Last week I went on the popular tech show TBPN to discuss the Strait of Hormuz crisis, the economics of OPEC+, and the possibility of powering data centers from space.
John Coogan
Up next, we have Alex Epstein, the author of Fossil Future, live in the TBPN Ultradome, taking us through what’s going on in the world, what’s going on in energy markets, what’s going on with OPEC.
Great to see you again, Alex. Thank you so much for taking the time to come on down to the TBPN Ultradome.
Please, get us up to speed. What should we be paying attention to?
Jordi Hayes
Look at this black on black.
John Coogan
You look fantastic.
Alex Epstein
Oh, thank you.
Jordi Hayes
With the hair too.
Alex Epstein
Oh my god. Do you guys remember what we talked about last time?
Jordi Hayes
The Strait?
Alex Epstein
The Strait. Yeah, yeah, yeah.
So by the way, interesting fun fact about AI. I think most of what I said last time was vindicated in terms of the main thing was this Strait needs to open and there’s no substitute for it. There are all these other little things you can do, but nothing compares. And that’s still true.
I would add: you need to enduringly open the Strait. So if you cut a deal with Iran and they have control over it—even if they give you control for a year or whatever, that’s not—then you’ve actually made the situation way worse than it was before the war, where everyone figured we really have control over the strait.
John Coogan
Yes.
Alex Epstein
But fun fact, since you’re talking about AI tokens. So in preparation for that—in addition to consulting experts and thinking about the issue—I have my own internal AI called AlexAI Pro, which I’ve invested over a million dollars in.
John Coogan
What!
Alex Epstein
Oh yeah, it’s nuts. So to talk about—and one of the things I’ve invested in is—
John Coogan
A stack.
Alex Epstein
Yeah, yeah. I don’t get enough compute from off-the-shelf AI. So if you can run your own agents, then you can do it. So that query, which I think led to very valuable content, was 48 kilowatt-hours.
John Coogan
Wow.
Alex Epstein
So that’s half a Tesla.
John Coogan
Yeah.
Jordi Hayes
Wow.
Alex Epstein
Think about that. That’s three power walls for one query.
John Coogan
That’s a ton.
Alex Epstein
Yes, I know.
Jordi Hayes
How long was that running for?
Alex Epstein
10 or 20 minutes.
John Coogan
What? That’s crazy. And what is it doing? Pulling data from the internet, pulling it together, writing?
Jordi Hayes
It’s like God Mode—
Alex Epstein
It’s really God Mode. I’ll show it to you sometime.
John Coogan
Okay.
Alex Epstein
Well, actually, so here’s an announcement for the first time—a version of that AI is now free to everyone who works in government. So it’s gov.alexepstein.ai.
John Coogan
No way.
Alex Epstein
Yeah, yeah. So it’s free—if you use too many tokens, we’ll have to just charge you cost beyond that.
John Coogan
Okay. Okay. Yeah.
Alex Epstein
But yeah, I mean, I have a lobbying firm—which is the only pro-freedom lobbying firm—the Energy Freedom Fund, which is a 501(c)(4) that I’m the unpaid president of. And I figure one of the best ways to spend those dollars is to give people a pro-freedom AI. So I’m not going to make any money off those queries, but I’ll at least cover our compute costs.
So this is a real world example of—I believe that if you know how to intelligently integrate AI, you can make use of a lot of energy and very profitably.
John Coogan
Sure, sure, sure. Yeah, of course. Because the results that come from good research or good policies and good consulting fees and all sorts of things.
Alex Epstein
But you need to train it. So a lot of the work is just literally breaking down everything I do and my researchers do. So I just built one today, which is the policy validator. Anyone is free to send us policies and we’ll lobby for them in proportion to merit, not in proportion of payment. We don’t take payment for this kind of thing.
John Coogan
Interesting.
Alex Epstein
But I needed to replicate, hey, I have these two really brilliant researchers, and then I’m pretty good, and we have some other pretty good people. How do you break that down?
And it turns out there are about 25 questions you need to ask to get the credibility of the people. Is this a pro-freedom policy? Is this going to increase energy abundance? Are there better ideas? And if you know how to really do it—and you have human validators at the end of it—it’s wild in terms of what you can do.
John Coogan
Okay. Let’s start with—on the Strait, there was this interesting piece in The Economist that was arguing that the market was simply not processing or digesting the fact that even if the Strait were fully open today, there’s still a massive shortage of energy that is effectively delayed and that that would have ripple effects on the economy, inflation, all sorts of things. How have you processed the impacts, the downstream impacts?
I think a lot of people see it at the pump when they go and fill up their cars if they drive gas cars. It’s starting to show up in other places, but how are you thinking about just what’s at stake, why the Strait being open is important from first principles?
Alex Epstein
Yeah. I’m very sympathetic to that argument. It would be just miraculous if it didn’t get a lot worse in terms of prices. I mean, you’re dealing with a situation we talked about last time. You have a certain amount of spare capacity. So international agencies released a lot—a reasonable amount—
John Coogan
Of oil reserves.
Alex Epstein
Yeah, yeah, in terms of their oil reserves, but these are all very temporary measures.
John Coogan
Yeah. It’s like 30 days here, 90 days there, 180 days over here.
Alex Epstein
Yeah. And there was already a bunch of supply.
John Coogan
Yeah. No one’s sitting on 5,000 days of oil.
Alex Epstein
And the thing you have to realize is, in America, we are very America-centric. We don’t even think about Canada, let alone Asia. And a lot of what’s happening with the Strait is oil that is intended for Asia and Asian consumption.
Now, the Chinese are in an interesting situation because they did build up a bunch of spare oil. Now there are questions of other things they need—like sulfur and helium—that go through the strait. And I’ve heard interesting claims about that.
But we’re already seeing in Asia various shortages, and one analyst that I like likened it to, okay, one part of the Titanic is starting to fill, and not everyone on the Titanic realizes this is happening, but you’re cutting off a huge—whether it’s 14% or 20% or whatever—you’re cutting off a huge percent of global oil supply, and that cannot last. And even if you solved everything today, it takes a while to bring it back.
John Coogan
Of course.
Alex Epstein
And right now we’re in ceasefire mode, which is not creating enduring—that doesn’t enduringly open it up.
John Coogan
Yeah. Yeah. I heard, I think it was Rahm Emanuel who was saying that the Gulf states do not want Iran to have a veto over the strait, even if the strait is opened. Now the conversation has shifted to: What does it take that America is potentially responsible or is being held responsible for removing that veto, right? Is that your perception as well?
Alex Epstein
Yeah, yeah, yeah, that’s my perspective; it needs to be enduring. In advance of this, there was the idea that, hey, if America ever goes into Iran, obviously we’re going to keep the Strait open, obviously we’re going to prioritize it. That unfortunately did not happen to the extent that it did.
I mean, there are different people in the administration, but overall—I mean, we have to just be objective; I’ll praise them where they deserve praise—but they were not prepared for this in terms of whatever the final decisions were.
I think within a week of our last interview—not because of our last interview, but just talking to people in the administration—they all became very clear that Hormuz is non-dispensable. Before that, there had been people saying, “Oh, we have Venezuela. We have all these”—just all nonsense. So they understand it’s—
John Coogan
We talked about that with Venezuela. It’s like 1% maybe.
Alex Epstein
Yeah, 1, well, you might get to 1. Now, at some point—
John Coogan
Might get to 1% and we’re talking about 20%.
Alex Epstein
Yeah, we’re talking about years and years.
John Coogan
Are there 30 Venezuelas? No. There’s no one to do business with.
Alex Epstein
Yeah. They understand the importance, but it’s still in this mode where Iran now is known to have—look, Iran has proven that they can control the Strait of Hormuz in a way that the US cannot obviously counteract. So if we cut a deal with them again where they can use the same power to stop us anytime they want, then it’s not open.
“Open” is a little bit ambiguous. It can be open momentarily, but it’s open on their terms. So basically you need—without giving any strategy, because I don’t know the exact strategy—it needs to open on our terms. That’s the only way you have a victory.
John Coogan
Let’s shift to OPEC. Can you give me a primer on OPEC? It’s the Organization of Petroleum Exporting Countries.
Alex Epstein
Yeah, yeah. And now it’s OPEC+ and—
John Coogan
OPEC+. Yeah, take me through the history and the impacts and importance.
Alex Epstein
Let’s talk about cartels. I think the easiest way to understand this—it’s important to understand cartels. And I think people have a uniformly negative view of cartels, which is plausible, but a little bit exaggerated. So you take the—
Jordi Hayes
People that aren’t a part of cartels.
John Coogan
There’s no “I” in cartel.
Jordi Hayes
Yeah, exactly.
Alex Epstein
Well, so you think about the—if we look at the early oil industry where Rockefeller is criticized as a “monopolist” and we created this thing, the Sherman Antitrust Act, and other things to prosecute so-called “monopolists.” And I’m totally against these laws for any number of reasons. The government should not be able to create monopolies that it enforces by force saying, “Hey, there’s one producer, nobody can compete.” But nor should it be able to say, “Hey, you’re really successful in this market—
Jordi Hayes
You’re too good.
Alex Epstein
—and so I’ve decided that you’re too good.” And one of the things that people counter with is, well, what if—
John Coogan
Economic deadweight loss.
Alex Epstein
What do you mean?
John Coogan
Just the idea that if you actually do control 100% of a resource, you can charge dramatically above market rates, which reduce demand and wind up having less human flourishing because you have less energy produced, in fact.
Alex Epstein
Yeah, so what happens in practice is, if you look at what happened with Rockefeller—Rockefeller’s focus was refining—but you look at the early people in the oil industry, the different producers, what would happen is oil prices are decent, then you get a flood of new oil on the market and people just get wasted. They get ruined. And so what does that do? That disincentivizes people from investing over time because the volatility is so high.
So what Rockefeller was basically able to do is he said, okay, I’m going to buy you up. You’re exposing yourself to way too much risk. I’m going to buy you up. I can run everything much more efficiently. And so in the long term, we can have something that is A) profitable and B) has much lower prices on average than the very volatile situation. And in fact, he dramatically lowered prices.
So the interesting thing—so you could think of Rockefeller, they call it—it’s in a sense a cartel, but it’s a free market cartel, which I think should be able to exist, but you can call it—
John Coogan
Yeah. And I believe that’s in the Sherman Antitrust Act in some ways. You have to prove consumer harm, and this is why it’s hard to go after Amazon, Google—
Alex Epstein
Well, there are later versions. I mean, it’s very vague. It’s like you can’t do “restraint of trade,” which—what the hell does that mean? And then later they have these different things. And I have a lot of reasons for being against it, but it’s notable that the volatility is a really, really big thing in oil markets historically, and that’s why people—
John Coogan
And that yields big organizations—
Alex Epstein
Whether or not you think free market cartels should exist, as I do, you have to understand why these things exist. Why any cartels—OPEC is not a free market cartel—but why these exist is because the volatility is just so, so high and oil is so, so valuable. So people want steady oil and they want people to be comfortable being in the oil business instead of just getting wrecked all the time and getting thrown out.
So we had this era of Rockefeller and then that was broken up. And then the United States had something called the Texas Railroad Commission, which basically cartelized—America was the dominant producer and so they did these things that basically rationed how much everyone could produce.
So the term that’s often used is “swing producer.” The US was the swing producer, which meant that they could basically control the supply in the world. And in particular, if there was a cut in demand for some reason, they could cut supply. And if there’s a huge increase in demand, they could increase supply.
So that happens until the Middle East starts to boom, and then the Middle East starts to become the swing producer with the rise of Saudi Arabia and others having very low cost oil. And so then you have the era of OPEC. But then you have fracking. And so for a little while, the US becomes the swing producer in the sense of we have unrestrained production, we add a lot of oil to the market.
And what happens at a certain point is prices crash, there’s overinvestment. Our US consumers benefit hugely from fracking, but a lot of these companies just get wrecked. And then they start doing what they’d call fiscal discipline, which functions as a restraint on supply. Even though they’re not doing any kind of cartel activity, they’re basically saying, “Hey, we’re not going to produce if prices go below this. We’re not going to keep increasing our production,” etc.
The reason, if you take OPEC right now and OPEC+, they have a lot of reasons—even though there’s a lot of unethical stuff and I don’t think the government should own the oil and I think they stole the oil. But if you just understand how they’re thinking, they want to sustain a certain level of price.
So you have the different swing producers, particularly Saudi Arabia and then UAE who we’re talking about—what happens if there’s excess supply on the market relative to demand? They will cut—this is the key—they will cut their supply as a swing producer to keep prices high. Because if they don’t, then prices will go low and that will have a ruinous effect on many people—including US shale by the way, because we have higher production costs—but including these economies that are dominated by oil.
So you take Saudi Arabia—they’re so dependent on oil and they have all of these alleged “green” ambitions that are totally fueled by oil and they have all these welfare schemes that are totally fueled by oil. UAE is a little bit less dependent.
So the interesting thing about UAE saying they’re going to withdraw is, can they sustain this if there’s a supply glut? Right now there’s a supply shortage. So it’s easy to say, “We’re going to leave OPEC,” because there’s no need from their perspective to cut supply. And then everyone will take all the supply they get. And Saudi Arabia doesn’t really care if UAE produces more now.
But when there’s a supply glut, is UAE—are they going to stay out of OPEC or is Saudi Arabia going to be able to pressure them back like they’ve done? Because Saudi Arabia can say, “We’ve got the most oil. We can just flood the market too and ruin you.”
Jordi Hayes
Is there a history of major suppliers leaving and coming back?
Alex Epstein
I don’t know, I mean, there’s at least been threats. Like Saudi Arabia has been able to use a lot of force. Now, they’ve been able to do that in the past, but the argument—so there’s an argument that the UAE won’t stay out of OPEC because Saudi Arabia can pressure them back in when there’s a supply glut.
There’s also an argument that UAE has become more disentangled from oil now than it used to be because it’s diversified its economy. It doesn’t have all the welfare obligations of Saudi Arabia, and therefore it can call Saudi Arabia’s bluff.
Now, people will say both UAE and Saudi Arabia have incredibly low production costs. It’s very cheap for them to bring a barrel up from the ground. But they don’t just have the production costs; they have all the governmental costs of actually how they’re obligated to spend that oil. If Saudi Arabia spends $5 a barrel on oil, say, that doesn’t mean at $100 a barrel, they get $95 profit because they have to finance all these schemes that they’re involved in.
John Coogan
Sure.
Alex Epstein
So that’s going to be an interesting thing. The other interesting thing is—so if UAE stays out, they’re going to increase production. Let’s say on some timetable this Hormuz thing gets resolved. Then it’s plausible in the next few years at some point you’ll have a supply glut because you’ll have added a million and a half barrels a day on top of everything else and you won’t have a corresponding increase in demand and you won’t have some other decrease in supply. So it’s possible that this could dramatically lower prices, which would be hardest for US shale.
Now long term, I believe—the best estimates I’ve seen is longer term—we’re actually screwed in the other direction. We’ve had all of these anti-fossil fuel policies that have disincentivized long-term investment in oil, and oil is really hard to sustain.
People need to remember oil depletes over time. So you don’t just take the same well and keep tapping at the exact same amount. You have to do what’s called reserve replacement. And there are many credible arguments that our reserve replacement has been incredibly inadequate in the ESG era, and that takes a few years to show up, but that’s actually my biggest fear. My biggest fear—I’m afraid of Hormuz keeping prices high, but I’m really afraid of insufficient reserve replacement with high oil demand because you’re talking like $200 a barrel.
Jordi Hayes
That’s drilling new wells or it’s—
Alex Epstein
You have to drill so much. You have to replace so much. And the oil supply is so politically driven. There’s so much oil in the world that you could harness if everyone had the policy of the United States under Trump and under a friendly Congress, but most of the world has these national oil companies. We’ve had ESG all over the place. It’s been hard to finance things.
I mean, as recently as 2021—think about this—the International Energy Agency said, “There should be no new oil and gas development financed.” So we could be really screwed in terms of higher prices.
John Coogan
I mean, geographically, it’s coming up on the map there. The UAE is directly affected by Hormuz.
Alex Epstein
Yeah.
John Coogan
Every barrel that they make will have to go through the strait.
Alex Epstein
Well, they have a pipeline.
John Coogan
They do.
Alex Epstein
They have one pipeline, but it’s about a million and a half barrels.
John Coogan
Okay. So they can get some out so—
Alex Epstein
Yeah, but they’re—Oh, yeah.
John Coogan
So if they become a swing producer, they are in fact important even in a world where the strait is closed.
Alex Epstein
No, no. It doesn’t matter as much right now because they’re saying we want the right to expand our production, but none of them can produce nearly as much as they want right now. This is why they’re doing it now. They’re not doing it in the time of a supply glut. They’re doing it in the time of a supply shortage because nobody really cares.
It doesn’t really affect things for them to say, “Oh yeah, we have a million and a half spare capacity that we’d like to use and we’re planning on using into the future, but right now we can’t bring most of that to market, and no one can bring anything to market.”
That’s different from a situation that we’ve had fairly recently where there’s tons of supply on the market—there’s too much, and US producers are saying, “Hey, we’ve got $50 a barrel oil. This is really hard to sustain.” Imagine then a million and a half new barrels coming on the market.
Jordi Hayes
Who wins? Who saw the news this morning and was fist pumping?
Alex Epstein
Well, I don’t think most people understand the consequences of these things because I think many people think, oh, it’s going to be amazing for the US. OPEC bad, US good. But OPEC, the way it’s set up, it in a sense favors our shale producers because they’re one of the set of higher cost producers in the world.
Jordi Hayes
So if OPEC collectively decided to just massively increase supply and flood the market, they could do real damage to our shale.
Alex Epstein
And this has happened already.
Jordi Hayes
Yeah.
Alex Epstein
This has happened in the previous year.
Jordi Hayes
Yeah. Like you’re saying, if you’re in shale and you’re trying to make money at $50 a barrel, you’re really hoping—what’s the sweet spot again? It’s like somewhere between 70 and 90.
Alex Epstein
Yeah. I mean, sweet spot is interesting because they’ll take whatever they can get. But yeah, if they get to 70, 80, 90, it’s a lot more profitable. And basically, not much changes about their cost structure when prices go low. So it’s almost pure profit.
I mean, a little bit they can squeeze from what are called the oil field service companies—but when you’re thinking of oil and gas, particularly oil, you’re just thinking every $10 that goes up, that is almost pure profit for them. And every $10 that goes down, that is almost pure loss of profit or loss in absolute terms.
Now in terms of policy, look, I think we should forcibly reopen the Strait. And I don’t believe that the US government should be directly trying to favor or disfavor its shale companies, but it’s just important for people to understand these dynamics. And also you have to understand the UAE is doing this at an opportunistic time. They’re not doing it at a time when there’s already a supply glut.
John Coogan
Sure. Shifting gears, where do you want to go?
Jordi Hayes
I wanted to ask you about beaming sun—
John Coogan
I had the exact same question—
Jordi Hayes
—down into solar panels so that you can get 24—
John Coogan
Yeah, Meta announced that they’re going to do something.
Alex Epstein
In space?
John Coogan
They’re going to put a mirror in space that shines light onto a solar array so that they can get 24/7 power to a data center potentially.
Alex Epstein
They’re going to do it on Earth?
John Coogan
The recipient of the light will be on Earth, the solar panel next to a data center, but there will be a mirror in—there’s a specific orbit that is always in the sun. And the sun will hit the mirror and the light will bounce down onto this particular solar panel in their solar array. And so they will be able to get power from their solar panels 24/7.
Alex Epstein
There’s no weather that interferes with this?
John Coogan
Weather might interfere a little bit.
Alex Epstein
Okay. So I have not—
John Coogan
Closer to 24/7 than current.
Alex Epstein
I mean, here’s the dynamic: obviously in space, you have 24/7 solar, and it’s really hard to do things in space. So all credit to people who are willing to invest their own money to try to do this. There are a number of variables that might make it succeed or not.
I mean, the more you’re talking about chips that are evolving very quickly on Earth—because we don’t have this moon colony yet—you’re talking about replacing chips every year, you’re doing these very logistically difficult things in orbit. That tends to disfavor the energy advantage you’re going to get from having the stuff in space. If you’re doing something that—some of these solar things work if the energy cost is high and you don’t need to change a lot about it, if it can run a long time.
So my view of solar is always, you need to recognize its strengths and limitations and use it accordingly. My argument continues to be on Earth—with the solar that we have right now—solar is primarily a fuel saving technology, not a real on demand power source. And I wrote a long article about this, go to alexepstein.substack.com to check it out.
By the way, that means that in some places, solar is a lot more valuable than others. And in particular, it’s valuable in places with very high fuel costs, which the United States is not really one of those places because we have really cheap natural gas and could get cheaper natural gas.
But in general, what we don’t have, what the holy grail would be is if you got solar and batteries so cheap that you could have self-sufficient solar by sufficiently overbuilding the panels and having multi-day battery storage.
So overbuilding the panels means—let’s just say round numbers—you have a hundred megawatts of demand in a given location, so one tenth of a gigawatt. Well, if you overbuild it by 10, then you have a gigawatt. Well, even when the sun is fairly low, you’re going to be able to meet your demand and then you can—
John Coogan
Especially with batteries.
Alex Epstein
Right. And then you can get rid of it and then you can charge the batteries. So you have more to charge the batteries. But then to make that work—because sun is not around at night, people really underestimate this as a problem. It’s not as much of a problem for wind, but it’s a big problem for sun; night is a huge, huge, huge problem.
So you need to then—and think about a winter day like we had during Winter Storm Fern. Even in Phoenix, you can have storms that disrupt the sun for a week. So you need lots and lots and lots of batteries, and you need lots and lots of overbuilding. And the question is, how cheap can you get it? And China’s not even nearly there yet, let alone the US, but it’s not a bad path to pursue.
It’s not bad to pursue because batteries are valuable anyway. Batteries are valuable, number one, to store reliable power and dispatch it. And Elon is in favor of that, and I’ve said on the show before, I’m in favor of that—so it’s good to get the cost of solar lower. It’s good to get the cost of batteries lower, but you have to recognize primarily it’s a fuel saving play, not a replacement play. But if we had 24/7, all bets are off. Then you get the benefits of solar all the time.
John Coogan
That’s the space mirror.
Alex Epstein
I hope that—as long as they’re doing it in a safe way, they should be free to try. And it’s interesting—the schemes I’ve seen in the past haven’t worked, and I don’t know if they have better energy people than they used to at Meta, so we’ll see.
John Coogan
We’ll see. Well, thank you so much for coming on the show.
Alex Epstein
Hey, man. Good to see you.
Jordi Hayes
Yeah, wish we had more time.
John Coogan
Have a good rest of your day.
Alex Epstein
Alright. Anytime.
Questions about this article? Ask AlexAI, my chatbot for energy and climate answers:
Popular links
EnergyTalkingPoints.com: Hundreds of concise, powerful, well-referenced talking points on energy, environmental, and climate issues.
My new book Fossil Future: Why Global Human Flourishing Requires More Oil, Coal, and Natural Gas—Not Less.
“Energy Talking Points by Alex Epstein” is my free Substack newsletter designed to give as many people as possible access to concise, powerful, well-referenced talking points on the latest energy, environmental, and climate issues from a pro-human, pro-energy perspective.
