The Iran War Crisis: Ex-CIA Analyst Helima Croft on Oil Shock & Energy Risk | The Weekly Wrap

Thank you so much, Steve, for having me.

Well, what I think is important is that countries in the region anticipated this. So I was actually in the region end of January, beginning of February, and people I spoke with at pretty senior levels in the energy sector in these countries were very concerned that if there was a sequel between the US and Iran and Israel, that the Iranians would try to internationalize the cost of the conflict by targeting neighbors, trying to send up energy prices and give President Trump pause ahead of midterms. Essentially saying to President Trump, do you want to think about $4 a gallon gasoline? Like, what's your pain point? How committed are you to really trying to change the Middle East? So, those leaders had hoped that President Trump would essentially do what he did with Greenland, essentially back down because the... Yeah, basically they kept saying Greenland, saying like when he was faced with the market response, he backed down. But what I said was I was concerned about he's not facing a market response in advance of any action in Iran. He's probably looking at the playbook for Venezuela, which went spectacularly well from an operational standpoint. The capturing of Maduro, very little market reaction to the decision to go in there. I think the market reaction was like for an hour. For an hour, and basically they saw that we had a plan, that we basically installed Deli Rodriguez, that we were not going for massive regime change. Essentially the goals looked manageable in Venezuela, and I think people in the administration also looked back to June. That's the first time we met, Steve, was right after... literally like a day after... a day after we met, we were on a panel discussing the 12-day war in June between Israel, Iran, and the United States. And remember there had not been a big market response. We had a brief run-up, but when people realized that there wasn't any supply disruption, people faded the story. So, I think the administration was working off of those two playbooks. But people in the region had been warned by the Iranians that they were going to expand the blast radius in terms of their response. And so, again, I think people in the Middle East had hoped that they had convinced Trump not to do this.

They did not. And that becomes a question of, I always say, where did those warnings go? Like, who was told that this could be a problem? Was it communicated directly to the president? And maybe it wasn't, and he figured, okay, I'm going to do it anyway. Maybe he thought, everybody warns, but I have been successful so far in these escalations. Like, you can go back to the first Trump administration. Remember when he killed Qasem Soleimani, the leader of the Iranian Revolutionary Guards Quds Force, sort of the Kaiser So of Iran, and people were like, 'Wow, this is going to lead to a massive regional war.' And the Iranians backed down then. So, President Trump could point to prior actions and say, 'Well, look, it didn't lead to the market response that you warned me about.' So, maybe he thought this time around it would be the same playbook.

Yes, we're here.

They're effectively a parking lot. What I think is interesting is the administration will come out and say one ship got through. Well, normally 80 ships go through. So, effectively...

Yeah. I mean, you can go anywhere from like 60 to 100 ships can go through a day. So you know this is not one or two ships with their transponders turned off is in no way anything close to normalized flows. I mean the Strait of Hormuz is effectively a parking lot, and so we have a situation where significant quantities of oil are not making it. And really importantly as well, we can talk about, are there some routes to divert oil away from the Strait of Hormuz? Not perfect substitutes, and they also have security risks. There is no way to export Qatari LNG. It is blocked. So we have LNG...

Well, it goes to Asia and it goes to Europe.

And so think about the Europeans. And we think about who is really facing an energy crisis.

We feel the price because it's a globally traded product. And so we will feel the price impact here. But the countries that will really...

The countries that will have supply problems will be in Europe and in Asia. But the Europeans had made the decision to pare back Russian energy supplies. And so they were backfilling what they used to get from Russia with supplies from Qatar, from Australia, and from the United States.

Well, this becomes a question about what does winning look like? I mean already we are facing significant shut-ins on the oil side. Obviously nothing's moving on the gas side, but the question is like, can we, with stockpile releases, can you get through a couple weeks? Sure. So we are waiting to hear the announcement of what is expected to be a stockpile release coordinated between countries and the International Energy Agency. So, European, Asian, US releases from global stockpiles. But that only gets you so far.

It can get you a couple weeks.

Just a couple of weeks.

Depending on again how many ships move, how much the stockpile releases. But what's important when you think about the US Strategic Petroleum Reserve, we drew down that significantly after the Russian invasion of Ukraine. We came out and announced early on we were releasing 180 million barrels from the SPR. We didn't refill that.

We have about 400 million. And so if you want to think about it though, if we're losing, you know, basically 20 million of crude products through the Strait of Hormuz every day. Now there are some offsets we're going to watch for, but you know that gets you only so far in terms of like what you can backfill. And then you get down to very, very low shock absorbers. And that's always been the concern I had about the decision not to refill the SPR because you need it when you have an emergency like this. And the original justification for the SPR, which was created, by the way, after the 1970s oil shocks, we decided we needed to have these reserves for emergency purposes. And originally it was supposed to be used for disruption to a US refinery and then...

A US refinery, and then we kind of changed the reasoning for it during the Arab Spring when we lost output from Libya, right? And even though we were not having a disruption to our refinery system from the Libyan outage, we used it to sort of manage price and to like put more supplies on for the global market. And then when it came to Russia-Ukraine, remember we did not have a physical market disruption in Russia-Ukraine. We had concerns about a disruption. We had concerns that there would be a 3 million barrel a day disruption and we preemptively released to cool prices. And so we've gotten to a situation where we've used it for a variety of purposes, but we haven't taken the opportunity of lower energy prices to refill it.

So people I have spoken to have said the limited aims that the Pentagon was given in terms of go after the missiles, the launchers, the naval assets, that can potentially be wrapped up in two weeks. And I say, gosh, you know, when I talk to people in the region, I say, oh, I hear it's two weeks. To like, gosh, that's a long time for this to continue.

They think two weeks is a long time because remember Steve, like nothing is moving and countries are having to physically shut in production. So...

So it means that you run out of storage. So let's say I'm an oil producer and I can produce... I'm UAE. I'm Iraq. Let me take Iraq because Iraq is a really interesting one. Second largest producer in OPEC, and I'm Iraq and I have had investments made in production and I can produce on any given day 4.3 million barrels, but I haven't invested in storage capacity. So I am dependent on the Strait of Hormuz to move my exports. I don't have... I have no place really to store excess oil. I have no... And so once I reach tank tops with storage, I have to physically shut in my fields.

They have already shut in about 3 million barrels.

And so now what I think is really important to understand why this is not just a concern but a real crisis in the energy markets is we've shut in across the Middle East about 6.7 million barrels a day. That's basically they're having...

Well, I mean, think about it in terms of we consume around 103 million barrels a day. So, you could say is 6.7 shut in really a big deal. But that's on top of just what's not flowing through the Strait of Hormuz on a given day. And then you go to how long will it take once those fields are shut in to restart. And I think it's a variety of different stories. Like some countries I think will have a faster turnaround time when it comes to restart. Like I think Saudi Arabia, which is like best-in-class, like a best-in-class national company, it's Aramco, they I think will have an easier time restarting. But you take a country like Iraq, which has infrastructure issues, investment challenges when it comes to their physical infrastructure, I think there'll be a longer restart. And then when we talk about gas, you know, once you shut down these liquefaction facilities, again, it's not a light switch. So the long...

It's just in terms of like the mechanics of these, you know, this cooling, how you actually have to shut down these facilities. So it's not just like I walk into this room, I turn off the light, I decide I want the light on, I turn the light on. Okay, that's why again I think countries in the region were deeply concerned about another conflict with Iran and they thought that the economic impact would be so significant that we wouldn't go forward with this because it could be really calamitous. So you do have cases where on the trade war he sometimes backed down. So you don't know when he's going to really back down with action, but typically when it comes to the Middle East, like I remember this so clearly with the issue of Qasem Soleimani and...

In his first term, and he had said that his red line in the Middle East was the loss of American life. And we had had a series of attacks in 2019 on energy infrastructure in the Gulf after we reimposed maximum pressure sanctions on Iran, and we didn't go in and assist those countries on oil because we said, look, we had a Carter doctrine actually, which said any threat to you, any threat to energy supplies out of the Persian Gulf is a threat to United States economic security. That was the Carter doctrine in the 1980s. So when you had this attack on the world's largest oil processing facility in Saudi Arabia on September 14th, 2019, knocked out half of Saudi production temporarily, people were wondering, are we going to go after Iran because we have this Carter doctrine? And President Trump was like, that's not the Trump doctrine. That oil is going to Asia. We have oil production in the United States. Like, it's not my problem. Not my problem. And people in the region were like, 'Wait a second. We have a Carter doctrine. What do you mean it's no longer operational?' But he had the Trump doctrine, which was no loss of American life. And when you had this person in Iraq, he was a contractor, actually newly naturalized Iraqi who'd become an American, he was killed in an attack linked to, you know, Iranian-backed militias, and President Trump was like, 'That's my red line.' And so he ordered the killing of Qasem Soleimani. And people were like shocked, like, how you're rolling the dice on killing again, like one of the most powerful men in the IRGC, the one who's planned so many of their external operations. Like you're killing Kaiser So and you think this is going to be contained.

But the Iranians were like, oh my gosh, like he's going to do this, like I don't want to mess with him. And they did a very telegraphed response, firing on US bases housing troops in Iraq, our troops in Iraq. But like, by and large the Iranians like folded. So if you're President Trump, when it comes to the Middle East, like you've been typically willing to do these daring operations and there hasn't been a lot of market blowback. So I do think in the back of his head he was like, well, people warn me all the time and show me when it's really produced a bad market outcome.

So this is what's interesting is what metrics are you using, Steve? So if we're using the...

Well, what does winning look like?

What does winning, or you know, the David Petraeus 'tell me how this ends' about Iraq.

So if you just go for formal missiles, the ballistic missiles, launchers, formal naval assets, you could say the US military is on track to meet targets, should meet the initial targets. Two weeks, two more weeks of this. But the question is, do we have more expansive aims? And that's what I think is confusing a lot of people is that on any given day, a different official in the administration might say something different about what our war aims are. So, if you listen to like the most recent Marco Rubio statements, it looks like it's fairly limited aims. But sometimes we've talked about we want to get rid of the Supreme Leader. President Trump himself has talked about that.