00:00All right, traffic in the Strait of Hormuz is down and oil prices are up after the U.S. reimposed
00:05its naval blockade on Iran.
00:07Just a handful of tankers are making it through daily compared to an average 21 ships daily in February.
00:13This week we spoke to diplomats, foreign policy and business experts at the Aspen Security Forum to get their view
00:18on the state in the state of the strait.
00:20Here's what they told us, starting with former NATO ambassador Nicholas Burns.
00:23The Iranians believe, I think erroneously, that they get to run the Gulf, the Strait of Hormuz.
00:28They get to be the toll keeper, exact fees, establish a fee structure.
00:32There's not a government in the world that agrees with that.
00:35And I don't see any way that President Trump can ever agree to that.
00:39That would mean Iran emerges from this long war of four and a half months stronger in that respect than
00:46when the war began.
00:47It would be injurious to the global economy, to insurance companies, to shippers, to people, the companies that depend on
00:55the free flow of commercial traffic.
00:56So I think that the president cannot and I believe will not give in, our president, on that issue.
01:02I don't think the Iranians are going to give in.
01:04So where does that leave us?
01:06I think a cat and mouse probably next couple of weeks or months leading into the autumn where there's a
01:12back and forth.
01:13They agree to a ceasefire.
01:15The ceasefire is honored, then not honored.
01:17They go back to exchange of fire.
01:19And I think that's where we are because these are hard-bitten, highly ideological leaders in Iran.
01:26They think they can play us for time.
01:28And so they're testing us.
01:30It's very important that President Trump stands up to them in that respect and not give in on issues like
01:35Iranians becoming the Tony Soprano of the state of Hormuz,
01:39you know, exacting tribute from other countries.
01:42I think all eyes right now are on the state of Hormuz.
01:45The conflict, which had originally been about Iran and Iran's nuclear capabilities, has really necked down to being primarily about
01:53the state of Hormuz.
01:55If you think about it, the agreement that was reached in mid-June was an agreement just on managing the
02:01state in order to get to talks on nuclear capabilities.
02:04We never even got there.
02:06There wasn't even really time for product markets and crude markets and LNG markets to normalize.
02:12And we're back to a situation, as you know, the U.S. announcing that it's going to have a new
02:18blockade on Iranian exports and imports that is poised for more escalation in the Hormuz Strait
02:25and clearly not a path to normalization there in the near future.
02:29How do you look at this?
02:30Is it intractable?
02:31Do you think we're kind of stuck, for lack of a better word?
02:34You know, I guess it depends on stuck in the short term.
02:38I think it's very hard to imagine that in the next few days, in a week or so, that we'll
02:44be at a place of credible normalization.
02:47I think even if there is an agreement between the Trump administration, the Iranians, the Omanis, the Pakistanis, which, of
02:54course, people are trying to get to,
02:55we are attuned to, we are attuned to the fact that Iran is going to try to enhance its position
03:02through sporadic disruption of the strait.
03:04And that is something that I think is going to have to be accommodated by markets over the medium and
03:11long run.
03:11We're already seeing that in the sense that you have Gulf countries announcing new investments in infrastructure, ports, pipelines.
03:20Over time, the strait will become less important because people are adapting to the reality that this is a choke
03:27point, which is going to be problematic,
03:28which doesn't mean catastrophic, but problematic for quite some time.
03:33What does the time horizon look like for that adaptation?
03:35So I know that there's been this effort to build more east-west pipelines.
03:39When is that going to be something that's a viable kind of competitor to using the strait to get energy
03:43out there?
03:43In terms of infrastructure, I mean, the infrastructure can be built maybe quicker than you think, but still we're talking
03:48a year or two years.
03:50And in that interim period, there still is the opportunity for the redundant infrastructure,
03:56the infrastructure that is currently taking Saudi oil out of the Gulf, you know, not through the strait or Emirati
04:04oil, that could be disrupted.
04:05So that's been one of the most important buffers in the crisis going from, you know, February, March until today,
04:12is getting a significant amount of oil out of the Gulf through that alternative infrastructure.
04:17We have to hope that infrastructure doesn't become targeted in subsequent rounds.
04:23We did see the Houthis kind of come back into the conflict or at least remind us that they're still
04:29potential actors.
04:30That, of course, could create new constraints on a market that is very, it's less well-positioned, if that's not
04:39terrible English,
04:40than it was in February to manage a prolonged disruption.
04:45No doubt you've heard the president asked about higher oil prices and something he says is it could have been
04:49much worse,
04:49that going into this conflict he was told it could be oil at $200 a barrel.
04:53And we never got to that point.
04:55Why is that the case?
04:56Why have we seen, yes, oil prices spike, but kind of stabilize around the $75 level?
05:01Sure.
05:01And he's right.
05:02It could have been much worse.
05:03And many people expected it to be much worse.
05:06And the reality is that we had a massive disruption.
05:11The International Energy Agency has called it, rightly, the largest supply disruption in history.
05:17And what is striking is that that didn't translate into an economic massive global disruption
05:24because the system was more resilient than many, including me and many other analysts, expected.
05:32And there were a whole number of reasons why that was the case.
05:35I would say there are three that are very, very important.
05:38The first is the redundant infrastructure, the fact that there were ways of getting a significant amount of the disrupted
05:44oil out of the Gulf without using the straight.
05:47That was very important.
05:49Secondly, was the use of strategic oil reserves.
05:52So, of course, as you know, in the 1970s, after the big disruptions on Middle Eastern oil then, you had
05:57the establishment around the world of global strategic reserves.
06:02And the IEA, the International Energy Agency, coordinated the largest ever release of those reserves, so 400 million barrels.
06:10And that really helped ease some of the pain.
06:14About five or six million barrels of oil a day were brought on global markets from those reserves.
06:19And then lastly, most surprisingly, is the role that China played.
06:23So China actually curbed its demand for oil on the global market.
06:29It didn't stop consuming oil, but it stopped building its reserve, which it had been doing for some time, and
06:36started using its reserve.
06:38It put a restriction on the export of product markets, so it had more product inside of China.
06:46And overall, Chinese demand for globally traded oil came down by almost four million barrels a day.
06:53So those three things were really important, along with the fact that the market was oversupplied when this all started.
07:01Now, I'll end on an important point, which is that I am nervous that because the global system managed the
07:11disruption of the last five months better than I think almost any of us could have expected,
07:16there might be a complacency, thinking, well, we can continue to manage it that way.
07:21The oil market is in a different situation today in July than it was in February, March.
07:27And some of those buffers have been whittled down to the point where, you know, we can't be so confident
07:33that we can manage a similarly sized disruption for a prolonged period of time.
07:39And so much of your work focuses on geopolitics and how companies experience that and are exposed to it.
07:44And I want to ask you about what's going on in the Middle East.
07:47So we've reached this point where the president's proposing a 20 percent tariff effectively on ships going through the Strait
07:53of Hormuz if the U.S. offers protection.
07:55Take us into the minds of executives, how they're thinking about what's happening here.
08:01Obviously, traffic is not back to what it was before the war began.
08:04What are they considering? What's top of mind for them?
08:06I mean, I think right now executives are trying to find some sort of a backup plan.
08:12And for those that were almost entirely reliant on goods that were being shipped through the Strait of Hormuz, it's
08:17not that straightforward.
08:19There's been overland shipment for some companies that have tried to move goods over land borders.
08:25There's now talks of new canals being dug, which is obviously not a rapid solution.
08:30But I think if we learned anything from COVID and the issues between U.S. and China and now the
08:34Strait of Hormuz, that reliance issue that companies have to understand a fallback in the event of a choke point
08:41like this being used, that is the priority.
08:44For some, there's not really an answer.
08:45But that risk just creates a true threat for these businesses going forward.
08:50Talk a bit more about that, the way that COVID kind of shaped their outlook on supply chains and how
08:54we're seeing that in effect here with what's happening in the Middle East.
08:57Well, and not to parrot the president, but people didn't really talk about supply chains as much before you realized,
09:02well, wait a minute.
09:03All these things come from China and all the raw materials we use for pharma, for other things came from
09:08China.
09:09Take that a couple of years forward, rare earths and the 27-odd rare earths that China began banning from
09:15the U.S., the U.S. was almost entirely reliant on them.
09:19So I think the awareness of how stuff works, how supply chains work, and trying to diversify that reliance, there's
09:26a huge focus on that, obviously in the U.S. government, but also amongst my clients that are trying to
09:31find alternative suppliers to really diversify away from a scenario where they could be held hostage.
09:37We'll see you next time.
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