Moving Beyond the Patriot Missile

A patriot missile being fired

The U.S. is hesitant to allow Ukraine to manufacture Patriot missiles locally, partially to protect U.S. military IP, but more so because it doesn’t want Ukraine to do it better. The reality is that highly sophisticated weapons like the Patriot aren’t the right tool for modern warfare.

Sure, in an American-led globalized system, these weapons are the cream of the crop. But that’s not the world we live in anymore. $4 million price tags and complicated supply chains are no longer viable. Modern wars require cheap weapons that are easy to produce locally at scale, like the drones we’ve seen across the Ukraine War.

Prefer to read the transcript? Click here

Transcript

Hey everybody, Peter Zeihan here, coming to you from near the trailhead of Sherman Sheridan in the Mosquito Range in Colorado. Took me so long to find a place without wind. Anyway, the news today is kind of all over. Specifically, I want to talk about defense contractors. We have a situation where it’s leaking out that the United States Trump administration, Donald Trump specifically, is unlikely to allow Ukraine to license production locally of Patriot missiles. The reasons that were given. The first one that is being said out loud is intellectual property protection, which is reasonable once you hand over the plans so that somebody else can make them, somebody else has the plans. The second one that is being said behind closed doors, that is probably more compelling for Donald Trump, is that if Ukrainians learn how to make these things, they’re going to iterate them and they’ll learn how to make them cheaper, faster and probably better. 

And that makes sense, because Ukraine was the node of aerospace and rocketry for much of the former Soviet Union, and that’s been applying those skills in real time to the war technologies that they’ve been developing in the last four years. And obviously, many of their weapon systems, most notably their drones, are now light years ahead of anyone else on the planet, including the United States. 

And so to say that they couldn’t apply aerospace and rocketry technology to what is ultimately a rocketry question is obviously silly, but as true as that is and as much as that is likely to be the rationale for Trump ultimately denying the Ukrainians access to the plans. It’s kind of missing the point. We’re at a point here where we’ve got two reinforcing and contrasting trends. The first is deglobalization, and we’re losing access to the global supply chains that allow sophisticated equipment to be made. So, for example, when people talk about AI weapons, they’re probably blowing smoke out their ass. Because the technology just doesn’t exist yet. High end chips. Things below, let’s call it seven nanometers that are etched into silicon. Just can’t deal with heat or stress or shifts in momentum or vibration. You know, all of those things happen a lot when you’re dealing with military equipment. And these supply chains are fragile, so it doesn’t take much of a deglobalization event for them to break completely. Now, military folks get around that by using special materials like gallium when making the chips instead of silicon. The problem is that the gallium supply chain is also very vulnerable. So the idea that the United States is going to be able to keep making these high end weaponry systems is itself kind of a stretch. 

Second problem, the United States is unique among all of the major powers in history, and that it basically has a hemisphere to itself. Ever since reconstruction and the Spanish-American War, there really hasn’t been a major power that has a sufficient footprint, much less a native presence in the Western Hemisphere to challenge American security dominance in a meaningful way. 

And that has allowed the United States military to develop differently from everyone else’s. Everybody else, whether you’re a naval power or a land power, ultimately you have rivals that are relatively close. And so your military technologies that you develop, the military systems that you field always have a degree of short term desperation built in. The United States has never had to worry about that unless we’re in a long, protracted, hot war like, say, World War Two, we develop our weapon systems based on the idea that the homeland is fundamentally safe and that we just need to project power across the ocean. So our systems tend to be far more durable. They tend to be far more technologically advanced. They tend to be expensive, but they have reach and lethality that nobody else has. Because everyone else is worried about bringing large numbers of relatively disposable things to the fight as soon as possible. All right. We’ll finish this in a minute.  

Okay. Had a hard time finding a place without wind. So here we are from the Colorado Intermountain above Fairplay, Kenosha pass. Where was I? Basically, we’re dealing with a changing environment in which the defense systems that were maintained by the global superpower and basically maintained during the Cold War in the post-Cold War era aren’t applicable anymore. The new weapon systems are simpler to build with more basic technology, whereas the more advanced systems that the Americans rely upon require global supply chains. And so we’re going to see a complete overhaul in how we handle defense over the next five, ten, 15 years. And the Patriot missile, while it is today by far the best anti-missile system on the planet, is probably going to lose that position. 

If the Ukrainians are even mildly successful, they’re going to be able to drive down the price of the Patriot. Right now, it’s about $4 million a pop. The people who make the patriot of the United States say they’re going to offer a lower tier version that’s about $2 million a pop. The Ukrainians need to get down to that, to a quarter of a million, a pop maximum. Otherwise, it just doesn’t serve the purpose in this new era where you can spam somebody’s defenses with just thousands, if not tens of thousands of attacks. There’s one more thing to keep in mind. The US is the late comer to this technological revolution, in part because of policies out of the white House and personalities and the Defense Department. The United States is not fully engaged in this new era, and is being very slow to embrace drones as the new way of doing things. That’s going to change dramatically as the rest of the world basically skips by the United States, which means the United States is going to discover waves and waves and waves and waves of hostile drones and multiple powers, some of them allies. And it will not have enough patriots for all of its needs. And it certainly won’t have enough patriots for all of its allies. So we’re probably very close to the final delivery of American patriots to anyone, not just Ukraine. And once that happens. Well, pace of anti-ballistic missile technology is going to skyrocket because everyone will be researching an alternative.

A Post-American Alliance for the Middle East

Map of the Middle East

Pakistan, Turkey, and Saudi Arabia are entertaining a NATO-style mutual defense pact. While this alliance might not be practical at this moment, it’s a much different conversation in the long run.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here, coming to you from Colorado. It is the 10th of August. And the new news is that over the weekend, representatives of Pakistan, Turkey and Saudi Arabia met in Mecca and basically tried to build the local equivalent of NATO, complete with a joint defense clause where an attack on one of them is an attack on all of them. 

Obviously, Iran is the boogeyman in the room at the moment. So let’s talk about how this at this moment in time, is kind of silly, but if you look forward a few years actually makes a lot of sense. So first the silly. Saudi Arabia obviously has been heavily involved in the war with Iran and has had any number of his physical assets for oil production, transport and refining attacked. And it’s been partially flanked by the Houthis, which are basically an Iranian proxy. So there is no part of Saudi Arabia that is safe from the drone and missile attacks the Iranians have been lobbying these last six. The idea that they would want a security pact with a country that’s not the United States makes a lot of sense, because the United States started this war, prosecuted this war without any consultation with the Saudis, and now looks to be getting bored with the war and is likely to just leave. And Saudi Arabia has to figure out how to live with that. 

On the other hand, you’ve got Pakistan and Turkey, which, while they don’t necessarily have friendly relations with Iran all the time. They don’t consider it a hostile state in the traditional sense. Yes, they’ve got some security issues. There are ethnic Kurds living in the border region between Turkey and Iran, and both sides try to stir up problems for the other one on the other side of the border. And the Baluchis are the problem on the border between Iran and Pakistan and basically the same math flows. But Iran and Pakistan don’t nearly have the kind of death grip on relations that the Saudis have. And anything from the Iranian point of view that gets anyone else collaborating with or with the United States is generally not a good thing.  

The Iranians are a lot like the Russians, in that they may have a lot of power, but they’re certainly not able to dictate a solution. So keeping everybody else broken up makes sense. And this agreement certainly doesn’t work for that. But keep in mind that the other countries have other things going on that the others want nothing to do with. 

So Iran is the issue of the moment. But, you know, if you’re in Pakistan, your only issue that matters is India and the Turks and the Saudis want nothing to do with a fight with India. And if you’re in Turkey, you’re either wrestling diplomatically and economically in culture with the Europeans or you’re getting ready for a fight with the Russians. And that is something the Saudis and the Pakistanis want nothing to do with either. So at this moment in history, the idea that this is a tripartite alliance where one of them will bleed for the other two is honestly kind of silly. And the Iranians have already kind of called it that. But if you step back a little bit and take the longer view, the picture changes. 

Regardless of why the United States is removing itself from a lot of the Eastern Hemisphere. You can make the argument that I’ve been making for some time that for reasons of demographics and geopolitics, the U.S. is entering a more retrenched phase. You can look at what the Trump administration has done is basically spent most of our long range weapons making it almost impossible for us to fight a real war in the Eastern Hemisphere now. 

Regardless of the cause, the United States’ position is the determinant of what happens in the Persian Gulf, is fading very, very rapidly and will probably collapse before the end of this administration, if not the end of this year. That reorders everything. One of the big things that people have forgotten about when they talk about globalization is it allows any local power to project economic and cultural influence on a global basis. 

And if you’re a non minor power, like, say, Turkey or Pakistan or Saudi Arabia, that can have an outsized impact on everything. But if you remove the United States in its security guarantor position and its ability to keep the sea lanes safe for everybody, all of a sudden all of these secondary powers have to take care of their own neighborhood. And that forces a reshuffling of priorities domestically and internationally. And so if you look at these three countries, all three of them are Sunni. So there’s that’s a religious extraction of Islam. So there’s already a degree of a cultural link. Saudi Arabia is the world’s largest oil exporter. Turkey and Pakistan are importers. And if you look at the other places where these places might get their energy from, Pakistan might be able to get some from Southeast Asia. But in a deglobalizing world almost all of that crude can be consumed locally. The Turks can get crude from, say, Turkey. But as the Ukraine war continues to heat up in a globalized world, it’s only going to get hotter. All of a sudden that becomes less viable to. 

So these three countries in the mid-term are going to be seeing closer and closer security and economic integration anyway. And the idea that today they are laying the groundwork for something that might actually resemble an alliance down the line. Well, we’re now going from pie in the sky to kind of common sense. It won’t work this year, probably won’t work next year, but by the time we get to 2030, we’re going to be in a very different environment, both in the Middle East specifically and in the wider world. And it’s interesting to see countries that have capability, like Pakistan, like Turkey, largest army and NATO like Saudi Arabia, already starting to prepare for a postAmerican world.

The Shadow Fleet Is Sinking

a ship sinking in the ocean

The first of Russia and Iran’s aging shadow fleet is sinking. The tanker is carrying ~1 million barrels of crude bound for India, but that oil is already leaking into the water off the Omani coast.

Beyond the environmental disaster, the next question is that of insurance. Since the shadow fleet is “covered” by Russia’s state-backed insurance system, whether they pay out or not will determine just how much longer the decrepit shadow fleet can operate.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here, coming to you from the peak of Sheridan. But today we’re going to talk about the Russian and Iranian shadow fleets and a ship that is in the process of sinking off the Omani coast in the Middle East. If you remember, we’ve got sanctions on Iran, we’ve got sanctions on Russia. And so both countries have turned to what are called shadow fleets, unregistered vessels that are old and were destined to be scrapped, that take out insurance from the Russian government. And the first one of them is now actually sinking. And we’re honestly pretty lucky here. It’s been four years since the Ukraine war got going, and in that time you would expect more of these things to go down. But it wasn’t until recently that Ukraine just started to openly attack the shadow fleet in the Black Sea, and so far they haven’t actually tried to sink anything. Now we’ve got one that is on its own, that is taking Russian crude to India. It is now sinking. Its the Caroline Bezengi, I believe is the name. Carries about a million barrels a day or carries about a million barrels. And it is now sinking off the coast of Oman, already in oil spill, it’s about 400km², and we’re already seeing oil starting to make landfall on some of the Omani islands. 

It’s in the last 48 hours, it’s condition has deteriorated significantly and it is very clearly taking on water. I can’t tell you when it’s going to sink, but there’s really no hope that it’s going to make it to its destination at this point. And so we’re talking about an ecological disaster that is at least three times as bad as what happened with the Exxon Valdez. 

It’s an open question whether anyone will let this thing dock because it’s just going to leak in port then. But at least one of the compartments is damaged to the point that the ship going down. Anyway, a couple of things to keep in mind moving forward. Number one, since this is the first real incident with a shadow fleet vessel, we don’t know how the insurance system is going to work. Normally, if you had a fleet of vessels in this sort of condition and one of them then sunk on its own without getting shot at, you would see an explosion in insurance rates that would probably lead to the decommissioning of every ship of its class. That’s not going to happen this time, because these are ships that should have been decommissioned already. So it’s an open question how Russian insurance is going to pay out because the state created the insurance policy specifically to evade what everybody else normally does on the high seas. And it will be interesting to see if the Russian government actually pays out to cover the environmental solution that will be required for example, for the Omanis. The second thing to watch is the degree to which the Russians do or do not act, will shape what the Ukrainians do and do not do. 

Because if the Russians do not honor their own insurance policy at all, then it’s up to the Ukrainians to probably sink a couple directly. And when that happens, no one’s going to allow these ships anywhere near any of their ports. So we’ve been talking about since the early part of this year how countries are getting more and more aggressive with the shadow fleet. Now we’re seeing the decrepit nature of the vessels probably being their own worst enemy. And as the shadow fleet gets retired, we’re looking at another couple million barrels a day just disappearing. It’s really hard to get a grip on Russian exports right now because the Ukrainians are attacking so much energy infrastructure. But at its peak it was about 5 million barrels a day of raw crude, plus another 2 million barrels a day from Iran. 

We’re looking at losing all of that as this year draws on. So, you know, exciting times. Take care.

Russia Loses Its Foothold in Syria

Russian flag at dusk with a moon in the background

Russia’s strongest military foothold and gateway in the Middle East is now gone. Russia has agreed to end its presence at the Latakia airport and Tartous port, as it hands over the reins to Syria’s transitional government.

Tartous was Russia’s primary hub for projecting power into the Middle East and Africa, and without it, Moscow will struggle to do much in the region. This is part of a broader trend of Russia scaling back positions and focusing its military capacity on the Ukraine War.

Prefer to read the transcript? Click here

Transcript

Hey, all, Peter Zeihan here, coming to you from Colorado. And the news is that on August 9th, that was this past Sunday. We have a new agreement between the transitional Syrian government, which is led by Sunni jihadist, formerly allied with Al-Qaeda and the Russian government, to basically end Russia’s military position in Syria. For the last 15 years, the Russians have maintained a strong military presence in two locations in Syria: the Latakia airport and the Tartous port, both of which have been under direct Russian military control the entire time, and the Russians have used both positions, both to intervene forcefully in the Syrian war, which ultimately ended up on the losing side, and then second, to protect naval and air power throughout the Mediterranean. That now comes to a close. The day that the agreement was signed, the 9th of August, the civilian administration in Syria took formal control of the airport again, and within three months they will take control of the Tartous port as well. Technically, there’s a face saving measure here that these will be joint training centers, but there’s really not a lot that the Russians bring to the table here. In addition to the fact that there are well among 90% of the Syrian population that used to be the target of Russian attacks, the idea of joint training with the Russians is a little, let’s just call it galling. So I expect the Russian position to be nominal. They might maintain a bit of an intelligence outpost, maybe a little observation, but that’s it. 

So we’re talking in excess of a 90% reduction in what the Russians used to get out of these bases within a very short period of time. And this marks the end of the Russian high water mark in the Middle East in the post-Soviet era. It’s not that they don’t have ties. They work with the Houthis, they work with the Iranians. They even have decent relations with the Israelis most days. But these were the only two military facilities that Russia has outside of the former Soviet Union, and it was the only way that they could reliably project power into the Mediterranean. And because the Turks control the straits that connect the Black Sea to the Mediterranean, and now that these ships that the Russians used to keep at Tartous have to go home or go somewhere. The ability of the Russians to even have the range that is necessary to protect power doesn’t exist. So we’re looking at the entire southwestern arc of the former Soviet space, basically becoming a no go zone for Russia. We’re seeing some color of this in many other operations around the world, as the Ukraine war basically sucks up more and more Russian military bandwidth. 

They still have things like the Russian Legion that are running around in Africa, causing coups or preventing them based on the day, but without the ability to reliably resupply their forces through Tartous, the ability of the Russians to even maintain those positions is going to be shriveling. So it’s a good day if you’re anybody but Russian, and if you’re Russian, you now have to focus almost exclusively on the Ukraine war, which I would argue was always how it was going to go. 

We’ll save the Ukraine war itself and the long term prospects there for another day.

Is This the End of U.S. Biofuels?

A green lit gas station with an oil tanker

The U.S. ethanol mandate in the early aughts reshaped American agriculture by tying corn production to fuel production; this saw corn demand double, with roughly half the corn crop now tied to biofuels. So, the case for diverting large amounts of U.S. corn into fuel production is now becoming less clear.

U.S. energy has become independent following the shale revolution. The environmental benefit has been refuted and moving forward, food security will be far more important than biofuels. Allocating large amounts of U.S. corn for fuel production becomes economically and politically difficult when it’s needed (and more profitable) to use for human consumption.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here, coming to you from a snowy Colorado in May. Because that’s what happens in the mountains. Today we’re taking a question from the Patreon crowd, specifically how I see US agriculture evolving over the next several years, specifically in light of the balance among corn and soy and biofuels, with, of course, ethanol being at the top of the list. 

Real quick history lesson for those of you not familiar with the space, the United States has used gasoline and diesel for pretty much everything for transport for the entire industrial age. Until we got to the early 2000, when we got a fuel mandate from the federal government. That said, a certain percentage of most gasoline that you pump has to have a certain percentage of ethanol. 

In most states, it’s in the 10 to 15% range. Now, lots of people have bitched and moan about this for multiple reasons, but basically it took the single largest commodity class that the United States had fuel and cross-referenced it with. The second largest of the United States has, which is row crops, specifically corn. So if you go back to the 80s, a few states in the Midwest, Iowa, of course, did have their own state ethanol mandates. 

But now we had a national one. And from roughly 2004 until today, The total need for corn grown in the United States is roughly doubled, because about half of it is now used for biofuels. Now, that’s not that’s a bit of a blanket statement. The leftover, once you extract the bit that can be turned into ethanol can still be used for animal feed. 

But what it has done is it’s radically changed the agricultural situation of the world’s largest agricultural producer, taking a large chunk of land away from producing stuff for food to instead it being available for fuel that is directly responsible for a lot of the increases around the world. We saw in food prices in the late 2000, because it took ten years for American farmers to produce the volume of crop required, as well as for the United States to build up the infrastructure required. 

Because you don’t take corn to an oil refinery, you have your own ethanol refinery, and then you blend that ethanol in with the fuels at another location. Anyway, in the world that we’re moving into, where agricultural supply chains break down on a global basis, we’re going to be seeing a world that isn’t able to feed itself. And with six or what are we, 7.5 billion people, whatever the number happens to be billions of people. 

And if you have half of the corn crop in the United States going towards fuel instead of human consumption, you can see how this is going to be a problem. It’s just that there aren’t very many countries in the world that have easy access to the inputs, whether it’s the manufactured product, the financial products, or the fertilizer products that are necessary to grow food at scale. 

The United States is by far the largest of them. And if you look at some of the other major producers around the world, most notably China and Brazil, they can’t be agricultural producers without globalization. They import too many of the things that allow agriculture to work. So in a post globalized scenario, if we’re lucky, we’ll only lose a billion people. 

Which brings us back to ethanol. Ethanol is the mandate, because you had a lot of folks in the farm states that were looking for a way to bolster rural incomes in general, and farmers in particular, and the mandate for ethanol and a new one that seems to be being gestating for soy diesel follows similar patterns. But if you remove this, call it conservatively, one third of global food production, then all of a sudden food prices are going to skyrocket. 

And the argument that the United States government should subsidize agriculture to make biofuels kind of falls away. You see, when this all started, the ethanol mandate had a three piece alliance. The farm states obvious environmentalists who thought since it was grown from the ground, it would have a lower carbon footprint. And national security folks who saw this as a way to break our dependance on the Middle East. 

Well, 2026 is not 2000, because now the United States has had the shale revolution. And it’s not just the world’s largest producer of crude oil, and the world’s largest producer of gasoline were the world’s largest exporter of refined product in general. So the national security folks have just kind of faded from this conversation. The environmentalist, who sometimes are a little squeaky with their math, did the math and realize that at best it’s a wash, because the process of growing that amount of corn and moving that amount of corn is actually generating just as much CO2 as what you have to do for gasoline. 

So they went away. So now it’s just the agriculture folks. And if it’s just the agricultural folks, it’s also ultimately going to be about farm income. And if you move into a world where a third of food production falls offline, all of a sudden farmers will be earning less growing food corn for the ethanol mandate than they would growing food for human consumption. 

So regardless of where you are on this equation and what argument you may have had in the past, the macroeconomic situation that led us to doing ethanol at scale is fading pretty quickly. One of the many, many, many outcomes of the Iran wars. We realize just how vulnerable global supply chains were in everything from semiconductors to tractors, because one part of the world produces a lot of the base materials that are used somewhere else. 

That is something that’s going to be reverberating for the rest of the year, and it is something that is really just the tip of the iceberg compared to what is coming. Ethanol was fine in a highly globalized world where there were lots of options. Pretty soon that’s not where we’re going to be.

Global Energy Stressors: Can Anybody Help?

An oil rig on the sunset

Are there any countries that might be able to ease the global energy stress?

Saudi Arabia might be able to ramp up output, but Houthi attacks could take that away in an instant. Producers like Guyana, Brazil, Venezuela, and Canada can only add small, incremental volumes, but most major expansion projects are years away.

So, where does that leave us? The global oil deficit is only going to worsen over the next few months. And with oil market data becoming increasingly unreliable, things are likely already worse than we think…

Prefer to read the transcript? Click here

Transcript

I guess I have a 3.5. This is the backside of that crown. Let’s talk about who might be putting other little volumes in. It’s not a lot. First of all, secondary peak of Bison. Most spare capacity in the world comes from OPEC, specifically from Saudi Arabia or the United Arab Emirates before it left OPEC this year. They’re the only ones who really maintain fields that can turn on off with that in mind. These are all countries that are constrained within, you know, the Saudis would probably be the ones with the best bet. But now that they have to export everything through the Red Sea and the Houthis are regularly attacking ships, most notably tankers, we should actually expect more Saudi crude to go offline rather than come online.

In the Western Hemisphere, we’ve got Guyana, which is a new producer, but their big boost was over the last three years. It’s again only incremental gains, 100,000 here and there, maybe. Venezuela. We, in the best case scenario, now that Maduro has gone might have gotten a fresh million. But now because of the earthquake, if they get half that it’ll be a really good day. Really good year. Brazil no, incremental again. Who am I forgetting? Canada. Canada has audacious plans to massively expand their export capacity, but these plans will not happen this year, next year or the year after. The heavy oil sands of Alberta take years, if not decades, to bring online as well. So the pipeline is only one part of the project.

About the only thing that we might see earlier is that Keystone is being resurrected, and it probably will be built this time, but not this year and probably not next year either. So that’s an issue for 2028, where we might see a half a million to 1 million fresh barrels. That’s not going to help this summer. The only other thing I can think of is Angola.

But Angola is all offshore. It’s all deep and it is failing. So actually the incremental gains that we get out of the Western Hemisphere this year might be enough to compensate for losses out of Angola, but really not much else. It all adds up to a pretty bleak picture for energy markets. I would love to give you pricing advice.

That’s a lie. I’ve no intention of giving you pricing advice, because what’s going on in the markets right now makes very little sense. Keep in mind that oil traders take their price cues from data and the data sucks. Iran doesn’t tell us what they’re producing or what they’re shipping. We’ve got the shadow fleet out of Russia. The Russians aren’t even generating data anymore that you can then look at.

And of course, the Chinese are a bit of a black hole. We know they’ve had a little demand obstruction. We know they’ve had a little fuel switching, but mostly they just don’t publish anything anymore. And it’s unclear if they’re even collecting the data. About the only thing

we can tell is that they have reduced their exports of refined oil product, which has impacted everybody in the Pacific Rim.

And that’s really the end of what we know. Best guess is that the shortage of 10 to 12 million barrels per day is going to go up over the next three months, for the reasons I’ve already talked about. Plus, of course, the Houthis. So the world has significantly less of a buffer now than it did a month ago or three months ago or five months ago.

And at some point that’s going to lead to some sort of market reaction. And when that happens, then we get some of the biggest demand destruction that we’ve seen, at least since the price spikes of 2007 to 2009. So something to look forward to.

Global Energy Stressors: Can Shale Save the World

Close up of shale rock | Licensed by Envato Elements: https://app.envato.com/search/photos/65f10818-30c9-4aa2-8207-5b9626ee65ae?itemType=photos&term=shale

The U.S. shale revolution transformed global energy, but that period of explosive growth is over. Existing pipelines and export infrastructure have reached capacity, meaning future output increases will take a bit of time.

With domestic electricity demand on the rise, U.S. exports will diminish over the coming years. That means America’s ability to offset global energy disruptions is dwindling. Couple that with Asian countries paying premiums for the remaining U.S. LNG, and Europe’s energy picture is only getting worse.

Prefer to read the transcript? Click here

Transcript

Okay. Now. Part three from near the top. Bison peak and all its weird greatness. And then behind me, we’ve got the ten mile range. And the mosquito range. So like quandaries over here and Sherman Sheridan over there. Maybe there…somewhere. Anyway, part three, the United States. Okay. The US shale revolution is different from every other period in energy history, primarily because of the geology.

In a normal Petroleum industry, you’re going to drill through something that’s called a caprock, which is a non-porous rock formation. I got to sit down again so you can see the crown behind me. It’s a non-porous rock formation, ironically. Like these. This is a red granite that oil cannot percolate through, so it builds up pressure behind it. So when you punch through the cap rock, you release that pressure and the well flows, and you maybe get a gusher if you’re lucky.

And even if you’re not, you can always create artificial pressure by pumping water or natural gas or CO2 or something else into the formation to force the oil to the surface. That’s not how a shale revolution well works. In shale, the crude is trapped at the moment of formation into a Petra carbon within the actual rock strata itself. It can’t migrate by definition. So you drill laterally through the formation, have holes in that pipe, and then you pump in pressurized water and sand to crack open the rock. The sand goes into the cracks, and then the little bits of pressure, trillions of little bits of pressure push the water out and back to the surface and it flows by itself.

You can’t do enhanced recovery on a shale. Well, for the most part, there’s some exceptions in there. There’s some gray areas. But anyway, what that means is that instead of the months to years to decades that it takes to bring a conventional well online and then the capital that is required to keep it producing beyond a few years.

Shale is really cheap. It’s up front. All of your costs basically goes into the frack itself, and then you’re done. The downside is that if the shale is in an area where you don’t have existing infrastructure, you have to build a really robust gathering network because you’re going to have a lot more wells traditionally than you will in a traditional field.

You know, there are some of the super fields out there that only have like a dozen wells total. Like that big one offshore in Mexico, which I can’t remember. Cantarell. Cantarell. Ghawar in Saudi Arabia, somewhat similar, whereas you can have dozens, hundreds, thousands of shale wells because they’re only producing a few barrels a day.

That’s gotten better over time, but overall, the logic still holds. Anyway, the United States has been fortunate to this point in that most of the places where we have shale formations, or at least the ones we’ve tapped so far, we also have preexisting infrastructure. So the Permian Basin in West Texas is the best example because it’s been producing crude for

well over a century. But we only started putting shale wells in there in the early 2000. The Bakken in North Dakota. Same general concept. Anyway, what that means is this infrastructure to gather and especially to transport. The crude has been there for decades. And even though those fields by conventional terms have been in decline for decades, as soon as shale came along. There was all this spare capacity and you could just shove whatever you wanted in there. And it wasn’t until about 15, ten years ago that it got so full that we had to actually build new infrastructure. So if you go back and look at the data in some of the early years, we were adding a million barrels per day plus a couple of years I think we even had 2 million barrels per day. That doesn’t happen anymore because now all of the gathering infrastructure, all the transport infrastructure is completely maxed out. And so for the United States to step in and add more oil or natural gas or whatever into the system, we first have to build an entirely new gathering network and then entirely new trunk lines to take it to the ports, and then, in many cases, new ports in order to load it up and send it overseas or refineries or whatever it happens to be.

So the explosive period of U.S. shale oil and natural gas output is now behind us, and we’re now in an incremental phase. And even if that was not the case for specifically for natural gas, we face another problem. Because of the artificial intelligence era, the United States needs massively more electricity. And that’s before you consider preparing for the end of globalization and all the new manufacturing that we’re going to need, and well-being and building things just uses more electricity than digits and numbers.

So whatever spare natural gas production we have right now, we can’t chill down into liquefied form and export because we need to burn it to generate power locally. So what the United States can do to help the world recover or cope with the Iran war and the Ukraine war has already been done, and you’re only going to get incremental increases in US exports from now on, assuming for the moment we even have stuff to export because our power demand is going through the roof.

At the moment, the Asians are bidding up the prices of things like liquefied natural gas. Now, the reason for that is pretty straightforward. Historically speaking, this is a region, especially in Northeast Asia. So China, Japan, Korea, Taiwan that imports 90% of their energy no matter what the form happens to be. And because they import so much, they have to pay more because they just don’t have any good options within 3000 miles.

And so there’s always been this price premium for anyone willing to ship or natural gas to Northeast Asia. The Europeans have always had an easier time of it because they got stuff from Norway and stuff from Libya and stuff from Algeria and stuff from the Russians and stuff from the Middle East. And so their prices have always been at a significant discount to the, the Asians.

And then, of course, the United States has the cheapest energy in the developed world. Well, now that the US stuff is all spoken for, that premium that the Asians have is probably going to spread to Europe, but it just hasn’t yet. So what we’ve seen this year is the Asians paying through the nose. And because they’re paying premiums, all the natural gas and some of the crude that would have normally gone to Europe has made the long trip all the way to Northeast Asia.

But as the Russians vanished from the scene and the Persian Gulf doesn’t recover, we’re looking at that premium spreading to Europe, and we’re looking at prices coming to Europe that they just haven’t seen for the bulk of these past five years, and they’re not ready for it. And it will lead to more deindustrialization impacts and an energy crisis, especially this winter.

And there’s really not a lot that anyone can do about it except for pray that it’s a mild winter, which has happened in the last five years for the Europeans, thank God. But that is a thin reed to base energy security on.

Global Energy Stressors: Europe’s Oil Supply Problem

Oil barrels surrounded by a European flag. Licensed by Envato Elements

As Europe shifts away from Russian natural gas, they have turned to LNG from Qatar to fill the void. Unfortunately, that pivot has brought on its own set of problems.

The Iran War has impacted Qatari exports, leaving the Europeans in a sticky situation. With current storage levels well below average for Europe and Qatar’s force majeure extended to September, the winter months could bring a harsh energy shortage for Europe.

Prefer to read the transcript? Click here

Transcript

Okay, still in bison, peaking on the upper ramparts. That is a McCurdy peak. The double one over there, and I’m now above above Devil’s Playground in just a bunch of really big rocks. Phase two, let’s talk neutral gas, specifically Europe. The Europeans used to get the plurality of their natural gas in piped form from the Russian Federation.

And over the course of the last five years, they’ve been phasing that down to zero. And with a couple of exceptions, they’ve been successful. But that comes at a cost. Not just financial but also security, because things have been so disruptive with the Iran war that the normal path that they had developed to survive in the post Ukraine war environment has been to tap liquefied natural gas from the Persian Gulf, specifically from Qatar.

And Qatar is having some problems. So normally most natural gas in the world, something like 85-90% of it is shipped by pipe. Because it’s a gas, you have to compress it, and it’s difficult to put that into any other form of transport. The one exception, which can get a little ugly from a logistics point of view, by the way, that’s Bison Peak. That’s where we’ll do part three.

A little messy from a logistical point of view is to liquefy it, which basically means you get a metric but ton of electricity, and you operate what is, in essence, a cryogenic freezer and freeze the gas down to something like -270, -300 based on which scale you’re using. And if you do that, it will condense into a liquid.

And then you can put that onto specially designed tankers and send it to any facility that has the technology necessary to regasify it, which isn’t too hard. And then you can treat it like any other normal piped gas within your system. So the Europeans have basically cut Russian pipe gas out and gotten Qatari liquefied natural gas in. One of the reasons this worked is they basically shut down everything in their economy that used natural gas for anything but electricity.

So, for example, the German chemicals industry is basically nosedived, and the combination of switching out supplies and reducing their demand has succeeded. The problem is with Persian Gulf close Qatar’s offline. Qatar got hit very, very hard in the war by Iranian attacks. The specific facility Ras Laffan, that does the natural gas condensation and liquefaction got hit hard. And when the Qataris tried to turn things back on in June, there were several explosions and a lot of people died.

Natural gas is naturally flammable and explosive, and you can imagine what happens with this sort of industrial infrastructure that’s required to turn billions and billions of cubic meters of the stuff into something that you can pour. Since the war began in February, exactly one cargo of Qatari LNG has made it out of the Persian Gulf. That was about three

weeks ago, when we had this nice little moment when traffic in and out of the Gulf reached something like three quarters of what had been pre-war.

We’ve never reached that number again. Most days were less than 10%, with single digits of ships coming or going. There’s no reason to expect that to change anytime soon. It’s going to take a lot more than a cease fire for that to pick back up. And unlike oil, which is relatively easy to produce and store in basically a tank.

Liquefied natural gas, you really can’t do that, especially when there’s a chance that missiles or cruise missiles might hit your storage facility. So Ras Laffan, for all intents and purposes, remains offline. The Qatari this week this, past week declared force majeure extended their force majeure through the end of September. And now we’re talking winter. And right now the winter storage for the Europeans for gas is less than half the normal. It’s the lowest it’s ever been going into a winter. Russian gas is gone, Qatari gas is gone. And as we will talk about in part three, the United States cannot ride to the rescue on this one.

Global Energy Stressors: Kazakh Oil Exports

Flag of Kazakhstan

Global energy markets are all over the place. So, we’re doing a short series on the major energy stressors across the globe and how this all is going to play out. Up first, let’s look at the Ukraine War’s impact on oil exports from Kazakhstan.

Ukraine is ramping up strikes on Russian energy infrastructure, but Kazakhstan depends on those same pipelines, processing facilities, and ports to get its oil out. Exports have already fallen off a cliff, and there’s no reprieve in sight.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here, coming to you from the lost wilderness near Denver in Colorado. I am on the lower ramparts of Bison Peak. Bison peaks right over there. That’s my next stop. And today we’re going to stitch together a few things that have come out in this past week that I think are worthy of discussion. First things first. The Kazakhs have published data about how much their exports have been hit by what’s going on with the Ukraine war. Quick recap is that over the course of March through June, the Ukrainians have gotten ever bolder in targeting Russian infrastructure pipes, pumping stations and especially ports. And this really matters for Kazakhstan because it’s landlocked. So it has to use the infrastructure of other people in order to get its stuff to market, by the way. We’re going through the Devil’s Playground area of Bison Peak right now. The key ones are on the Black Sea, specifically Tuapse, and especially Novorossiysk. That is where roughly under normal circumstances, about three quarters of Kazakhstan’s oil exports flow. In addition, the Ukrainians have hit things like processing centers on the Russian side of the Kazakh-Russian border and some of those processing facilities specifically for the Karachaganak field are ones that primarily actually process Kazakh throughput. And without those processing facilities, you can’t pull the sulfur or the natural gas out of the crude stream. And so you can’t put into the normal pipeline network. Anyway, all of these things and more have been hit over and over and over. And according to the Kazakhs, they’ve been looking at a 50 to 70% reduction in output from all of their major fields. So Karachaganak has been hit. The two big ones in the Caspian Sea area are Kashagan, and especially Tengiz and Tengiz actually dates back to the 80s, is the first foreign investment deal ever into the former Soviet Union. The companies that are most affected by this, are Russia’s Lukoil, which is now just an arm of the state, and America’s Chevron and Exxon, the three of those together, the majority of the output here. I’m not counting the Kazakh energy company because it doesn’t do anything it just takes a cut. Anyway, The problem is there are really no good options for the Kazakhs really at all. The in the last month, the Ukrainians have gone from simply attacking physical infrastructure to going after shadow fleet vessels directly both on the Sea of Azov and now in the Black Sea. So I would expect this 50 to 70% drop to be kind of the norm. And this is a country that used to export 2 million barrels a day. And by used to I mean like two months ago. There are really no good alternatives here. Kazakhstan does have a patched together Frankenstein system that exports some crude to China, basically from their eastern and southern regions, but that is typically only a quarter of a million barrels per day. Or on a really, really good day, they might reach a half a million. Everything is really the Black Sea or bust. There is a bypass pipeline in Azerbaijan called the BTC: Baku. Tbilisi Ceyhan starts in Baku. The capital on the Caspian Sea goes through the inner Caucasus zones to Tbilisi, the capital of Georgia, and then on to the Mediterranean port of Ceyhan on the Turkish coast. BTC can handle about a million barrels a day, but it’s primarily an Azerbaijani line and is always at least at half full. So if the Kazakhs were to ship tanker crude across the Caspian Sea, which is its own problem, they could offload at Baku and go to the BTC. But if you take that combined with a Chinese route on a really, really good day, they’re only looking at getting maybe, maybe, maybe, maybe three quarters of a million barrels out. Everything else is going to fall, and it’s highly unlikely that it’s ever going to come back, or at least until such time as the Ukraine war is over. Unlike the Biden administration, that was really hard ass with the Ukrainians about going after Russian infrastructure. The Trump administration really doesn’t care, even though we’re having problems over in the Persian Gulf. And so the Ukrainians are taking out anything they possibly can, and they’ve proven that they can track the tankers that the Russians are using at sea. And now that the ports have been damaged, especially the loading tanks, the tankers can only load up at roughly the pace that the crude is coming in. So it used to be that the tankers would pull up to a dock and you’d have 4 or 5 tanks that were full and they’d all drain down at the same time, and so the tankers could get out of there in just a couple of hours. Now it takes the better part of the day. And with that sort of scenario, the Ukrainians, just using commercial satellite photos know exactly where the tankers are and where to target. So we’re looking at over a million barrels per day going offline, probably permanently. And there’s really nothing we can do about that. That’s piece one.

Why I Don’t Worry About Cyberattacks (for the most part)

A hacker a a computer terminal

Following the cyberattacks in Minnesota, many have reached out regarding cyber threats from a national security perspective.

Most successful cyberattacks don’t target critical national infrastructure; they go after individual organizations. Thanks to the decentralized cybersecurity model adopted by the U.S., there is no single system an attacker can compromise to cripple the entire country.

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Peter Zeihan here come to you from the east, east, west, west side of Bison Peak. On my way down, I got buzzed while I was up here that there’s been a cyber attack in Minnesota effecting at least 30 different municipal districts. The information I have to work with is very limited. I have no bars up here. 

Got garments to me. Anyway, I thought this would be a good time to talk about cyber because we’ve got the the background and we’ve got the teaser. So short version. This is not something I worry about in the traditional sense, not from a nation state point of view. It’s serious issue. Cyber has been becoming more and more of an issue because the tools that are necessary to do cyber attacks have proliferated massively. 

And you can pick up basically a starter toolkit on the dark web for just a couple hundred dollars, and for a few thousand, you can get some really interesting tools. And people have been using those to hack whatever databases they can get into, whatever systems they can, and hold whatever hostage they can. Common attacks are ransomware, where basically you lock up somebody’s database and say, if you don’t pay me X by Y date, I’m just going to delete the whole thing. 

And a lot of folks don’t have sufficient backups, so they really don’t have much of a choice to pay. And you can always tell if you’ve got somebody who’s dedicated to cyber defenses by who pays. Of course, anyone who pays has a vested interest in not telling anyone that they’ve paid, because that’ll tank their stock value or confidence in their institution or whatever it happens to be. 

From what I understand, with Minnesota, that’s not in play. It doesn’t look like any services were interrupted. People are pointing their fingers at Iran because that’s the flavor of the month at the time. I have no way to say that it’s Iran or something else, but I do want to underline when it comes to national security issues, this is something that, while not minor, is not something that I kind of put in my top tier of concerns. 

The reason is the combination of disassociation and concentration when it comes to cyber defense versus cyber offense. Back when computers became a thing back in the 1980s, we had Ronald Reagan and nobody knew what was going to happen with all of this. So there was no institution that kind of take responsibility. So Reagan’s decision was to make the National Security Agency, the NSA, responsible for cyber offense, and their job was to hack everybody all the time, put in backdoors, put in worms, whatever. 

Working from the theory that if we ever get involved in a hot war, or if the other side does cyber against us in a way that kills people, we will have the option to go scorched earth. The idea being that the NSA’s would have access to as much as possible, and they could basically implode opposing systems from the inside so they would never carry data again. 

Not just a hack, but a physical destruction of the hardware down at the node. But defense wasn’t touched because if you wanted to throw a cyber defense umbrella over the entire country, you would need a massive institution. And how would you determine where the line is? Is it the fortune ten companies? 

The fortune 100, the fortune 500? The fortune 5000? Is it everything going down to the mom and pops? And remember mom and pop companies that have employees of 50 or less or half of the employment base? Do you deal with individuals in this way? Do you deal with universities? And rather than try to come up with a solution to that problem, Reagan just everyone else, you’re on your own. 

So every government institution at the local, the state and the federal level, and every company, regardless of size and every individual, regardless of wealth, is responsible for their own cyber defense. You fast forward that to the 2020s, and what it means is the same ease in which people can get hacking tools is also available for people to get defense, and especially encryption tools, and off the shelf encryption tools that just cost like 2030 bucks can’t be hacked by anything shy of a semiconductor taking a couple of years, it doesn’t mean that you’re perfectly safe. 

Human error is undoubtedly the way the most hackers get into systems, but it does mean at this moment, as long as you have a degree of awareness and put a little modicum of effort into it, the advantage really is for the defender. Will that always be the case? I have no idea that the semiconductor industry and software is evolving in very strange positions, and I can’t underline enough that most successful hacks get in because somebody has been sloppy or hasn’t changed their password, or lets them in because of a fishing attack. 

These are all very real concerns, but what it means is, from my point of view, it is impossible for cyber attacks to take down the country because there’s no single defense. There’s no node that an enemy can hack into and take down the whole country, or take down all the power grids. We’ve got thousands of power grids and thousands of water districts across the country. 

You have to hack each of them individually and then everyone around them. When they realize there’s a hack, they usually cut their connections. Part of the reason for that was because of, if you remember back to 2001, 2002, right after nine over 11, we had a power outage in the northeast and in eastern Canada because we had interconnections among our power grids. 

Well, after that event, everybody basically built firewalls, and that worked not just to prevent cascading power failures, but it also worked to prevent cascading hack access. So anyone who wants to take down the United States has to hack literally tens of thousands, if not tens of millions of things to in order to do it. And even the Chinese, at their height before their demographic bomb went off, never had enough people to do that. 

There’s an open question whether AI, as it evolves is going to be more effective as an offensive or a defensive capability. That is part of the handwringing around something called mythos, which is a new clod product that’s anthropic. It’s the company that generates clod because basically mythos is doesn’t have barriers and it hacks things, but it also figures out where the vulnerabilities are so that you can reverse patch everything to. 

Bottom line is this is all evolving, but the physical structure that the United States has set into place often operations concentrated, defensive operations dispersed makes it very easy for individuals or individual companies to get hacked, but functionally impossible to do meaningful damage to the US structures even in a time of war. For what it’s worth, in the world these days, that passes as good news.