Transcript
INTRO
Jamie Nolan: Hello, Jigar. I'm so sad we are not together this week.
Jigar Shah: I know, I know. We saw you so much in Deep Creek Lake. It was amazing.
Jamie Nolan: That was so fun. And also, I see that you are home, so you were also not there. But I just have to say what a joy it was being in 70 degree temperatures all week. It was like sweatshirt weather.
Jigar Shah: It was like that the whole summer. I'm telling you, it got up to 85 degrees twice. Other than that, it's in the 70s.
Jamie Nolan: It was a little bit too chilly for me to swim. I got in the lake exactly one time. I was there for a week, but I did get to go out on the boat multiple times, and I went on several very nice hikes, and I enjoyed just being slightly chilly. And I got to see your house, which was lovely.
Jigar Shah: Oh, thanks. We're going to have to do an Energy Empire retreat over in Deep Creek Lake next summer.
Jamie Nolan: That sounds really fun. And our executive producer, Simon, who's also local to the DC area, will have to join us. And that sounds like a good way to write off part of your mortgage on your taxes that month. Talk to your accountant about that, Jigar.
Jigar Shah: I'm always looking for a good tax break. There you go. That's how we do it. The other story I was thinking about this week: did you see that Governor Abbott just put a pause on all data centers in Texas?
Jamie Nolan: I did not see that, because I have been coming back up to speed from being out on vacation. One of my strategies is avoiding news, because I'm a news addict. You told me about that, and I can't even believe it. I cannot believe that, first of all, a Republican would do that, but also in Texas, of all places. It's extraordinary. What do you think that means for the general public view on data centers? Have we reached a new bipartisan agreement that we all hate them? What's going to happen next?
Jigar Shah: Well, certainly Steve Bannon and the left have now agreed that they both hate data centers, so I think they are in arms with that. But ultimately, look, Governor Abbott is running for re-election and it's a 50-50. I think he's probably going to win, but it's 50-50. His opponent is coming after him hard around data centers. One data center in particular in the Permian Basin just pissed off the entire community and finally withdrew. So politically, he's going to have to come out strong and tough on data centers. And they had this whole Batch Zero process where they were supposed to fast-track all these data centers this month, and that now seems postponed for several months. It just feels like the entire Texas story around how they're rising to the occasion is getting derailed because of all of the hatred for data centers.
Jamie Nolan: It's wild. I was talking to my brother-in-law who lives in Texas this past week about how much ERCOT has really turned things around from a few years ago, when they had all those terrible power outages following that winter storm and a bunch of people died. At the time, I was like, they've got to connect to the rest of the country. This is ridiculous. They can't stay isolated like that. And they dug themselves out of that hole largely with batteries. They've kind of become the utility service area to look to. And I think they've been relatively nonpartisan in their deployment of clean energy technologies. Lots of solar and batteries went in on the grid there, lots of wind power in Texas, of course. They continue to be a state that defies trends that are defined on a partisan basis when it comes to energy. So I'm really curious about this development, and I am anxious to see what's going to happen. I'm also getting to the point where I'm just, like, peak data center. I just want to go through a day where I don't have to talk about data centers.
Jigar Shah: Dear Lord, it's everywhere. I totally agree. Did you know that I was on the Landman podcast? They were saying that 50% of all of their revenue now comes from the solar, wind, and battery storage industry.
Jamie Nolan: So you're saying that Landman, the TV show, has it completely wrong? Because don't they just talk mad shit about renewables on that show? I still haven't watched it.
Jigar Shah: It's a really good show. But yes, it's certainly not reflective. And they were not enthusiastic about being portrayed that way.
Jamie Nolan: Oh, did you hear that? That's Paramount Plus, right? Paramount, you need to bring in some consultants from the industry to talk about their view of renewables.
Jigar Shah: A big shift in season three.
Jamie Nolan: Well, as I was saying, I'm really, really sick of talking about data centers. And for that reason, I am really excited that we have James Gutman on the show today. Our good old friend James Gutman, our expert on Iran and all things oil industry and geopolitics and everything related to it. And he's back with his typical dose of optimism to update us on what's going on in the Strait of Hormuz.
Jigar Shah: Yeah, he keeps calling himself an optimist. I don't see it, to be clear. But he keeps calling himself that, and if that's what he needs to say to make himself feel better. The thing about James, which is so amazing, and which is why we keep inviting him back on, is he's so damn good at these predictions. I learn so much from him every time I talk to him. So I am really excited to bring him back on.
Jamie Nolan: Me too. I mean, he kind of scares the shit out of me every time he comes on. But nonetheless, he continues to be correct. Aside from the fact that no one can predict the completely irrational actions of this administration on energy and on armed conflict, if you will. But that being said, to the extent that James can predict what is going to happen, he has been right often.
Jigar Shah: All right. Well, without further ado, let's get into it with James.
EXXON'S QUARTER AND THE PRICE AT THE PUMP
Jamie Nolan: James, welcome back for a fifth record time to Energy Empire. We are so happy to have you.
James Gutman: Thank you so much, Jamie. I'm very pleased to be here. Very excited.
Jamie Nolan: James, help us square some headlines from this week, as well as a recent post from President Trump on Truth Social. Exxon just reported $14.5 billion in quarterly profit. That's $160 million a day. Chevron had its best quarter in six years, and Valero, a refiner, just posted its highest second-quarter profit ever. Meanwhile, 59% of Americans say they're cutting back on spending because of gas prices. The administration's answer is a Justice Department price-gouging investigation. And President Trump posted on Truth Social coming after the oil majors for the cost of gasoline. Sounds to me like he's trying to defer some responsibility here. But give it to us straight. Is this investigation from the Justice Department the administration's way of acknowledging that the war kind of caused these price increases, just without saying so?
James Gutman: I'm not really the one to try and impute meaning or intent into what the administration does or what President Trump tweets.
Jigar Shah: Who is? Diplomacy out of James. He's like, don't get me crosswise with the White House, Jigar.
James Gutman: But here's what I will say. You take Valero, or you take the oil majors who have assets outside of the Persian Gulf, or refineries that are unaffected. Of course they're making money. All this Persian Gulf oil and gas and refined product is dramatically curtailed. The Chinese have completely upended their approach to exporting their products. If you happen to own the refinery in the Atlantic Basin, you should be getting paid, right? You have the one refinery that's still keeping people supplied with their jet fuel. So that's the way it works. I'm not saying it's a good thing or a bad thing. I'm saying when something happens and you destroy a piece of the supply, then for the people who still have the remaining ability to provide, the price of what they produce is going to go up, and they're going to make better margins. That's just the way it works.
Is it price gouging? I don't think so. I'm not the guy who's going to make that DOJ kind of analysis and definition. But I'd be sort of shocked, if I was an investor in Exxon, if you weren't making more money at a time like this. I'd be like, what have you done with my capital? Why have I gone through the fallow years for you to not generate a return when you are actually producing something that is properly scarce at this moment? So I think that is a better way to think about the situation. As far as what Trump thinks about the conflict and the war and responsibility, I will defer to my diplomatic angels.
Jamie Nolan: It's unfortunate that he happened to make this promise of $2 a gallon gasoline. It's very unfortunate he happens to be on the record, and now we have to hold him responsible for that promise.
James Gutman: Under promise, over deliver. That's one strategy.
TWO WORLDS OF DEMAND
Jamie Nolan: Well, it really seems like there have been two stories coming out of this when we look at this question of demand. There are the countries who actually built something during this crisis: a global surge in rooftop solar, an EV surge across Southeast Asia, fertilizer plants converting to green ammonia. I was actually explaining this to my husband, because I think sitting here in the U.S., you don't see those trends. You don't realize that a great deal of the world has actually structurally changed things in response to this crisis, and those represent real, locked-in structural changes. But in the United States and Europe, it looks really different. Most of the adjustments people made were purely behavioral. People drove less, flew less, turned the thermostat up or down. That behavior snaps back the moment prices normalize. So James, is demand destruction really a story of these two disparate worlds? Permanent in the places that had to build their way out, but temporary in the places, including the U.S., where we're just kind of waiting it out?
James Gutman: In the U.S., it's a mixture of both, obviously. I think in the U.S. it's more deferral. It's more of a price-elastic response that isn't structurally changing the underlying dynamics. I am skeptical about what you're suggesting with respect to Europe. I think in Europe there's a bit more momentum to adjust the investment that will generate a less import-dependent energy mix. So you may be looking at a longer-term demand destruction story there. In Southeast Asia, in sub-Saharan Africa, it's a done deal. There's no universe where it doesn't make sense for them to buy Chinese kit and electrify as much as they can and go renewable. Why wouldn't you? And that's gone forever. That demand will simply not come back.
In the case of the U.S., you run a real risk of having very much an island economy, where you've got the vast majority of the planet driving ever more attractive electric vehicles, and you've got Americans getting frustrated with ICE vehicles. There just isn't the market base and the amount of money available to keep them at the technological forefront. And when it comes time for the U.S. to pivot the OEMs, Detroit, again, which keeps getting whipsawed back towards a global standard vehicle, we may not have OEMs anymore. We've done so much damage to that industry. So to take it back to the demand destruction argument: we could be finding the U.S. as this island of people who might respond to the price of gasoline, but it has less of a longer-term impact. That leaves them with a very different kind of production economy than the parts of the world that have shifted to a different input mix.
Jamie Nolan: I can always count on you for the most optimistic projections there, James. Thank you for that vision of our bright future.
James Gutman: I'm just getting started.
Jigar Shah: I mean, we did build 400 gigawatt hours of EV battery manufacturing facilities while we were at the Loan Programs Office. But I digress.
Jamie Nolan: We know a lot of those are converting to utility-scale batteries, though, Jigar, right?
Jigar Shah: Yeah, they're still going to get used. They're just not being used for EVs.
Jamie Nolan: Sure. But we do need EVs as part of this.
James Gutman: I get it that we need to feed the data center rollout, and this is our future. And people who want reliable electricity immediately are turning to renewables, because that's the most immediately available. That makes a huge amount of sense. But the problem is that the consumption stack further down, the U.S. just isn't pivoting as quickly. And I think it's going to bite.
IS THE MARKET COMPLACENT?
Jigar Shah: All right. In terms of when this war is going to be over, the market seems to believe every Truth Social post and every statement by our Treasury Secretary that we're imminently going to reopen the Strait of Hormuz. But it feels like nothing is actually fixed, right? Iran still controls the Strait. Ships are still being attacked. Strategic reserves are still being drained, even if it's less fast than people predicted. And physical markets, I think, are still in a structural deficit. So are we watching one of the great episodes of market complacency? And when reality reasserts itself, what does that look like at the pump?
Jamie Nolan: And in the stock market.
James Gutman: Commodity markets are really bad at pricing expectations of future outcomes. They're not prospective markets in the same way that a bond or an equity market is. I know that a lot of people go into commodity markets with a view on a surplus or a deficit in a year or three years or five years, where they've got a view on what the cost of production will be, because that's where the supply curve is going to meet the demand curve in five or ten years. I used to try to do that, and it sucked. Like, I sucked. It's just really, really hard.
Jigar Shah: And now you just do podcasts.
James Gutman: And now I just do podcasts. I do more than that.
Jamie Nolan: Thank you, professional podcast guest James Gutman.
James Gutman: Podcasting is my favorite part of the day. You have no idea how much I look forward to having these conversations with you guys. But to go back to the commodity markets. When we look at the futures curve, I always hear people talking about, yes, well, the futures curve is backwardated, this means the market is complacent, they're saying everything's going to go back to normal. Everything may well go back to normal. That's not what the futures curve is telling you. What the futures curve is telling you is that today's disruption is not a permanent shift in a supply or demand curve. Wherever the supply and demand curve meet in the future, five to ten years out, that's where the marginal barrel is priced. If the marginal barrel should be 75, 85, 90 bucks a barrel, that's where the back end of the curve is going to be. It doesn't mean anything about whether the war is going to be over or going to go on forever. It's about where that curve intersects. And nobody who can hold a position in the market is going to do that on the basis of their geopolitical forecast and then check and see if they were right five years later.
Everything from the back end of the curve, the five-year forward, to the front, that's an inventory story. And that's about, do you have the barrels? Do you have the barrels now? Are the barrels going to be here in six weeks? Eight weeks? Ten weeks? At a certain point your visibility kind of evaporates. And now you've got people who are like, yeah, I believe the war is going to be over in three months, and therefore the availability of barrels is going to be collapsing, and that's why I want to place my short position. To which I would say: where's your hedge? Where are the barrels that you're going to use to hedge? Good luck with that. I don't believe you. So using the market as a forecasting tool just never works. And that's why I want to be careful about extrapolating, like you did, from the market dynamics to a sense of complacency about whether the war will end and how it will end.
If I could just draw from the conversations that I have with people who are at the bleeding edge of trading this: I think everybody understands that a perpetual state of intense conflict is in nobody's interest. That Iran ultimately wants oil and gas to flow through the Strait. That America needs oil and gas, even though it didn't think it did, to flow through the Strait. But that the conflict is not going to end at all in the foreseeable future. So there's going to be this constant pressure. Take what's going on in the Red Sea. The Houthis are once again threatening to cut off traffic, which causes a real problem for the Saudis with Yanbu. That conflict heats up when they see an opportunity or when there's something they want to get, and it dies down when it's in their interest. Iran's going to have the ability to heat it up or dial it down. When does that describe a war that is over?
So when oil traders look at how this is playing out, what they're saying is that there's going to be this permanent level of insecurity and instability because of conflict in the Gulf, and it's not going to resolve in a nice clean way. The way, for example, 1991 did. You liberate Kuwait, cap the wells, restart production, send the Iraqis back home, a victory lap, and you're done. That was a clean end. It doesn't look like we're going to have one of those. This is where Jamie says I'm a really optimistic person.
THE CENTRAL BANK OF MOLECULES
Jigar Shah: Well, you're a realistic person. I think there's a lot of folks who see this perpetual thing. One of the things I wanted to get into is that in your Substack, you talk about this monetary policy of oil. When we were in the Biden administration, one of the things that we did was instead of selling oil out of the Strategic Petroleum Reserve, we lent oil out of the Strategic Petroleum Reserve. We actually gave people barrels basically for free and said, you give it back to us in two or three years and refill it. And that's a lot of what the Trump administration is doing now. So is this a permanent feature, now that two different administrations have done it? Is Washington deliberately managing the price of oil like the Federal Reserve manages interest rates?
James Gutman: Yeah, and that's something I dug into in a couple of those Substack pieces you were talking about. I think the answer is yes. Something we've talked about in the past is how, when the U.S. achieved some sort of notional or titular energy independence, which is true at one level but very much not true at another, it meant that the U.S. was more willing to deploy its energy assets in support of other policy objectives. If you think about the instances in which SPRs were deployed prior to the Russian invasion of Ukraine, they were entirely defensive reactions. Only one of them was in response to a natural disaster, and that was Hurricanes Katrina and Rita. But they were designed to provide cover for a defensive reopening of an intact or shuttered oil-producing area. For example, the Libyan civil war prompted an oil response as a way of managing that.
I think what you saw with the Biden administration was this idea that, you know what, we don't need to have this oil in reserve in the same way we did when we were a massive net oil importer. We can run the risk. So we can say to Russia, we don't like what you're doing in Ukraine. You're not cutting off the world's oil supplies, but we're going to go ahead and support our allies in cutting off your ability to provide oil to the market, or your ability to profit. And we're going to use our oil reserves as a way of managing that price impact, which would hit close to home. I think the Trump administration saw this and was like, yeah, we like that strategy. We don't need to husband these oil reserves the way we did in 1991. Maybe we can go and have an operation, launch a war in Iran, and if worse comes to worst, we provide these barrels the way we've done it, through lending. The Biden administration, the Trump administration. That's smart. It's a smart way to do it. It affects the part of the oil price curve that really, really matters, and that helps to keep the price under control.
And this is going back to the conversation we started with before. This is half of why the price of Brent hasn't skyrocketed: because the administration has done a pretty good job, actually, of managing the barrels that are available in commercial inventories, to a great extent through what comes out of the SPR and un-sanctioning barrels, so that they can support commercial flows and make sure that the numbers the traders really care about, the barrels I can touch, are managed.
Here's a problem with that whole central banking analogy, because I know that we have people who are very finance-sophisticated in the White House who are looking at this market and thinking about how to approach it. The problem is that you can't print the molecules. If I'm sitting there at the Fed and I have a financial crisis I need to work my way through, we can issue debt till the cows come home. It's free. I can give money to the system with the push of a finger. If I am trying to accomplish the same sort of price management operation with oil, I've got to have the barrels. I can't borrow them from the future. I can't print them. I've got to have them now. Right now we have them. But what happens when you get lower and lower and lower and you start to get to critical operating levels? There's a certain amount of pressure that you need in these salt domes in order to be able to extract the oil. When you run out, you run out. And you're no longer a central bank of oil. I think that's one of the things the U.S. needs to be very, very careful about.
Jamie Nolan: What exactly happens when that vault runs low? When refilling the Strategic Petroleum Reserve, doesn't that mean tightening the oil market on purpose, at exactly the moment no politician wants higher prices?
James Gutman: That is correct. I mean, the idea is that when you refill it, you're buying further down the curve, or in time. So you're hitting the market when there's less tightness, and you sort of solve the problem. Think about the way rates are managed, or liquidity is managed, in the financial markets. When the Fed steps in, they will unwind a lot of the liquidity. Sometimes it takes time and it's painful, but QE is followed by QT. Many, many years later, but it's followed by QT. You're going to have the same thing with the oil market. That will help to boost prices further down the curve. But if you're smoothing out the fluctuations at the front, in the immediate term, I think that's actually a pretty good use of your oil reserves. I don't really have a problem with that. They used it in a technically effective way.
A SHIELD IS A WEAPON
James Gutman: I think the issue here is, what is the purpose for which you are deploying your reserve? Is this a shield? Are you protecting yourself? One of the things we probably want to think about is that a shield is a weapon as much as a spear is. If I feel confident that I've got this ability to manage the price of oil and insulate my consumers, so that if I want to go ahead and hit somebody I've got a defensive block, I'm more likely to hit somebody. I think that's just the logic.
And it's not just the U.S. Here I'm speaking off the cuff, but look at Israel. Fifteen, twenty years ago, 98% of Israel's primary energy consumption was satisfied through imported fossil fuels. They had nothing domestic. And then came the natural gas fields, Tamar, Leviathan. Now close to 50% of Israel's primary energy consumption is domestic. Do they still employ petrol and oil and some coal? Yeah, absolutely. But they're a lot closer to being energy independent than they were before. Has that changed the Israeli calculus? Does that make them more willing to run a risk, because they feel like they've got a bit of a shield, so maybe they can take the chance and throw a punch? I think that's exactly what happens.
So when the U.S. has this idea that it can operate a central bank of oil that can protect consumers from price volatility, if other countries feel like they now have that capacity to act with impunity, despite being embedded in a global energy context, I think what it does is increase the risk of conflict.
WHAT IS CHINA SAVING IT FOR?
Jigar Shah: But let's take it to the other side now. China's playing the same game. They claim to have barely touched their strategic reserves. They've cut their imports by five and a half million barrels a day. They're ramping up electric vehicles, not just passenger vehicles but also heavy trucks. High-speed rail. Coal-to-chemicals. They spent a decade building. They're nursing their savings when we spent ours. So what are they saving it for?
James Gutman: War.
Jigar Shah: Good God, y'all.
James Gutman: The Chinese invested heavily in real optionality in their industrial system. And boy, oh boy, that worked. That worked really well. Coal-to-liquids, coal-to-petchem, turning those liquids into petchems. They managed to dramatically reduce their need for naphtha and other parts of the petrochemical stream that was feeding into their industrial base. That worked really, really well. They leaned hard on developing electrified mass transit, high-speed rail, electric vehicles, not just for consumers but for goods distribution everywhere. And when push came to shove, they were able to say: we are the state, we are the party. You need to lean towards your EV when you're going to visit grandma, or take the train. You can still drive your ICE or your partial hybrid, but you're going to tilt the other way. You're going to reduce your consumption of NGLs when you're producing plastic, and you're going to turn to coal-derived products. And we get to tell you why you're going to do this. And people sort of salute and say, there you go. Boom. Now you're looking at five and a half million barrels a day. It's like, wow, that really worked.
Did they take anything out of strategic reserves? I think so. Nobody really knows. But taking barrels out of their strategic reserves was the last line of defense. What they really did is they stopped filling their strategic reserves. So where are they now? In the West, not just the U.S. but also Japan and Korea in particular, we've dramatically run down our SPRs. We just have. China has not. China has demonstrated that it has the optionality to shift consumption on a dime. They can either sell those deferred cargoes into the market, which they did, to help Europe out and the rest of the world and make a profit at the same time, or they can use it to insulate their domestic economy. What does this tell China? It tells China that if there's a conflict, they are in a better position, relative to other people's position, than they were a year ago. They have an SPR, and the SPR is there to protect them in case of a disruption of imports. That would be war.
A BUYER'S CLUB WITHOUT AMERICA
Jigar Shah: Most people don't know that the International Energy Agency was created after the 1973 oil embargo as a buyer's club, organized by the United States to counter the OPEC producers' cartel. There have been five coordinated reserve releases in its history, and this one, 400 million barrels, is by far the largest. But something important has changed. For the first time, the country organizing the release is a net petroleum exporter. You've drawn a parallel between the IEA and NATO, two institutions built by an America whose incentives have moved on. So play it forward. When the next shock comes, do Europe, Japan, Korea, and India build their own collective energy security institution, a buyer's club without America at the head of the table?
James Gutman: I think the answer is yes. And you already see, quietly, in the outskirts of where policy conversations are being had, people putting together the bureaucratic institutional infrastructure to have that kind of post-hegemonic system in place. And this is exactly what the U.S. asked for, right? The U.S. said, we want people to stop depending upon us, to carry their own weight. So what people are saying is, okay, well, we can't stand alone, so we need to increase our ties with other middle powers in order to carry our own weight. That could be through tie-ups between the Japanese, the Koreans, and the Europeans on defense procurement. It could be organizing technological standards or trade agreements. It could also be revitalizing a non-U.S.-centered approach to energy cooperation. The IEA may not like it if I say this, but it was also a creature of American hegemony. It was established in the West, under the rubric of the OECD, to provide a counterbalance to something that was threatening to the U.S. and its allies.
EUROPE'S €14 TRILLION
Jamie Nolan: So now, throughout this, Europe has kind of been backed into rearmament. The United States is delaying weapons deliveries that European allies already paid for, because we burned through our own stockpiles over Iran. And in a paper called The New Martial Plan, you and Jeff Currie put numbers on what comes next. An additional €4 to 5 trillion of defense spending over the next decade based on current goals, €9 trillion once you include adjacent infrastructure, and at the outer limit approaching €14 trillion if Europe matched what America has historically spent and what Poland is spending right now. To put that number in human terms for our listeners, that is roughly the entire GDP of Germany spent four times over. One of the largest capital mobilizations in peacetime history, by a continent famous for not spending money. So where does that capital come from, and do you see Europe actually following through?
James Gutman: Europe has an abundance of capital. Its capital is stagnant, and it's stagnant for a variety of reasons, one of which is the lack of a capital markets union that would allow it to flow cleanly from one location to another. There are these myriad regulations that make it incredibly difficult for an allocator, or for a private equity investor, or simply for somebody who just wants to be in the market, to move their money through these different jurisdictions. And it's unnecessary. There's also a returns compression that comes from the way the European financial system is structured. Corporates are taxed and regulated in a way that compresses returns, and that makes it harder to mobilize savings, which are ample, and put them into these kinds of productive uses.
So can Europe finance it? I think Europe can. I think the way Europe finances it is by getting very, very aggressive in optimally regulating. I'm not saying deregulate, but optimally regulating, and breaking down a lot of the intra-European barriers to the deployment of capital and to investment generally. Would that allow Europe to invest in the kind of defense priorities it might need without feeling any pressure on budgets? No, of course not. The only country in Europe that can really afford to spend money is Germany. And it's about time, and they're trying to. But they still struggle to figure out if they really want to spend money, even though they can. So it's going to hurt, and it's not going to be easy.
Are they doing it? Sort of. When I go and talk to people in London or Brussels or Paris, everybody's really focused, and I see a real consensus on wanting to do the right thing, but I see less ability to actually do the right thing. I feel a bit like a gadfly. I'm just like, oh my God, stop arguing about cherry or chocolate. It's ice cream. Just buy the ice cream and move on. Just get it over.
Jigar Shah: Put it in a waffle cone.
James Gutman: Put it in a waffle cone. Move on. We've got to go places. I feel like I'm talking to my kids again. But they're still stuck on, I want chocolate and you want strawberry, and I'm just going to dig in my heels. Again, like talking to my kids. I think that's where we are, and it's not great. But I think that necessity is the mother of compromise and invention. And when push comes to shove, people will do it.
THE MIDWIFE QUESTION
Jamie Nolan: And this is super important, because you've argued that security spending is how you get everything else. Motorways, the internet, nuclear power, and solar all came out of military budgets. And you've argued that the American military and private capital were the midwives of Silicon Valley. You once called Trump the midwife of the green transition. We talked about that on the pod. So is European rearmament about to midwife the European energy transition, assuming everyone can decide on an ice cream flavor and go ahead and just get it done?
James Gutman: I think that part is already happening. When you sit down and have conversations with people about establishing national priorities, what you see from the defense sector is a very, very clear desire for electrification, for developments in battery technologies, for the ability to deploy domestically produced electric vehicles, for the ability to diversify their fossil fuel imports, or eliminate them if necessary. The military is very supportive of grid integration and grid management, developing ways to have electricity islands that they could take with them on a forward deployment. These are all really, really helpful if you're sitting there trying to revitalize an energy transition. I think this is something I've talked about for a couple of years: the best friend for Team Green is actually the guy in the uniform. He wants you to win, if you're in Europe. So I do think that is going to be a major progenitor for this European technological move in the energy space.
I also want to go back to the success that the Americans had over the course of the 20th century in their industrial development, because it was phenomenal. There are a host of reasons people point to, and all of them have various degrees of validity. But one very important one was the role of the U.S. government in stepping in and providing a variety of services. That could be anything from defense procurement to de-risk various investments, to providing capital, to developing a beautiful research university system that spun off so many innovations and so many technologies, and then helping to develop the financial markets infrastructure. Remember, I was talking about capital markets union: that would allow these innovators to then access capital, and it all just kind of worked. You had this military-industrial complex, the Department of Energy, the Department of Defense, sitting at the center and, dare I say, deploying capital in pretty smart ways to move the process along. When we get to that point on a coordinated basis in Europe, I think things move very, very quickly. At that point you could see a lot of success. And we need to deliver on success. We need to stop making promises, and we need to start seeing delivery.
THE SLEEPER SUPERPOWER
Jigar Shah: All right, let's stay on this topic, because you wrote in your Substack the nicest thing anyone's ever said about Brussels on the show. "Capital likes the rule of law. The United States, Russia, and China are all trying to acquire unwilling peoples, by force if necessary. The European Union, in sharp contrast, has a waiting room filled with applicants. That is power." James, you told us before that Europe might be the surprising winner of this war. Is the boring, bureaucratic, rule-following EU actually the sleeper superpower of this era?
James Gutman: That is exactly what I think it could be. And I'm not making a...
Jigar Shah: You're, like, willing this thing into existence.
James Gutman: I am. I am. And yeah, I get it. Maybe it's just because I want it to be. There are these values that are enshrined, still, within the European Union, around discourse and compromise and coordination. And what that allows you to have, done properly, is a much more diverse and inventive and innovative and resilient society: a collection of countries that have willingly sacrificed some degree of sovereignty in order to have a voice and to have agency in a much broader range. So I think that can happen. I think that happens through developing muscle memory for compromise, and getting a track record of small wins that lets you then move on to the better ones.
Jigar Shah: And a strong wartime leader. I mean, let's not kid ourselves. Europe is at war. The Ukraine-Russia war continues to happen. You've got the Strait of Hormuz war. They need a strong wartime leader.
James Gutman: It also would make sense to have a collection of strong wartime leaders who can actually sit down and coordinate and work together. So instead of looking for one centralized authority, I think the virtue here is making use of the ability for rational discourse, for this kind of problem-solving approach that doesn't involve forcing somebody to follow a strong leader. I understand what you're saying. You want a wartime leader, somebody who has the ability to pull everybody together, to stand up against the bad guys. I get it. I get the appeal. But strong leaders force themselves onto their own peoples. And the virtue that we see in Europe is the ability to have this vibrant cultural and intellectual and productive environment that can turn out these wondrous series of innovations and developments. And you don't want to suppress that.
Jigar Shah: The picture coming into my mind, James, is Mean Girls. Stop trying to make fetch happen.
James Gutman: I haven't watched that in a long time.
Jamie Nolan: I just feel like we're still trying to force our American values on them. Like, we need somebody to stand up and lead. It's just not the European way, right? Lead by coalition. Except it's like a group project in college. You still need somebody to be like, I'm going to coordinate all these monkeys. I've got to get all these people organized to get something done. So we still need somebody to step up and do that.
James Gutman: Yes. But just like when you were in college and you were coordinating those group projects, Jamie, which I'm sure you did with diplomacy and patience, you didn't force anybody. You weren't bullying anybody. You simply deployed your emotional intelligence to understand the varying perspectives that people were bringing, and then you used your negotiating capacity to analyze the set of outcomes and find an overlap, and then helped people get there by using your communication skills so they could understand clearly.
Jigar Shah: And you did it in five languages, Jamie.
James Gutman: In five languages. And you did it with grace and elegance.
THE PENUMBRAL AGE
Jigar Shah: Let's get to my last question, and we're going to give you two, just because you've earned it. First: you look for answers in history and models. So put this year in the history books for us. When someone writes a definitive account of the 2026 energy shock, what is the title of the chapter we're living through right now?
James Gutman: I'll go bigger than that. I would call this an age. I would call this the Penumbral Age. What I mean by that is we're in this period of time where it's not just that everything's gone gray, but the borders, the transitions between the black and white and the various shades of gray, have faded. We've lost the sense that there's a difference between the one thing and the other. Take war. Are we at war or are we at peace? We're in this constant state of hybrid war. Are we living under democratic systems of government or authoritarian systems of government? Is this laissez-faire or is this state capitalism? The fact is that the borders here have all merged and blended.
When you think about this in the context of the energy transition: is it the energy transition, or is it the energy continuation? We've dissolved the difference between these very clear, polar, defined ways of characterizing what we're doing. You were talking about the IEA before. I wonder if that's maybe a recognition by the IEA, when they walk back some of their peak oil demand, that we're looking at an energy ecosystem where you have these various ways to produce energy and deploy energy, and they all have costs. Some of those costs are immediate and definable and can be measured in dollars. And some of those costs are diffuse and distant, and in some ways easier to ignore, but they're still very, very real. What we're looking at now is this dissolving of the boundaries between being on one side of an energy debate and being on another side, and instead looking at this grayness in the middle, which says: what are the costs and the benefits of this solution versus that solution? Maybe that solution is natural gas. Maybe that solution is solar with battery. Maybe that solution is a moonshot attempt at fusion. I don't know. But those are the costs and benefits, and they're all in the basket. So I would call this the Penumbral Age, and I want to put it into a grander geopolitical, or grand historical, framework.
Jigar Shah: You heard it here first. Everyone's going to have to know the word penumbral.
WHAT DOES JAMES GUTMAN GET WRONG?
Jamie Nolan: So, our second last question, which surprisingly no one has asked you across our four previous episodes, because it's uncomfortable. So we probably should have asked you sooner. You've been more right than you have been wrong in your predictions on the show. The toll booth, the inventory draws, the fertilizer hit, the clean energy acceleration. It all went down like you said. But every framework has a blind spot, and the people who are right about most things are usually wrong in one specific way that they can't necessarily see from their own model. So, what does James Gutman get wrong? What is the assumption that may be baked into your worldview that someone sitting across from you right now, like me, should be pushing back on harder than we have?
James Gutman: So I have an answer to that, because I stare at myself and think about how I function, and this is a consistent mistake that I make. I have a way of looking at the world which assumes that if I can come up with something approximately rational as a course of action, then that's what other people are probably going to approach. We can quibble about preferences or probabilities, and sometimes you do the rational thing and it doesn't work. That's okay. People make mistakes. Sometimes that mistake is a war, or whatever. But I assume that when the evidence mounts and it's kind of clear that now's the time to do this, people will do this.
And I'm going to be kind of pointed, and maybe I'll get some criticism for this. If you go back to our first podcast that we did together, guys, I thought it was really, really clear that the U.S., when it didn't have a clear victory on day three or day five or whatever, should just say it's a victory and walk away, because there wasn't a set of outcomes that was going to be optimal for you. That is not what the U.S. did. And there's still this part of my brain which starts smoking as I try to understand why the U.S. didn't do that.
Jigar Shah: Well, this is that whole escalation trap thesis, right? That basically you need to be as grizzled and storied as George H.W. Bush to know to walk away early.
James Gutman: Yeah. I mean, you call it an escalation trap. You've got a lot of smart people who've got a lot of experience sitting there, thinking.
Jigar Shah: I mean, do you? Have you looked at this White House? Are there any people in this administration that have a lot of experience? That was the first term, James.
Jamie Nolan: I mean, maybe there are, but those aren't the ones that are in charge, right? We have Pete Hegseth running this war, for God's sake. I don't think anybody thinks he's the grown-up in the room. So yes, they defy logic or rational thinking. So that's what I hear you saying, James. You can't predict what this administration is going to do.
James Gutman: I'm not going to call anybody out or cast any aspersions. I'm not trying to do that. But what I do want to say is, you asked me for my blind spot, and I've got a model for how people work in the world. That model works out pretty well, and it's got some assumptions baked in, and I've flexed it. But when people choose not to follow that approach, then I start to struggle. And I think that's how I made the mistake that I made in calling for a war that ends in days, not weeks or months. That was a mistake. I misjudged.
Jigar Shah: Well, with that, it's never a mistake to talk to you, James. Thanks for being here for your fifth time. It's always very late in the UK when you're recording, but we very much appreciate you being with us.
James Gutman: Thank you. It's always a pleasure.
DEBRIEF
Jamie Nolan: Well, yet another uplifting conversation with our good friend James Gutman.
Jigar Shah: Well, I choose to make it uplifting. He was saying that the U.S. dollar is still going to be around for the rest of my professional career. So I don't have to worry about having accounts in different currencies. That makes me feel better.
Jamie Nolan: I mean, I was a little nervous about what he was saying about that. He thinks that a lot of China's actions can be explained by their need to retain their oil reserves for the purposes of war. That made me a little bit nervous. But I appreciate his continued realistic predictions. So we'll see what happens there. Otherwise, I don't know, when is this conflict going to wrap up? Are we headed into another endless armed conflict that just goes on without an end and then just fizzles out? That's kind of what it's feeling like.
Jigar Shah: Yeah. I think where we are right now is that the Trump administration has basically offered to try to go back to the way things were before the Strait of Hormuz was closed, and the Iranians are like, hells no, we now have this new power and we're going to keep using it. And as a result, I think what James was saying is, instead of this massive shift to clean energy or whatever it is that people were expecting to see, you're now seeing thousands of small decisions being made every single day by energy ministers and decision makers around the world, particularly in Southeast Asia and sub-Saharan Africa and other places, where people are slowly reducing their imports of traded oil and natural gas and coal and trying to go more domestic. Those are all small decisions that won't really be noticeable probably until next year. But when people notice it, they'll be noticing it in a really big way.
Jamie Nolan: Absolutely. And I think that here in the United States, you're only seeing people make small decisions differently. But in other nations, the AP just had a story this past week about how much solar deployment has accelerated in the Philippines. We are seeing major shifts on other continents as a result of this conflict that may be invisible to the United States. And I think folks continue to see this administration's war on clean energy, and as a result, people are just less likely to shift to clean power sources here. But in the last few weeks, I have told a bunch of people: I just plug in my car at my house, and I pay my power bill, which is exactly $8.70. I make more than enough energy to power all the miles that I drive in a given month. So I think people are starting to ask questions here and there, now that gas prices are back up and there's more curiosity about EVs. And certainly, due to what we're seeing with electricity prices, there's curiosity about clean power, even though we know a lot of the tax credits are about to expire. We're certainly not seeing a huge shift like other nations are experiencing. So I think it's good for Americans to remember that just because of what you see outside your door, that's not the whole story. James is really good at broadening everything out and taking us across the globe in terms of what other nations are doing, why, and what people are experiencing on the ground.
Jigar Shah: Well, as you know, I went to Brussels several times last year, and I think I'll be going again this December. I share James's optimism for Europe really taking the lead. I just think they have a lot of work to do, because Hungary was in the way for so long. Now that Orban's gone, they're finally fixing that and catching up. Orban was sending a lot of private information to Putin, so there's just a lot of stuff in the middle there that they had to fix. But I'm hopeful that they rise to the occasion, because I do think that leadership in this moment is so crucial, and the U.S. has definitively taken a step back.
Jamie Nolan: Absolutely. Well, those of us in the United States that have a more European mindset on these topics, as well as other things like international cooperation and diplomacy, would really like to see Europe step into the fold here. So let's hope they're listening to the podcast, and that they are going to take your advice under advisement, Jigar.
ASK JIGAR
Jamie Nolan: Welcome to Ask Jigar, our weekly segment where Jigar answers your questions about energy, and honestly, anything else that you're wondering about. A quick reminder: anyone who sends in a question that gets chosen to be read on the show gets an Energy Empire hat from our merch store, so send them in. Our first question comes from Dani Lopez-Salcedo, who says: Jigar, for a while now, the energy podcast world has been talking about hyperscalers paying for residential batteries to fix grid issues and neutralize NIMBYs, and you've been citing the Octopus study on this a lot. So what's getting in the way? Why haven't we seen these deals announced?
Jigar Shah: Yeah, it's a great question. I think that for a long time, the hyperscalers were convinced that they could solve their speed-to-power problem by just putting natural gas generators behind their data center and getting speed to power that way. That supply chain is not working, and it does not win over the community. So the community hates these data centers, and you've seen that boil over over the last few weeks. So that's one piece of it. The hyperscalers are now more open-minded to giving people batteries in their communities, because they realize they have to win them over. Second, the utility has to be on board. The utility has to agree to this whole scheme, because otherwise it doesn't really promote speed to power. You need to free up capacity on the local grid so that the data center can get connected faster. The utilities were against that solution, but now they're getting beat up by the governor and a lot of the people who live around there, so they're more open-minded. So I'm hopeful that if you guys all keep beating up the data centers and the utilities, they'll come to their senses and be more supportive of the idea.
Jamie Nolan: All right. Our next question is from Dave Hutchins, who says: Jigar, a super PAC funded by solar executives just helped take down Congressman Andy Ogles in his Tennessee primary, even though Trump endorsed him. That's the third Republican this cycle who went after clean energy and lost their race. Is this the moment clean energy finally learns to play hardball politics? And how powerful can this PAC, and the clean energy lobby in general, actually become?
Jigar Shah: It's a great question. And I have played a very small part of it. My good friend Tom Matzzie runs this PAC and has gotten some very high-profile supporters to put a lot of money into the PAC, which has been great. But I think the big thing here is that it's less about Republicans and Democrats, and more about the fact that solar power has come, right? It is very clearly the cheapest way to provide power today in the United States. And these congressmen did not just oppose solar power. They went out of their way to threaten the President of the United States and say that they were not going to support the OBBBA that extended the Trump tax cuts unless solar was treated in the most cruel and most bad way possible. So I think there's a lot of people who misunderstand why folks are going after them. When you come after our industry, and the 300,000-plus people who work in it, and you do it in a cruel fashion, there should be consequences. So I'm glad that Tom is doing that, and I'm glad that people recognize that solar power is now part of American energy and deserves every right to be deployed at scale.
Jamie Nolan: Amen. Couldn't have said it better. All right, our next question comes from Matthew Mayers, who says: Jigar, I saw you keynote the Citizens' Climate Lobby conference. Some of us CCL volunteers in North Carolina now have a meeting with the chair of our state utilities commission. There's a long list of things we'd like to see done better in our state. What should we actually ask him, and how would you prioritize?
Jigar Shah: One of the things that I find shocking is that we know what saves money, and we know why utilities don't want to do that: because they serve their almighty shareholders, and they want to make sure they can make the most money possible for their shareholders while getting away with it with the regulator. I don't understand why the regulator lets them get away with it. In this case, Duke is trying to build a bunch of natural gas power plants that are brand new. They're paying three times as much for them as they would have paid five years ago. They separately project that natural gas prices are going to go from $3 a million BTU today to $5 a million BTU in the future, and those fuel costs are a straight pass-through to residential and other customers. Everybody knows this is a bad idea. A better idea? Add batteries to the 7,000 megawatts of solar projects that are already deployed in North Carolina without batteries. Everybody agrees this is the cheapest possible way to bring data centers on board. But Duke doesn't like the idea. And the regulator has been totally warped, because it used to be that the regulators were picked by the governor. Now it's, I think, two people by the legislature, two people by the governor, one person by something else. So they have all sorts of dissension in the regulator ranks, and everyone is confused about who exactly is protecting the customer. So I would ask them: who exactly is protecting the ratepayers of North Carolina?
Jamie Nolan: Great question. All right, our last question comes from Mukund Viswanadha, who says: Jigar, I'm a medical student who wants to work on climate through clean energy policy. Hospitals run around the clock and lean heavily on fossil fuels. How can physicians push the healthcare industry toward renewables?
Jigar Shah: Oh, it's a great question. When we think about fossil fuel burning, a lot of people talk about CO2. But the real impacts of fossil fuels are really around particulate emissions, NOx and SOx emissions. In fact, I remember the Obama administration did a big report at the time, through the National Academy of Sciences, showing that Medicare and the VA alone spent billions upon billions of dollars in healthcare-related costs because of the burning of fossil fuels. So this is really a healthcare issue. And we should be making sure that if we're forced to burn fossil fuels, there's a way to do it as cleanly and safely as possible. But many places like hospitals are required to have backup diesel generators and natural gas generators, just in case there's a power outage. Many of them can actually switch to cleaner-burning fuels, or switch to batteries. And then those batteries can get paid day to day to provide grid services. So you get a payback on those batteries, instead of having a cost center that takes money away from patients with the diesel generators or the natural gas generators.
Jamie Nolan: So who is the decision maker in a hospital who would decide on the backup power system, so that physicians can get in touch with them?
Jigar Shah: Yeah, it's a great question. It's normally somebody who is a head of operations at the hospital. They're doing diesel generators because it's easy, because somebody else has put a specification in place and they're just copying that specification. It's a lot more work for them to do something different and new. So you might need the administrator or the board to push for something that makes a lot more financial sense.
Jamie Nolan: Awesome. All right, that's all for Ask Jigar this week. Remember, send in your own questions, and if yours gets picked, you'll get an Energy Empire hat. The link for submitting questions is in the show notes.