A lot of people are talking about how we’re currently facing the highest inflation levels in decades. Few are talking about how inflation–a bugbear that stalked the US economy for decades until the 90s–has been kept so low for so long. 

As with so much else in the era of globalization, most have mistaken the growth and development and stability of The Order as humanity’s default. Few things could be further from the truth.

Interested in more? This Wednesday we are hosting the final installment of our exploration of economic trends inInterested in more? We are hosting the final installment of our exploration of economic trends in an era of globalization tomorrow, Wednesday 12/1: Part III: The Face of Inflation. We’ll be diving into not simply the inflation of the now, but also bringing together the wildly disparate inflationary trends that will entangle the American and global economies for the next four years. Everything from manufactured products to industrial commodities to energy to money itself.

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Gasoline costs. Housing costs. Food costs. Consumer goods costs. They are all going up. The inflation is real and it is only “transitory” if by “transitory” you are measuring time in years.
 
The real nut of the issue, however, is that few of the current price pressures have anything to do with government policy. Higher energy costs are the result of years of financial mismanagement. Higher housing costs are an outcome of large-scale internal migration decisions. Food costs largely boil down to transport issues. Consumer goods costs are an outcome of COVID-related demand whiplashes.
 
This might sound odd, but I don’t worry so much about these short-term inflationary pressures we’re currently experiencing. They are the outcomes of our current economic evolutions. That makes them uncomfortable, but ultimately, heh, transitory.
 
I’m far more concerned with the waves of inflationary pressures occurring just past the horizon:
 
The American economy is in the midst of the greatest rewiring in the history of the Republic, while the global system faces systemic breakdown. Those pressures are not simply inflationary, they will have a far greater impact upon prices than anything we’ve seen so far in 2021.
 
Here’s a more homegrown inflation source that will be — at least in part — an outcome of internal political and government decision-making.
 
Over the course of the past sixty years, we’ve become somewhat accustomed to the geopolitics of oil. Interrupt oil flows from the former Soviet or Persian Gulf regions, and we see energy inflation wash over us all. It forced us to pay attention to the ins-and-outs of politics in as calm, measured places as Gaza and Tehran and Riyadh and Caracas and Moscow and Kiev.
 
One of the (many) benefits of the American shale revolution is that America just doesn’t care very much about any of these places any longer. It’s a big piece of why energy prices are chronically lower in North America compared to the rest of the world, and why U.S. troop deployments abroad are now at their lowest levels in 120 years.
 
But the path to deglobalization isn’t a smooth one, wrapped up as it is in a variety of technological evolutions, some of which may force the United States to become more involved in managing the world. For as difficult as the geopolitics of oil has proven to be, it is nothing compared to the geopolitics of green energy. Yes, green electricity is generated at home, but the supply chain for constructing wind and solar facilities makes getting oil out of the Middle East look like a game of checkers.
 
For oil we needed to interface with Saudi Arabia and Iran and Venezuela and Russia, but greentech requires us to interface with Chile and Argentina and Bolivia and China and Australia and Congo and Gabon and Brazil and South Africa and Peru and Mexico and Kazakhstan and Turkey and India and Mozambique and oh yeah still Russia.
 
If the Green dream of 100% non-carbon energy is to take form, we will need to replace our one energy input supply chain with over a dozen more.

Interested in more? This Wednesday we are hosting the final installment of our exploration of economic trends in an era of globalization: Part III: The Face of Inflation. We’ll be diving into not simply the inflation of the now, but also bringing together the wildly disparate inflationary trends that will entangle the American and global economies for the next four years. Everything from manufactured products to industrial commodities to energy to money itself.

REGISTER FOR THE FACE OF INFLATION

Digital copies of the series’ previous installments can be purchased here:
Part I: Wither the Workforce

PURCHASE ACCESS TO WITHER THE WORKFORCE

Part II: Supply Chains No More

PURCHASE ACCESS TO SUPPLY CHAINS NO MORE

On November 18 news leaked out of Taiwan, Japan, South Korea, China and India that the Americans have approached pretty much every country that matters about a joint, simultaneous release of oil from each country that maintains emergency reserves. The goal being to tamp down rising oil prices. The subtext is that the Biden administration’s efforts to get OPEC and its oil-exporting partners to produce more crude have proven unsuccessful.

Normally, I’d just dismiss this as media banter and rumor mongering. Stuff like this drops out of the ether every time oil prices rise. This time is probably different; Simultaneous indications from multiple countries that lack a track record of energy-related drama suggests the news is for real.

I guess the primary reason I would have normally dismissed the idea of oil releases is because…it is a really, really stupid idea.

First off, oil demand is inelastic. When prices go up or down by 10%, 20%, 50% it is rare for demand to budge at all. Only when prices go up (or down) by an extreme amount and stay there for months do we get fundamental shifts to demand. Which means any short-term price drop won’t impact the underlying market fundamentals one whit.

Second, even if every country on the planet with oil sitting in tanks or salt caverns agreed to follow Biden’s lead, they could not maintain the effort for nearly long enough to shift the demand picture. Most countries don’t have more than two months of import cover. Turns out that most find storing something like crude oil — a material that’s corrosive and toxic — to be difficult and expensive.

Third, what makes oil prices go down isn’t so much increases in flow but increases in production and above all storage. It is having extra oil on hand that weakens prices. Releasing crude from storage isn’t production. Releasing crude from storage reduces storage. It actually makes the market tighter.

Which means, fourth, as soon any releases end, demand fundamentals will not simply take prices right back to where they were, they will take prices higher because there is now less storage as a buffer.

And so, reserves are not tapped lightly. Historically speaking, the United States has only released oil from its reserves to impact pricing when there has been an actual production disruption. For example, in 1991 when Iraq invaded Kuwait, or in 2005 when Iraq descended into civil war and Venezuela got serious about its journey to self-destruction. Nothing like that is happening currently.

These aren’t particularly sophisticated economic talking points. “Oil 201” if you will. And that is what has me concerned. Transport Secretary Pete Buttigieg knows this. Energy Secretary Jennifer Granholm knows this. Commerce Secretary Gina Raimondo knows this. National Security Advisor Jake Sullivan knows this. The chances of this quartet of the smartest people on TeamBiden not advising the president of such a basic economic function are zero.

Which tells me that one of two things has happened.

Option1: There’s some sort of massive misunderstanding going on here and the information that’s leaking out of Asia is in some way wrong. If so, this’ll blow over very quickly and we’ll all go back to our lives.

Option2: Biden’s instinctive populism has overwhelmed his willingness to listen to basic facts, and he is pursuing a populist, Trumpesque economic policy in the belief that his diktats can direct the markets.

If it is Option2 then, well, crap. If the goal is to decrease oil prices, there’s an easier, faster, diplomatically cheaper, more economically viable and more environmentally friendly way to do it: The United States is the world’s largest oil producer because of the shale revolution. Using a mix of new production techniques developed in the past two decades, U.S. oil producers can bring new production to market in just six weeks. Even Saudi Arabia’s reserve capacity takes a minimum of three months to bring on-line. Shale output has far lower carbon output as part of its production than the global average, and because U.S. shale is produced in the United States rather than a different hemisphere, the shipping footprint is similarly lower. (Also, production taxes!) Politically, it would indeed be awkward for green-friendly Biden to approach the U.S. oil sector about producing more oil, but IMO not nearly as awkward as it has been for him to approach de facto Saudi Arabian leader Muhammad “Hacksaw” bin Salman…which he has already done. (Only to be turned down flat.)

I have been nursing some concerns about the Biden administration’s economic policies for some time. I’ve reserved judgement because most of his plans require Congressional action, and until Congress actually passes something of substance it is all just political theater. The oil-release action is in a different category because it can be done by executive order.

As a rule, I like to give presidents plenty of time before I declare them lost causes, and therefore part of the problem rather than part of the solution. With Obama it took until year five, with the specific straw being when Obama started barring people who brought him news he ideologically disagreed with from even entering the Oval Office. That action turned the entire Executive Branch into a tone-deaf echo chamber. With Trump it happened in year three when he decided he was “done” with coronavirus. That action is largely responsible for the death of a half million Americans. After seeing the quality of the people in Biden’s cabinet, it never occurred to me that it might happen before year two.

But here we may be. Arguing that Option2 is what is truly in play, is another energy-related action from Biden administration this week: an order that the Federal Trade Commission investigate American oil producers, refiners and gasoline distributors for price fixing. Fixing in the wildly unconcentrated American oil complex is functionally impossible. Leaving aside the hundreds of differently motivated oil producers and hundreds of regionalized gasoline distributors and tens of thousands of gasoline retailers, there are 135 operating oil refineries in the United States, and they tend towards cutthroat competition. Collusion among them would be hilariously unwieldy and only one tattletale hold-out would result in billions in fines for the other 134. Biden should know this too. Buttigieg and Granholm and Raimondo and Sullivan certainly do. This isn’t policymaking. This is populist blamestorming in the Trumpian style, using the tools of the state to target your political opponents.

But I digress.

What’s happening with the oil markets, what is driving prices higher, what is apparently prompting Biden to push for a mass release, are symptoms of an issue far larger and more substantive than mere presidential mismanagement. What’s happening is financial mismanagement on a global scale. Its effects are magnifying with time and will be with us long after Biden is gone. What we are seeing now, with oil prices well on their way to $90 a barrel, is just the tip of the iceberg.

But it will not be felt everywhere.

Interested in more? Energy inflation — deep, chronic, and above all varied — is a big piece of the broader, long-term inflation picture that we’ll be exploring in our final seminar on the evolutions in the American and global economies in the age of deglobalization. Join us December 1 for Part III: The Face of Inflation.

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Scheduling conflicts? Not to worry. Everyone who registers will be provided with a recording of the webinar to watch at their leisure. 

We hope you will also join us today the Supply Chains No More webinar and Q&A session. Registration information and more at the link below.

Part II: Supply Chains No More
Today, November 19, 1p Eastern

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Those who missed out on Part I: Wither the Workforce can purchase access to the recorded webinar and presentation materials at the link below.

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Join Peter Zeihan today, November 19 for the second in a three-part series on the here, now, and soon-to-be of the American and global economies. Part II: Supply Chains No More will focus exclusively on global supply chains, providing insight to the current status of delays and disarray, and identify which sectors will have no choice but to fundamentally restructure in the months and years to come.

Scheduling conflicts? Not to worry. Everyone who registers for Supply Chains No More will be provided with a recording of today’s webinar to watch at their leisure. 

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We hope you will also join us for the Face of Inflation webinar and Q&A session. Registration information and more at the link below.
 
Part III: The Face of Inflation
Wednesday, December 1

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Those who missed out on Part I: Wither the Workforce can purchase access to the recorded webinar and presentation materials at the link below.

PURCHASE RECORDING OF PART I: WITHER THE WORKFORCE

I look at a lot of charts, so you don’t have to. But here’s one I need to share. It’s a partial breakdown of product prices by the U.S. Bureau of Labor Statistics, that’s the group of wonks who tell us (formally) what inflation is doing. Check out the more recent data on the far right. I’ve peeled out the various energy-related trends so you can see just out of control they’ve gotten of late.

Not nerdy enough for you? You can mix and match your own factors here.  #DataIsCool

Current supply chain woes aren’t just about goods getting to Southern California, or how efficiently Southern Californian dockworkers can get those goods in I’ve got two bits of good news and one bit of bad news.
 
Good1: The good news is that as high as energy prices have recently become in the United States, relief is on the way. Oil and natural gas prices have now been high enough for long enough that America’s shale operators have steadily expanded operations and fresh production is already feeding into the system. We might not feel that relief in the form of lower prices until March, but relief is still on the way.
 
Good2: As bad as prices seem, it is way worse everywhere else. Natural gas prices in Europe are now ten times what they are in the United States, and the Europeans have zero reasons to expect their situation to improve one whit this year. Or next year. Or the year after. Europe has next to no local oil or natural gas production, and no shale sector to speak of. Instead, the Europeans have chosen to rely on solar and wind power (on the world’s cloudiest and calmest continent, no less), with a bit of bridge assistance from…the Kremlin.
 
Bad1: Good1 might make you exclaim a sigh of relief. Whew! This too shall pass. Weeeeell, not really. Just because I don’t see energy inflation holding up in the United States does not mean that I don’t see us entering one of the weirdest periods of economic transition in American history. You name the sector — finance, manufacturing, housing, agriculture, transport, commodities — we are in for at least the strongest inflation we’ve seen in this country since the 1970s.
 
Breaking down that is going to require a great deal more than a newsletter.
 
Join us for the final installment of our series on the future of the global and American economies in an age of deglobalization.

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Part II: Supply Chains No More

Join us Friday, November 19th at 1p Eastern for our webinar about the challenges facing global supply chains: 

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