not immune to be sure. But I think we are more insulated than parts of the world that are very heavy oil importers where those physical shortages show up more. There’s also a dynamic with natural gas where the price of natural gas in the U.S. is almost totally disconnected. It’s below $3 here and it’s gone to $15 or $20 in Europe and Asia. 

 

There are some other buffers there too. And I think that’s important to acknowledge, say, in China. China has a strategic oil reserve of more than a billion barrels. And the U.S. has been selling our strategic reserve off — both sides of the aisle, in my view, foolishly. I think out of a sense that the shale revolution gives us newfound security. And China has been for energy security reasons, not just environmental or climate reasons, trying to reduce oil imports for decades by electrifying more of its economy. Half of the new cars sold in China are electric because they don’t want to be dependent on global oil imports. If you’re in Southeast Asia and some lower middle income countries — Pakistan, Bangladesh, Thailand Vietnam — the pain is particularly acute right now in those places. Much more so than we’re feeling here.

 

ISAACSON: Why is jet fuel so expensive, especially in Europe now?

 

BORDOFF: Yeah, it’s the nature of the refining system and where they import from and the way their refineries are optimized. And when you refine a barrel of oil, you get different products from it. Gasoline, diesel, jet fuel, other things and certain crudes like which — everyone’s talking about middle distillates now, certain types of crude produce more of some than others. So as the type of oil that tends to come out of the Strait of Hormuz has been disrupted it’s caused disruptions in the products that are produced when you refine a barrel of oil. And those are manifesting themselves more with some products than others. So, as you said, more with jet fuel than say with gasoline and more in certain regions than others, because we should remember the Gulf was not only the Strait of Hormuz, we say 20 million barrels a day went through it, that was about 15 million barrels a day of crude, but 5 million barrels a day of refined petroleum products. So there were refineries in the Gulf that couldn’t get their jet fuel, their diesel out, and people were seeing shortages.

 

ISAACSON: Why is it then that the stock market had the best month, you know, in a long time. April was the best month in memory. It’s hit record highs. Shouldn’t this be affecting the U.S. economy?

 

BORDOFF: Well, it has affected inflation levels and has been somewhat of a drag. But as I said, I think the market generally — and other guests you guys have had on recently have commented on this — have a sense that this is a short-lived crisis. This will be over relatively soon. On relative basis, we are pretty better-off than some other parts of the world. So I think it’s kind of a timing question. And then you have some other parts that are a little more immune from global shocks like this. The AI boom is driving the U.S. economy. China’s economic growth forecast has been revised downward — still not catastrophic, but revised downward partly ’cause they depend a lot on exports and this concern about, for manufacturing, kind of what the global economic impact of this is gonna look like on demand.

 

ISAACSON: Well, you talk about the AI boom driving the U.S. economy. To what extent is that gonna put more demand on energy needs?

 

BORDOFF: It is already. And you know, we have long talked about energy prices as an important economic and political issue in elections. That tends to be gasoline prices. But what’s new is we’re talking about electricity prices now. That’s a big issue in elections. You’re seeing a lot of communities concerned about what data center development does to electricity prices as well as other issues. On a global basis, we should be clear that there are other drivers of electricity demand growth that are much bigger than data centers, even air conditioning. But in the U.S., electricity demand is rising, sharply, for the first time after about two decades. Data centers are a major source of that. The issue is more acute in certain places like Virginia and some other places. So it’s not an issue in some parts of the country. But we’re gonna need more power generation capability and we’re gonna need to use our existing grid much better and more efficiently.

 

ISAACSON: Should the U.S. try to stop or halt the export of liquified natural gas from the U.S.?

 

BORDOFF: I’ve written for a long time that I think that would be a mistake. The U.S. has a lot of natural gas production in excess of our current demand. When you produce oil, you get a lot of natural gas in the process. And we’ve become the largest supplier of LNG to the world market, which has helped our allies. I mean, this was an issue we talked about when I served in the Obama White House. That was the first time someone had asked for permission to approve the export of natural gas. There were very important questions about what the impact is on the U.S. economy. Does it push up energy prices? And the truth is, we have a lot of cheap gas in this country. There are environmental questions that are critically important to answer and make sure you’re dealing with the environmental footprint and methane leaks associated with gas.

 

But there is a really important national security argument too. And what I remember, the conversations we had in the Obama White House were how to think about the security it would provide to allies like those in Japan or Europe, in a situation where there was a disruption to gas supplies like Russia cutting off the supply of gas to Europe. I mean, that was something that we talked about. And I think we actually saw a real life case play out a few years ago where Europe was in a much better position than it otherwise would’ve been because we have a more interconnected, integrated global gas market now. When there’s a supply disruption somewhere, market forces do what market forces do. And in response to those price signals, countries can get supplies that they wouldn’t otherwise be able to get.

 

ISAACSON: For a long time, we’ve talked about energy independence in the United States, sort of a phrase. And you’ve written this piece in Foreign Affairs with Meghan O’Sullivan. And you, I think, say, that’s not a goal we should be chasing or even a concept that’s that’s very useful. Explain why.

 

BORDOFF: Yeah, it’s a goal, obviously, presidents for decades have talked about energy independence and depends how you define the term independence. The idea that the U.S. has gone from a huge importer to a large exporter has certainly helped the U.S. economy, helped from the geopolitical standpoint I just talked about. But what Meghan and I wrote in Foreign Affairs was that I think the lesson from the 1970s energy crises that many took was that more integration interconnection and global cooperation increases, not decreases energy security. After the Arab oil embargo, we created the International Energy Agency. So consuming oil countries could have diplomacy and cooperation when there were crises. We created strategic stockpiles that we collectively managed and shared to work together to put out in case of an emergency. We created an interconnected integrated global oil market. So what I talked about before, if there’s a supply disruption, a tsunami hits Japan or a hurricane hits the U.S. Gulf Coast, a global market gives you security ’cause you can access supplies from other places. That didn’t exist really in the 1970s when oil was sold in long-term contracts between buyer and seller. 

 

I think in the world of geopolitical competition, fragmentation, the deteriorating world order that Mark Carney spoke eloquently about at Davos, and so many others have. Countries increasingly view interconnection as a source of risk, not a source of strength. And we sort of warn about the downsides of that view. It is certainly the case that countries want to produce more at home. There’s good arguments for that. But if you try to disconnect, take an approach that looks like autarky, as we called it. There’s a lot of downsides to that, which happy to talk more about.

 

ISAACSON: Well, tell me those downsides because I’m looking around and thinking we’re lucky. Strait of Hormuz closes, yet we have huge amounts of natural gas. We have our own oil. We’re not that dependent on the ships coming through that strait.

 

BORDOFF: We’re not, but we’re still exposed to a global market. And as I described a moment ago, I think it, you know, with natural gas it’s a bit different, but for oil the benefit we have in addition to more economic activity, when prices go up, there are winners, there are losers — not just losers. But, but we kind of, it’s a timing question. We have like a headstart as we talked about before, of maybe two to three months before we’re feeling the pain the rest of the world does. But in a global oil market, we’re gonna feel that pain eventually, which is why one of the things — you asked why the U.S. is better off today, it’s not just ’cause we’re producing more, it’s because we’re using less as a share of our economy. Since the Arab oil embargo, the U.S. economy has increased fourfold and oil demand has barely gone up. So when an oil shock has — we feel it less, it has less of an impact. So trying to have more electrification as China did of our use less oil through energy efficiency through electrification, that also makes us more resilient. 

 

And then the thing to say, I think more than anything else is, there’s a cost to self-sufficiency. If you’re worried about solar panels and batteries from China, and there might be good reasons to worry about some of those things and you wanna make everything at home, you wanna mine all your critical minerals process, all your lithium. You can do that. It’s probably more expensive. And that’s gonna be true for lots of other parts of the energy system. So the question is what insurance premium society is willing to pay in a world that is increasingly seeing geopolitical risks and and concerns. But if you really try to wall yourself off and make everything at home, that’s probably — undermines your relationships and diplomatic alliances globally. But it’s also can be very, very expensive.

 

ISAACSON: You say that it hasn’t fully affected the world economy yet, but oil shocks generally lead to global recessions at some point. And correct me if I’m wrong. Tell me, do you think we may be set up for a global recession even though the stock market keeps going up?

 

BORDOFF: You know, there are probably macro economists who’d have a more firmly held view on that. I’ll say from an energy standpoint, you’re right. There’s a long history economist James Hamilton and others have documented how most major oil shocks have fed into recessions. But there are a number of buffers in place now that are stronger than we have seen before, including the fact as I said, that the global economy is far less oil intensive now than it was in the past. You have this massive new source of supply in shale growing 9 million barrels a day over the last decade or so, which is just an unprecedented increase in supply that helped to cushion the world. That’s part of the reason we were a bit oversupplied, as I said before. So I think you’re gonna see a very — we’re already seeing quite an adverse economic impact in certain regions. One of the things that’s different today is in the past when I said before, oil prices have to rise high enough to make people use less to destroy demand. That pain today, that demand destruction is being seen first and foremost in middle and lower income countries. ‘Cause that’s where the growth in oil demand has been most pronounced. The last 10 or 20 years is these emerging markets. So I think that’s where you’re gonna see the worst economic effects.

 

ISAACSON: Jason Bordoff, thank you so much for joining us. Appreciate it.

 

BORDOFF: Thank you.