Did China outsmart America after the oil shock?

Latitude Media, covering the new frontiers of the energy transition. Jigar's always pointing out the predictions you got wrong. I think Jigar means that in a loving way, and I think it's also really helpful to figure out where you make mistakes. And I'd also point out that, you know, sometimes when Jigar says I'm wrong, he's wrong. Well, that's obvious. I mean, I think in general, the reason I have to point out when you're wrong is you were like 80% right. And so I had to, like, focus on the wrong parts so that people understood that you weren't 100% right. Yeah. I mean, I think the thing that disturbs me is, like, on the ones that I got wrong, which I take full credit for being wrong, I was wrong for reasons that worry me more than if I had been right. We all get things wrong. And if we did an episode pointing to all the things that Jigar has gotten wrong, we'd have to double the length of the recording session. Ha! I'll tune into that one. Love you too, Steven. Love you too. From Latitude Media, this is Open Circuit. After Iran shut down the Strait of Hormuz, the world lost more oil faster than at any point in history. Everyone thought prices would go through the roof, but they didn't. Today we're asking why. And the answer is less about market resiliency and more about two major government interventions. The U.S. intervened one way. China did it a very different way. And our guest thinks the tools they used are going to get used again with major geopolitical consequences. So this week, the real lesson from the oil shock. With China and the U.S. proving their new power in oil markets, what comes next? A look at the new rules of global energy is coming right up. Open Circuit is supported by the Building an Advanced Energy Ecosystem Conference, where leaders from cleantech, utilities, power generation, national laboratories, and investment convened to share their ideas on how to make the world a better place. and how to shape what's next for energy and innovation. From critical minerals and microgrids to quantum and AI, this conference is designed to spark partnerships that move from ideas into action. Building an Advanced Energy Ecosystem is happening September 14th through 16th in Albuquerque, New Mexico. Register now at nmwomenlead.org using code CIRCUIT to join the conversation. Open Circuit is supported by Fishtank PR, an award-winning PR firm focused on climate and energy tech, renewables, and sustainability. Fishtank is known for providing smart relations that connect brands to journalists on both today and tomorrow's most important energy stories. If you want a PR partner that's thoughtful, shoots straight, and gets results, you'll like Fishtank PR. To learn more about Fishtank's approach, visit fishtankpr.com. That's F-I-S-C-H, fishtankpr.com. Latitude Media is hosting its next conference this October in Austin, Texas. Flex Summit will bring together the senior. leaders and practitioners working to scale flexibility as an essential grid resource across planning, markets, technology, and finance. Join speakers and attendees from Xcel Energy, Base Power, Octopus, ERCOT, Tesla, and more for two days of forward-thinking programming on distributed capacity, grid-edge flexibility, and the AI demand economy. Head on over to latitudemedia.com slash events, or you can click the link in the show notes to see the full agenda and register for Flex Summit 2026. And of course, our listeners. Get a discount. Use the code PODS10, P-O-D-S-10, PODS10, for a 10% discount. Welcome to the show. I'm Stephen Lacey. I'm the executive editor of Latitude Media. Jigar Shah is my co-host, and he is also the host of the Energy Empire podcast. Jigar, how are you? I am fantastic. I am enjoying the dog days of summer. Yeah, you are days away. You're days away from your vacation. You've already got the vacation shirt on. I've already got it on. I'm ready to go. Please tell me you're not going to be tapping at any Twitter threads or LinkedIn think pieces while you're on vacation. Do you actually take a break? I do take a break, but, you know, some of those things are in the can, and so they may publish while I'm gone. You know, that's how we do. And joining us is James Gutman. He is the head of research at Abax Technologies. James is an expert on the economics of global energy markets. He was recently a strategist at the Carlyle. And he also writes the Substack newsletter, Arcs and Angles. James, good to see you. Welcome to the show. Thank you very much. I'm deeply honored to be on the show and to be back with my dear friend, Jigar, as he gets ready to decamp for places where that shirt is acceptable. What is it like being a commodities expert at this year as everyone tries to figure out this upheaval? Yeah, suddenly I'm popular. Like, everybody's, like, you know, wanting to, like. Like, take me out for a beer or something. People are listening to you at dinner parties? Yeah, like, you know, usually I get, like, sent to the back table with the kids. So, it's. Obviously, commodities, you know, they're something that become very exciting when things go wrong, and then suddenly, you know, people kind of stop paying attention. But they're always there, and it's, you know, very fundamental to, you know, the plumbing for the global economy. I think that right now. We've got a couple things that have sort of happened. You know, one is with, you know, the AI story and the clean energy transition. There have been just, like, these pressures that have been building on the energy space, which are fascinating. Like, really, really interesting. But at the same time, there has been this sort of once-every-couple-generations shift in the global geostrategic order. And these have been sort of accelerated and advanced by. By, you know, particular personalities and administrations. But they are part of, you know, a longer-term historical process. When you bring these three things together, like, there's no dearth of things to talk about and to look at and to try and unpack. I would say that, like, the one thing that I think people still sort of struggle with, and they kind of struggle to wrap their hands around, is just how fundamentally the commodities markets tie back to a physical reality. Uh, something that you have to be able to touch, you have to be able to stick your hands into. And we've gotten used to this idea that everything is virtual, that everything can be, you know, everything is a derivative, that everything can be, you know, manufactured on a screen based on some, you know, sequence of credit-based transactions. But ultimately, commodities, unlike most of these other things that we look at, come back to a physical. So, if you understand the physical aspect, I think you've got a leg up on trying to understand the geopolitical. And that then helps you say something a bit more interesting and maybe useful about what we're doing with an AI rollout or with a clean energy transition. That's where I find my conversations leading at these dinner parties I now get invited to. Well, I want to focus a lot of this conversation on the macro story of America and China, something that you have been writing a lot about on your substack. How they've exercised power over the last six months and how this newfound leverage could be exercised in the future. Before we get there, though, I do want to just start with a story that is in the news and get your comments on it from both of you. Iranian hackers have reportedly infiltrated water systems in at least a dozen states. It's opening up a new front in the war. It's part of this bigger story of water energy infrastructure as a key target in this war. You know, Iran has, of course, attacked energy and water infrastructure in Gulf states with drones. Of course, it held energy markets high. It's hostage by closing the Strait of Hormuz. Iran hasn't done anything with this water system hack, but it's a new point of leverage. And, Jigar, I want to get your thoughts on this. This is a story that has been playing out in the power sector for some time. What does this say about the vulnerabilities of water and power infrastructure in this country? I mean, the good thing about where we are today is that we've been studying this for the better part of 20 years. And so we know where our vulnerabilities are. And we've had blue ribbon commissions. Our good friend, Tom Fanning, who used to be the chairman of Southern Company, now runs a nonprofit that does a lot of this work. And what you find is that this is really a prioritization problem. It's not a what-should-we-do problem anymore, right? So we actually know how to protect our water and power infrastructure. There are certain gateways that you can put in place that actually put in security layers that protect you. And Minnesota did a great job of. Of implementing one of those layers for this particular hack. But I think that, in general, this has always been a prioritization problem, where people study how vulnerable they are, and then they don't allocate the money to actually get the fix in place. And when these kinds of things happen, now it's as good a time as any to actually implement the fixes. And so I think people are going to start doing that at scale. But I don't think people should be worried about how vulnerable. How vulnerable we are, as much as, like, you know, be pushing their infrastructure owners to actually implement the solutions that we all have written about. James, what's the story to you? Yeah, so, I mean, I agree with everything that Jigar just said. And it's unfortunate that we play catch-up with these sort of things. I guess what I'd add to what Jigar's saying is that it's a pretty. And not knowing any detail about who did what, when, where, what. Like, that's. I'm not going to opine on that. But let's just assume that it is, you know, who we think it is. And they're doing what we think they're doing. It's just an illustration of how this, like, clear. delineation between war and peace has just sort of dissolved and we live in this period where you know it's not just gray but like there's no border between the gray and the white on the one hand or the or the black on the other are we at war yes and no both and neither like all at the same time so we have critical infrastructure iran targets this critical infrastructure in ways you know that fall short of a kinetic attack but are clearly aggressive in exactly the same way that we've been seeing with north korea and with other state agents you know over the course of the past 10 years or so and so this is just an illustration of how it just gets hotter and hotter and hotter and hotter and they know what they're doing like water like we're getting really really basic here guys like this is this is as core as it gets and not just for ai data centers but like for life on earth you know jigger says you know we shouldn't get too worried about it because we've we've got the means to protect ourselves and and i and i trust triggers right but take this as evidence for what our world looks like you know over the course of the next five years or 10 years as we're sort of working through this geopolitical moment i mean look none of us are cyber security experts but i think what freaks me out is thinking about what the where the chinese have infiltrated right like they've deeply embedded in our government contracting systems it makes you wonder if we really got to a truly intense conflict where they could surface you know the attack surface is all over u.s infrastructure and so i think that's what makes me nervous is that yes we caught these but who knows where else the chinese or the iranians for that matter are embedded in our infrastructure systems but just consider the possibility that we're already in the conflict there are going to be episodes of like very sharp kinetic frictions in between major and middle powers and some maybe even the major powers but if you look around the world today and you look at how many countries are at war and what these wars look like and if you look at these kind of hybrid war actions that we're seeing right now we're already in that conflict with china it's just we keep delaying the definition or or sort of admitting the reality of it until like something grand and horrific happens but this is this is war like we are in a undefinable state that in many ways is war does this feel like a new development where water and power infrastructure are emerging as really important targets in conflict you know drones are much more sophisticated now as we saw in the ukrainian conflict like drones have become central to warfare um iran has targeted some of the most important targets in conflict iran has targeted water and energy infrastructure throughout gulf states using drones does this feel like an important new development to you it doesn't feel new it feels like a very natural evolution of um of sort of the way we fight wars i mean think about the idea of total war go back to world war ii horrific right like the victors in world war ii won because they were better at targeting the civilian population and destroying the enemy's capacity to survive much less fight we are like way way down from anything remotely like that kind of a total war scenario but the targets are in fact the same so you know look at the war in the ukraine the drone strikes on both sides are very clearly targeting physical infrastructure the enemy's willingness to persist in a conflict you know in a very asymmetric way um iran's doing exactly the same thing you know they are they're demonstrating that they have this capacity to target you know water and power resources throughout the gulf states you know letting them know that you know if it comes down to a contest to who can endure more pain you know the regime in iran thinks they can endure more maybe they're right i don't know uh this cyber attack in the u.s that you're talking about it sounds like a signaling exercise to me the concerns we have about you know the chinese infiltrating our systems and for all i know we've infiltrated the chinese like i i would assume tit for tat right we've been working on it um i would assume but like this is an indication of like what war looks like in the 21st century just like it did in the 20th century but at a steady background hum kind of noise as opposed to a definable it started here and ended there shift gears a little bit and talk about the extraordinary government interventions you referred to um so look over the last six months we've collectively learned what people like james already knew the strait of hermuz is a waterway that carries about a fifth of the world's oil when it closed we lost more supply more supply than any disruption on record and at the start of the uh conflict at the start of the war in many analysts predicted possible panic in the market but it didn't happen exactly as thought uh prices certainly moved but not anywhere close to what was expected and i want to talk about what did happen and your argument james is that this was not the market moving normally it was two governments the us and china intervening in very different ways and i want to talk about what those interventions are so china the world's largest oil importer the country you'd expect to be highly exposed maybe the most panicked the most desperate for barrels uh was was the opposite it quietly bought less oil than usual right when the world lost all this supply so i guess the big question is how did it reduce imports so steeply and what was the impact on the market what the heck was going on in china yeah um so first off uh hats off the chinese have played this brilliantly uh and it's part of a longer-term strategy and it has worked out fantastically for for the chinese um the chinese cut their crude oil imports by you know something between five and six million barrels a day and and and every time i give a number i'm like rounding aggressively because nobody really knows like the the details about what goes on in china it's very carefully kept um roughly a third of that dramatic curtailment in their imports um was uh the chinese deferring or perhaps destroying demand roughly a third was de-stocking in some way um and then roughly a third was just not adding to the already incredibly large spr for oil that uh that they'd already built up um and that was really effective so all in all like again you know very rough estimates i reckon that's about half of the gift that the oil market got uh which helped to keep commercial inventories oecd commercial inventories within a range that would force them to do what they were supposed to do and that's what we're going to talk about in just a moment so let's talk about what we're going to talk about in just a moment so let's talk about what we're going to talk about in just a moment so let's talk about what we're going to talk about in just a moment so let's talk about what we're going to talk about in just a moment um how did the chinese get there they invested very heavily in real optionality in their economy so in the ability to you know to exercise the option to pivot from one use of energy to another or one source of energy to another and they paid a premium for it warheads curtail a supply out of hormuz you know gets curtailed prices go through the roof and so there is a policy lever that the that the chinese push it's not explicitly price driven it's more um mandate driven and it says you know you have evs in your in your forecourt use them more you know you you want to go see grandma over the holidays use the train you know find these ways to exercise that optionality that they built into their electrostate um by investing so heavily in a renewable stack that feeds into evs they also have invested very heavily into a coal stack you know which you know which we don't like from a carbon perspective but from the chinese angle this means that they leverage technology on coal to liquids and coal to pet chems and so they can stop taking in naphtha in order to feed their the petrochemical industry and to produce plastics and they can use their their coal capacity for china and a lot of this was the same type of technology just more modern that you know the germans used during world war ii the south africans during apartheid yeah so this is not like a brand new type of technology although they probably modernized it so i think the chinese have done a great job in in updating that and scaling it i think it's still a really nasty business um oh it's terrible no you don't want anybody to do this but it worked um so i think that was a great that was a great exercise of their investment in this real optionality in order to defer uh if not destroy mostly defer i think uh but we can get into that demand i think um another piece here was a d stocking but like throughout the petrochemical supply chain so i think there was a who knows i don't think they took much out of their strategic reserves i think they took a bit i don't think they took much i know like there's no way of knowing this for sure i think there was some d stocking uh throughout the refinery complex and of you know finished products in you know the petrochemicals and the plastics complex and that makes sense they cut their refinery runs they ran down their inventories that helped to reduce their their demand pull and then i think you know going back to what i said before part of it was just they had been building up a massive inventory uh for their mspr so they hit pause one of the things that i think is sort of worth paying attention to is that we're getting some pretty good early indicators that the Chinese are coming back. So refinery runs are picking up. They've actually started to rebuild their product inventories and their pet cum stocks, and they're starting to export again at the same time that they're starting to take more crude cargos from the Gulf and from elsewhere. Right, so that's what I was going to ask. Oh, so if the Chinese did this, are we out of the woods? Like, are we good? I mean, so no. I mean, I think the Chinese, they did what they did. They dampened the impact on the global market, and they made a bunch of money, by the way, right? Like, so all of those cargos which they had booked, they were like, oh, wow, price of crude just skyrocketed. There you go. You can have it. They destocked. Now they're back, which tells me that it was never a permanent demand destruction kind of shift. It tells me that it was, in some way, sort of a demand deferral sort of shift. And I would also want to just sort of add, as a final point on this one, I spent a good chunk of my career trading on the other side of people who were, you know, trading industrial metals and energy out of Shanghai. And boy, oh boy, like, they know what they're doing, and they work as a team. And, you know, they're very, very good at staying out of the market when it's peaking and stepping back in when it's low. So from a high level, this is Team China Incorporated buying low, selling high. Buying low, selling high. And they're doing it pretty well. They're doing a good job with it. That is about half, roughly half, of the insulating effect, I think, that we saw in the market, which has kept crude oil prices relatively restrained. Jigar, what are you most interested in when we look at the Chinese story? You know, early on in the conflict, we teased this a little bit, that China would have advantages because of electrification of transportation, because of coal switching. So as you saw this play out, and I know, as James said, it's not entirely clear what all the dynamics were, but what. You know, what's most interesting to you from the Chinese experience thus far? Well, I think it's important to note that the Chinese don't operate in a vacuum, right? So when they made the decisions that they did, remember, at the moment at which the conflict occurred, Omani and Dubai oil hit $166 a barrel, right? Physical. That's real money, right? Now, the Chinese could say, well, we're not going to pay that. We're going to let Indonesia or Pakistan or somebody else take it. Fine. But then, those people paid it, right? And so whoever did take those last shipments paid it, right? And so what you're finding is that when the Chinese did this, they doubled immediately, right, the sale of heavy trucks that were EVs, right? So they moved their existing supply chain faster to destroy demand. But they also eliminated the ability for the country to supply Southeast Asia with finished products. So they said, no more sale of gasoline or diesel or jet fuel or whatever else to Southeast Asia, right? And so now, all of those people were suffering, right? And so now, you see that those folks, whether it's Indonesia or the Philippines or others, have been ramping up their deployment of clean technologies. Most of them knew that they could have saved a lot of money using solar or wind or battery storage or electric vehicles, et cetera. But they were just going slow on the deployment. But now that they were faced not with higher prices, although they did have higher prices, but actually physical rationing, right, shortages, they were like, well, we don't have a choice. Even though we're culturally against the energy transition, we kind of need to do it because we're being denied access to the molecules that we need to run our economy. And so we're going to have to do these things, which of course also benefited China because they were exporting that equipment. So part of, I think, part of this is also just waking up the rest of Southeast Asia to the fact that the Asian Development Bank had paid for study after study after study after study about how these folks could transition from coal in all these other areas. And they were just taking their sweet-ass time to do that transition. And now, for instance, you see very large projects in sustainable aviation fuels going into Southeast Asia. You see very large projects in alternative feedstocks to, you know, chemical production and plastics production because not all these folks have access to, you know, all of this feedstock, right? And so my sense is that the Chinese played both sides of this. They, you know, like created a fortress China on this side, but it also created more pain for their neighbors in Southeast Asia. Yeah, I just would add one thing there, Jigar, because I agree with what you're saying. And I just would add that as their trading partners around the world, so not just in Southeast Asia and South Asia, but also in Europe, you know, have sort of resigned themselves to the fact that they need to develop more capacity with electrification and renewables and that that's going to have to come from China. They get more comfortable with the idea of getting into bed with the Chinese supply chain. I don't think people like it, especially not, you know, some of China's neighbors. But once you get into that habit, I think it gets a bit easier. So like the China narrative or sort of the China vision of, of sort of reclaiming a place as the middle kingdom, it's been advanced by this. Kind of. I think that that is, that's half the story. The other half the story, I think, is that all of these countries are forcing the Chinese to do technology transfer, right? You've seen that with Brazil. Now you see it with Indonesia. And the Chinese are fighting back. But at the end of the day, they're going to lose this battle, right? I mean, every one of these continents is saying, we'll buy your stuff, but we're going to demand, demand, demand, domestic content, right? We're going to need to make sure that there's some manufacturing in our country. We're not going to do this transition where we're addicted to you. The biggest opportunities rarely happen by accident. They happen when the right people are in the same room. Join us in Albuquerque, New Mexico, September 14th through 16th for the Building an Advanced Energy Ecosystem Conference, where leaders from every sector of the energy industry, come together to build partnerships that move ideas into action. Conversations will span industry-disrupting technologies, responsible policy strategies, workforce development, and the innovations driving responsible energy growth. New Mexico plays a vital role in America's energy future. 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FISH is spelled F-I-S-C-H, fishtankpr.com, or follow the link in the show notes. On October 14th and 15th, Latitude Media is offering the chance to hear from experts defining the next era of distributed capacity. FlexSupply.com is a great place to find out more. FlexSummit 2026 is a two-day in-person conference in Austin, Texas, tackling how to scale flexibility as an essential grid resource. And the programming includes a live recording of OpenCircuit, plus a stacked agenda with presentations, panels, and networking with people at the forefront of the market. Our podcast listeners get a 10% discount. Use the code PODS10, P-O-D-S, PODS10, when you check out, and you can see the full agenda and register today for FlexSummit 2026 at Latitude Media.com. Or just click the link in the show notes. But think about what the Chinese have already accomplished. Because even if they do hand over technology, which is a debate, it's a conversation, you know, it's a give and take. Now they're in there. Like, they're on the ground. They're building, you know, factories. They're transferring technologies. They're taking market share. They're in. They're in. But that is okay for me. Right? Remember, like, what I care about the most is diversification of supply. Like, I don't know that I care that it's like, you know, using Chinese technology. What I care about is that once that capacity is put in place, then it cannot be controlled by Beijing. And so my sense is that, like, the Brazilians, once they have that technology, can manufacture using those plants. And if Beijing says, sorry, we're going to, like, stop supplying you with feedstock, well, then they can get their feedstock from the U.S. or they can get their feedstock from other places, right? Like, for me, what I care about deeply is that we remove the over-reliance on Chinese exports and we diversify manufacturing around the world. So I agree with you about the diversification of manufacturing. I hope you're right about the ability to treat China as equals once they have these facilities on the ground. But that does require the ability to continue to play sort of hard knuckles ball with them. I'd much prefer to see European or Brazilian or Indian manufacturers developing domestically derived supply chains. I don't think it's going to happen anytime soon. And that means it's going to be Chinese. And we're going to work towards the jigger scenario where we get treated fairly. The jigger scenario. The jigger scenario. And just so you know, that's just been, that's just like, there it is, the jigger scenario, capital J, capital S. So, like, pull some of these threads together. Like, what do you think the grand, I know a lot of this is a mystery still, but like, do we have any grand theories about what China is doing here? The jigger's not going to be surprised when I say this. I think China has been extremely clear about its vision for the 21st century. It is one where China recovers territorial control of what China thinks it should have territorial control over, where China has restored itself as the, preeminent power in East Asia, restored itself as a middle kingdom, and where China sees its influence globally as on par with the respect that it thinks it deserves. And I think what China is doing is preparing itself for a war at a more kinetic level or at a higher level than what we've seen in order to not have to fight that war. So, when China establishes, its energy independence, which is an extraordinary feat for a country that is net short energy across the board, when China can establish a degree of energy independence, it has a capacity to wage war. That capacity to wage war, played appropriately, becomes a deterrent to war. That means it doesn't have to go to war because the other side is going to recognize that it's better to cut a deal. I think that's what the Chinese are doing. And the elephant in the room, yeah, it's Taiwan. I think the Chinese, their goal, medium term, is Taiwan. And this is part of it. I mean, the only counterpoint I'd make is I just think that the Biden administration did such a good job of standing up battery manufacturing facilities, solar manufacturing facilities, et cetera. And now you've got the Trump administration that's actually making it harder to import a lot of this equipment from China. And so, we are, by definition, standing up alternative solar. supply chains around the world, whether it's Indian manufacturers, Brazilian manufacturers, Turkish manufacturers, like, we don't have a choice, and domestic manufacturing, right? And so, while, like, I think that the Chinese have relative strong positioning today, my sense is that that position will get weakened quickly because, I mean, look at their solar industry, right? They will, they will deploy less solar this year than they did last year, because they had a run-up of demand, because they had, like, a, you know, subsidy that was expiring last year. And that extra solar is not going to get absorbed by the rest of the world this year. So, you know, the Chinese solar firms are going to lose even more money this year. And the electric vehicle firms are having record exports, and they will also lose money this year, right? And so will the critical minerals companies, and so will the battery companies. And so, at some point, right, all of these people who claim to be capitalists in China are basically state-owned enterprises. And my sense is that that deteriorates very quickly. And so, like, I think that, like, they look strong now, but my sense is that unless you have strong companies that are profitable underneath this, then they will end up getting, you know, in a place where they will get out competed by others around the world. I think you're right. Let's turn to the U.S. now. So, the U.S. took the opposite approach. It opened the tap. It started releasing oil from its own emergency reserve into the market. The U.S. is unique because it has a huge reserve capacity and the ability to drill more. So, as you argue, James, you think the U.S. was using these barrels in a more activist way as a sort of monetary policy. Walk us through that argument. Yeah. So, I think in China, there's a memory which says, you know, an order comes from, you know, the highest point in the bureaucracy and it filters its way down. And at lower levels, it gets executed. In the U.S., we have a very different kind of way of operating. And I think here, the model that people are very comfortable with is like central banking. So, you have a central bank, you have a Fed chair, and, you know, you change a short-term policy rate, which in and of itself doesn't have that much of a direct effect on the economy. But it works its way through the rest of the credit system, and it can become very influential on the economy. So, you have this financial market, which amplifies the government's ability to turn a knob, essentially, and to create some sort of an economic outcome. And these are two very, very different ways of looking at the economy. I think that what's happened in the U.S. is something like this. So, in the mid-20-teens or so, depending on how you want to measure it, the U.S. became sort of titularly, nominally energy independent, so, and petroleum. So, that means that, you know, even though we were still dependent on a global supply chain for specific products in specific places, we were ex-supporting more than we were importing, if you just look at the total amount of crude and products. And I think that that introduced a degree of sort of comfort. So, the IEA was an institution that was created, back when we were the rules, establishing the rule of law and a global order in order to help manage a complex global system. But the IEA was an institution that functioned, you know, in many ways analogously to NATO, as sort of a buyer's club, a defensive organization established in the wake of the oil shock in 1973 to coordinate things like SPRs and SPR releases. And it was used as such, you know, over the course of the ensuing decades. When an energy-producing country, you know, was involved in a conflict or attacked, you know, Kuwait, the Libyan civil war, then there would be this coordinated IEA release. I think what we saw, starting with the Biden administration, was a willingness by the U.S. now to deploy its own SPR and to operate through the IEA and through its network of allies who had their SPRs as a way of deploying this influence into the oil market in order to support a geopolitical goal. So with the Biden administration, you had Russia invading Ukraine, and you had, you know, this pressing need to try and cut off the flow of funds into Russia. Okay, fine. So if you're not buying Russian barrels, then what's going to make up the difference? Well, it's going to be a couple hundred million barrels out of, you know, IEA SPR organized, you know, by the Biden administration, and it was pretty effective. It did the job. So this was like the first instance of this use of the SPR in this kind of way. And we should note that this is like an order of magnitude larger than any previous IEA release. So it was a big, big deal. So Trump, the Trump administration, I think, you know, probably looks at it and says, yeah, that worked out pretty well. And it turns out we don't need these resources in order to protect ourselves as a democracy. So when it launches a war of choice in Iran, with Iran, it says, what could go wrong? Well, what could go wrong is the price of oil could spike, and we could get nailed at the gas pump by the consumer. Okay, what can we do? What we can do is we can release more barrels of oil from the SPR. And there's this mindset, which is very used to this kind of central banking kind of model, which says, yeah, you know, we add liquidity, price comes down, outcome we like happens, so on and so forth. I think at a certain level, that's effective. At a certain level, that does work. But I think there's a lot of devilry in the details. There's a lot of devilry everywhere. So, yeah. So I think this is where I start to get very, I get nervous, because oil is not the same as treasuries. Like, Scotty Besson can, you know, print or can print treasuries, you know, whenever he wants to. It's literally the flick of a pen. You got to pull out a piece of paper, pull the barrels out of the ground. You can't borrow the barrels from the future. You can't print them. They got to be in inventory. And right now, the U.S. is careening, although the pace is slowing, towards, you know, some unknown number at which we can no longer support SPR releases. Like, there has to be a certain amount of pressure in these salt domes. Like, you just can't take it down to the last bit of sludge at the bottom of your inventory. You're done. So we're getting to the point where, like, your central bank of molecules, your central bank of molecules, your central bank of oil is, like, looking into the vault, and it's looking kind of bare, which means you're not going to be able to do this for much longer, or you're not going to be able to do this again or indefinitely, something to that effect. The second place where I think it gets a little bit squishy here is that you may be able to control the number of barrels of crude oil that enter into the Atlantic Basin that affect OECD commercial inventories, which is really what the machines and the traders focus on, that keeps the price of Brent oil, you know, in sort of this historically normal range, irrespective of what's happened around the world or what's happened in the past. global inventories were at large. You can do this. That doesn't affect the pump because it doesn't affect product prices. Going back to something that Jigar was sort of, I think, alluding to before, if you look at refinery gate prices, so the barrel of crude and then the refining margins that are attached on top of it, we are at blisteringly high levels still. This is why American consumers haven't seen prices at the pump collapse with the price of oil. This is why diesel is still at extremely painful levels and is having an inflationary impact. So, you can control the barrels that come out of the SPR because it's crude oil, and you can manage the price of crude oil in the North Atlantic Brent, but you can't control refining capacity, and you can't control. product inventories. And therefore, you can't control the prices that people actually care about most when it's time to pay a bill or to vote. And this is where I think that the current policy is at some risk of having unintended consequences. Well, I think there's two points to be made here. One is that both China and the United States seems to be, you know, getting to the end of this policy working, and so they better get a deal done with Iran. You know, next week. And then the second piece of it, which I think is what James is saying, is this is now a playbook that both countries can use in the future for more minor disruptions in the oil industry, right? And so, when you have more minor disruptions, my sense is that both countries are going to actively manage oil prices. And so, I worry a little bit around figuring out if you're an oil investor, if you're an oil investor, if you're an oil investor, if you're an oil CEO, you know, like, how much agency do you think you have left in terms of how you make money, right? If you've got two of the world's superpowers who are basically testing out ways of figuring out how to control oil prices globally, I'm trying to figure out how much longer this is really a capitalist enterprise. Not only should you be worried about this if you're the oil guy, but you should be worried about this if you're in an industry that produces oil. That produces something that these people who are in charge think is of national security importance. So, right now, we're talking about oil CEOs. What about the people who harvest jewels? It's not hard to see all of the people in this industry as coming under this kind of pressure. And it is a new playbook. Like, we have state capitalism, varieties of state capitalism here, to coin a phrase. And we have a China model, and we have what's appearing to be a U.S. model. And I think you absolutely, should expect this to be played again, and again, and again, regardless of which administration is in office. Yeah, that was a question that came to my mind as you were explaining this. Like, is it repeatable for other industries? Where is it most repeatable? So, critical minerals, equipment production? Like, where are the other areas where this could be used? That's a really good question. And I think it's a fantastic question. And I think what you would probably say is, I think it's a fantastic question. And I think what you would probably say is, is, you know, movements by the state to try and create this capacity in other areas. So, critical mineral stockpiles, for example, which we already know, you know, they're building, and for good reason. Like, you know, if conflict comes, you want to have this. But it also creates sort of a policy capacity. You know, holding pieces of a supply chain so that you can try and turn it, turn the knob. To the right or to the left. You know, AI, for example, being able to manage the availability of AI engines. All of these are sort of indicative of an approach to, you know, a new kind of state capitalist model. To the extent that they can rely upon stockpiles, it's going to look more like the central banking approach. To the extent that they can't, maybe it looks more like the mandate from heaven approach that the Chinese have. But this is our world. This is our world, I think. The other big question that comes to mind is, if the U.S. has established this framework, then does it embolden a future administration to go start another conflict? I hope not. I really hope not. But I think the sad truth is that it can. And I'm going to go away from the U.S. administration, and I just want to talk very, you know, briefly about Israel as sort of a possible, you know, indication of what the future looks like. So, Israel has a national narrative which justifiably says it's, you know, sort of in a permanent state of existential threat. And it views Iran as an existential threat. And this is not new. But one thing that is new is that over the course of the past 15 years, Israel's gone from importing something like 90%, 98% of its final energy consumption, you know, primarily oil and gas, but, you know, also some coal, to about half, and the reason why Israel was able to do that is because it achieved this degree of energy independence with, you know, Tamar and Leviathan and the natural gas fields in the Eastern Med. And you got to think that as the Israelis are working through the playbook of what could go wrong with this war in Iran, they're thinking, "Well, we have vulnerability on energy, but not like we did back in the 1980s. Not like we did back in the 1990s." So, that's an example. You could probably make the same argument, you know, with a number of places around the world. Does the next administration come in and say, "I got a central bank of molecules. Maybe the first time around it worked really well. Maybe it didn't. Maybe we're getting better. You know, maybe this gives me more cover in order to justify or pursue, you know, the next sort of conflict I might want to get into." Maybe. I mean, a shield, if you think of this, you know, central bank of molecules as a defensive weapon, a shield is a weapon. Exactly as much as a spear is. And it can embolden, I think, adventurism. So, I think we need to be very, very cognizant of what that might look like. Are there any lessons here for how clean energy statecraft might play out? I love that phrase, by the way. I'm going to steal that. Go for it. I think that the group that's, like, really in the bullseye and the target board are obviously the Europeans, the Japanese, the Russians, the Americans, the Europeans, the Europeans, the Europeans, the Japanese, the Koreans, a sort of like-minded group of, you know, liberal democracies that, you know, were organized around the U.S. And I think it's fairly clear that they view cooperation and coordination amongst themselves as kind of the only way to balance their competing interests of maintaining national sovereignty, but also being able to, you know, assert themselves on a global stage where you've got a very aggressive economy and a very aggressive economy, and you've got a very aggressive China on the one hand, and a very aggressive U.S. on the other, and a very unpredictable, you know, Russia, to take a third example. And so, I think statecraft for these countries looks a lot more like negotiating partnerships, technology-sharing deals, capital investments into each other's production chains, you know, a much more bilaterally driven or, you know, plurilaterally driven trade and economic development. So, I think there's a strong, you know, government-driven trade approach to trade in the clean energy space where there's a strong, you know, governmental involvement. I think you should be very much expecting that clean energy producers or the people who are in the clean energy supply chain and stack are asked to participate more in political conversations with trade partners of like-minded companies. So, you should expect more of a clean energy statecraft going forward. That would be my take. I'd be curious as to what Jigar has to say on this, actually. So, I think if you think about what is happening in Cuba, where, you know, after the Venezuela conflict, right, Cuba didn't really have the molecules necessary to keep its grid going. The Chinese have come in with a gigawatt worth of solar panels, and they just commissioned a 50-megawatt battery storage facility, etc. But the Chinese actually don't have the orchestration software or other mechanisms by which to operate a virtual power plant. And the U.S. is probably not going to supply those services to Cuba. And so, this is where Europe, like, could step up. But it's not clear to me that Europe is going to step up, right? And I think one of the things that I find fascinating about this moment is that the Chinese know how to supply goods, right? Electric buses or electric cars or solar panels or batteries. But they don't actually know how to do skills transfer or orchestration services, right? Like, when you look at Pakistan, you know, they deployed a whole bunch of solar panels quickly, and then that led to the basically bankrupting of its electric utility. Because the Chinese don't know how to help the electric utility of Pakistan to prevent it from going bankrupt. And so, like, there is this notion that right now, that the technologies that, you know, we talk about on the clean energy side are fully mature and are the cheapest way of supporting the, you know, $7 billion. million people around the world who have some sort of energy poverty, that I don't think the Chinese by themselves actually know how to solve the problems in those countries. But the U.S. is no longer partnering with the Chinese like we did during the Obama administration to help bring joint solutions. And I don't know whether the Europeans are going to step up and provide that service. But it's an opportunity for Europe. It's very much an opportunity. There's lots of opportunities for Europe. As I've been discussing for 18 months, I just haven't seen them seize them. James, how does the national security driver of energy decisions now reframe clean energy as a tool? I think it's pretty critical. And I think there's sort of two reasons to kind of turn to this. So the first is that energy vulnerability, you know, the national security implications of the U.S. economy are very important. And I think there's sort of two reasons to kind of turn of energy imports fall squarely on fossil fuels. So with the exception of a country like the U.S., which is, you know, as we have said, nominally energy independent with fossil fuels, the way you have an energy dependence, the way you import energy is rock liquid gas, you know, fossil fuels. So if you want to be less dependent on energy imports, then you are going to have to import more energy. So if you want to be less dependent on energy imports, then you are going to I think you now have this motivation and this impetus and this imperative that's no longer simply dependent on climate change as the reason. It still may be the most important reason, but it may not be the one that gets us out of bed to actually take action today. I think the second national security-like sort of framing that you really want to take is when we're developing a clean energy supply chain in Europe, we're not going to have a clean energy supply chain in the European Union. We're not going to have a clean energy supply chain in Europe, for example. We are being watched very carefully by a military leadership and by a civilian political leadership and by a bureaucracy, which sees us as an asset should the unnecessary and unfortunate conflict occur. Like the job of the soldier is to prepare to win a war so that he doesn't have to fight the war. Clean energy is what enables you to fight the war. Therefore, they care deeply about what we're producing and how we're producing it and where we're producing it with whose technology and all of these sorts of things. You talk about SAF, right? Sustainable Aviation Fuel. For sure, there are generals in European countries who want to make sure that there's something that they can rely on, even though there's not a universe in which it's a source for military aviation. But you want that diversification. That's something that we need to be very aware of as we seek out funding or we start to push for a change in a regulatory structure or an incentive program so that we can help to advance the adoption of a technology throughout a system. The allies you find might be wearing great big shiny stuff on their shoulders. They might be the ones that you want to turn to and say, can you help me get this down the road? Well, the thing that you are not saying, but I think is important to say explicitly, is that when the Europeans decided to sign long-term contracts with the United States on liquefied natural gas during the Ukraine conflict, they thought they were signing a long-term contract with a partner. Today, I would say every European capital is now trying to figure out how to decrease its reliance on America and LNG, right? And so one of the other national security, energy security issues, which I don't think Europe thought it needed to do, but they do, is to reduce their reliance on the American energy supply chain. And that's getting them to turn to green solutions as well. Yeah, I mean, I think that's right. I mean, I think another thing that you might be thinking about from the perspective of Europe is, you know, when they were signing the long-term contract with the United States, they were also signing contracts with Gulf producers, or it was in a context in which Gulf producers were adding to the global LNG mix and helping to keep the balance. I think Europeans generally feel very, very insecure about their relationship with the United States, as well as with other, you know, powers around. And they want to be able to have a conversation with the U.S., which isn't as dependent. They don't want to appear like a vassal because then they'll be treated like a vassal. LNG contracts with the United States may have been a good idea at the time and may be the only option at the time. But right now, I think there's a little bit of perhaps caution. And it's the same, exact same kind of caution as when an F-35 purchase program comes under review. Same thing. So I want to tie this all together to wrap up here. We have two governments, two very different tools, the U.S. working through markets, China working through direct control. Do you see these as like two fundamentally different approaches or are they two versions of the same instinct? I think there's a convergence here. So I think like we have this idea that, you know, there's these sort of two separate entities. There's the state and then there's society. And there's like this, you know, transmission of influence and of information between the two. And that's never been the case. I think the Chinese version of this has society embedded within the state. I think the Western version and the North Atlantic version has a degree of overlap, but it's not a complete degree of overlap. So we're talking about, you know, ways of looking at the world that have sort of been in place, you know, since time immemorial. I think, you know, what's probably very important now to think about these two competing systems, is that like state capitalism is back. The state is back. It's not going to retreat. Will it operate with society in more of this interactive overlapping way as, you know, through financial markets, for example, as signaling and capital transfer and risk transfer mechanisms or institutions, infrastructure, or will it be in the mandate path? And I think that's the choice that we're going to be facing. I want to be careful. Like, somebody could hear what I'm saying is sort of like, you know, the inverse of a Fukuyama end of history, sort of like a return of history, you know, a return of sort of some grand ideological contest. And I don't know that that's what I'm suggesting, but I would suggest that we are coming back to a world with two distinct ways for the state and the society to interact. And this is in the context of what is happening in China right now. And I think it's very clear to us right now. James Gutmann is the head of research at AbEx Technologies. He writes the Substack Arcs and Angles. You are one of the best communicators on this subject, James. I really love your Substack. I enjoyed hearing you talk about this. So thanks so much. James Gutmann: Thank you. Thank you very much, Stephen. It's really an honor to be included. And it is always a pleasure to be able to spar with my very dear friend, Jigar. So thank you. Jigar, enjoy your vacation. I hope you get to go shirt shopping and buy more sweet shirts like that. You will see a whole new group of shirts the next time around. The wardrobe has become increasingly important on video. So you've stepped up. I appreciate it. Open Circuit is produced by Latitude Media. The show is edited by me, Sean Marquand, and Anne Bailey. You can find all of our episodes on Apple, Spotify, wherever you get your podcasts. And of course, our video episodes, all of our videos are there on YouTube. Subscribe to Latitude Media. You'll get our show, Open Circuit, and Catalyst with Shail Khan. You can also find our transcripts at LatitudeMedia.com. Be sure to subscribe to our newsletters while you're there. James Gutmann: Thanks so much for being here. Thanks to James and Jigar. I'm Stephen Lacey. We'll catch you next week.