Bob McNally (Part 2)
Founder & President, Rapidan Energy Group
There are these deeply embedded assumptions about the way the world works that aren't even questioned, much less analyzed — and the idea that the United States would protect the flow of energy from Hormuz was one of them.
Summary
Leadership Matters often touches on topics that are of importance to the news. However, for this week’s episode, I wanted to focus our time and attention on an issue of central concern to CEOs around the globe with one of the foremost experts on the subject.
Bob McNally is the founder and president of Rapidan Energy Group, as well as a friend of the show. We’ve had him on previously to discuss the contours of his career and philosophy on leadership, in a remarkable conversation you can find here. As the world today grapples with one of the largest energy disruptions in history, I wanted to bring Bob back on Leadership Matters to help our listeners understand the larger implications of what’s going on in the Persian Gulf.
From the fallacy of true energy independence to the need to brace ourselves for a world without energy “shock absorbers,” Bob offers some sobering advice. However, the insights he offers are of great significance to executives across a host of industries. They provide an initial roadmap for how we can navigate the challenges of today and build a sustainable, energy-abundant future.
Mentions & Resources in this Episode
Guest Bio
Robert (Bob) McNally is the founder and president of Rapidan Energy Group, a Washington- and Houston-based energy market, policy, and geopolitical consulting firm. Rapidan Energy Group provides actionable and differentiated data, analysis, and advice to senior risk-managers and decision-makers at financial firms and companies in the energy sector. Bob is the author of Crude Volatility: The History and the Future of Boom-Bust Oil Prices (Columbia University Press, 2017).
Bob’s experience extends from the financial industry to the White House. Mr. McNally started his professional career in 1991 as an oil market analyst and consultant with Energy Security Analysis, Inc. In 1994, he joined Tudor Investment Corporation and for twelve subsequent years analyzed energy markets, macroeconomic policy, and geopolitics for Tudor portfolio managers, earning promotion to Vice President and Managing Director. Mr. McNally served in the Peace Corps in Senegal from 1988-1990. From 2001 to 2003, Mr. McNally served as the top international and domestic energy adviser on the White House staff, holding the posts of Special Assistant to the President on the National Economic Council and, in 2003, Senior Director for International Energy on the National Security Council.
Mr. McNally earned his double major BA/BS in International Relations and Political Science from American University and his MA in International Economics and American Foreign Policy from Johns Hopkins Paul H. Nitze School of Advanced International Studies (SAIS).
He was co-chair for energy policy on the 2008 Romney Campaign, served on the Policy Advisory Committee for Senator Marco Rubio’s 2010 campaign, and regularly advises congressional and administration officials on energy policy and markets. Mr. McNally is a Member of the National Petroleum Council. Mr. McNally has testified to the House and Senate on energy markets and national security and speaks to professional conferences on energy markets, policy, and geopolitics. He has been published in Foreign Affairs (co-authored essay with Michael Levi, July/August 2011) and has been interviewed by CNN, The Economist, Fox Business, The Financial Times, The Washington Post, National Journal, Platts Energy Week TV, PBS’ Great Decisions in Foreign Policy series, Bloomberg News, Aviation Daily and other programs and journals.
Episode Transcript
Alan Fleischmann
Welcome to Leadership Matters on SiriusXM and leadershipmattersshow.com. I’m your host, Alan Fleischmann. I’m joined today by a returning guest, one of the world’s foremost authorities on energy markets, and a voice that leaders around the world have relied on as we navigate the most severe energy shock in modern history.
Bob McNally is the founder and president of Rapidan Energy Group, the leading independent energy market, policy, and geopolitical consulting firm. A former top energy advisor to President George W. Bush on the National Economic Council and the National Security Council, Bob is also the author of the award-winning book Crude Volatility: The History and the Future of Boom-Bust Oil Prices. As CEOs and executives around the globe grapple with what the International Energy Agency has called the largest oil supply disruption in history, Bob’s insights have been indispensable, helping decision makers separate signal from noise and protect their stakeholders amid tremendous disruption.
I’m thrilled to have Bob once again join us on the show to talk through his perspectives on what’s happening in the energy market, its implications for the global economy, and above all, what leaders need to know in order to navigate this period of tremendous uncertainty.
Bob, welcome to Leadership Matters. It is a pleasure to have you on the show again.
Bob McNally
Alan, thank you very much for having me on, and I’m delighted to be back. Thank you.
Alan Fleischmann
So, before we kick it off, tell our listeners a little bit about Rapidan Energy Group. What is it that you and the firm do?
Bob McNally
Sure, thank you, Alan. Rapidan Energy Group is a 25-person energy consulting firm clustered in Washington, DC, and Houston, Texas. You’ve known me for a long time, and what our firm does is embodies where my career has been laid: that is, at the intersection of markets — supply, demand, inventory, price, market fundamentals, energy markets specifically — and then policy, then geopolitics. The confluence of those three circles.
Rapidan is sort of like a mini National Security Council and National Economic Council. I was privileged to work on both for President George W. Bush, and our goal is to provide investors and risk takers and opportunity seekers who are confronting energy risks and trends the ability to seize opportunity and be aware of danger, calling balls and strikes.
My firm is nonpartisan. We’ve got left, right, and center, but our mission together is to predict and analyze, not to influence necessarily. And I must say, all of us at Rapidan Energy Group are pretty busy these days. There’s plenty of material for us to work with.
Alan Fleischmann
You get it right. One of the things that I’m always struck by — and I know so many of your clients, and those who invest alongside your counsel — you almost always seem to get it right. I do talk about you behind your back quite a bit. You’re a senior advisor, in full disclosure, at Laurel Strategies as well, and I’m always impressed that you’re not afraid, you and your colleagues, to have a point of view. Other people speak with many, many caveats. You don’t, and I always find it amazing how much you are willing to say what you think, knowing that there’s great risk to having those predictions. But I think there’s nobody else like you that actually seems to get it right.
Bob McNally
Alan, that’s too kind. You’ve known me since I was 17, and my wife has known me since I was in my early 20s; both of you know that I am capable of error. I am certainly fallible.
However, we are patting ourselves on the back just a little bit, at least with seeing the Iran-Hormuz crisis — the greatest disruption in energy market history — coming. I think those of us of a certain age, your age and my age, and perhaps older, have a certain place in our minds for Iran, because we came of age with the Iran hostage crisis and that humiliation. We’ve been at sort of a soft or low-level war with Iran for a long time. I’ve been obsessed with Iran, I’ll submit, for my entire adult life. But in the last 10 to 15 years or so, I saw that we were on a collision course. My firm not only expected that there would be a conflict with Iran — we went so far as to model it. We did the analysis that I don’t think anyone else has done. We did it in 2019, and we updated it last year, in 2025. We asked ourselves: if Iran and the US come to blows, which seemed to us to be inevitable, what would that mean for energy markets and gas and oil, given that that region and the Strait of Hormuz is the world’s most important energy artery?
So I’m proud to say — I’m sad to say, because I’m not happy about this — that Rapidan thought the unthinkable. We imagined what was unimaginable before that: not just that the US and Iran could come into a conflict, but that in a way, the Carter Doctrine and its Reagan corollary could fall, what I call a load-bearing assumption in energy — an idea that was so foundational, so embedded in our thinking, that it was unquestioned. There are low-probability and high-impact events that one can consider, but then there are events that you don’t even consider, and I would submit that until February 28, nobody ever thought about the idea that anyone could choke the flow of not just energy, but fertilizer and industrial inputs, sulfur, and other things from Hormuz for three months-plus. It was unthinkable. The Carter Doctrine and its Reagan corollary established that the United States would not allow this to happen, and we backed that up in the Tanker War. Nobody disrupted Hormuz. When the United States and Iran came to blows in 1988 — Operation Praying Mantis — we sunk a good deal of their navy in an afternoon, and in the first and second Gulf Wars, we were victorious militarily in a couple of days.
So going into this, we saw it coming, and we would talk to folks and say, “Look, I think we’ve crossed some Rubicons here with Iran.” October 7, 2023; the bombing of Iranian nuclear facilities last June; decapitation strikes; and then Iran seizing Hormuz. We saw this coming, and we did the analysis. We had a dear friend of ours, a retired, decorated Navy captain and intelligence officer, do the analysis, and he said, “Look, if we start a war with Iran, we have to assume at least four weeks of disruption of Hormuz.” And Alan, as I said earlier, this was unthinkable. No one could conceive that the United States would allow an adversary to do something like this.
Alan Fleischmann
Explain to us a little bit more about the traffic that goes through the Strait of Hormuz. Why is this such an important highway, if you will? And why is it, if we’ve had all these decades of knowing how vulnerable the world was to this one area — why didn’t we have other arteries set up?
Bob McNally
So the Persian Gulf, or Arabian Gulf, whichever you prefer, produces 20 percent of the world’s oil. It’s by far the most important oil-producing and exporting region. It also exports 20 percent of the world’s liquefied natural gas, LNG, out of Qatar. And we’re all learning this as well: it’s not just energy. It produces urea, which is a feedstock in fertilizer, so crops and farmers around the world depend on the arrival of that urea to seed their fields and plant their crops. Sulfur and other industrial inputs for microchips and other things all come from that region, and almost all of it passes through a 20-or-so-mile chokepoint, the Strait of Hormuz.
Imagine — we live on the East Coast, so for East Coasters it’ll be easier — it’s sort of like I-95, right? There’s a northbound lane and a southbound lane, and those are the lanes through which by far the world’s most important energy exports, and these other exports, flow.
And to your point, look, our military understood that this was a risk. Our military, we know, had prepared for decades to protect the free flow of energy and other things through the Strait. According to The Wall Street Journal — you can read it, it’s public, and I think it’s true — they were prepared to defend that strait from the beginning, back in February, when this conflict started. But President Trump decided that Iran would capitulate to the United States before it would become necessary to mount a big defense. So we didn’t do it, and we know that Iran did not capitulate.
To go back to what I was talking about — a load-bearing assumption. These are ideas that for decades were not even questioned. Think of the dollar-gold peg. From when Franklin Delano Roosevelt established the dollar-gold peg in the early ’30s until 1971, no one questioned that. And then Nixon took us off of it. That was a trauma for global finance. No one could imagine a world where gold was not equal to whatever it was, $35 an ounce or something like that. Or imagine the load-bearing assumption that the Federal Reserve would never allow a systemically important bank to fail. It was unthinkable. Y ou didn’t question it. And then that’s what happened in 2008. Or in my energy world — and I wrote a book about this, thank you for mentioning Crude Volatility — for 90 years, from the early 1930s until about 2005 to 2008 or so, no one could imagine a world without an OPEC, or before it, a Texas Railroad Commission — some body that regulated the supply of oil to keep prices stable. It was unthinkable. It was unimaginable. And we no longer have it, and that’s why we’ve seen this crude volatility.
So my point is, there are these deeply embedded assumptions about the way the world works that aren’t even questioned, much less analyzed, and the idea that the United States would protect the flow of energy from Hormuz was one of them.
Alan Fleischmann
You mentioned earlier the different kinds of wars, moments of stress and tension and combat in that region. When I think of those, I always feel like the world kind of united against the common foe. That isn’t what’s happening here, though. That’s another problem, I think — there hasn’t been the same rallying call, and there hasn’t been the same united response.
You’d think, with a fifth of the world’s oil transporting through the Strait every day, that this would be such a crisis that countries would be united in a way that would make that rallying call one voice, not many. Different countries in different regions are responding differently to the crisis, right?
Bob McNally
You’re very right. Well, let’s consider that.
I think it’s fair to say, notwithstanding the motivations of President Trump in launching the attack — and again, I’ll be very transparent with you, and you’ve known me for a long time: I think the last thing we want to bequeath to our children is this Iranian regime with nuclear weapons, so I have a lot of sympathy for the president’s goals with regard to preventing Iran from achieving it. But if we can just set that aside for a moment, I think it’s fair to say that the world was not behind, broadly speaking, the US decision to attack Iran on February 28. Perhaps with the exception of Israel. The Gulf Cooperation Council countries — enemies of Iran, threatened foremost by Iran — were not necessarily in favor of it, and the world, Europe, and Asia, which depended most importantly on the flow of energy and other things, did not support it.
We almost want to think about this in two phases: before the ceasefire and after the ceasefire. The February 28 to early April period was about the United States doing what it thought was right — President Trump’s decision, without a lot of international support, to put it lightly. Then we had a ceasefire, and the ceasefire is starting to unravel a little bit. But I think we’re transitioning, Alan, into a phase where now it’s not necessarily about the nuclear weapons. Now it’s about the world’s supply of energy, agricultural inputs, fertilizer, and other things. Now I can see where the world will shift to wanting to open up that strait.
So you’re right — it started where the world was not united. But then Iran, of course, responded, and that surprised many, including me, by attacking its other Gulf neighbors heavily: Bahrain, Kuwait, Saudi Arabia, the UAE. That surprised many folks, and in some ways, I think that brings them together. So I think we have to think about this in phases. This war is not over. Like so many wars we study — World War I, the Civil War to some degree, World War II — they start out with folks thinking it’s going to be short and last a lot longer. They may involve other issues and bring in other parties. So I don’t think this is over yet, and I think as we go on with this, and the world begins to suffer from the loss of these critical supplies from that region, you’re going to see the world want to open up the Strait and cooperate to do so.
Alan Fleischmann
You don’t see any sign here, today, of that happening anytime soon?
Bob McNally
No, I see some signs. The Europeans have come together — the British and French — and said, “Well, we’ve got our minesweepers and we’ve got a plan.” Now, they’re saying, “As soon as there’s a peace agreement, we will deploy our minesweepers to clear up that strait.”
But look, if this goes on, the situation will become dire from an energy and a food standpoint. I think you will see countries act in their own interests, regardless of whether they agreed with President Trump’s decision to start this war or not. It’ll become something else. Now it’s about food and energy flows, which is essential for economic stability and national security.
Alan Fleischmann
Is there anybody who’s able to step in? Any country that’s able to step in?
Bob McNally
I don’t think so. I think China has very little influence. China has much more economic and financial equities with the other side of the Gulf, with the Gulf Cooperation Council members, than they do with Iran. I think Russia is desperately hoping Iran doesn’t lose, because Iran is such an important workhorse and industrial supplier and drone supplier to Russia. But I don’t see an external party being able to intervene here, really, no.
Alan Fleischmann
So no one’s benefiting? There’s no one country or countries that are filling the gap and benefiting because they’re able to fill the gap?
Bob McNally
Well, the country that’s benefiting so far is Russia. It is winning a windfall in terms of revenue, and if Iran emerges intact and in any degree appearing to be victorious, it’s a huge win for Vladimir Putin. Iran is how Russia is able to project power into the Middle East. Iran supports Russia in technology and drones and so forth. If this battered-but-intact, if fractious, regime survives — especially if it has won some degree of control over Hormuz, which it had not had before — this is a win for Putin.
It’s also a win because in that world, where Iran is still a threat to the region and has sort of prevailed, we should expect a premium — a higher price on oil and natural gas — to stick, and that higher premium will be earned by Russia, which is a big exporter. So Russia is a big winner if this conflict ends with Iran holding its own, victorious in any way, sort of prevailing.
Alan Fleischmann
Is there a moment where you think we can sustain this pressure, and then the tipping point happens? If nothing actually is resolved by a certain date, do you think that gets us into the next phase of a treacherous calamity, or a global economic one?
Bob McNally
You know, I’ve been an oil analyst for 35 years, and I’ve never seen a moment where just about every oil analyst I know, every oil company, every competitor of mine, agrees on something. We usually disagree about where supply and demand and price are — there’s a healthy disagreement — but I’ve never seen this.
We all pretty much see a train wreck later this summer. Meaning that the world has dealt with the loss of the oil from Iran by running down shock absorbers, if you will — strategic petroleum reserves. China has reduced its consumption of oil and its stockpiling of oil. There’s been some demand reduction. Airlines have canceled flights in places. Petrochemical facilities in Asia have shut down. But that’s sort of like holding your breath. It’ll work for a little while, but you can’t just do that forever. At some point, you have to exhale and breathe again, and you need to supply your economy with energy, and some of those shock absorbers, like strategic stocks, are going to wear off.
And so most of us… You’ve seen Exxon and Chevron publicly talk about this, which is kind of unusual; they’ve given voice to what we all see. Most analysts, when they look into the late summer, July and August, if we don’t see a healthy resumption in those flows from Hormuz, see the oil price having to rise sharply to curtail demand. Because there’s sort of an iron law in economics: you can’t consume what you can’t produce or withdraw from inventory, and we’re getting down to the bottom on inventory. So that means if we can’t produce 9 percent of our energy because of this conflict, we can’t consume that much, and to achieve that balance, the price of oil is going to rise really sharply.
Because remember, oil is not like cigars, or Chipotle, or nights out at the opera. Those are discretionary things we can live without. Energy is more like food. You have to eat, you have to get to work. People don’t easily give up travel. They’ll easily give up something that’s frivolous or extravagant, but not a must-have. So if we need to really reduce our consumption of oil, if we’ve gone through our inventories — which most of us expect by the late summer we will have — you’re going to have to have big price increases.
What we’ve seen in history is that when you get a big and sudden oil price increase, it tends to spill over into other sectors of the economy. We saw this in the early ’80s and the late 1990s, and certainly 2008, where you get these big spikes and it starts to hurt the financial system and the economy more broadly. That slows economic growth — which is one way to enforce that iron law.
Alan Fleischmann
The way you’re describing it — one day we’re resilient and we seem to be getting through it, and it hasn’t done horrible things yet, although we do see prices hiking, but then all of a sudden the next day it’s a calamity.
Bob McNally
You’re right. You’re right. And a lot of us oil analysts are getting a lot of pushback, a lot of criticism, saying, “Hey, I thought it was a disaster. Why is oil still below $100, and the equity markets are making new highs? Everything seems to be fine.”
And here I would just say: oil markets and traders are always forward-looking, so they think about the future when they’re making their price and they’re trading. However, they’re not always accurate. In 2022, the oil market exploded. Oil prices went up — we saw an all-time high in gasoline, $5.02 a gallon, in the summer of 2022 — and that was because the world thought we were going to lose a lot of Russian supply. We ended up not losing Russian supply, and when the market realized — wait a minute, this fear we had was wrong — prices collapsed again.
Well, Alan, I think we’re seeing sort of the mirror of that now, where we have had an actual loss, much bigger than what we thought we’d lose from Russia, but the market has taken the view that it’s going to be okay. President Trump is going to sign an agreement, oil will flow, Hormuz will open, and we can go about our lives. There’s this, I think, misplaced optimism. And just as in 2022, you had to wait a few months until the data showed that the fear the market had wasn’t taking place — we didn’t lose Russian supply. In a mirror fashion this year, I think what the data are going to show later this month, in July and August, especially as we see inventory drops, is that we actually have a bigger problem than the market realized. And when that happens, I think you’re going to see these big oil price increases. The traders will have to align to reality.
Alan Fleischmann
What do you think a global CEO — you have many clients who are global CEOs — what do you think they get wrong when they look at this, and what do they need to understand and get right?
Bob McNally
Well, it’s tough. This is a very unusual circumstance; again, Rapidan saw it coming, but it’s understandable that most folks didn’t. We don’t think about the worst-case scenario actually happening, and I understand that. Most CEOs — and I know, Alan, you know so many, and I know they rely on you for your advice — they’re optimists, right? To be putting capital to work, to bet on growth, to make a return, you have to be by nature an optimist, and I respect that a lot. When you’re an oil market geopolitical analyst, however, you’re a bit more of a pessimist.
I wouldn’t say that CEOs have to become more pessimistic, but I think they have to leaven their optimism — their natural, rewarding, and desirable optimism — with a grounding in reality. And the reality is, I believe the Middle East cannot be stable — and specifically, as we’re learning, the free flow of precious energy and fertilizer and other important industrial inputs won’t be assured — as long as you have a hostile Iranian regime in that region. I think we’ve crossed, as I said earlier, a Rubicon. We’re not going back to 47 years of managed hostility.
So if I’m a CEO, I want to put capital to work. Now, I will say this: I think this will encourage folks to look at the Americas and Africa — any other region where there are ample energy resources. I think folks are going to look at that with a newfound enthusiasm. Again, I would assert to you, before this started, no one could conceive that we would have this type of risk to energy production and flows in the Middle East, and it’s happened — even if it ends tomorrow. Unless this ends with the Middle East becoming like Europe — if Iran ends up with a regime that’s very friendly and benign, and it’s sort of like Western Europe after World War II, it’s had enough war — that would be a great scenario. But if it’s anything less, I think CEOs have to think about this: a growing world, a prosperous world, needs energy, all forms of energy. To be realistic, to be aligned, maybe you have to realize the Middle East is not as safe in some ways as we thought. Now, that may be unfortunate — it is — but it’s also accurate. It’s being revealed to us.
So I think it makes it interesting to look at sourcing your energy, your industrial energy production, your supply lines to the Americas — North and South America — and Africa. There are other areas of the world, and I think they’re going to see a tailwind from this.
Alan Fleischmann
What do you think the media is not getting right? You’ve been on so many shows — there’s a great segment on 60 Minutes you were on. You’ve testified before Congress. You’ve been actively educating public officials all over the world, let alone in Washington. But what is the media getting right, and what are they getting wrong? Because so much of how we interpret what’s happening, and the urgency of what’s happening, is through their lens.
Bob McNally
You know, I think the media is doing a good job. Look, all of us are in terra incognita here. None of us have been here before: the world’s largest energy disruption, all the spare capacity, that buffer we relied on in the past, gone, and it lasting much longer than anyone expected. And I think the media — and I mean that broadly, including social media and X… It’s just amazing, the sources of information we have, from tanker tracking and satellite. Things that when I was working for President Bush 25 years ago, you had to have a security clearance to see. Now, measuring the shadows on tank tops at oil facilities and oil storage is free and commercially available. So look, I think the media has done a good job at reflecting and transmitting what’s going on.
I think we have to look at a deeper level: how do societies and industries react to sudden, unexpected, unimagined change? It’s an adaption issue. It gets into human psychology. Again, we can imagine low-probability, high-impact kinds of things happening to ourselves, to our businesses. What happens if my house burns down? What happens if we have a recession? What happens if a key man or a key woman leaves? You think about those. But the loss of Hormuz, the idea that the flow of that much energy could be at threat, is something no one’s considered. And I think the media has done a good job at revealing that.
What I think we’ll look back at, though — and I think the remarkable thing about this, in some ways, the thing that surprised me — is how optimistic the market has remained. Specifically, when the Trump administration, President Trump himself, says encouraging things, it reassures everybody. How many dozens of times now have we seen the president tweet that a deal is around the corner, gasoline prices are about to fall, Iran really wants to make a deal, we’re getting very close? WThere’s Charlie Brown and the football with Lucy. How many times?
I think it’s not the media; it’s the market, really, the investment community, that has gotten this wrong. They’ve been a little bit gullible in believing that this awful nightmare, which they never imagined, is going to suddenly end. That they’re going to wake up from a dream, because President Trump will sign something with Iran. And I think the President knows that, and so the President has been very successful at reassuring and talking down the markets. Again, as you and I sit here today, the equity markets are at or near all-time highs: oil is below $100 a barrel. No one would have thought that. In early February, if you said we’re going to lose the Strait of Hormuz for three months, and oil is going to be below $100, and equities at highs… I ascribe that to this optimism. You like optimism in CEOs, but it has to be leavened with reality, and the reality is we have a much bigger problem.
I think we’ll come from this with a healthier response, a healthier understanding and respect for risk, and that’ll be good for us. It’s a tough learning experience, but we’ll have it.
Alan Fleischmann
And who’s the hero here? Who’s actually getting it right out there? Are there heads of state, heads of government, right now that are getting it right?
Bob McNally
Well, I don’t want to say they’re a hero — I certainly don’t want to say they’re a hero — but among my community of oil analysts, if you went back a year and could see what’s coming, which country prepared for it the best? In some ways, it was China. China has been maniacally filling up its oil reserves, its strategic reserves — filling, filling, buying more oil than it uses and storing it — and it has an enormous reserve right now, 1.2 billion barrels. As a result, China is in a less vulnerable position than many other countries right now.
Now, the rest of the world would love it if China would be so kind as to use those inventories, draw them down to help the world get over the supply shock — because oil is a global market, one price everywhere; a supply disruption anywhere means a price increase everywhere. I don’t think China’s going to do that. They’re going to hoard and hold on to most of it. But they at least were very well prepared for this.
I will say this, though, Alan: I think on a more optimistic note, the United States is also fairly well prepared for this. We have ample gas and oil, and that’s because under presidents Obama, Biden, and Trump, and certainly President Bush earlier with the gas, we didn’t strangle that shale revolution. That shale revolution turned the United States from a huge net importer of oil and gas into the world’s largest producer and exporter.
Those decisions — we may not have realized it back then — have paid dividends. Now we’ve got so much natural gas that our natural gas prices have actually been falling during this. Now, our consumers still face that oil price — we still face the world oil price, so no one’s immune from that — but at least from an economic standpoint, our economy is better off.
So we can pat ourselves on the back, and it’s both parties. I think the best thing this country has done on a bipartisan basis for energy was under President Obama, when we lifted the ban on exporting crude oil. That was essential to keep oil flowing and producing in the United States, because our oil is of a quality that needs to be exported. President Obama and the Republican Congress, in what I think was the last great instance of bipartisan, sound energy policy, removed that unnecessary export restriction, and that helped President Obama when he was putting sanctions on Iran, helped the world adjust to that, and it’s helping us now. So I guess the United States, in some ways, has prepared for this.
There is one area, though, where Iran is exposing the folly of a policy mistake, and that was drawing down our strategic reserves, our oil reserves. Under President Bush, when I was working for President Bush after 9/11, we filled the Strategic Petroleum Reserve to the top. And then, starting about 10 years or so ago, both parties thought, “We don’t need this reserve, we’ve got plenty of shale oil — let’s just sell off that oil and buy other stuff with it, nothing to do with energy.” Republicans and Democrats did that, thinking, what could ever happen? And then President Biden drew down 180 million barrels plus — largely depleted the reserve — after Russia, even though there was no disruption. I think now we’re heading towards the lowest strategic stocks since the early ’80s, since you and I went to high school. The misfortune is that we are depleting our strategic stocks at a moment when the need for strategic stocks has never been higher. Some lessons you have to learn the hard way. I have a feeling, coming out of this, the United States and other countries are going to want to build up their reserves and get ready for another disruption like this.
So, to answer your question: I think China prepared well. The United States did well for itself by making its economy resilient, allowing that shale revolution to proceed — both parties did that. We may have erred in drawing down our strategic stocks. That was foolish, but we’ll rebuild those later.
Alan Fleischmann
What do people need to know, Bob, right now? Our audience here, our listeners, are leaders, aspiring leaders, people who are involved in all kinds of leadership positions, and they care a lot about leadership. What do they need to know, what do they need to fix? What do they need to advocate for fixing right now? Because of the vulnerability here — I thought we were so independent. There was a whole theory that the United States didn’t need to depend on anything elsewhere when it came to energy. Now, the truth is, it’s not really as much about energy independence — it sounds like it’s about access to the Strait of Hormuz, which is important. But it’s both, right? I mean, I thought we were independent. That was the big argument for so long.
Bob McNally
Yeah, there have been these fallacies in energy — that if we could just produce all the oil we need, we would be insulated from wars around the world and disruptions in the Middle East. This has once again proven that false.
Energy markets are global. They always will be. They’re actively and widely traded. They’re priced in a global market. Whether you’re Saudi Arabia, or the United States, or China, or India, whether you’re a big exporter or a big importer, it doesn’t matter. Everybody faces the same price.
So this drives a need for international cooperation. It does, even if you’re of a more nationalist, stay-at-home bent. Energy imposes some imperatives on us. You know, I come from the political right. I come from a smaller-is-better perspective when it comes to government, a more free-market perspective. But I wrote a book basically showing how, when it comes to oil anyway, you need to have a role for government — even in doing things Republicans don’t like, which is controlling supply. The Texas Railroad Commission — Texans, people put on earth by God to produce oil and limit government — resorted to some of the most heavy-handed quotas and interventions in markets we’ve ever seen in any industry. They did that because if you don’t, it’s just the nature of oil: it can be very volatile and very destabilizing, and we’re talking about the lifeblood of modern civilization.
So I would say this: we need to have stability in the Middle East. Even if the United States is an exporter, we still need it. We need it here, they need it in China, they need it in Europe — everywhere, because we’re all in the same energy market. I think that means we must deal with the problems that are causing that instability. And it’s the Iranian regime, in my view. We have to deal with the problem of Iran in that region, and the instability and violence it by its nature causes, and realize it’s not just a far-flung conflict in which we have no interest — it is something that can, as we see, wreck our economy and endanger our national security.
So I think the world has to come together and work to stabilize the Middle East. It’s not just going to be the United States. We have to identify, in a clear-eyed way, what the sources of instability are, who the problem is, and eliminate those problems and bring stability, so that we can all avoid what we’re about to see. Because mark my words: it’s not over.
Alan Fleischmann
You said at the earlier part of this interview that you have concerns about Iran. Is your concern that if there isn’t a regime change, this is a temporary situation that only can get worse later?
Bob McNally
That’s right. I think we crossed three thresholds that constitute a Rubicon, that make a return to what you and I have known for 47 years — a sort of managed hostility — no longer viable. It was the United States and Israel attacking Iran’s nuclear facilities and decapitating their leadership; it was Iran inspiring, if not supporting, the devastating attack against Israel in October 2023; and it was Iran choosing to put a chokehold on Hormuz.
After October 7, Israel, in my view, is no longer willing to manage risks. It is going to remove them — whether it’s Gaza, Lebanon, or Iran, whether it’s Bibi Netanyahu or anybody else. I welcome your view and pushback on this, but I think that’s where Israel is. That’s number one. Number two, Israel and the United States have crossed the threshold into directly attacking Iran’s nuclear facilities and decapitating its leadership. Can we imagine if an adversary just decapitated our leadership in Washington, and we just kind of put new folks up and went on? I mean, imagine. And then Iran has played the oil card in a way it never has, nobody ever has. We may think we skated by the worst, but believe me, the worst is coming.
Those three things, I think, cannot be undone. They create a new circumstance where, as long as there is a hostile regime in Tehran, there will be a risk of major disruption and instability in the world that is unacceptable for just about everybody. So I just think we’re in a new framework right now, and we have to fix it. We’ll see how long it goes on, but one way or the other, we have to deal with this.
Alan Fleischmann
By the way, you’ve got super insight and intelligence on what’s going on. Are there protests happening inside Iran? Are there things happening that give you a sense that there is a heartbeat for an overthrow of some sort in Iran, or do you think it has to happen from the outside?
Bob McNally
Unfortunately, no. I’m very fortunate to have as my partner at Rapidan Energy Group and our CEO Scott Modell — a wonderful, patriotic American polyglot who served in our CIA as a field officer. So he ran spies and fought with the special forces in Afghanistan after 9/11. He speaks Farsi, among other languages, and was our top intelligence Iran expert. Through Scott, we still keep tabs on what’s happening over there.
And no, unfortunately, at this point the Iranian regime has successfully brutalized and cowed its public. The regime has been decapitated, it’s fractured, but it is functioning. There’s a new group of leaders — younger, ambitious. They have control of the guns. There’s no sign of the army splitting from the IRGC or anything, no signs of public protests. They murdered tens of thousands of people. So we have a hostage-taking, where they’ve taken Hormuz hostage and their own people hostage. We don’t yet see any sign of regime fracture at this point, unfortunately.
Alan Fleischmann
Is there anything that could be pressured from the outside that you think could actually be helpful? And are people there aware that there’s a whole lot of people outside Iran that are hoping that they will prevail?
Bob McNally
You know, I’ll be uncharacteristically optimistic. My wife, Denise, calls me Mr. Worst-Case Scenario — you’ve known me for a long time, and I can sometimes tilt toward the glass-half-empty side of things — but I’ve always thought Iran is going to end really well. It may be very violent on the way there, but Iran has an amazing population. One Iranian American just married into my family, actually — I’m glad to see that we have that. Think of Persians, Iranians: cosmopolitan, thousands of years of history, industrious, intellectual, fabulous people. I’m told by my friends who are diplomats from other countries who go there that Iran is a country with the second-largest support for the United States in the Middle East, after Israel.
I’m an optimist here. I believe in equilibrium and the alignment of reality to circumstances, whether it’s governments or prices. I think eventually the Iranian people are going to have a government that is like them. They’re as oppressed and brutalized by the regime as people in other countries in the region have been, and I don’t think that’s sustainable.
When Iran has a government that is like its people, it’s hard for me to imagine so many things not getting better all at once, from a global economic, energy, and security standpoint. You will have a powerhouse country. In the ’70s, the United States and Israel were both great friends of Iran. We will invest, we will trade, there will be tourism, risk will go down across the region, investment will increase. Russia will be an enormous loser. So I see things getting really better, I have to admit.
Now, Scott always calms me down. He’s forgotten more about Iran than I’ll ever know. He’s like, “Bob, take a chill. You’re right, but this regime is ensconced, and it’s brutal.” So I’m not saying it’s going to happen tomorrow. But Alan, I think in our lifetimes we’re going to see Iran have a revolution and a better government, and when we do, we’re going to see things get better, not only in the region but in the world, in a way that’ll make us very happy and optimistic. And you know what? I’m very optimistic about it. I was even on AI the other day — Scott and I are designing our Rapidan Farsi sign for when we open up an office in Tehran, because I think the future is very bright for the Iranians and the United States and the region.
Alan Fleischmann
Does that mean you think it’s imminent — there’ll be a change, then? It sounds like you’re optimistic. You’re buying the T-shirts.
Bob McNally
I am. I am optimistic. I’m just afraid that — you know, it’s like when we’d take a trip to Cape Cod with my father, and we’d ask him, “When are we going to get there, Daddy? When are we going to get there?” And he would say, “It’s going to get worse before it gets better.” I’m afraid that seeing off this regime may require more violence before it gets better. So I’m concerned about that, but it is going to get better. Iran’s going to end up in a good place with the rest of us.
Alan Fleischmann
That’s great. And what about the timing, again?
Bob McNally
Well, that’s privy only to Rapidan clients. No, just kidding. We don’t have a crystal ball on the timing. All I can say is I think it’s going to get worse before it gets better, but I think we’re talking about a matter of years, not decades. The regime — they are getting older, some of them. In this era of social media and information, everyone can see what everyone else is doing, and given just the intrinsic qualities of the Iranian people, I’ll be surprised if this regime can hold on for much longer.
Alan Fleischmann
Well, that makes me feel more optimistic too. And then, what happens afterwards?
Bob McNally
What happens afterwards, I think, is we will see — hopefully — the Middle East enter into what Western Europe did.
If you think about Western Europe, they had to go through three devastating wars to solve a kind of core problem, which was the emergence of a unified Germany: the Franco-Prussian War, World War I, World War II. And after World War II, there had been enough devastation that they created a new framework that set them on a course for unity, that sort of suppressed nationalism within the European Union. Still issues, still things going on, but it has made war almost unthinkable there among those countries, and that’s a good thing.
I think the Middle East has to get there and have that moment where they realize: it’s the weapons we have now, it’s the proximity those countries have to each other, the devastating quality of the weapons. It imparts an imperative, which says, we’re always going to have problems, we’re always going to have tensions between countries, but we have to work those out in civil, nonviolent ways. We have to manage competition the way the UAE and Saudi Arabia do, and other countries do. Every country is different. Every country is going to have antagonisms and competition. That’s fine, but we have to manage them in a way in which we take the resort to force off the table.
And when Iran has a regime like its people, I’m confident that region will be able to adopt that stability — that moving beyond military force and terrorism as a means to achieve their goals. If we can get there, Alan, it’s still the world’s richest energy province. You’ll have more energy, you’ll have stability, you’ll have fewer risks like we’re facing right now. It will hurt countries like Vladimir Putin’s Russia. It’ll put downward pressure on energy prices. I think China won’t be playing games as much, trying to divide and so forth. I think the world will be a better place. I really do. If we can get the Middle East right, I think a lot of things get easier for us.
Alan Fleischmann
I imagine from the Israeli perspective, they’re not going to let go until there’s a regime change.
Bob McNally
Right. I agree, especially after October 7, 2023. That’s right.
Alan Fleischmann
They see this as a one-time opportunity.
Bob McNally
If you think the Iranian regime was considering nuclear weapons before having been decapitated and attacked, what do you think a surviving regime like this is going to think about nuclear weapons after this? I think this is a conflict that can only end with the Iranian regime leaving the stage, and I don’t think Israel will stop. I don’t think we will be able to stop. We may want to walk away from it, but I don’t think we can. I think this has to end with a good riddance to this regime. The only question is, how much violence has to happen on the way out?
Alan Fleischmann
Wow. And actually, I’m feeling more optimistic because of you, so I should say I’m feeling good about this.
What’s happening in the rest of the world around energy? I’m curious now — at Rapidan Energy Group, are you spending all your time, I imagine you are, on what’s happening right now in the Gulf? Or are you also looking at other parts of the world like you normally do? Are there conversations happening anywhere else in the world right now?
Bob McNally
No, there are — there are lots of things going on. One of them is sort of a tangent to Iran, and that is, people are wondering: wait a minute, we’ve seen these oil price increases — they’re up 40, 50 percent. People are buying electric vehicles more than they were before. Could this crisis accelerate electrification of transportation, EVs, the transition? Because remember, going into this at the end of last year, I think the narrative was shifting from a Paris Agreement world, where the world was united and driving towards fast decarbonization, to a world in which energy security, energy affordability, and other issues were rising. And now folks are saying, wait a minute, maybe Iran is going to kickstart the EV revolution.
Now, I’m a little bit skeptical about long-term big change. When oil prices go up, we always see interest in more fuel-efficient cars and EVs go higher. It happens all the time. It happened from 2003 to 2008, when oil prices nearly quintupled. But people are wondering, could this be a big transition like we saw in the 1970s?
So I’m going to get a little wonky on you here, Alan. In the 1970s, if you think about the kinds of oil that were being consumed in the OECD, the rich world, over 40 percent of the oil was this heavy fuel oil, which was burned for electricity generation and space heating and industrial uses. It was gunky. It wasn’t like gasoline and diesel, which came lighter. Then two things happened in the ’70s that caused that to go away just about forever. One was a quadrupling of oil prices. OPEC just forced it; they raised the price on everybody from $3 to $12 a barrel in the early 1970s during the Arab oil embargo. The second thing was, in response to that big oil price increase, we were able to quickly put substitutes for fuel oil in place. We had coal, we had natural gas, we had nuclear, we had renewables. All of those energy sources could also be used for electricity generation and space heating. So we said, this is crazy — the price of oil went up four times, I’ll go use this other stuff. By the way, China wasn’t controlling those energy sources back then, so this was great. And now, if you sit here today, fuel oil — that heaviest, dirtiest oil — is less than 5 percent of our consumption.
So some people are thinking, well, wait a minute, maybe because of this Iran crisis we’re going to see EVs take out gasoline, right? I don’t think so, because I don’t think we’re going to see a permanent increase in the price. We may go much higher — I think we will — in oil prices, but they’re unlikely to stick. It’s not like someone can impose those prices; they’ll probably fall after they rise. Secondly, China controls the cheap EV supply chain, and there’s still a lot of resistance to allowing that. I don’t think consumers are ready to adopt electric vehicles in the way that industry was willing to adopt coal, gas, nuclear, and renewables back in the late 1970s and early 1980s.
So I think it’s going to be a tailwind, this crisis, but how big, how sustainable? Look, I’m not the only person; people have different views, and reasonable people can differ and debate about this. I tend to be skeptical about long-lasting, major change. But for the time being, EVs are looking better, and so are fuel-efficient cars. Countries in Asia are going to be asking, how do we get out of imported energy as fast as we can? Now, some of that will mean coal. A lot of countries in Asia are saying, “It’s too bad, but I’ve got to go back to burning coal, because I can’t depend on Qatari LNG.” So in a way, you’re starting to see a revival of coal, but you’re also seeing a revival of interest elsewhere.
That’s one thing I mentioned earlier — this investor interest in the Americas. No question: Canada, Alaska, the United States, South America, Argentina, Guyana. These places now are going to see an enormous, sustained increase in investor interest, because the Middle East has proven itself to be risky in a way that was never conceived of before.
The other thing — and you and I talk about this all the time — is the data center phenomenon, and the debate over how much energy use, how much efficiency it could cause. Is the energy use overstated? We’re just at the beginning of this. It’s a fascinating, very different area involving technology, but also resource use — oil, water, politics, the acceptance by local communities of these data centers, and so forth. At Rapidan, that’s one of our fastest-growing services — the data center work, the policy and the politics of that. Tech companies are becoming energy companies. Two different worlds, and they are now becoming one, because technology now will be linked to energy. It’s just a fascinating thing.
Alan Fleischmann
Tell me, what piece of advice would you offer leaders looking to sustain their institutions right now through this volatile period? And what is the one question no one asks you, but should ask you — that I should be asking you right now?
Bob McNally
I’ve always thought this, and it’s especially true now with data centers and the tech companies — and maybe we’ll get more progress now — but it’s even the case with oil and gas companies: I think one of our biggest problems is literacy. Energy literacy.
Because on the one hand, a lot of people think they know a lot about energy. It’s one of those things where, you know, I fill up my car, I hold the gas pump, I put it in, I press the button — I interact physically with energy. I see the price of energy every day, and people may think, I understand it, because it’s so present in my life. You ask somebody on the street, what’s the price of gasoline, they’re probably going to know it. Milk, a banana, maybe not, but they’ll know the price of gasoline. Energy is so present in our lives, and I think that confers a sense that we understand how energy markets work, and that’s false. I don’t think there is widespread understanding.
So I’ve always urged folks to think about how we can improve basic understanding of energy realities. It could be things like, under the Paris Agreement, we’re going to put in place these mandates and subsidies and pass a bill, and we’re going to have peak oil demand by 2030 — it’s just wishful thinking. You don’t see this in other areas, Alan. You don’t see it in medical science. You don’t see people walking around saying, “Well, I know how we could whip breast cancer if we just did this or that.” Most people know they’re not doctors. They don’t understand medical science. I don’t understand what causes cancer. But with energy, there’s this low bar to entry, in some ways. It’s dangerous in some ways, because myths, wishful thinking, and delusions can go further in energy than in other areas.
Again, I speak as one who’s a student of energy. I’m still learning. I’ve spent my life devoted to it. I wrote a book about it. I’m still learning every day about energy, and I’ve been immersed in it for 35 years, and I’m humble about it. So I think it’s really important that we teach energy literacy. How energy is produced, transformed, transmitted and priced; how and why energy transitions tend to be rare and long, slow affairs, much more so than we perhaps would like. All so that we are just more knowledgeable. So that as we confront these political debates, which we’ll have, over land use, air quality, economics, and fiscal issues, we can do it with a sounder understanding of the realities. Energy is all over. It’s in our lives. It’s not a rare medical or esoteric foreign policy issue that most people don’t have to deal with in their lives. It is with us, and it always will be, and I think we have to do more on energy literacy and explaining energy realities to folks. I think that’s the most important thing.
The question — what would I say to people? Getting back to this misconception thing: what I love about energy is some of the delicious ironies and uncomfortable truths that it forces us to confront. I don’t know what it is about me, I like uncomfortable truths. I probably need to get a life, do something else more joyful. But one of them is, there’s a sense out there that, wouldn’t it be just great if we could blow up OPEC and be free of it? Part of this energy independence thing was, we can just be free of OPEC. President Nixon announced Project Independence in 1973, saying, we’re going to get out of OPEC, we’re going to be energy-import free by 1980, he said. We didn’t.
And again, this gets back to this literacy question. Sometimes we have to acknowledge that you need to have something we normally don’t like — heavy-handed government intervention in the economy — to provide stability, and you need that with oil. Oil, just by its basic nature, is wildly volatile. People say, “Well, shouldn’t we just get out of OPEC? Wouldn’t it be better if we were free of OPEC?” Not really. Actually, we need an OPEC, or an OPEC+, or some group to manage supply, or the United States will be the first victim.
People ask, what’s the biggest threat to the oil market in the United States? This energy boom, which both parties have encouraged, that has brought us so many geopolitical benefits, what’s the biggest risk to that? Is it climate change? No. The biggest risk is that we won’t have this supply stabilizer, this price stabilizer — whether it’s OPEC, OPEC+, or some other group — because when you don’t have that, it’s like you suddenly get on Space Mountain, the roller coaster. You get wild volatility: way up into the $100 range, way down to the single digits, and you can’t run an economy. You can’t run shale. The shale oil industry can’t live with that kind of volatility. It’s sort of like trying to bake a cake on Space Mountain. You can’t bake a cake on Space Mountain — it’s too volatile. You’re going up, you’re going down, you’re lucky if you don’t throw up. And that’s how the oil market works. So that’s one of the biggest misconceptions and questions I confront in my career, what it takes just to keep things stable in oil, and therefore everything else.
Alan Fleischmann
Now, do you love what you do?
Bob McNally
Never had a dull moment. I’m very grateful. As you know, I wanted to go into military history, and it was only because I didn’t get rich in the Peace Corps that you helped me get a job at an oil consulting firm. I looked at the pay scales of history teachers and oil analysts — and my wife, Denise, was pregnant with my daughter, Grace. As you know, I tell people I drifted into energy; I didn’t master my voyage there. I’m so grateful, because energy involves the things I know you love and I love.
Alan Fleischmann
Now, I would say this behind your back too: you may be one of the world’s leading energy experts, but you’re also one of the leading policy and geopolitical experts. It just happens that you’re deep and wide in relationships, understanding, insight, and have institutional memory around the energy sector, which has been such a big part of your professional life. But when we have conversations about all the elements of geopolitical dynamics, all the elements of risk, all the elements of promise and potential around politics and policy — you’re the person I go to.
Bob McNally
Well, Alan, we’ve been on this journey together since I was 17. I’ve learned so much from you and through you. When you’re ready to have another career, come on over to energy.
Alan Fleischmann
I don’t see that happening, but thank you. You’re a great leader, a great CEO.
You’ve been listening to Leadership Matters on SiriusXM and leadershipmattersshow.com. I’m your host, Alan Fleischmann. We just spent the last hour with Bob McNally, the founder and president of Rapidan Energy Group, discussing the crisis in the Strait of Hormuz, the historic shock to global energy markets, and what leaders in every industry need to know and understand to lead through this energy volatility. Bob, it’s such a pleasure to have you on. On behalf of all our listeners on Leadership Matters, we thank you very much. And I can tell you right now, we want to have you back on soon.
Bob McNally
Thank you, Alan. So much enjoyed it. Thank you very much.
This transcript has been edited and condensed for clarity.