Much to agree on here (and a few things we still need to discuss over the long-planned glass of wine - assuming there’ll still be governments to provide air traffic controls and safety, roads to drive on, sidewalks to walk on etc so that we can actually get together…)
Nicely said, I will reply with a warm approving chuckle, and with the note that if -- as I hope -- we'll meet over European wine in Europe, the danger is more that governments will have regulated exactly what kind of wine we can drink depending on the hour, location and weather...
As usual, I'll leave the monetary argument to others and stick to your energy passage, which is where I can add something.
You draw a reassuring lesson from the Iran shock: the IEA warned of the biggest energy crisis in history, yet the economy rerouted supply, redistributed it, and adjusted demand, so its resilience was underestimated. Two things complicate that, and a third sits inside your own argument.
First, most of what did the absorbing was not a repeatable capacity but a one-time draw on finite buffers. The IEA released 400 million barrels from emergency reserves, about four days of global consumption, which now have to be refilled over years. Oil moved through bypass pipelines that carry roughly nine million barrels a day against the twenty the strait normally handles. Spare production capacity, by definition, runs out the moment everyone pumps flat out. At the peak the near-closure removed an estimated 14 million barrels a day. The system survived a four-month disruption by spending its savings, which is why Citi was modeling $150 crude and analysts still called the market strongly undersupplied when the deal arrived. Surviving before the buffers ran dry is not the same as strength.
Second, and more consequential: for a decade, the thing that kept oil markets tight was China, and China has quietly changed sides. Between 2015 and 2024 it added close to 6 million barrels a day of demand, roughly 60% of all global oil-demand growth. That was the engine. It has now stalled and begun to reverse: Chinese oil demand fell in 2024 for the first time in twenty years. The reason is the demand you credit with adjusting so gracefully, except that much of it left the market permanently before a single tanker was turned away. By 2025 China's EV fleet alone was displacing about 1 million barrels a day, some 15% of what its road-transport oil use would otherwise have been, with electric and LNG trucks removing roughly another half-million. Worldwide, the EV fleet displaced around 1.7 million barrels a day in 2025, equal to Indonesia's entire consumption. Run the same disruption three years ago, into a market where China was still adding a million barrels a day of fresh demand and where a driver hit by a price spike had no affordable electric alternative to escape into, and the adjustment comes out of price and rationing, not substitution. The graceful demand adjustment you credit was built by the electrification you expect this war not to accelerate.
Third, your own text points the other way. You call the June inflation relief temporary precisely because crude rebounded the moment the ceasefire stopped holding the strait. But if energy prices are volatile enough to swing headline inflation and shape a rate decision, they are not also the background noise the economy simply shrugged off. Energy cannot be a first-order force and a non-event in the same piece.
The economy was more resilient than the 1970s analogies feared. But that resilience was spent reserves on one side and permanent demand flight on the other, and both are reasons to reduce oil exposure, not reasons to be reassured by it.
Thank you. Your comment adds important detail (which I omitted because it would have made the post too long.) It helps explain my point, it does not contradict it. I acknowledged that the one-off release of oil reserves helped, and you confirm that a more consequential factor is the permanent reduction of China demand thanks to electrification. We both left out US shale production, which remained on the sidelines, and would help adjust to a more prolonged shock.
I don’t see a contradiction in my argument: a rebound in oil prices could now push US headline inflation back to 4-5%, but not to the double-digit levels that ‘the worst energy crisis in history’ would lead us to expect.
While I do not expect electrification to accelerate as a consequence of this war, I expect it to continue and would certainly not oppose it. It must go hand in hand with the energy transition, however, since more electricity needs to be generated. Here, I strongly support reducing reliance on Middle East oil first, and oil overall. I would also love us to be able to run the global economy on wind and solar. But the transition needs to be mindful of the costs – and transparent about it – and careful about creating new vulnerabilities, as when Europe made itself overly dependent on Russian gas.
Thank you, that is a fair and generous reply, and I think we are closer than the thread suggests.
You are right that a rebound to 4-5% headline inflation is a different animal from the 1970s double digits, and I take the point. Those two claims sit together without contradiction.
Shale is the sharper of your additions, and I would only draw one distinction inside it. As a global price backstop it is real: let crude run high enough for long enough and US shale ramps, adds barrels to the world market, and softens the price everyone pays, importer or not. That mechanism is genuinely global, which is why it belongs in a piece about world stability. But a lower price is not the same as lower exposure. The importer with no production of its own still had to buy every barrel at the world price, from suppliers and through a strait it does not control. Shale can lower the ceiling on what that barrel costs. It does nothing about the dependence itself. It is relief on price, not on vulnerability, and only one country gets to hold it in reserve. That is worth separating, because vulnerability is the thing this whole exchange has been circling.
Which is why I want to press you, gently, on the phrase itself: "new vulnerabilities." I would rather argue with what you mean than with a strawman, and I cannot tell whether you mean dependence on a fuel or dependence on equipment. The distinction is close to the whole argument. A fuel dependency is recurring and revocable: you buy it every day, and the seller can shut the tap, which is exactly the Russian gas trap you cite. An equipment dependency is a one-time purchase of a durable asset that, once installed, produces for twenty-five years no matter how the manufacturer feels about you the next morning. Nobody embargoes a turbine that is already spinning. So which is it? Because the Russian gas lesson, read closely, argues for the sources that cannot be turned off, not against them. Shale, Gulf crude, and Russian gas are all someone else's supply. The panel on your own roof is the only one denominated in your own autonomy.
And if we are serious about transparency on costs, the first line item I would audit is not the wind farm that gets built and the infra to connect it. It is the one that does not. We seem to have invented an infrastructure asset class whose entire value sits in the leases, permits, and interconnection positions, and is maximized the moment construction is ruled out. That is the rare subsidy that delivers all of the rent and none of the electrons. It is not a cost of the transition. It is the cost of getting the policy wrong, and it belongs on the ledger in bold.
I don't expect us to settle the pace of electrification here, and you may be right that this quarter is a price response rather than a durable shift. But on the direction, and on doing it with honest accounting and an eye on real dependence rather than imagined ones, I suspect we largely agree.
I do think we agree more than we disagree. On transparency, for example, I agree with you: I think the responsible attitude would have been to explain to the public the rationale for building a new power infrastructure, acknowledging that it implies a short-term cost, but it will bring benefits down the line. And your point that we should also count the cost of not changing the existing system is very well taken. Too often instead the strategy has been to bribe the public with subsidies, to create the impression that the energy transition would quickly and costlessly deliver cheaper energy.
On new vulnerabilities: I agree with you that solar panels on your roof give you autonomy and less vulnerability. But there will be days when the sun does not shine, so we need to complement them with storage and/or backup generation options. If you don’t plan that well, you open up new vulnerabilities. Also – but here I have not done my homework yet – recognize new vulnerabilities to the extent that the energy transition relies on critical minerals with limited and concentrated supply. And as long as you do need fossil fuels in your mix, I’d say produce your own if you can and then diversify your imports – and consider nuclear.
As you said, we’re not going to settle this complex issue here, but I feel we could converge on a solution we could both live with.
Much to agree on here (and a few things we still need to discuss over the long-planned glass of wine - assuming there’ll still be governments to provide air traffic controls and safety, roads to drive on, sidewalks to walk on etc so that we can actually get together…)
Nicely said, I will reply with a warm approving chuckle, and with the note that if -- as I hope -- we'll meet over European wine in Europe, the danger is more that governments will have regulated exactly what kind of wine we can drink depending on the hour, location and weather...
🤣🤣🤣
As usual, I'll leave the monetary argument to others and stick to your energy passage, which is where I can add something.
You draw a reassuring lesson from the Iran shock: the IEA warned of the biggest energy crisis in history, yet the economy rerouted supply, redistributed it, and adjusted demand, so its resilience was underestimated. Two things complicate that, and a third sits inside your own argument.
First, most of what did the absorbing was not a repeatable capacity but a one-time draw on finite buffers. The IEA released 400 million barrels from emergency reserves, about four days of global consumption, which now have to be refilled over years. Oil moved through bypass pipelines that carry roughly nine million barrels a day against the twenty the strait normally handles. Spare production capacity, by definition, runs out the moment everyone pumps flat out. At the peak the near-closure removed an estimated 14 million barrels a day. The system survived a four-month disruption by spending its savings, which is why Citi was modeling $150 crude and analysts still called the market strongly undersupplied when the deal arrived. Surviving before the buffers ran dry is not the same as strength.
Second, and more consequential: for a decade, the thing that kept oil markets tight was China, and China has quietly changed sides. Between 2015 and 2024 it added close to 6 million barrels a day of demand, roughly 60% of all global oil-demand growth. That was the engine. It has now stalled and begun to reverse: Chinese oil demand fell in 2024 for the first time in twenty years. The reason is the demand you credit with adjusting so gracefully, except that much of it left the market permanently before a single tanker was turned away. By 2025 China's EV fleet alone was displacing about 1 million barrels a day, some 15% of what its road-transport oil use would otherwise have been, with electric and LNG trucks removing roughly another half-million. Worldwide, the EV fleet displaced around 1.7 million barrels a day in 2025, equal to Indonesia's entire consumption. Run the same disruption three years ago, into a market where China was still adding a million barrels a day of fresh demand and where a driver hit by a price spike had no affordable electric alternative to escape into, and the adjustment comes out of price and rationing, not substitution. The graceful demand adjustment you credit was built by the electrification you expect this war not to accelerate.
Third, your own text points the other way. You call the June inflation relief temporary precisely because crude rebounded the moment the ceasefire stopped holding the strait. But if energy prices are volatile enough to swing headline inflation and shape a rate decision, they are not also the background noise the economy simply shrugged off. Energy cannot be a first-order force and a non-event in the same piece.
The economy was more resilient than the 1970s analogies feared. But that resilience was spent reserves on one side and permanent demand flight on the other, and both are reasons to reduce oil exposure, not reasons to be reassured by it.
Your mileage may vary.
Thank you. Your comment adds important detail (which I omitted because it would have made the post too long.) It helps explain my point, it does not contradict it. I acknowledged that the one-off release of oil reserves helped, and you confirm that a more consequential factor is the permanent reduction of China demand thanks to electrification. We both left out US shale production, which remained on the sidelines, and would help adjust to a more prolonged shock.
I don’t see a contradiction in my argument: a rebound in oil prices could now push US headline inflation back to 4-5%, but not to the double-digit levels that ‘the worst energy crisis in history’ would lead us to expect.
While I do not expect electrification to accelerate as a consequence of this war, I expect it to continue and would certainly not oppose it. It must go hand in hand with the energy transition, however, since more electricity needs to be generated. Here, I strongly support reducing reliance on Middle East oil first, and oil overall. I would also love us to be able to run the global economy on wind and solar. But the transition needs to be mindful of the costs – and transparent about it – and careful about creating new vulnerabilities, as when Europe made itself overly dependent on Russian gas.
Thank you, that is a fair and generous reply, and I think we are closer than the thread suggests.
You are right that a rebound to 4-5% headline inflation is a different animal from the 1970s double digits, and I take the point. Those two claims sit together without contradiction.
Shale is the sharper of your additions, and I would only draw one distinction inside it. As a global price backstop it is real: let crude run high enough for long enough and US shale ramps, adds barrels to the world market, and softens the price everyone pays, importer or not. That mechanism is genuinely global, which is why it belongs in a piece about world stability. But a lower price is not the same as lower exposure. The importer with no production of its own still had to buy every barrel at the world price, from suppliers and through a strait it does not control. Shale can lower the ceiling on what that barrel costs. It does nothing about the dependence itself. It is relief on price, not on vulnerability, and only one country gets to hold it in reserve. That is worth separating, because vulnerability is the thing this whole exchange has been circling.
Which is why I want to press you, gently, on the phrase itself: "new vulnerabilities." I would rather argue with what you mean than with a strawman, and I cannot tell whether you mean dependence on a fuel or dependence on equipment. The distinction is close to the whole argument. A fuel dependency is recurring and revocable: you buy it every day, and the seller can shut the tap, which is exactly the Russian gas trap you cite. An equipment dependency is a one-time purchase of a durable asset that, once installed, produces for twenty-five years no matter how the manufacturer feels about you the next morning. Nobody embargoes a turbine that is already spinning. So which is it? Because the Russian gas lesson, read closely, argues for the sources that cannot be turned off, not against them. Shale, Gulf crude, and Russian gas are all someone else's supply. The panel on your own roof is the only one denominated in your own autonomy.
And if we are serious about transparency on costs, the first line item I would audit is not the wind farm that gets built and the infra to connect it. It is the one that does not. We seem to have invented an infrastructure asset class whose entire value sits in the leases, permits, and interconnection positions, and is maximized the moment construction is ruled out. That is the rare subsidy that delivers all of the rent and none of the electrons. It is not a cost of the transition. It is the cost of getting the policy wrong, and it belongs on the ledger in bold.
I don't expect us to settle the pace of electrification here, and you may be right that this quarter is a price response rather than a durable shift. But on the direction, and on doing it with honest accounting and an eye on real dependence rather than imagined ones, I suspect we largely agree.
I do think we agree more than we disagree. On transparency, for example, I agree with you: I think the responsible attitude would have been to explain to the public the rationale for building a new power infrastructure, acknowledging that it implies a short-term cost, but it will bring benefits down the line. And your point that we should also count the cost of not changing the existing system is very well taken. Too often instead the strategy has been to bribe the public with subsidies, to create the impression that the energy transition would quickly and costlessly deliver cheaper energy.
On new vulnerabilities: I agree with you that solar panels on your roof give you autonomy and less vulnerability. But there will be days when the sun does not shine, so we need to complement them with storage and/or backup generation options. If you don’t plan that well, you open up new vulnerabilities. Also – but here I have not done my homework yet – recognize new vulnerabilities to the extent that the energy transition relies on critical minerals with limited and concentrated supply. And as long as you do need fossil fuels in your mix, I’d say produce your own if you can and then diversify your imports – and consider nuclear.
As you said, we’re not going to settle this complex issue here, but I feel we could converge on a solution we could both live with.
I agree on all of the above!