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.

Prefer to read the transcript? Click here

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.

Prefer to read the transcript? Click here

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.

Prefer to read the transcript? Click here

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.

Would You Like Some Plutonium with That?

Fragment of Plutonium | Photo by wikimedia: https://upload.wikimedia.org/wikipedia/commons/6/60/Plutonium_%28Element_-_94%29_3.jpg

The US needs to massively expand its ability to generate electricity. A possible solution? Mixed-oxide nuclear fuel. We’re talking repurposed weapons-grade plutonium mixed with uranium. This is complex, expensive, and time intensive. And perhaps more to the point, there’s a proliferation concern. No surprise that Russia is the only country that has done this so far…

Prefer to read the transcript? Click here

Transcript

Hello. Peter Zeihan here. Coming to you from Colorado. Today we’re going to talk about an old technology that the Trump administration is dusting off and seeing if it’s applicable for the current environment. The reason is that the United States has just massive electricity shortages right now, and a number of states are on the verge of having, rolling brownouts. 

And we’re not talking here about California. We’re talking about everybody. Trump administration says that it wants to massively expand manufacturing output. We can debate whether the policy that is in place is going to enact that. But I would argue that we need to expand, the industrial plant by at least double in order to prepare for a globalized world. 

Most of the products that we’re used to importing, we’re gonna have to make ourselves one way or the other. Plenty of debate to happen about the specifics of Washington’s policy. But if any version of this is going to happen, we need more electricity. We probably need to expand the grid by about 50%. 

And at the moment, pretty much all electricity expansions in the country are on hold. The Trump administration’s tariff policies have massively driven up the cost of doing everything that is related to the grid. For example, copper and aluminum, the two biggest inputs. And those now have a surplus tariff of 50%. And the government has actually canceled a number of power plants that it doesn’t like. 

Because Donald Trump doesn’t like windmills. So the government, as a partner in the process of expanding the grid, has basically become a burden rather than a bolster. So this new technology, old technology, is something that maybe the government can actually step in, in a constructive way. And it’s called mixed oxide fuel. In essence, you modify a nuclear power reactor. 

So instead of running on a down blended uranium, where, say, 3 to 5% of the uranium is a fissile component, in a broader block of power fuel, you instead use MOX, which is a mix of uranium and plutonium. Whether one technology is better or worse than the other from an economic point of view is very much in debate. 

The only country that uses Mox at the moment for their civilian power systems is Russia. And Russia does it because it had 30,000 nuclear warheads, mostly plutonium driven, as part of its arsenal. When the Cold War ended. And they basically when they decommissioned them as part of arms control agreements, they took all of those warheads and spun them into the fuel. 

So from their point of view, it’s a big savings. As a rule, once you factor in the cost of expanding or modifying your nuclear power system in order to use the MOX, it’s probably a wash for an economic point of view, because the up cost investment is so high. And if you’re going to use it just to use spent military, surplus equipment, eventually you’re going to run out of that. 

You don’t have to have a plutonium supply chain. So a number of countries have played with this technology, most notably Britain, France, the Netherlands, Belgium, and Japan, also India. But no one has actually instituted as a civilian program. The problem is very simple. Not a lot of countries have nuclear weapons. Not a lot of countries had tens of thousands of them to decommission to serve as an input fuel source. 

Really just the United States and Russia in that regard. Which means that if you want this to work, you have to build a civilian plutonium production system. Now, plutonium does not occur naturally in the world. It’s pretty much only generated as a byproduct of a, you guessed it, uranium power plant. One of the waste products that comes out of spent uranium based nuclear fuel is plutonium. 

So if you want to have a MOX industry, first you have to have a uranium power plant industry, and then you have to have a system that takes the spent nuclear fuel and separates out the plutonium and purifies it. So basically, to have this sort of power sector, you have to have a civilian system that creates large volumes of weapons grade plutonium as part of their supply chains, which explains why most countries have not embraced it. 

The Trump plan would do basically an echo of the Russian plan and take some plutonium cores from weapons that we have decommissioned and convert them to MOX. The problem they’re going to come across in addition to the proliferation question, is the same problem of everyone else who has decided to play this game. It’s a processing issue. You have to take the plutonium cores from the old decommissioned weapons, spin them into a different form in a different geometry. 

it’s a manufacturing issue. It’s a fabrication. And above all, it’s a processing issue. And one of the problems the United States has at every level right now is we don’t have enough materials processing. We need to be able to turn bauxite into aluminum. We need to be able to turn iron ore into steel. We need to be able to turn copper ore into copper wire. 

And if this program was going to work, would need to be able to turn surplus plutonium cores from decommissioned weapons into fuel. So it’s an interesting idea, but there’s a lot of upfront investment that has to be done before you can seriously try it. 

They are hoping, hoping, hoping, hoping to have a little pilot program going by the end of calendar year 2026 to see if it’s even viable. I don’t know if it’s going to be viable, but as part of this process, you also then have to prepare a fuel cycle that puts weapons grade plutonium civilian hands on a regular basis. 

And to this point, the only country in the world that have decided that that’s a good idea is Russia. And Russia, of course, is one of the world’s great proliferator.

The Highs and Lows of Burgum’s Energy Strategy

Photo of a pumping station at sunset

Trump’s Secretary of the Interior, Doug Burgum, has shifted his energy strategy to focus on oil and gas. He’s doing this because renewables are no longer financially viable in most of the US, but there are some holes in his plan.

Between interest rates and tariffs, solar and wind projects are making less and less sense in fewer and fewer places. So, a fossil fuels-based strategy makes sense; however, using federal lands isn’t going to be the magic solution Burgum makes it out to be.

Given the lack of infrastructure, slow permitting cycles, and limited financial incentives…development will be slow and pricey. We’re talking a decade+ before anything meaningful comes out of it. Burgum’s geopolitical angle is what really interests me, though. He hopes to use US oil to undercut Russia, which doesn’t quite align with the rest of Trump’s inner circle.

Prefer to read the transcript? Click here

Transcript

Hey all Peter Zeihan here. Coming to you from Colorado. Today we’re taking a question from the Patreon page, specifically about Doug Burgum, who is the new Secretary of the interior under the second Trump administration. And the question is basically, Burgum seems to have devolved from an all of the above approach to energy to just fossil fuels, just oil and gas. Why is that? And should we care? I think that’s broadly an accurate assessment, but he’s not doing it for ideological reasons, despite the fact that he’s in the Trump administration’s, Burgum basically is saying that oil and gas is more reliable for the environment that we’re in right now, and we need to unlock the federal lands to get as much of it out as possible. 

So let me talk about why he’s probably right and then why he’s probably wrong. So first the correct. We’ve seen the cost of financing go up by a factor of roughly five, in the last six years. And that means if you are looking to borrow capital, everything just costs more. So, for example, take mortgage. I’ve owned my house since before the transition, so my mortgage rate is 2.5%. 

You know, eat your heart out, Millennials. Today the mortgage rate are above seven, and they’re probably only going to be rising for the remainder of the decade and well into the next one. 

So let’s say just to pick numbers that your mortgage today is 8% compared to my 2.5%. That means your monthly payment on a 30 year mortgage is a little over twice what I pay. 

So whatever the house is you are looking at, suddenly you’re looking at having to pay twice as much and that entire increase is all extra interest. Well, most green tech projects, whether it’s solar or wind or biomass or whatever else, don’t have very high fuel costs. Everything is the upfront, construction, the land siting, the physical construction, the labor for that. 

And that tends to be roughly two thirds of the cost of the entire project. If you compare that to a conventional natural gas or coal system, a thermal system, most of the cost, roughly two thirds is fuel, and only about one fifth of the cost is that upfront construction. Well, the upfront construction is something you have to finance. 

So you’re talking about a project that already had a much higher financing, burden. And now you’re roughly doubling, if not more, the cost of the project over its life. Now, I have solar panels on my roof. They paid for themselves in four years. But part of that is because of where I live. I live at 7500ft. And that means I live above an elevation where 99.5% of other Americans live. 

So there’s very little air, much less moisture, much less cloud between me and the sun. In addition, ambient humidity in my neck of the woods is about 15% versus the national average of over 60. About 90% of Americans live in a place that’s more humid, so I’m closer to the sun. I have less obstacles, the humidity doesn’t get in the way, and so I was able to pay for my panels in four years because the amount of electricity we generate, you drop down to where I lived in Austin, where the humidity is much higher and I was only at about 1000ft. 

And the break even for those panels took closer to I think it was nine years. If you moved to say, New York out of the city, you’re talking about much higher humidity, much lower solar penetration, much lower altitude and your break even time if you’re lucky, is going to be in the 11 to 14 year range. 

That was when interest rates were cheap. Now you need to double that, maybe even triple that. So there really aren’t a lot of places in the country that have a decent economic payback for wind and solar in the current environment. I live in one of them, but like I said, 99.5% of Americans live below me and 90% of Americans live in a place with lower humidity. 

So I am not the norm here. Still works here, still works in Colorado, still works in North Dakota. Burgum should know North Dakota isn’t just a leading oil and gas state. It’s a leading wind state. But you change the rules of finance like we have and that doesn’t help very much. And so most projects in most of the country just aren’t economically viable in today’s capital cost environment. 

And that’s before you consider that the vast, vast, vast majority of the solar panels we use in the United States are imported from China. And so now there’s a tariff, tacked on top of that, that at the moment is 55%. But by the time we see this, I’m sure that number is going to change. Oh, okay. So that’s where it becomes probably right. 

Solar and wind, at least for now, are offline unless there’s a significant change in the environment, whether because of the technology, the manufacturing base or the cost of financing, it’s really not going to be a big part of the picture in the United States for the rest of the decade, and probably throughout the next one where he’s wrong. 

Federal lands. Okay, federal lands by almost default, have very little infrastructure on them. You’re talking natural forests are, for the most part, in addition, because they’re federal lands, they have not been exploited for economic purposes aside from logging here and there. And there’s very, very, very little oil and gas development on them at all except in the offshore, which is a special case, maybe a topic for another time. 

One of the things that we’ve learned about the shale revolution is that the states control most subsoil rights. They can be privately held, but the states control the regulation on federal lands. The subsoil rights are all federally held. They are not controlled by private interest. So step one, there is no one who would get involved in the project who has a personal financial reason to push it. 

If you want to go on to federal land, you have to get a lease that costs money. So already you’ve got that layer of cost built in that does not exist in, say, the Permian in West Texas or the Bakken in North Dakota. Problem number two is infrastructure. One of the reasons that the Permian in the Bakken had been such successful oil plays in the shale revolution is because a lot of the infrastructure was already there from previous oil booms, and for the first roughly decade, they were just putting new oil into old pipes. 

It’s only in the last decade that they’ve actually had to build more physical infrastructure. For takeaway capacity. You want to produce oil or gas in federal lands. You have to build that infrastructure from scratch. And most of these places not only don’t have pipes, they don’t have roads. Third problem information, because the Permian in the back end were preexisting fields, there had been preexisting geological surveys of them. 

There was some place for the shale guys to start. You want to do this in federal lands, you have to start from scratch. Fourth regulation Texas, North Dakota A handful of other states have a relatively encouraging investment climate for oil and gas because they have decades of experience. The federal government doesn’t have that on most federal lands, and so they’re gonna have to make it up as they go. 

Now, could this Trump plan for massive deregulation make a difference? Sure. But consider the scale on the time in Texas. If you want to drill from the point you submit your permit, 99% of permits are approved or denied one way or the other within 48 hours. In the United States, on federal lands, it generally takes 230 days. Now, when Trump won, they got that down to 220 days. 

But the bonfire of regulation that would required would first require the Trump administration staffing up the senior staff of the various departments in order to figure out which regulations to keep and lose. And that process has not yet begun, and we are already in July at five. Oh my God, it’s only been five months. Holy crap. Anyway, if all of these pieces were to magically fall into place today, you build your roads, you start your seismic surveys, you start building the pipeline infrastructure with money you have not yet earned. 

Then you start drilling. You would expect to see first meaningful output of oil and gas from the federal lands. Assuming that the surveys show that there was oil and gas there. Let’s call it 2040. Texas wasn’t made in a day. It took a century to build Texas’s oil platforms and what it is now, you’re not going to wave a magic wand to make it all happen overnight. 

So wind and solar, most places. Yeah, that’s for the past. That’s for the far future. When? When gas on federal lands. I wouldn’t hold my breath on that one, but I don’t think we really need it. The United States already produces more oil and gas in any country in history. In fact, we export an extra 5 million barrels per day of refined product. 

We export more finished product, gasoline, jet fuel, and the rest than any three countries in world history have ever produced. Raw crude. That’s already the best in human history. I really don’t overly feel the need that we need to do more, unless you want to do it for geopolitical reasons. And this is where Bergmann gets kind of interesting from my point of view. 

He has emerged as a voice in the foreign policy establishment on the topic of energy dominance. Now, that is for the most part, just a bunch of bunk that Trump likes to say from time to time that has never actually been put into any meaningful policy. But Bergen’s idea is to deliberately drive specific oil producers and exporters out of the market, and then displace them with American crude. 

And the country that he is most interested in doing that, too, is Russia. He wants to crack down on the Russian shadow fleet, which is using under or uninsured old leaky tankers to send roughly 3 million barrels of crude a day around the world. He wants to break any pipeline connections. The Russians have to the outside world, and then he wants to steadily ratchet up sanctions so that they can’t keep the existing oil fields that they had going. 

That’s really interesting. That could take us a lot of fun places. And since in an American shale context, it only takes 6 to 12 weeks to bring in a new oil well online, it could be done with a relatively limited impact on international markets, all else being equal, which of course, they never are. But it has put him at a crossroads with most of the people that Trump listens to on foreign policy. 

Basically right now, the inner circle doesn’t include the secretary of state, Rubio, who’s basically been banished after Foggy Bottom and isn’t allowed into the meetings. You’ve got some of Trump’s buddies from New York real estate. And we’ve basically been wrapped around the little finger of Vladimir Putin. 

You’ve got the director of National Intelligence, Tulsi Gabbard, who, if she’s not working for Putin, is probably a clone of him. And now we have Laura Loomer, who has basically taken over as de facto national security advisor. Laura Loomer is basically a, a far less competent version of Hillary Clinton. So she’s mean. She wants to kill people, but she doesn’t actually know anything about what she’s talking about. So, you know, you put that together and all of a sudden you’ve got this former governor of North Carolina who walks in like numbers and facts and history and economics matter. It’s an interesting room.

The Night the Lights Went Out in Geor- er, Spain

A candle in darkness

On Monday, April 28, a widespread power outage hit Spain and Portugal. Other than our marketing guy who was on vacation in Madrid at the time claiming he “had no signal” and “couldn’t work”, this outage highlights a broader issue with renewable energy infrastructure.

The root of the problem comes from the use of green energy sources like solar and wind, that lack the built-in stabilization that traditional energy sources like coal and natural gas have. This meant that there was no safety net to stabilize the grid once a fluctuation entered the system. Thus, the automatic shutdowns were triggered, resulting in a widespread outage.

Preventing future outages will require some changes. An expensive and multi-decade integration with a fast-discharge battery system. Keeping 15-20% of the grid powered by coal or gas. Or using microgrids, like a hippie compound. No solution is perfect, but outages will continue until something changes.

Oh, and don’t think this won’t happen anywhere else. Grids that are defined by isolation (think the United Kingdom, or Australia) will be next up.

Prefer to read the transcript? Click here

Transcript

Hey, Peter Zeihan here coming to you from Colorado. It’s kind of like Seattle today. Anyway, today we’re going to talk about the power outage in Spain and Portugal, what it means, how it happened and how you fix it, because it’s kind of relevant to a lot of other things that are going on in the world right now. 

Okay. Electrical engineers out here. I’m not going to give this in the purest form. I’m going to try to make this safe for laymen. So hate me if you want to, but hopefully I’ll get this right. The issue is something called alternating current, which is what we use for electricity distribution. And throughout pretty much all of modern life and alternating current, as it might suggest, is a wave. 

So there are peaks and troughs. It follows a very regular route. And in the European situation they use a 50Hz, oscillation. We use a 60 here in the United States. Just for a point of comparison. Not one is not better than the other, just is. Anyway, basically, there’s a wobble built into the power system, and that wobble has to stay stable. 

And if, for whatever reason, you introduce, a change in the wobble or a second wobble, all of a sudden all the gear that is operating at that wobble starts to have issues and it starts to shake, and oftentimes it catches on fire. Sometimes explosively. And it doesn’t take long for the disruption to manifest as a problem. 

So for example, when the wobble was changed in Spain, it only took about four seconds for things to go horribly wrong. And because the things that catch on fire are critical pieces of equipment like transformers, what you have into the system is a series of failsafe built into every node where they sever themselves from the grid. Should that wobble, shift, or second wobble get introduced and everything just goes dark. 

And the same happened at the interconnectors that connected the Iberian Peninsula to Morocco and France. They just shut themselves off from everything else. And we had a cascading failure, to kind of put it into layman’s terms. The normal wobble is very regular, and it’s kind of like at a junior high dance when everyone’s doing the Macarena. Da da da da da da da da da da da, and then all of a sudden somebody flips a switch and everyone attempts to do the lambada, and it’s chaos and everything is destroyed. 

Anyway, the problem that was introduced here is that the Spanish and the Portuguese no longer have a failsafe to stabilize the wobble. What normally happens, and the reason why we don’t have this kind of blackout on a regular basis, on a global scale, is that most of the power generation of the world comes from coal or natural gas, which are thermal units. 

And when you burn the natural gas or burn the coal, you get a stream of energy that basically spins a turbine. And that turbine, in addition to generating electricity, also has a lot of pent up kinetic energy stored within it. So if something changes the wobble, something changes it away from that 50MHz that the Europeans have to have. 

You can either spin up or slow down, or otherwise tap the power of that spinning turbine to buy yourself a few seconds so that we mere humans can react and bring on or take off other capacity to stabilize the current in Spain and Portugal. At the time that this breakdown happened, about 80% of the electricity was being provided by solar and wind, which sounds great from an environmental point of view and from a national security point of view. 

However, all of the energy that comes out of solar and wind is direct current. And so every solar panel and every wind turbine has an inverter that turns the power from direct current to alternating current to match the wobble. And there aren’t a lot of moving parts, so there’s no kinetic energy that you can tap. 

And so there just wasn’t enough coal and natural gas, enough turbines spinning in order for them to stabilize the entire thing. And in four seconds, all went straight to hell. Now, if you want to fix this, you’ve got to options. Option number one is to continue down the net zero route and put in another type of battery. So right now you’ve got grid storage which is typically lithium ion or lithium phosphate or lithium cobalt. 

And these batteries do not charge or discharge very quickly. But that’s not what they’re there for. They’re there to provide supply to the grid so that everyone has power. Instead, you need a fast charge or a fast discharge battery that’s usually lithium. Titanium. Now, titanium sounds all impressive, but really the supply chains for titanium are more or less okay. 

The issue is one of manufacturing. These batteries are made in six different places. Only one of those places China. So it’s know South Korea, Japan, the United States, Switzerland I think are the big four outside of China. But they don’t make very many of them. They’re relatively new battery type. And so if all of the lithium titanium batteries that were capable of grid storage were provided to Spain and Portugal, it would take a year of global production just to fix the situation on the on the peninsula of Iberia. 

So we’re talking about needing to do a very significant industrial build out on a global basis if we want to solve this on a global basis. And of course, you have the other little minor problem that pretty much all of the world’s lithium is processed in China. And between China’s pending impending in-progress demographic collapse, including the trade war, that is absolutely smashing. 

Their, their home industries. We also need to relocate the entirety of the lithium processing industry away from China into more stable places. So solving this from a battery point of view is very problematic if you want to do it on anything less than a 15 to 20 year time scale. The other solution might not be as ideologically friendly. 

If you’re agreeing, but it’s a lot simpler. Just keep 15 to 20% of your grid constantly running on coal natural gas so that you have those term bits spinning all the time. The reason we’re seeing this in a place like Portugal and Spain first is because Portugal and Spain are on the Iberian Peninsula. They don’t have a lot of physical interconnections to other grids, so they can’t rely on the spinning turbines of the country next door. 

One of the reasons that the Germans have not experienced this problem is even though they have for a few days in the summer, basically go 100% green. All of their neighbors have coal, natural gas plants, and so when things start to spin out of control, they can rely upon the stabilization provided by all of their neighbors. So you’re going to see this first in places that try to go green, that are more isolated. 

So your islands and your peninsulas watch Australia because you’ve got a disconnected grid there. Watch New Zealand, it’s an island. Watch the United Kingdom. Holy crap, the United Kingdom is very lucky. This hasn’t happened to them already, because their green tech is not nearly as reliable as it is in Spain and Portugal. It’s not as windy. It’s not a sunny and so you have a lot more spots pouring in. 

But if you happen to get a windy, clear day, all of a sudden they go from being 100% green to 100% unstable. The only other solution I can think of is microgrids. That works for some people. They’re incredibly expensive. And you have no backup should something go wrong? The advantage is in a microgrid. If everything’s on direct current, you don’t have to worry about the wobble at all. 

But you have different problems anyway, one way or another, as green tech gets more integrated into systems, one of these three solutions has to happen. One of them requires a multi-decade build out. One of them requires a big step back from an environmental point of view, and one of them basically means becoming a rich hippie commune. 

None of these are great solutions, but that’s where we are.

The Fire Hose of Chaos: The Green Transition Is Over

Photo of a plant growing in a lightbulb

The green transition in the US has made great progress in recent years, but the wheels are falling off. This is largely due to economic pressures, lack of financing, and the new tariffs instituted by Trump.

Wind and solar projects require heavy upfront investment, which isn’t a great combo with capital costs skyrocketing and available capital draining from the system (blame the retiring Boomers). The government support for the green transition has also dried up; the Biden admin had the Inflation Reduction Act and other Greentech subsidies, but the Trump admin has pulled support and funding for these programs and projects. And you can’t forget the new tariffs hitting key components for the green transition, which have made solar prohibitively expensive and wind an uncertain gamble at best.

So, it looks like the green transition in the US will effectively be on pause until the US can build out its own manufacturing base. And that’s at least a decade-long process…

Prefer to read the transcript? Click here

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.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, all. Peter Zeihan here. Coming to you from my parents backyard in Iowa. I’m visiting because I’m a good boy. Anyway, today we’re going to talk about the end of the Green Revolution in its current form, at least in the United States. There are three things that have come together to basically completely destroy the economics of the green transition. 

And then a couple of things on the side that are making it more difficult anyway. The first has to do with the baby boomers. Two thirds of them have retired, which means that all of the money that they were saving for retirement has been liquidated. And it’s gone into less exciting financial instruments such as T-bills and cash. 

And that means there’s less capital available for everything. So we’ve roughly seen the cost of capital in the United States increased by a factor of four in the last five years, has nothing to do or very little to do with government policy. It’s just that there’s less money available in the system overall. So mortgage rates go up, car loan rates go up, anything it needs to be financed goes up. 

And that’s a real problem for green tech. When you’re looking at, say, a conventional thermal power plant, coal, natural gas, that sort of thing, you only have to pay for about one fifth of the cost of the life of the plant at the front end. That’s the upfront construction. And then about two thirds of the expense over the full life of that power plant is the fuel, the coal or natural gas. 

And you buy that as you go. That’s not how it works with wind and solar. With wind and solar, about two thirds of the cost has to be paid upfront. And that means it has to be financed. Well, you increase the cost of financing by a factor of four, and all of a sudden you’re talking about a financial commitment. 

That’s just huge compared to what it would have been just five years ago. And that is now happening across the entire space. So that alone would have probably ended 70% of the power plants that are in solar and wind. Just just off the top. The second problem, of course, is that you have to finance everything upfront in the first place. 

Anyone who wanted to do the green transition really needed a helping hand from government, typically at the federal level. And the Biden administration, through things like the IRA Inflation Reduction Act, was very big in providing that financing. Well, that’s basically gone to zero under the Trump administration. So your financing costs have gone up by a factor of four, and you don’t have any outside help. 

But the real killer, especially for solar, has now been the tariffs. Almost all of the photo voltaic cells that are used in solar systems are produced in China, oftentimes with slave labor. And while the green transition folks were willing to overlook the fact that, most of the stuff was ha, I still have a sticker on there. 

Well, most of the folks in the green transition were willing to overlook the slave labor thing, in order to get the panels that they needed. You can’t really overlook 145% tariff. So if the PV cells cost you two and a half times as much and your financing cost has quadrupled, that’s just not going to fly. 

Now, it’s not quite as bad for wind because there are some non-Chinese providers of wind turbines. Most notably in northern Europe. But those were where we have a tariff of at the moment, 10%. It was 20% a week ago, that just introduces a lot of uncertainty into the system. So both of those things are gone. 

Wind a little on the edges. Maybe. Solar’s absolutely out of the question for most people now. The only other remaining piece is batteries. When last year, the Biden administration slapped a lot of tariffs early in the year on Chinese electric vehicle bills to keep them out of the U.S. market. What happened is the Chinese repackaged all of the EV batteries into, container units to be sold as grid storage. 

And so in calendar year 2024, adding battery storage, which is actually the cheapest form of power that you could add to your system. So the Texans in particular, you know, just boned up on that hugely. Because if you can have a battery grid system, it’s actually better economics and say having a natural gas peaker plant because they normally speakers or is would only run a few days of the year. 

The batteries can take that load, but since you now have them. And since Texas is the number one green energy state, they would use their solar system to generate power during the day, store the extra in the batteries, and then use that during peak demand and evening hours when the sun’s going down. 

It worked really well. She was like 48% off of power costs, but now we have 145% tariff on all of those batteries as well. So I don’t want to say that that’s going to stop cold, but the pace of the application is going to slow considerably because the Chinese dominate that space. And we haven’t built the industrial plant here yet. 

That isn’t necessarily to fill the gap for ourselves. So for the moment, minimum two years, probably until we have a better battery chemistry, probably until we have better PVS, certainly until we have more diversified manufacturing base, which is a ten year process. We’re looking at the green transition taking a bit. 

Wind Energy Deserves Some Love

Photo of multiple wind turbines

I’ve bad mouthed solar power enough times for people to know where I stand, but why am I taking it easier on wind power?

Solar power has a few glaring issues. There are high energy and carbon costs associated with solar panels, it’s intermittent, and it’s often installed in suboptimal locations (thanks to tax credits from the Inflation Reduction Act). Combine all those and you have an energy source that’s just not very reliable. Sure, there are ways to improve upon some of these pieces, but wind energy is a much more reliable alternative.

Wind turbines can generate baseload power thanks to new tech giving access to more stable air currents. They also use more widely available materials and have a simpler production process, which contributes to cheaper energy generation. And these turbines are only put where the wind blows…I know, what a crazy concept.

Prefer to read the transcript? Click here

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.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey all, Peter Zeihan here coming to you from just outside of Kingston, New Zealand. This is Lake Wakatipu. Today we’re going to take an entry from the Patreon page, specifically. Let’s see if I can get this quote right. You’ve talked a lot of shit about solar power and the green transition. That’s a quote. But you’ve never really talked badly about wind. 

Why is it something we should be worried about? This is something that we should be aware of. Short version of why the green transition is problematic. And my point of view is that most of the equipment that has been put down to this point hasn’t been in the right places. Most advanced countries tend to be in temperate zones with big swings between summer and winter. 

Which means that things like solar are always going to be a disadvantage because they can’t provide baseload. You know, sun goes down. Yes. Problem number. Number two, winter is a problem. And places that are very, very sunny, like, say, Sicily, are either too mountainous or too far from population centers. So if you’re going to put solar panels up and say Berlin, you will never pay down the carbon cost, much less the economic cost that it took to install the things in the first place. 

There’s also a problem with raw materials. The processed silicon that goes into PV cells is one of the most energy intensive things that can be done by humans in the town. Per pound, it’s something like 35, 40 times as carbon intensive of making steel. And a lot of that is done by slave labor in Zhejiang, in China, on top of that. 

So, you know, fun. Wind doesn’t have most of these problems. I mean, yes, there are obviously places in the world that are windier than others. And the geography of green power still matters. But in terms of raw materials, they do require a lot. But they require copper, which it’s difficult for me to envision a world where there’s a huge copper shortage. 

Zinc, which is spread around the world in terms of production and processing. So that doesn’t go away. And then chromium, which is not something that is particularly rare either. It’s not that there aren’t some sticking points, but there’s nothing like you would have when you’re looking at, say, electric vehicles or battery technology where just so much of the core material is relatively rare and in geographically concentrated positions. 

Second, there’s the issue of improvement in the technology. Yes, solar has gotten incrementally better. Year on year for the last 30 years, and that is great. But wind who, when they’ve discovered that if you make a turbine tall enough, it doesn’t even matter if it’s windy on the ground. So we now have turbines going in that are 800ft high and higher, and with that sort of range, you can actually tap into currents that are much stronger and far more reliable than what you would get closer to the ground. And so in places like West Texas and Iowa, we have for a couple of years now, already seen significant baseload power coming from wind. Baseload versus intermittent. Let me explain that real quick. So baseload is, you have it pretty much all day and, you know, the wind blows at night, whereas intermittent means that when the wind stops, you don’t get power anymore. 

Wind used to be a primarily intermittent power source, although you could get some at night. Solar will always be intermittent because you can only get it when the sun’s out, and you can only get it when it’s not cloudy. So whether it’s a geography issue, a materials issue, or just the mechanics of what greentech is, wind looks a lot more stable. 

And then finally there’s a labor issue. Solar panels and all of the attendant things that go with it require fingers and eyes for their manufacturing, especially assembly. Wind is oversimplifying here. A big turbine and a bunch of big blades. And then you’re done. And those blades are typically some sort of carbon fiber, which is something that’s not particularly difficult to manufacture. 

So no matter what happens with the green transition, no matter what happens with the world of electricity moving forward, wind is a far more durable component of our future. And that’s before you consider that it also generates a lot more electricity per dollar. So for every dollar that you put into generating, say, solar power, you’d actually get twice as much electricity coming from wind. 

And that means in places such as the wind belt in the United States, the Great Plains wind has long been the cheapest source of power and has been driving other sources of power out of business, especially once they started to address the intermittency issue. So wind looks good no matter where it happens to be. Some places are better than others. Try to move there if you can, or at least get a wire that takes the power to you. 

Oh, one more quick thing. Why you haven’t heard this before is simply due to a combination of the Inflation Reduction Act and personal preferences. You see, the IRA provided cash for anyone who credits tax credits for anyone who could put up green tech. And while not everyone can have, say, a wind turbine at their house, anyone can put up solar panels. 

So wind turbines very rarely go to places that are not windy, whereas solar panels often go to places that are not sunny because individuals could do it. So, for example, the state in the United States was the highest penetration per capita of solar panels is Vermont our least sunny state. And so just like Berlin, they will never generate enough electricity to pay down the carbon cost, much less the economic cost of installation. 

With wind, you don’t have that problem because, you know, you’re not going to put one of these turbines that’s 800ft tall on your roof.

Is Federal Regulation Coming to the Texas Power Grid?

Photo of powerlines and grid

That innate sense of independence that every Texan comes out of the womb with has also made its way into the energy sector. With an isolated grid managed by ERCOT, Texas has found itself in an energy pickle of its own.

Since the Texas grid stands alone and the capacity market disincentivizes peaker plants from being built, it’s more vulnerable to certain things like natural disasters that cause prolonged outages or fluctuating weather patterns and high temps which intensify energy demands.

The big concern is that energy demands in Texas are expanding…rapidly. To sustain the industrial expansion and population growth, the Texans might have to do something that goes against every fiber in their being: accepting federal regulation to help connect their grid to neighboring states’ grids.

Prefer to read the transcript? Click here

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.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey everybody. Peter Zeihan here. Coming to you from the Austin airport. Yesterday we talked about how California has found the new in a unique way to increase their energy insecurity, along with increasing prices. And today, it’s time to talk about the same topic in Texas. We’re going to go with an electricity story today. There are three kind of mega grids in the United States. 

One that kind of roughly, cuts down in front of the rocky line separating east from west. And then something called Ercot, which is Texas’s electricity reliability, group, which is basically just Texas. And Texas has its own grid because it has a different, philosophy when it comes to regulation from most others, which is a fancy way of saying they like as little as possible. 

But that doesn’t necessarily mean that they have no regulation, and that doesn’t necessarily mean their approach is working. One of the big things we’ve seen in Texas in recent months and years was there’s not a lot of depth or durability to the system, because unless there’s a very clear economic rationale for doing something on a day by day basis, it typically isn’t done because there aren’t going to be regulations about how long power can be off line for maintenance or redundancy in case of a storm. 

And Texas is a Gulf Coast country. And so when a hurricane comes through like one did earlier this year and hit Houston, power is out for 2 to 3 weeks over much of the city. They have a much bigger problem coming up just around the corner now. There’s something called a capacity market in Texas and regulations have been around for a while. 

Basically dissuade people from adding power to the grid unless that power is going to be used all the time. So there’s a little bit of an ideological slant here. The idea being that solar never works at night. So if you can’t pass on the cost to the end user because it can only be used half the time, can only pass on part of the cost, then maybe won’t. 

We won’t get as much solar. Solar is doing just fine in Texas, especially out west where it’s just a brilliant economic model. But this capacity market restriction has also restricted the Texans from building what are called peaker plants. Every day there’s a certain pattern where power is in higher or lower demand. And the smart people in the electricity market have figured out a way to ramp up production for those times. 

As a rule. And it’s going to vary location by location, season to season. Peak demand tends to be between 6 and 9 p.m. at night, when people are coming home and getting dinner and watching TV, and then it tends to drop off a cliff around 10:00 am and doesn’t pick back up until people are waking up around 6 a.m. the next day. 

Well, in Texas, because of this capacity market thing, they don’t get a lot of plants to generate power specifically for those windows. And I don’t know if you’ve been to Texas, but it’s a hot place. And so when you have peak demand from 6 to 9 p.m., everyone’s running their AC full bore and the peak is much stronger. 

You add in the erratic nature of weather in Texas, whether it’s the great Plains or the Gulf Coast or the interaction in between, and they have the most extreme variations between low and high. So if anyone needs a lot of speakers, it’s going to be Texas. But the capacity market actually dissuades people from building those. So we are now in a situation where Texas has had 35 years of incredible industrial and population growth, and considering what needs to be done over the next few years, the industrial growth really needs to continue. 

But there’s not enough electricity to power it, and the capacity market is now getting in the way. So we’re probably going to get a Texas two step of outcomes here. Number one, the Texans are going to have a series of rolling brown and blackouts as the power system fails. It’s just not stable. And then second, the Texans will probably be asking the federal government to dissolve the seam that separates Ercot from the rest of the country in order to import huge amounts of power from neighboring states. 

And in doing so, they’re going to have to subject themselves to at least some degree of regulation from the federal government. The alternative is rolling brown and blackouts and the failure of the Texas industrial expansion model. So basically, the Texans are going to do something they really don’t want to do. They’re going to have to ask for help from… Oklahoma.

Why Is Gas So Expensive in California?

Photo of gas pumps at a station

Picture this: you’re driving down the PCH in a sports car with the top down, hair is blowing in the wind, and then the gas light comes on. You pull into the first gas station you see and a gallon of gas costs $14.99. Okay, maybe I’m exaggerating a little, but California is heading towards a massive energy crisis.

California has been living in its own energy world for quite a while. As if its distinct gas formulation designed to reduce air pollution, high gas taxes, and dependency on foreign oil weren’t enough, the state now requires refiners to keep reserve supplies (raising costs further and creating more logistical issues).

Since California isn’t a beneficiary of the shale revolution, they still import crude from the Persian Gulf and use outdated methods of collection. This makes them vulnerable to global energy shocks and could lead to extreme gas prices throughout CA. So, if you were planning to head to the west coast, let your hair down, and take a cruise along CA State Route 1, you may want to grab a few extra gas cans before you cross the state line.

Prefer to read the transcript? Click here

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.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Huntington Beach, California. Behind me is the old Huntington Beach refinery. This used to be a major oil producing zone. In fact, there’s still a handful of producing wells across the L.A. area, with one of the most prolific ones being inside of a mall in Wilshire Boulevard. Never say that the Californians aren’t capable of a bit of, double dealing. 

Anyway, the reason I wanted to talk about this, and this is what, you know, made me think of it, is we’ve got a bit of a crisis going on in California. I’m going to rotate around a little, not only is the view better, but you can even see some of the old, oil platforms out in the ocean. 

Hey. They’re okay. Anyway, short version is that California has a very high tax regime for, a lot of things, but none more so than gasoline, where it has the highest gasoline taxes in the country. And as a result, gasoline in California is ridiculously expensive, often goes over $5 a gallon. I think it’s where it is right now, actually. 

Anyway, there’s some other reasons for this, but, we’ll get to those in time. Bottom line is the Californians have become a nerd, but angered by very, very high gasoline prices and very, very volatile gasoline prices and more so than everyone else, you know, everyone else is, you know, used to the up and down of crude prices of how that affects things. 

There’s more going on in California for you that was worth exploring. The governor of California, Gavin Newsom, has recently signed into law a project that will force refiners to maintain storage of gasoline grades for the California market as a cost of doing business in the state. The intent is so that when maintenance happens, especially unscheduled maintenance, that there’s always a reserve that the state can fall back on to keep energy prices out of control. 

Unfortunately, it’s going to do the absolute opposite. And the cost of, complying with this new regulation combined with all the other regulations in California and at the energy sector, which are already, the stiffest in the country, means that a lot of refineries are evaluating whether they even want to stay. And, shortly after the new law was signed, Phillips 66, which maintains a refinery near here in Los Angeles, announced that, next year will be the final year that there are refineries operating and they plan to shut down and redirect their efforts to other places, most notably other states. 

A couple things here. Let’s talk about the technical of why what Newsom and the Democrats here are doing is just purple idea. First and foremost, California, in order to control air pollution, has a different formulation from the rest of the country. So any refinery that is producing, gasoline or unleaded or whatever else for the California market has to produce a very specific type of fuel that doesn’t have a demand anywhere else in the world. 

And so no refineries outside of the state produce for the state because there’s no margin added for them. So it’s just the locals. Second, not every urban center in California has the same regulations. And in the summer, a lot of them had different regulations. So not only do you have to produce a strain that is different for the state as a whole, but when you get to the summer months, you have to produce several different ones. 

And all of this drives up costs because it reduces scale. The idea of the regulation that you have to have storage makes sense. But gasoline, once it’s refined into a fuel, if it’s stored for any appreciable amount of time, you know, more than days to a few weeks starts to degrade. So the cost of keeping this up is really high, and the waste that comes out of it is not minor. 

And so from a carbon point of view, this isn’t a great idea anyway. There’s any number of reasons why this isn’t a great plan, but the Californians are doing it anyway. And that means that California is setting itself up for a bit of a problem down the road, more than just high prices. You see, California is the only one of the lower 48 that is not participating in the shale revolution in some way. 

They have a significant oil field here in the Monterey Shale that’s out in Kern County in in the valley. But the techniques that are used for fracking have specifically been banned. But oil production has not. So, the locals are using technologies that are older and arguably dirtier than shale tech in order to produce crude for this local market. 

This new regulation further separates California from the rest of the country. Also, keep in mind that the United States is now far and away the world’s largest exporter of refined oil products. By the end of this calendar year, we’re looking about 5 million barrels a day of exports of things like gasoline and jet fuel. Obviously, none of that’s coming from California. 

But for the rest of the country, we’re awash in an embarrassment of energy production and fuel production, whereas California is in huge deficit. And now California is the state that is most dependent, not just on energy imports, but energy imports from another hemisphere. Yes, all the refineries in Louisiana and Texas like to use imported crude. They mostly use, Venezuelan, Mexican and Canadian and to a lesser degree, crude grades from the Eastern Hemisphere. 

But everything, almost everything that California gets comes from the Eastern Hemisphere. And almost all of that comes from the Persian Gulf. So the next time we have an energy shock, for example, because I don’t know, Israel bombs Iranian oil production and export facilities and that Iran returns the favor by hitting Saudi Arabia. We get to know what are you prices? 

Most of the United States is like, whatever. But here in California, they have made themselves uniquely exposed to international shocks while also being uniquely exposed to their own. So one way or the other, we are looking at a significantly darker chapter in California economic history. Just around the corner. And that’s before you consider things going on in Silicon Valley or the capital market or the general aging of the millennials, all of which are already hitting California pretty hard. 

So stay tuned. When it gets bad, I’ll be back because it’ll be cheap.