A Massive Energy Break Coming Soon

An Oil Tanker in the ocean

We’re slipping closer and closer to a major oil supply crunch. With the Persian Gulf still shut in, global inventories almost depleted, and threats to other oil supplies, the world doesn’t have enough oil to keep things running for much longer.

The Chinese have been able to substitute some of their oil demands with coal-based products, but this is just a band-aid. Eventually, oil prices will spike, and certain consumers will no longer be able to afford petroleum products, leading to demand destruction.

Northeast Asia will be hit hardest due to its heavy reliance on imported oil, but even Europe will have issues, despite having alternative supply sources.

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Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. I wanted to give everyone an idea of just when the oil crisis is going to hit, because we’re about their short version is that since the Iran war started, we’ve had somewhere between nine and more, currently about 13 million barrels per day of Persian Gulf crude that isn’t even getting produced, much less exported to the wider world. 

And we are well past the point where the last tankers of exports pre-war have reached their destination. So everyone’s just been burning through stocks and at some point in either June or early July, we’re going to reach basically minimum operating levels for inventories and half the world, if not more. 

We’re looking already about 1.25 billion barrels of crude that haven’t been delivered. With every day goes by. That’s 10 to 13 million barrels of crude that have to be pulled from inventories. And because prices haven’t dropped, which is kind of weird. Demand really hasn’t dropped all that much. We’ve seen a little bit movement in some subsectors, like say, jet fuel and diesel, but for the most part, people are continuing to consume crude like this isn’t a long term problem. 

Oh my god. Anyway, at some point in June or early July, we’re going to hit the wall. The primary reasons why it hasn’t happened already is we’ve got two little factors in play. The first are the strategic reserve releases that the IEA approved two months ago. Now, in the case of the United States, this has really helped out Europe because the United States is a net exporter of crude and refined product by a large margin. 

So we don’t need the crude that is being released. So roughly 2 to 2.5 barrels a day of crude from our strategic petroleum reserve are just crossing the Atlantic and helping out the Europeans. And since the Europeans are so much more efficient at energy use than we are, that has really helped them kind of square the circle in the mid-term. 

It won’t last much longer, but for now it’s holding on the Asian side. Something else has helped out. That’s a little odd. 

When you make petrochemicals, you usually use a mix of feedstocks. You turn oil into something called naphtha. That’s your primary feedstock, but you also use liquefied petroleum gas like ethane and propane and butane. Some of these have partial substitutes, specifically the naphtha. 

And what the Chinese are doing is trying to cut out as much naphtha from their system as they can, and instead substitute it with a kind of processed liquefied coal. Now, this is wildly inefficient and expensive and especially polluting. But when you’re in a throughput driven system like the Chinese, it’s not so big of a deal. So headline. 

The Chinese petrochemical sector uses about 4 million barrels a day of product, of which about half, maybe a little less, is naphtha. And they’ve been able to substitute coal for maybe a third to half of that which is bought Asia. A little bit of wiggle room and has prevented the Chinese from having runaway price increases. You combine that with their large scale application of very, very, very small electric vehicles and a grid that primarily runs on coal anyway, and they’ve bought some more buffer that way too. 

But all of this is going to evaporate over the course of the next 3 to 6 weeks. So we’re very close to the break assuming nothing else goes wrong. And as we have seen in the past, that if we do get into a hot war situation again, the Iranians have easily demonstrated that they can hit any part of the export infrastructure from the Persian Gulf that bypasses the Strait of Hormuz, specifically the bypass pipelines of the United Arab Emirates and the Saudis have so were, ironically, in probably the best that can be hoped for right now. 

No hostilities, but the Persian Gulf still closed. If the Persian Gulf were to reopen tomorrow, it would be months before any new crude would flow, because it just takes that long to turn these fields back on and in some cases, years. So the late June and into July deadline is probably going to happen regardless of what happens with the negotiations that are ebbing and flowing back and forth. So get ready for a fun summer. 

How this usually happens is when you’ve got this sort of disruption. Prices go through the roof because there just isn’t any throughput. It’s not that people have cut refinery runs for the most part. It’s just that we’re not going to have feedstock. And when that happens, you get this lovely thing called demand destruction, where prices rise to a point that some parts of the economy, some people in some parts of the world simply can’t afford the crude derived products at all. 

And when that happens, their demand is destroyed. Till such time as prices fall back into line. The last time the world experienced this scale of disruption, it wasn’t the oil crises in the 70s or the 80s. It was World War two when everything got sunk. So historically unprecedented is the term. And keep in mind that with the global happened, some version of this was going to happen in a large scale. 

Regardless, the parts of the world are going to be most affected. At the top of the list is Northeast Asia, because this is an area that imports well over 90% of their crude. And until recently, all of that crude has really come from the Persian Gulf. They do get a little bit of a kicker from the former Soviet Union now, a little bit from the Western Hemisphere, but not enough to make a material difference. 

And the second worst will be Europe, where they also import 90% of their crude. But they have the potential of tapping more regions, most notably North America and North Africa and West Africa. So here we go.

Using U.S. Energy as Leverage

Two LNG tankers at port

Trade relations between the U.S. and Europe are on the fritz. The latest in all the noise is the suggestion that the U.S. could restrict LNG exports to the EU if trade negotiations break down.

This is a low blow, as Europe imports most of its gas. And if you haven’t noticed…the world is in a bit of a shortage at the moment. Cutting off exports would be legally and practically difficult, but a distressing notion nonetheless.

While the idea of using U.S. energy dominance as a negotiating tool isn’t surprising, I had originally pictured this strategy as being reserved for rivals, not allies. But there’s the Trump administration for you.

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Transcript

Hey, all. Peter Zeihan here. Coming to you from Pozza Della Cava caves in Ovierto, Italy. Today we’re looking at some of the strange things that are happening in US European relations. As you may or may not remember, the Trump administration is carrying out 200 simultaneous trade talks and none of them are really going anywhere, which means it’s really up to secondary officials that normally wouldn’t have much power in negotiations to kind of set terms. 

And one of them, Andrew Pozner, the US ambassador to Europe, has said that if talks between the Trump administration in Europe don’t go well on things like, well, this is neat on things like auto tariff levels that the United States is going to stop sending liquefied natural gas to the continent. Now, that’s it’s a total dick move, but that doesn’t mean it won’t work. 

Two things. Number one, Europe imports nearly 90% of their natural gas. And before the Ukraine war, it was more or less an even split between stuff from North Africa liquefied natural gas. It was imported from multiple countries, stuff from the former Soviet Union and then Norway. What’s happened now is that two of those got away because of the Ukraine war. The flows from Russia have stopped and because of the Iran worshiping strait, a former flows from Qatar, which is the largest LNG supplier to Europe pre-war, have also stopped. That means US natural gas is one of the few sources of energy that the Europeans can still access, and if that is to go away for any reason, then the Europeans are kind of screwed. 

So that’s kind of piece one. Piece two is how this would happen. It’s kind of difficult to imagine. That doesn’t mean it can’t happen, though. The issue is private enterprise. The United States doesn’t have a state or company. It just has private companies that are buying natural gas on the American market, cooling other facilities, typically on the Texas or Louisiana coast, and then shipping it out. So if the United States was going to bar those companies from selling to Europe as part of negotiations, there were definitely a bevy of lawsuits. But if there’s one thing about this administration that we really do understand is it’s deeply disinterested in general business conditions or the role the government plays in business, and it’s really not constrained by legal norms at all. 

So while from a clear, clean legal point of view, I don’t see how this would happen, I don’t think that would really dissuade the federal government under this administration at all. So will this work? This is one of the things that in my projects, in my books in the past, pre Trump, I said we should probably expect that the United States will try to leverage its energy, security and economic strength in order to get whatever it wants out of anyone. It’s just a little frustrating from my point of view, to see this used against allies as opposed to potential foes, but, you know, bygones.

Impacts on the U.S. Power Grid from the Iran War

Satellite view of north american lights and energy

The U.S. is relatively insulated from the conflict in Iran and the closure of the Strait of Hormuz, since it’s a net exporter of nearly every major energy source. Most other countries aren’t so lucky…

However, there are plenty of indirect risks for the U.S. Global energy shortages could spike commodity prices (like coal) and disrupt supply chains; this would affect key U.S. imports like aluminum, copper, and transformers.

So, the U.S. power grid is likely safe in the near-term, but secondary effects on infrastructure and manufacturing could complicate things down the line.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. Today, we’re taking a question from the Patreon page. Specifically, it’s whether or not I think that there are any parts of the US power grid that are particularly vulnerable to what’s going on in Iran right now, because of the closure of the Strait of Hormuz, for example, 20% of global liquefied natural gas is locked in. 

And if you happen to be an importer of that, that’s a bit of a problem in any number of ways, because you can’t keep the lights on. Nothing else really matters. This is something where I’ve got some good Not only is the United States insulated because it’s in a different hemisphere, but the United States is a net exporter of every type of energy, whether that is raw electricity that’s already been generated, natural gas or jet fuel, naphtha, coal, all of it. 

Which means that unless there is a direct price link back to the United States through something that is used to make electricity, you’re kind of in the clear. The only fuel out there that really has that sort of link is liquefied natural gas. And the United States is the world’s largest exporter of that now. So there’s at the moment, no direct link. 

Now there’s plenty of indirect links. So for example, if you use coal in the United States and the United States is a coal exporter and the price of coal goes up on a global basis because of energy shortages related to other countries having power problems, and you might feel indirectly, or if you want to take a longer step in something, we’re all going to feel probably by the end of the year, the sort of rolling energy crisis that we’re starting to see in East Asia and to a lesser degree in is absolutely going to hit manufacturers markets. 

And the United States imports. A lot of the things that we use to stabilize our own power grid, whether that’s aluminum cabling for things like power lines, copper for anything that goes into electronics, and more advanced pieces of equipment like transformers, which take over a year to build. Because of the complexity, we will be feeling that in our power grid, but that is very indirect. 

That is not this month. That is a problem for probably the fourth quarter of this year. So for what it’s worth. I do have a little bit of good news from time to time.

America’s Leg Up on Petrochemicals

Petrochemical plant

The Iran War has caused a massive disruption in global petrochemical production. Since most of the world relies on oil-derived naptha, the ~12 million barrels/day shortage is taking a toll.

Many countries in Asia and Europe are beginning to feel the pressure, but the U.S. has a leg up on everyone else. Thanks to the shale revolution, America’s cheap and abundant natural gas is used to produce its petrochemicals. This has enabled the U.S. to avoid shortages and become a dominant global supplier of key petrochemical inputs.

Nearly every industry, from plastics to fertilizers, is impacted by these materials. So, the global industrial landscape is getting shaken up once again.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Walla Walla, Washington. Today we’re talking about the Iran war and the impact that it is having on petrochemicals. 

The way most of the world decides to make petrochemicals is they start with crude oil and then refine it into an intermediate product called naphtha and then naphtha. 

Then it goes on and is processed into tens of thousands of things that we all use every day. That’s not how it operates in the United States. In the United States, because of the shale revolution, we have basically a bottomless supply of natural gas. Based on whose math you’re using, roughly one third of the natural gas that is produced in the United States, it’s produced is a waste product, or at least as an associated production of oil, which means that in the United States, natural gas is significantly cheaper compared to the cost of oil. 

So in the rest of the world pre-war, the ratio between oil and natural gas on a point of view was about 5 to 1. In the United States, it’s closer to 2 to 1. So we use natural gas to produce products that, everyone else would use naphtha for. Well, what has happened? Two things. Number one, all that natural gas means that the United States can produce most petrochemicals at a significant cost advantage versus everyone else. 

Second, with the Iran war going on now, there’s a global shortage of oil to the tune of about 10 to 12 million barrels a day. So everyone else is hardware is designed to turn oil into naphtha, into petrochemical products. But all of a sudden, the price of oil on the availability of oil means that basically everyone in the East Asian rim, and very soon, everyone in Europe, simply can’t access the product they need at all, and they don’t have access to enough natural gas in the first place to switch over. 

And even if they did, they’d have to change their hardware to be able to do it. So the United States is becoming, from an economic point of view, the only real functional, large scale supplier of the butadiene and methyl groups, which is where we already had, huge advantage. And that’s things like, particleboard and silicones and octane for gasoline and nitrogen fertilizers and melamine, plastics, a lot of things like that. 

Whereas everybody else is now discovering that they don’t have the price structure that’s necessary to maintain competitive production of really any of this. Third problem, because the United States, is able to have an advantage now in all of the product sets. We’re seeing a significant shift in production quantities as well as qualities. So let me show you this chart here. 

If you start at the bottom left, that gray bars oil, you turn into naphtha, which goes on to make all the water products go to the right side. At the bottom you start with natural gas. You crack it to get ethylene, and then you turn that into products. But this whole set can be made with natural gas. 

And so the United States has not just a price advantage now, but just a huge advantage in the quantity, the type of products that can be made in mass. You play this forward for six months, two years, which is easily going to happen because of the Iran war. And we’re looking at a shattering of the petrochemical supply chains on a global basis outside of North America, and that’s going to have massive impacts downstream on pretty much every industrial sector.

Iran War Winners and Losers: North American Energy

Satellite view of north american lights and energy

As Persian Gulf and Russian exports collapse, global prices will rise, which should benefit the U.S. and Canada. However, if exports are halted to keep gasoline prices down, then North America would become oversupplied. This would effectively cap oil prices near production costs, despite the rest of the globe facing shortages and rising prices.

This means the producers wouldn’t see much upside, with refiners becoming the only real winners (even though they still have to retool to use that domestic light crude).

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. And today we’re doing another one of our Open-Ended series on winners and losers in the Iran war. And today we’re talking about energy markets, specifically in North America, where the two big players are the American shale patch and Canadian producers primarily, although not exclusively, in Alberta. All right, first things first. Let’s get an understanding from where we were the day before the war. 

U.S. shale output is at record levels, and by itself is the single largest producer of crude in the world. But most of that crude is light and sweet. The issue is that in shale formations, there’s not a big pool of crude for you to stick a straw into. It’s tiny, microscopic little packs, and so you drill into it, inject liquid which cracks the rock. You inject sand, which then goes into the cracks. You pull the water out and the sand keeps the cracks propped open. So the facility then generates its own pressure as this stuff drains up. And because of that, the oil never migrated through a rock formation. So it’s very pure. It’s, very light, very sweet, low viscosity. 

Canada’s oil sands are very different. It’s basically Bitterman, or oil sand where you’ve got a relatively porous rock and the petroleum is migrated through a lot to kind of almost make it a sludgy gel. So it’s very thick and very heavy, and some of the crazy stuff is actually solid at room temperature. So they have to often inject steam in order to make it liquid so they can pump it up. 

Sometimes they literally electrify it, sometimes they strip mine it. Anyway, it’s a lot more energy intensive than what happens with U.S. shale, but in both cases, the cost per barrel is pretty high. It’s rare that it’s, under 30. Sometimes it’s over 60. So in both shale patches and the, Albertan oil sands, if prices are too low for too long, a lot of the work just stops. 

Anyway, on the surface, with having the Persian Gulf go away right now, we’re at 10 to 12 million barrels a day off line. even if the war ends tomorrow, that will remain that way for at least three months, because these fields can’t just be flipped back on. Some of them will take at least two years, probably more. 

And that assumes no additional damage, which, considering the path we’re on right now, is a laughable, scenario. We’re probably looking at the bulk of the 22 million barrels per day that comes out of here never coming back, or at least not within a decade. In that scenario, oil prices have nowhere to go but up and starting strongly, strongly, strongly. 

So. So it would appear that US shale and the Canadian shale patch are big winners here mid term. Because, you know, if the price of oil doubles or more and you production costs don’t change and you have access to the world’s largest market and you’re nowhere near the the shooting, it seems like all positives, right? Wrong. Because when oil prices go up, there’s another piece in play here. 

First the Ukrainians are taking out basically the western half of the Russian oil complex. They’ve already destroyed the ability of the Russians to export through the Baltic. They’re going to be working on the block very soon. That’s at least 3 million barrels a day of Russian crude, maybe as much as five. That simply isn’t going to come back either. 

So we’re looking at Persian Gulf crude and Russian crude disappearing from the market at the same time, which will send prices even higher, which again, is great for Canada shale. Right? Wrong. Because I don’t know if you guys noticed this, but the American president, Donald Trump, is pretty populist. And if we start getting $10 gasoline in places that you know, aren’t California, there’s going to be a bit of a rebellion. 

And this is something that Trump doesn’t have to stretch the law to deal with. Back in 2015, when shale oil was new, there was a big debate in Congress over solar and wind versus oil exports, what was necessary to push the American energy complex forward. And the compromise that was reached was that we would allow oil exports that used to be illegal, and we would subsidize the development of solar and wind, and to make sure that we had a stopgap, the president was given the authority without having to go back to Congress, without having to even have a hearing to end U.S. oil exports if market conditions argued for problems. 

However, he defines that, which means that the 5 million roughly barrels a day of crude that the United States exports right now could go to zero with the stroke of a pen. And if we enter in a situation where the American internal oil market gets really expensive, to the point that it becomes a political problem for Trump and an economic problem for the country, you bet your ass he’s going to do that. 

So now we’re looking at a scenario where Persian Gulf crude and Russian crude and American crude all go offline at the same time, sending prices sky high. So this sounds like it would be great for the Canadians, right? Wrong. Because most of the crude that Alberta produces is shipped south to the United States, and it can really only be refined in refineries that the United States operates. 

They do have a one pipeline that isn’t doing very well, by the way, called Trans Mountain, that goes out west to British Columbia. That one pipeline will obviously be filled up to its capacity in this scenario, and anyone can get the crude out that way. We’ll be able to sell to the global market at a high price. But with that one exception, most of this is actually probably going to be seen energy prices in the United States and Canada going down. 

Because in a scenario where you can’t export, we’re in an environment of super saturation. And as long as you can produce crude in the United States and Canada for $60 a barrel, that’s pretty much as high as prices can go when you’re in such a huge surplus situation. So we get a situation in North America where prices are kind of capped at 60 to 70. 

We get a price situation in the rest of the world where 200 is a good day, and that’s where we are. That doesn’t mean that there are winners in the North American energy complex. It’s just not in production. It’s in processing. You see, the restriction on U.S. exports doesn’t apply to crude, refined products just to raw crude itself. 

So if you operate a refinery and you have export options, you can export your naphtha, your crude or your gasoline, your diesel, whatever it happens to be to the wider market at inflated prices was just one little glitch. U.S. refiners for the last 30 years have steadily retooled their entire complex to run on heavy, sour, imported crude, for example, from Canada. 

But with the United States locking itself off, most non-Canadian sources of heavy crude are simply not going to be available anymore, and they’re going to be forced to deal with the light sweet that comes out of American fields. Now, this can be done. The modifications are easy. They’re actually going to be dumbing down the refineries to run on higher quality crude. 

But in the process of doing that, they’re writing off a lot of capital investment. At the same time, they have to invest in a different kind of fractionated system. It’s not that that’s particularly expensive. It’s not. But that takes a long time. But it is definitely going to cut into the rate in which they can benefit from these situations. 

And in the meantime, they’re probably going to be having runs that are going at significantly lower efficiencies than they would prefer. In the long run. It’ll be great. In the long run, they’ll be making more money, but they have to get to the long run first. So for the first year or two, there’s going to be a lot of stress on their hardware before they can change over some of the infrastructure. 

So again, just as we’ve discussed with almost every other country, the conventional wisdom that a lot of people saw in the first couple of weeks of the conflict really doesn’t apply. As soon as something happens, there’s a reaction and oftentimes it’s the second, third, and even fourth order effects that are the ones that really stick. That’s definitely how it is with this topic.

The Energy Crisis: Downstream Impacts

Globe shot of energy hubs

The global energy crisis has moved from theoretical to very real. As the last shipments sent before the war begin to arrive, we are now hitting a turning point in the energy crisis.

Rationing and black markets have already sprung up in Asia. Some countries have found ways around the shortage (for now), but that has created new issues for others. The Europeans will feel the heat in the coming weeks, as oil from both the Gulf and Russia disappears.

The U.S. has also lifted sanctions on Russian and Iranian oil that is already in transit, temporarily easing shortages, but undoing years of work to limit export income for these countries.

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. Yesterday we talked about what was going on with energy markets, primarily in the upstream, dealing with disruptions out of Russia and Iran. Short version. It’s pretty bad. It’s getting worse. Now, I wanted to deal with things that are close to the consumer where it’s pretty bad and getting worse. 

It has now been five weeks, which means that there’s a half a billion barrels of crude oil that hasn’t made it to market 

The final tankers from pre-war shipments from the Persian Gulf arrived in all of Asia last week. The final tankers will arrive in Europe this week and starting next week, the disruptions to from what the Ukrainians are doing to Russian oil exports will start to affect Europe as well. 

A mix of things here. Let’s start with who’s feeling what. Because of the shortages in Asia, we already have widespread rationing and the development of black markets. It’s affecting different countries in different ways. So for example, India has gorged on the thin stream of Iranian crude that’s coming out, and the legalization by the Americans of Russian crude that is out and about. 

And that has allowed them to avoid any sort of direct energy crisis as regards to oil and oil derivatives. However, almost all of their cooking, I should say all. But for about half the population, their cooking is done with propane liquefied petroleum gas that is exclusively produced for them in the Persian Gulf. That has gone to zero. And so now they’re seeing an energy shortage in that regard. 

Places like New Zealand and Thailand and Taiwan and the Philippines and Vietnam are all experiencing degree of energy shortages and rationing. And already the country that is most panic and should be is Korea, because their options are very, very limited and they’re a major industrial player in Japan at the moment, is avoiding this largely because they have access to sources from the Western Hemisphere and a navy that can protect them if it comes to that. 

And at the moment, the Chinese are okay, not because they’re not experiencing energy shortage. They absolutely are. But China has an overbuild of refineries. And so part of their economic model was to build refineries, absorb crude from abroad, refined into fuel, and then export that fuel. And so the way the Chinese have avoided an energy crisis is by stop exporting fuel. 

So at the moment China is okay, but those fuel exports now have stopped arriving in various places and countries like Australia, New Zealand, which used to get their fuel from China, their refined fuel suddenly aren’t. So we have a different sort of rationing and energy crisis. In Europe it’s going to hit them from multiple angles, but they do have a little bit more time. 

Like I said, the last tankers from pre-war Persian Gulf exports arrived this week. So it’s only now that the crunch really begins. The problem will be in 2 or 3 weeks, because they have this weird little setup where Russian crude can’t be bought in Europe, but it’s exported somewhere else, refined a product and shipped back. So we’re now starting the fuze on that, and in three weeks the Russians, will basically be a non-factor in European energy. 

At the same time, the Persian Gulf becomes a non-factor in energy. And it’s going to be a mess all around. A couple other things. Number one, there are more ships leaving the Persian Gulf. We saw 20 to 30 on both Saturday and Sunday, which brings up us to about one fifth of pre-war levels. The difference is Oman, which is the country that controls the southern side of the strait. 

Last week we talked about how the Iranians had set up a tollbooth system and were charging about $2 million per vessel and then kind of sort of escorting, ships through the northern part of the Strait of Hormuz in their territory. Oman is now doing the same thing in the south, basically to tankers, ships, whatever they happen to be are either re flagging or changing the trans front doors to say, Omani owned. 

And Oman has always been kind of the neutral power in the Persian Gulf. The Iranians have always kind of considered it in a different basket compared to Kuwait, Bahrain, Gutter and Saudi Arabia. In the UAE, which are more of the American camp. So far, the Iranians have not targeted these Omani vessels. I’m not saying that they this is a safe path. 

It’s not. But it has allowed some ships to get out. I will underline, however, that almost all of the ships that are using this route are leaving. Very, very, very few are coming in. Those that are typically Iranian flagged using the northern route. So of the two 300 ships that were stuck in the Gulf before, some of them are getting out. 

Nobody’s going back in. And that means that the oil production, even if it continued, even if it wasn’t damaged, still has no place to go. Let’s see. Finally, the big achievement of the Trump administration in this war so far in energy markets has been ending. the sanction system on places like Russia and Iran. They have now lifted fully the sanctions on purchasing what’s already on the water. 

And that has allowed basically the last 4 or 5 years of attempts to isolate the Russians in the last 10 to 15 years of attempting to isolate the Iranians economically, to vanish into the ether. If there’s going to be an effort by the United States or any other country to limit the legal access to these crudes, they’re going to have to start completely over. 

So the last 5 to 15 years of efforts to kind of squeeze these economies is now broken. Now there’s plenty of other things, physical damage, for example, that are drastically affecting both of these markets, primarily the Russians. But it is interesting to say that it took a war launched by Donald Trump on Iran in order to make Iranian oil legal again.

Good Luck, Texas

Texas cattle in an ice storm

A major cold front is sweeping across America, and I’d like to point out that our neighbors to the North are the ones who sent it down. But some areas are going to feel this more than others.

Texas is exposed due to its isolated power grid. Cold weather strains the system and essentially shuts everything down. This is a shorter storm cycle than the 2021 freeze, and thankfully, Texas has winterized since then, so the fallout shouldn’t be as devastating.

Outages are still possible, but statewide blackouts are less likely than last time.

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Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. As everybody knows, there’s a cold front that’s pushing down from Canada that’s affecting basically the entire Midwest down to Texas and over into the South and the eastern seaboard. 

For those of you who are in Texas, this is for you. You see, the power grid in the eastern part of the United States is interconnected. 

So if you’re east of the Rockies, everybody’s on the same grid, and people can pump power from one zone to another without a problem. Texas, however, is on its own. Texas does not like regulation at the federal level at all, in case you didn’t know. And, sometimes this works for them and sometimes it doesn’t. And this weekend we’re going to find out what it is. 

The issue is, kind of 2 or 3 fold. Number one, if you get ice, ice lands on the power lines. The power lines weigh more. Sometimes they snap. Number two, in times of extreme temperature variation, like a high cold front, people are going to be using a lot more energy than they would normally. 

So there’s a lot more stress on the system in general. And then third and freezing temperatures, natural gas production can be interrupted. A lot of natural gas fields bring up a little bit of water as a side effect and ends up in the pipes. And if the temperature drops enough, that will turn into ice, and eventually they’ll clog and freeze. 

So if you remember to a winter storm we had a few years ago, I think was 2021. The area around Dallas got so bad that the pipelines were frozen solid, and they basically had to deliberately ignore all safety regulations and go out there with blowtorches and heat up the ice so that the energy would flow. This cold front is both better and worse than that one. 

Better in that it is not going to last as long. We’re probably only going to have subfreezing temperatures in Texas for 2 or 3, maybe at most four days. Number two, Texas has made a lot of advances since then in making their system more stable, both at the grid level and at the production level. More pipelines are buried, for example, because if you just put your pipe under six inches of dirt, that insulation is probably going to be enough. 

Not a real crazy thing here. Almost everywhere in the United States that produces petroleum puts them underground. Texas was really unique because it just never really got cold enough for them to care. Now they do. Third, there are three different production regions in Texas, and it’s really going to depend upon what happens with the ice line here. the biggest one around the Dallas Fort Worth area is called the Barnett Shale. It’s almost exclusively natural gas. It is the primary source of energy for most of the region’s natural gas power plants. If we get ice in the Dallas area, but not lots of subfreezing temperatures along it, as long as it stays above, like 2025, we’ll be okay. 

That’ll probably be fine. Further south is Eagle Ford. Now, usually Eagle Ford, because it’s East of San Antonio stays warm enough that there. No, this is an issue. It’s unclear if that’s how it’s going to be this time. Probably they’ll get a lot of ice. Ice is not a big problem for pipelines, because it’s not cold enough to freeze the inside, and it just makes things very uncomfortable. So you could have high traffic incidents in San Antonio. While this is going on. Don’t drive in Texas if there’s ice because oh my God, they don’t know how to drive anything that’s not dry. 

Third one is the Permian that’s out west, Odessa, Midland, getting into New Mexico. That one’s probably going to be fine. 

A quirk of this particular storm is it’s blowing down from Alberta on the east side of the Rockies. And when you get down towards that part of Texas in New Mexico. Yes, you’re still to the east of the Rockies, but the Gulf Stream starts pushing everything further east. So it’s kind of like a hurricane in reverse, if you will. 

So while those areas are expected to be cold, they’re not as expected to get as cold or for as long, which would suggest that the largest oil natural gas producing basin in the country, the Permian Basin, is probably going to be able to maintain operations. So none of this is risk free. We’re probably going to have some sporadic power outages, but between the improvements and the dynamics of this specific storm, it looks like we’re not going to be looking at mass blackout events. 

And that’s a good day.

World’s Largest Nuclear Plant Coming Back Online in Japan

Photo show three nuclear power plant reactors

Japan is restarting the world’s largest nuclear power plant, after a 15-year shutdown following the Fukushima disaster. Nuclear power used to account for over 30% of Japan’s national electricity, so seeing these reactors come back online restores a key pillar of Japan’s energy system.

Japan’s mountainous terrain forced each region to establish large, redundant energy systems; therefore, the return of nuclear power gives Japan surplus capacity and flexibility in an otherwise stagnant environment.

With the global energy trade growing more unreliable by the day, Japan is now better positioned than most to weather the storm.

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Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. Windy day. Today we’re and talk about the energy system in Japan because the Japanese just turned back on the world’s largest nuclear power plant. Now, if you remember roughly, what’s it been 15 years ago now? Almost. There was a really bad earthquake in the Sendai region of Japan, which generated a Sunni army which flooded a large power plant that happened to be on the coast. 

Note to self, don’t put up nuclear power plant on the coast on a fault line. Anyway, because of the partial meltdown, because of the damage, because of the radiation leak. Because it’s nuclear power. The Japanese shut down every single nuclear reactor they had until they could complete a series of safety tests. And a lot of those power plants didn’t do so well on the first round. 

Anyway, fast forward 15 years later, more and more of them are opening back up. And now this new large one is as well. Which means I think it’s a good time to talk about what the power system in Japan looks like, because it is giving the Japanese a lot of options that other countries don’t have. So Japan is an archipelago, lots of islands, some bigger than others. 

But what all of their cities have in common is they’re backed up against really, really rugged terrain, mostly mountains, and a pretty steep ones at that. This is shaped the political culture of Japan going back since the emergence of the Japanese, ethnicity well over a millennia ago. And it means that most Japanese, in a manner somewhat similar to Germans, having a local identity more than a national identity, from many points of view, because they’ve basically spent time immemorial competing with one another, but oftentimes having a hard time reaching one another. 

So you have a very, very strong local customs, traditions and identities. What that means for the power system is that you can’t link together two prefectures in Japan with power, infrastructure, because the terrain is too difficult. This is not linking Iowa and Minnesota together. You have to go up and over mountains to get from one little enclave on the coast to the next one. 

And what that means is each major city in Japan, you shouldn’t think of it as a city. You should think of it as its own thing, its own almost country from an infrastructure point of view. So if you have to do that, you can’t rely on piping in wiring and power from your neighbor. So you need excess supply. 

So you build power plants that you expect to never use. You do ones that burn coal or natural gas. You have your nuclear power plants. Maybe you do a little solar, wind or tidal if you’ve got the right environment for it, maybe even put up an oil burner, which is something that usually not even third world countries would do. 

But the point is, if one of them goes out, you have a backup plan. Now, since the Sendai earthquake, Japan has taken one of those pillars of its energy security nuclear and just taken it completely offline. It used to be 30 to 35% of national demand. That is now coming back in a very big way. At the same time, the Japanese economy over the course of the last 30 years has been fairly stagnant, so power demand hasn’t moved too much. 

So you have this large oversize energy system for each individual part of Japan, and they’re now getting one of their major sources back. So if you fast forward a few months, a few years into a world that is more disconnected, where things like energy trade are not nearly as reliable, all of a sudden the Japanese have a lot more options than other countries. 

Yes, they still have to import the vast majority of their energy, but they don’t really care where they get it from, and now they don’t really care what it is. So even in a world where energy supplies break down as long as there’s something that works, the Japanese are going to be okay. And that’s a lot better than what I can say about a lot of the countries out there.

The Reality of Electricity in America

Electrical powerlines on a sunset

Doubling the US industrial capacity requires 50% more electricity…already a high barrier to entry. If we want to throw in some new data centers, add another 25-50% on top of that. No small feat.

Should the US want to accomplish this industrial buildout, then heavily investing in long-distance lines is essential. The data centers are going to require 24/7 baseload, which means nuclear or coal (and natural gas for surges). So, you’ll have to swallow that pill too.

Power needs to be able to flow from where it’s created to where it’s needed. Transmission is the name of the game. Without that, none of this works. And if someone tries to paint a different picture for you, maybe don’t drink their Kool-Aid.

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Transcript

Hello from Hazy Colorado. Today we’re taking a question from the Patreon page. Specifically, it’s about electricity and data centers and what is it going to look like if we’re going to do all these data centers, much less consider doubling the size of America’s industrial plant? 

How much power do we need in what is going to look like on the other side? How do we get there? A lot, a lot wrapped up in there. Let’s start by saying that we need 50% more electricity if we don’t do data centers, if all we’re going to do is double the industrial plant, data centers are on top of that, and that’s another 25 to 50% based on which model for the future of data centers that you want. 

Now, everyone broadly agrees on the problem here. Now, one of the big weaknesses in the United States grid is it’s not very well interconnected. We don’t have a lot of cross state, large scale electricity transmission lines. And what that means is that regardless of where you need electricity, you’re kind of stuck with local resources in order to get what you need. 

And that means you’re going to be overbuilding capacity in order to guarantee what you need, which means you’re going to have more facilities than the nameplate would suggest, and they’re going to be running that lower capacity. And that’s particularly true if you want to do something, say, with green tech. So, for example, if you put a big solar farm in, say, Arizona, you’re going to generate three times as much electricity as if you do it outside of New York City. 

And so the whole idea of a long range transmission line is you can take the power from where it can be generated efficiently or cheaply, and move it to the places that can’t. And in that way you get a much more efficient system, even if it might cost a little bit more. So roughly, if you expand the grid by half, you need about $1 trillion in new plant, new generation facilities, and then about half $1 trillion in distribution systems that assumes you’re doing everything within state boundaries. 

You’re paying more for more nameplate than you probably could use, because you’re gonna have lower efficiencies, but also means higher manufacturing costs, higher installation costs. Or you can spend about maybe 20% more, if that 20% more is almost exclusively on long range transmission. And if you do that, you build less generation that is more effective at what it does. 

And you wire in the power. Here’s the issue. The United States really doesn’t have any of those long range high voltage lines. In fact, if you’re looking at above 70 kilovolts, which is kind of the standard for like the big stuff, we only have one cluster in the country, and that is an area roughly a triangle between Pittsburgh, Pennsylvania, Chicago and Saint Louis, because in the middle of that triangle is coal country. 

And back during the 60s, 70s, and 80s, a succession of American governments came to the conclusion that it was cheaper to wire electricity than it was to rail coal. So you generated the electricity within this triangle and then had these massive lines to send that power somewhere else. 

If the goal is to have a lot more electricity, regardless of why that version of the model needs to be replicated more or less nationwide, and that is easily a $300 billion program, probably more now. 

Data centers specifically, something that everyone seems to forget, is that data centers churn all the time, 24 hours a day, which means any sort of power generation that cannot generate electricity 24 hours a day is something that a data center will not consider. So solar out because it’s dark every night, wind largely out because most places don’t have reliable wind currents. 

Although in some places, if you go high enough, that’s a possibility, which merely means you only have two options. Number one is you can build a new fleet of nuclear power plants because while they can be spun up and down, the Nuclear Regulatory Commission really doesn’t like to see those numbers change because it looks a little bit like a meltdown. 

And we try to avoid those. So you build a nuclear power plant either specifically for it or nearby, or you refurbish an old one, whatever happens to be baseload power, that’s what you’re after. Baseload power. The only other option is coal. Yes, you can build a natural gas plant, but natural gas is better for spinning up and down. 

You want it for surge capacity as opposed to more generally for baseload capacity. So either you’re getting nukes or you’re getting coal. And if you want data and you don’t like those two things, then you might as well does not try to do either. Data centers at all. And just kind of forget the next 30 years of human technological advance. 

This is what you need. Lots of long range transmission, lots of nukes, lots of coal, and then natural gas, solar and wind for everything else. Anyone who cannot lay it out like that to you, it’s been blinded by a degree of ideology or personal interests. This is what you need is a digital future or a more industrialized future is what you’re after.

Ukraine’s Energy Scandal

Hand offering stacks of Ukrainian money

Some officials over in Ukraine have been stuffing their pockets with $100 million stolen from the energy sector. Before you get worried that someone has been dipping into the US or EU aid…this dates back long before all that started flowing in.

Before the war in Ukraine, Russian natural gas transited the country in massive volumes. Guided by the morals of the Soviet system, Ukrainian officials took their cut off the top of the profits. Once the war hit and the gas stopped flowing and the bombs started falling, Ukraine rushed to modernize its process. Updates were made and efficiency became the focus, but those who benefited more from the old system clashed with the new models.

These reports are now surfacing, and many key figures implicated in the corruption have already fled Ukraine. So, what should we expect? We were seeing a major overhaul of the energy structure anyway, now it will just coincide with some political and economic house cleaning…and mounting pressure from the war.

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Transcript

Hey all. Peter Zeihan here coming from Colorado. Today we’re gonna talk about a scandal that’s breaking in Ukraine. President Zelensky is in a bit of hot water because some of his former allies, not current, have basically been charged, accused of stealing upwards of a $100 million from the system, mostly from the energy sector. What? This is what this is not. 

Let’s start with what is not. This isn’t people stealing the aid that has come from the European Union or the United States to help with the budget or military equipment or anything of that. In fact, the Ukrainians have a really digitally ironclad system where they film every part of the weapons transfer system right up until its usage. 

So there’s a digital record showing that it didn’t end up in a black market. So people who say that that’s just conspiracy theory bullshit, mostly generated by, the Russian bot farm. What it is, though, is real corruption. The Ukrainian energy system is kind of a mess. And not just because of the war. It used to be completely state controlled, and you basically had a government enterprise who controlled the natural gas transit system that crossed the country from the Russian space into the European space. 

The Ukrainians charge transit fees for that, and then took a bit of the natural gas as payment in-kind in order to fuel their entire economy. And because the energy was coming from the former Soviet system, the people who were in charge of it had a very bureaucratic Soviet mindset and part of the bureaucratic Soviet mindset is I get 2%. 

So what happened? Was Ukraine unique among the former Soviet republics? Really unique within the Eurasian landmass, thought of itself as having free energy provided for by the Russians from 1992, when formal independence happened, until very, very recently, certainly until the war started in 2022. And so there was never any effort by the Ukrainian state to become more efficient. 

And in terms of the calories burned or the energy consumed per dollar of GDP, Ukraine usually figured in the very, very bottom of countries in the world, certainly on the continent. 

So the people who were in charge of this system made money on the throughput, and so volume was all that they cared about because they got a percentage cut of everything. 

Enter the war. With the war, the energy system has been under attack, and the state bureaucratic model is not very good at responding to that, because it’s never been about efficiency. So bit by bit by bit, the Ukrainian system has become more efficient because if it hadn’t, the power plants would have never been rebuilt, the transformer stations would have never been repaired, and the country would be living in the dark. 

You put this against that old statist model, and eventually we were going to get a crunch because Zelensky, like every president before him, had to keep the lights on. And so the people who were the corrupt ones had to work with the new ones who came in, operate on more of what we would call a market basis here in the United States. 

And they were getting more and more and more of the system, because every time something was damaged, it moved out of full state control into some more of a hybrid system. Well, so much has now been destroyed, especially this last winter, that finally, these two almost diametrically opposed approaches, vast volumes and corruption versus more efficiency, came to a clash. 

And now we’ve got the exposure. Is it something that can bring the government down? Who knows? He definitely involved himself with the people because he was the president and it was the country, and that’s what he inherited. And he had to, Does that mean it could have been cleaned up sooner? Sure. But I’m not the one that’s fighting a war right now, so I have a hard time making that value. 

Judgment. All we know for certain now is that the chief people responsible have fled the country. And so they’re definitely no longer getting their cut. And that means we’re probably going to see a significant overhaul of what’s left of the statist energy system in just the next few weeks, against the backdrop of the Russians being much more effective at targeting energy assets across the country. 

So it’s not just that we had a corruption scandal and now the personalities are changing. We also have had so much physical destruction of the assets that it’s a question of whether the old system will persist at all. Keep in mind that the Europeans have now cut completely their use of oil and natural gas that comes through Ukraine from Russia. 

Those pipelines are basically shut down now with a couple of minor exceptions. So we were always going to see a house clean of this from an economic point of view. Now we’re getting a house clean from a political point of view as well.