China Will Soon Lose the Title of “World’s Manufacturer”

Globalization led to the rise of China as a manufacturing powerhouse, since finding the lowest cost producer was the priority. However, deglobalization, coupled with China’s demographic decline and aging workforce, has both eroded that competitive advantage and changed everyone’s priorities about cost. So, what happens next?

With China fading from the spotlight, Western countries will become more protectionist, which means manufacturing will be coming back home to places like the US and Europe. But that’s going to bring a while slew of problems with it.

While this transition will create significant job growth and increase the political power of labor, it will also bring high inflation and inefficiencies. This will force highly skilled workers to take on tasks that were historically outsourced to cheaper labor markets. So, if you thought inflation was bad now, just wait…

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First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everyone. Peter Zeihan here coming to you from Yosemite. This is an unnamed lake behind me, so I’m going to claim it. This is Peter Lake and there’s Peter Island right in the middle of it. Great for laps. I built a summer home here. Any who? I wanted to talk a little bit today about the global structure of employment.

Looking forward and back, if you could sum up the concept of globalization into a single phrase, it would be lowest cost producer. The idea is, whoever can produce the product or the step in the supply chain at the lowest cost in a reliable manner pretty much gets the business. And when the Chinese built it up to the bar in the 1980s, they brought a billion industrial workers with them.

And that’s before you consider the fact that it’s a single legal structure, such as it is, or that they subsidize the bejesus out of everything to drive any competition out of business. Basically, they took all the assembly and the low-end stuff from the rest of the developing world, where no region was probably suffering more than Latin America.

Where the geography is much more difficult for infrastructure. And so the Chinese could outcompete them there as well. For the first world countries, and most notably, the United States, we got out of that sort of business because if you pay an American $50,000 a year to assemble a car, it’s going to be a really expensive car.

And so we doubled, tripled, quadrupled down on design work. And there are few industries where this shows up more than technology. The Chinese may make some low-end semiconductors and do a lot of assembly, but it’s the Americans who design most of the chips and make a lot of the high-end chemicals that are necessary for Chinese fabrication facilities to work.

So when someone tells you that the Taiwanese or the Chinese or the Koreans or the Japanese stole our industry in semiconductors, you know, no, we still do the high-value added stuff. The Chinese do the low-value added stuff. Anyway, this has been the state of affairs in increasing intensity for the last 30 to 40 years.

And now we’re entering a new world where the Chinese are aging out. And so they’re losing their economic competitiveness, even at the low end. And their workforce is collapsing because their population is in demographic decline, actually, demographic decline is too kind—demographic collapse. They now have more people aged 60 to 75 than 0 to 25, if I remember my math correctly. Anyway, it’s close.

Sorry, I can’t fact-check out here anyway. Lots of old people, very, very few young people, and even fewer people coming into the workforce in the future.

Okay, so what happens now? Well, the Chinese are no longer competitive. It’s only because of the sunk cost of the industrial plant that we still think of China as an industrial power.

And, you know, 30-odd trillion dollars in sunk cost in industrial plant. That’s not nothing, but it’s not enough without a workforce.

That’s before you consider the trade wars that are intensifying, regardless of who wins the American presidential election, regardless of who wins in various European elections. Both the American and the European blocs have turned very sharply protectionist, specifically versus China, and so we’re probably going to see significant crunches in the trade portfolio of products coming from China very, very soon.

What we’ve seen with the electric vehicles is really only the beginning. What that means is if the Europeans, and especially the Americans, still want stuff, they’re going to have to make it their damn selves. And there is the problem, because the United States has geared its educational system, its infrastructure, and its capital structure over the last 30 years to do more and more higher and higher value-added work, not a lot of assembly.

And so we’re going to have to take highly paid, highly skilled American workers and put them to work doing things that, under normal circumstances, they’d have people in another country do. Now, this will generate a lot of employment. This will generate a lot of political power for labor, organized or otherwise. But it comes at a cost, because if you’re going to pick one word to sum up globalization, it was efficiency.

And there is nothing about having people do jobs that they weren’t trained for, or that they’re overqualified for, that’s efficient. So yes, we will get huge growth, and yes, we will get huge inflation to go along with it. The 2, 3, 4, 5, 6, 7% that people have been bitching about these last 3 or 4 years, that’s just the start.

Deglobalization’s Impact on Global Food Exports

Image depicting global grain and coffee sacks for export

Globalization has allowed us (meaning humans as a species) to make some of the worst lands farmable, inhabitable, and even prosperous. But what happens to global food exports when globalization ends?

There are five requirements to sustain successful agricultural exports in a deglobalized world: productive arable land, petroleum for fuel, and three essential fertilizers (potash, phosphate, and nitrogen). If a country doesn’t have access to one these, they might be SOL.

North America is the big winner here, specifically the US and Canada which have almost everything right at hand. Other regions that top the list are Argentina, New Zealand, Australia and South Africa, although these countries may struggle with fuel supplies. Brazilian agriculture will suffer due to poor land quality and heavy reliance on fertilizers coming from China and the former Soviet Union (which are likely to destabilize). Any of those specialty crop producers, especially those in the California’s Central Valley, will likely have to pivot business models due to shrinking markets, high costs, and dependency on Chinese markets.

Deglobalization could cause a potential drop in calorie production by a third and the fallout would be devastating. We’re talking widespread food shortages and catastrophic levels of starvation.

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First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everybody, Peter Zeihan here, coming to you from central Yosemite. I’m standing by another mountain lake, which, being unnamed, is now officially called Peter’s Other Lake! And it even has a beach—pretty cool, right?

Anyway, today we’re diving into another question from the Ask Peter forum: what’s going to happen to global agricultural exports in a post-globalized world? Short answer—nothing good.

To sustain agricultural exports, you need five key things:

  1. Arable Land: You’ve got to have a lot of productive land.

  2. Petroleum: Agriculture on a large scale relies heavily on internal combustion engines. There’s talk of electric tractors, but the technology isn’t there yet. Their charge doesn’t last long enough, and they don’t have the power to do meaningful work. So, unless you’re talking about a small electric cart for something like apple picking, we won’t see electric solutions this decade, probably not even next.

  3. Fertilizer: Fertilizer comes in three parts—potash (potassium), phosphate, and nitrogen (usually derived from natural gas). These are sourced from different parts of the world. For instance, about half of the world’s phosphate exports come from China, and that’s already problematic since China might face disintegration. Worse yet, those phosphate deposits are in interior regions prone to secession. So, say goodbye to that supply. Potash is mostly found in Belarus and Russia, but thank goodness for Saskatchewan in Canada. As for nitrogen, which is made from natural gas, it’s more widespread, with the U.S. being the top producer.

Without access to all these elements, growing food at scale becomes much harder. In a post-globalized world, the number of places that can sustain agricultural exports shrinks significantly.

At the top of that list is North America, particularly the U.S. and Canada. Saskatchewan has potash covered, the U.S. has plenty of nitrogen, and both countries boast some of the best farmland in the world. For phosphate, once you move away from China, you’ve got options like Morocco, Israel, Saudi Arabia, and even Florida.

Other regions in decent shape include Argentina, which has highly productive land, and South Africa, New Zealand, and Australia. While these countries, with the exception of Argentina, can’t produce their own fuel, they are outside major conflict zones. So, if there’s fuel and fertilizer available for trade, these are likely destinations, as they can pay in hard currency.

Brazil, however, is in trouble. It has some of the worst land quality globally and is the largest importer of fertilizer, relying heavily on China and the former Soviet Union. Brazil’s status as an agricultural powerhouse isn’t over yet, but you can see the sunset from here. Parts of southern Brazil near Argentina may fare better, but the explosive growth we’ve seen in soy production is temporary.

In the Old World, France stands out. Like Argentina, France has excellent farmland. It’s also far enough from conflict zones to remain relatively safe and close enough to the North Sea for natural gas. If there’s any international trade left, France is one of the few nations with a capable navy to secure its sea lanes.

But that’s still not enough. We’re looking at global calorie production potentially dropping by a third. And that means a lot of starvation.

Now, beyond staple crops like wheat, rice, corn, and soy, there’s also a thriving trade in specialty crops—cherries, apples, alfalfa, and more. In a post-globalized world, many countries will lose the ability to pay for these. If China is your primary customer, it’s time to look for a new market. The country that should be most concerned about this is the U.S., particularly California’s Central Valley. This area has extremely high production costs due to strict regulations and its desert-like conditions, which make input costs (water, for example) sky-high. It’s not naturally fertile land.

As long as inputs are cheap and China is willing to pay top dollar because they’re price-insensitive, this business model works. But that’s not going to be the reality much longer. So, check your specialty crops, see where they’re being sold, and figure out if those markets will hold up as globalization breaks down. If not, you’ll need to either switch markets or find a new crop.

Alright, that’s it for me. See you next time!

Will Climate Change Be the Death of Wheat?

A photo of a wheat in the winter

Although climate change models are still evolving, historical climate data shows a clear warming trend. So, let’s discuss the impacts of climate change, specifically who will be affected the most and who might even benefit from it.

When you think of climate change, think of it as an amplification of current conditions. So, hot and dry areas will likely become hotter and drier. Hot and humid regions are likely to get even wetter and face severe health risks. Agricultural zones in marginal climates will suffer the most, especially those dependent on wheat.

Speaking of wheat – humanity’s primary calorie source – you might want to enjoy that cinnamon roll and pasta while you have the chance…Okay, maybe that’s a bit dramatic, but you can expect production to decline and prices to soar. This will especially impact places like the American Great Plains, central Argentina, the Russian wheat belt, and northern China.

However, regions with dual wind streams are poised to do pretty well amidst the warming climate. Think of zones like the American South and Midwest, parts of Argentina, Uruguay, northwestern Europe, and New Zealand. Unfortunately for the Chinese, their agricultural regions are particularly vulnerable, which will lead to severe food shortages and famine.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

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Transcript

Hey everybody, Peter Zeihan here, coming to you from Blue Lake at the border between Yosemite National Park and the Ansel Adams Wilderness. That’s the Pinnacles behind me, and let me tell you, the hike up here was quite the challenge! Today, we’re tackling a question from the Ask Peter forum: with climate change, where are we going to feel it first? Who’s going to be hit the hardest, and is there anyone who might actually benefit?

First off, let’s remember that our understanding of climate change is still developing. Yes, there are plenty of smart people studying it, but when it comes to understanding how the atmosphere works on a global scale, we’re learning as we go. I find it most reliable to look at the past rather than just the projections. We have over a century of climate data from most locations, tracking temperature, wind, and precipitation. If you look at what’s happened over the last 140 years or so since industrialization began, there’s been a clear uptick in temperatures.

By the time my fourth book, The End of the World Is Just the Beginning, was published, that temperature increase was 1.1°C over the entire period. In the last few years, it’s ticked up to 1.2°C. This doesn’t just mean that the world is getting warmer; it’s getting warmer in different areas at different rates. One key thing to remember about precipitation is that while warmer air can hold more moisture, it also requires more moisture before precipitation occurs. So, hot and dry areas are getting drier, and wet and hot areas are getting wetter.

As long as you have electricity, a degree Celsius isn’t a big deal. Take the United States, for example—back in the 1930s and 40s, Florida and Iowa had similar populations. Now, Florida’s population is about eight times that of Iowa, thanks to air conditioning and reliable electricity. But I’m more concerned about two specific regions.

First, the developing world areas that are already hot and humid, like Brazil, the northern coast of South America, sub-Saharan Africa, Southeast Asia, and the Indian subcontinent. These regions are already very wet, humid, and hot, and adding even a little more heat could be a serious health risk.

The second area of concern is agricultural zones that are already hot and dry. Agriculture tends to be concentrated in regions where specific crops grow best—avocados in California, wine in southern France, and so on. Wheat is the exception because it’s essentially a weed and will grow almost anywhere. As the world has diversified its agricultural production and globalization has spread crops globally, wheat has steadily been pushed to the margins, except in places like northern France, Quebec, and parts of Pakistan and India where it’s tied to cultural or food security.

Wheat is now grown in cold and dry or hot and dry regions like the American Great Plains, central Argentina, the Russian wheat belt, and northern China. This means that when climate change starts reducing moisture in these areas, wheat production will collapse, and prices will skyrocket. And since wheat has been humanity’s number one calorie source for millennia, this is a big deal.

But it’s not all doom and gloom—some places might actually benefit. Regions that receive moisture from two different wind streams, like the Gulf Stream and the monsoons, are less likely to suffer catastrophic crop failures because both wind systems are unlikely to fail in the same year. This is good news for the American South, the American Midwest, northern Argentina, Uruguay, northwestern Europe (especially the UK and France), and New Zealand.

However, most of the world relies on a single wind current, so even minor climate changes could have outsized impacts on agriculture, especially wheat.

Now, on my way down from the hike, it hit me that there’s a country out there with both monsoonal and jetstream moisture, and that’s not necessarily a good thing. In the American Midwest, both hit the same region, but in China, the monsoon affects the southern rice belt, while the west-east jetstream waters the northern wheat zone. This is bad news for China. Everything I said about wheat applies, but it gets worse because rice requires meticulous water management—flooding and draining the fields multiple times. If rain comes at the wrong time, the entire crop can be lost. So, no matter how climate change unfolds in the next few decades, we can be sure that hundreds of millions of Chinese people will be at risk of starvation.

Alright, now I’m really done. See you next time!

Why Should Red States Get Greentech Investments?

If the green transition is ever going to work, it needs to happen everywhere. So, don’t get your drawers in a bunch when you see green energy funds from the Inflation Reduction Act being invested in Red States.

While there may be more support for the green energy transition in blue states, the reality is that red states may offer a more viable path to ACTUALLY getting it done. Between business-friendly policies, more rural land suitable for energy projects, and a number of geographical advantages, red states will be critical to the green buildout.

While these red states might not be known for their environmental activism, their geographies make them prime locations for green investments…try not to think so much about ideology on this one, just focus on places that give us the best shot at making the green transition work, wherever that might be.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Hey, everybody. Hello from Square Top Peak, with Argentine Peak in the background, and further back, you can catch a glimpse of a pair of Colorado’s famous fourteeners. Today, I want to talk about green energy and red states. There’s been some hand-wringing in the environmental community because about 75 to 80% of the investment from the Inflation Reduction Act has gone into red states—not purple states, but solid red states.

First off, let’s all calm down. If the goal is truly to achieve a green transition, it has to include everyone, so this is actually good news. But I think it’s important to explain why this shift in mindset has happened on places like Capitol Hill when it comes to green tech investments.

The first reason has more to do with the business climate than the subsidies themselves. As a rule, red states tend to have a more business-friendly, low-regulation approach to things. Whether it involves providing a bit of money or just having lower legal costs for operating in the first place, it’s easier to get projects off the ground in a place like Nebraska than in a place like Oregon.

The second reason is related to the rural-urban divide. To oversimplify, red states are generally more rural and have a lot more land that can be dedicated to energy projects. For example, if you’re in New York City, you probably have a coal or natural gas power plant nearby, and the power is wired into the city. But if you want wind or solar energy, the closest place with significant solar or wind density is North Carolina, which has arguably benefited the most from green tech investments in the Northeast because it’s the nearest viable location for power generation.

In the U.S., we have what can be called a Sun Belt and a Wind Belt. The Wind Belt runs mostly through the Great Plains, from North Dakota straight down through South Dakota, Nebraska, Kansas, Oklahoma, and Texas. Colorado and Iowa also have significant wind resources. But generally, the further west you go, the better the wind conditions get. The same pattern holds for solar power. As you’d expect, the further south you go, the greater the solar intensity. Ideally, you also want a bit of altitude and low humidity because those conditions are more conducive to efficient solar power generation. So the primary solar zone stretches from east of Los Angeles in Kern County, California, through Arizona, New Mexico, Oklahoma, and especially Texas.

These two belts—the Wind Belt and the Solar Belt—are getting an outsized portion of green energy investments, along with North Carolina because of its proximity to major population centers that can’t generate their own green energy. The issue of population density is really significant. You’re not going to install solar panels in a forest or on the slope of a mountain unless it’s an absolutely perfect spot. You want large expanses of flat land where no one lives, and if that land doesn’t have much agricultural value, it’s even better. So places like West Texas, eastern Colorado, and North Dakota are ideal. These areas aren’t exactly known for being strongholds of environmental activism, but they happen to be some of the best locations in the country—and indeed, on the planet—for green energy installations. And that’s exactly where these investments are heading.

A New Player in Global Oil Markets: Guyana

*This video was recorded prior to Peter departing on his backpacking trip in July.

Guyana is a country we don’t hear about too often, but its rise as an oil producer has earned it some air time. In particular, we’ll be looking at the implications this carries for global oil markets.

Guyana discovered oil in the late 2010s and aims to produce 1.4 million barrels per day within the next five years. ExxonMobil is the big dog leading this operation. So, who will this bump in the oil markets impact the most?

Countries in the Eastern hemisphere will gain some added stability to the oil supply mix. As Russian oil loses its legs in Europe, any outside sources will be welcomed with open arms. For the Americans, the emergence of Guyana on the oil markets isn’t great news, as the medium sweet crude coming from Guyana works well with European refineries. So, mark this one down as a nice win for the Europeans and a small loss for the Americans.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
Support medshare's global efforts

Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. Today, we’re going to talk about something in the Western Hemisphere that isn’t related to the American political system. We’re focusing on Guyana, of all places. Guyana is a small statelet on the northern coast of South America, which historically hasn’t mattered much at all.

It’s located in the middle of the tropics and is bordered by the Amazon, so there hasn’t been much going on there until someone discovered oil in the late 2010s. Back in 2018, this place produced nothing, but today, it’s producing about 600,000 to 650,000 barrels of oil a day. ExxonMobil is the primary operator for nearly the entire operation. Just this week, they started their seventh expansion, with the goal of reaching 1.4 million barrels per day within five years.

From the perspective of big producers like Russia, the U.S., or Saudi Arabia, this isn’t a huge amount of oil. However, to give you some context, this production level is more than Iran is exporting right now and puts Guyana above countries like Qatar or Libya.

Let’s talk about the pros and cons. If you’re in the Eastern Hemisphere and concerned about oil security, which you should be, this is, of course, a great sign. One of the issues we’re seeing with the Ukraine war is that Western countries have gradually ratcheted down on tech transfers to Russia, particularly in oil extraction technology. The goal here was to strangle the Russian economy so that it couldn’t afford the war. Initially, efforts started with things like price caps, then targeting shipping insurance, and now focusing on the shadow fleet of tankers trying to circumvent the sanctions. And while all of this is working, they haven’t yet taken steps to actually destroy Russia’s ability to produce oil in the first place.

At the margins, the technology required for offshore production has been denied to the Russians, but offshore production wasn’t a significant part of their operations. The real driver of Russia’s oil production is labor and tech transfer. Over the last 25 years, Russia has transitioned from a Soviet-style system, which sloppily produced a lot of crude at relatively easy fields, to a more focused system that uses more technology to efficiently produce crude at more advanced sites. Today, I’d argue that probably two-thirds of Russia’s oil production comes from that latter system, which relies on foreign technology and expertise.

When the Ukraine war began, most major service companies, like Halliburton, cut their contracts and withdrew from Russia. However, they did two things: first, they sold their local subsidiaries to their employees, who were Russian nationals, thereby maintaining an under-the-table connection. Second, they pre-sold a couple of years’ worth of equipment to allow these new subsidiaries to continue operating. As a result, Russian oil output has remained steady throughout the conflict.

Now, a few things are happening. First, the Europeans have largely separated themselves from the Russian energy complex. Yes, crude is still flowing to third countries, where it is refined and sent back to Europe, but the exposure is much less than it was two years ago. Second, the last of the pipelines across Ukraine are starting to fluctuate due to legal and operational reasons. The Ukrainians have always stated that when the contracts with Russian oil and natural gas companies expire, they will turn off those pipelines. And yes, despite two years of war marked by sexual assault, genocide, and kidnapping, the Europeans have pressured Ukraine to keep oil and natural gas flowing across Ukraine into Europe. However, this arrangement will end by the end of this year. In fact, earlier this month, we saw cutoffs in the lines going to Slovakia, the Czech Republic, and Hungary.

A little side note here: the Czech Republic and Slovakia managed to get exemptions to the sanctions imposed two years ago, but they’ve been working hard to find alternative supplies and build replacement infrastructure. Hungary, on the other hand, has not, and now they find themselves without oil and natural gas. There’s a story within a story here for the Europeans, but that’s a topic for another day.

The bottom line is that, with the exception of Hungary, most European countries have pretty much weaned themselves off Russian energy. Now, the Europeans are discussing how to actually kill the Russian energy sector, and they’re focusing on stopping tech transfers. Currently, it’s legal for third parties, most notably China, to buy this equipment and send it to Russia. The Europeans are now discussing how to expand the sanctions regime to prevent this from happening. Considering that the Europeans are already in the early stages of a pretty intense trade war with China, this is a powerful lever they can use in various ways. Essentially, if the Europeans can force China to cut off support to Russia, China might maintain some market access to Europe, which is crucial for avoiding its own economic breakdown. So, this is real, and it’s probably going to happen in the next few months. When it does, we’ll likely see more problems in the Russian energy complex as they struggle to get their oil to market.

If you’re in the Eastern Hemisphere, and the 5 to 7 million barrels per day of crude and related products that Russia produces start to wobble, having an extra million to a million and a half barrels of medium-sweet crude coming out of Guyana suddenly becomes very attractive. And if you’re European, this is a great match because the crude from Russia is a medium-sour blend, while the crude from Guyana is a medium-sweet blend. It’s not too far off from what European refineries were designed to process. So, if you’re European, you now have a backup plan.

The downside is for American producers. The U.S. shale sector is significantly different by several metrics from global oil norms. Most of the world’s crude is relatively heavy and sour, meaning it’s thick, viscous, and contains a lot of contaminants, most notably sulfur. U.S. light-sweet shale is different because it didn’t migrate through rock formations, so it didn’t pick up contaminants. Also, because it was trapped in rock strata almost at the moment of formation, it never had a chance to mix with anything and get thick and gooey. So, it’s light, sweet, and basically the consistency of nail polish remover.

This was great at first, but once you start producing 8 million barrels a day of it, which has all hit the market in the last 15 to 20 years, you basically saturate the market for that kind of demand. The Guyana crude, while definitely heavier and more sour than U.S. light-sweet, isn’t so far removed that it competes in a fundamentally different product bracket.

So, if you’re an American shale producer, you’re basically selling into a super-saturated market in the U.S. right now and trying to export this crude to the wider world for a better price. But now, you have roughly a million to a million and a half barrels of competition coming from Guyana. Ironically, Exxon’s new project has made the economics of shale just a little bit worse.

I don’t think anyone is going to be broken over this, and it has made the security of Europe quite a bit better. Whether or not that’s a win for you depends on which side of the pond you happen to call home.