Hosted by Christina Ruffini and Sir Richard Dearlove
Guest
Helima Croft
Helima Croft is a Managing Director and Head of Global Commodity Strategy and MENA Research at RBC Capital Markets.
Episode Summary
In the wake of the United States’ MOU with Iran, the headlines have been chock-full of optimism.
Sir Richard Dearlove and guest co-host Sabrina Singh sit down with Helima Croft, Managing Director and Head of Global Commodity Strategy and MENA Research, RBC Capital Markets, to lend more nuance to the news.
Also: What Starmer’s resignation could mean for the UK, takeaways from the recent G7 meeting, Ukraine’s success with drones, and how things have changed in the decade since Brexit.
In this episode:
(00:00) Intro: Strait of Hormuz Crisis Explained
(02:00) UK PM Starmer Resigns: What Comes Next
(08:34) G7 Summit: China, Ukraine, and Europe's Crisis
(14:22) Ukraine War: Can Russia Be Stopped?
(18:35) Brexit at 10: Was It Worth It?
(23:24) Is the Strait of Hormuz Really Open?
(30:08) Oil Markets React to Iran-US Peace Deal
(36:55) Iran Nuclear Deal: What's Really at Stake
(44:39) Iran Sanctions Explained: Congress vs. Treasury
(48:01) OPEC's Collapse: Saudi Arabia vs. China
(51:47) Best and Worst Case Outcomes for Oil
(58:22) Key Takeaways: Global Energy's New Reality
Hosted by Sir Richard Dearlove (former MI6 Chief) and guest co-host Sabrina Singh (former Pentagon Press Secretary)
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Transcript
COLD OPEN
Croft: Is control of the strait now more important than the nuclear program for re-establishing deterrence for Iran in the region? If you really want all the US sanctions removed, then President Trump has to go to Congress. And that is a seat of opposition to Iran in Washington. And that's where I think you're going to see a battle royale over the terms. I think we're going to come out of this crisis now with basically two energy regulators. You can have me back — at the end of the year we can have a scorecard.
INTRODUCTION
Singh: Hello and welcome to One Decision. I'm your guest host, Sabrina Singh, and I'm joined by my co-host and former head of MI6, Sir Richard Dearlove. Hello, Sir Richard.
Dearlove: Hi Sabrina. And I'm on your side of the Atlantic this time. My background shows, If anyone knows about the state of Maine, this is a foggy state on certain days.
Singh: Well, you're having similar weather to what we're having here in Washington DC — foggy and still raining. But your backdrop is much prettier than mine. Well, Sir Richard, with so many new developments coming out of Iran over the last week — negotiations on ending the war, talk of reparations and nuclear stockpiles — the entire global economy is waiting to see how and when this conflict will come to an end. We are excited to dig into that conversation with friend of the show Helima Croft, and discuss the geopolitical ramifications of the Trump administration's ongoing negotiations with Iran. And if you haven't already, be sure to subscribe to One Decision on YouTube or wherever you listen to your podcasts. Now it's time for In Brief, where we dive into some other stories with international implications. Sir Richard, I really want to ask you about Starmer. I really want your thoughts.
Dearlove: Okay, that's fine. I can talk about Starmer until the cows come home.
Singh: What are your thoughts? Where is the UK headed now? IN BRIEF: UK POLITICAL UPHEAVAL — STARMER FALLS, BURNHAM RISES
Dearlove: If you read the media, we're headed down a political track that makes us look like Italy with the speed in the change of governments. This is the seventh Prime Minister in ten years or whatever, and that is very uncharacteristic of the British political scene. So obviously something odd is happening. There are various explanations. But let’s try to stick to the essentials. Starmer was elected in a rather freak result — but it was a result that was explicable in the circumstances — with a huge majority in Parliament, largely because the right-wing vote was split. This was two years ago. First-past-the-post system, he ends up with a majority of a hundred and eighty. And it was described as a sort of unloved victory. Basically, Starmer has proved to be a poor politician. He's a thoroughly decent, hard-working lawyer who, I think, has high personal standards. And there’s no whiff of scandal about him or anything like that. But he just has been very wooden as a political figure. Indecisive. It's not clear what his policies are, what he actually believes in. There have been a number of policy U-turns. So come the council elections, this unloved parliamentary majority gets a huge kicking in the council elections. And does appalling badly. Not just badly for a sitting government — they lose more council seats than I think any party has done in living memory. And the party that profits massively is Reform, this is the hard-right party led by Farage. But they only have at the moment, I think, nine members in Parliament, some of whom are defectors from the Conservative Party. The anxiety that strikes Labour is that if they're going to have to fight an election against Reform with Starmer as the leader, they're going to do really, really badly because he is so unpopular. So, very unusually for Labour — because they're not as traditionally vicious a party as the Conservatives, amongst themselves — do put such pressure on Starmer that he has lost the confidence of key members of his cabinet. Two of the leading ministers had resigned in recent weeks — Defence and Health. So Starmer is really left in a completely beleaguered position. The alternative leader is this guy Andy Burnham, who was the mayor of Manchester — but he cannot compete for the leadership of the Labour Party and therefore to replace Starmer unless he's elected to the House of Commons in a by-election. So one of his buddies in Manchester stands down in a seat where Labour traditionally wins, although there's a significant Reform vote. Burnham gets elected in this not closely contested by-election. So we're now in a situation where Starmer has announced his resignation, and Burnham is almost for sure going to be elected leader of the party and Prime Minister. In the UK you can change the Prime Minister without a general election if you have a parliamentary majority, which they have. Although now, because Burnham's appointment is going to be largely uncontested, people are getting worried that they don't really understand what his policies are. And Burnham’s plus is that he was a very successful mayor of Manchester and led a huge revival of that city. And he is a really clever political communicator, charismatic. But on the other hand, if you dive into his career, his political achievements are pretty shallow. He comes in and the issues are not going to change. And the issues are: the government needs to raise a lot of revenue, therefore the issue of high taxes is on their agenda. Growth is stubbornly resistant to improvement. And the government are faced with two massive problems: one, to hugely increase defence expenditure, which they're reluctant to do; and the other is a welfare bill in our social democratic state here in the UK which is unaffordable and growing massively by the day. Starmer had to square this circle, and there's no magic solution. And he’ll face the same situation that has brought Starmer to his knees.
Singh: That completely makes sense. And helpful context to know the inner workings of what could happen. But also the challenges that Starmer has had to face. We just are coming off the G7 summit — Macron's last G7, and most likely Starmer's last G7 as well. The G7 said they aim to cut reliance on any rare earth supplier to sixty percent by 2030 — clearly a nod to China. What did you make of the statements coming out from the various leaders at the G7 that you witnessed last week?
Dearlove: The two issues that seemed to be to the fore were this critical minerals alliance and the decision to cut dependence on China. China controlling ninety percent of global production at the moment — by sixty percent in a relatively short period of time. I'm not sure whether that's realistic. It's very easy to make these statements at a G7 meeting, but the coordination and follow-up required is very complex and difficult, particularly when a lot of it depends not on government investment but on private investment. And the two rare earths they've chosen to focus on — lithium and nickel — well, let's see what happens. It's definitely a gesture of anxiety about China's control at the moment of this critical market, particularly for global electrification. The other area, of course, was Ukraine. The key issue is: did Merz and Macron and Starmer change Trump's view of the Ukrainian situation? Some of the reporting seems to indicate that Trump at last is coming to terms with the fact that this is Putin's war not to win. I wouldn't say Putin's war to lose — the Russians are not going to lose this war. But the important thing is that Putin doesn't win it, i.e., doesn't achieve his objectives in Ukraine, and that we help the Ukrainians hold the line. What's happened in the last few months is that the Ukrainians have been much more successful in taking out Russian infrastructure, particularly Russian energy infrastructure, plus cutting off Russia's ability to resupply the Crimea by making the routes into Crimea almost impassable because of the rate at which they're being attacked — particularly by Ukraine's improved and rapidly expanding drone technology, especially at medium and long-distance range, where they've made significant advances. So these seem to be the two issues. And of course this is also Macron's swan song — his farewell. He's been a massively controversial politician in France. If you think the UK’s got political problems, just delve into the French political scene. My French friends say they're envious of the relative benign situation of British politics in comparison with what's going on in France. His legacy, judged from an economic point of view, actually looks quite interesting and I think will survive. And his reputation will survive with it. He's been reasonably good on European security, particularly on the issue of Ukraine. But where a lot of my French friends are very angry with him is the way he abandoned French strategic interests in Africa, particularly Mali and the Central African Republic, and has really stood aside and left a vacuum there that has partly been filled by Russia, as I’m sure you know.
Singh: Don't you think Macron was also smart in playing to Trump at the summit and inviting him for a personal private dinner at Versailles? It showed some of his political skills coming through. But you're right — European politics, both in the UK and France, very complicated right now.
Dearlove: Germany as well — Merz is really unpopular, his coalition government isn't doing great, and there's massive opposition to him with the AfD gaining in popularity all the time. So you've got the three principal European nations in terms of economic, military, and security power all in a dire political circumstance. The next couple of years in Europe are going to be fascinating.
IN BRIEF: UKRAINE HITS BACK
Singh: You alluded to this earlier — last week we saw Ukraine launch its largest drone attack on Moscow in years. We're seeing Ukraine making some small advancements. I think European leaders really wanted to impress upon President Trump that Ukraine is still fighting. What do you think the trajectory of the war is, and how can European leaders continue to work on keeping Ukraine from the negotiating table right now?
Dearlove: At the moment I don't think there's any incentive on the part of the Ukrainians to make any concessions at all. Although there is some vulnerability along the line of the fortress cities which hold the front and are strategically positioned — there is Russian pressure in that area, which is somewhat concerning. But, on the other hand, the Ukrainians seem to have gotten themselves into a stronger position in terms of taking the war to Russia and undermining Putin's support. There's much more criticism appearing in Russia of Putin's policies. The economy is faring rather badly. And you've even got things like petrol rationing in some areas of Russia now where the Ukrainians very deep into Russian territory have knocked out energy supplies. So I think there's a resurgence of hope that the Ukrainians can not only hold out but can maybe go militarily in a more positive direction — which might eventually persuade the Russians they're not going to get any further militarily. And if that were to be the case, what I would predict as an outcome is certainly no Ukrainian concessions on territory, or sovereignty, or anything like that. But bear in mind Russia occupies nineteen to twenty percent of Ukrainian territory. I think you'll get a line of frozen conflict, some sort of ceasefire, and no negotiation on either side towards a resolution. So basically it would be an armistice line — the historical equivalent is the armistice line between North and South Korea. That could last for years without any change. What would be worrying if the conflict were to cease is that it gives Russia time to rearm and reconsider its strategic position more generally. And NATO will be under huge pressure to coordinate better their own rearmament. They're still having to cope with the problem of American troop withdrawal from Germany, although it's not entirely clear whether this very sophisticated anti-missile unit of five thousand might be partially redeployed in Poland. That hugely affects NATO's capability in the face of Russian escalation anywhere along the border north and south. So there’s a huge amount to play for.
IN BRIEF: BREXIT AT TEN
Singh: Richard, I do have one more question for you — this is the tenth anniversary of Brexit. So i have to ask, given the political upheaval happening in the UK, what is it like to look back at that time? Has Brexit fulfilled the promise you saw in it?
Dearlove: I think that the problem has been the implementation of Brexit. It just hasn't been exploited in the way that some of us hoped and expected. And it's remained — and that's a significant word, 'remained' — a potent division in British politics, because the Remainers are still a powerful lobby and have not really accepted the referendum vote, which took us out. There's no question that successive governments haven't successfully exploited the opportunity. However, there are a lot of positive aspects. The problem now is that we have a Labour government whose lack of success economically, domestically, has made them look back at the relationship with the EU, giving Remainers new hope that there will be concessions and a closer relationship with Europe. What worries me is the extent to which the arguments for and against Brexit have become thoroughly distorted. The main distortion applies to the economic model. The economic damage, which is the Remainers' claim, is thoroughly, thoroughly distorted. I can certainly point you in the direction of a number of economic analysis papers which show authoritatively that despite the problems Brexit caused, the overall impact on the economy hasn't really been very significant at all. We haven't gained a lot of benefit from Brexit, which is what it needed to show. But the downside is nothing like the opponents of Brexit claim. And of course Brexit is sandwiched between the 2008 banking crisis and the pandemic. How you separate the effects of these issues is very, very difficult. I remain optimistic that in the longer term the benefits can be developed by a more confident government. But Burnham is instinctively much closer to the Remain camp than to the Brexit camp. So it will be interesting to see how his administration deals with this issue. GUEST INTRODUCTION: HELIMA CROFT ON THE IRAN MOU AND ENERGY MARKETS
Singh: That was very helpful. And now going from Europe to the Middle East — it's time for our interview. The memorandum of understanding signed last week by the US and Iranian governments was meant to reopen the Strait of Hormuz, end the war, and let the markets exhale. And yet days later, Iran's military declared the strait closed again, while Washington insisted it never closed at all — a fitting symbol of how unsettled all of this remains. Beneath the relief sit harder questions: what will it take to get Gulf production back to where it was, and whether we've entered a fundamentally new era in how we regard fossil fuels and energy security. To make sense of what this deal means for energy markets and the global economy more generally, we're joined once again by Helima Croft. She is global head of commodity strategy and MENA research at RBC Capital Markets, a CNBC contributor, and a former CIA analyst who has spent her entire career analyzing the interplay of geopolitics and market dynamics. Helima, welcome back to One Decision. There’s a lot going when it come to the US-iran deal and ceasefire on all fronts. As we speak, what is your understanding of the status of the Strait of Hormuz? Is it open? Is it closed relative to pre-war standards? How is traffic flowing?
IS THE STRAIT ACTUALLY OPEN?
Croft: This is really the million-dollar question. We have seen an uptick in traffic, particularly for ships leaving the Strait of Hormuz — we’ve had this massive buildup of ships waiting to exit. We've seen an uptick using both the Iranian channel and the Omani channel. But what's really important to understand is that we are nowhere close yet to pre-war levels. On any given day right now you might have twenty-five, thirty ships going through. But before the war started you could have a hundred, a hundred and twenty ships going through; you had ships moving in both directions. So it certainly is an improvement on what we saw in March and April, but we're nowhere close to normalization yet.
Dearlove: Can I just follow up by asking — if ships are leaving, what is their willingness to go back in? I've been quite involved in insurance, and the premiums must be massive for ships that want to go back in. So I'm assuming it'll be quite some time before you get a balance of traffic both ways.
Croft: Sir Richard, I think this is really important, because different shipping companies are going to have different risk appetites for going back the other way. We think you're going to see Chinese ships willing to go both ways, Indian ships willing to go both ways — but particularly tier-one Western shipping companies, we think they're likely to sit it out for a while to see what the security environment looks like. What does the payment scheme look like? The Iranians are insistent that you will have to coordinate transit with them — that after sixty days, there will be some type of service fee to go through the Strait of Hormuz. We're anticipating that the Revolutionary Guard will remain a sanctioned entity even if some of the sanctions are waived. So if you are a Western tier-one company, can you pay a fee to a sanctioned entity to go through the Strait of Hormuz? So I think there's a lot of euphoria in the markets with people saying the crisis is over, the strait is open, start your engines. But we think it's going to be a protracted and messy restart process. And I would point to the situation we see in the Red Sea — the United States did a deal with the Houthis over a year ago to end hostilities, but shipping traffic is still fifty percent below pre-crisis levels because a lot of Western shipping companies just don't believe it's safe to transit that route.
THE TOLLING QUESTION
Singh: Just to follow up on Sir Richard's question — can you talk about the idea that Iran and possibly Oman might try to institute some type of tolls or fees for ships that go through that passage? What kind of impact would that have for shipping — not just in the strait but globally? And to your point about shipping being decreased in the Red Sea by nearly 50 percent, how would shipping change for global markets if there is some type of fee that will go into place after 60 days?
Croft: This is going to be the other million-dollar question – I keep using that phrase because we simply don't know how this is going to end. I think you’re going to have a situation where some companies are willing to pay the fee — some have been paying fees to transit the Iranian corridor. The question is: if you are a Western company, a Danish company, a Norwegian company, a Japanese company — are you willing to pay that fee and potentially have issues with your compliance department, because the Revolutionary Guard is expected to remain sanctioned? Can you pay a fee to a sanctioned entity? Is there some coordination with Oman that lessens the compliance risk? Hard to say. I also think you're going to have a pretty strong reaction — at least privately — from the other Gulf Cooperation Council countries if Oman coordinates with Iran on a transit fee. A number of GCC leaders have said absolutely not to paying a transit fee. They have said the strait has to remain an international waterway open to all commerce. So any situation that ends with Iran charging a fee, even in coordination with Oman, is going to go against that pretty strong GCC position.
THE IRANIAN CHANNEL VS. THE OMANI CHANNEL
Dearlove: Can you also explain, Helima — is the passage up the Omani side too narrow or too difficult to become a principal route? As far as I understand it, the Iranian-controlled route is more navigable, broader, and easier for shipping to take.
Croft: Yes, That's a hundred percent correct. You can't normalize if you're just going through the Omani Channel. Part of the problem is also mining — we are stuck with two relatively narrow channels; the Iranian channel is wider because of the presence of mines. We do not have a fully open waterway that ships can go through. You can hug either coast, and you have more room to run if you go through the Iranian channel. The real question is: how quickly can you get minesweepers in? How fast can you open up more channels in the strait? And operationally, what does the control environment look like? All of these things are in a to-be-determined state right now. But if you look at where oil markets are, equity markets — people believe that this is just done, that this is essentially start your engines, they've opened this up, and we're just dealing with some minor logistical problems. We're in an unprecedented situation in terms of unbottlenecking this waterway.
MARKETS VS. REALITY: OIL PRICE EUPHORIA
Singh: Talk to us about the markets. Because I find it fascinating that oil prices fluctuate, while they remain high, are about a dollar higher than before the war started. When do you see markets potentially normalizing? When do you see oil and diesel prices going back to pre-war levels? Or do you think we remain in this state for quite some time?
Croft: It's amazing that markets are where they are, given the fact that we've had over a billion barrels of crude displaced because of this war, and we're still drawing down our inventory buffers. The market is really pricing in full resolution, full return to oil exports — not thinking about what restocking is going to look like. One of the things that really saved us from having a $150 oil price situation was that the Chinese relied heavily on their inventories. The Chinese cut their imports by millions of barrels a day and relied heavily on the buffer they had built up. So the question is: does China come back into the market now that oil prices have come down, as a buyer? Are they back in the restocking trade? What happens if we don't fully normalize in terms of exports going through the Strait of Hormuz — what if we remain down by several million barrels a day? We don’t know the answers to these critical questions. We're in such early days of this reopening, but I still think there are these headwinds for oil that we really have to pay attention to.
Dearlove: One of the things I've read recently about the market is that you're going to have perhaps a very short-term glut as the stored oil that wasn't shipped rushes out onto the market — which could then be followed by a massive shortage, because the problems of production haven't been solved. Once that initial flush has gone through the market, the international market will be in trouble again. Is that a correct interpretation?
Croft: I think we really have to see how much gets out in this initial wave. What we look like we’re getting a lot of right is from the Iranian barrels — with the double blockade in place, they couldn't be sold. So we’re getting the most barrels coming out right now seem to be these Iranian barrels, which has really interesting implications for the whole security picture in the region. But once we've worked off the barrels that were waiting to exit, I think your point is right. What we're going to focus then on is what does the restart timeline look like for fields? How many ships can you get going back into the strait to drain storage? Because what we saw in the early days of the war is Middle Eastern producers quickly reached tank tops when it came to storage in the region. So how quickly can we start draining that storage as part of a restart process? We're maybe in the best days right now for getting a lot of crude out of the strait. The question is: do we get enough ships to go back in, and what do the restart timelines look like? And Sir Richard — pay very close attention to inventories. The Cushing facility in the United States, where all the WTI comes in, is reaching operational lows. The US SPR is getting close to operational lows. Are we reaching a dangerous point in storage? Can we get enough crude to the market to avert that situation? Because US production was a big part of the story as well — there was a massive pull for US exports. The question is do we start to see less pressure on US inventories, because that is something to pay attention to when it comes to price as well.
RUSSIA VS. IRAN: WHO WON?
Singh: Helima, you raise such great points. Laast time you were on, you identified Russia as the big winner of this war. I’m curious, given the fact that the US Treasury has now given a waiver for 60 days for Iran to start selling its oil at market rates — I’m curious if you still think Russia is the big winner here for the war, or is Iran walking away from the table with the stronger and upper hand, particularly when it comes to selling oil right now?
Croft: What I did not anticipate when we had our initial conversation is the degree to which the United States would seemingly meet the Iranian term sheet — almost all of their demands — in terms of the unfreezing of assets. And it's really important to understand: even though it's Iranian money from oil sales, when you unfreeze that money and allow Iran to repatriate it, there is no clawback mechanism. That's not like a sanction you just reimpose. So I think the Iranians were wise to focus in the negotiations on frozen assets — because once that is returned, there's no way to get that back. And then in terms of the sixty-day general license waiver, it's gone beyond what a lot of people initially anticipated the waiver exemptions would be. Now Iran can sell into the United States, it looks like. So it was a very, very ambitious general license from the Iranian standpoint in terms of the ability to sell their oil. There are also real questions about Iranian control over the Strait of Hormuz. I had been in so many conversations in Washington, particularly when Gulf delegations would come through, and they kept insisting: Iran cannot be left in charge of the Strait of Hormuz. And yet, if you look at the MOU, it looks like Iran is in charge of the Strait of Hormuz. Now the question is, can they rebrand a toll as a service fee, some insurance scheme? But they did not operate a toll booth or a department of motor vehicles licensing scheme before the war started. And so that's a massive win for Iran. I think an interesting question is: is control of the strait now more important than the nuclear program for re-establishing deterrence for Iran in the region?
Singh: Knowing what this new deal is — how does Russia factor into everything?
Croft: There's less of a need to give Russia exemptions at this point. That had been something the administration did early on in the war — giving a general license for Russia to sell oil. Now with Iran having the general license, do they need to make the type of concessions to Russia that they did in the early months of the war? So I think that's going to be very important to watch. I would also say that China is a really big winner coming out of this as well — because it was really China that came to the rescue of the global economy. First, the Chinese decision to build up a massive stockpile of commodities that could be used to shield consumers around the world from the impact of the war. The Chinese decision to curb imports really did prevent a massive breakout in oil prices. So I think China's position as a sort of global financial energy regulator has been bolstered by this war.
THE GAS MARKET
Dearlove: Could you explain to us what has been happening in parallel to the gas market? As an alternative source of energy supply it's crucial. And I don't quite get how the gas market now has tracked against the price of oil.
Croft: Initially when the war started, we saw a run-up in gas prices — particularly European gas prices. There was a real concern about what it would mean for countries like the UK, so dependent on Qatari LNG. So we'll be watching closely what the Qatari restart looks like. The United States, though, once again — as we saw with Russia-Ukraine — really rode to the rescue in terms of additional volumes that they were able to deliver to key consumers. And this war happened at a seasonal low for oil and gas. If it had happened going into the winter season, that would have been a much bigger problem. We were exiting, going into spring when the war started — so seasonality played a big role. Inventory buffers played a big role. Storage levels played a big role. But the United States as an exporter, both of oil and gas, helped shield key consuming countries in terms of preventing massive shortages. As we head into winter and start thinking about the winter season — how quickly can we get Qatari gas back is going to be a critical conversation.
ENERGY TRANSITION: WHAT THE WAR CHANGES
Singh: On the point you just brought up about the US being an exporter of oil, I think we've seen in comments from this administration that the US is largely insulated from what's happening in the Strait of Hormuz. And you've seen China and other countries adapt. But what does this mean in terms of where we’re going either for electrification or solar — how is this war going to impact the change in energy and global markets going forward? Do you see countries moving towards different energy sources now?
Croft: I think if you're in Asia and you are heavily import-dependent Asia and you did not have the ample buffers that China built up going into this crisis — where you really did have an energy crisis, where you really did have rationing and shortages and work from home. Asia did have a serious energy policy crisis – particularly, again, the importing, developing nations of Asia. Are you now thinking about energy security, economic security through greater diversification? And, again, when I talk about China's role being enhanced at the end of this conflict: which country dominates the entire value chain for renewables? It is China. So is this another vehicle for China to enhance its relationship, and cooperation, and potential dependency with neighboring countries? Because we certainly saw this on the product side. One of the first things China did was they put a products ban in place — but then did a selective waiver for exporting products to countries that had previously had territorial disputes with them in the region: the Philippines, Vietnam. So they really did use the energy diplomacy card. And so are we going to see China using their dominance in renewables again to bolster their position regionally?
Dearlove: You made an interesting point about the US role as an exporter, which Sabrina just picked up on. If you take a longer-term view now of the international energy market, it seems to me that there is a really important strategic shift taking place — the US establishing itself as perhaps the major exporter of fossil fuels globally. And isn't the irony also of this crisis also that the US economy as an exporter is going to benefit from high prices more significantly than people really understand at the moment?
THE GOLDILOCKS PRICE FOR US PRODUCERS
Croft: That's always been an interesting challenge for the Trump administration — we saw it in Trump 1, especially. If we go back to March 2020, when we had the beginnings of the COVID crisis, and we had Russia and Saudi Arabia get into this price war at OPEC and essentially decided they were going to flood the market — we had the most oil on the market in the midst of the worst demand collapse in history. It was so interesting because President Trump at first was like: this is great for the US consumer, bring on $30 oil. And then you had US producers call him and say: President Trump, American energy dominance dies in a $30 oil price environment. And then President Trump really switched very quickly and said: I have to get OPEC back together with the Russians because I need a higher price to save the Permian Basin, to save our exporters. So President Trump always kind of flips between what is really good for the consumer in terms of low energy prices and gasoline prices, and what is a price that is necessary to keep US production abundant. It’s an interesting question at $77 Brent, low-seventies WTI — is that a Goldilocks price right now for sustaining US production and it’s not too painful for the US consumer? I'm going to be watching his rhetoric around energy prices because there is a higher price that is needed for the US producer than certainly what we see in the Middle East to keep production going.
SANCTIONS: WAIVERS VS. TERMINATION
Singh: I just want to go back to something you talked about earlier, which was the sanctions. And the fact that the US Treasury just this week has lifted sanctions on Iran being able to sell its oil now. A final deal could terminate sanctions entirely. What does that mean?
Croft: Good question, Sabrina. This is really important to say: waivers or termination? I spent a lot of time in my previous life working on sanctions. It's really important when we think about Iran sanctions in the US versus Russia sanctions and Venezuela sanctions. So the question is: does this new regime in Iran — this more IRGC-led regime — do they really push the issue on we want all the sanctions removed? Because if you really want all the US sanctions removed, then President Trump has to go to Congress. And that is a seat of opposition to Iran in Washington. You have a number of Republicans who are deeply unhappy with this deal. So it's going to be a harder process to get Congress on board for vacating their own measures. That is something people are not paying close enough attention to because they see the general license and think it's all great — not really looking at the fine print. If you really say 'remove the sanctions with the final deal,' that deal has to go to the Hill. There was a question under the Iran Nuclear Agreement Review Act of 2015 whether just the MOU would have to go to the Hill for review. If you look at the language in that legislation, it does look like the MOU should have been sent to the Hill five days after signing. There's no way they can avoid sending a new deal to Congress though. And that's where I think you're going to see a battle royale over the terms.
Singh: That's really helpful — thank you for clarifying. I was under the impression that Treasury does have some sanctions that the Treasury could lift, but that’s helpful context in terms of the congressional approval needed.
Croft: Just some sanctions were done by Treasury, but the lion's share — the most punitive measures on Iran — were done by Congress with bipartisan majorities. So much so that President Obama didn’t have – even if he had vetoed the legislation, it would have been veto-proof. That's where it becomes a challenge. And subsequent administrations learned from the danger of outsourcing sanctions to Congress. Going forward, a lot of the measures put in place under the Biden administration on Russia were all done by executive order. Same thing with a lot of the measures on Venezuela. It doesn’t mean that there are no sanctions on Iran done by executive order. It's just that a large part of the sanctions architecture on Iran is congressional. It becomes like a spider web — it’s so sticky that the repeal process on Iran becomes enormously challenging.
OPEC AFTER THE UAE EXIT
Dearlove: Helima, what future now for OPEC with the departure of the UAE? It seems to me that a byproduct of this crisis — which plays into Trump's hands — is the significant weakening of the influence of OPEC over the international energy market. Is that a correct conclusion? It's been dominant for so long and suddenly it seems to be falling apart.
Croft: I think the exit of UAE was something that was in the cards. We saw that dispute in the summer of 2021 — there was an OPEC meeting in July of 2021 where they were discussing new baselines, and a dispute prevented an agreement for about ten days. At that moment a lot of OPEC watchers were thinking: we don't know how long the UAE is going to stay in OPEC — in part because the UAE had made the decision to invest billions of dollars in expanding their capacity. They came up with a new trading benchmark, the Murban benchmark, the idea that benchmarks need barrels. And it was a question about how long ADNOC — Abu Dhabi National Oil Company — would be happy to see that investment sitting idle. So I don't think many of us are surprised by the UAE exit. The issue is around timing, of course. But that was in the cards for several years. The issue though is what is the material impact in terms of extra volumes coming on the market. Before the war started, I was actually in Saudi Arabia for an IEA, OPEC, IMF – it’s IEF – meeting. A lot of the discussion was around the idea that there wasn't a lot of spare capacity within OPEC — because almost every producer in early February was basically maxed out except for Saudi Arabia. So I don’t think there was a lot of spare barrels that were going to be thrown on the market. UAE was producing fairly close to their upper limits. Same at the time with Iraq. A number of countries were basically pretty much maxed out. Saudi Arabia was the only one that was sitting on spare capacity – meaningful spare capacity. Kuwait has a little bit of spare capacity. But Saudi Arabia has decided to bear the burden of adjustment largely on their own backs. So the question going forward is: what is going to be the appetite for Saudi Arabia to continue to play the regulator role?
TWO ENERGY REGULATORS
I think OPEC's main decisions about regulating the market really come down to one central banker — it’s really Saudi Arabia. So what is Saudi Arabia feel like is in their appetite to continue to regulate the market?
But I think one upshot of this war is: do we now have two regulators now? Do we have Saudi Arabia as the production regulator, and China as a regulator on the consumer side? The decision of China to build reserves that could be so heavily used to avert a global crisis — that to me is the twin story. I think we're going to come out of this crisis now with basically two energy regulators.
Singh: That’s incredibly helpful because that goes right into my next question for you: to bring it home for us, can you give us the best-case scenario, the range of outcomes? How do you think this breaks over the coming months or this next year? Where do the chips fall, what does it look like for the strait, oil and gas prices, and the broader market?
BEST-CASE SCENARIO AND SCORECARD
Croft: I love this question because you can have me back — at the end of the year we can have a scorecard. How did you do? The holiday show! Looking at the market now, one week into the MOU — I still think it's going to be a messy, protracted reopening. We're in the initial euphoria of: it's open, start your engines, a flood of crude on the market. I certainly think if you've been sitting in the water for a hundred-plus days — warm water, growing barnacles on your ship — you want to clean up your ship and get out. The question is who's coming back in. What is the appetite of tier-one Western shipping companies? A company like Maersk does not go through the Red Sea anymore, even though the US did the deal with the Houthis a year ago. So the question is: will the Danish shipping companies, Norwegian shipping companies, Japanese shipping companies go back through in an unsettled environment? And what happens 60 days out, because these nuclear issues remain unresolved. If you're Iran and you have the White House willing to give up so much in the MOU — are you going to make significant concessions when it comes to a final resolution? What type of inspection regime are you going to allow in? What's the status of the highly enriched uranium maybe under Isfahan or not? What are you going to allow in terms of follow-on agreements? So I think a lot is still up in the air. And I just don't think that's an environment where certain companies and insurers are going to feel confident that this is an open, free, easily navigable situation.
Dearlove: My follow-up question: when is the market — particularly in response to the Brent crude price — going to become more realistic? Out of interest, I do track the price of shares in some of these smaller oil companies, which are very sensitive to the market. And the shifts in the share price are just ridiculous — because they seem to anticipate an optimistic outcome. Trump says or does something in Washington and the share price plummets, then euphoria disappears, they start getting nervous again and the share price climbs. They go up and down like a yo-yo, and it seems to me there's a lack of mature judgment.
Croft: I think there's a corner of the market that believes that President Trump can just manifest the best-case scenario. And when you have the S&P at record highs, people are so excited about the AI story — they find this messy and complicated, and they just want to move on. But the problem is Iran has not moved on. We still have an unclear operational environment in the most important waterway in the world. So I think it's going to be potentially an end-of-summer discussion. As you get closer to sixty days, and people can step back and say, well, does thirty ships a day or forty ships a day really constitute a reopening? How many are going back through? What does the restart really look like? As we get closer to that sixty-day deadline, we're going to know a lot more about the open-for-business story. And I think that's the moment you may get a reassessment on how easy it's going to be to bring all these barrels back on.
ONE DECISION TO WATCH
Singh: Helima, there’s a lot going on this week, and a lot more to come. The question that we close every conversation with is — what is the one decision you're watching this week?
Croft: Easy question for me. Am I going back into the strait? I can exit — but will I return?
Singh: So you're watching the shipping companies and possibly the insurance companies as well.
Croft: Yes. It's one thing to say after a hundred-plus days on the water that I’m willing to leave. The question is: what is it going to take to incentivize me to return?
Dearlove: And if the negotiations were to break down — which I still think is a pretty high possibility — where do we go then?
Croft: Exactly. And what does that mean for the price of oil? When does the market realize the talks have broken down? Because one thing we didn't even discuss is how successful the president was in convincing the market the war was over — from the very start of the war. We had three dozen 'war is over' pronouncements starting basically on February 28th. I think most people, if you had said on February 28th this war is going to go through the middle of June, they would have said it would be so much more calamitous for the global economy — prices will be at all-time highs. But there was a huge segment of the market that just believed every breathless pronouncement that was coming every that the war was over. So now the question is: when do they realize there's a problem?
Singh: Helima, thank you so much for your time, for this conversation today. We greatly appreciate it. Thanks for joining us.
Croft: Thank you.
Dearlove: Helima, that was terrific. You are the guru on this issue.
Singh: This is so helpful, truly.
Croft: I love this podcast. I literally had to rush through my doctor's appointment — I'm like, I have somewhere to be today.
POST-INTERVIEW DISCUSSION
Singh: Well, Sir Richard, what did you think? I certainly learned a lot, and I think she's right that we're going to have to watch what the shipping companies do this week and next week. But I'm curious for your thoughts.
Dearlove: She really is, as I said, the guru on giving one an insight into these really complicated issues. And I think she's brilliant at clarifying what is still at stake. Her final comment is the crucial one — about whether shipping will go back in through the Strait of Hormuz. Coming out is reasonably straightforward, but the class-one shipping companies in the West are all tied up with an insurance industry where the appetite for risk is the judgmental factor. I think we're a long way from seeing a resolution that takes us back anywhere near where we were before the crisis started. I think for me that’s the key observation. And her explanation of the sanctions issue and the way that China had benefited from its ability to build this huge strategic reserve, which made a massive difference across Asia — for those countries that were facing not just high prices but severe shortage and therefore there was the threat of rationing, not being able to buy gasoline for cars and that sort of thing. She gave us a terrific reflection of the key issues. And the other one which I think is really important is this Goldilocks balance in the United States between an energy price that keeps American production at a strong level and then a floor price that means you start closing down wells in the Permian Basin or stop fracking because none of it is any longer profitable. That's a crucially important issue too, and I'm pleased she drew attention to it.
Singh: Yes — her explaining the waivers and the sanctions, and then going into how OPEC is involved or not involved and what happens in the strait. My takeaway is that if Iran and Oman start charging some type of fee or toll masked as a fee for shipping companies to transit through the strait, the implications for global markets– it’s very unsettling.
Dearlove: And the IRGC is a proscribed organization in most Western countries now. If they're collecting money and you're a shipping company — are you paying a terrorist organization? Breaking the law? People forget these really important technicalities. You can say things, but the implementation is really, really difficult and complex.
Singh: You're totally right. Well, Sir Richard, that's all for this episode. Join us every Thursday for more exciting conversations about world events that go beyond the usual headlines. Subscribe to One Decision on YouTube so you never miss out on our conversations putting global news in context. And for more conversations with leading decision makers and thinkers, check out OneDecision.com where you'll find additional commentaries, conversations, and explainers. I'm Sabrina Singh, and thank you for listening.
