Trump's Iran War: Hubris, Blowback, and Peak Oil

Transcript

Trump's Iran War: Hubris, Blowback, and Peak Oil. James Gutman returns to Energy Empire for a fourth time. Day 51 of the Iran war.

Jigar Shah: All right, so Day 51 of the Iran war. I think the ceasefire expires April 21st. I thought the Strait of Hormuz was open, but now it seems closed. My understanding is that there's some gunboats firing on Indian tankers who are supposed to be friends of Iran. The US is still blockading Iranian ports. We've got a trio of extraordinary individuals in JD Vance and Steve Witkoff and Jared Kushner heading back to Islamabad. And I think we're still threatening to bomb every power plant and bridge in Iran. Tucker Carlson is asking whether Trump is the Antichrist. And I thought, who better to talk about all this stuff than our good friend James Gutman.

Jamie Nolan: Welcome back to the pod. You are our first four-time guest. We love having you on. We wish we had more fun stuff to talk about though.

James Gutman: It's great to be here, Jamie, thank you. And I do appreciate being called back. I'm waiting for somebody to call back to say, hey, we want to talk about all the happy, slappy stuff.

Jamie Nolan: We'll just have to do one for shits and gigs after hopefully all this wraps up. Any day now. Any day now. So this episode we are dropping right around Earth Day, so I have to ask. You've come on the show three times and argued that Trump is the accidental clean energy president. Since this war started, countries are installing solar at record pace so they never get cut off again. And the IEA says oil demand may have peaked — not because of any climate argument, but because of this war. Two years ago, Jigar got the Earth Day award. So James, is it Trump's turn this year?

James Gutman: I think Trump absolutely deserves the Earth Day Award for helping to revitalize the push towards renewables. And there may be a peace prize down the road as well, when we finally resolve all of these conflicts.

Jigar Shah: Oh my God, the Peace Prize. Lord Almighty.

THE CEASEFIRE

Jigar Shah: So you, James, on Day 51 have been consistently wrong about the fact that folks are actually trying to solve this conflict. So now that we've got a blockade, what is your view of the endgame since Day 31?

James Gutman: Thank you for that, Jigar. You're keeping me honest. Just for anybody who wasn't here the last time, or the first time — yeah, this war should have sort of ended on day three, when it was pretty clear that the Iranians weren't going to just immediately collapse or submit. At that point, the US should have just declared victory and gone home, in my opinion. And now we're at Day 51.

And boy, these two are really stuck into it. They're both kind of trapped. I think that both of them really want an out and exit. And the problem is that they're unable to define an acceptable exit for their own internal constituencies, as well as the longer-term strategic goals.

I actually think that most of the shock from the closure of the Strait — the initial shock — has actually worked its way into the market. At this point, we know what we're dealing with. We've struggled to find barrels and we've reallocated and we've rejigged. And so now there's this much more predictable, still very painful and sort of ominous pig in a python working its way through. But we're no longer in that "oh my gosh, what's happening" phase. Now it's like — it's happening. So it's less interesting to stare at the screens and say, is this the tweet that makes the difference? And it's more interesting to say, okay, this is already now a fact. What does this mean going forward?

Jigar Shah: Well, your expertise has always been the long term and not the short-term play by play. So I appreciate that.

James Gutman: I studiously avoid trying to make short-term forecasts.

Jamie Nolan: That being said, tomorrow Vance, Witkoff, and Kushner are headed back to Islamabad. Iran says it won't show up while the blockade continues. Do you have any new thoughts on what might happen tomorrow if there's no deal?

James Gutman: I can't begin to — we're in a zone of irrational behavior here where they're both sort of stuck doing things that they shouldn't have been doing. I think both sides need to declare victory and walk away. However they phrase it, however they do it, just get there. If this next round of conversations in Islamabad doesn't turn out anything good, then it will be more punching. And it'll be the round after that. We've been there for a few weeks.

THE $150 BARREL NOBODY IS PRICING IN

Jigar Shah: All right, let's dig deep then, James. The IEA said that dated Brent, which is physical crude, hit about $150 a barrel. The futures market, which is what everyone really watches, is trading below that. Global oil supply dropped roughly 10 million barrels a day in March. The IEA is calling this the largest disruption in the history of the global oil market, bigger than the 1970s oil crises. But markets keep rallying every time someone says the word "deal." Last time you gave us three reasons for the disconnect — buy the dip, the Trump put, and stockpile resilience. Seven weeks later, most of that stockpile seems to have worked its way through the system. So help us make sense of why oil futures are at $100 a barrel or below.

James Gutman: Yeah, so I think what we need to do is distinguish between the physical market and the paper market. And this is where most people start to yawn and walk away. But just bear with me, because I think it's really the crux of the whole thing.

I can't say this often enough. Equity and bond markets price the future. But commodities price the past. When I'm buying a stock or a bond, I'm getting a promise of future earnings through dividends, a promise of future coupon and repayment. But when I buy a commodity, I'm buying something that is already out of the ground or something that is in the ground but there is a plan to take it out of the ground. It's something that's already there. It's the past.

So in the physical market, there are three prices. There's the price to pull it out of the ground, and that's the long end of the forward curve. And that hasn't moved, Jigar. Long-dated Brent is flat as a pancake.

There's another price, which is the price to pull it out of inventory. That's the backwardation — the spread between the front month contract and the long date. In Brent, the front to the 12th month screamed to a 50% backwardation annualized over that entire curve, which is the steepest backwardation we've ever seen in the history of Brent crude oil trading. That is a paper market screaming stress. It is saying the price to pull inventory out right now has just gone through the roof.

And then there's the third price, which is the price to get people to actually stop consuming. And that's where you get into your physical markers. Your dated Brent, your physical barrels east of Suez, your physical products — Singapore jet got as high as close to $300 on an all-in basis. Those are the prices you have to see to get a refinery to say, that's my willingness to pay — that's what I have to do to get those barrels to avoid shutting down my refinery. Or to get somebody to say, I'm going to shut my petrochemical processing facility and just not produce the plastics. Or to get somebody to say, I'm not going to use that LPG for my cooker and I'm just going to do without. That's the demand rationing piece.

If you look at what the paper market trades, which is what everybody sees on their screen — Brent roughly $95 a barrel — that's pricing inventory in the Atlantic basin as a spread to that long-dated price that hasn't changed. Right now, OECD inventories are fine. We walked into this with inventories looking decent and so far they haven't drawn. So why should you see this ginormous backwardation if you haven't seen the actual inventory come out?

But at some point, those barrels have to be replaced. They've got to come from someplace. That fleet of tankers that Mr. Trump likes to point to heading towards the US Gulf Coast — assuming they can all load, that's going to dramatically reduce the visible commercial inventories.

Jigar Shah: But they're not filling up with oil, right? They're filling up with finished products — gasoline, diesel, and jet.

James Gutman: Well, there's only so much finished product that US refineries can pump out. At some point, you're going to start taking crude oil inventories out of OECD commercial. That's where you're going to see the price pressures feed through into the paper market in a very direct way. You can't avoid this, Jigar.

I said I don't like to forecast, but this is as close as you're ever going to get me to making a forecast. You can't avoid inventory draws. I can't imagine a universe in which we don't have dramatic inventory draws in OECD commercial. It just has to happen.

DEMAND DESTRUCTION

Jamie Nolan: So let's take this one step further. This rationing is driving real demand destruction. I know that hasn't been a huge story in the US, but we're starting to see stories about Japan, the Philippines. I just read that there might not be enough jet fuel for the major European airlines this summer, which is absolutely wild. When does this actually become the story — particularly in the US, where beyond rising gas prices, we have been largely isolated to date?

James Gutman: You want to be careful. Because this could have a real sharp sting in the tail for the US. One of the reasons why we have this great big beautiful energy market in the US is because we've got a market. And that means you can price for things. And if people will get a better price by filling up their tanker in the US and shipping it overseas, then that's exactly what they will do.

As you start to see that physical pull coming through the pipeline — where it's just inevitable that you're going to get this massive draw out of Atlantic basin commercial inventories — that gets fed very directly through to American consumers. And American consumers will start to see meaningfully higher prices than we've already got, and that will curtail consumption directly in the US. That's where you're going to see some of that demand destruction.

I think it's important to bear in mind that the IEA has completely eliminated their expectation for global oil demand increase in 2026. They've basically taken it to zero. But what they haven't done is permanently destroy it. At the end of 2026, they have global oil demand recovering to 106 million barrels a day. So they've got this great big crater, which tells you that's demand rationing — but it's not completely permanent demand destruction.

After that wave of demand rationing — which is how people get through a temporary shortfall — there's going to be permanent demand destruction. Where does that come from? It comes from permanently higher prices, and it comes from a permanent reluctance to be dependent on something which is so intensely volatile. That's where you see the permanent demand destruction. And we're seeing it now.

Something I wrote about with my colleague Jeff was that peak oil supply never really happened. And then we spent a lot of time talking about peak oil demand. But the truth is we didn't see peak oil demand either — demand kept rising. Even the IEA had to throw in the towel on that one. And what we argued was that what we're seeing is peak oil trade. Well, I think peak oil trade is really clearly here now. But if peak oil trade is here, then I think what follows is peak oil demand, relatively rapidly.

So in a very weird kind of way, I wonder if Donald Trump is the guy who brings us to peak oil demand on an accelerated fashion.

Jigar Shah: Well, I mean, it is a straight shot from peak oil demand to the Nobel Peace Prize. So I just want to make sure that people realize — it's just so much winning. Oh my God.

ENERGY INDEPENDENCE AS HUBRIS

Jigar Shah: All right, James, let's get back into your area of expertise. You've been writing about this a lot — energy independence as hubris. We talked about the United States basically not having to protect the shipping lanes because we feel like we're energy independent. Your working title here is "Hubris, Blowback, and Energy Independence." Walk us through this thesis, particularly as it pertains to Israel.

James Gutman: When the US crossed that magical line between net energy importer to net energy exporter, it created this perception of new possibilities. It's important to caveat that by saying perceived energy independence. If I happen to be sending 100 million barrels of crude oil products overseas, but I have no refining capacity, so I import 50 million barrels of refined product — I am not energy independent. I am on a total joules basis, but I actually have a lot of energy dependence there.

But what happened with that relative shift is that it created this willingness to use coercive force in a way that perhaps the US might not have been willing to do in the past.

Now, we can see the same pattern with other countries. Take the example of Israel. Israel's been in a state of war kind of nonstop since the formation of the state. War is nothing new. But in 2014, with the opening of the Tamar natural gas field and Leviathan, Israel saw this dramatic reversal in its energy dependence. They went from basically having near 100% dependence on imported energy supply to around 20%. That's a big move.

So if you look at it from the perspective of Jerusalem, they have fewer constraints. If they get very aggressive with Iran, right, wrong, or indifferent — there's just one fewer threat they have to worry about because they don't have to worry about being subjected to an energy embargo. It doesn't matter anymore. It's that relative shift in perceived energy independence that can make you act in a less constrained fashion.

Let me keep extending this. Russia is and always has been an energy exporter. But with the collapse of the Soviet empire, there was a collapse in Russian oil production that recovered in the latter part of the 1990s. By the early 2000s, their exports had recovered quite strongly. And what did they do with that? The early 2000s was also when the Russians started to weaponize very explicitly their energy exports — oil and gas — primarily to the former components of the Soviet empire. By having this ability to wield this energy weapon, it gave them more confidence in swinging with it.

Take it another step further. China is a net energy importer and probably always will be. But they have worked really aggressively to reduce their dependence. It's domestic coal, nuclear, solar — the electrostate that everybody likes to talk about. And it is a mountain of strategic reserves. They've taken a losing hand, an energy-dependent hand, and turned it into one that's actually pretty good. What does that do for China? It makes them less constrained. They don't have to lay awake at night worrying quite so much about energy being used as a weapon against them. So it lets them do things with their neighbors that maybe otherwise they wouldn't feel as comfortable doing.

That's how this shifting in energy dependence and independence creates these opportunities or unshackles constraints on various players.

EUROPE

Jamie Nolan: So let's jump back over to Europe. Europe did not want this war. Starmer said explicitly, "This is not our war." Now over 40 countries are meeting in Paris on a UK and France-led mission to reopen the Strait without the US at the table. Europe is building a post-war security architecture for the most important waterway on earth, and the country that started the war is just not invited to that conversation. How big of a deal is that?

James Gutman: I think it's a really big deal. A couple of caveats. The Europeans have said they are not going to force the Strait open and that they're not going to get involved until the Strait is open. It's just going to be a "keep it open" kind of situation. And I think that's fair. Promising to force the Strait open would be beyond their capacity.

The fact that they have explicitly done so as a parallel track to what the United States is doing — not trying to make this depend upon or reflect the interests of the United States directly — is really important. And I think that's actually good for the US in the long term.

But what it does suggest is an ongoing reshuffling of global alliance relationships. The Europeans are trying to protect their energy interests at home and abroad. But they're also opening themselves up to playing a different kind of role on the international stage. It's not European warships in a flotilla commanded by an American. It's European warships in a flotilla that perhaps might include Indian warships or perhaps Chinese warships. I don't know. But that opens up new possibilities if it's a European-led mission.

I think that's good for America actually. Really good for America. Because this situation where America perceives itself and in fact is trying to be everything everywhere all at once — to make sure that the entire world is playing according to a rule book that the US mostly wrote and mostly benefits from — that gets really confusing and hard to maintain. It stretches America and it aggravates America.

And if the Europeans can step in and say, actually, go away. You're energy independent. Remember, you don't care about this. How about we take care of this and we'll work with our friends in the Gulf and find a solution that makes sense. That gives the US maybe a little bit more chance to breathe and to focus on its own domestic issues in a more settled fashion.

WEAPONS AND JET FUEL

Jigar Shah: I mean, there is a fly in the ointment there. The US just told European allies — including countries in the Baltics and Scandinavia that border Russia — that weapons they've already purchased and paid for under US contracts are going to be delayed because of the Iran war. We are burning through American stockpiles. Over 1,800 Patriot interceptors were used in the first 16 days alone. Trump spent years pushing Europe to buy American weapons and to really spend a lot more of its GDP on defense. And now he can't deliver the weapons. So how does Europe respond to that?

James Gutman: Let's just be clear — it wasn't Trump who did all those things. Every US president who's ever breathed has been pushing American weapons onto the Europeans and telling them to spend more money. Eisenhower at the dawn of NATO complained that the Europeans weren't spending enough. Clinton complained. Obama did it as loudly as possible. Trump just does it in his own inimitable fashion.

The problem with the resupply of America's NATO allies with Patriots and other munitions is it's just a fact. We've burned through a lot of resources and we now have a strategic vulnerability because of the munitions we've expended.

If I tell you that I'm going to deliver 38 widgets on a certain schedule and then it's 13 widgets two years later and then it's actually no widgets and it might not be ever — you're not going to come back and do another deal with me. So that adds to the insecurity. And a lot of the posturing over things like Greenland or going into Iran without consultations with European NATO allies — this just adds to that push to distance yourself.

I think that gets felt in Japan and Korea as well, and with other US allies around the world. Europe just needs to suck it up and work with what it's got.

Jamie Nolan: That brings us perfectly to our next question. I mentioned earlier that Europe has maybe six weeks of jet fuel left. We're looking at thousands of canceled flights. One major airline shut down an entire subsidiary. Jet fuel prices have doubled. 40% of Europe's jet fuel imports came through the Strait — none since the war started. And this is right before the summer travel season. If the Strait doesn't reopen, what happens to European aviation?

Jigar Shah: I was at a birthday party yesterday. And that was the question that every single parent asked me. They were like, should we buy tickets? And I was like, no, you shouldn't buy tickets. You should wait to see what's going to happen because I don't know that you're going to be able to go to Europe this summer.

James Gutman: Yeah, a lot of staycations. You remember our Day 3 conversation. Around Day 5 is when I actually bought my tickets for a little holiday because once I knew it wasn't over on Day 3, I was like, holy Toledo, I don't know where this is going to go. I want to get this in. But I have canceled all other travel.

That's probably indicative of how most Europeans at the consumer level are responding to this. There are plenty of lovely places to visit this summer if you live in the UK and want to stay in the UK. I'd like to point out there are also trains that connect you to Europe.

A big part of this problem is not just about the availability of crude oil. It's about the availability of refined product. A lot of those refineries are trapped to the west of the Strait. The Gulf states were super smart in what they did — they had this oil and gas that they wanted to move downstream and take more of the profit-making opportunities. That's why you have so much aluminum that comes out of the Gulf — really inexpensive energy turned into power turned into aluminum. So that tightens up the aluminum market too if you can't get it out.

For the Europeans and everybody who'd like to fly in an airplane, there's just this massive game of pass the potato as we try to figure out what refineries are going to be able to get crude in order to produce the middle distillates that we all need to fly. Until that gets resolved, you're going to see sporadic and localized shortages and rationing.

There are going to be airports in Europe which are probably going to say, yep, these flights have to be canceled for the next three months. Airlines are going to have to prioritize. Prices don't look like they're going to go down until there's some resolution.

But this is just a pathway to demand rationing. Does it lead to demand destruction — which is permanent rationing? In the case of air travel, probably not. But how this is going to affect consumer behavior in Europe more broadly — that's going to be a lot more EVs. That has just been a phenomenal shift.

Jigar Shah: It's like you get a BYD and you get a BYD and you get a BYD.

Jamie Nolan: I saw EV sales were up 50% in March in Europe, which is just wild.

WINNERS AND LOSERS

Jigar Shah: All right, let's move to the other winners and losers. Because it feels like everyone's calling Russia a winner right now. But given where the Europeans are going, where China's going — it does seem like there's a reshuffling of the global order and Russia might get the short straw.

James Gutman: Superficially, when this whole thing first happened, people liked to point to Russia as the obvious winner. And in a lot of ways, Russia is a winner — a lot of the sanctioned barrels that were floating now have been purchased and have a home.

But Russia hasn't won as much as people might have initially anticipated. Those floating sanctioned barrels that have been taken onshore — they were already priced. Congratulations, the transaction's gone through, but you didn't get $105 or $115 a barrel. You got whatever you sold it at, maybe without a discount.

And the Ukrainians have been pretty aggressive in trying to interdict Russian crude oil exports and refinery operations, so the Russians have actually put on an export ban for gasoline. I think Russia wins, but perhaps not as much on the dollars and barrels front as you might have thought. Where they win more clearly is in the further fracturing of Western alliances.

Another winner — but only in the sense of losing less — is the US. The simple fact is that the US does produce more joules than it consumes, even if it is dependent on a global trade system. But it's important to understand that for the Americans, if the producer is going to profit, then the consumer has to pay, because that means the producers are able to export. If the Trump administration decides it doesn't want consumers to pay, then that means they're going to have to put export controls on US crude and products. And that means US exporters won't benefit. So there's a mix to how the US wins.

Another guy to look at — is China. China is an energy importer that has played a bad hand very, very well and made itself largely insulated from this current disruption. One of the reasons why TTF natural gas prices for Europe haven't risen more than they have is because the Chinese very swiftly switched from their own gas to coal-fired power plants for their electricity burn. And that lightened their call on LNG in Asia, which freed up more carriers to move to Europe. So they actually did Europe kind of a favor by switching to coal. And they can do this because they have so much capacity.

Jigar Shah: It does feel like LNG is — fool me once, shame on me, fool me twice — you're in a place where folks got screwed on LNG with the Ukraine conflict in 2022. Now they're getting screwed again in 2026. I don't know that LNG is ever used again for the power sector. It's only used for the industrial and petrochemical sector where it's absolutely needed. Everyone else is going to coal, renewables, nuclear.

James Gutman: Maybe. I think you need the molecules. Natural gas serves a great function as a balancing fuel. Not everybody has the coal. But I think it's premature to say people are going to turn away from LNG writ large. I do think people are going to want to diversify. Relying upon LNG is probably not a great strategy — it needs to be part of your strategy.

IRAN AND ISRAEL

James Gutman: Another winner is Iran. They've been pummeled, absolutely devastated. The Iranian people have suffered beyond belief. But from a strategic perspective, the regime is still there and the regime has exercised its biggest card, its highest playing card, and it's mostly worked.

Another loser you might want to think about is Israel. Israel has been extraordinarily effective on the military front, but politically, this has turned into a real problem in the US. On the left, Israel's war in Gaza has caused a lot of unhappiness. And now on the right, there's a sense that Israel has led the US by the nose into Iran, right, wrong, or indifferent.

What it means is that Benjamin Netanyahu may have the singular prize for having lost America for a generation for Israel. And that is an incredibly important thing. That is the third rail of Israeli politics. Whatever you do, don't screw up the relationship with America. Literally anything else you can get away with, but not that one. So I think it puts Israel in a challenging situation from that perspective.

EUROPE AS A WINNER

James Gutman: There might be a surprising winner here, and that might be Europe. Nobody likes to self-criticize and flagellate more than people who live in Brussels. And it's mostly deserved, if I'm honest. But this sequence of extraordinary shocks has pushed the Europeans to make choices and to start agreeing to compromise, to horse-trade, and to start really getting to the very necessary sacrifices and commitments they need to make in order to achieve some degree of stature in the world. That extends to defense, it extends to energy. A European flotilla — that's extraordinary for the Europeans to organize. That's a big move.

Jigar Shah: I feel like this is like the joke where there's a priest who is very pious and is warned that a natural disaster is coming, and he says, don't worry, God will protect me. Then the floods start coming in, a boat comes by and says, come on in, I'm going to save you. And he says, don't worry, God will protect me. And then he gets on top of the steeple and there's a helicopter coming down — get in here, I'll protect you. I feel like people are saying to Europe, this is the time to get all 27 member states riled up, let's get your grid fixed, let's unleash European innovation. And they're like, God will protect me.

Are they finally getting the message that they have all this innovation and expertise ready to be unleashed?

Jamie Nolan: Well, when their flights get canceled, that might be just the ticket.

James Gutman: Yeah, I know the same joke — Jigar's is just always with the rabbi. The short answer is, in my opinion, yes. Sometimes you need to have your vacation canceled and your prices go through the roof and be bullied by the guy next door and just be scared or angry or frustrated enough to shake it off and get down to business.

I actually think there is a lot of consensus that's formed. There's a lot of detail that needs to be worked through, a lot of process. We're talking about a group of countries who have to negotiate and compromise and work out an agreement. They are pluralist, they abide by rule of law, discourse. These countries have to negotiate in order to move forward. They don't force people to do things.

I don't want to get into the weeds on the Hungarian election, but at the end of the day, it was amongst other things a vote against the guy who was opposed to working with the European Union.

Jigar Shah: And was passing state secrets to Putin on every single draft that was coming through. Good riddance to Orban.

FERTILIZER

Jigar Shah: All right, we need to get into a lightning round now. You talked about on Day 31 that we were going to have a fertilizer challenge. We are now in that place. The American Farm Bureau just surveyed 5,700 farmers. 70% of them said they can't afford the fertilizer they need this season. Some of them basically said, if I buy fertilizer at these prices, I will be guaranteed to lose money. And some folks are projecting that 25% of global acreage is probably not going to apply fertilizer this year during this growing season. How do we think about the impact on fertilizers?

James Gutman: It will be worse in the summer, in the Southern Hemisphere planting season. Yes, it's bad, but it's going to get worse.

Jigar Shah: So does that mean we have food now, but we'll have less food in nine months?

James Gutman: Or different foods. More beans, less wheat and corn, for example, because it's just a different nitrogen requirement.

Jigar Shah: The anti-ethanol people will thank you.

James Gutman: It also means biofuels will probably to some degree be priced out. But it's really important to bear in mind that it's the Southern Hemisphere planting season that's coming up where you're really going to see this, because a lot of farmers hadn't purchased their fertilizer or their crop treatments in advance. The real hit I think is actually to come and it's going to suck. It's going to be painful. It just is.

Jamie Nolan: The American Farm Bureau survey found that 78% of Southern farmers cannot afford the fertilizer they need this season. And of course, these are Trump voters. They've got governor's races this year. At what point do you think Republican candidates in those states are going to start distancing themselves from this war, if not from the Trump administration at large?

James Gutman: I'm not going to profess to be the most savvy about US domestic politics. But from where I sit, it does look like there's already a clear and significant fracturing in the political support that Trump has relied upon.

I tend to take a longer view. There are a lot of longer-term forces that are working their way through the American body politic right now that go way beyond Donald Trump. And we're still going to be dealing with them when Donald Trump is not president. They're represented by a lot of different factions within MAGA and within the shell of the Republican Party, and they're also represented in the Democrats.

As farmers wake up and say, I wanted to buy this much crop treatment but I can't and I have to settle for less or different — that adds to the frustration and agitation they feel. They're going to put their political chips with somebody else, but that's still going to be within this highly fractured and polarized American political system.

I think it bodes poorly for Trump. And I think it raises the possibility of even further fracturing in American politics. And your European listeners should look at that and say, whatever I thought about maintaining my own strategic security independence or my own energy independence, I should be massively increasing my efforts in that respect.

You can say from London or Paris or Berlin or Brussels, I love America. But right now, America has to deal with America. And those American farmers are going to say, we need to deal with American farmers, not we need to worry about what's going on in the rest of the world. So Europe has to hold America's beer for a while. I think it's basically it.

Jamie Nolan: That'll be the key takeaway from this episode — Europe has to hold America's beer for a while. I mean, I wish they would. Please, please do.

James Gutman: It all starts with a flotilla or a glass of wine. Maybe it includes the Canadians, the Japanese, the Koreans. I don't know if you saw, but the Canadians have signed up to observer status on the fighter project that the British, the Italians, and the Japanese are developing. It's another one of those examples of how America's friends — and they're still friends, by the way — are saying, we need to be able to look out for each other so that America can start working through its domestic issues. It's just the way it is.

TESTING NATO

Jigar Shah: I think the challenge I see with all of this though, James, is that — you've got a lot of right wingers who have called Trump the Antichrist or whatever it is — but the thing that I worry about so much is Putin actually testing NATO. Like bombing somebody or doing something that would test America's resolve. And then the question is, is Canada really up to the task? When Carney gave that big speech at the WEF that everyone cheered about — are they really ready to have each other's back? Because I'm very worried that Putin's going to test NATO's resolve this year.

James Gutman: I think it's highly likely. I'm more worried than you. And the thing is, NATO as a mutual defense pact, in my opinion, is probably dead. It's very hard to maintain that fiction of "we will all come to each other's defensive aid if any one of us is attacked." That is something you hope never to have tested.

So the next move that would make sense for Putin — and I'm not asking for it, that's for sure — would be to look for the weakest link in European NATO and to punch and see if they can punch back and if the rest of the NATO countries punch back.

Quite frankly, the weakest link is probably the UK. The reason why you would want to hit the UK is because it does have a sizable military and it is relatively powerful compared to its allies in Europe. However, it hasn't really maintained its capacity. It doesn't have adequate missile reserves. It doesn't have adequate platforms. So a couple of punches — missile strikes — and you could see the UK questioning whether or not they have the ability to stay kinetic. And that next step up to nuclear would be catastrophic for the UK.

So you could find yourself in a place where if you can force the UK to accept some sort of made-up submission to some farcical Russian complaint by a few days of missile strikes, and the rest of European NATO doesn't step up to help, then I think you've ended NATO permanently.

Or something else happens — which is the rest of European NATO, forget about the US for a second, punches back as well. And if you did see a concerted response to that kind of Russian aggression, I think the Russians would back down pretty quickly. The Ukrainians have demonstrated that.

Jigar Shah: I'm sure they would back down really quickly. I just think Putin wants to test it.

CHINA AND TAIWAN

Jigar Shah: The last thing for me is that China has really telegraphed now that they're going to do a managed reunification with Taiwan. It doesn't feel like there's an uproar around the world around it. You had said that when that happens, that's the last thing remaining as friction between Europe and being friends with China. How do you think about that?

James Gutman: I just don't want to say best friends — just friends.

China has made it very clear that they will take Taiwan, that they will have the military capacity to do so around 2027 — which would be right in between US midterms and a US presidential election. So the US is distracted. This is also a moment when the US has run down its inventories and found itself stretched.

A worst-case scenario for the US right now would be one where it is fully engaged with Iran, Russia decides to test in Europe exactly as we were discussing, and the Chinese decide to say, now's the moment we want to assert ourselves with respect to Taiwan. I think the outcome there is the US just backs away from probably all three.

If you're Taiwan — especially the Kuomintang, who have very clearly signaled what they want to do — you're probably looking at a way to manage that scenario and negotiate some sort of deal that allows you to maintain whatever degree of sovereignty or independence that you want.

However that managed reabsorption of Taiwan resolves — once it resolves, or once it's very clearly resolving, then the view from Beijing shifts. Your natural adversary for 400 years has been Russia, not Europe. The Chinese have a very justifiable long list of grievances with respect to the European powers, but there's no shared border. There's no contested resource. They're not fighting over the South China Sea with a European country.

Once Taiwan is no longer an issue, it becomes Russia where Chinese anxieties become more directed. And at that point, Europe is more interesting as a counterbalance, as a counterweight to Russia. There's a logical progression here, and I wouldn't be surprised if the Russians have thought this through.

Russia is at the moment a de facto client state of China in the sense that they're entirely dependent on energy exports for their foreign revenues and those exports go almost entirely to China and India. Russia is finding itself in an increasingly strategically insecure place. If you look to the east, Russia's naval access has a choke point. If you look to the west, Russian naval traffic is constrained by the GIUK gap — Greenland, Iceland, UK. If you look to the north, Russia has 6,000-7,000 kilometers of increasingly accessible coastline, which the Chinese are developing nuclear icebreakers to travel along as they trade with Europe. Russia feels very insecure.

What does Russia do to manage that insecurity? They dominate Western Europe. How do they accomplish that? Maybe they throw a punch at the UK. The UK fails to respond. NATO falls apart. The rest of European NATO says, okay, we'll cut a deal with Russia, we'll follow orders, we'll give you preferential trade agreements.

If you're in Beijing, that looks really bad. Because now the guy who's been scary for 400 years has his own strategic independence, and you don't like that. So if you're Beijing, once Taiwan is resolved, you want Europe to be able to stand apart from the US but also stand up to Russia. It makes sense for you.

The future holds more conflict, more unsettling reshuffling of these alliances. But I also think the future might hold a revitalization of the center. Populist extremists and middling powers can get away with a lot when the rules are being enforced by the European Union as a supranational authority. But when push comes to shove and people are no longer able to get away with things because the situation has gotten extreme, or because the US isn't backstopping the global order, then there's this perhaps convergence to the center. So that might be the other thing that happens — more conflict, but also a revitalization of the pluralist center, politically, both internationally and within countries.

WHAT'S NEXT

Jigar Shah: James, you've been on this show four times now. Each time I feel like it's getting darker. But your insights are just very clarifying. And I think in this moment where everyone has access to ChatGPT and Claude and all sorts of powerful tools, we have less and less clarity. So thanks for being clarity for us and our listeners.

James Gutman: Thank you very much, Jamie. Thank you very much, Jigar.

TAKEAWAYS

Jigar Shah: My head's still spinning. I feel like up is down and down is up. We spent a lot of time talking about Europe and Russia and China and Israel. I am not used to having a Council on Foreign Relations episode, but I did learn a lot.

I'm curious though, Jamie — we didn't really get into the politics of the moment. It does feel like whether it's MTG or Tucker Carlson or Alex Jones or Megyn Kelly — it just feels like even Joe Rogan is turning on the president. I think a lot of these folks thought he was going to be anti-war. Now he's gone full-on Iran conflict. Everything in the world is upside down. And I feel like there hasn't really been a clear understanding of what this is going to do to the politics of the country.

Jamie Nolan: Absolutely. You can really see the public faces of the MAGA movement questioning at least this policy decision of the administration. Trump and Vance were very outspoken. Stephen Miller was very outspoken that they would not be embroiling America in another sustained conflict in the Middle East — and here we are. They haven't been able to crystallize for the American public what the goals of this war are or what the timeline is, and clearly they don't know how to get out of it. I don't really understand what the endgame is here for the administration and I'm just as bewildered as everyone else. It certainly doesn't bode well for the midterms.

Jigar Shah: Well, that and I feel like Robert Bryce has never really been a huge fan of solar and wind and is constantly talking about how much he loves coal and natural gas. But recently he's been the big champion for killing data centers in communities. If the Trump administration isn't fighting on this front around the Iran war, it's also losing the battle around American public support for winning the AI data center race. Maine just banned data centers for the next 18 months. There's so much stuff happening on the home front that's not getting focused on.

Jamie Nolan: Absolutely. Data centers are largely disliked by folks on the right and the left, facing so much pushback. We know that energy is an important lever that can be pulled — the data shows that data centers powered by clean energy are more supported by local communities. I mean, who wants a diesel generator in your backyard? It's loud, it's noisy, it's dirty.

I don't know if you saw this, but there's this new acronym that folks are using — Bring Your Own New Clean Energy — for new large load users. BEYONCE! Oh my God, so brilliant. As a comms person, I was so delighted when I saw that. Bring Your Own New Clean Energy. That is definitely a key to getting support for these projects.

It is frustrating though, seeing the administration so focused on these international issues when there are all of these very important domestic issues falling by the wayside. Certainly rising energy prices, and who knows, next year it could be blackouts. We really need to see a sustained focus by the administration, particularly the Department of Energy, on these issues.

Jigar Shah: Well, the last thing — I saw there was a call that Chris Wright and Doug Burgum ran with 200 of the top oil and gas executives, begging them to drill for more oil. And all of them basically said, you guys should pound sand. We do not believe that these high oil prices are going to stay forever. This is not a great investment for us. We are just going to sit on our hands. And you saw a lot of oil executives selling their stock as their stock prices have gone up. We're in this weird upside-down world where America is full of oil and gas, and we have a lot of executives saying, I don't think this is a good time to drill more.

Jamie Nolan: You know what it is a good time for? It is a good time for the clean energy industry to double down on the communication of the benefits of our technologies. I want to see increased spending on marketing and communications and political advertising and PAC spending across the board from clean energy companies. Because this is the moment for you to communicate what you can do for America and for the world more broadly. Get in the fray. Be bold.

Jigar Shah: Well, I'm excited for that message. And I'm also excited because Fervo is going to be in the news — their stock is pricing here pretty soon. I think you're going to see this moment where clean energy is going to be discussed in a really big way on CNBC, in the Wall Street Journal, all these places over the next six weeks. I'm excited to see how many people take you up on your clarion call and rise to the occasion.

Jamie Nolan: I can't wait. I love to see the winning by the companies in our sectors. I hope there's just more of this to come. I hope that this is the silver lining from this absolutely terrible war. War is never a good thing. But when we see a renewed interest in EVs, in solar, in batteries, in geothermal via IPOs like the forthcoming IPO from Fervo — it is a good thing. It's a good long-term thing for all of us. I just want to see people really embracing this moment.

Jigar Shah: Well, I think we'll leave it there, Jamie. So good to see you. And thank you everybody for listening. As you know, you can hear us on Apple Podcasts, Spotify. We increasingly have a ton of people watching us on YouTube. I still don't understand how you watch on YouTube and do other things, but I think it's awesome. And really thank you to S2G Investments for their early support of the Energy Empire podcast and all of our friends out there who keep recommending us. Keep doing it — it really is making a difference. Thanks everybody.