Transcription
Hello and welcome back to Unheard. The narrative at the moment around the Iran war, if I was going to try and summarize the mainstream opinion, is that it's going badly for the United States. It's much more complicated than they realize and they're being inadvertently dragged in to a longerterm conflict. One person who we respect very much who has a slightly different or at least more nuanced view is Professor Helen Thompson. You will remember her as presenter of These Times, a great unheard podcast. She's also a regular on this show. She is professor of political economy at Cambridge. And what she has to say might surprise you. Welcome back to the show, Helen.
Pleasure, Freddy. Helen, the opinion of most commentators seems to be that although over time with huge amounts of investment, America can improve the security of the straight of Hormuz, realistically it's not going back to a risk-free zone. And so America is really in a pickle. Do you agree with that?
Yeah, I do. I mean, I think at the moment that the the oil markets, at least outside Asia, are like underpricing the risks that are now in play. There's still a assumption that this is going to play out by the end of the month maybe or certainly, you know, the first few weeks of April and then some kind of normality is going to be resumed. But I think it it's very difficult to see why anyone would think that normal is coming back soon. And that I think goes beyond the military situation in the Gulf. It goes to the assumptions that in many ways have like been shattered for the oil producing states, the non- Iranian oil producing states in the region, including that Iran will directly attack their oil processing facilities. Basically, you think this is a long-term change or a or a major change to the kind of dynamics of energy and particularly for that region. You don't share the optimist. You say the markets are pricing in if you look at oil futures, it sort of returns to something like a normal price within a year. You would say that this this might have a longer term impact. Part of the difficulty in understanding what's going on is the difficulty in having a clear understanding if you like of what the motives of the Trump administration have been here. Because if you start from the assumption that this is about Iran and Iran's military position and that the aim of the war is fundamentally to disarm Iran strategically and if that has the payoff of regime change so much the better. But if it doesn't nonetheless kind of job done at a a certain point and you then say well look Iran's going to be weakened as a result of this if it's assuming it's successful in this aim and then that's the space in which normality occurs and that actually it's a better normality than it was before because actually the risk of confrontation with Iran has been taken away from what goes on in the Gulf. But if you think and I'm I must admit I'm more inclined to this view that actually strategic considerations about energy and the relationship of that to geopolitical competition with China is part of what this war is about for the Trump administration and that actually trying to change the geopolitics of transit through the straight of Hormuz and particularly perhaps to hurt China in this respect then there isn't really the possibility even of going back to normality when the fighting is over because actually see in this way it is a play by the Trump administration to change the strategic energy calculus in the Persian Gulf not least for China so in that sense normality can't come back.
So what you're saying there is almost contrary to what most commentators are saying which is that the closure of the straight of Hummus is a is an accident, a kind of failure of planning, and how could they be so stupid? Of course, the Iranians were going to do this. What you're suggesting is actually it might have been part of the calculus of the Trump administration. They wanted this chaos because the country it hurts the most ultimately is China because a major source of oil is pretty much cut off for them.
It's oil and gas. I think we've got to be clear that it isn't just about and it's also about like fertilizers and helium as well. If you look at the sequence of events that led to what's now being called the closure of the straight of Hormuse actually you know it begins about maybe a week into the war perhaps a little bit less when the shipping insurance companies particularly know Lloyds of London stopped being willing to ensure transit through the Persian Gulf and it looks like the the trigger for that was actually the attack by the US on an Iranian naval ship near Sri Lanka. So like the sense that actually that there's risk of conflict all the way through the Indian Ocean going into the Asian markets. You can then see after a few days of this which leads to, you know, tankers not going through that Trump says, "Well, look, we're going to take over insurance and we're going to provide um convoys to reduce the military risk and therefore reduce the perception of risk for the insurance um companies." We can't really see that that's been translated into any action by the the Trump administration, not in a meaningful way. So I think you can then say like Iran has taken advantage of that and you might now say that Iran is contributing to why transit is so difficult through the the straight of Hormuz because it's been firing across the Gulf. But the fundamental driver of the problem was actually the response of the shipping insurance companies. And I think that that puts things in a slightly different perspective just on this issue of like what does it mean to say that the straight is closed and who has done this than this narrative which says the Iranians have now closed the the straight of horm.
But why does that help the Americans? I mean on my inferior brain is trying to kind of play this fourdimensional chess and I'm playing catchup with you Helen. But is it that the the main part of the trade in that across that sea is between states like Iran and states that are closer to China and that America is more self-sufficient and therefore it's kind of quite happy to degrade that. So you know the principal beneficiaries of oil transit and just I guess gas transit as well through the Persian um Gulf and through the straight of Hormas is Asia rather than either the United States or um Europe. Europe has benefits to some extent. The United States imports a pretty small amount now of of oil through the the Gulf. The the principal importers are Asian countries including obviously China. If you then look at like the where China is getting its its oil from in the in in the Middle East, it's getting them from the Arab states including Saudi Arabia more than it's getting from Iran. But the thing that changed during the first Trump administration because of the sanction regime that Trump put on after withdrawing the United States from the Iran nuclear deal was that about 90% of Iran's exports were going to China. Prior to that then the Europeans have been taking a not insignificant amount of oil from the Iranian regime which is why they tried so hard initially to try and find a way of circumventing those sanctions. So the biggest loser of the absence of transit through the the the Persian Gulf um is China. Now there's several caveats to that though that necessary. I think at the moment it looks like some tankers destined for China are getting through from Iran. But you can still understand that not in terms of Iranian control of that but in the fact that actually that the Chinese ships or the ships bound for China I should say are not being insured by you know like western shipping insurance companies. You can also say that China has spent quite a bit of time, you might also say in preparation for this moment building up significant reserves of oil to cushion itself against the issue. But if you were to see a situation in which the status quo, if you like, well, the new status quo were to last for months and months, then China hasn't really got, I think, a defense against that. So, you have to consider the possibility. And again, I'm just putting these things on the table because I think you have to have competing hypotheses about what's like going on. That actually part of what's going on isn't just about Iran. It's about the Trump administration trying to hurt China in the energy competition which he is now engaged in with China. And you might say it's more than energy competition. It's a kind of resource competition.
So Saudi, am I right? Can still sell oil via a different pipeline that doesn't involve the straight of Horus.
The Saudis can can probably move up to though is disputed up to 7 million barrels like a day through that pipeline that comes out into the Red Sea. They say that they can move that much. Whether they can is like open to question. The issue that then comes into play there though is when do the Houthis come back into the story? Because if we go back into 2024 and early 2025, then the the Houthis were effectively making transit through the Red Sea and into the Sewish Canal very difficult through the drone attacks. And indeed the US and and Britain, albeit rather ineffectively, were engaged in a maritime operation to try to reopen the Red Sea. Um, and and not not really succeeding at that. So far, we haven't seen that much response by the Houthis to the the the Persian Gulf crisis, but I think it's a scenario in which they become more involved again, in which shipping through the Red Sea becomes difficult again, very difficult again, is is a scenario that has to be considered. And at that point, the Saudi pipeline is not a defense. It just becomes another part of the problem. I don't know the geography of whether the pipeline how far up the Red Sea the pipeline comes out. I mean, I'm just wondering whether there's a big macro development here, which is that Gulf states that are allied to the west could find ways to transport their products to Europe andor America, essentially westward up through the Sewish Canal. And America makes life extremely difficult for those states to transport eastward to Asia. In principle, you could say there is something to that and that's where you know the geography of the oil markets and transit through the oil markets is like is like very important. I think the question would be on that I mean leaving aside the fact it would still probably be a hit because it's only the Saudis have got the pipeline and it's got you know limited capacity is like can you see the Trump administration being willing to be that accommodating to the European countries particularly given the rs that are now taking place about whether European countries would contribute to an operation in the Persian Gulf. And if you think about the the Trump administration like general attitude towards European states where energy is concerned, it's been in a way much more like let's try and make them dependent on the United States on American gas. So again, you might say, you know, is it really in the Trump administration's interest in terms of the way that they conceive these things, not the way that we might conceive these things to be that helpful to the Europeans? I'm not so sure.
Right. So Europeans in in your scenario actually remain more dependent on American energy.
Yeah, they still are. I mean I think one of the big shifts we have to understand is is like that the strategic consequence in energy terms of the Russia Ukraine war to been to make European countries significantly more dependent upon the United States for energy than they were before. and that the Trump administration since it's come back has made it a priority to try to make European states even more dependent on the United States for energy. So you can see in that now abortive US EU trade deal that the big demand that the Trump administration was making was for the European Union to buy essentially a fixed amount of LNG from US companies. I mean more than was actually in any way like plausible, but it's nonetheless evidence of their thinking which is let's increase European dependency upon the United States.
It's just such an interesting idea because it flies in the face of so much of the commentary. That sense that the cavalier or irresponsible attitude that the Trump administration appears to have towards the Middle East. Okay, let's bomb for a while now. Let's stop. Oh, let's topple the Iran Iranian regime or let's not. There is actually potentially a strategic calculus behind it because the Gulf is less important to the US than it is to both Europe and China. So ultimately if it's if there's problems in the Gulf in this way, the country that is least impacted by it is the United States.
Absolutely. And in principle then it can be a beneficiary of it in terms of gas markets. And I think you know the other thing we have to remember is if we go back to that strategic security report from last autumn, it is clear that energy abundance as the Trump administration likes to call it is both an aim and it is also a means of engaging in geopolitical competition. And in lots of ways, AI and the fact that AI is so incredibly electricity intensive has now intensified the energy competition aspects of geopolitics because you don't just need to be energy abundant to use this language to succeed at AI in state competition terms. It would really help if you could actually also hurt your principal competitors energy security and your principal competitor in AI is obviously um China. So hurting China's energy security is a win.
So where does China go next if the Gulf source of energy is a little bit more volatile or less readily accessible? What are its other options?
I think you can already see, you know, it's back to Russia. You can already see that the back to talks serious talks about a second China Russia gas pipeline, the power of Siberia. First one opened in like 2014 and it's looked like China has stalled a bit. The alternative within Russia, if you like, is to encourage more liqufied natural gas production in Russia through the Arctic around the Arctic and then through the Great North Sea route, which completely cuts out, you know, dealing with the Persian Gulf and the and the Indian Ocean and indeed the um Malaca straight.
Does Russia have enough to supply China and keep it in the AI business?
On the AI aspect of it, China will do what it's done in response to every energy potential crisis that it's faced for at least the last 20 years, probably certainly the best part of the last 20 years, which is burn more coal because that's central to China's electricity strategy. But the Russians are clearly sitting on more gas in the Arctic than they can presently exploit. perhaps in relation to technology, certainly in relation to what has been like the the sanction regime. But I think that we've seen for some time that China has an interest in Russia developing more Arctic gas production and and that that will and that will continue.
The picture you're painting for us is really of a fragmented global energy market where you have a strong North America that is plentiful, pretty much self-reliant. you have a developing China Russia block that will be increasingly trying to be resilient against those external shocks. And as always, we have to ask what happens to Europe because we're kind of stuck in the middle without plentiful energy supplies of our own. Uh we have a the Gulf on our doorstep, but that is notoriously difficult as we're seeing at the moment. Where does Europe go for its energy in this new bifocated energy world?
Well, I think that the the interesting question like here over um the medium-term anyway, is are we heading for a Europe Russia reset for energy like reasons? If you go back to the beginning of the postc world war or the the big beginning anyway, let's put it that way of the postc world war Europe western Europe Soviet energy story. uh it was the sewish crisis in 1950 56 there was some Italian interest before then hence why I say the big you know origin story but if you look in terms of like West Germany and and France the sewish crisis is central to the attempted term because the United States um under the Kennedy administration tried to thwart it to to Soviet energy and I think you can say that if you you know, over a long period historically that Europe is constantly choosing between like dependency on the Americas, on the Western Hemisphere. Um, it gets to the point where it doesn't like that. That's sort of the inter war story. Then it has acute dependency upon the Middle East. I mean, I'm simplifying here, but you know, Middle East after 19 like 45. Um, it runs into the sewish crisis where it's shown that the United States is willing to exercise a veto over how European states can behave in regard to their own energy security interests in the Middle East. So, you bolt off in the in the Soviet direction. You get to the Russia Ukraine war in 2022 and you then have like you know the Germans who haven't got any liqufied natural gas ports at this point desperately trying to get ports and German um economy minister going off for meetings with Qatari officials about importing from Qatar meeting you know US LNG firms about buying from the um United States. You're always picking between one of these poisons if you like. That hasn't changed now. And we know that dependency upon more dependency upon the United States at this moment is something that's pretty unattractive because of the way in which the Trump administration has been dealing with European states. you can't have a simultaneous bid for strategic autonomy from the United States and at the same time saying oh yes our response to problems in the Middle East will be to make ourselves more dependent upon US energy um exports. Now the difficulty with that is if you look what's coming out of Germany and what Mertz is saying is he clearly does not want a reset with Russia and this is the bind is that the situation with Ukraine makes the reset with Russia really rather difficult.
So final question for you Helen. If you are Kstarma or a European leader of a serious European power, do you think we should be more involved in order to try to help secure the straight of Hormuz, try to reopen those channels, try to be more active in that conflict defending against Iran?
The thing that I think is hard for the present policy of staying out is the Red Sea. Because even if you take a like a more straightforward interpretation of what's going on than perhaps I've um given you um Freddy and you say, okay, that the US really is committed now to try and to use military force to reopen whatever that actually means in practice, the Persian Gulf. and that um it is genuinely angry that the European governments are not being willing to engage with with Trump about that. You're still left with a question like of the Red Sea. It's very hard to see that the US has a deep strategic interest in military action to keep the Red Sea in the Sewish Canal open just because so little trade whether it's hydrocarbons or whether it's fertilizers or helium is going to the United States by that route. That's just a function like of of geography. You remember those leaked text messages from Vice President JD Vance at the time where it was discussed whether they should be securing the Red Sea. He was furious that the Europeans weren't doing it themselves. He was saying it's got nothing to do with us. Not going to send American military in that direction.
I mean the British obviously were the British were the one European state that actually did engage in military action with the with the United States uh on the Red Sea. It must be said that action was quite you know pretty ineffective but a situation in which the British government recognizes the importance of the Red Sea and action there but is simultaneously saying to the Americans Persian Gulf that's your like problem unless that you actually are able to mobilize a much broader European coalition that is willing to take responsibility for the Red Sea and the the Sewish Canal then they're being confrontational with Trump about the Persian Gulf I think is untenable.
It's amazingly reminiscent of the sewers crisis in a way although it's it's obviously different. We had Aris Rousenos writing unheard saying it's a kind of reverse sewers and that it's exposing the limits of American power. I'm not sure if we go that far, but it sounds like what we might come back to is some kind of French, British, maybe Israeli, European kind of alliance to try to resecure that passage sewers and down into the Red Sea because the Americans are increasingly not really interested in doing it for us.
Yeah. I mean the difference is though that the Israelis don't like import from the the Middle East now which they they did in like they they imported from Iran really until the revolution. We talk about the the sewish crisis particularly in Britain for obvious reasons being about 1956 but actually you know the major sewish crisis in terms of like the world economy was like 1967 to 1975 when the canal was shut you know for completely shut not some metaphor for being shut just shut for like 8 years and there was no power that was able or willing to keep it open you know it was closed by NASA in June of 1967 at the beginning of the the 6- day war. And it was in the subsequent months that the British position in the Middle East effectively dissolved with being chased out of Aiden and led to the announcement that Britain would be withdrawing from like east of Sri and there was no move whatsoever about from the the United States to like step in and take military action to keep the Sis Canal open.
Final final question. At the end of this 3-w weekek period, is anyone stronger in your view or is it a just a sort of sense of increased chaos and uncertainty? Are there any players involved that are looking stronger than the others relatively now?
I think Russia is in a stronger position than than it was. Both because Russia always benefits from, you know, rises in the price of oil in particular, but gas as well, and because the Trump administration has loosened some of the sanctions on Russian oil exports in order to try to keep the price rises from going any higher than that they have um been. And if you just look at it in a sort of relatively straightforward way, you know, like Russia effectively had to sell oil to India and China at a discount essentially since the first months like of the of the war, but particularly since the oil sanctioned regime like came into place. Now it can go back to you know demanding market prices from China and India for its oil. That's a big gain from Russia's point of view.
And the US stronger or weaker.
I think that that still depends on like where that this is going because I think that one should take seriously at least the hypothesis that there is a strategic big picture like rationale to this that goes beyond Iran's military capabilities. It doesn't mean that it's that it's going to succeed. it doesn't mean that they're not going to be like unintended um consequences and that the the US still has to deal with the quite substantial risk that the hit to energy prices will translate into a recession.
We'll find out pretty well in the ne next couple of quarters. Um Helen, as always, thank you so much. So much to think about there. It was an absolute pleasure.
Thank you, Tony. That was Professor Helen Thompson, a regular, a favorite here at Unheard, whose breadth of knowledge both about the real nuts and bolts, the mechanics of the energy markets, but also the breadth of history. I mean, she will recall the detail of years of the 20th, 19th centuries better than anyone else I know. It's always a pleasure to talk to her and as ever so much to think about and it goes completely in the face of most of the narratives that you will read and hear about. Thanks to Helen, thanks to you. This was unheard.