The Hormuz shock, AI and China: the state of global energy, with Jason Bordoff

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Jason Bordoff, Founding Director, Center on Global Energy Policy, Columbia University: I was always careful over the last three months to describe it as the largest oil supply disruption in history, which may or may not be the same as the largest oil shock in history. And we've learned that it was not the largest oil shock in history in terms of price impacts. And I think it's going to require some retrospective analysis to fully understand why that was and what happened.

Robin Pomeroy, host, Radio Davos: Welcome to Radio Davos, the podcast from the World Economic Forum that looks at the biggest challenges and how we might solve them. This week, an interview from the Summer Davos where many people were talking about the Strait of Hormuz energy shock.

China says its huge advances in electrification insulated it from the impact, and it wants to sell wind and solar power infrastructure to the rest of the world. We ask why some countries might be reluctant to buy.

Jason Bordoff: If the United States or Europe, Western economies come to say, well, if it's made in China, it's a risk, we can't buy it, and then we're going to build our own domestic manufacturing, I don't think there's a full appreciation for how extraordinarily difficult that is. That is a very large amount of sand thrown into the gears of the clean energy transition.

Robin Pomeroy: Jason Bordoff of Columbia University’s Center on Global Energy Policy came into our podcast booth at the Summer Davos in China to give us this timely update on the global energy situation.

Jason Bordoff: AI is going to be an enormous asset that I think in the long run, maybe the short run, is going to be more friend than foe when we think about what we need to do to move faster toward an energy transition.

Robin Pomeroy: Follow Radio Davos wherever you get podcasts, or visit wef.ch/podcasts. I’m Robin Pomeroy at the World Economic Forum, and with this look at the present and future scenarios for energy…

Jason Bordoff: We need to think about other things to not just reduce dependence, but to de-risk continued dependence.

Robin Pomeroy: This is Radio Davos.

Welcome to Radio Davos.

On this episode, we're returning to the question of energy and I have a co-host on this episode. Roberto Bocca, who is head of energy at the World Economic Forum.

Roberto Bocca, Head, Centre for Energy and Materials: Hello, thanks.

Robin Pomeroy: How are you doing, Roberto?

Roberto Bocca: Very well.

Robin Pomeroy: We're actually recording this on the last day of the AMNC26, the summer Davos in China. And This is just a great time to reflect and you and I have invited a guest. Tell us who this guest is in front of us.

Roberto Bocca: It's Jason Bordoff. I think you had that as a guest recently as well, is the founder of the Centre for Clean Energy Policy at Columbia University.

Jason Bordoff: Good to be here. I'm used to being a podcast host because we have our own. So it's very weird, but it's great to see you.

Robin Pomeroy: Well, it's great to see you in person, Jason. We did a podcast remotely just a few weeks ago. Your podcast is called the Columbia Energy Exchange and you're the co-host of that podcast.

It's really interesting to follow up only a few weeks after that, when we were in the middle of what I think you defined as the biggest oil shock in the history of oil.

The world didn't stop turning. There were big impacts, probably regionally quite different, but tell us what were the impacts and why the world didn't stop turning, why the global economy did not grind to a halt? And maybe you could just remind us as we're recording this on the 25th of June what the situation is now and tell us what the immediate impact was.

Jason Bordoff: Yeah, I was always careful over the last three months to describe it as the largest oil supply disruption in history, which may or may not be the same as the largest oil shock in history. And we've learned that it was not the largest oil shock, in history in terms of price impacts. And I think it's going to require some retrospective analysis from organisations like ours and others to fully understand why that was and what happened.

But the idea for energy security planners, and I worked in the National Security Council in the White House of President Obama, the closure of the Strait of Hormuz has always been the mother of all nightmare scenarios for global energy supply disruption.

We did that for more than three months, and it was painful. Oil prices went up. That pain was not evenly distributed. I think that's important to remind people of. The pain was certainly felt more deeply in lower and middle income countries, parts of Southeast Asia, physical shortages for a period of time, but only temporary. We saw the physical price of oil really go much higher than the so-called traded price of oil you tend to see on your screen.

But even then, the average price of oil over the last three months has been a little over $100. Today it's back to basically where it was before this conflict started as flows start to, there's about 100 million barrels sitting in the Strait waiting to get out, it's starting to get out now.

The peak oil price was around $120. These are nowhere near the $150, $200 sort of scenarios that I think most people would have said would have resulted if you lost, you know, 20% of the world's oil supply and LNG supply.

And it's interesting because so much of the conversation the last few months has been the lessons that people take from a crisis like this, the discussion of what energy security looks like in a world of geopolitical competition and fragmentation.

And Megan O'Sullivan, my frequent co-author, she and I wrote in Foreign Affairs that in response to energy shocks like the 1970s, countries really looked to reduce oil consumption.

China has been a good example, where we're sitting now, of a country that this crisis validated their strategy of trying to electrify more of their economy, hold large strategic buffers just in case, and get more of that electricity from domestic sources like renewables and of course coal in order to be more resilient and reduce dependence on imports and exposure to a geopolitically volatile global oil and gas market.

I think that is still a lesson some people will take from this, but it is interesting to kind of ask whether another lesson people could take is if you are dependent on the global oil market, it's a remarkably resilient market if over the last three months, we could have a scale of disruption we have never seen and prices went up, but not catastrophically so.

Again, there were a number of reasons for that. The market was oversupplied before this all started. Supply was going to exceed demand this year by quite a substantial margin. We were drawing inventories at a very large rate, and you can't do that forever, so this couldn't go on for months longer.

One of the most significant factors, which will require some study going forward, is the fact that Chinese imports fell four million barrels a day. We often talked about a swing oil producer, like Saudi Arabia. There's a question now of whether we might have a swing consumer in the market.

Robin Pomeroy: What do you mean by swing consumer?

Jason Bordoff: Well, meaning if in response to a shock like this, the Chinese economy is able to dramatically shift in short time frame, how much oil it is consuming and importing. That changes the amount of flexibility in the market to deal with the disruption.

I don't know if that's repeatable. I mean, part of that was because they were buying so much oil to fill their strategic stocks. And they stopped doing that. So that's not something that may be repeatable, that may have been kind of unique to this moment in time.

But there were a number of factors that, I think, have reminded us that I think it is still true that countries would be more resilient and secure, not to mention we have to do all of this for climate change to electrify more of your economy, produce more of that with domestic low carbon sources. But you have to be amazed at how resilient the global oil and gas system has been last three months.

Robin Pomeroy: Just before we started recording, we were checking the news, checking the oil price, which remind me Roberto was at...

Jason Bordoff: $73 just shy of 70 before this before the attack

Robin Pomeroy: Three months ago. So business as usual, if you were just to read the market numbers, that little war is over. That little crisis is over.

Is it though? I mean, the Strait of Hormuz has always been there. It's not widened. It's still there. You've still got the Islamic Republic of Iran, which frequently reminds us is ready to act if it or its allies in, for example, in Lebanon are attacked, from one day to the next, can't it just close this down? Surely the energy markets know this could happen again.

Jason Bordoff: Yes, and I think from a technical standpoint, I've always been of the view that there's no reason the supply can't come return to market reasonably quickly, weeks to a couple of months.

There hasn't been a lot of physical damage to most of the oil infrastructure. There's been a bit more to the gas infrastructure in Qatar. It wasn't a full shutdown, so you're able to rotate well shut-ins. They can bring it back online a bit faster.

The question is the confidence that shippers have to go back into the Strait of Hormuz if their people and employees and equipment, large valuable tankers, might get stuck there, or it's costly and can do damage to wells to shut them in and bring them back online.

So how much confidence do people have that this is behind us and it's time to invest to get things back to normal? And it should be said that we are still in a tenuous, uncertain state with this deal. It was a 60-day deal to try to discuss whether you could have a deal about the Iran nuclear programme.

So, you know, President Obama, who I mentioned I worked for, after a year of secret talks, it then took 18 months to try to get the original Iran deal that President Trump tore up because he found it to be a bad deal.

I'm pretty sceptical that you're going to get an Iran nuclear agreement in the next 60 days. I don't think Prime Minister Netanyahu and Israel are particularly happy about this deal and whether there continue to be strikes against southern Lebanon or things that cause the deal to break and a random drone strike and violence flares up and then everybody gets nervous again and stops sending their tankers into the strait, all of that is still very possible.

I think the thing that would give you optimism that the deal might hold is it does seem like both the US and Iran want it to. President Trump said he did not want to be Herbert Hoover. I think he saw that much more economic harm was coming as we run on inventories and energy prices go up.

Robin Pomeroy: What's the Herbert Hoover reference?

Jason Bordoff: The U.S. President who presided over the Great Depression and kind of plunged the U. S. Economy into despair.

And from Iran's standpoint, it should be said, I think quite clearly, I don't mean this as a partisan comment, although I worked for President Obama, this is a really good deal for Iran. So I don't think their incentive is to let it fall apart either.

They're seeing formal waivers of sanctions that have been in place across both parties for a long time. They can sell oil and oil products and petrochemicals. The waivers, presumably, will allow them to sell them at a higher price, not have to sell them at discount on the black market. And they're getting billions of dollars in frozen funds returned to them. And they retain the capability to rebuild their nuclear programme if they were to so choose.

So I think those are the reasons you think the deal might stick for a bit.

Robin Pomeroy: And that's what the markets will be factoring in, all those things.

Maybe we should move on and talk about this event here and the conversations you might have had about energy here in China.

Roberto Bocca: Actually, I was going to ask you, Jason, because of course the conversation we had so far was on oil. We have been discussing this for the last 50 years. It's a different format because podcasts were not there 50 years ago. Oil has been important for a long time.

But I think what is different, and we have seen it here, is beside the fact that we are in the right place when we think long term, because China is definitely a long-term thinker. But all the other dimension of energy security, the world is going through electrification, an acceleration in electrification.

So when you think about energy security is not anymore only about oil and the Strait of Hormuz or the similar, but also the element of electrification so some of the conversation here we're about cybersecurity, right? We're about materials.

So I don't know what are the reflections you have, Jason, but I think it's also important when you look at the energy system that we go beyond oil, and maybe these are some of the, definitely are some of the things we have seen here in the conversation, where there was willingness to cooperate, but maybe not total agreement. It would be interesting to hear.

Jason Bordoff: No, I think that's exactly right. I mean, even before this crisis, obviously, as you know, electricity use was growing globally three or four times as fast as total energy use. We were already entering what our friend Fatih Birol at the International Energy Agency has called the age of electrification.

So we are growing electricity use in advanced economies like the U.S. and China and Europe.

A big part of that is data centres. Globally, it's a range of other factors like air conditioning and basic economic development. Mechanisation of agriculture and industry.

It's interesting. It allows you to sort of talk about both because I heard a few references here this week, for example, in China. Well, the difference between the 1970s oil crisis and today is we have all these clean energy solutions that make it easier to substitute for oil. We don't need to use oil because we have cheap solar panels.

And of course, it's not that simple, right? Oil is not used to generate electricity, whereas it was in the 1970's. So if you want to displace oil with electricity, renewables, you need to do other things first, like electrify your cars and your trucks and your heavy industry and your petrochemicals, and all of that is a lot harder. Cars you can obviously do, there are challenges with it, but only about 20-25% of oil demand is cars.

So there was a lot of conversation here as well about clean energy, the innovation frontier, renewables, but we talked about advanced nuclear technology. We talked about grid solutions and battery storage, a lot of discussion of critical minerals, and a lot of discussions of the chemicals sector, petrochemicals and industry where there's a lot oil and gas used.

There are clean energy solutions, but it should be said here in China, for example, coal to chemicals is a pretty big strategy right now for investment for economic and energy security reasons. Those may not always be aligned with climate and decarbonization goals.

Robin Pomeroy: China is, if you want to buy solar panels or wind turbines, the place you might be buying them from is China. I've heard some conversations here about China should be exporting more, but there's a reluctance maybe in the West to buy vast amounts of this for a couple of reasons. The trade deficit, the trade balance, but also maybe concerns about cybersecurity. I was interviewing Adam Tooze here, who's very much in favour of China doing all this, but he says China needs to show the world that there's not a kill switch in this thing, that if you're suddenly relying, not only might you be relying on China for these imports of infrastructure, but also the software, could Beijing suddenly turn off your new way of generating electricity. Has anyone discussed that?

Jason Bordoff: Oh, yeah. We discussed it here, and it's important. It's part of the reason, I mean, the ability for the World Economic Forum to convene at a very senior level is really unrivalled, so it's always a privilege to participate.

But having the chance to come to China in particular was of interest just because we don't have enough opportunities for dialogue, whether you agree or disagree, particularly between the US and China these days.

And I've been saying for quite some time that the question of whether the concerns about energy security in this new world of geopolitical competition when energy security is much more top of mind, countries after the Hormuz crisis in particular may want to reduce oil imports, LNG imports, electrify more, follow a Chinese strategy. That is in fact what China has done is electrify of their economy with solar panels and batteries and critical minerals and electric vehicles. If other countries wanna follow that same approach, it means buying most of your kit from China because China produces everything I just mentioned. 70, 80, 90% dominant position.

And the question is how do countries perceive relative energy security risk with the daily flow of molecules that are imported versus dependence on China for supply chains? And they're different, right? The daily flow oil is different from a solar panel that once it is installed, it produces, you're not buying electricity from China, you're buying a product that once it's installed makes electricity. That's not to say there's zero risk, or including cyber, it's just different.

And I don't think we're having a nuanced enough conversation about how to understand the differences between a solar panel and heavy rare earths and batteries and other things.

And I think that's really important because if the United States or Europe, Western economies come to say, well, if it's made in China, it's a risk, we can't buy it, and then we're going to build our own domestic manufacturing with Inflation Reduction Act subsidies, some tariffs to protect your economy, I don't think there's a full appreciation for how extraordinarily difficult that is. That is a very large amount of sand, not a small amount of sand, thrown into the gears of the clean energy transition.

I'm not saying that just means ignore energy security risks and be dependent on China for everything. We learned after the pandemic that if you're 90% dependent on a country for protective equipment, medical equipment, prescription drugs or semiconductors, there may be risks.

But we really have to be precise about what those risks are. Because that leads you to different solutions to de-risk, where you need to acknowledge that in clean energy, China's dominant position is going to be there for quite some time to come, even with Herculean efforts to reduce it. And if the answer is just don't buy it from China, that's going to be an enormous headwind to a clean energy transition. So we need to think about other things to not just reduce dependence, but to de risk continued dependence.

Roberto Bocca: I think the phrase that I heard multiple times is derisk is important, more nuance is really important, so it's not just black or white, it's much more nuanced than that. But also derisk but not decouple for the point of we do need the expertise, the technology development that is done in China.

So this is very important and I think part of that transition will be also to accept that there will be investment from China probably in other markets that will allow also some of that transfer back of technology over the years.

So that was also part of the conversation we hea you know, is China going to be investing in Europe or maybe in North America to bring some of those technologies already developed here and then little by little will allow also other countries to develop those technologies.

Jason Bordoff: And countries are answering that question very differently.

Obviously, Pakistan is buying an enormous amount of Chinese solar. India wants to build a domestic solar industry. Some countries want to restrict Chinese imports. Some, like Brazil, want to attract Chinese investment to build, we're OK with Chinese vehicles. We just want them built in Brazil. So they create jobs in manufacturing in that country.

Robin Pomeroy: Roberto, you recently published the Energy Transition Index which people can find on the World Economic Forum's website. It's the annual kind of taking the pulse of the global energy systems around the world.

What about the developing world? Places that don't have great grid infrastructures, that maybe don't have massive sources domestically of fossil fuels. Where do you see things going there when it comes to the energy transition? Are there hopeful signs? Where are things happening in places like countries in Africa, maybe parts of Southeast Asia or Latin America?

Roberto Bocca: Yeah, well, that's one of the biggest challenges, effectively, that a lot of the capital that's still going, the energy transition, and by the way, a definition of transition that includes security, affordability, and sustainability, so transition in a broader term or transformation, if you like. But we see that most of the capital, particularly on clean energy, are still going to China and the developed markets, much less in the developing markets.

So we're talking about 75% still go in the major market and only 25% to the large developing markets that are, you know, when a lot of the demand will come because of economic development and also all the challenges that there are and Jason was referring to, to the element of somehow indirect element of climate change with air conditioning and cooling. Actually, this is the biggest source of growth for electrification. It's not data centres, as most people think, but it's actually the cooling.

Robin Pomeroy: Yeah, you and I are escaping a European heat wave right now, aren't we? Which wasn't unexpected. We know climate change is happening, and we knew the El Nino thing. It is burning hot in a city in Switzerland where there's very little air conditioning. That is going to have to change. Schools are closing down, as we were discussing before this.

Jason Bordoff: It's funny how climate change doesn't care whether you talk about it or not. It keeps going.

Robin Pomeroy: That's right. It doesn't care whether you believe in it or not either, does it? It's going on anyway.

You mentioned AI and data centres, so we know there's a massive demand, although maybe not as massive compared to things like cooling. Part of this increased demand for electricity is from AI. What about the use of AI for the future of energy? It is a great technology potentially for things like managing the grid, for rebalancing the grid. Have you heard conversations here about that at all, Jason?

Jason Bordoff: Yeah, and I've been pleased that, you know, some other of my colleagues from the Centre on Global Energy Policy have helped spark that conversation. And if you haven't had David Sandolow on this podcast, I'd encourage it because he's a deep expert in China, but also has been doing an enormous amount of work with a large annual report on exactly that question, how AI can be a tool to help the energy system, to help clean energy and to help address climate change with better predictive weather or high grading line capacity to move more renewable energy through existing lines a lot of work to get more energy out of renewables with predictive weather modelling, demand response, so we've always left the low-hanging fruit of efficiency untouched. We can do a lot more to better manage how we use energy.

It is it is the case that, again, particularly in places it, electricity for AI is a source of strain, but it's very localised. It's certain countries and even certain parts of those countries, not at a global level yet.

And that's going to mean not just building more renewables, but building more natural gas plants. We just saw a large deal in the US a few days ago announced between Chevron and Microsoft to use cheap natural gas in Texas from the Permian for a data centre. And that generates opposition, and I understand that because it might mean some more emissions.

But I really think that the capacity for AI to be a tool to help the energy system work more efficiently, get more out of it, and advance the use of clean energy. And with innovation and materials science and some of the discussion that we've had here to see breakthroughs in fusion or advanced nuclear, AI is going to be an enormous asset that I think in the long run, maybe the short run, is going to be more friend than foe when we think about what we need to do to move faster toward energy transition.

Roberto Bocca: I think what is interesting, and Id be interested in your perspective, we have touched, but not so much, there is this element where AI can help in the transformation of the materials, and actually that was where material was much higher on the agenda than it was in the past.

But there's not the idea that we always think about energy on the supply side. We said oil, we said also gas, but renewable and so on. But really the next frontier is probably the optimisation of the system where supply and demand through to the transmission are optimised thanks to what you were referring to, predicting weather and also maintenance and everything.

So there is really an optimisation of this system that is possible through AI and thanks to AI.

I was talking with one of the innovators, you know the theme of this meeting was innovating a scale, and one of the Technology Pioneers found a way through AI to optimise the grid by 30%. That means that you need less infrastructure or you don't need new infrastructure because you can put through your grid 30% more.

Because one of big challenges we are talking about when you talk about electrification is you need more infrastructure, right, to deploy that electrification. But actually through AI you can optimise the grid by 30 and he was saying we can get to 100%. You can double the capacity. This is really a game changer in terms of also the cost of the transition.

Jason Bordoff: Yeah, I totally agree. We've never really taken the demand side as seriously as we should. As someone who regularly writes articles in a place like Foreign Affairs, you hope the occasional one is lasting, but I think one of the ones that has lasted the best is by, you know, energy iconoclast Amory Lovins, who famously wrote a piece in Foreign Affairs in 1975 about the hard path and the soft path. So it was like after the Arab oil embargo and the energy crisis. What are we going to do to deal with that?

Well, you can break lots of rocks and lots of hard to reach places and deep sea around the world and pull more hydrocarbons out of the ground. But there's a soft path where we get more from the energy that we already use because as he has said, nobody cares about how much energy you use or where it comes from. They care if they have hot showers and cold beer. And you can do that with more or less energy depending on what kind of energy you're using and how efficiently you're you using it.

And there's lot we could do. Have always been able to do more with that than we have, and that remains true today. Great. I'm going to bring it to a close.

Robin Pomeroy: Is there anything else we need to cover?

Jason Bordoff: Just the importance of, I mean, a lot of discussion here, as Roberto and I were talking about as we walked in here, was about the need for cooperation and the speech from the premier yesterday about harmony as a major theme for the Chinese government.

I'm not trying to overlook the real challenges in the relationship and the valid critiques that maybe both countries have of each other. I'm talking particularly about the U.S. And China. But there was a real strong emphasis here, which is why it's important to bring leaders from the US, from Europe, from China, other parts of the world together to figure out how through this world of fragmentation and distrust, it's going to be really hard to achieve these goals if there's not some measure of continued cooperation and commercial engagement. We're going have to figure it out how to navigate that. That's really, it was an important part of the last few days.

Robin Pomeroy: Jason Bordoff, director of the Centre on Global Energy Policy at Columbia University and co-host of the Columbia Energy Exchange podcast. Thanks very much for joining us on Radio Davos.

Jason Bordoff: Thank you.

Robin Pomeroy: Thank you, Roberto, for being my co- host, Roberto Bocca of the World Economic Forum.

Remember you can follow Radio Davo wherever you get podcasts. You can find all our podcasts at wef.ch slash podcasts. You'll also find our sister podcasts, Agenda Dialogues and Meet the Leader. There's a three weekly podcast from the World Economic Forum.

For now, from me, thank you for listening, and I'll see you next time on Radio Davos.