Why the Iran War Is a Warning for Natural Gas

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Hi, I'm Rob Summier, and you are listening to Shift Key, heatmap's podcast about decarbonization

and the shift away from fossil fuels. It is Monday, March 2nd. Over the weekend,

the United States and Israel launched a new war on Iran, killing its supreme leader and bombing

hundreds of targets across the country. The war is a big deal for the United States,

for Iran, for the Middle East, and for the global economy.

And even though it was preceded by the largest build-up of US military equipment in the

region since 2003, it was still, in a way, surprising. There hasn't really been any effort to

sell the war to the American people. It's still not clear that it was legal or constitutional,

and President Trump has been hazy about his goals for the conflict.

For our purposes, though, here at Shift Key, the war is going to have big implications for the

world's energy markets in the short term and the long term. Like all geopolitical shocks,

it is going to shape how countries make decisions about energy long after this particular conflict

ends. And the longer this conflict goes, the deeper its consequences could be.

So for today's episode of Shift Key, I wanted to get our bearings on this new war and what it could

mean. Our guest today is Gregory Brue. He's an analyst with the Eurasia Group's Energy Climate

and Resources team, focusing on the geopolitics of oil and gas. He serves as the group's country

analyst for Iran, and he's a historian of modern Iran, oil and US foreign policy, as well as

the author of two books about the subject. He's going to walk us through what has happened so far,

just how long this conflict could go on and what it will mean for energy. Greg, welcome to Shift Key.

Thanks for having me on. Can you start by giving us a macro picture of what has happened over

the past 72 hours at this point? Sure thing. So early Saturday morning local time, so late in the

evening on Friday night here in the United States, the US and Israel launched a significant

military operation against Iran. In the past 48 hours, the US and Israel have bombed probably

more than 1,000 targets inside Iran. These are mostly military targets. Iran's ballistic missiles,

elements of its military infrastructure inside the country, its navy, its naval assets,

close to the Persian Gulf, all have come under significant fire. In addition, Israel has specifically

targeted members of Iran's leadership. Supreme Leader Ali Khamenei is confirmed dead. Other members

of the leadership have also been assassinated. There are other members that their spates are

made unknown. In response, Iran has fired our large number of missiles and drones at US bases,

at Israel. Some what's surprisingly, however, many of Iran's missiles and drones are being fired

at Gulf Arab states. The UAE has come under intense bombardment, Bahrain, Saudi Arabia, Kuwait,

even Oman, which is a state that's pretty friendly to Iran, and Qatar all have come under attack

from Iran's drones and missiles. The impact to energy so far, Iran kind of informally declared

the Strait of Hormuz closed in the first 12 hours of the conflict. This hasn't really been

followed up with any official action. There haven't really been many tanker attacks by Iran,

but tanker traffic through the strait has come to an almost complete halt. Oil tankers,

LNG tankers, tankers carrying refined products. Most of them have kind of frozen in place as they

await for some clarity as to the situation and as to the risk. Oil prices rose sharply.

Sunday night when markets opened, the price of oil went up from about $73 a barrel to about

$80 a barrel, then it fell slightly. It's out around $78.79 now. Equally important, I think

natural gas prices have increased sharply in various regional markets. The price of natural gas

in Europe shut up dramatically today on news that Qatar was going to be shutting off gas production.

That's how the energy story has kind of played out. I should note, at the time we're recording,

the war is still ongoing, the US and Israel are still bombing Iran, Iran is still firing back.

It doesn't look to be concluding anytime soon. I want to get to the energy picture in a second,

but let's talk about what has happened. As far as we can tell from the places that have been bombed

from the kind of targets that have been chosen by the US and Israel, do we have a sense of what

their goals are here? We have a sense. I'll say that. The president has made a number of addresses

to the nation where he frames this operation in two ways. One, this is the US and Israel using

military power to significantly reduce the threat that Iran poses to US interests, to US bases,

and to US allies. In the run-up to this war, there was a lot of tension being paid to Iran's

nuclear program. That program was mostly destroyed in the war of last June, although elements of

it remain. However, there were quite a few comments from US officials, and a lot being said in private,

which suggested that the key US in Israeli concern was that Iran's nuclear program, but it's stockpile

of ballistic missiles. Iran is in kind of an interesting state as far as its military. It's been

under sanction for so long. Its ability to build up a conventional military has been pretty curtailed,

like it doesn't have advanced jet fighters. It doesn't have a lot of advanced sophisticated

military hardware. It's military is kind of inferior as far as the region is concerned. What it does

have, what it's spent a lot of money and a lot of time and a lot of resources on, is developing

a large number of advanced ballistic missiles. That's been, I would say, the single largest focus

of the operation. Israel and the US taking aim at Iran's missiles, trying to blow them up,

trying to blow up the factories where these missiles are made, the stockpiles where the missiles

are kept, the launchers that Iran uses. That's the sort of military goal. Trump has been talking about

regime change, but the way he's been framing it is interesting. He says that the US supports

regime change in Iran, but that it has to come through the actions of the Iranian people,

that the US won't put boots on the ground, that there's not going to be a ground invasion of Iran.

So I think right now, I think the goal for the US is somewhat open-ended. I think they're going

to continue to bomb Iran so long as they see means to do so, to keep degrading it, to keep damaging it.

If that ends with a new regime, great, but at the end of the day, so long as Iran is

significantly weakened, and as so long as the threat that Iran poses to the US and the region

and to Israel has been significantly reduced, I think that's enough of a win for at least the

President to claim victory. What would that mean for Iran to be as a state that would have no

more military that basically lost its entire elite and senior leadership structure and has

faced these large protests? Like, do we have any sense of what this would mean for the Iranian people?

Well, for the Iranian people, nothing good in the short term. Any kind of war

puts immense strain on a country, on a people, on a society. We saw that in the war of June

of last year. I talked to people in Iran quite frequently, and apart from the political sense,

the sense of anger at the regime, the discontent that's widespread at this point,

there was a lot of trauma from the experience of being bombed for two weeks, and right now they're

being bombed not only by Israel, but by the global superpower of the United States. It's a campaign

of bombing that doesn't appear to be coming to an end anytime soon. This is going to do additional

damage to Iran's economy. As far as the regime is concerned, there were plans that had been put

in place even last June during the war with Israel to manage in the event of Hamine's sudden death

by decapitation or assassination strike. So his death has not been a body blow to the regime

leadership. There's already a process that's in motion to pick a new supreme leader. They're likely to

pick one in the coming days. They appear to be doing so quite quickly. That is their way of signaling

that, hey, nothing's going to change from this, right? Regime's not going anywhere. The Islamic

Republic will continue to stand tall. If Trump sees victory in blowing up most of Iran's military,

the Islamic Republic will see victory in surviving that conflict. So long as they emerge with their

position more or less intact, which they're likely to do, what we saw in January was a regime that

has no compunction about using lethal force against its own people. The security forces are still

in their control. The police are still in their control. The army hasn't revolted. The leadership

hasn't cracked. So long as that remains the case, I think this war ends with the Islamic Republic

still standing more or less, but in heavily battered form. Do we have any sense of how this ends on

the US side? I think this ends when Trump decides it ends. Right now, there have been some recent

comments from the president that sound defiant, that sound resistant to bringing the war to an end.

I would hesitate to say, however, whether this administration wants this war to go on for more

than a few weeks, right? A longer war keeps oil prices high, a longer war threatens further damage

to the US position in the region. Iranian missiles and drones are getting through. They are

causing damage, not only to the US bases, but to GCC states. There's only so long that the Saudis,

the Emirates, the Qataris are going to want to continue to be hit by Iranian drones. They're

going to want this war to end fairly quickly. As for Trump, if you look at past experience,

the war is that he's been able to deliver. The military interventions that he's carried out

and been able to frame his winds have been short. They've been decisive. They haven't turned into

prolonged conflicts. I think that's where his head is going to be. Try to pull a victory out of

something that lasts only a week or two, but right now he's signaling that he's willing to go

the distance. Part of that is in response to the Iranians, because the Iranians are treating

this like a battle of wills. We can go longer than you. We can keep shooting. We can take the hit,

but so long as we continue to cause damage and pain to you, it's going to be in your interest

to wrap this up sooner rather than later. It's interesting because there's two different Trumpian

instincts here, or two different Trumpian tendencies. The first is to basically push through with

a policy until he reverses it. A long time political strength of Trump's has been that he can

reverse any policy at the drop of a hat. There's no embarrassment. There's no shame that policy is

over. We move on. The second tendency here is that as you were saying, he hasn't been afraid to

break norms. We saw this at the end of his first term with the assassination of Soleimani in

Iraq. We saw this term with the operation of Venezuela. In Venezuela, there was a sense that,

oh my gosh, as the US now involved in a Latin American country, we involved in a process of regime

change. It turned out no, because seemingly they had already a back channel with Delci Rodriguez,

and she was going to be basically a US puppet in the new kind of quasi regime that emerged.

But here, it doesn't seem like there is either a, if they had a goal, they've already accomplished it,

which is decapitating the Supreme Leader. If they had a kind of a back channeled puppet leader

to put in charge of the country, Trump actually said yesterday that their second or third choices

to lead the country had been killed in these military strikes. He didn't have a candidate,

now of course he wouldn't reveal this, but he didn't have some kind of candidate ready to go

to take over Iran who could then deal with the US and be addressed to by the US.

Yeah, so I think the president is putting out a lot of different narratives around this,

as far as what the US goal is, whether it is meant to collapse the regime. I mean, he's been saying

things like the IRGC will surrender. They'll hand their weapons over to the people, which is a

really nice idea, but it's very difficult to see that happening in reality. It's very difficult

to see how that would happen. A Venezuela-style transition is somewhat more plausible, or it could

have been somewhat more plausible, but only really in a scenario where the US and Israel

deescalate following the assassination of Khamenei, and they're not doing that. They're continuing

to bomb Iran. They're maintaining the pressure. Whether the United States is communicating with

members of the Iranian leadership is, you know, beyond me, I couldn't speculate as to that.

I do see it as being plausible that they're communicating to the Iranians, you know, if you want

this to stop, give up X, Y, and Z. Well, keep doing this unless you surrender, unless you

capitulate, and the Iranians are going to have a very strong sense to not do that, expecting them to

surrender, misreads the Iranians, both in terms of their position, but also in terms of their

ideology and their characteristics. They're not going to back down. Can you walk us through

some scenarios here? So what would a 10-day, I think there's been some reference from the

president from others that this could be a 10-day campaign? There's been other time frames that

are thrown around. We're going to get to them. But what would a 10-day campaign here look like,

given that? I guess we're already on day three. Yeah, we're on day three. So the opening

salvo included the most significant targets in Iran's military. Its navy was heavily targeted

in the opening days of the strikes. Obviously, Khamenei was hit first. I think he may very well

have been the first target. There's been some reporting to suggest that the Israelis decided

to move forward the timeline of strikes because they saw an opportunity to strike at Khamenei,

who is generally a fairly elusive figure. He spends a lot of time in secure locations. In this

instance, he was at his residence. It was daylight. He was exposed and they decided to go.

This expanding over the next week, you know, the Americans, the Israelis could continue to strike

at missile facilities. A lot of these facilities are hardened. They could keep the fight going so that

they can get the Iranians to deploy their missiles so that the missiles can be destroyed in the air

or on the ground. I think some of this will start to look a little bit like a war of attrition

by the end of the week. That's probably how the Iranians are thinking about it. They're shifting

or likely will shift from firing lots of missiles to firing lots of drones, which they can do so

more easily. They have a lot more of them. They have somewhere in the realm or had somewhere in the

realm of 2000, short range and 2000, medium range ballistic missiles when the war began. They have

thousands of drones and they can keep firing them in large numbers. So if the Iranian goal is

to impose pain and cost the US to force them to deescalate, then the Iranians will keep shooting

at GCC targets at US bases and at Israel so long as they can. For the Americans, after 10 days,

they probably will have done as much damage as they could do to Iran's capabilities. Israel has

also targeted internal security forces, police, the besiege, power militaries that the regime

uses to put down descent. Again, I don't know if the operation is actually aiming at regime change,

but hitting targets like this will undermine the regime, will weaken its control on Iran's

internal security. We'll cause Iran to exit this conflict in a weakened state. That serves

Israel's interests, even if it doesn't end up with the regime collapsing. I would expect more

strikes like those in the days to come. The last question and then we'll move to energy,

which is ostensibly the topic we're talking about. What would a five-week campaign look like?

Briefly. So five. Because we invest the other time frame, I think we've heard from the president.

Yeah. I mean, a campaign could last five weeks. I don't know if it maintains the same level

of intensity because they will start to run low on targets. A five-week campaign would likely

involve more strikes on internal security forces, on leadership, on the apparatus of the regime.

I think a five-week campaign would be more geared around making the Islamic Republic's position

inside Iran untenable. Either creating the environment for protests, creating the environment for

internal fracturing, so that you get some kind of shift in the leadership towards individuals who

are willing to capitulate, who are willing to come to terms with the United States. That's I think

what a five-week campaign would look like, but I also think a five-week campaign wouldn't be

carried on with the same level of intensity. The U.S. would continue strikes, probably at a lower

rate. It would look again a little bit more like a war of attrition with the Iranians continuing

to shoot back as far as they are able. The problem with a five-week campaign for me is that the

political costs to trump mount the longer this war continues, right? Keeps oil prices high,

keeps energy prices high, the risk of U.S. casualties, the risk of damage. The longer he goes without

pulling a win out of this, I think the weaker he looks. This week's episode of Shift Key is brought

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Something I've been thinking about is that the U.S. posture during this war, which is kind of

all tactics, no strategy, is kind of derived from Israeli military approaches, but there was no

effort to build up a constituency in the U.S. for this war. There's no sense of existential

risk like there is in Israel around Iran, in the U.S., around Iran. And so to some degree,

there are Israeli tactics, and there isn't Israeli posture that's being borrowed for U.S.

operations in this conflict, but there's none of the domestic politics that makes that possible

in the U.S. Yeah, I mean, absolutely. Iran matters a great deal more to Israel than Iran matters

to the United States, and so far as Iran matters to the United States. I do think, though,

it needs to be remembered that the U.S. is committed to maintaining its position in military

hegemony in the Middle East, and Iran is a threat to that position. It's a threat to U.S.

bases in the region. It's a threat to U.S. partners in the Gulf. It's obviously a threat to Israel,

and Israel is a close U.S. ally. This is a relationship that's come under political pressure lately,

but as far as strategic cooperation, as far as the alignment of interests,

when Israel and the United States look at the region, they tend to have very, very similar views.

And a key aspect of that view is Iran is a threat. So as far as the approach to Iran, using military

force, there has been a shift in the last two years. Some of that is Iran's own doing. Iran

chose to escalate in April of 2024 when it launched hundreds of missiles and drones at Israel for

the first time ever. It was signaling that it was now willing to take direct military action against

Israel, Israel responded by taking direct military action against Iran, and it has not gone well

for the Iranians. In that sense, Trump is going further than any U.S. President has in the past,

and he is following Israel's lead to some extent. But I would hesitate to draw too much,

to say that there's too much space between the Israeli and American positions, as far as viewing

Iran, viewing the region strategically. But certainly politically, no one in the country,

no one in the U.S. is telling Trump, a war with Iran is a national priority. A war with Iran is

how you're going to get your poll numbers up. A war with Iran is how we're going to win the midterms.

That does put constraints on how long the U.S. can continue this war, and on how Trump is going

to see any kind of upside from it. Nor has Trump tried to convince his coalition that a war with Iran

is a national priority. But let's talk about energy. I think the first place that people's

minds go when you're talking about Iran, when you're talking about the straight-of-form moves,

is oil. Why is the straight-of-form moves particularly important to the global oil market?

And then second of all, what have we seen as the initial effects here?

So the straight-of-form moves matters for three reasons. One, it is a very narrow waterway.

So it is quite easy, theoretically, to block it. Other waterways, even the Bab al-Mandab and the Red

Sea, the straight-of-Malaka, other strategic pathways through which large quantities of energy

move are not so easily disrupted as the straight-of-form moves. That's reason number one. Reason number two,

Iran. Iran is there. Iran frequently threatens to block the straight-of-form moves,

frequently threatens to close the straight-of-form moves. It is a hostile actor,

vis-a-vis the other states in the region. We are now seeing proof of that given that it is

open fire on the GCC in a concerted way. That's another reason why the straight-of-form moves

gets so much attention as far as the connection between the straight security and the situation

of the global oil market. The third reason, I guess there are four reasons. The third reason is

the volume of energy moving through the straight. It's close to a fifth of global oil

supply. It's 20 million barrels a day. Sometimes a little more. It's a significant portion of the

global LNG supply coming from Qatar has to pass through the straight-of-form moves. A large

quantity of refined products, middle distillates, condensates, fuel oil moves through the straight.

So the volume affected by the straight being closed or disrupted or affected in some way

is very, very large. Finally, the fourth point, there's nowhere else to go. You can't go around

the straight-of-form moves. You have to go through it. Tankers that can't transit the straight

or a block from doing so have no other options. There's no Africa root as there was with the

Red Sea disruption. So for those four reasons, straight-of-form moves gets a lot of attention,

and it's why it's getting attention now. Although interestingly enough, price of oil has responded,

but has not moved so in a significant way, at least for some people's expectations.

Well, the theme of the year in oil so far has been that there's a glut of oil, or there's at least

a small glut of oil. We've kind of been dealing with that for a long time, and so I wonder if that

is, in some ways, one hesitates to call this good for oil markets, but it is kind of solving an

issue for the market. Do you think oil is the most important energy product affected by this war?

Well, it's certainly the largest in terms of volume, given how much oil moves through the straight.

However, I think this could end up being a gas story as much as an oil story for two reasons.

One, gas has already been physically affected. Just this morning,

Qatar LNG put out a notice saying that it was halting production due to Iranian attacks on

its facilities. Theoretically, this means that all Qatar LNG exports will be halted. And Qatar

is among the top three global LNG producers. So if that happens, global LNG supply will be

significantly constrained. So far, there hasn't been any significant constraints to oil supply.

Tankers have paused in transiting the straight-of-form moves, but physical disruptions haven't yet

occurred. The second reason is the state of the global gas market is tighter than the state of the

global oil market. Oil is in a slight imbalance in supply versus demand. That's been what has

been keeping prices relatively low over the last six months, geopolitics notwithstanding.

By comparison, gas inventories in Europe and Northeast Asia are fairly low as these countries

are coming out of the winter months. So the effect of a Qatar shutoff or the effect of a significant

disruption in LNG traffic through the straight, even if it is only short, could end up having

fairly significant effect. Finally, prices, gas prices have shot up today much higher relative

than to the increase in oil prices. So already, the gas market is responding in a more significant

way than the oil market has. Who will feel the effect of tighter and higher LNG markets and prices?

I mean, is this primarily a Japan and Europe story? Is this something we're in the US?

I mean, we explored a lot of LNG, but would we expect those LNG prices to translate back into domestic

gas prices? I think gas prices in the US are likely to remain fairly low. They may increase slightly

as the average LNG price globally increases, but I think this will affect Europe, particularly as

their infantories are somewhat lower than major Northeast Asia importers like Japan and South

Korea. The Europeans are still getting over the long effects of the war in Ukraine, moving away

from dependence on Russian gas. They've had to depend on LNG to a more considerable degree.

So a disruption on this scale, if it proves lasting, could be quite bad for the affordability of

energy in Europe. Europe's not going to run out of gas, but it will be forced to pay more money

for it. Finally, there could be a dynamic that we saw in 2022, where all other markets that can't

compete with the high prices that Europe is demanding feel the effects. Markets like Southeast Asia

will see perhaps less access to LNG if more cargos are being diverted to Europe to take advantage of

the very healthy arbitrage opportunities between Europe gas prices and those in the United States.

What do you think we learned from the 2022 post-Ukraine energy shock that might be applied now?

Like what emerged then that could affect what we're about to see?

I think if this conflict does end up disrupting LNG exports in a significant way, where the

disruption lasts more than a few days, where the prices rise and remain high, I think it will

offer up a similar lesson to the war in 2022, which is that LNG can be very volatile.

It can be very reliable, but during periods of intense geopolitical conflict,

with supplies like Qatar being affected by conflict, affected by security in the region,

that ends up hitting consumers, because they end up having to shoulder much higher prices,

they end up having to shoulder the burden of insecure energy. One of the arguments made

against LNG over the last couple of years is that while it makes a lot of sense, the economics

make a lot of sense, if it's continually exposed to these kinds of volatile spikes,

if geopolitics keeps the average price of gas much higher than that of coal or renewables,

then ultimately LNG can compete with those alternative sources of supply. Even if the economics

make sense, the geopolitics might not. Well, this is what I was thinking. From some climate

folks, I think there's been a turn after this conflict is there is after many conflicts to say,

look, this is why renewables are so important because they don't experience this price volatility

in the same way that LNG does. The issue is coal also doesn't really experience this price volatility,

and frankly, many, many countries around the world, particularly those that suffer when LNG prices go

up in Sub-Saharan Africa in Southeast Asia, do actually have ample coal resources. And if they need

to, they'll learn from the Chinese example as much as building solar and batteries is important,

so is building a big coal fleet because you always have security of supply with coal.

Absolutely. Gregory Brue, thank you so much for joining us on Shift-Key.

Thanks for having me back.

Thanks so much for listening to this emergency episode of Shift-Key. We'll be continuing to cover

the conflict at HeatMapNews. That's HeatMap.News. Until then, Shift-Key is a production of Heat

MapNews. Our editors are Jolene Guvenenico-Loricella. Multimedia editing and audio engineering is

by Jacob Lambert and by Nick Woodbury. Our music is by Adam Kromelau. Thanks so much for listening,

and see you soon.