The energy shock imposed on the global economy this year has been substantial. But many experts expected crude prices to go even higher than they have so far. After all, the shuttering of the Strait of Hormuz blocked off a fifth of the world’s oil and natural gas from reaching its destinations. So, what happened?

I put that question to Daniel Yergin, the foremost energy guru and historian. Yergin is the author of The Prize, which won the 1992 Pulitzer for general nonfiction, and the vice chairman of S&P Global. He also organizes CERAWeek, the energy industry’s premier annual event.

According to Yergin, Saudi and Emirati pipelines were able to bypass the strait to get some of their oil on the market. But the biggest surprise came from China, which was not only able to suppress internal demand but also drew on what is widely believed to be the world’s biggest reservoir of crude reserves. Has Beijing become the world’s main shock absorber for energy? What will that mean for the future of the trade of energy and related commodities?

I spoke with Yergin on the latest episode of FP Live. Subscribers can watch the full discussion on the video box atop this page or download the free FP Live podcast. What follows here is a condensed and lightly edited transcript.

Ravi Agrawal: The expert community has been saying that the Iran war is a seismic event for the energy markets. The head of the International Energy Agency says it’s the biggest crisis ever. Let’s just start there. Why is this such a big deal?

Daniel Yergin: The Middle East is so central. Twenty percent of the world’s oil and liquefied natural gas (LNG) flows through the Strait of Hormuz. And it turns out it’s not just an energy crisis—it also involves helium, fertilizer, the products that will not be made because of the crisis, and agriculture. So, this is a seismic event not only for world energy, but for the world economy.

RA: But I have to say, Dan, as we’ve been covering this story, it strikes me that things could have been much worse, right? Crude prices peaked around $120 a barrel. Even in the last week, they touched $100, but then they came down quickly. And these are not historic highs for the energy market. The sky hasn’t fallen exactly. So at least in terms of crude prices, why has this crisis not been as bad as many analysts were predicting a few months ago?

DY: You’re right. The oil hit roughly $120 a barrel in 2008, and if you adjust for inflation, that’s a higher price. But that wasn’t really based upon any disruption. Obviously, what you’re looking at here is the number one maritime choke point in the world economy: the Strait of Hormuz.

Why it hasn’t been worse is because the disruption has not been quite on the scale that people thought it would be a month or two ago, when they were talking about $150 or $200 a barrel as inventories got drained. Some supplies did get through. The Saudis built a pipeline system in the 1980s in response to the “tanker wars,” so they could move about half their supplies out. The United Arab Emirates has a pipeline that can move half of its supplies out. There are government-controlled stocks—in the United States, it’s called the Strategic Petroleum Reserve. Some oil was released from there.

Two other factors stand out. One is the dramatic change in the position of the United States as an energy producer, in particular its ability to export not only oil but oil products, like jet fuel, diesel, and gasoline. But I think the biggest surprise here is the response of China, which replaced the United States as the world’s largest importer of oil. They cut their imports almost in half, and I have to say, no one could see that coming.

RA: Let’s just dig into that a little bit more, because China is so opaque in many ways. Just to talk about crude here, how much oil was China importing prewar? And do you have a sense of the size of its strategic reserves or how it was able to replace those potential imports?

DY: China’s demand was around 16 million, 17 million barrels a day. It was importing around 12 million barrels per day. As it has with many other products, it has strategic stocks controlled by the government. It’s thought that China has 1.5 billion to 2 billion barrels of oil, which is a huge number, in its stocks. On top of that, companies have their own inventories. China basically cut its imports by 5 million barrels a day.

How did they do that? The Chinese do not like to buy oil when prices are high. They like to fill inventories when prices are low. They pay very close attention to the market. So, they raised domestic prices, which affected demand, and demand went down a couple million barrels per day. They stopped exporting oil, and then they drew on their inventories. All of that was keeping the price from hitting $150, $200 a barrel.

The Chinese were concerned, since China depends so much on its exports to the world economy and didn’t want to see a global downturn. They were interested in protecting their economy, and they did that. Taking 5 million barrels a day of imports out of the system relieved a lot of the pressure. It’s also particularly significant because the Strait of Hormuz, in economic terms, flows east. Eighty percent of the oil and 90 percent of the LNG that went through the Strait of Hormuz goes to Asia. So, there was particular sensitivity in Asia to this disruption, and the challenge in China—like Japan, which is the other country that’s built up large reserves—is that cushion of supply.

RA: I want to try and explore the longer-term changes that will come about because of this conflict. Let’s start with countries. The crisis has impacted energy exporters and importers in different ways. My sense is that many of them don’t have the same trust in supply chains they once did. No matter how this gets resolved, I think that they’re going to be more skeptical not only about the Strait of Hormuz but any kind of choke point dependency. What’s your sense of how countries are beginning to think about longer-term adjustments they’ll have to make?

DY: Choke points have now become part of the geopolitical vocabulary. I’m glad you mentioned supply chains, because it’s really part of a larger phenomenon. This is writ large, but the shifting view of supply chains began around 2019, 2020, and was accentuated by the COVID crisis and then by the rising tension between the United States and China. Supply chains used to just be about efficiency, and you didn’t think much about security—you didn’t pay a security premium, you just wanted the quickest and most efficient. Now, it’s shifted to thinking about security and resilience.

I think the Gulf countries, for their sake, are going to seek to diversify from dependence upon the Gulf, and that does mean pipelines. In the case of Saudi Arabia, it means pipelines going into the Red Sea. And you have the issue of the Houthis, but I think that’s very much on the agenda.

In general, I think you’ll see a movement to diversify sources. A rebranding of renewables is going on right now, from climate and emissions to resilience, energy security, and independence. It also means other regions are going to get a big boost in terms of investment and attention.

RA: I have to ask, though, when you speak of resilience, doesn’t that disproportionately advantage bigger or richer countries and leave a lot of other ones behind?

DY: I do think that’s the case. If you’re Japan, you can afford to have large strategic stocks. If you’re a less-developed global south country, you don’t have that same ability. But also, frankly, Europe forgot about energy security—and it’s a rich region, but they’re going to have to do it, too.

The United States went from being the world’s largest importer to being the largest producer of oil and the largest exporter of natural gas. So, you talked about the impacts on Asia, where it really hit people’s incomes and livelihoods and led to rationing and shortages. In the United States, it’s been mainly measured in terms of what happens with the gasoline pump.

RA: Prices there are up by about a third since last year, right?

DY: That’s right. They’re about a dollar higher, and as we know, there’s no price in the United States that is more politically sensitive than gasoline prices. Lower-income people who have to commute 40 miles a day to their job and can’t afford to buy an electric car are the ones who get really hurt by that.

And then it has a pervasive impact on inflation, even in the United States. Our team at S&P Global did a calculation once that about 70 percent of the cost of the food on your table is actually energy costs—from fertilizer to diesel for your tractor, to transporting it from farm to destination, processing, and so forth. Those costs are going to work their way through the system over time.

RA: Fascinating. I want to linger just a moment on the United States. S&P Global also had some great research on how natural gas will become America’s second-biggest net export in about five years. It’s striking to me that as you were talking about the price at the pump—which is crude-related and tends to have a global price point that affects all countries relatively equally—gas is just so different because the United States is able to afford or sell gas at a far, far lower price point than, say, what Asian economies are able to access. And that, in a sense, has become one of the big changes between now and a decade ago, right?

DY: Absolutely. Just to put in context, second-largest export means three times the value of all Hollywood and television programs, three times corn, three times soybeans, and also 70 percent of the current value of semiconductors.

What’s happened is the shale revolution. The shale revolution saved Europe from Russian President Vladimir Putin because our ability to send LNG to them meant that Putin couldn’t use the gas weapon to shatter the coalition of support for Ukraine. U.S. LNG was right at the forefront of it.

At our CERAWeek conference, the German economy and energy minister in March said that the number one thing that really saved them was exports of LNG from the United States, along with supplies from Norway, Qatar, and other countries at the time. We basically have 40 years of known, certified natural gas reserves. That means that we can build up exports of LNG, but we still have more gas even though we’re exporting. That means wholesale natural gas prices in the United States have actually gone down since this war started. These low prices give the United States an economic advantage as a manufacturer over Europe and other parts of the world.

RA: Which has immense geopolitical ramifications. Inasmuch as the price at the pump, which is crude, has some impact on the thinking of the White House and how long it can tolerate this war, the fact that natural gas prices are down is very telling because that has a range of impacts on how the country thinks about its actions abroad.

I want to talk a little bit about the private sector, which you know very well. You get to speak to all these energy executives at CERAWeek and elsewhere. What is your sense of how they are thinking about the post-Iran war landscape?

DY: It’s still early. Their first thing, of course, was the security of their people, their systems, and the partners they work with in the region. Do you keep your people there or not? It has varied from company to company, whether you withdrew some or not.

But what it does mean is that they will look at other regions. They’ll look at the Western Hemisphere. Even before the crisis, the Western Hemisphere was actually producing more oil than the Middle East, which was a surprise. Brazil produces four times as much oil as Venezuela right now. It’s thought that Africa will be a beneficiary of investment. I see a step up of activity in the eastern Mediterranean as an alternative source of gas to Europe, which it already is. So, I think there will be diversified supply.

It’s still early, because, remember, capital budgets are investments that go out five or six years. But we were seeing this even before the crisis. A lot of industry had become very focused on the United States, as the United States went from producing 5 million barrels a day to currently 14 million.

But you start to see people saying, “At some point, the United States is going to peak out. We have to go back and start exploring for oil more seriously than we did before.” You didn’t have to explore with shale. It was just a different business. And now exploration is back on the table, and this is going to accelerate it. It will really be up to governments, how to be competitive to draw in the investment.

RA: But in this moment of immense geopolitical risk and conflict, do companies have any confidence to even think about pipeline investments or exploration?

DY: Yes, absolutely. The Iraqi-Syrian pipeline is in partnership with U.S. companies. Big U.S. investment firms have announced major investment in pipeline systems within Kuwait. Household name companies. I think autumn will be a critical time because there will be some very big conferences in the region, and those countries are going to go out of their way to restore confidence. People do want to maintain their partnership, show their support for those countries, as their facilities are being attacked in ways that had never been expected.

But also, those countries themselves will be spending more money on defense and thinking about it in a way that they hadn’t in the past. But it’s funny—you’d think that after six months, people would have remarkably changed their plans. It just doesn’t happen that fast in the energy industry because you’re talking about investments that take five or seven years.