Cold Front Incoming: Can Energy Markets Weather Russia-Iran Sanctions? | Energy Shots

Good morning, and welcome back to another episode of Energy Shots. I'm Kevin Book, senior advisor here at the Center for Strategic and International Studies, and co-founder of ClearView Energy Partners. I'm joined by my co-host, Joseph Majkut, who is the director of the Energy Security and Climate Change Program here at the Center. And Joseph, you are where Where are you, Joseph? >> Good morning, Kevin and colleagues. I'm coming to you from Anchorage, Alaska. It's been a great visit. I've been here attending the National Governors Association's Assembly of Energy Advisors. Had a chance to talk to policymakers from around around the United States about the challenges they're facing. A lot of the things you and I talk about, Kevin. Electricity prices, data centers, fuel prices. I've also had a chance to see some great wildlife and a couple nice sunsets as well. >> Joseph, you you mentioned fuel prices. I can recall a conversation I had, I think back in 2008, with an Alaska senator. We were talking, as we do on this show, about the disposable income share that goes to gasoline and how it was high and rising. And she told me, "Well, it's even higher in Alaska." What do we have on the screen here? >> Well, it's no secret that the cost of living in Alaska, a remote place, uh a lot of things have to be shipped here, including fuels, refined fuels. Um prices can be high. And we're showing here the evolution of gas and diesel prices for Alaska and the United States over the course of the last year. As the economy and voters are feeling the price increases from the war and other market disruptions that we're going to be talking about this this morning. I think the I'd really draw your attention, Kevin, to the the last couple months, where in blue tones we're showing the US and Alaska diesel prices. When I was a kid growing up in Washington state, we often heard about the high prices people in Alaska pay. But just look at that increase that the US average diesel prices experienced over the last couple months. And I think it's fair to say everybody in the lower 48s paying Alaska prices these days. >> You know, I note this morning that the AAA estimated national average diesel prices at $6.45 a gallon. That is a nominal record price. And if you compare it to the CPI-adjusted real price from the peak in June of 2022 at $6.59, it's very nearly real peak as well. But in Alaska, it very close to that $6.61 a gallon. National average gasoline price $4.47 here nationally, but in Alaska $5.06. It's higher. It seems like a difficult time to be talking about maybe putting more sanctions in place that could tighten up supply. But that brings us to today. There's a a bill signing. Very well could be the Lindsey O. Graham sanctioning Russia Act of 2026. At 4:30, the president is due to have in the White House. What do we have on the screen here? >> Well, Kevin, this is a pretty major development from this week. On Wednesday, the House of Representative representatives voted on the sanctioning the Lindsey Graham sanctioning Russia and Iran Act taking up the Senate text. Talk about what that was going to do in a moment, but we're showing here the the vote coverage. 262 yays, 159 nays. The bill creates new sanction and tariff authority to pressure the Russian oil export economy secondarily, well, directly in terms of new sanctions on vessels, people, banks, but also secondarily creating new tariff authority on which the president can with which the president can control or coerce large importers of Russian energy. And you see here in the in the House, this was a bipartisan vote, but there's a lot of reluctance in that big block of Democratic nays on the right hand side of the screen, around assigning giving the president new tariff authority. The tariff authority that exist that would the bill would create means that for the largest importers of Russian crude oil and natural gas, president could assign up to a 100% tariff on all imports from those countries into the United States. It also gives him the authority to assign a 500% tariff on all Russian imports, the extent to which those are still in existence. >> Joseph, the the bill is interesting in a couple of respects. It has evolved since its introduction in April of 2025. One of the evolutions was the creation of broad waiver authorities for those sanctions, including the sanctions you mentioned against vessels. It also doesn't mandate that the tariffs be put in place. It provides the option, but not an obligation for those tariffs. And if you if you look at that and and ask you know, will will we see sanctions? I think there are there are real questions about whether the president might find a national security reason for for waving them as the bill provides. There's also questions about whether he might exploit a second feature of the tariffs, the secondary tariffs. Democrats were very critical of the bill in some of the the leadership offices on the hill in the house saying that this ability to assign these up to 100% tariffs on countries that evade or facilitate the evasion of sanctions was broadly drawn and could be used for for purposes other than the intent of pressuring Russia in in the Ukraine war. And I suppose we'll have to see what happens there. What are you expecting to see going forward? >> I don't know. I think that this is you know, the the idea that this creates a new tool to create real pressure on Russia. We've tried very hard over the past five years to limit Russian oil export value and the oil market finds ways around the sanctions authority that we have that already exists. The tariff tool is blunt, potentially very powerful. Will it be as easy to evade? I can't tell you. And will the president be willing to do more than threaten its use when the market is otherwise so disrupted? I have a hard time believing that right now, but over the long term, it might be a useful tool. Again, like you say, we're going to have to see. >> Well, so let's talk a little bit then, Joseph, about which are the countries, if the tariffs are to be used, that could be could be targeted. What what do we have on the screen here? >> The the The screen here is showing us the the major importers of Russian seaborne crude from the past year by month. Now, the story really is, Kevin, about two countries, India and China. China imports uh a huge amount of Russian oil, and over the past few years, because of the shank sanctions policies following the invasion of Ukraine, India has emerged as a large importer of Russian crude oil as well. On the chart, China's in red, India's in orange. And you look at the some of the volumes we've got here, Kevin. India started the year importing about 1.3 million barrels per day of Russian seaborne crude. As the market got disrupted following the uh US-Iran uh conflict and the closure of the Strait of Hormuz, that went up to 2.5 in April and close to that in May. Now back more toward 1 and 1/2. Uh China started a bit above 1, and now it's under 1. Um but those are the two big ones. The the potential tariff I mean, both as geopolitical entities, as large economies, those are the those are the countries that I think this tariff package could potentially mean a lot to. And the trade volumes implied are quite large. United States imports $300 billion of goods approximately in 2025 from China and a hundred billion dollars from India. The potential use of these tariffs is massive. >> There are implications for trade obviously and there are implications for market tightness if diverted barrels can't find new homes which I think is one possibility. Uh and uh it >> One of the biggest questions is what if it works Kevin? >> Well secondary tariffs were deployed under authority the president invoked using the International Emergency Economic Powers Act until of course the Supreme Court in February ruled that that was illegal. Uh this reinstates essentially the opportunity to impose secondary tariffs using that tool. Uh I think we'll come back to this as it rolls out if indeed it is signed today. It may be many weeks or even months until it becomes an operative question. But that takes us I think to the the sort of the backdrop against which this is occurring. These are not the only sanctions. Ukrainian President Volodymyr Zelensky uses the term sanctions to refer to the kinetic disruption of energy infrastructure in Russia that he is he has been able to achieve with ever improved targeting of drones against refineries. And what you have here is a rack up prepared by a member of my team using public sources and I think you recall Hatley Post when she was a member of your team. And so this is her a a recent non-exhaustive rack up of anecdotal strikes on Russian infrastructure. These can include many strikes against the same targets. You can see the tankers are the leading category at the bottom and oil infrastructure second after it but refineries behind that. A lot of strikes on refineries which have had the effect of diminishing available Russian diesel exports to the world. And that's significant of course it against the the price that we mentioned on the first slide because we're short diesel in in a sort of ordinary context. Last year you might have seen 800,000 barrels per day of maritime diesel exports from Russia there abouts and now we're down to to essentially zero. There's a ban in place through the end of October. And in addition to that, the the availability of product for export has been constrained by these improved targeting. These these conditions, these additional conditions on top of the the war in the Middle East start to create a cumulative risk concept that that we've talked about before. The idea of knock-on risk. Essentially a tighter world is more sensitive to the incremental interventions by actors anywhere if there's a disruption somewhere. And so in this tighter world, we find ourselves with with this. Uh Did you see this tweet from Iranian Parliament speaker Mohammad Bagher Ghalibaf? It's it's a little unusual for those who who are not following his online postings. He has he's taken to trolling in ways that I think traders and and economic sort of experts who might be his target audience find interesting or worthy of commentary. Here he is he has modified the Taylor rule which addresses interest rates relative to the gaps between actual and target GDP and actual and target interest rates. And it's essentially a way to express interest rate directionality for the the Federal Reserve which on Wednesday increased rates by 25 basis points. And uh he has added two terms and alpha coefficient modifying in actual versus target Strait of Hormuz volumes and a beta coefficient modifying Bab el Mandeb Strait volumes. And I would notice that he refers to this as the Straits plural Taylor rule. Which is to say that he's incorporating both the Strait of Hormuz about which we have talked so much and now the increasing Houthi activity in the the Bab el Mandeb Strait at the the end of the Red Sea going into the Gulf of Aden, where the Houthis have have recently taken territory Mocha on the coast as well as islands in the strait and have the opportunity to impair cargos. Why why do you find this significant? >> Kevin, I think this tells us two things. I mean, one, it does have a sense of dark humor about it, which you have to admit. But but two, this is the first claim I've seen by an Iranian leader on the economic impacts of their actions in the Strait of Hormuz and in the Bab al-Mandab Strait. Now, for the long time, the the political story has been that the economic threat that came from the from the war and from the closure of the Strait of Hormuz sort of belongs to the US, but here actually you've got the Iranian government saying, "We own this. These are our actions." And it's telling us, because this is, you know, an important equation used to set one of the most important macroeconomic factors for the United States and the world, that the stakes are quite high. I actually thought it's a it's a very interesting and revealing tweet. >> You know, if we translate it into what we at ClearView sometimes call dude speak, what you would say to a friend at a bar starting with the word dude, "Dude, what's happening here is that Parliament speaker Gallab is essentially saying that this is a source of inflation. It is a way of pressuring the United States and that interest rates are due to rise." He says, "You can't 25 basis point a choke point." Which is I think his way of saying that physical interruptions physical interruptions can provide a source of Well, let's call it knock-on risk, which takes us to the East-West pipeline, the principal conduit from the the Strait of Hormuz side where most of the Saudi cargos had previously shipped to the Red Sea exit that the kingdom has been employing since the start of the Hormuz crisis in ever increasing volume. On September 10th and September 11th, uh there were strikes against the pipeline disabling it. Uh recent days, Secretary Wright uh has said that he expects it to be up and running uh at least partially through a bypass relatively soon, but anecdotal reports and satellite evidence suggest that at least one or maybe two pumping stations uh are badly damaged uh and that there could be at least a partial outage for some weeks to to maybe even a little bit longer. Uh and uh and and here we are. So, zooming in on it, Joseph, this knock-on risk, why is this important? >> I think this is important because over the last 6 months, the whole the whole period of this conflict, we've all been a little bit surprised by the durability of the market losing the 20 million barrels of free-flowing oil through the Strait of Hormuz. Now, over the last month and a half, we think a lot of that has been restored at least on a semi-daily basis because the US Navy is uh protecting ship flow. We even saw it daylight transits of of ships leaving the Strait of Hormuz over the last few days, at least anecdotal, you know, at least a few of them. But, the the rerouting of much of the oil, which in Saudi Arabia is produced in the eastern part of the country, to the west played a huge part in reducing the market the total market imbalance from the closure of the Strait of Hormuz. And now that we've seen the pipeline attacked, it's going to take, you know, days to weeks, but also we just have a a sort of a new term in in that risk factor calculation because once you target the pipeline, you can of course do it again. Um with with reserves diminished and the market looking much tighter, you have to think that this is sort of a uh the the energy security uh um is continuing to degrade as it appears the war is escalating in new ways. >> Yeah, I think that that context you gave is really important because if we look at the retaliations, again, uh a non- non-exhaustive anecdotal rack up of strikes here against regional energy infrastructure. We can see that there's been a lot of countries in the region that Iran has targeted or Iran's axis of resistance axis of resistance partners and proxies have done. But Saudi Arabia has really received sort of the the largest number of of these strikes against energy infrastructure. And that that is a significant factor because as you say these these targets can be hit more than once. They can be hit again and again. And if you look at again by sort of the the infrastructure type replicating the same format and continuing. You know, these pipeline strikes may not be the most numerous. And in some ways if you think about it pipelines interruption in flows in a pipeline can be repaired on relatively short order through the kinds of bypass mitigation that we were just discussing. Whereas strikes against more complex facilities like refineries or for that matter LNG terminals may take months to calendar quarters or in some cases even years to be fully restored. But when you look at the the sheer volume, this this is really one of the the outgrowths of the risk calculation that has changed as a function of the war. In producing regions there was generally a certain hesitancy to to strike against a neighboring producers infrastructure because if you live in a glass house, you tend to want to avoid incoming stones. And and now we're seeing that this has become sort of the coin of the realm and an expectation on an ongoing basis. Which is to say that when we look at what was already impaired in the strait as you mentioned Joseph, some volumes since the start of Project Freedom officially and unofficially thereafter in early May, still were creeping out at night and a rising share thereof. But in the meantime, that impairment created context where anything that threatened the outlet to the Red Sea was incremental knock-on risk that could achieve very significant upside pressure to the crude oil price and with it pressure on I guess Washington, other importing governments, American partners. So, so where do we go from here? >> I would say, you know, given my conversations the last few days, creates pressures on governors and and states as well trying to figure out how do you respond to this dramatic price increases we've seen over the past year. Maybe not as much as we initially thought they might be, but maybe we're getting toward a place where all of the analysts who were claiming that we would see global oil prices 120 or above, you know, maybe we are getting to that place. I don't know. You and I don't make price forecasts on Energy Shots, of course, but the risks have to be acknowledged as being larger with less cushion than we would like to see. And so, even in this context, we're talking about how do we help, you know, how do they help people pay for heating oil this winter? How do they help people conserve energy resources and work more efficiently? What does this mean for EVs in the United States? A lot of the same conversations you and I have had on on Energy Shots, I think we're going to continue to see evolve over the next few weeks. Let me ask you, what are you looking at in terms of the global market balance and market dynamics when it seems like there's just numerous more factors that could interrupt what had become a um unsteady balance. >> Yeah, an uncomfortable equilibrium for sure, Joseph. And I think that middle distillates are still at the top of my list as they were on several episodes ago and and will continue to be probably going into the harvest and the hauling season for holidays, but also the heating season thereafter. When we look at the middle distillate pool that includes diesel fuel, it also includes heating oil, and that's not always an election sensitive issue, but this year here in the United States, closely contested elections for the Senate in Maine and for that matter in Alaska, where you are, Uh, have 50% of homes heated uh, with heating oil uh, primarily in in Maine, uh, 28% in Alaska, 37% in New Hampshire in New Hampshire, which could also be a closer than expected election. Uh, and so that this is a real factor. When we look at the economic pressure, it's not just economic pressure writ large, uh, it's economic pressure targeted for political outcomes, uh, and that uh, that's an unusual factor uh, to to start seeing in our internet connected social mediated uh, social media mediated world, uh, but it's the nature of foreign affairs and geo geo strategic outcomes today uh, and in the world we're in. So, I think what I'm going to be watching for Joseph is further knock-on risk and with it further responses. Uh, there are still 38 and a half million barrels of committed strategic petroleum reserve volumes uh, that haven't yet been allocated as we have also discussed. Uh, you know, at high prices with a steeply backwardated forward strip in the in the oil market, uh, you might see more occasion for another exchange. Uh, in addition to that as diesel prices rise, importing governments are going to have to think about what they're going to be doing. Uh, it's still the case here that the Trump administration is working from the supply side and not the demand side, but export constraints in some fashion uh, remain an open question. Uh, certainly on Capitol Hill there are are members who are willing to discuss it on both sides of the aisle and uh, it looks like the the administration has ruled it out but not not in a sort of comprehensive absolutely not way, but in a conditional way that only if it lowers prices. Well, here we go. >> Well, and then bear in mind we you know, there is news reporting that the president will meet with Gulf Arab leaders next year on the sidelines of the big UN conference and General Assembly in New York. So, maybe we'll see some changes in strategy uh, amidst these uh, recent escalations. >> There will be much to watch next week and I will look forward to having those discussions with you Joseph here on Energy Shots. For all of you out there uh, watching today, we thank you for your continued interest and attention. We always appreciate your comments and we encourage you to have an energetic day. >> [music]