China Faces Deflation as Economy Stutters

Photo of woman holding Chinese Yuan

China is facing an economic downturn reminiscent of Japan’s struggles in the 90s. Actually, I take that back…China’s outlook is much worse.

The core of China’s problem is declining demographics. This crushes demand and leaves industrial production as the only path forward. Issuing debt and spending more on real estate, bailing out local governments and boosting industrial capacity isn’t going to do much, in fact, it will lead to deflation…a particularly nasty economic phenomenon which occurs when oversupply drives prices down into a reinforcing spiral of dysfunction involving recession, industrial busts, mass unemployment and general mehness.

If the Chinese want to avoid deflation, they’ll need to cut industrial capacity, but that’s not risk-free either. And to round out China’s list of issues, Chairman Xi’s chokehold on Chinese power adds another layer of complexity to successfully navigating this economic headwind.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

If you sign up for our Patreon page in the month of October, the proceeds from your subscription for the remainder of 2024 will be donated directly to MedShare. So, you can get our all of the perks of joining the Patreon AND support a good cause while you’re doing it.

We encourage you to sign up for the Patreon page at the link below.

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from New Orleans. It’s like 6 a.m., but this is the only time I have today to record, so here we are. The news in the last few days is that the Chinese are doing another, another, another stimulus program. It’s starting to feel a lot like what happened in Japan in the 1990s, where they throw more money into the situation, hoping to generate economic growth.

But it never did, because their problem at its core is demographic. Unless you can get people to spend more, to consume more, all that’s left is industrial development. In the case of Japan, they used that for real estate, and so the bottom fell out of the market, and it took 25 years to recover. You could argue it’s only in the last five years that Japan has gotten back to some version of normal.

In the case of China, the demographic decline is way more advanced than it ever was in Japan 20 years ago. In fact, you could argue that in terms of the collapse of numbers of people under age 50, it’s actually much worse today in China than it is in Japan, even now, even though Japan’s the world’s oldest society.

It’s that lopsided. Anyway, back to the topic. The Chinese indicate that they’re going to issue a lot of debt, which is something they’ve never really done before, with the numbers being floated somewhere in the low hundreds of billions to the mid hundreds of billions. So by any measure, even for an economy China’s size, this is potentially a huge amount of capital.

So the question, though, is what are you going to put it towards? Three things have been floated. Number one, buying up property that hasn’t been finished so it can be finished. Well, that will exacerbate the oversupply of condos, which is already more than enough to house over a million and a half people, so that does nothing except for maybe generate a little bit more public goodwill because that’s where 70% of private savings is.

So that’d be a political decision, not an economic one. The second one is to bail out the debt of local governments. Local governments can sell land and issue bonds, but they can’t raise taxes, so they have no way of really generating an income. And once they issue debt, they have really no way of paying it back.

So that’s like a $4 trillion asset class that’s completely bunked. And while, you know, we throw half a billion at it, that’s not nothing, but it really doesn’t move the needle in any appreciable way. And the third idea that the Chinese have floated is, shocker, building more industrial capacity. So we’re in this weird situation where the Chinese are kind of damned if they do and damned if they don’t.

I mean, if they do nothing and consumption continues to wither and tariffs against them for their overproduction continue, then their industrial case fails and the population basically falls into impoverishment. This new idea of throwing a lot more money against industrial output actually generates potentially a worse outcome called deflation. Now deflation sounds nice, but it is not. We’re all familiar with inflation, when prices rise, either because there’s an insufficient supply or too much demand.

Eventually, you get spiraling prices that hurt everybody and eventually eat away at the value of economic assets. Based on who you are, that’s different levels of disastrous. But deflation in many ways is significantly worse. Deflation comes from a similar imbalance between supply and demand, but it’s when there’s too much supply compared to demand. In those circumstances, prices start dropping because there’s too much stuff.

People can’t possibly consume it all. And eventually, people become used to the prices going down, so they put off their purchases, which increases the disparity between supply and demand even more. Eventually, it gets so bad, and the oversupply becomes so much relative to demand that the industrial base starts to collapse and people start to lose their jobs because nothing is profitable anymore.

And then all of a sudden you’re hitting it on the demand side as well. The demand is collapsing because people have lost their jobs. Some version of this, in a persistent but mild form, happened in Japan starting in the late 1990s and continued all through the 2000s and through most of the 2010s. We also had a version of this in the Great Depression.

The problem we have in dealing with deflation is, ultimately, you have to get supply and demand back into whack so that they’re actually aligned with one another again. The two ways to do that are to increase demand or decrease supply. In China, it’s difficult to imagine being able to increase demand because there are now more people over age 50 in China than there are under age 50 in China.

And generally, it’s people under age 40 that are doing most of the consumption, and that is the class that has been completely gutted by the one-child policy, in addition to the world’s fastest industrialization process. It’s only been a generation since Chinese folks were having, on average, five and six kids, to now having one. In fact, in the metros where the majority of Chinese now live, we’re now looking at the birth rate being one quarter or less of replacement levels.

We’re talking about 0.5 children per woman. There aren’t enough people to even think about a meaningful consumption rebound. Well, that leaves destroying supply. And in this, the Chinese face two problems. Number one, oversupply has been the state mantra for the last 40 years, and that is the Chinese development model. You look around the world, you figure out something that’s in demand.

You produce it. You use subsidies, you use cheap labor. You produce, produce, produce, produce, produce—not for your domestic market, for the foreign market. You export it. And over the last 40 years, this has moved from product to product to product, from steel to cement and now increasingly electronics products. Now they’re trying to get into electric vehicles.

And it’s just on and on and on and on. Well, in a world where those who are experiencing breakneck economic and demographic growth, there’s some strength to that model. And especially in the 1990s, in the 2000s, we had the developing world kind of getting in the act of industrialization and urbanization. But a couple things to keep in mind. Number one, you only urbanize once, and once you do that, your demand for those sorts of products drops.

Second, when you urbanize, your birth rate collapses. And if you’re, say, Brazil, that means you had a demographic moment in the 90s and the 2000s, but now you’re actually aging faster than the European countries, and your demand has kind of hit a plateau. And you’re also looking at the Chinese, who are basically doing product dumping at scale. You’re like, you know what? I don’t want to play this game. And so it’s not just the United States and the European Union and Japan and Canada that have put all these tariffs on things like electric vehicles from China. It’s also Indonesia. It’s also Brazil. It’s also Turkey. Most recently, Russia. The Chinese have produced all this stuff with the intent of swamping markets to save their social model.

And in doing so, they basically encouraged everyone to block the markets of Chinese products. So if the Chinese were to add more industrial capacity now as part of a stimulus program, all that’s going to do is exacerbate the oversupply. And now there’s nowhere for it to go. So I would argue that a year ago, before this really got serious, the Chinese probably had about twice the industrial plant that they needed because so much of it was geared to service the foreign market.

Well, now a lot of that is being shut out of foreign markets, and the Chinese are having to deal with it at home. Any stimulus will be on top of that. So the only way that the Chinese can avoid deflation at this point is to basically gut half or more of their industrial plant, and then you’ve destroyed the employment program for the entire country.

And if there’s one thing the Chinese government is obsessed about, it’s making sure that people have jobs so they don’t get together in large groups and go on long walks together. So there are any number of reasons how the Chinese economy can ultimately collapse. Demographics are at the heart of most of it, but it could be a trade war.

It could be a deflationary spiral, or it could be any sort of resource restriction. That’s not a short list, but we’re now in a situation where they could theoretically make it all about internal miscalculations and trying to rationalize their economic model for a world that can no longer support it. So this has become very real, very fast, and the Chinese are struggling mightily.

The question is whether or not they can come up with enough policy creativity to try something new. And since Chairman Xi has basically gutted the entire system of all decision makers but himself, I don’t think the chances of that are very high. All right, you guys take care.

The (Next) Gulf War Is Coming

Photo of a destroyed building in the middle east

If you’ve read my book The Absent Superpower, then today’s video shouldn’t come as a surprise to you (yes, I wrote it nearly ten years ago!). If you’ve been stuck under a rock and haven’t gotten the chance to read it -OR- you want a refresher, you can purchase a copy below.

Given the recent conflict in the Middle East, I’m worried that an oil crisis could be brewing. The main players that might kick off the (next) Gulf War are Iran, Israel and Saudi Arabia.

Israel was recently attacked by Iran and their retaliation could be devastating for Iran. Should they choose to target critical Iranian oil infrastructure – most of which is conveniently located near Kharg Island – Iran’s exports would plummet. Should that happen, an Iranian attack on Saudi oil fields wouldn’t be out of the question, and then we could be talking about 20 million barrels per day being under threat.

That means a global oil price of $300 per barrel is in the cards…but not for everyone. The US has the domestic supply to maintain a price closer to $60 per barrel (outside of California, because they still rely heavily on Persian Gulf imports). China would get the snot knocked out of ’em if it does play out like this. The UAE and Saudi Arabia would keep some exports alive thanks to pipelines that bypass the Strait.

Before you go buy a few drums of oil to throw in the basement, let’s wait for Israel to decide what their retaliation plan looks like.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

If you sign up for our Patreon page in the month of October, the proceeds from your subscription for the remainder of 2024 will be donated directly to MedShare. So, you can get our all of the perks of joining the Patreon AND support a good cause while you’re doing it.

We encourage you to sign up for the Patreon page at the link below.

Transcript

Hey, everybody. Peter Zeihan here, coming to you from the gloomy California coast. Got a nice little inversion layer going on out there. Anyway, today we’re going to talk about something that I haven’t really talked about in my professional career because I never thought it was going to happen until we had a change in circumstance. Well, we’ve had a change in circumstance, and now it’s time to talk about it.

And that is the possibility of a severe oil crisis because of a conflict in the Middle East. Now, back at my old job at Stratfor, they were always beating this drum. The idea that Iran was about to close the Strait of Hormuz and oil prices go to $500 and blah, blah, blah. And I was always the dissident voice because unless and until Iran feels it has no other choice, that doesn’t work because all of Iran’s crude goes out through the Strait of Hormuz.

Now, when I left, I went on my own. My second book, written about ten years—ten years ago, how did that happen?—mentions the three wars of the globalization period, conflicts that will boil up because the U.S. has stepped back, and whether the countries feel they have an opportunity or because they’re desperate, they take matters into their own hands.

Now, one of these I called the Twilight War, which is now in the opening act with the Ukraine conflict as the Russians try to reshape their neighborhood. But the second one, I called the Next Gulf War. And it’s about a conflict in which Iran and Saudi Arabia fight each other at each other’s throats because they can’t reliably get energy out.

So they try to take out each other. In that scenario, you basically have potentially 10 to 12 million barrels of crude that is at risk. Now, I haven’t brought this conflict up very much since I wrote the book because the circumstances haven’t warranted it. Especially in the last three years, it’s all been about Ukraine and Russia in their Twilight War.

But in recent days, I am reassessing. And specifically, the concern is after Iran launched a couple hundred missiles at Israel a couple weeks back, the Israelis have made it very clear that they intend to retaliate in the time and place of their own choosing. And they’ve specifically shortlisted Iran’s oil sector as potential targets. There is a very obvious target point.

It’s called Kharg Island. There is subsea infrastructure that links via pipe the mainland to the island. And then all, all, all of Iran’s offshore loading platforms are just off the island. This is the only meaningful export point for Iranian crude. And as the Israelis have proven, back in April when we had the previous Iranian assault on Israel, they can take out any air defense system in the country.

If you remember back then in Isfahan, which is where the Iranians have the nuclear program headquartered, the Israelis took out the air defense around the nuclear program specifically to prove that they could if they wanted to. So any sort of air defense and Kharg is almost a rounding error in the Israeli calculus. And there’s no bridge here. It was not built by the Iranians.

It was built by Westerners in the days before the Shah fell. So if Israel decides to move, it’ll just take a couple of sorties. They’ll be done in an hour. And Iran’s entire oil export capacity would be devastated. And in that scenario, suddenly Iran doesn’t have much to lose and, out of desperation, would probably make a push to take out Saudi Arabia.

The scenario specifically outlined in the book involves a military invasion that crosses into Iraq and Kuwait, heads south, making a beeline for the oil fields. Keep in mind that the southern half of Iraq is Shia-populated and has generally had a very pro-Iranian slant ever since the war against Saddam Hussein back in the 2000s. Whether or not it would be an easy invasion is open for debate based on how or whether other countries, such as the United States, get involved.

But even if that is not an option, all of those missiles that the Iranians launched recently against Israel, they have more than enough to take out oil export and processing facilities on the western side of the Persian Gulf, notably Saudi Arabia. Most of Saudi Arabia’s crude comes from the Ghawar region, which is hard up against the coast, and all of the loading platforms are also on the Gulf Coast.

Well, most of them. So you’re talking between the two of them, a significant reduction in what is globally available. If it was just Iran, not a big deal. You’re talking about a million barrels a day. They’ve been under sanction for a while. They’ve mismanaged their own system. But if you bring in Gulf states, most notably Saudi Arabia, all of a sudden that 1 million turns to 10 million or more, and that doesn’t count what comes out of, say, Iraq or the UAE or Kuwait, all of which would be in the way of a potential conflict.

So now you’re talking potentially 20 million barrels a day. You want oil prices above $300? That’s how you get there. Now, not everything is equal for all players. Yes, currently we have a single global oil price. But in that scenario, that system would shatter because in the United States we have a populist president, and the people running for president are populist.

And back in 2015, U.S. Congress granted the American presidency the authority to summarily end all American crude oil exports, which have been several million barrels a day for a while now. The shale revolution really is rocking and rolling. And so if we have oil prices shoot up, you would have the president, whoever it happened to be, end exports. That would create a super-saturated market within the United States while denying the rest of the world another few million barrels per day, sending prices up even higher.

So you’d have a functional ceiling in the United States of $60 to $70 a barrel, and you’d have a functional floor in the rest of the world, probably around $200 to $300 a barrel. So you get a global depression. At the same time, the United States just kind of skates right on. Second, the country that would suffer the most by far would be China.

It is the largest consumer of crude from Saudi Arabia, from the UAE, from Kuwait, from Iran. And all of those sources would be in danger in some way, if not going completely. Third, on the producer side, not everyone in the Persian Gulf would suffer equally because the Saudis and the Emiratis have seen some version of this problem coming.

And so both of them have built bypass pipelines that avoid the Strait of Hormuz completely. So roughly 5 million barrels a day, maybe as much as six and a half, could still get out. That’s enough to take a lot of the sting out from a budgetary point of view. And if you’re Saudi Arabia and oil prices triple but your exports halve, you’re actually in a net financial superior position.

Assuming the Iranians don’t conquer you. And then finally, in the United States, there is one state that would be in a different situation, and that would be here in California. California doesn’t have any pipes that connect it to the oil fields of Ohio or North Dakota or Texas. And it is the one oil producer in the country that has not benefited from the shale revolution because of regulation out of Sacramento, which means that in this scenario, they’d be kind of hosed because they actually import most of their crude from the same place the Chinese do—the Persian Gulf.

So in the rest of the country, you’ve got a ceiling on energy prices. But out here on the West Coast, you’re looking at $10 a gallon for gasoline, triggering a significant schism in the economic outcomes, even within one country. So this has gone from something that was just kind of out there in the future, if and when de-globalization really gets going, to all of a sudden it’s a meteor.

And now the chances it’s going to happen? Well, I mean, really that’s up to Israel. And then, of course, the Iranian reaction. But I would say it’s somewhere between 1 in 4 and 1 in 3 to happen over the course of the next few months. And considering the depth of this disruption, I hope everyone sleeps well.

My Recent Interview On Borderlands + Patreon Info

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And if you needed another reason, if you join me on Patreon in the month of October, your subscription fees for the rest of the year will be donated to MedShare.

From the video description:

In this episode of Borderland, Vince sits down with renowned geopolitical strategist Peter Zeihan to dive into the complex realities of immigration, U.S. policy, and Mexico’s uncertain future.

Peter breaks down what both the left and right get wrong about America’s immigration debate, and offer his perspective on the models that could reshape U.S. policy. He also takes a hard look at Mexico’s new president and the growing threat driven by cartels.

He is also the New York Times bestselling author of The Accidental Superpower, The Absent Superpower, Disunited Nations, and The End of the World Is Just the Beginning.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

If you sign up for our Patreon page in the month of October, the proceeds from your subscription for the remainder of 2024 will be donated directly to MedShare. So, you can get our all of the perks of joining the Patreon AND support a good cause while you’re doing it.

We encourage you to sign up for the Patreon page at the link below.

Patreon Live Q&A + President Biden Is Making a Trip to Angola

President Joe Biden standing in front of an American flag

The Live Q&A Is Next Week…

Still haven’t joined the Patreon? Well, if you don’t want to miss out on the Live Q&A, join “The Analyst” tier before next Wednesday, October 23rd! And if you needed another reason, if you join me on Patreon in the month of October, your subscription fees for the rest of the year will be donated to MedShare.

President Biden is making a trip out to Africa (since recording, this trip has been postponed due to national weather issues). No, he’s not going on safari; he’s looking to shake some babies and kiss some hands over in Angola.

During the Cold War, Angola buddied up with the Soviets. Despite the conflict of interest, American oil companies still helped Angola make oil for Europe. Play that forward to the present, and Angola is producing around 2 million barrels of crude per day. And while that’s something, the US has its oil needs covered, but the Angolans still have something the Americans need.

Angola provides a gateway to the mines in Africa rich with minerals and natural resources, and the US would love to get a key to that “gate”. So, the US is investing in things like railway infrastructure, in order to help these resources funnel directly to the US or Europe.

The US isn’t the only interested party though. Angola is encouraging foreign investment and benefiting from the competition. Biden’s visit highlights how committed the US is in developing these ties with Angola and securing a supply chain for these resources.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

If you sign up for our Patreon page in the month of October, the proceeds from your subscription for the remainder of 2024 will be donated directly to MedShare. So, you can get our all of the perks of joining the Patreon AND support a good cause while you’re doing it.

We encourage you to sign up for the Patreon page at the link below.

Transcript

Hey, everybody. Peter Zeihan coming to you from Washington, D.C. That smell of auditorium behind me. Today we’re going to talk about an upcoming trip that Joe Biden has to Angola. Now, during the Cold War, the United States and Angola were definitely on opposite sides. There was a civil war there that the Soviets and the Cubans and later the Chinese were supporting.

On one side, we were supposedly on the—oh, hello, that’s a big-ass squirrel that seems to think I have food for it. Anyway, during that time, the Americans were on one side, the Soviets were on the other side, and American oil companies were helping the Soviet-backed government generate oil that was then sold to Europe.

And, you know, Cold War, weird stuff. Anyway, bottom line is that the Cold War is long since over. Americans are saying bygones, and the Angolans are a little curious as to the details, but they’re open to some sort of a deal. It’s not that Angola is all that important to the United States for its own sake.

I mean, yes, they produce one and a half to two million barrels of crude a day, but the U.S. is the world’s largest refined product exporter now and the world’s largest crude producer. So it’s not like we need it for us or even for our allies anymore. The issue has to do with mining. Africa is kind of the great frontier for large-scale mining, particularly on a belt of countries going from Congo south.

This is the old Cecil Rhodes group. Cecil Rhodes is the guy who basically founded modern South Africa. And from the copper belt in southern Congo, there’s a series of collection railroads that link together and form a spine going down Zambia, Zimbabwe, Botswana, and ultimately reaching the better ports in South Africa. Well, there’s something called the Benguela roadway or the Liberta corridor that cuts across Angola to the Atlantic that intersects this line.

And ever since apartheid ended in South Africa, the government has become increasingly dysfunctional, and the maintenance on the main spine railway has steadily degraded to the point that it’s pretty rough in a lot of places. So the idea the United States has is if we can rehabilitate the Liberta corridor and rebuild the Benguela Railway, which dates back to the Portuguese occupation a century ago…

Oh. Then there’s another route for this stuff to get out, and it would be going to the Atlantic instead of the Indian Ocean basin. And that’s closer to the United States and Europe, as opposed to China. So it’s become a bit of a tug-of-war that the Angolans are encouraging, because everybody’s spending infrastructure money in their country.

And the people who won the civil war, the pro-Soviets, are a minority. So now we have the group that the United States used to support, which is closer to the majority. That’s kind of an oppressed population. So once again, there’s all kinds of weird geopolitics going on in this southwest African nation. At this point, building a railway is pretty straightforward.

The United States is basically invested in this project as one of its bigger overseas aid projects, and it’s probably going to be completed and operational within a couple of years. Too little, too late? Time will tell. But the country is very much in play. And so, of course, Uncle Joe’s going there.

How a Small Town in NC Could Disrupt Global Semiconductor Production

Photo of a semiconductor

The Live Q&A Is Next Week…

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We’re hitting the backroads today and chatting about the small town of Spruce Pine, North Carolina. What this town lacks in population, it makes up in its (extremely important) quartz mines.

These mines in Spruce Pine play a critical role in semiconductor manufacturing, thanks to the very pure quartz found here. This pure quartz is used to make the crucibles in which silicon is melted down without contamination. And no this isn’t just one of the many places that has this stuff…Spruce Pine accounts for an estimated 70-90% of the world’s crucible-grade quartz.

Hurricane Helene has put these mines in jeopardy with the heavy rains and flooding that hit the area. This has shut down the roads and the mines, and recovery efforts will be stalled until the larger towns are taken care of. This means the mines could be out of commission for a while, impacting the supply chains for the semiconductor fabrication plants.

We’re not in the red-zone yet, since most facilities keep a decent reserve on hand. However, if the production of this high-quality silicon is affected, we could be looking at major disruptions down the road.

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

If you sign up for our Patreon page in the month of October, the proceeds from your subscription for the remainder of 2024 will be donated directly to MedShare. So, you can get our all of the perks of joining the Patreon AND support a good cause while you’re doing it.

We encourage you to sign up for the Patreon page at the link below.

Transcript

Hey everybody. Peter Zeihan here, coming to you from DC in the National Mall. And today we’re going to talk about a little bit of hurricane damage that you probably were unaware of. Specifically, the town of Spruce Pine, the town of like 2300 people in western North Carolina. And the issue is that this is a town that produces sand. So roughly 150 million years ago, as Southerners tell time, there was a series of non-volcanic intrusions into the area that is now part of the Appalachians.

And we got all of these feldspar, quartz, and mica deposits. Until recently, the feldspar is what everybody was after. So you’ve heard of Pyrex? Feldspar is used in the high-quality glass that they produce, but the rest of it, especially the quartz, was basically used as concrete aggregate in construction and local road production. Nothing special. Then the semiconductor sector took off.

Well, it’s getting really weird and moving behind some of the construction equipment that is everywhere in DC right now. Anyway, then the semiconductor industry got started, and semiconductor is made primarily of silicon, and silicon is basically just processed quartz. What they discovered was that the type of quartz that exists in the Spruce Pine mines was so pure that it could be melted into something called a crucible, which is basically a little bowl.

The crucibles then could be used to melt other, lesser-quality silicon. You have to do the melting in a very, very, very, very high-quality crucible, otherwise the crucible will introduce flaws and other materials into your silicon, and then you don’t get the electrical properties you are after. The sand that comes out of these Spruce Pine mines is so pure that it is used for 70 to 90% of global crucibles to make the semiconductors.

They also use the other silicon they have there as well. And it’s also very good for that. But it’s the crucible-quality silicon that you’re really after. Anyhow, the two companies control the space. They’re not very chatty when it comes to the details. About 70% of the labor force in Spruce Pine—population 2300—works in the mines.

And the miners are—well, they got two feet of rain dropped on them, which did a significant amount of damage to the mines, although the miners are not telling us what. They’re focusing on helping the people recover, and the people can’t recover because the city is cut off. There is one road out of the mine. It’s been largely destroyed, and it’s going to be at least a month, probably closer to two, before we have some idea of whether or not it can be repaired to a level that allows equipment to come in to, say, pump the water out of the mines.

And this is not a priority for things like FEMA, because Asheville, population 100,000, is also cut off, and it’s on the interstate. So everyone’s going to focus on that first. We’ve got quite a while before we know whether or not the mine has been damaged sufficiently to imperil long-term production of this very specific type of quartz silicon.

As to everybody else, most of the folks that make these things, most of the semiconductor fabs who use this stuff, and most of the purification facilities, probably have about three months of reserves to use. So there’s no immediate disruption from supply, but we’re going to have to wait one to two months before we find out if this temporary interruption is something more significant. And if it is, then all bets are off, because this is where we get almost all of it.

Again, while you can make a crucible out of lesser silicon, that lesser silicon will then contaminate whatever it is you’re trying to smelt, which means that high-grade semiconductor-quality silicon will not be available in sufficient quantities to do more than a third of what we currently expect our semiconductor industry to create. That could be a very big deal. We won’t know for a couple of months.

The Downward Spiral of the Chinese Economy

A man holding a Chinese Yuan in the middle of Tinannamen Square

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If you ever need to make an online dating profile, be sure to add “long walks on the beach discussing the economic challenges facing China” to the list…I promise you’ll double the dates in no time.

The Chinese have been struggling with economic growth since the beginning of COVID, missing their growth rate target repeatedly and on the verge of a recession. Attempts to bail themselves out continue to fall short, likely because these stimulus measures do not address the core problems (that the population is aging and private consumption is plummeting).

That’s not even an exhaustive list either. The Chinese banking system is severely strained as well. With the government pushing for more lending at low/negative rates, the banking sector is in dire straits. Until major reform hits China, the spiral down will continue…and a larger financial crisis will continue to creep closer and closer.

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

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

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

And then there’s you.

Our newsletters and videologues are free and we will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Transcript

Hey everybody, Peter Zeihan here, coming to you from the South Carolina coast. And today, we’re going to talk about the normal things I talk about when I’m walking on the beach, and that’s Chinese finance. Okayyy? Let’s get that out with a straight face. Okay. For those of you who have been watching the Chinese markets and the economic recovery—or lack thereof—over the last year, you’ll notice it’s been kind of a rough year for them.

By their own statistics, they’re not going to hit their 5% GDP growth target for the year. And if you talk to private folks who have a more realistic understanding of what’s going on, the China that is what’s left of the Chinese bureaucratic system has basically gutted its own statistics to the point where they’re becoming literally useless. We are talking about a borderline recession.

We’re not in China, and this isn’t new. The Chinese economy stumbled in the fourth quarter of 2019 with the onset of Covid. And aside from a couple of blips here and there, it’s kind of been down in the dumps ever since. It wouldn’t surprise me if we had an actual forensic audit done on Chinese books and found that the Chinese economy writ large over that entire period was actually roughly the same size it was before.

The data isn’t out of malfeasance. It’s just the system is outdated. It’s a flag, so you don’t get accurate data at the local level, much less at the national level.

Anyway, in the last couple of weeks, we’ve seen a huge number of measures—not huge stimulus, two different things. They’ve tweaked the mortgage rate a little bit and reduced something called the reserve requirement, which is the percentage of bank deposits that have to be held back at the bank in order to make loans.

All of these things are mildly stimulatory, but they don’t get to the core issue that China now faces: it has so few people under 50 that there just isn’t much of a consumption base to be boosted. And that’s before you consider that the government of Chairman Xi Jinping really doesn’t see private consumption as a meaningful driver of economic growth.

From an ideological point of view, the idea that people would spend on themselves as opposed to spending on the state is something that seems to be a little alien to him based on his rhetoric and speeches. Anyhow, that also kind of ignores the point. We’ve talked a lot about consumption, investment, and trade.

But something we don’t talk about very often are Chinese banks, which are the method by which capital makes its way into the Chinese economy—like in most economies. And that is also completely broken. The Chinese method of encouraging economic activity is to lean on the banks so they lend to everyone for everything, often at zero to negative rates once you adjust for inflation. And when you put a bottomless supply of capital in front of anyone, they will gorge on it, and you will get economic growth.

But whether that growth is stable or sustainable is, of course, questionable. Basically, for those of you in the United States, I’ve just described subprime, Enron, or the savings and loan crisis. It’s all fine until someone actually has to start valuing the loans that are on the books. And when you flood the market with credit, a lot of these loans just don’t work out.

In the U.S., we call these “non-performing loans” (NPLs). If 1.5% by value of a bank’s loans go into that NPL category, then a government regulator will knock on your door and force you to change your policies to bring that number down. Once you get over 2%, that’s when banks start snapping like matchsticks because there isn’t enough margin on those loans to grow out of them.

Well, in China, the margin is sometimes zero or even negative. And because the concept of fiduciary responsibility doesn’t exactly translate well into Mandarin, many of these loans that should have never been made have gone bad. By most internal estimates, China’s total NPL ratio for the entire banking sector is somewhere between 5.5% and 6%, which would basically mean their entire banking sector is, well, out of luck.

This doesn’t mean every bank is there, but for every bank that is below that number, there’s at least one or two above it. As a rule, the least stable banks are the ones that aren’t on the coast. Investment inflows, export activity, and foreign money mean coastal banks tend to run tighter ships.

But as you move inland, especially to poorer, more agricultural areas, it’s all about Chinese state banks, whether they’re the big four national banks or smaller regional ones. So, if you want to talk about the future of Chinese economic growth, it’s not going to be boosted by changing the reserve requirement.

It’s going to be improved by getting the banks into a position where they can actually function a bit more normally. But that can’t happen until they deal with the NPLs. In the U.S., every time we’ve dealt with NPLs, it’s only been because we had a recession linked to the financial sector, like the subprime crisis of 2007–2009 or the savings and loan crisis in the 1980s. China will need to go through something similar.

But you’re talking about something at least an order of magnitude worse. And in relative terms, because the U.S. economy is much stronger than China’s, you’re talking about something even worse than that. So, it’s nice that the Chinese stock market is having a little bit of a pop, but none of the underlying issues have been addressed. Trying to make credit easier when credit is already overextended will simply make the inevitable crash that much harder.

How Effective Are the Israeli Defense Systems?

Photo of Iron Dome missile defense system firing

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Israeli defense systems are getting put through the ringer as of late, so let’s talk through each of these systems, how they’re doing, and what the US involvement looks like.

The Iron Dome is what we hear about most often; this is what intercepted the rockets from Hezbollah. This system is designed to counter unsophisticated rockets, and thanks to Israel’s small size, it does this quite well.

When the bigger stuff starts to fly, like ballistic missiles, that’s when the Arrow system comes into play. While its been successful against the recent attacks from Iran, the US was helping out on the tracking/targeting side of things, so we don’t have a true measure for how good this system is on its own.

That helping hand from the US is key, not only because its helping the Israelis defend themselves, but the US is also getting some valuable, real-world testing for tech that can be used back at home. So, its a bit of a win-win here.

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

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

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

And then there’s you.

Our newsletters and videologues are free and we will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Transcript

Hey, everybody. Peter Zeihan here, coming to you from the South Carolina coast. And we’re going to talk about technology that’s been in the news a little bit, and that’s missile defense, specifically the Israeli system that has proven to be remarkably successful in recent years, both at shooting down Hezbollah rockets coming in from Lebanon and, more recently, ballistic missiles coming in from Iran.

A couple of things to keep in mind—three things to keep in mind. Number one, there is more than one system here. The first system is called Iron Dome, and that is the anti-rocket system deployed in northern Israel that’s been intercepting the rockets coming in from Lebanon. Now, it’s not that this isn’t an impressive system in its own way, but the rockets being fired by Hezbollah are oftentimes garage projects.

And as such, you’re not talking about something that is particularly sophisticated or moving particularly quickly. Basically, what happens is the Israelis launch a lot of interceptors when a barrage is coming in, and they kind of loiter until they can lock onto a rocket, and then they zip down and hit it. But even if they miss, a lot of times these things have a very high dud rate.

Over a third of them probably don’t even explode when they do hit, and they have next to no guidance. In fact, most have had no guidance at all. So it’s good for what it is, but let’s not overplay it. Also, keep in mind that Israel is the size of New Jersey, and the northern border with Lebanon is very, very short.

So, from a technical point of view, it’s relatively easy to guard that sort of territory. The second system, second thing to know, is the ballistic defense system called the Arrow system. And it is significantly more sophisticated than what’s going on with Iron Dome. This was pulled into play to defend Israel against the ballistic attacks that came in from Iran last week.

Now, the problem here is in assessing how successful it is. We really don’t know, not because it hasn’t shot missiles down, but because it hasn’t done so alone. In the recent attacks from Iran, the United States has been there, present, shooting things down too, and linking the radars together. And we just don’t know how well the Israelis could do if it weren’t for American involvement in the defense.

It probably still is among the best in the world, but everything that has been thrown at it has already had to deal with the United States. Everything has basically been designed before the year 2000. You’re talking about missiles that are at least 20 years old, off of designs that are at least 30 years old. Calling it cutting-edge is probably the wrong phrase.

Again, this is a country the size of New Jersey. You don’t need a lot of arc of coverage in order to shield the whole thing. And even with those factors in play, a lot of the missiles still made it through. They didn’t cause any substantial damage, but that is a fault of the missiles, and maybe, perhaps deliberate targeting, avoiding civilian areas more than anything else.

And then the third and final thing to keep in mind is that, for the United States, this is a perfect layout. U.S. assistance with both of these defense systems, with the intent of then taking them, modifying them for our uses—whether in terms of deployment, theaters, or the homeland—and then scaling them up. And so, believe it or not, all of the ongoing agony and violence of the Middle East, in many ways, is providing the perfect testbed for missile defense for U.S. defense systems.

Okay, I’ve got to hit the beach today, but anyway, until that, bye.

MedShare Donation + What Do Hurricanes and Political Factions Have in Common?

Satellite photo of hurricane helene over Florida

You’re about to watch a free video on factors impacting the US election, but before you do, learn how you can get access to the most recent videos and support a good cause in the process…

 

All proceeds for the remainder of this calendar year from all new subscriptions on Patreon between now and November 1, will be donated to MedShare International. That means you can get access to the daily videos, news digests, community forum and live Q&A, and your money will be going directly to support those in need.

You can click the link below to join us on Patreon or donate directly to help support MedShare’s efforts.

I know everyone wants constant updates on the upcoming US election, and if you haven’t figured this out by now, that’s not really my shtick. However, I will offer a couple factors that could influence the outcome of this election.

First, we’ve got the severe damage to infrastructure in the swing states of Georgia and western North Carolina caused by Hurricane Helene. While this might not seem like something that would impact the election, these highly Republican areas are sensitive to voter turnout, to the point where a few thousand votes could change the result.

The bigger factor to watch is organized labor and the business community. Neither of these factions are fully aligned with a major party, so that puts a lot of votes up in the air. Expect these factions to act as swing voters and introduce a hefty amount of volatility to the political landscape.

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

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

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

And then there’s you.

Our newsletters and videologues are free and we will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Transcript

Hey everybody. Peter Zeihan here, coming from Washington, D.C. That is the Rose Garden behind me at the White House. And of course, there’s a new layer of security that wasn’t here last time I was here, so you can’t see anything. So instead, we’re going to put the Treasury Department or ours. At least, it’s a, you know, pretty building.

Anyway, a lot of you have been asking me to give you an update on my assessment for the election, and I’m just not going to do that. I gave my assessment two years ago. It was based on structural factors, and those structural factors haven’t changed. And if you want a blow-by-blow of what’s going on precinct by precinct, I am not the guy to do the hot takes.

But I will tell you two things: one on a micro fact that is likely to impact this election, and the second one is on the broader trend that will affect future elections. So first, the micro effect. When Hurricane Helene rushed in from the Gulf, it did something that most hurricanes didn’t do and maintained significant strength even when it was a couple hundred miles inland.

Normally, when you have a storm surge on the tornadoes and the wind and the rain, you devastate an area of the coast. Then, when it’s time to pick up the pieces and repair the damage, the first thing you do is get the interstate corridors back up and running and then move on to the secondary roads. Most coastal regions, particularly in the Gulf, are pretty flat, so that’s not too hard to do.

The devastation can be immense, but once you get the road arteries back up and running, things aren’t so bad. But when you move inland and start hitting the Appalachians, you’re in a different situation. It’s not flat, and you don’t have a grid network for roads where they’re all over. You have very specific roads following very specific corridors.

And if you dump two feet of rain in those zones, the rain washes off the mountains, gets into the streams, and river levels can rise by 20-30 feet or more and wash everything away. That is exactly what happened in northern Georgia and western North Carolina. Now, in both cases, we’re looking at years before the physical infrastructure is repaired and probably more than another month before we even get a reasonable damage assessment.

And why that matters to this election specifically is that northern Georgia and western North Carolina are among the reddest of the red areas in the country. Both North Carolina and Georgia are swing states this time around. So, the idea that you can have several million voters, and have a few hundred thousand, who, for whatever reason, can’t vote because of physical infrastructure conditions, in races where just 10,000 votes might separate the winner from the loser—you can see how that can tilt the election pretty easily.

The second thing that’s longer term is what’s going on with organized labor and the business community because right now, neither of those factions are part of either major party. Donald Trump pushed the business community out of his coalition for being, from his point of view, unnecessarily disloyal.

And the unions are kind of in flux between the Democrats and the Republicans. They’ve got kind of a foot in both camps but are not really committed one way or the other. If you remember, the Teamsters President—big union in the United States—actually endorsed Trump live on stage at the Republican National Convention. And in the most recent court strike, the Biden administration refused to take a trust-busting action against the unions.

In an attempt to draw the unions back into the Democratic coalition, both factions are very much in play. This has never happened before in human history because these two factions, their arguments, and their compromises, form American economic policy. And the idea that one wouldn’t be part of one coalition or the other is strange, but both at the same time? Not reasonable. Not sustainable.

If you look at either the Trump administration or the Biden administration and wonder why their economic policy seems batshit crazy, that’s why. The people who have traditionally done the math as part of economic policy formation are not in the room. Now, this is, like I said, not sustainable. Sooner or later, one or both of these factions are going to either rejoin one or both of these coalitions or form their own, and we will have a reorganization of American politics.

Now, there’s nothing about this that is odd. We’ve done this five times in American history already. This will be the sixth reorganization, and it will form what will be known as the seventh party structure. But until that happens, both of these factions, arguably historically the most powerful factions on both sides, are in play. The business community has always been the backbone of the Republican coalition, and organized labor has always been the backbone of the Democratic coalition, or at least since the last reorganization.

So this will not last. But until such time as these factions are back as part of the political process, they are functionally swing voters. And that makes this election a lot more volatile than it would have otherwise been.

Okay, that’s it for now.

MedShare Donation + The Koreans Are Coming to the Ukraine War

North Korean soldiers marching

You’re about to watch a free video on the North Koreans getting involved in the Ukraine War, but before you do, learn how you can get access to the most recent videos and support a good cause in the process…

All proceeds for the remainder of this calendar year from all new subscriptions on Patreon between now and November 1, will be donated to MedShare International. That means you can get access to the daily videos, news digests, community forum and live Q&A, and your money will be going directly to support those in need.

You can click the link below to join us on Patreon or donate directly to help support MedShare’s efforts.

Reports coming out of South Korea indicate that North Korean troops could be deploying to Russia. These reports are unconfirmed, but the South Koreans aren’t usually in the business of lying. So, what does this mean for the Ukraine War?

North Korea hasn’t seen combat in ages, so while they gain some field experience, the rest of the world will get a glimpse at their capabilities. If the artillery and missiles the North Koreans already sent to the Russians are any indicator, I wouldn’t expect much. This could also drag the South Koreans into the conflict on the Ukrainian side, which might outweigh what the North Korea brings to the table for Russia.

Speaking of dragging new players into the war, Iran’s involvement with Russia could get Israel involved as well. This would likely come in the form of Israeli attacks on Iranian facilities making drones, but with Israel being a leader in defense technology, this could be a game changer for the Ukrainians.

The Russians are showing their declining military capacity by grasping at straws trying to get the North Koreans and Iranians to save their asses, but that strategy may soon backfire.

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

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

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

And then there’s you.

Our newsletters and videologues are free and we will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Transcript

Hey everybody. Peter Zeihan here coming to you from Colorado. Today there’s some weird stuff going in in the news. We’ve got reports that North Korean troops, are in the process of deploying to Russia. Some technical advisers are already there providing the Russians with assistance on how to use North Korean weaponry system. But now we’ve got, open discussion in South Korea about, intercepts. 

From Point Yang, about, an actual troop deployment to maybe even fight on the front lines. Now, I don’t have any way to confirm this. I don’t have, my ear in the Korean dictator Kim Jong un’s, House or anything like that. But the South Koreans are not known for making stuff up. I mean, they’re known for. 

And they’re known for bulgogi and kimchi and soju and electronics and cellular technologies and computing and mass manufacturing and heavy drinking. But they’re not known to make shit up. So I’m taking this a little bit more seriously than I would any other random report. We don’t usually get a lot of fake noise out of Seoul. Anyway. Four big things come from this. 

Number one, the North Koreans have not been in a fight since 1953, so there is no living soldier in North Korea that is ever fired a rifle in anger. And getting any sort of information on how they might perform in real world circumstances would be an intelligence bonanza. Of course, it goes both ways. The North Koreans haven’t had been in a fight, so being able to see a front line, even if they’re not major combatants, is something that they could use for training purposes. 

But for the point of view of the United States and South Korea, this is going to be the best bit of information we’ve ever had, in the last 70 years. That will allow us to remap our war plans, for the Korean Peninsula, should anything go wrong. Having a more accurate view of your enemy is always the first step, to planning. 

The second big thing, North Korea is not the only country that is providing foreign assistance to the Russians. Specifically, they’re providing, ballistic missiles and artillery shells to the degree that maybe half of the artillery shells that have been used in Ukraine by the Russians this year are from North Korea. I mean, they’re crap. Probably half of them don’t work. 

And they’ve been blowing up more Russian artillery tubes than Ukrainian artillery tubes, because sometimes they blow up too soon. Anyway, they’re not the only ones. The Iranians are also involved with the Shaheed drones, which over which a thousand have been used at this point. Now, just as in with the North Korean situation, there’s an intelligence bonanza to be had here or a way to get information on the inside of the system. 

The Iranians, have recently launched a couple hundred ballistic missiles against Israel, and Israel is itching to respond, and they’ve basically already been given the green light, more or less, by the Biden administration to do so. The question is where, when and how? Well, if we now have the North Koreans intervening in the Ukraine war and we already have the Iranians intervening in the Ukraine war, then there’s an opportunity here for in exchange for the Biden administration, you know, kind of giving its blessing, to an Israeli retaliation attack on Iran. 

They might just add a couple target coordinates in order to get the facilities that make the shitty drones. Iran, like North Korea, is not exactly a technological leader, and the number of personnel that can put these things together is relatively limited. So if you were to take out a cluster of technical support, which the Russians desperately need, as well as the manufacturing facilities of which the Russians desperately need, you could as part of your retaliation attack, see Israel actually remove a huge source of military capability from the Russians in the Ukraine war. 

Also, keep in mind that the Russians are among the best in the world at assassination campaigns. And whenever an Iranian nuclear scientist gets a little bit too useful, they tend to meet a dire end. Just simply expanding that target set to include drone technicians is something the Israelis could do very, very, very easily. The third thing, as I mentioned, North Korea and Iran are not countries that I would mention as technological leaders and the fact that the Russians need them for half of their artillery shells and a substantial percentage of their drone warfare, that bodes really, really badly for the Russians ability to maintain this war long term. 

We already know that they’re only be able to make a double digits number of new tanks a year. They’re just really refurbishing their old ones. And if the technical skills within the military industrial complex of Russia are down to the degree that they’re this dependent on two fourth string countries, that would suggest as we move forward, they’re going to become wholly dependent upon imports of weapons. 

Well, that provides other opportunities for countries to choke the Russian war machine, because if the vulnerability isn’t in Siberia, if it’s inside this farm, that’s a lot easier to get to, especially if you’ve got countries like South Korea or Israel who are now involved. Which brings us to the fourth and final thing, South Korea, in Israel now involved, there’s a diplomatic angle here as well as a strategic angle. 

You have to consider both of these countries have been desperate to avoid Ukraine’s entreaties, and the United States requests to get involved in the conflict in any meaningful way, because they’ve got bigger security issues closer to home. That focus wholly on them. And they didn’t want the Russians stirring the pot in their own backyards. Well, now the Russians are stirring the pot in their own backyard, so they are involved. 

And so we’re seeing the political restrictions loosened in both Jerusalem and Seoul. And that can have a lot more impact than simply providing the Ukrainians with some technical help and some weapons systems. South Korea is one of the world’s five biggest arms exporters and produces regular things like artillery and rocket system and tanks that are not too far behind what comes out of Germany or France or the United States, but at a significantly lower price point. 

In fact, they’ve already signed a deal to provide the poles with over a thousand tanks and assorted systems. Providing that sort of assistance to Ukraine is obviously a no brainer. But when you look at a country like Israel that has under 10 million people and is in kind of a tough neighborhood, mass producing hardware quickly is something they cannot do. 

But the South Koreans can. And to flip the equation, the Israelis are the world leader or a world leader in anti-missile technologies and by far have the world’s best anti artillery and anti rocket technology and their Iron Dome system. Well, on day one of any theoretical Korean War, the North Korean is going to be lobbing all kinds of ammo into downtown Seoul. 

So if Israel can help out Korea with artillery and rocket defense, cooperation between these two countries changes the strategic calculus of both of them in a very positive way. And if you can take Israel’s technical acumen on some specific weapons systems and married to Korea’s ability to produce a lot of things very quickly, you can actually see that working out through the entire Western alliance system. 

So as I said several months ago, when the North Koreans started to get involved at Russian insistence, you know, this was probably one of the dumbest things that the Russians could do. I mean, yes, it gives them a tactical leg up in terms of ammo, but it risks bringing in a really important player. On the other side, and that’s South Korea. 

And now we’re looking at both Israel and South Korea being brought in at more or less the same time and being brought in together. And that changes a lot. 

Photo from Wikimedia commons

Impacts of an Israeli Strike on Iran’s Oil Sector

Photo of black oil barells

You’re receiving this video a week after its initial posting on Patreon. If you’d like to get access to this content as soon as it’s released, along with a number of other exclusive perks, click the link below.

Following my video on Iran’s attacks from the other day, I feel it necessary to explore the possibility of an Israeli strike on Iran’s oil sector and the affect it would have on global markets.

Iran’s oil exports hover around 1 million barrels per day. Thanks to sanctions, mismanagement, and maturing fields, production has taken a hit over the years. Regardless, that’s a million barrels per day that could vanish from the markets, which means a $10-15 increase per barrel on top of the “war premium”. Not a global catastrophe, but it will still hurt.

The US is fairly insulated from shocks to the global oil markets (like this one), so I’m not worried about the US. Should this get really bad, the US president can authorize a suspension of crude exports which would create a glut of oil in North America…similar to what we’ve seen with natural gas prices.

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

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

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

And then there’s you.

Our newsletters and videologues are free and we will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Transcript

Hey everybody, Peter Zeihan here, coming to you from the beautiful chaos that is Dallas Love Airport, headquarters of Southwest Airlines. In the aftermath of a video I recently did on the Israelis and their potential strike on Iran — specifically targeting the oil sector — I thought it would be worth noting how that could affect a few things, most notably here in the United States.

So, Iran’s oil production has been suffering for years. Part of it is due to sanctions, but mostly it’s because their regulatory regime is really punishing for would-be foreign investors. They basically require that the state take a leading role in everything, and the state company is not very good. Most of the oil fields in Khuzestan are mature and require a lot of technology that the Iranians don’t have and don’t understand in order to make them produce meaningfully.

Everything else worth having is offshore, but the Iranians have absolutely no ability to operate offshore by themselves. So while the numbers that officially hit the market ebb and flow because of the sanctions regime — and whether or not the Iranians are attempting to sneak around sanctions — the actual flow is about a million barrels per day of exports. Sometimes it’s as low as 400,000, sometimes it feels a little bit higher, but about a million. Now, if you remove a million barrels a day from the market, we’re going to feel it. But that’s only 1%, so you would expect, in a purely market-driven environment, for that to kick up prices by ten, maybe fifteen dollars a barrel. Of course, since it would be due to someone dropping a bomb on something, there would be a war premium on top of that.

The impact globally is going to be felt, it’s going to be real, but it’s not going to be huge. As for the United States, I’m really not concerned. The U.S. is no longer an energy importer. We’ve come a long way since 2007, when we were importing something like 14–15 million barrels a day, thanks to the shale revolution.

The United States is now arguably one of the lowest-cost producers in the world, and our production is well over 20 million barrels a day. Moreover, the U.S. has diversified its economic strength and is now absorbing far fewer barrels. Now, if you look at the headline numbers, you’re not going to see that, but that’s because the U.S. Energy Department calculates things differently from everyone else.

We look at the amount of crude we actually consume in total, including what goes into our refineries for products that are then exported. That’s not how most countries do it. The argument here is that nobody consumes raw crude; it has to be turned into something. So, it’s not a stupid way to look at the data, but it does make it seem like we are more dependent on international trade than we actually are.

In fact, if you consider all the types of crude that the U.S. produces — raw crude, natural gas liquids, condensates — we now have such a huge surplus that by the end of this year, the U.S. will be exporting 5 million barrels a day of roughly defined product. In the history of the petroleum era, there are only three countries that have ever produced more than 5 million barrels per day of raw crude, and we’re exporting that much in refined product.

So, the degree to which the United States is insulated from this is robust. Now, do keep in mind that oil is an internationally traded product, and so there is more or less a single global oil price point because it is an easily exchanged commodity. But if we ever get to the point that there is an oil shock — I don’t think that will happen with Iran — but if we do, and prices get to a point that the American president finds untenable, the U.S. president, courtesy of powers granted back in 2015, has the authority to summarily suspend all exports of raw crude. And we do a lot of that too. If that happens, the crude gets trapped within North America.

We get a supersaturated energy market, and then North American energy prices separate from global energy prices in a manner very similar to what has already happened with natural gas prices. U.S. natural gas prices, because of a similar glut in natural gas, are as a rule one-fourth to one-eighth what they are in Europe or Asia. So if we ever do get into a situation where crude prices get sketchy, you can count on the American president — whoever it happens to be — to enact that power.

Then, all of a sudden, we’ve got energy prices here that rarely go above $60, because every shale oil field we have is cost-competitive at that price, while everyone else screams past $100 on their way to $200 and more.

Okay, that’s it for me. Of course, the biggest downside of being here is that, because Southwest is a hub and it’s open seating, you have to check in 24 hours online in order to get a decent seat. And because I was launching this new thing called Patreon 24 hours ago, I forgot. So I am C-51. I will be the sad person up against the bathroom, trying to squeeze this lengthy, 6-foot-5 frame into a middle seat that does not recline. Pray for me.