What War Means for Energy Prices | Helima Croft

And so for President Trump, the idea of diminishing Chinese and Russian influence, I think, was part of the appeal to him for going in there. As well as the idea that essentially Venezuelan oil reserves — they say it's the biggest oil reserves in the world again — but this is not like having barrels in Saudi Arabia where it's much easier to extract. These are difficult barrels to extract. But he liked the idea of, I think, having this resource that he felt he could sort of control.

They've been massively building out their storage capabilities. But it's interesting when you talk to — I won't name them — but some of the very senior Trump administration officials, they have a view that China is stockpiling for strategic reasons. They are, you know, basically preparing for conflict with the United States.

If you look at this year and you strip out all the geopolitics, you'd say, gosh, this does not look like a market that needs additional barrels if we look out 12 months. But then all these other factors come into play. Let's say President Trump decides to use the armada that he has sent to the Middle East to target Iran. If we are entering a period of escalation, disruption, that's when you think about prices higher from here.

Thank you for having me. And you elevated me by calling me an agent. I was actually a CIA analyst.

Well, what's interesting — so I was an analyst, and so we were responsible for essentially writing the newspaper for the president. It's a presidential daily briefing he gets every morning. We would do longer-form pieces for senior policymakers. And so I was part of a group that was looking at worldwide threats to oil disruption.

Well, I think it is, particularly when it comes to oil markets, because if you think about the sort of geology of the oil patch before we had the shale revolution, Western countries were very focused on their dependency on foreign suppliers. And so we were always having to focus in the United States on Middle Eastern supply, other emerging sources of supply like in West Africa, the Stans. And then when I started working in financial markets, again, before the shale revolution, if you want to think about oil prices, you had to think about spare capacity, and so you always had to keep an eye on these big producing countries, questions about how much oil did they have left in the tank.

I think the shale revolution changed a lot of these dynamics because once you started getting this abundant source of supply in the United States, short cycle, so you did not have to wait years between getting the sort of barrels after you made the investment, I think it changed a lot about how investors thought about the oil market. They became less concerned about thin spare capacity. They thought about the United States providing ample volumes. And so I think both policymakers and some market participants kind of said, well, you know what, I can focus on other parts of the oil market. But as we continue to see, geopolitics comes roaring back.

Well, you know what I think is very interesting? I saw the kind of test case for this. So I remember during the, again, the Arab Spring where we started to have, you know, disruptions in places like Libya, concerns about, you know, other oil-producing countries potentially having disruption. I felt like that was almost like the kind of peak geopolitics moment. And then we had this decision that came, an OPEC decision that came in November in 2014, and it was actually Thanksgiving Day.

And OPEC made the decision because we already were having US production coming on. We already were in the days of the shale revolution, but we didn't know at what price shale needed to continue, the shale producers needed to keep producing. And OPEC made the decision in November not to cut production. And I remember when they made the decision not to cut, and you saw prices really start going down. But really, I think it caught a lot of oil producers off guard because I was later told that their view was that shale would have a break-even in the 70s, that it was expensive, that basically you could do this experiment of not cutting production, and that shale would break maybe six months in.

And they were not anticipating the sort of resiliency of US shale production, that their experiment in terms of not putting in a price floor, seeing prices just collapse, and shale kept going. I think that really changed our thought process. And I remember going to subsequent OPEC meetings, but the big one then in November, a year and a half later, when they basically made the decision in 2016 that enough was enough. That basically, yes, shale was declining, but also their revenue was being hugely impacted by the fallen prices, that they had basically allowed this massive buildup of oil inventory.

And so I was at that fateful meeting where the OPEC producers decided to join up with the Russians. And remember, if you think about the Cold War, some of us are so old, we remember like the heated days of the 80s, you had the Russians and the Saudis on the opposite ends of the Cold War. And then you had this decision in November of 2016 where essentially OPEC and the Russians joined together to manage the market. And I'll never forget one really smart observer said to me in Vienna, this was a shotgun marriage driven by shale. That essentially for the OPEC producers, they had to basically do a deal with their historic adversary in Moscow and these other non-OPEC producers to get control back of the oil market.

That is such a great question because I feel like there has been a sort of evolution in how President Trump thinks about the oil market. Because President Trump, I think, when he thinks about OPEC, he thinks about the 1970s, the gas lines. He thinks about what it did to President Carter in terms of his political, you know, misfortunes. And the first Trump administration, initially, he was very, very anti-OPEC. But I will never forget because I was in Vienna in March, March when we had that fateful meeting in March 2020 where the Russians and Saudis could not reach an agreement. And, you know, the Saudi oil minister, his Royal Highness Prince Abdulaziz, I can tell you, I had been in Saudi Arabia early on, like, you know, early, early February 2020, and he was deeply concerned. He said, we don't know about the extent of demand destruction from this virus, but it could be worse than SARS, and we need another production cut. And the Russians were like, no, you had no agreement.

Biggest demand collapse in history, starting with, like, because we're in the early days of COVID, and this price war began in the midst of the COVID demand collapse. And you had the Russians and the Saudis, and everybody put every barrel they could on the market, and prices were collapsing. And as soon as I landed back in New York, my phone was blowing up from shale executives saying, President Trump better get these Russians and Saudis back together or the American energy dominance story dies.

Because President Trump initially couldn't decide: falling prices good for the US consumer, or do I need to save shale? And in March, April 2020, he decided to save shale, and he was the one who became the architect in April of the biggest OPEC Plus production cut in history. They cut over 7 million barrels, and it was an amazing moment where President Trump really kind of took control temporarily on this producer group to save US shale producers.

And you fast forward to where we are now, and it's really clear that for President Trump, the lower the better. And I think that for shale producers, this has become a kind of a challenge for the industry because on the one hand, they love his deregulatory agenda. They love the fact that he will permit anything. They love the fact that very early on he signaled that he was going to rescind the kind of Biden freezes on LNG export permitting pauses. Like, they think it is a much better environment on the regulatory front. And yet President Trump's desire for $50 oil does not really meet their medium-term objectives. Like, they can certainly survive another year with WTI prices in the 50s, but it's not an environment where they grow or where they thrive.

And so I think that has been the interesting challenge for these executives is that there's no signal that he's willing to provide price support. And I think what also was interesting is I attended the National Petroleum Council. I'm a member of that organization, and it's an advisory group to the Secretary of Energy, and it was so interesting. We had our meeting in December, and Secretary Wright gave this really interesting speech where he talked about low energy prices being key to the entire Trump agenda when it comes to reshoring American jobs, when it comes to his view of an American manufacturing revival, winning the AI race with China.

And so I do think it's gone beyond simply saying that this is a nice thing to have for US drivers. He now has an entire economic strategy based on lower energy prices. And that, I think, poses more challenges for producers because you have to then wonder at what price would he step in if lower prices are a cornerstone of the entire economic agenda.

Well, I think what is interesting is you have the International Energy Agency in Paris, which had come out a couple years ago and said essentially no need for investment in traditional fossil fuels, now having to kind of walk back that analysis. And I do think certainly when we look at the data center buildout, there is, if you want to look at the bull case for natural gas, like, that is the bull case for natural gas. Because if you look at the US strategy, when you talk to senior officials in the Trump administration, they will tell you that the AI race will be determined on who wins the baseload power race, and the United States strategy is almost entirely based on nuclear. I mean, nuclear and natural gas.

So that is so different than when you want to think about China, which is basically like, yes, natural gas is important, but we're also doing wind, solar, hydro, coal. The US, again, it's natural gas and the lead with a little bit of nuclear, but we've essentially said when it comes to renewables, that is not part of the mix that we're looking to when we think about the AI race. So I do think, like, when you think about natural gas, like, that is the kind of medium-term bull case for natural gas demand.

So I think that is the question, though, ultimately, when you go back to the sort of geopolitics and the AI race, is can you win the AI race if you're basically saying we're going with one primary energy feedstock with a backup on nuclear versus a country that is truly going all of the above when it comes to energy?

I think it's not as simple as that. I think that the reasons that we are going in have evolved over time. It a little bit reminds me of the run-up to the Iraq war in the sense that I think there were different stakeholders in the administration that had different reasons for wanting to go in.

And I do think that if you look at somebody like Secretary of State Marco Rubio, who importantly is also national security adviser, which means that he now sits in the White House and has more extensive West Wing walk-in privileges. You could say that Marco Rubio's, a lot of his political career has been based on Cuba politics and the idea that the United States should prioritize the overthrow of the Cuban regime. And many people say that Venezuela is an extension of Cuba policy because Venezuela historically, particularly under Hugo Chavez, when we had the kind of heyday still of Venezuelan production before it went into like sharp and steady decline, his Bolivarian revolution was about using the proceeds of oil exports to fund political allies in the region, when it came to Cuba with the provision of outright barrels to Cuba, helping to keep the lights on in Cuba.

And so for Marco Rubio, he really does want to sever the financial link between Venezuela and Cuba in the hopes that potentially you get some type of different regime emerging in Cuba. The question is, if that is your goal, and others talked about drug trafficking, migration, I think that was an issue for Stephen Miller. If the revitalization of the Venezuelan oil sector was not your sort of principal leading goal, but something that's kind of nice to have, something that might pay for development there, but not a really origin story goal, later became the justification.

What is the commitment of the United States to providing the necessary capital, security, technical assistance to revitalize a sector that's been on a multi-decade decline? And we started this conversation with the oil strike, and I think that was kind of a seminal moment for Venezuela because prior to Hugo Chavez, PDVSA, the national oil company of Venezuela, was one of the premier national companies in the world. I mean, the technical competence there was extraordinary. Venezuela was producing, you know, at one point, you know, close to 3.5 million barrels a day. We're lucky on any given day if they're producing 800,000.

And that oil strike was such an important moment because Hugo Chavez decided that the oil workers were a source of opposition to his regime. The United States had dabbled in a little coup plotting there, and he'd become incredibly paranoid about sources of opposition that might be externally funded. He sees this oil strike, he sees collapsing production, and he basically says, I am going to take control of PDVSA and I'm going to turn it into an organ of the state. And 20,000 PDVSA employees were fired overnight.

And then you had thousands of other PDVSA employees saying, I'm not going to stay here. I'm not going to become part of the Bolivarian revolution. I'm not going to become an ATM for the Venezuelan military. So I'm going to go to Canada. I'm going to go to Kuwait. I'm going to go to the United States. I'm going to leave Venezuela. And so the national oil company really was hollowed out. And not only did you lose manpower, they didn't invest in equipment, they didn't invest in, you know, keeping the wells going. And so you started to have this really atrophying of Venezuelan production.

And so because it is a multi-decade decline, the amount of money and capacity building that it's going to be required to get Venezuela and the oil sector back up on its feet is extraordinary. And I talk about that December meeting of the National Petroleum Council. A lot of oil executives are there for that, so you can have interesting sideline conversations. And they were saying it's going to cost, to grow Venezuelan production just by a million additional barrels, it's going to cost $10 billion a year.

And then you need to deal with the security issue. Who's going to deal with the colectivos? Basically a paramilitary force. These guys ride around on their motorcycles. They report up into the very feared interior minister, Cabello. Who's going to deal with them? Who's going to deal with like rewriting contract terms there? Who's going to basically fix the electricity grid? Like this is an enormous undertaking if we really have a goal of really turning around PDVSA.

You can probably get a couple hundred thousand barrels, though, out of PDVSA in terms of new production just by bringing in diluent in order. It's a very, very heavy product to basically be able to like get a couple hundred thousand additional barrels. You bring in diluent, you do some minimal improvements in the security sector, some potential new investments in the grid, but to get an additional million barrels a day, you're talking about the 2030s and a lot of capital.

I think that is about, and I think it is important to look at President Trump's national security strategy that came out in December because it's such a clear articulation of his hemispheric strategy. The idea, you know, we wrote a piece calling it Monroe 2.0. He calls it the Dunro doctrine. But the idea that the United States should be the dominant player in the Western Hemisphere, and Venezuela was seen as an outpost of first Chinese influence because they were a principal taker of Venezuelan barrels, had given, you know, billions in loans, part of the whole way China does their dealings with commodity-producing countries, essentially oil for basically Chinese investment infrastructure or minerals for Chinese investment in infrastructure.

So that was like the original Chinese entry point was the sort of oil-for-investment trade with China. But then you had increasing Russian influence there. There was a period where multiple floors of the PDVSA towers in Caracas were occupied by Rosneft employees. And so for President Trump, the idea of getting, you know, or diminishing Chinese and Russian influence, I think, was part of the appeal to him for going in there.

As well as the idea that essentially Venezuelan oil reserves, they say it's the biggest oil reserves in the world again, but this is not like having barrels in Saudi Arabia where it's much easier to extract. These are difficult barrels to extract. But he likes the idea of essentially having these barrels that can be brought to US Gulf Coast refiners, which run in a heavier barrel, not the sort of lighter barrels that shale produces. He liked the idea of, I think, having this resource that he felt he could sort of control.

So I do think it appealed, there was a clear economic argument, but I do think, and that's how you get to Greenland, this idea that you want to be the dominant player in the hemisphere.

Well, I think what's interesting is like we really thought they were going into Venezuela when there was such a massive buildup of US forces off the coast of Venezuela. We were targeting those drug boats in Venezuela. Like it was very clear to a lot of people in Washington middle of December that this was either going to be a kill or capture exercise involving Nicolas Maduro.

Iran. There had been a view at least in mid-December that President Trump was kind of done with Iran. Again, if you look at the national security strategy, very focused on hemisphere influence. But then when it got to the Middle East, it basically said the Middle East is important, but not as important as it used to be because we have so much production of oil in the United States, and we have revitalized our ties with our key Gulf allies, and we had a 12-day war against Iran, and we did significant damage to the nuclear program. It looked like President Trump was kind of ready to turn the page on Iran.

Until you had the visit of Israeli Prime Minister Netanyahu to Mar-a-Lago on New Year's Eve. And he gave this speech from Mar-a-Lago, and I actually happened to be in Palm Beach for Christmas break. So it was like you cannot really get away from work. And he gave this speech where he talked about the protesters, saying that depending on how the regime treated protesters, the US might have to go back into Iran. Also talked about the missile program as well.

And we thought that was fascinating because there have been so many protests in Iran, like really large-scale protests. And this was really the first time an American president said, we may militarily intervene depending on how they treat a domestic uprising. And we thought, this is really interesting because we've deployed so many assets already off the coast of South America. Can we also do a significant military operation now in the Middle East? Like, can you do everything everywhere all at once?

And what is the actual endgame when it comes to Iran? Like if we intervene because of a domestic situation, who are we picking to take charge? Like clearly when it came to Venezuela, we did a deal with Delcy Rodriguez basically saying if you are willing to help us when it comes to the oil sector, meet some of our core objectives and not undermine us, we will largely keep military in Venezuela in place.

If you think about Iran, if we're going in to aid the demonstrators, sure, we could take out the very old Supreme Leader of Iran, but are we going to keep IRGC, the Revolutionary Guard, Inc. in place? Do we have the kind of viable opposition that we are going to get behind? Can you do that based on air strikes alone? So I think it became a really interesting conversation about what are the endgame objectives.

And now we have been ramping up our presence there, and it seems that the administration in Washington may be a bit split between those who do want another round of kinetic action in Iran and those who seem to be potentially advocating for giving diplomacy one more shot. Like, can you get significant concessions where the Iranians maybe say we're not going to enrich uranium anymore, we will forego ballistic missiles? Like trying to see at this moment where the regime has faced significant protest, where they faced a pretty brutal US air campaign and Israeli air campaign over the summer, whether you can get a deal that off-ramps this crisis for now at least when it comes to US involvement. I think we'll know in the next days or weeks.

Depends on how the Iranians respond. Think about over the summer. Think about if we had sat down 10 years ago and said the Israelis and the United States are going to be bombing the Iranian nuclear sites. I mean, certainly if we'd had this conversation in 2010, oil would be through the roof.

But the fact is that the Iranians chose only to retaliate when it came to Israel's domestic energy infrastructure. They did not target anything regionally. In sharp contrast, frankly, to 2019. Like I remember in 2019 after we zeroed out exemptions from imports of Iranian oil and the then foreign minister Javad Zarif was in New York making the rounds at, you know, several New York think tanks because at that point we had a regime that we considered more reformist in Iran. And so officials in that regime would travel to the United States.

And I'll never forget then foreign minister Javad Zarif in 2019 said if we can't sell our oil, no one's going to be able to sell our oil in the region. And you had like attacks on tankers off the coast of UAE. You had pipelines attacked, and then you had Saudi Arabia's Abqaiq facility, world's largest oil processing facility, hit by a combination of drones and cruise missiles, taking half of Saudi's production off temporarily.

So if you fast forward to last summer, there was concern, could the Iranians retaliate like at least how they did in 2019? Like what if they hit a major oil facility? What if they hit a tanker in the Straits of Hormuz? That could be really impactful for oil prices. But the Iranians did not do any attack like that. And their main response outside of targeting Israel was to do an attack on the US base in Qatar, but they telegraphed that in advance.

So a lot of market participants were like, okay, the scenario we all feared happened. We've had no regional oil supply disruptions. I'm going to turn the page and focus on other issues. I'm going to focus on will we have too much oil on the market? What does demand look like?

But at this moment right now, I think a lot of market participants are thinking that maybe the Iranians, with their back against the wall, if we go into Iran again, if we were to do a regime change operation, if we were to, you know, either capture or kill the Supreme Leader of Iran, that the regime may respond differently, that they may take a page from 2019 and hit a tanker in the Straits of Hormuz, that they might hit some regional energy facilities to raise the cost economically for the United States.

So again, I think a lot's going to hinge on what we do, what we target. Some have suggested maybe we target Revolutionary Guard bases because the regime has been able to use the Revolutionary Guard to put down the demonstrators. There are no real indications right now that they are disobeying any orders to brutally crush the protests there. So some have suggested the United States may target those bases, force the Iranians to rely, the government to rely more heavily on the army because that's seen as a more broad section of Iranians are in the army. Maybe they would not comply with orders.

But if there was an attack on a base, for example, would the Iranians respond with something more symbolic? But again, if the Supreme Leader is targeted, there is a concern that the Iranian response would be much more formidable when it comes to regional assets.