Hormuz fallout: Energy chaos is here to stay

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AMY HARDER: I think you definitely need to pay attention right now. I think the two storylines that we’re seeing with Iran and the AI boom, these are two of the biggest, fastest-moving storylines that I’ve experienced in my 20-year career. Energy is the thing we all need, but don’t notice until it’s gone or expensive, and that is where we’re at right now, quite suddenly.

BOB SAFIAN: That’s Amy Harder, national energy correspondent for Axios. With fallout from the Strait of Hormuz dominating headlines, Amy takes us beyond the gas pump shocks to identify what’s a near-term headache and what may be lasting structural changes. She also digs in on the AI data center boom and what have become staggering electricity demands. It’s a moment where energy, geopolitics, and technology are all colliding at once. So let’s get to it. I’m Bob Safian, and this is Rapid Response.

[THEME MUSIC]

Amy, welcome back to the show.

HARDER: Excited to be here.

SAFIAN: You’ve had a crazy time covering the energy world these days with Iran and the Strait of Hormuz. We’re talking late on a Tuesday. By the time this reaches our audience, who knows what might have changed? How do you stay on top of it? What are your days like?

HARDER: They’re pretty crazy right now. My metaphor to date has been I feel like I’m ping ponging between the Iran war and the data center boom. And those two stories, there is some potential overlap, but they’re pretty separate. And so, I spend my days juggling the news from both of those worlds.

Copy LinkWhy the Strait of Hormuz closure is unlike past oil shocks

SAFIAN: Let’s play a little ping pong then. Let’s start with the war and Iran. More than 20% of the world’s oil used to move through the Strait of Hormuz. Now, almost nothing. How optimistic are you or your sources about what today looks like versus a month ago?

HARDER: Not very optimistic. This scenario of the Strait of Hormuz being essentially fully blocked was almost unprecedented. We’ve reported recently at Axios that there have been modeling exercises to determine how bad an oil crisis could get, one particular exercise in 2007 and another in 2022. The potential risk of the Strait of Hormuz fully closing was considered so laughably unlikely that it wasn’t even considered. And so, we really are in uncharted territory with where things go from here as long as the Strait remains closed.

SAFIAN: It seems like an identifiable risk, but was it because it’s never been closed before?

HARDER: One, it’s a navigable waterway. It’s not a canal, like the Suez or Panama. It’s just the way of geology, in some respects, so nobody ever thought it could be closed. But also, number two, because it was almost too big to fail. 20% of oil and natural gas in the world goes through there. It was almost too big for the institutions as they exist now to respond. And we’re feeling the impacts of that now. And we’re still in the window where the stockpiles and other oil that has been floating around the world has been reaching port. Experts and analysts who I talk to say we are in for an extremely difficult moment of demand destruction if the Strait remains closed.

Copy LinkWhy energy prices are likely to stay high

SAFIAN: The estimates are that U.S. consumers are spending like a billion dollars more a day, gas pumps, shipping costs, airline tickets, and these prices are expected to stay elevated even if the war ended right now. They would stay elevated for a year or more, certainly beyond the U.S. midterms. Can you explain that timeline? What would keep prices up for that long?

HARDER: The oil industry is like a giant tanker, no pun intended. It’s not a jet ski that can turn on a dime, it’s a tanker that requires time to restart. And so, that’s why you have this lag in both the potential for prices to go back down once the Strait opens back up. But also, on the flip side, there’s a lag in what I termed a moment ago about demand destruction, which is sort of an industry term, but kind of a scary one as well. It basically means if the Strait remains closed, oil prices will go so high, there will be destruction of demand and people will stop driving. It’s already happening in some parts of the world. It’s happening slower in the United States because we have so much oil, but it will come for us if the Strait remains closed.

The framing of the question is what I’ve been hearing all over. To me, it’s one of those things where when we hear people… Like the CEO of ExxonMobil, Darren Woods, has been saying this a lot lately. When the Strait opens back up, it’s going to take a while. That is sort of like saying, “Well, when I get out of this water, I’ll stop drowning.” But we are in the water and we are drowning and we don’t know how to stop that. The concept of how is the Strait going to open back up is the question we need to be asking. Is it going to go back to the way it was before as a freely navigable water? Iran says no, from what I’ve understood, but everybody else is saying it must. That’s the crux of the challenge going forward. But as the saying goes, you can never go back, and everybody I talk to say we are not going back to the way things were on February 27th.

SAFIAN: So if the closure continues, what are the implications of that over time? I mean, obviously, prices stay elevated, I guess, but are there other implications?

HARDER: This is the world’s biggest oil disruption in history by a wide margin. Even in the 1970s oil embargo, which disrupted far less oil than what we’re seeing today, you saw huge shifts. That’s what helped cause the nuclear renaissance in the United States. Fuel economy and vehicles was something that also accelerated significantly in the last couple of decades. So looking forward, what will be the lasting impacts from this? I think partly because of President Trump and his policies, one impact I suspect will be a greater stockpiling of fossil fuels. Coal is also already seeing a renaissance, not here in the United States, but in other countries, you’re seeing a turn inward for domestic energy sources. Sometimes that will mean renewable energy, but oftentimes it will mean coal.

SAFIAN: It’s interesting that the US is less impacted than other regions. It’s got to shift the whole global energy relationships with each other after something like this.

HARDER: The reason why the United States is being impacted currently less than other parts of the world is a couple of reasons. We’re not as reliant on Middle Eastern oil as Asia, for example, is. That’s largely due to the fact that we are the biggest producer of oil and natural gas in the world. Oil is priced on a global market though, so we are still facing those higher prices that you mentioned. Natural gas is a totally different beast. It’s still priced regionally. Natural gas prices, which affect the consumer primarily through electricity prices, have remained far below the prices that Europe and Asia are seeing. We are in a little oasis of normalcy with our natural gas industry while the rest of the world is in chaos. It is a striking result of the fact that we are the largest producer and exporter of natural gas, and that all happened over the last 15 years, and that shouldn’t be discounted.

That being said, demand destruction is coming for the United States too in the next several weeks. If the Strait stays closed, that will have a humongous impact on prices. We have not even seen the full price impact because of the buffers that we had built into the system that will eventually wear thin.

Copy LinkWhat the oil crisis means for renewables and electric cars

SAFIAN: When the term Strait of Hormuz became standard headline fare, I found myself thinking, well, this is why you want robust renewable energy. Even if you’re not worried about climate change, there are security reasons, there are economic reasons. How much enthusiasm, renewed enthusiasm is there for renewable energy?

HARDER: I think you’re seeing that develop in some parts of the world, certainly a renewed emphasis on that. You also saw in Europe when Russia invaded Ukraine in 2022, it did redouble some of its efforts on the renewable energy front. So I think you’re going to see it somewhere. And yes, we’ve all seen the memes that said, “Your solar panels don’t go through the Strait of Hormuz.” Now, I will say there’s other geopolitical implications for all types of energy. With renewable energy-

SAFIAN: Right. Because all your solar panels come from China, right?

HARDER: Exactly. But the key difference there is it’s not an immediate commodity that can be shut off like a spigot. You buy the solar panels, you can stockpile them in humongous doses. Once you buy the panels, the energy is free. And so, I do think long-term… And we are beginning to talk about this crisis as having humongous long-term impacts. I wasn’t initially willing to say that right after this happened, because as we all know, sometimes things with President Trump are over very quickly and you’re like, “What the heck was that?” And you go back to the way you were living. That’s clearly not the world we’re living in now.

And so, I do think electric cars will be an interesting one. For the last couple of decades, there was a pretty bipartisan support for fuel economy, fuel efficiency, President Obama and President Biden both on a double down on electric cars. We’ve obviously seen Trump pull back on that pretty aggressively. I will be exploring in my reporting, to what degree could this crisis detoxify electric cars? Because if you drive an electric car, right now, you are fully insulated from this crisis. The longer the Strait is closed, the more lasting drive I think we’ll see to electric cars.

Copy LinkHow the crisis has impacted the rest of the world

SAFIAN: I mean, it sounds a little scary, the way you talk about what may be coming in the relatively near future.

HARDER: I hope I’m wrong. I hope the Strait opens back up. I think all of us want that. There is always the possibility that everybody who’s so in this debate is somehow crying wolf and it won’t come to pass. But I also should emphasize that demand destruction has already aggressively occurred in other parts of the world, and it can be so easy to be very insular as Americans, but the world has changed. Daily life has changed for billions of people already because of this war. Restaurants in India are closing down because they don’t have the natural gas they need for their restaurants, and the impacts go far beyond that, but that’s one that stuck with me.

SAFIAN: And the volume of strategic reserves, as those are worked down, then the buffer is gone. That’s what’s been creating the relatively limited price rises so far.

HARDER: Right. The market continues to be optimistic, and good for them. I’m not feeling optimistic. Of course, if the Strait opens back up, oil will eventually flow again. That’s not the problem. The problem is how does it open back up? I think so many things in the Trump presidency have seemed unprecedented, and I think considering this closure is becoming chronic, we’re staring down a potential scenario where the Strait may never fully open back up, and what does that look like for our oil and gas industry? And that is a little bit alarmist, but I also think it can’t be taken off the table. And I’m saying this after reporting out that story about how a closed Strait was considered so unlikely that it wasn’t considered within the bounds of planning.

SAFIAN: The Strait, once considered too big to fail, and yet here we are. So are there other levers in energy that we’re underestimating, particularly around the hunger for AI compute? We’ll talk about that and more after the break. Stay with us.

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Before the break, Axios’ Amy Harder guided us through the volatile Strait of Hormuz and the risk of demand destruction. Now, we talk about AI as a catalyst, both good and bad, in our energy future, where nuclear and renewables fit in, and what’s at stake in these ominous inflection points. Let’s dive back in.

Copy LinkHow AI turned into a major grid challenge

The other ball that you’re playing ping pong with is AI data centers, this growing power demand from them. Now, I went back and looked, when you and I talked last time, which was maybe 18 months ago, you were citing stats that other energy drivers, like air conditioning, would actually generate more demand than AI, that maybe AI was taking up more attention than it should. Has that shifted?

HARDER: I definitely have a changed perspective, and I can’t believe it’s been 18 months. It simultaneously feels like forever and yesterday. So I will say on a global aggregate perspective and level, I still think electricity demands like air conditioning and electric cars, those are still likely to be a bigger pull on our electricity than data centers specifically. But when you look especially at the United States, which is the leader by far, even surpassing China, which is saying something because we don’t really beat China in most things, data centers are a humongous pull in electricity. And that picture becomes even more pronounced when you look at specific parts of the country. Virginia is obviously one, known as Data Center Alley. Texas is catching up pretty quickly. And it is striking how fast these companies are moving to secure their electricity. It really is the thing everybody needs, and it’s the underpinning of the AI economy.

SAFIAN: And as this AI economy grows so exponentially, can we put a number on how much energy is needed for AI?

HARDER: Well, in the electricity space, we work within gigawatts or megawatts. And I try to avoid that word in my stories, because to 99% of the people out there, it doesn’t really mean anything, but it’s hard to avoid. I’ll share a recent story that I reported on. Fermi is a data center company in Texas that is in the middle of a crisis. Its CEO was just pushed out. It doesn’t have any customers. Their electricity project in Texas is massive, it’s 17 gigawatts. And most people are like, “Okay. 17’s not a big number.” But 17 gigawatts is three times the amount of electricity that New York City needs. So that’s insane to think that one campus of electricity plants would draw that much power. A few years ago, one gigawatt was a lot. So the size of energy and electricity we’re talking about here is just huge.

SAFIAN: The investment in these energy needs for AI, is it siphoning resources away from upgrading the grid and a clean energy transition and all of that, or are the AI hyperscalers footing the bill for this transition by building out the data centers?

HARDER: I tend to think it’s more the latter. I do think longer term, this boom in electricity will be good for the energy transition, because it will accelerate a lot of technologies that have been too expensive for so long. I recently interviewed the CEO of Commonwealth Fusion Systems, a fusion company, Bob Mumgaard. They have a partnership with Dominion. They just signed up to get connected to the Mid-Atlantic grid system, which is the first time that has ever happened, and this is all thanks to the AI boom. And he said, “Yes, our electricity is more expensive than current electricity, but the companies are willing to pay a lot for this high-end compute.” What he was implying is that it was replacing human jobs. Instead, that is being replaced with electricity. Expensive electricity, sure, but still not as expensive as a human.

Copy LinkWhere nuclear and natural gas fit in AI’s power race

SAFIAN: I was reading there’s a lot of enthusiasm about nuclear power permitting. Nuclear making a comeback is part of the response to the AI ball in the air, the Hormuz ball in the air? Where does that come in?

HARDER: It’s definitely in response to the AI boom. I would put fusion and fission, i.e. nuclear power, both in the same category as being considered too expensive for different reasons. One, because fusion doesn’t exist yet in any sort of substantive scale. And existing nuclear power is pretty expensive, but again, they finally have found a customer rich enough to pay for that power, and those are the hyperscalers. And it really is a blessing, but also a curse that this is how it’s going. I will say though, for all the demand pull that we’re getting for things like fusion, advanced nuclear power, the biggest immediate winner right now is going to be natural gas, and that, of course, doesn’t help the energy transition. But it’s complicated, and over the long term, which is what the climate cares about, these newer technologies will get a huge boost from AI.

SAFIAN: Because for the hyperscalers, they need so much energy that paying above today’s market is okay because they just need the supply there down the road.

HARDER: Exactly. And also, importantly, the tech companies also are still largely committed to their climate goals. They’re not talking about climate as much, if at all, anymore, but they remain committed. Google is considered the leader, alongside Microsoft. Both of those companies have or are likely to pursue natural gas as well. But they’re staying committed to their climate goals, and that’s what’s pushing them to consider these newer technologies as well. It’s also the case though that they need as much power as they can get, and there’s a years-long wait for turbines that you need for natural gas. So making bets on fusion when it might not be ready until 2035 is actually okay, because that’s how far out they’re planning.

SAFIAN: And they have to look that far out for any of their energy sources, so looking that far out for this, it’s part of the portfolio bet that they’re making.

HARDER: Exactly. I do think particularly with Google, which I’ve done a lot of reporting on Google, there is still an acknowledgement that climate is an existential concern for its customer base, for its employees, and there’s still this inkling of climate concern that has otherwise almost evaporated from our conversation. One thing that’s very reliable is that debates go as a swinging pendulum, and eventually, climate will rear its ugly head again. But I do think as these technologies are commercialized, thanks to the AI boom, their prices will come down, and that will make them more competitive with fossil fuels.

Copy LinkHow climate goals are shifting inside energy and tech companies

SAFIAN: And do you hear, even from the fossil fuel companies and executives, that quietly they acknowledge that climate change is going to return as an issue and they can’t go all in on fossil fuels, or have they been like, “Great, that was a blip and I can get back to drill, baby, drill”?

HARDER: If you ask a West Texas wildcatter, they’re not thinking about climate change. They probably never were, but they were more defensive about it a couple of years ago. It’s very different in other parts of the world. Take TotalEnergies, a French oil company, they inked that controversial deal with the Trump administration to get its money back for offshore wind leases and shift that money to oil and gas investments. I chatted with the CEO the other day, and he said, “We’re not doing offshore wind in the United States because the policy is too unreliable. But we are continuing with renewable energy in other parts of the world and in the United States, it’s just onshore.” And the company is committed to its climate goals, not because the CEO is a climate activist, but because they want to exist for the long term and they want to position themselves for the future. So I think from the more global perspective, you’re seeing that acknowledgement. But regionally, here in the United States, it really is off the table for the moment.

Copy LinkWhy energy is no longer an invisible part of the economy

SAFIAN: This moment in the energy world is so fraught. When you look across Hormuz and AI and renewables, the full mix, what do you think people most misunderstand?

HARDER: One thing that I’ve long said, energy is the thing we all need, but don’t notice until it’s gone or expensive, and that is where we’re at right now, quite suddenly, in two of the major parts of our economy. One, the Iran war has made oil either scarce completely or really expensive. And on the AI side, same thing, but with electricity. And so, I think there’s going to be at least a temporary, but hopefully more lasting understanding and appreciation for why we need energy and the trade-offs that come with all types of energy sources.

SAFIAN: And if I want to believe, oh, all these headlines about Hormuz and AI, really, it’s just noise. There are bigger long-term issues, and potential solutions, AI or fusion or whatever. Or is it like, no, you’ve got to pay attention to right now?

HARDER: I think you definitely need to pay attention right now. I think the two storylines that we’re seeing with Iran and the AI boom, these are two of the biggest, fastest-moving storylines that I’ve experienced in my 20-year career. For so long, the industry was moving pretty slowly, relatively speaking. Even the fracking boom of the 2010s didn’t really break out of the energy world. But now, with AI infiltrating our lives, whether for good or not so good, the energy side of it is very present. And so, I think that has a ton of implications for the average person. One, they’re connecting AI and potential job losses to high electricity prices, and that connection could be scary going forward. I know I was alarmist about the Strait never potentially opening back up, and here I am potentially being alarmist on this side.

But I think it’s worth it to talk about and to acknowledge that the data center industry and tech companies, they’re living this. The opposition to data centers is growing so significantly. The general public’s view of AI is also not positive. I think energy is breaking out of its insular debate because this is all affecting us. I’m using AI constantly to write about AI, and the irony is not lost on me. And so, I’m by no means an AI hater, but I also want to be self-aware and just mindful of how I use AI. I think that’s something almost every interview and conversation I have with energy leaders, it comes down to how we use AI as humans. And so, it’s making me feel my humanity more, and I think it’s making others feel that same way.

SAFIAN: Well, Amy, thanks so much for doing this.

HARDER: You’re very welcome. It was a really good conversation.

SAFIAN: Energy is indeed breaking out of its insular debate, as Amy puts it, and whatever the outcome of today’s twin crises around the Strait of Hormuz and AI, that is a positive. Amy is so right in noting that we too often take energy for granted, but it is foundational, even more foundational than technology, because, of course, our technologies rely on it. I hope that Amy’s worst fears about energy markets turn out to be wrong, but as with so many other things in modern business and society, we can’t assume the best will happen. I’m drawn to areas where change is underway because you only get progress through change, but change only leads to progress if it’s guided in that direction, consciously and humanly. Here’s hoping that our better selves prevail in the Strait and beyond. I’m Bob Safian. Thanks for listening.