00:00So the Strait of Hormuz, you mentioned a couple of things there.
00:02Resilience with real limits.
00:04You mentioned diversion, not displacement.
00:06And you mentioned the fact that this is bigger than Hormuz.
00:09And indeed, over the past couple of months, we have seen that this is bigger than Hormuz.
00:13This is a fundamental issue right now.
00:15Do you think that what's happening right now in the region, despite the conflict and the casualties around it,
00:22the unfortunate casualties around it, of course,
00:24do you think that it opens up the eyes of countries in this region to just how vulnerable they could
00:31be to those choke points?
00:36Wonderful. Well, it's a pleasure to be here with you.
00:39Thank you for having me on the program.
00:40And indeed, we did launch.
00:42I'm a part of the McKinsey Global Institute, which is McKinsey and Company's business and economics research arm.
00:47And we did launch a big report last week called Aftershocks
00:51that really tried to both understand this particular shock in Hormuz,
00:56but also what this means, how it is emblematic of a broader energy security imperative for countries across the world.
01:05And indeed, what we find is that Hormuz, of course, is a critical choke point in energy trade.
01:12About 20 percent of all oil and 20 percent of all LNG in the world transits through the Strait of
01:19Hormuz.
01:19But it's by no means a singular energy security choke point.
01:25Overall, we find if you look at all energy trade in the world,
01:28about two thirds of that transits at least one other one type of maritime choke point.
01:34And Hormuz is not even the biggest one.
01:36It's actually the Strait of Malacca.
01:38About 95 percent of people around the world live in places that are reliant on imports of at least one
01:45kind of fuel.
01:46So even in places that are net energy exporters, like Australia, for example,
01:51it's still dependent on energy imports of diesel.
01:55And if you think about energy trade that's occurring across countries,
01:59one third of energy trade happens across countries that are geopolitically distant, that are not allies.
02:04And so all of this means energy security matters more in the world, not less.
02:09OK, so Mikola, what are the learning lessons here?
02:12How do how do countries because you mentioned it's bigger than Hormuz?
02:15How do countries try to tackle conflicts that emerge such as this?
02:19And especially with Hormuz, the Red Sea, Bab el-Manda being at the heart of what is happening right now.
02:24What are the what are the solutions?
02:26Or is it according like what it is, according to the United States,
02:29Scott Bassin saying that it's going to be a water body within the next two years is going to be
02:33irrelevant.
02:34Is that something you agree with?
02:38Yes, if we look at the Strait of Hormuz in particular,
02:41what we're actually seeing is, of course, a whole host of near term responses to the challenges in the strait,
02:47everything from the bypass pipelines that you alluded to, to thinking about the use of inventories.
02:53But I think what we're also seeing in this moment is not just these near term responses,
02:58but the crisis actually triggering long term, medium and longer term responses.
03:03And one sort of set of responses is to the strait itself.
03:08What we're seeing is announcements for additional bypass pipeline capacity measures like increased oil supplies in other parts of the
03:16world
03:16that together could by 2030, by our estimates, offset about 35 to 70 percent of flows through the strait.
03:25But importantly, this is an offset.
03:28It's not a displacement.
03:29As you said, it's a diversion, not a displacement of Gulf oil, because if we look at where Gulf oil
03:34sits on the cost curve,
03:35it's among the cheapest oil in the whole world.
03:38And so what these measures that are being put in place, everything from new bypass pipelines,
03:42new oil capacity, new coal conversion capacity in different parts of the world,
03:46what they do is provide additional buffers to provide resilience against a future shock.
03:52Countries also thinking about responses beyond the strait, everything from electrification to using coal as backup power.
04:00And so there's a whole host of other responses that are being put in place, not just for Hormuz, but
04:04more broadly.
04:06OK, Mikhaila, what about supply chains?
04:09What does this tell us about supply chains?
04:11If flows were to normalize tomorrow, let's say, in the strait of Hormuz,
04:15how long would it take for supply chains to come back to the ground?
04:21Yeah, so I think one of the things that is important to recognize with energy flows around the world is
04:25energy flows take time.
04:27So we are seeing, of course, some continued flows through the strait.
04:30In Q2, for example, we saw about 3 million barrels of oil flow through the strait.
04:35But if the situation was to normalize and further flows were to pick up,
04:40this is going to take on the order of weeks to months to normalize.
04:44And that's everything from the time it actually takes oil tankers to travel across the world.
04:48But it's also things like building confidence in shippers to actually allow for transit through the strait.
04:55So even if things normalize in terms of the conflict,
04:58how this plays out through the energy system is not going to happen overnight.
05:01It's going to take time.
05:02So we'll see you next time.
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