How bad will the energy crisis get?

0:00 This is the Persian Gulf where roughly 20%

0:05 of the world's oil and natural gas comes from.

0:08 Iraq, Kuwait, Bahrain, Qatar, Saudi Arabia, and the United Arab Emirates.

0:15 Almost all of their oil has to pass through this narrow strait,

0:21 the Strait of Hormuz, which is currently almost completely closed due

0:26 to the threat of Iranian missiles and especially drone strikes.

0:32 This is already causing major energy price spikes in the US,

0:37 Europe, and especially in Asia.

0:42 But experts are telling us that it's likely to get much,

0:45 much worse if the conflict continues much longer, which it probably will.

0:52 So, what can you expect?

0:53 How bad will the energy crisis get?

0:56 Hey, I'm Yuri.

0:57 I have a PhD in economics and in this briefing I will summarize and visualize

1:03 for you the latest research by geopolitical experts

1:06 and energy economists on the upcoming energy crisis.

1:11 Specifically, I've constructed three scenarios for you and will

1:15 tell you how likely I think that they are.

1:18 Scenario number one.

1:21 The strait is opened soon, but damage to crucial infrastructure means that it

1:26 will take time to go back to normal.

1:29 Scenario number two.

1:31 The conflict will continue for a while because Trump may want to back out,

1:34 but the Iranians and Israelis won't let him.

1:37 And scenario number three.

1:40 A wild card, but apparently seriously considered by the Trump government,

1:45 the conflict continues and Trump moves to ban US energy

1:48 exports to keep voters happy for the upcoming midterm elections.

1:53 This scenario would be a disaster for Europe and Latin America.

1:57 But before digging into these three scenarios with price

2:01 predictions and how likely each of these scenarios is,

2:06 we have to start our briefing with three crucial pieces of context.

2:11 The first is that this energy crisis is essentially

2:13 about three different products which have quite different dynamics.

2:19 First, there is oil, crude oil,

2:26 which still has to be refined locally, and so-called oil products like gasoline,

2:34 diesel, cooking oil, and jet fuel, which have already been refined in the Gulf.

2:39 Finally, there is liquefied natural gas, LNG,

2:43 which is mostly used to generate electricity and for heating buildings.

2:47 Now, LNG mostly comes from Qatar and about 90%

2:54 of it goes to Asia and about 10% goes to Europe.

3:02 These numbers really only matter in the short term because ships take,

3:06 for example, more than a week to travel from the Gulf to Japan.

3:10 However, after that, ships can go wherever they please.

3:13 So, in the long term, everyone that uses LNG will suffer from this.

3:18 After all, if there is no LNG in Asia,

3:22 then Asian buyers will just start bidding up the price,

3:26 which will attract ships from, for example,

3:29 Europe, which will raise the price of LNG all around the world,

3:33 even in places that export LNG like the US.

3:37 However, for crude oil, the dynamic is quite different.

3:42 Again, about 90% of crude oil goes to Asia, but luckily in this case,

3:49 if the strait remains closed longer,

3:51 there may be some relief because there are actually two pipelines,

3:56 one in Saudi Arabia and one in Dubai, through which, after a while,

4:01 about 10 to 15% of crude oil could bypass the Strait of Hormuz.

4:07 And for Europeans like me, there may be some more good news.

4:10 Not all oil is the same.

4:12 There is sweet and then there's sour crude oil.

4:15 There's light and then there's heavy crude oil.

4:18 This is important because our European refineries are optimized

4:22 for sweet light oil from Africa and from the United States.

4:27 On the other hand, Asian refineries are

4:30 optimized for Middle Eastern crude medium sour oil.

4:37 And crucially, because this will become important later,

4:40 US refineries are not optimized for light US shale oil, of which there is a lot,

4:47 but rather for heavy and sour crude oil from Alaska,

4:51 from Canada, and from Mexico.

4:54 This is why European and American crude oil prices,

4:58 measured by Brent crude and the Western Texas index,

5:02 respectively, did go up, but not by as much as crude oil prices in Asia.

5:08 The Western Texas index, WTI crude oil,

5:11 President Trump has used this benchmark to try to convince

5:15 the American public that things have not gotten so bad yet.

5:19 But this is misleading.

5:20 What matters for most Americans is, of course, not crude oil,

5:24 but rather the price of refined oil products such as gasoline,

5:28 diesel, and jet fuel.

5:30 And actually, a lot of crude oil was already refined in the Gulf countries.

5:35 But now, ships carrying fuel, diesel, and jet fuel are also stuck in the Gulf.

5:42 Therefore, as you can see here, even in the US,

5:45 consumers are already suffering more than the Western

5:48 Texas index benchmark would have you believe, which is the blue line.

5:54 While it went up by about 60% since the start of the year,

5:59 diesel in the US is up by almost 100% and gasoline and jet fuel by 80%.

6:07 And this makes sense, right?

6:08 Given that we've seen that for crude oil,

6:10 the global market is not completely global due to refineries in the US,

6:15 Europe, and Asia being optimized for different types of crude oil.

6:19 But on the other hand, jet fuel, diesel,

6:21 gasoline, this can be shipped all over the world.

6:23 So, ordinary Americans are less protected than some may think.

6:28 But sadly, today's already sky-high prices might get quite a bit worse

6:34 if the conflict drags on because of our second piece of crucial context,

6:39 which is reserves matter.

6:41 This is about the role of strategic reserves.

6:45 Rich countries like Japan, China, the US,

6:51 and European Union, they all have strategic reserves.

6:55 China has the most, about 1.3 billion barrels.

7:02 And then the EU has about 570 million.

7:08 The US has about 415 million.

7:11 And finally, Japan has about 470 million barrels.

7:17 And together, that is about 75% of global reserves.

7:22 But because, for example, China imports more than the US,

7:25 the picture for how many days that these reserves

7:28 will last for these countries is actually different.

7:32 Here, Japan is the big winner.

7:34 It has about 224 days of reserves left.

7:39 China, about 110 days, even though it has a giant reserve.

7:44 And then the US, 120 days.

7:46 And finally, European countries only 90 days of reserves are left.

7:52 Now, so far countries together have

7:54 released about 400 million of these reserves.

7:58 And this has kept prices lower than they would have otherwise been.

8:01 But if the conflict lasts much longer,

8:04 these reserves will run out and then oil prices can go quite a bit higher.

8:10 Luckily, there is also some good news

8:13 in the form of crucial context number three.

8:16 People can change.

8:18 For example, when the 2022 gas crisis hit Europe, a massive price spike,

8:25 then Europeans collectively reduced the price by quite

8:28 a lot simply by lowering the temperature in their homes,

8:30 for example, improving the efficiency of factories, and wearing sweaters more.

8:36 Similarly, countries without significant reserves, like,

8:38 for example, Bangladesh and the Philippines,

8:41 have already contributed to lower demand for oil because they rationed fuel,

8:46 for example, by reducing the work week from five to four days.

8:50 Now, if prices really spike due to a longer war,

8:53 a lot of Asian countries will probably turn from gas back to coal energy.

9:01 And Europeans may actually start buying a lot of EVs from China again.

9:07 Meanwhile, on the supply side, there's good news for gas and bad news for oil.

9:10 The good news for gas is that there's actually a lot

9:12 of capacity scheduled to come online in the United States,

9:17 export capacity for LNG,

9:18 and that is about as much in the next 3 years as the entire production of Qatar,

9:24 which was 20% of the global supply.

9:26 This means that while gas prices are projected to go up,

9:30 it probably will not be as dramatic as it

9:33 was during the 2022 gas crisis in Europe.

9:36 On the other hand, when it comes to oil,

9:38 most excess capacity was actually in the Gulf countries.

9:43 So, if the price went up by a lot historically,

9:46 the Gulf countries would bring it back down by pumping more oil.

9:51 And now, they will not be able to do

9:53 that given that the Strait of Hormuz is closed.

9:56 These three are, I think, the main dynamics that you'll need to be aware of if

9:59 you want to know what to expect from the upcoming energy crisis.

10:02 Asian countries will hurt the most

10:04 because their refineries need Middle Eastern crude.

10:08 But, when it comes to natural gas and diesel, gasoline, jet fuel,

10:12 we are actually all in the same boat because markets are global.

10:16 Reserve releases will help.

10:19 Keep an eye out for them,

10:20 but also keep an eye on total reserves because if they run out,

10:24 oil prices could really spike.

10:26 Luckily though, over time economies will adapt

10:29 somewhat as they learn to live without oil.

10:33 But, okay.

10:34 What can we expect concretely?

10:36 Here are my three scenarios.

10:38 In scenario number one, the US, Israel,

10:44 and Iran reach a quick deal which fully opens the Strait of Hormuz.

10:48 This could either happen because overwhelming

10:51 US military force cripples the Iranian

10:53 regime or because a country like China is able to negotiate a truce.

10:57 In this scenario, oil and gas prices will slowly

11:01 come down from the level that they are now,

11:04 but prices will remain higher than they were before the war

11:07 due to a lingering threat of Iran closing the strait again.

11:12 Most professional economic reports that I've read,

11:15 like those from Goldman Sachs,

11:16 the International Energy Agency, and Deutsche Bank,

11:19 use this as their baseline, but honestly,

11:23 I think this scenario is very unlikely and give it a 10% probability.

11:29 Now, scenario number two, the war continues for 6 months or longer.

11:34 The Strait of Hormuz remains largely closed.

11:37 This means the world will run out of reserves sooner or later,

11:40 but at the same time, the world will adapt somewhat,

11:43 meaning that gas and oil prices will stabilize

11:46 at around 200 to 300% of where they were.

11:50 That's a lot higher.

11:51 Europe will face the highest gas prices,

11:53 whereas Asia will face the highest oil prices.

11:56 The US gets off relatively easy,

11:59 but still faces around double the energy prices than it had before the war.

12:04 Just for reference, this means Brent crude oil prices will

12:07 go to around 150 to perhaps even $200 per barrel.

12:13 I give this scenario an 80% likelihood.

12:19 Finally, the scenario number three,

12:21 the energy nationalism scenario where Trump becomes extremely unpopular due

12:25 to high energy and to somewhat save the midterm elections,

12:29 he bans many US exports of energy.

12:33 And since we've seen that especially Europe heavily relies on US gas and oil,

12:38 this would be a massive disaster for Europe.

12:40 And while it would probably be very effective at lowering US natural gas prices,

12:46 it would not fully lower gasoline, diesel,

12:49 and jet fuel prices because US refineries are optimized for heavy

12:54 crude oil which they do not produce enough of themselves.

12:58 Finally, not being able to export would of course

13:00 cost US producers a lot of money and therefore

13:03 the US government a lot of tax income

13:06 which it will probably need to fight the war.

13:08 So, I only give this scenario a 10% probability.

13:14 But, why did I pick these probabilities for these three scenarios?

13:18 Because the reports that I used for the oil price estimates,

13:21 Goldman Sachs, Deutsche Bank, International Energy Agency,

13:23 they all used the short conflict as their go-to scenario, their baseline.

13:28 So, why do I think that a long war is now way more likely?

13:32 Well, there are two reasons.

13:34 The first reason has to do with the geography

13:36 of the Strait of Hormuz which favors Iran.

13:40 You see, there are mountains here everywhere on the Iranian side.

13:45 So, it will be super easy for small Iranian strike teams with, for example,

13:50 cheap drones to keep harassing ships in the Strait

13:55 of Hormuz even if there are American troops here somewhere.

14:02 And even if American troops take out the regime in Tehran,

14:06 [clears throat] for example, then it will still be possible for Iranian

14:11 resistance fighters to hide in these mountains

14:15 again with very cheap drones or they can even lay mines in the Strait

14:20 of Hormuz or they can come in with these new naval drones that we've seen

14:26 all over the Black Sea in Ukraine

14:29 and that have dominated the Russian navy there.

14:31 And this brings us to reason number two

14:33 why the Strait of Hormuz will likely remain closed.

14:36 A short war seems increasingly unlikely.

14:39 You see, so far whenever Trump did

14:41 something wild and it spooked financial markets,

14:43 like threatening to annex Greenland, he always made a deal.

14:48 Financial market traders actually called this the taco trade,

14:51 standing for Trump always chickens out.

14:54 And one potential reason why oil prices

14:56 are not higher right now is exactly this.

14:59 Oil traders expect Trump to back out when oil prices get too high.

15:04 However, according to many of the geopolitical experts that I follow,

15:09 the real problem right now is that Trump

15:11 is no longer in full control for two reasons.

15:15 First, he started this war with Israel.

15:18 Even if Trump can convince the Iranians

15:20 that he will truly retreat or stop attacking them,

15:24 he also needs to convince them the Israelis will retreat

15:27 and so far he has not been able to fully do that.

15:30 However, the second reason is now perhaps even more important.

15:34 Many experts agree that neither the US or Israel are now fully in control

15:39 of the war and that is because they essentially hurt the Iranians too much.

15:45 Therefore, they don't have much more to lose.

15:47 And importantly, given that Trump struck them in the middle of negotiations,

15:51 killed their leader,

15:53 how can the Iranians trust that he won't just hit them again in a few months?

15:58 This is why they demanded that the US

16:01 retreat from all major bases in the region,

16:04 which do you think Trump will just leave the entire Middle East like that?

16:09 Humiliated?

16:10 Who knows.

16:12 I don't think so.

16:13 I mean, he's very unpredictable, but I don't think so.

16:16 And this is why, sadly,

16:17 I think scenario number two is currently the most likely,

16:21 meaning that European natural gas prices are likely

16:24 to go up by almost double to 100,

16:28 which is still, of course, far far below uh the 2022 Ukraine crisis.

16:36 And given that reserves are limited,

16:37 oil will likely also get far more expensive,

16:41 perhaps even 150 to 200 USD per barrel, which would be unprecedented.

16:49 Although, corrected for inflation, which is what you see in this graph,

16:52 it would be slightly below still what happened

16:56 in 2008 just before the global financial crisis.

16:59 So, there you have it.

17:00 This will be a massive hit to all economies across the globe,

17:04 especially in Europe and Asia, who are the biggest oil importers.

17:08 It will lead to inflation.

17:09 It may cause another food crisis because natural gas is

17:12 a big input in fertilizers and it may cause a massive

17:16 currency crisis or multiple massive currency crisis in South Asia

17:20 because they rely a lot on remittances from the Gulf countries.

17:24 It would mean airline tickets get much more expensive.

17:26 And of course, it would be like

17:29 a great depression for the Gulf countries themselves.

17:32 But, that was not what this video was about.

17:35 It was purely about the effects on oil and gas.

17:38 If you'd like to see a follow-up analysis about these other subjects,

17:42 then let me know in the comments below.

17:45 And if you want to dig deeper, I highly recommend you check out

17:48 the excellent analysis by our advertising sponsor,

17:51 The Economist, who, as you probably noticed,

17:55 I heavily relied on for this analysis.

18:00 Specifically, I got the idea for the third scenario from their article,

18:05 "What if Donald Trump decided to ban oil exports?" And for scenario number one,

18:11 I heavily relied on the article, "Even the best-case scenario for energy markets

18:15 is disastrous." I highly recommend you go read

18:18 these articles right after this video and then

18:21 to determine which energy scenario is most likely,

18:26 I think The Economist's "Donald Trump Has Four

18:29 Bad Options for the War" is essential reading.

18:33 As these articles show, The Economist delivers insights to let you

18:36 see the bigger picture and think for yourself.

18:39 This is why I almost always rely on their analysis for my research

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