Trump Might Be Onto Something with Data Center Energy

Blue lit hallway of data center servers producing energy

We’re back to Trump operating as if 1:37 AM Truth Social posts are policy, but this latest one might actually be worth discussing in the daylight…in front of actual decision-makers.

Trump’s post would require data centers to generate their own electricity and supply any surplus power back to the grid. This could address some of the major hurdles facing the U.S. reindustrialization process, mainly energy demands.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. Good morning. Today we’re going to talk about…I try not to do this because there’s so much to deal with. But at 1:37 a.m. eastern time Donald Trump got on to Truth Social, and in this, let’s just call it, dump. He said a lot about data centers that I actually think is worthy commenting on. A lot of his midnight ramblings are less worthy, but this one is on topic. He says that any large data center is going to have to provide its own power and supply whatever surplus it has back to the grid. And I think it’s worth talking about how that might happen. At the moment, it’s just a truth social posting. There’s no regulatory structure. It’s just him signaling what he wants. But considering where we’re going with the data center industry and how public outcry has risen, I think it’s not a horrible idea. It doesn’t mean that there aren’t some problems. 

So, you know, obviously this is going to have to go through a regulatory issue. There’s probably going to have to be an act of Congress, in fact, there absolutely has to be an act of Congress. So this is not something that’s going to take effect this year. But if Trump does push this, and I honestly think that any president would probably push things in this direction, it indicates that we’re going to have significant changes. Let’s talk scale conservatively. If you look at the AI data centers that currently are on the books to be built, not the ones that have been approved, but you know, everything that everybody says that they want and they’re trying to line up. You’re talking about needing to expand the American power grid by about 25%. That’s assuming no new data centers are designed or implemented or initiated, and there will be more. So we’re talking about a significant amount of power generation. And normally it would take the United States best case scenario, 30 years to expand its power grid by that volume. We haven’t had to expand the power grid in a meaningful way since the 70s, because in the 80s, the 90s, the 2000, the 2010s. We got out of a lot of heavy industry. We moved to less power intensive sectors like services and technology, and we just haven’t had to build things out. Now we do. And that requires a whole new industrial space. 

Now you take a large data center, especially some of these ones that are more than 100MW. Some of the new ones are a full gigawatt. And the idea that the local communities can just hook up a power cord and suddenly just supply these data centers is ridiculous. You’re talking about massive volumes of new infrastructure. And wherever the data center has to be, it has to be relatively close to the power plant. So that limits siting. By saying that a power plant has to be joined to the data center, you’re also limiting where the data center can be, but you’re actually guaranteeing it’s going to be a little bit further away from a population center, which overall is probably a very good thing because these things are fairly noisy. You have to basically cool a huge amount of territory, and that means, for lack of a better phrase, in HVAC system that has fans going 24/7. Also, keep in mind that the power that a data center needs has to be provided 24/7, which largely rules out most solar and even wind. You can put in battery systems. But if you want to go 100% green with a data center, you’re talking about needing an input system that is six and seven times the nameplate of the data center, because you can’t always rely on the sun to be out, especially at night. And then you have to pair that with a massive battery system. So you’re really talking about baseload power generation, which means nuclear, natural gas, or coal. And as a rule, you just don’t put those in populated centers. That’s one problem. 

Next problem. This will undoubtedly evolve into a direction where the mandate requires the data center produce more power than it needs and feeds it back into the grid, basically placing the tech center at the center of a electricity buildout, which is also smart. But now you need an interconnection between the data center and the rest of the system. And that’s a whole level of infrastructure to this point that the data center industry has just ignored and loaded onto whatever the local community is that they happen to be in. 

So think about this. Siting restrictions are now different. If you have a green mandate for your city or state, you’re never going to get a data center. And considering how central it is to the American economy these days, that’s kind of a big deal even before you consider artificial intelligence. And then third, you now need a power system that can flow both ways. That gets to another level of regulation. Because right now, most power in the United States is provided by a local company designed for their specific city or county or a rural region. There aren’t a lot of broad zones like, say, Duke Energy or Southern Company that provide multiple states, which means now we have to have a regulatory shift at the federal level to break down those different districts so that power can flow from the data center into the normal grid. That absolutely requires an act of Congress. 

Now, all of this banded together is still absolutely a net gain for the United States by almost any measure. But it challenges some interests. It breaks down local autonomy on some issues while elevating it on other issues. And that means it’s all going to be very political at the state, the local and the federal level. So I appreciate the out of box thinking, and I wish it had come out something other than 1:37 a.m. in a truth social rant. But if this is something that is actually put in front of Congress, it’s going to get some serious looks because this is a potential solution to a lot of the problems out there. It’ll generate its own new ones. If you start having an economic entity, a specific subsector that is allowed to generate its own power because the United States can’t do that right now. That is also going to generate concerns of oligarchy, which are reasonable. So the whole question is how is this going to be banded together? And it has to be banded together at the federal level, which again whole new series of challenges and arguments. Anyway, we’ll see where it goes. And we’ll see if Trump remembers that he said it when he wakes up.

The Turn: Demographics Meet Deglobalization

Lights going dark over a globe shot of earth

We’re living through an interregnum. The old global order is breaking down, the new one hasn’t arrived, and the transition is moving faster than anyone can comfortably track. Foundations are changing, and the consequences extend far beyond Washington.

How Will the Elections Impact Serbia and Brazil?

A ballot box with a checkmark on the paper going in it

Both Serbia and Brazil just had major elections, but neither is likely to change much. Unfortunately, these are two countries bound by their respective geographies, and it will require much more than an election to alter their trajectories.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from a foggy Colorado, it is the 26th of October, and we had a whole host of fun things over the weekend. A couple big elections that I want to talk about. 

The first one was in Serbia. Now Serbia is a Balkan country stuck in the middle of the Balkan Peninsula. It is right along the Danube and has served as a choke or a springboard for navigation and commerce throughout the region for centuries now. It used to be part of the former Yugoslavia, if you remember that one from the Cold War, which broke up at the end of the Cold War and triggered a combination of war, civil wars and secessionist wars and ethnic cleansing that killed a minimum of 150,000 people, probably a lot more based on whose numbers you’re using. 

Anyway. A guy by the name of Vučić, yes, that is mispronounced because there are way too many accents on that name. Basically lost. He’s been in charge for most of the past 30 years, directly or indirectly, or as president or as Prime minister, and he has now been kicked out of the party by a group called Student List. One of the fun things about Serbia is it has had a very, very active actually, this is the entire former Yugoslavia, very, very active student political movement and not like student movements in the United States, like the Young Republicans, that just kind of pop up in their adjuncts to the parties or in, say, South Korea, where they just like to protest, no, no, no, these guys actually have heft and they form coalitions that actually are designed to and often do, influence who gets elected and sometimes even run their own candidates as they did. This time the group is called Student List. And it’s not just a bunch of young kids or professors. It includes, for example, a former central bank chief. Anyway, Student List has won the elections very cleanly, Vučić has already accepted the results, and so they’re going to be forming a new government now with a majority of the seats in the parliament. Serbia has always kind of had its position of one foot in the west and one foot in the east. The Serbs are Slavs, and so they have always kind of served as a position for a Russian power projection into the region, up to and including during the civil and the genocidal wars in the former Yugoslavia in the 1990s. The question that everyone in Europe is having is now that the Vučić is gone, whether or not there’s going to be more pro-European orientation and a more anti-Russian orientation. And I wouldn’t bet on that. 

A couple of things to keep in mind. Number one, the population is Slavic, Serbs are Slavs. And so there is a degree of ethnic connection to the Russians. It doesn’t mean that they have to do what the Russians say, but to think that they’re just going to ignore it for the purposes of a domestic political election is a bit of a stretch. Second, what little this election has been about foreign affairs. It really hasn’t touched on changing foreign affairs. This is an election about domestic reforms and economic restructuring and removing some of the corruption from the system. You know, all issues we’ve heard before and moving on. Keep in mind that since the Yugoslav wars ended, Serbia’s kind of been on the outside. Every other member of the former Yugoslavia is well on its way to EU and NATO membership, and several of them have already made it. Serbia has just kind of been stuck in the 1990s, and it’s just had a hard time figuring out what it wants. And if all it’s going to do is channel Russian or Chinese influence, that really doesn’t take them very far, especially now that Bulgaria and Romania and Slovenia and Croatia are all in the EU already, and even places like Albania, God have made it into NATO. Anyway, their foreign policy push for the Student List is to finish the negotiations with the EU and then put it to a referendum, which, you know, duh, but that’s about all they have discussed as regards to the West, the position on, say, the Ukraine war is no sanctions on Russia and pushing for an end of the war. Not exactly a break with where we’ve been. So if you were looking for this to be a big shift, it only is if you’re interested in domestic Serbian politics, if you’re looking at the broader international field, they either are sticking with more or less where the previous government was, or they have to make it up still, it’s a new government. We’re probably not going to find out this year, but don’t expect radical changes. 

The other big one was in Brazil, where we had a bit of an upset. We had two people running Bolsonaro, who was the son of the previous Bolsonaro, who was president, and Lula, who is the same guy who was president before and before and before. This is an election that has been like fingernails on a chalkboard for me, because we’ve had Lula versus a Bolsonaro now for basically this century. And Brazil is a country that’s a little difficult to operate because there’s an uplift on the coast and all the people and all the economy is in the inland. And so getting the infrastructure to get everything out to the coast is always been a royal bitch.  And over the last 25 years, they have built more infrastructure to make it a little bit easier. But it’s still kind of difficult. And so you get this giant country with just under 200 million people I believe, that just punches way below its weight in regional affairs, much less global affairs. But everyone is convinced it’s the shit. It is not the shit. It is not shit either. But it’s not great. And an election between basically the same two cults isn’t going to do anything. I’m not a fan of either of them. The Bolsonaro family is the group that says that the real problem with the Nazis is that they were just too soft on the domestic foes. God. And then Lula is, at best a poor manager, who’s not been very good at using the tools of the state to actually push economic development. He spent a lot of money on a lot of things in Brazil for its class, you know, large, diversified developing countries, has by far the highest debt of that class. According to their numbers, it’s 82% of GDP, according to the IMF it’s probably closer to 100%. And that is arguably not survivable. That will almost certainly require a debt restructuring, probably during this next term. And we haven’t had a large developing country go down the debt tubes for quite some time now. And now that everyone in the world is facing some sort of debt crisis, this could very well be the country that ticks off that crisis. Or if it gets ticked off somewhere else. This is a country that is looking at a very, very deep problem. The Lula team has never been good at finances. The Bolsonaro team is not going to let go. And so basically we have been in this tug of war that’s kind of like the US culture war for about 15, 20 years, and it is going to continue. 

So I hate to say it, despite all the talk in both of these countries and around both of these countries about what a landmark election this was, it really wasn’t. It’s just the next step along the road in countries that were trapped by their geography. Not a whole lot has changed. Sorry.

Data Centers: A Necessary Evil…Kinda

Cooling fans at a data center

While data centers are a massive, loud, and expensive drain on critical resources, they are essential to modern life.

I’m not here to argue the downsides of data centers, because everyone knows all that; however, many people see them as just AI power stations, and that’s where I’m stepping in. Data centers touch nearly every part of modern life: research, cloud storage, social media, and so much more. Without them, life gets a whole lot slower, more expensive, and all the stuff you know and love gets much scarcer.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. And today we are going to talk about data centers. You may have noticed that there’s a bit of a political brouhaha about them, the idea that they absorb a lot of electricity and a lot of water and are generally making life loud in rural America. There’s something to all of that. I want to talk about the movement against data centers and what data centers actually do, because there’s a lot of misconceptions there. 

So first, the data centers themselves. Most of the brouhaha has to do with artificial intelligence. The core of any AI system is something called a graphics processing unit, which is a chip that is normally involved in personal computers to handle graphics processing. Ergo the name. When large language models, which are the current iteration of AI that everyone’s all gung ho about. When they got big a few years ago, the people who are doing AI were looking around for preexisting types of hardware that were good at doing multiple types of processing of data in parallel, and GPUs were the only thing out there. So most AI data centers are either going to use GPUs directly or something that’s descended from that lineage, that works very similarly, but at the core is a relatively small chip, in most cases about the size of a postage stamp, integrated and packaged in different ways. But the problem is, as anyone who has a gaming console will tell you, or anyone who runs a multiplayer computer system for games that has a lot of graphics, is that these things get hot. So normally they exist one at a time under a fan. They run for a few hours and then they turn off. But in a data center, they’re running 24/7 hot, and they typically have to be hooked up to a coolant system that for most systems is either air or water based. And those systems are running 24/7. And the return, the hot air or hot water that’s taken away is typically more than 180 degrees. So the cooling system is very power intensive, whether it’s air or water. And if it’s water based, it’s a question of whether it’s using an older system or newer system. The older systems have evaporation towers to cool off the heat. That’s where your water demand comes from. Your newer systems are more closed circuit, but you still have to fill it up with several millions of gallons of water on the front end. And then of course, there’s leakage. So there’s a constant demand, not as much as the older systems, but still very, very real. 

Anyway. Writ large, over 80% of the water use and over half of the electricity use for a data center does come from cooling, and there’s not a lot you can do in the short term to change that. I mean, you can move away from the evaporation towers, of course, but that requires different sorts of hardware and generally is incorporated into the system on the front end. They are working on new types of GPUs that incorporate the cooling into the actual chip architecture. But the first of those is not expected to come out this decade. The problem is that there’s a lag from the point that you design a chip, and then you build out the logistical system that is necessary to incorporate the chip into a data center. Years. Simply fine tuning the production cycle of a fabrication facility takes 6 to 12 months, based on the piece of hardware you’re trying to do, and then it is somewhere between 90 days and 180 days before your first production run actually generates your chip. Because once you have your silicon disk, you have to etch it and bake it and cool it dozens of times. That’s not a day process. That’s a multi-month process just for their first run. At that point, you then take your finished semiconductor wafer and you break it up into the various components. And those get incorporated into various intermediate products. That’s another 60 to 180 days. So from the point that you finally decide you have your perfect design to the point that you have enough of those finished products to put into a data center, you’re talking 5 to 7 years. That’s not going to happen before 2030 at the absolute soonest. 

So we’re stuck more or less with the environment that we have today, which means a lot of power, a fair amount of water, and the demand is very real. Some people say that the Chinese are trying to manipulate public opinion to go against data centers, and no they’re really not. The Chinese are not nearly as good at that as the Russians are. And the Russians don’t care about this topic because they can’t make any of the chips, and they’re not using any of the chips because they don’t have an AI sector, and their data centers are pretty piss poor, anyway. The Chinese do have a bot farm that has something like 200 million accounts, but only 200 of those accounts have been assigned to participate in the anti AI space. And almost all of the followers of those accounts are just one another. The Chinese just don’t understand how to manipulate a free society in the way that the Russians do, because the Russians have had a century of practice, and so it’s just really a non-factor. Most of the opposition is real. That doesn’t mean that it doesn’t cross over into other unrelated sectors. So, for example, there’s a lot of people in the green movement who see any sort of fossil fuel as a sin and data centers, because they have to run 24 hours a day, can’t just can’t use solar and wind for an appreciable percentage of their demand because it’s not reliable enough. And of course, the sun doesn’t show at night. Now you can put in batteries into a data center, and all of them have batteries, but it’s mostly for power smoothing, so there’s no interruption in current as opposed to store solar or wind power, because just the fields you would need would be immense. So most of them have to run on nuclear, which is not an energy sector in the United States. As expanding people talk about small modular reactors becoming a thing, but small modular reactors are somewhere between 5MW and 300MW, with most of them probably around 50. By the way, we haven’t built a prototype yet, so that is all very perspective. And let’s say you have 50 a 50 megawatt SMR and you have a one gigawatt data center. Okay. So you’re going to put you’re going to put 20 nuclear reactors into a single data center. The math just really isn’t there. If you don’t use nuclear, your only other options are coal or natural gas. And so you get these green factions that are opposed to data centers because of the type of power that they undoubtedly are going to have to use. There is not a single data center on the planet that runs on solar or wind at all, and there won’t be ever, unless our nature of what solar and wind can do changes are a bit, a lot, radically. That’s also a problem for a different decade. 

Okay, so that’s the front end. Now let’s talk about what the data centers actually do. Just because opposition is real doesn’t mean it’s not without consequence. So let’s break this into three big categories. First, the things that you might not have thought of but are probably not a reach for you. Big data processing and obviously artificial intelligence in that category. But so is graphics processing. So is any type of research. So is climate modeling. It used to be that you would have a mainframe or a series of servers in your company, and you would use them to do the big data heavy work, and it would take hours for them to crunch the numbers. That has all been offloaded to data centers now. When people talk about the cloud, the cloud is 100% data centers. So whether you’re saving your own files or you’re doing a climate model, or you’re in the energy sector and you’re trying to figure out how to frack a well more effectively, or are you doing biological research, every bit of that isn’t just stored in data centers. It’s processed in data centers. And it has been for years. The second category are things that you probably realize already. Your email. Anytime you use your computer to send or receive any information, whether that’s for an insurance claim or for personal use, all of that is going to be using a data center. So for whatever reason, we don’t have enough data centers. All of a sudden you have to do all your computing and storage local, and that’s an order of magnitude more cost for you. One of the reasons why laptop computers have kind of faded in terms of general use is a lot of the tasks that they used to do have now been offloaded to the data center sector and aren’t being done at all. So think of all the accounts that you have, for example, for your bank, for your fire insurance, for your home insurance, for your mortgage, for your checking account, for your savings account, for your debit account, for your credit cards. All of that is done almost 100% in data centers today, which means we get to a third category. The things you probably haven’t thought about. Anything that can be turned into zeros and ones now largely has been. So. For example, it used to be that you had a phone and you had a phone line. Well, once we switched over to cellular communications, your phone handset turns your voice into a series of zeros and ones and sends it off to a tower. That tower sends it to a data center. That data center routes it to a different tower. And that tower then beams those zeros and ones to whoever the receiver of the call is. Basically anything you do on your phone, no matter what it is, including voice. It’s now processed through a data center. So that’s your entire social media history and participation. That’s every app you have, regardless of what it does. Now it is something that has been digitized, and you have to apply that thought process to everything in the economy. If you go back to, say, the 50s and the 60s, well before data centers, everything that involved interaction among companies was done on paper. So just to pick one example, your grocery store, every day, they would go through and do inventory and figure out what they needed to order, and they would put it down on paper, and that paper would be physically handed off via the mail to the person who would then fill those orders and send it back and stock the shelves. By the time you got to the 70s and 80s, that paper had been partially digitized via the fax machine, but everything still had to be done manually, and something like 10% of the American workforce at its peak was involved in this sort of data processing, which was really just putting pen to paper and then sending it off in some way. So once we got to the digital age, we started transferring all of this as the zeros and ones. And once faxes started to give way to email, we started sending them as attachments or now eventually just an app process. And so anytime your at a grocery store and you buy something, it no longer has to be manually counted. The system itself says, okay, you just bought two things of yogurt and a thing of eggs that goes back to the back room where they tallied up moment by moment. Where they set thresholds. We’re like, okay, if we keep going at this pace, we’re going to write out of yogurt in three days, in eggs in four days. So let’s preemptively place an order that’s all automated. It’s all done through data centers. 

So if you want to go into a world without data centers, you have to consider what you’re giving up. Everything that you can now do at home. You will probably have to go in and communicate with a real person. Anything that is digitized. You’re gonna have to do with paper. And so for things like, say, grocery stores and anyone who has to deal with inventory, you’re talking about needing literally millions of workers to do very, very, very painfully low value added jobs where minimum wage wouldn’t begin to cover the cost of those people. So you’re talking about slower service, like by weeks, you’re talking about less product variety, you’re talking about longer lead times and basically condemning 10 million Americans to have jobs that have no value add. So do data centers have negative effects? I’d never try to argue against that point, but keep in mind that without them and without their ongoing expansion, you really are talking about dialing back the clock to where we had a far lower standard of living and far lower personal incomes.  

I will note a couple of things that are exceptions. Health insurance is still done the old fashioned way, which is one of the reasons why we all hate it so much. So keep that in mind. If you want your experience with your insurance company to become the norm for your entire economic life, then a world without data centers is exactly what you’re after.

Oil Pricing Is Going Crazy

Gas pump displaying prices

Oil prices are going crazy, and the current price of ~$105/barrel doesn’t even account for all the additional costs incurred along the way.

Additional costs were once only a few dollars per barrel, but they have risen to over $40 in some cases. This has been caused by the Russian sanctions and Iranian attacks in the Persian Gulf, which have forced sea-to-sea transfers, increased tanker costs, and jacked up insurance costs.

Oil markets are continuing to become more regionalized, and the now-widening price differences could eventually turn into supply disruptions if we don’t get this shit-storm sorted out soon.

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. And today we are going to chat a little bit about how oil is priced, because it makes a big difference in where we are with the world starting to spin apart. Normally everything from the production at the wellhead to the transport to maybe initial processing to getting on a boat is all kind of lumped into the price. And so in the cases of the Persian Gulf, that’s coming out to about $105 a barrel, recording this on the 18th of October, but that’s not necessarily the price that you pay. That’s the price that you pay when you pick it up. But if you have to pick it up through some sort of convoluted system, that’s a surcharge. You can have surcharge, insurance costs. And then of course you have to get it to your end destination. Usually all of that combined is minor is only 2 or $3 a barrel. But that’s not the situation we’re in right now. We’ve got a couple of major things going on. 

First of all, because of the existence of the shadow fleet in Russia, crude is no longer transported by its shortest possible route by pipeline from, say, the western Siberian fields to Europe. Instead, it’s loaded onto tankers and the black and the Baltic Sea. It goes around Europe. Sometimes it goes around Africa. It certainly goes around Southeast Asia in order to reach India and China. That adds a journey that’s roughly the distance of sailing all the way around the planet. That’s a surcharge. In addition, because you need more tankers to take the same amount of crude to their destination because you’ve got this long route, all of a sudden tanker rates start going up. And then, of course, the second big thing is what’s going on in the Persian Gulf, with the Iranians hitting tankers going to and from the Persian Gulf and occasionally hitting infrastructure elsewhere in the region. That means that the Saudis, the Emiratis, the Kuwaitis, the Qataris are all loading up crude on their own tankers, turning off their transponders, sailing dark into the Arabian Sea and then doing a sea-to-sea transfer to other tankers, which means even more tankers are used, and they’re doing so in a way that causes insurance rates to shoot up. So basically what we’re looking at is on a global basis, most of this long haul transport has added at least $25 a barrel to the price of crude that you don’t see in the daily metrics, but the people on the receiving end have to pay it. In India and especially China and Japan, in many cases, especially if you’re talking Persian Gulf crude that has now surpassed $40 a barrel. I mean, simply doing that little shuttle out of the Persian Gulf into the sea-to-sea transfer, typically it’s 20 to 25, and that assumes that nobody is shot at that week, and everyone’s been shot at at every week for the last 30 weeks. 

Anyway. If you’re lucky enough to be in an area where this isn’t relevant, like, say, West Texas, you’re selling crude on the international market for about $100 and your transport costs are minimal. Sometimes it gets a little bit too safe. So, for example, West Canadian Select out of Alberta is selling for only $75 because it’s just piped to the mid-continent part of the United States. So you can have countries that are not anywhere near the danger that do profit, like, say, the United States, and that don’t profit from the change in circumstances like Canada. 

Anyway, I could do a thousand videos on how all gets weird when you start messing with things, but the bottom line is, we’ve seen a severe break in the security environment that allows the market to function, and even without the Ukraine war getting any worse. And you know, shocker, it’s getting worse. We’re looking at these price differences widen massively. And by the time we get to the end of the year, unless something is resolved politically, we’re going to be looking at outright breaks in supply lines.

The Great Oil Split Has Begun

An exploding vintage oil can

Global oil markets are beginning to fragment, and with each added layer, the likelihood of returning to a global unitary price for crude gets further away. But this oil split isn’t hitting everyone the same…

As tanker shortages and security risks make long-distance crude shipping increasingly expensive, regions like Europe and Northeast Asia will be forced to pay whatever they must since they have limited alternatives. However, North America will likely benefit from a surplus of cheaper energy since the crude can’t make it anywhere else.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from a drippy, foggy Colorado. And today we’re gonna talk about the oil markets. Specifically, we are seeing ever widening spreads between the prices of different crude grades. Specifically, you’re looking at things like Canadian crudes all of a sudden trading at a significant discount to everything else. You’re also seeing similar things like that in smaller, crude grades that come out of places like Africa, whether it’s North or sub-Saharan. And the problem is transport. You see, under normal circumstances, when you have a wide spread between prices in one continent versus another. Tankers show up to take the crude from places where it’s cheaper to deliver to places where it’s more expensive. And that ensures a certain degree of balance in the market and keeps global energy prices more or less unitary. That is now ending with huge implications for the sector. 

So we’ve got three big things going on. First of all, of course, is the Iran war and what’s going on in Persian Gulf. In order to get crude out of the Persian Gulf and not get hit by Iranian attacks with the Saudis and the Emirates and the Kuwaitis and the Qataris and the Iraqis are doing is using their own internally owned tankers to load up, turning the transponders off, sailing out of the Gulf, dark, and then doing a ship to ship transfer on the other side. What this means is it basically almost doubles the amount of time that it takes to get a tanker from the point of supply to the point of demand, because you have to do a transfer along the way, which means you need twice as many tankers to service the same route. And with the Iranians now expanding their attacks to areas that are not necessarily in the Strait of Hormuz, they’re going to have to go further in order to do the ship to ship transfer, which is going to require even more tanker days in order to compensate. And that’s before you consider what’s going on in the Red Sea with the Houthis, which is generally a somewhat similar problem. So, number one, it’s hard to get the crude out in this environment. And number two, getting it out requires an additional 10 to 15 to maybe even $20 a barrel in order to compensate for this last step. And all of that is absorbed with more risk and especially more tankers. 

The second one, of course, is the Ukraine war. The Russians under sanctions that used to send most of their crude to Europe by pipe that has now stopped, which means they have to load up in places like the Baltic and the Black Sea with tankers, and then ship them around Africa or through Suez all the way to East Asia or South Asia, basically required a huge number of tankers to handle something that used to not even be done by tankers as well. And that is driving up the split. 

And then third, because the shadow fleet exists and now it’s probably one fifth of all tankers out there. People haven’t been investing in new tankers because there’s a huge volume. But all of these issues are now kind of coming to a head. 

The biggest one, of course, is in the Russian space. The Ukrainians have now demonstrated a capacity to hit tankers and ports and critical nodes, like pumping stations, with such alacrity that we’re seeing the Russian crude, the Urals blend, basically disappear from the market. That opens up a problem because all of a sudden, with that crude gone, those tankers have to do something else. Or more likely the Ukrainians are now starting to damage them and remove them from the fleet completely. You remove the tankers and then all of a sudden it’s not an issue of high versus low prices, it’s can you get a tanker or not? And the Persian Gulf, with the Iranians now going further abroad, similar sort of problem, but with more legality. And if you want to start building a tanker today, you’re not going to get it before the end of the year after next. 

So what we’re seeing is long haul shipping not disappearing, becoming so expensive that these spreads are getting wider and wider and wider. It doesn’t affect everyone equally, and it really depends upon what your destination market happens to be. So if you’re, say, in Africa and you’re trying to just get your crude to Europe, that’s not a big haul. If you’re trying to get from Venezuela or Colombia to the United States, same thing. So you’re not seeing the spreads open up with those crude grades as much as you are, say, with Canadian Select, which all of a sudden only can be shipped by pipe to the United States. And this has got to be frustrating. They spent a decade trying to get a pipeline to the Pacific. It’s finally open, and all of a sudden the tanker rakes means it’s not viable to ship the stuff to Asia. Some of it has to go anyway. So, for example, if you’re Persian Gulf crude going to Northeast Asia, I mean, the Northeast Asians don’t have any other alternatives really, so they have to pay whatever they have to pay. 

What we’re seeing is the early stages of some very, very hard splits in the markets, with the United States basically trading in a situation where it’s either domestically supplied. The Canadian crude has nowhere to go, so it’s sold at a big discount in the United States. The Venezuelan and the Colombian crude has nowhere else to go. So it’s being sold at a slight discount to the United States. And then the Eastern hemisphere just kind of implodes, because if you can’t get the crude from supply to demand, and if you don’t have an alternative for that crude, which for most products there just isn’t one, then you’ve got to pay whatever you have to pay. So the long term forecast here is something I’ve been talking about for the better part of the last decade, with the United States basically having a functional ceiling on its energy prices of around $70 because all of its fields are viable at that level. And globally, you probably have a double the North American price in places like Europe and triple or more in places like Northeast Asia, because there just aren’t any alternatives, whether it was war that was destroying the production sites or now disruptions in the tanker market that is getting us there, it really doesn’t matter because all of this is going to happen more or less at the same time. 

Remember that the Iranians have demonstrated they can shut down the Persian Gulf energy complex very easily, and the Ukrainians are demonstrating that they can shut down the shadow fleet in the Russian energy complex a little bit more difficult, but well on its way. So we’re looking already conservatively at over half of the world’s globally traded crude vanishing. At the same time, we have a tanker crisis. We’re only at the beginning of this, and this is going to be the norm for the bulk of the next 20 years.

Ground Drones Hit the Frontlines in Ukraine

Gladiator Tactical Unmanned Ground Vehicle at Redstone Arsenal | Photo by Wikimedia Commons https://en.wikipedia.org/wiki/Gladiator_tactical_unmanned_ground_vehicle#/media/File:Gladiator_240G.jpg

The Ukrainians have introduced ground drones to the battlefield, attacking Russian positions and disrupting logistics. This is yet another innovation emerging from this war that is shaking up how wars will be fought.

These ground drones have been used in frontline attacks via fiber-optic cables, as well as being dropped behind Russian lines by aerial drones. These ground drones offer new ways of targeting vehicles, supply depots, and other logistical targets.

Like all wartime innovations, it won’t be long before the Russians and others replicate this tech. And the prospect of having to deal with mobile IEDs is pretty damn scary.

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Transcript

Hey everybody. Good morning from Colorado. Peter Zeihan here. And today we’re going to chat about a new innovation that the Ukrainians are using on the front in the war ground drones. Now when people think about ground drones, they naturally think of some sort of early version of The Terminator, you know, a giant track thing with giant machine guns that just plows through human formations. That’s not what’s in play here. These things at max are about 90 pounds, usually about half that. And they look honestly a little bit like some of the little off road radio controlled toys that you might have used as a kid. You got a photo of a couple of the models here. 

They’re used at the moment, it seems, in two different ways. The first one is for direct assaults on Russian positions, and basically they just drive up and explode. So, you know, think of tremors if you remember that movie. Alternatively, a heavy bomber drone, which the fact that heavy bomber drones even exist, heavy bomber drones can carry 90 pounds, ergo the limit, and they drop them behind enemy lines to attack vehicles and logistical support. Now I’m reading between the lines here, because the Ukrainians are not talking a lot about the details of these, because it’s a new weapon and it’s in operational use. And every place they’ve used it, they’ve surprised the hell out of the Russians. But it appears that the ones that are used for the direct ground assault on the front itself generally have fiber optic cables trailing behind them. And by doing that, they can’t be jammed. But it also means that their range is very, very limited and their maneuver is limited. Because once you start dropping a cable behind you, too much maneuvering and you’re going to get tangled up and it become useless. The big advantage of ground drones over air drones in this sort of operation is they can park and wait for hours, for days. Normally, an air drone is only going to be aloft for a few minutes, maybe as much as an hour. When you talk about the ones that are targeted to the front, but this way you can position things slowly ahead of time and then come back and activate a whole slew of them and just obliterate the Russian position in concordance with direct aerial attack and humans and maybe even tanks. 

The ones that are dropped behind enemy lines are really interesting though. Remember, the Russians are the best in the world at electronic warfare. And so one of the problems the Ukrainians have, especially on the front line, is getting through that. And that’s why those tethered drones, the fiber optic drones, exist both for ground and air units. But once you drop it off behind enemy lines, there is no way that you can have a digital tether to it. You’re talking about 5 to 15km behind enemy lines. A couple of things they have going for them. Number one, E-W is normally directed forward and up because they’re worried about communications and the worry about aerial attacks. It’s not necessarily going backwards and down. And so it is possible for the Ukrainian ground drones if they’re dropped behind enemy lines, literally sneak up behind the Russian positions in places where there’s more powerful EM, where it’s really more of a dome. However, that still won’t work, and you still need to control this thing. There is no sign at present that some of the memory drones that are capable of limited decision making are implanted into the ground units, because there just isn’t enough pilot data to really work with. So you do have to have a communications. So it does have to be outside of the EM bubble. That suggests that they’re using another aerial drone as a relay when they activate these things, but then they’re going after trucks on roads and tanks and depots and things like that that are well behind where you could reach with front line drones or artillery. And in doing so, it appears over the last several weeks, the Ukrainians have just completely gutted the Russians ability to supply parts of the front. 

So you can combine that with deeper strike drones, air drones, that are hitting things 100 and 200km behind enemy lines and basically the entire front section of the Russian front, the last 100-150km has become a no go zone for anyone who doesn’t have strong EM, and that has made resupply impossible. And that in at least in part, explains why the Ukrainians have made so much progress actually retaking territory throughout September. 

As with all technologies like this that are really just based on putting old parts together in new ways, you shouldn’t expect this to be a perennial Ukrainian advantage. Probably by this time next year the Russians will be using them. But you also have to consider that the technologies here are not going to be limited to the Ukraine front of the war between Russia and Ukraine. We’ve already seen some of those memory drones leak out and be used by the Iranians. And probably very soon the Houthis. You start applying the same logic to the ground drones, and we’re talking about a new sort of warfare emerging that is going to make it very difficult for any sort of projection based military to push force somewhere else. So just to pick a topic, the US Army, the hardest thing they do is the logistical supply to keep their forces operating. In Afghanistan, that required daily convoys of diesel trucks going through Pakistan, for example. In an area that is saturated with aerial drones, especially now ground drones, that becomes impossible because it used to be that they would have to worry about things like IEDs on the roadside, and that required certain techniques in certain vehicles and certain detection methods. If you’re dealing with a ground drone, it’s an IED that can move, and all of a sudden the entire supply system for what the US did throughout the war on terror just isn’t viable. And we’ve got to find a new way to do everything. We’re not going to figure that out in six months.

Should the U.S. Military Invade Yemen?

A US military soldier in fatigues with weapon slung on his back

I’ve got a bit of a loaded question for everyone today: should the U.S. military get involved in Yemen?

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from a warm Colorado autumn afternoon. Today we’re taking a question from the Patreon crowd. Specifically, is the United States about to get sucked into a fresh war in the Middle East in Yemen? And if so, is that something we want? 

Yemen is a mountainous country in the southwestern extremity of the Arabian Peninsula, and like all mountainous areas that get enough rain to have a population, that population tends to be a little ornery. So basically think of it as Chechnya or Scotland or West Virginia, just warmer. And it has rebelled against whatever the order has happened to be in the region, at least since the time of the late Egyptian pharaoh. So at least 3000 years ago. It’s been a problem for everyone who’s been the major power in that area. And so this is no surprise. That also gives you an idea of how durable the rebellion can be. 

Let’s talk about the strategic picture in Yemen. And then we’ll talk about what we’re up against now. So strategic picture is that these people live in the mountains. They’ve got wells, so they have enough water for what they need to do. And they have a cash crop and something called Qat, which is water intensive and is drying the country out. And it’s basically a mild narcotic. So everyone in Yemen is stoned a lot. But the people who are in charge, the ones that are problematic, the Houthis, have enough territory that even if you have a collapse of the water table, it’s really not a problem. What we’ve seen in recent weeks is they’ve taken over a lot of the coastal territory, which a lot of people are like, ooh and ahh, and this is bad because they can threaten the strait, but they were threatening the strait before. They’re using primarily missiles and drones that are wholly provided by the Iranians. Yemen has no indigenous manufacturing capacity itself, so it’s basically just assembling kits under Iranian direction. And that means you’re talking about weapons systems that have a range of over 100 miles. They don’t need the coast to fire. I mean, yes, they could have people that can go and see, but you don’t actually have to have physical control of the entire coast to do that. You just need one guy with a pair of binoculars and then, you know, maybe look at the satellite feed. So if you went in and kicked the Houthis out of the coast, it really doesn’t change the picture. You would actually have to go into the interior, into the mountains and fight. Which means that if your goal is to root out this specific problem, you have to invade a country with 30 million people, I believe it has, and occupy enough of it that it can’t be used as a base of operations for forces like this. That means you’re combining kind of the worst case scenarios of Afghanistan and Iraq into single fun fight. Now, raise your hand if you want to go back into those two countries. That’s basically what we’re looking at here. It’s just that Yemen, unlike Iraq, doesn’t even have decent infrastructure that U.S. forces could operate from. And it has all of the twisting, the turning supply chain problems because of mountain roads that Afghanistan had, so, you know, no fun at all. 

In addition, Yemen threatening gulf infrastructure, gulf shipments and Saudi Arabia, if you remove it from the equation completely, you haven’t solved any of the problem. Keep in mind that these weapons systems that the Iranians are sharing have a range of about 600 miles, and they’re pretty basic. You could see that expanded in the future, but 600 is plenty. And if you look at the attacks that have happened elsewhere in the region, as we know from the war with the United States in February and March, April and May, the Iranians can already hit everything in the region. And as was underlined just last month, the Iranians still have influence in southern Iraq. And so recently, there was a drone and missile attack on what’s called the East West pipeline, which takes Saudi Arabian crude from the Persian Gulf across Arabia and into the Red Sea. Anyway, an attack from Iraq is the one that damaged it and took it offline for a couple of weeks. So even if you take Yemen out of the equation, you would then if you really want to secure the area, have to go and do the same thing for Iraq again. And even that won’t fix things, because these weapons have more than enough range that can be operated from Iran direct. During the war, on multiple occasions, the Iranians hit sites on the Saudi coast of the Red Sea. So all of this is in range from multiple places. 

So you’re really talking about doing something that’s significantly more involved than what we did on the global war on terror and having to physically occupy Yemen and Iraq and Iran all at the same time. So, no, I can’t say that is something that I would recommend. The flip side, of course, is if the US doesn’t do something like this, then there is no military solution whatsoever to secure Persian Gulf energy. You basically have a really ugly choice to make. You make a political deal with Iran that allows the oil to flow, and that means giving Iran a whole lot of things that it wants that the United States has been fighting to not give it since the revolution back in 1979. Or you walk away and just realize that the Middle East, you can’t do anything with it, you can’t control it, you can barely influence it. And the crude isn’t going to flow unless the Iranians cut deals then with individual powers in the area. So it’s an ugly, ugly, ugly situation. And Yemen just underlines just how ugly.

Does China Have a Succession Plan

Flag of China woven and waving

Concerns over Xi Jinping’s health have begun to spread following his appearance in Washington. Beyond the obvious question of how Xi is doing, let’s discuss the Chinese succession plan if Xi kicks it.

Unfortunately for China, there’s not much to discuss here. When you have a leader who has hollowed out every meaningful institution in the country, it’s kind of tough to come up with a solid successor. Expect regional fragmentation, widespread instability, and economic turmoil.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. Today we’re taking a question from the Patreon page, specifically at the recent summit between US President Donald Trump and Chinese Chairman Xi Jinping. Xi didn’t look that good. How bad is he? And what’s the succession plan in China? It’s like, well, let’s start with the first part there.  

Yeah, he looked bad. He was in the white House, you know, for quite some time. But over two thirds of the time he was there, he was in a separate room with just his wife basically recovering. Of course, none of that made it into Chinese media. Everyone just talked about how she outsmarted and outlasted Trump in every possible way, because that’s what propaganda looks like. Anyway, of the hours that he was at the white House, they had very little contact. I mean, there was the dinner, there was the tour, and then there were a couple of short meetings. And honestly, that was it. Not a lot was discussed because there wasn’t a lot of time to discuss it. And the deals that came out on the other side were pretty milquetoast. And then he was hustled back onto his plane and flown home. I think he might have gone via Canada anyway. He didn’t have a particularly robust social schedule. And whether you want to view that as a repudiation of Trump, which is fair, or you can review it as the fact that he’s physically just not up to it, which is also fair. Remember, this guy’s 80. So do you think that he’s in there for the long haul is probably a stretch. 

Anyway. The problem we’re going to have in China is that there’s there’s nobody to take over. China’s a big place, bigger than the United States. Lots of people, lots of different geographic subregions and lots of barriers between them. So historically speaking, China is kind of fallen into two categories. Either it hypercentralizes like it is now to the point that the bureaucracy is damaged beyond repair, the military stops functioning, and eventually this over centralization leads to a broad political, economic and social breakdown which we’re headed for. Or the regions grab as much autonomy as they can swallow, and basically start functioning like independent states. And eventually you get a widespread civil war where the center tries to reassert control, or the regions go to war with one another. It’s another viable option for where we’re headed. The difference this time is because China is so dependent on the rest of the world for the inputs for, say, its food supply, but also its manufacturing system also to keep the lights on. We’d be facing a deindustrialization breakdown at the same time. The only way you might, might, might, might be able to hold that off is to have a strong ruler. Somebody kind of like Xi, who can hold the system together. Here’s the problem. Ever since he came in 14 years ago now, Xi has gone after those people, put them in prison, executed them, exiled them, intimidated them into silence. And so whether you’re looking at the educational system or the media or the business community or the military or the state apparatus, all of it has had its teeth ripped out to the point that all it can do is offer milquetoast praise of their great leader. So if Xi were to keel over tomorrow, there simply isn’t an institution, much less a personality, who could potentially step forward and take over his role. And even if there was, so much competence has been deliberately bled out of the system that whoever this person is probably wouldn’t be able to rule competently anyway. Think of China as a ball that’s been tossed up, and it’s at that moment at the high. Where it’s just kind of rotating and everyone’s kind of looking around like, oh shit. 

Historically speaking, when China loses a ruler who’s of the centralized type, it’s a generation of freefall and a civil war and a famine before the system starts to stitch itself back together. You’re doing that today in a backdrop where Chinese industrial dependency and agricultural dependency is so huge that the population adjustment conservatively will be half the population, that assumes it can recover on the other side of this. So the leadership issue is just one more problem the Chinese have that they have to deal with over the next 20 to 30 years. The best case scenario is that Xi becomes the new Yeltsin or Brezhnev, and remains just alive enough that he can be propped up in a chair and wave to the crowd every once in a while. While everything slowly disintegrates around him. The problem, of course, is that information control in China is very, very tight. And if we can’t get reliable population numbers or GDP numbers, we sure as shit can’t get an accurate read on Xi’s health. So, all of this is reading between the lines and looking at historical examples, and not one of them looks positive.

China Gets a New Base in Southeast Asia

Chinese troops in formation and in camouflage fatigues

The Chinese are laying the groundwork for a new overseas military base in Laos. What makes this so special? Well, it would be the first foreign base that China can reliably supply without heavy dependence on other countries. And it would enable greater power projection across mainland Southeast Asia.

But there are some caveats. This base would be hard up against the Thai border, and for anyone who lacks regional knowledge, Thailand isn’t just some pushover country. It has a longstanding history of independence and a military to uphold that. Regardless, China’s base could significantly alter the region’s strategic balance.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. It’s a nice fall day. Figured I’d get out and stretch the legs. Today we’re going to talk about a new development in Southeast Asia. It appears, I don’t want to overplay it, but it appears that the Chinese are laying the foundations for their first overseas base that they can actually supply without outside help. Keep in mind that they only have one until now. And that one is in Djibouti. It’s part of the whole anti-piracy operation, but that is completely dependent upon countries like Vietnam and India allowing their navy to operate unfettered, and the United States even facilitating actively Chinese supply lines. They just they can’t project power that far.  

The new one is in Laos, a country in Southeast Asia. It’s landlocked. It is. Let’s be kind. It’s a failed state, and the only reason that it even gets talked about at all is because Chinese investment basically controls it. Chinese security forces basically run the intelligence services. It is not an independent power in any stretch of the imagination. It’s much more under the Chinese thumb than, say, Belarus is under Russia’s thumb, for example. Anyway, it’s landlocked. It’s got Vietnam on one side, Thailand to the south and Myanmar to the west. And so what it really has is strategic position among countries that really matter now and will really matter in the future, because if you look forward 10, 20, 30 years, these three countries, Vietnam, Thailand and Laos have a combination of industrial capacity and geographic potential and for the most part, a good demographic structure. So they’re going to be major industrial powers moving forward. Anyway. The new base is just south of Vientiane, which is the capital of Laos, and it’s basically hard up spitting distance of the Thai border. And with the air base, it seems to be under construction. Satellite photos have shown a number of Chinese aircraft that have been there, and not just overnight. So it’s not an exercise. The Chinese would be able to project power really throughout land based Southeast Asia, which is something that could be a problem for anyone in the area. Pros and cons from the Chinese point of view, pros of course, is the new reach that they have and turning a client state into a military satrapy. Not a bad idea. Cons. The country that this is on the border of is Thailand, and Thailand is arguably the most capable country in the region from an economic and from a security point of view. So if you put an air base hard on the border of a country that actually has a functional army, if you ever use that air base, you’re going to be hating life and the not too distant future. Also, keep in mind that Thailand is not a normal country in many respects. It’s not that it’s pro-American, although as a rule it is. It’s that Thailand has a deep cultural muscle tone that isn’t just part of the post-World War II era. Even at the height of the Age of Empires in the colonial age, Thailand was never fully colonized. The core of it, including right up to the border that this base is now on, always remained under domestic Thai control. 

So if the Chinese were looking to pick a fight with someone who can fight back, they picked well. And if they’re looking to undermine a country, this is the one they have to undermine. So one way or another, this is really colorful, and I don’t think we’re going to have to wait more than a couple of years to see how Thailand and other countries respond. 

That’s it.