Can Iran Control Internet Cables in the Gulf?

AI generated undersea internet cables

We’ve previously discussed the vulnerabilities of global internet infrastructure, but today we’ll focus on subsea data cables in the Persian Gulf.

Global data traffic depends on undersea cables that carry massive amounts of information between continents. Iran has now decided it wants the ability to control and charge for data traffic moving through the region (mirroring its stance on shipping through the Strait). Many Gulf countries built separate subsea infrastructure, so all of them are exposed to disruption.

These vulnerabilities will likely push more communications toward satellite systems like Starlink, but that opens a whole new set of challenges. Another reminder of the fragility of globalization.

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Transcript

Hey all, Peter Zeihan here, coming to you from the winery of Tenuta Oderisio in, where am I? Abruzzo in Italy. Today we’re going to talk about a little thing in the Persian Gulf called data cables. Now, for those of you who have ever sent an email, there’s got to be a way for you to access the internet, for the information packets to get from X to Y to Z, and eventually to where you need them to go. 

Now, there’s a number of ways you can do this. You can piggyback on the telephonic network. That’s a relatively new method using, say, 5G or 4G signals. Older school. For those of you who are Gen X or boomers, you remember, of course, modems where it went over the telephone lines that were physical at the time rather than wired. 

But if you want to go across the planet, there’s this little problem called the ocean, and there is no cell signal that is strong enough to get across. So you have to do one of two things. Number one, you bounce up to a satellite with something called Starlink, which is really the only model that does it right now, which has a cost and a hardware issue. 

Or you send it into the telephone network, and eventually it gets to a launching point on the coast and loads into a data cable that crosses the ocean to a spot on the other side. I think it’s loaded into their telephonic network, these data cables, there’s literally thousands of them, and the big trunk ones just carry a huge amount of data. 

Typically, one of them that crosses the ocean carries more data or has more capacity carry data than all of the telephonic systems just 25 years ago. Now, what is going on in the Persian Gulf is that the Iranians, who are trying to assert control and sovereignty over the Strait of Hormuz in order to get control of the oil trade, are not limiting their ambitions to that. 

They’re going after container ships, they’re going after Bulgars, they’re going after food carriers, and they’re going after the internet cables. And they’re now saying that they think they should be able to charge a transit feed for any data flowing in and out of the Persian Gulf. Now you look at a map of the Persian Gulf, and you’ve got a lot of Arab countries on the western side Kuwait, Bahrain, Saudi Arabia, gutter, the United Arab Emirates and Oman. 

But something that everybody forgets is all of these countries really don’t like one another, and some of them would just flat out hate one another. So they, whenever possible, try not to make their national infrastructure dependent upon what happens in the next country. Over. So the United Arab Emirates, for example, doesn’t have a data cable that crosses Saudi Arabia and goes up to Jordan and into Israel and then on to Europe. 

And no, no, no, their only access is out into the Persian Gulf through the Strait of Hormuz on a subsea cable. The same for Kuwait, the same for gutter, the same for Bahrain. Which means that if you take a country like the UAE, which is actually reasonably well run and not nearly as medieval and thudded like, say, Saudi Arabia, they’re completely vulnerable to this sort of blackmail. 

And if you play this forward into a world, you have to realize that data cables can’t be defended and they can’t dodge. So anyone who decides they want to go after them can really sever them in a day if they want to. So the transmission system that we have become used to, that we don’t think of as a globalized thing, is actually one of the most hyper globalized aspects of physical infrastructure that exists on the planet today. 

And in the Strait of Hormuz right now, we are getting a glimpse of what to come when data connections that are allowed upon physical connections simply aren’t going to be viable long term. And that only leaves satellites. And that starts a different conversation about sovereignty and space and the ability to defend that sort of network. Because Starlink is already in the thousands of satellites, that already makes it more populous and orbit in terms of number of satellites than everything else put together, that is also not sustainable, but we’ll deal with that on a different day.

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.

Iran Diplomacy Has Yet to Begin

Two diplomats shaking hands in front of flags. Licensed by Envato Elements

The administration’s centralized and personalized approach to foreign relations has collapsed U.S. diplomacy across multiple fronts, including stalled Iran talks, poor relations with allies, and uncertainty ahead of future negotiations with China.

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Transcript

Hey all. Peter Zeihan here, coming to you from Colorado. Today we’re taking a whole batch of questions from the Patreon page and kind of lumping them together. And the general topic is diplomacy in the Iran war. Now, a lot of folks have been wanting me to comment on every ebb and flow in every Trump administration initiative or Truth Social post. And, you know, number one, that would be exhausting. 

Number two, to the bigger point, most of these things don’t matter. The way diplomacy normally works is you have a cadre of people in the State Department and the CIA and the Defense Department in the national security apparatus, whatever it happens to be. And they all have their own contacts that they maintain on behalf of the government on the other side. 

And you have back and forth communications that all of these people at lower levels, medium levels, higher levels, and those people are used to shape the conversation so that when the president comes in, all the groundwork has done been done already. The issue we have with the Trump administration is most of those people have been fired, and the ones that haven’t have basically been barred from carrying out any sort of diplomacy because Trump sees this as his personal purview. 

So, for example, when you look at the Chinese summit that’s supposedly is about to happen, it wasn’t until last Friday and Thursday and Friday when, for the first time, major CEOs were starting to get approached about whether they could join the president’s delegation. All of the groundwork that is normally done to make sure that the president isn’t wasting his time, none of it is being done. 

And so the president will go. It will either be a completely pointless summit, or chairman G will probably be able to convince Donald Trump to do things that the United States really, really, really, really would not want him to do. Basically, Trump has become the biggest dove in the administration in relationships with almost every country, because he sees himself as the only one who can make a decision, which is true. 

But he also sees himself as the only one who’s even worthy to talking him to, which is not. So you play this toward the Iran war, when the State Department is out of it, when the national security is out of it and the Defense Department is out of it. You basically have what’s left is just the president and whatever individuals who chooses to appoint. 

What we’ve seen so far are three people that have been appointed JD Vance, the vice president, who was sent once and it was such a disaster, he was removed from the team completely. We have Steve Wycoff, who is in competition for being the dumbest man in America and has never come back to the white House with anything that is useful except for the propaganda of the other side. 

And so relations, when Whitcomb is involved, are generally stalled with everybody. And then Jared Kushner, who is the son in law of the president, who is not an idiot but always is coming at things from the point of view of I want to walk away from this with a real deal. And so you get these New York Jewish real estate folks who are going to places like negotiations with Iran. 

And shockingly, not a lot of us happened. So what happened at the end of last week is probably the best example I can give you. There was a one page, one page memorandum that the United States sent the Iranians, which wasn’t rejected out of hand, but is already being stretched onto a two week process to evaluate one page, because that’s about all the attention span Donald Trump has. 

Like you could resolve everything in Israeli-Arab-Persian relations in one page. So while that was going on, Donald Trump also pushed forward this other idea called Project Freedom, where the US Navy would start escorting vessels in and out of the Persian Gulf. Now, there’s a lot of tactical reasons that won’t work. 

I think I’ve dealt with that already, but let’s talk about the diplomatic reasons why it didn’t work with the whole Iran war. Donald Trump refused to consult with any of the allies in Europe, in Asia, in the Middle East, with the exception of Israel. Of course, that was party to the war, which means that when the war did not resolve in the way Donald Trump wanted to, none of these countries felt that they could or should get involved, because they had no say in how it was carried out in the first place. 

That also carried forward with Project Freedom. After one day, the Saudis said, you can’t use our airbases for this anymore because you’re not taking negotiations seriously. So unless and until you cancel Project Freedom and start talking to the Pakistanis, who are the interlocutors again, you can’t use Saudi air bases to enforce Project freedom. So the thing was canceled after two days after a grand total of two ships were escorted. 

Unless and until Donald Trump realizes that the US doesn’t have the military force to break open the Persian Gulf until he realizes that only a political deal with Iran is going to end the situation. We’re just in this holding pattern with the entire region is offline. Now, I would argue that Trump aside, a lot of the stuff is never coming back anyway. 

But as long as Donald Trump is the president, until he changes his negotiating tactics. We haven’t even begun meaningful negotiations at any level on this topic, because he doesn’t allow the lower level people to do their jobs. He thinks it has to be him. And so he’s established himself as a single point of failure throughout the entire bureaucracy of diplomacy that we have with absolutely everyone on every topic. 

And lo and behold, we don’t have a meaningful trade deal with anyone. After a year and a half, Iran talks are stalled and relations with all of the allies are at the worst that they have been in decades. It’s going to be really interesting to see how this China summit goes, because the same lack of preparation and consultation that has happened with everything else, with the administration, applies to the second most powerful country in the world as well. 

So it’s going to be some good watching. But don’t expect anything to be a meaningful deal in the way that most people mean the term.

So You Want to Break Iran…

Satellite view of the Strait of Hormuz

The blockade of the Strait of Hormuz has forced Iran to get creative with its oil storage.

Iran hasn’t been able to get its oil out of the Gulf, so they’ve started using available shadow fleet tankers as floating storage near Kharg Island. But as the other tankers begin to return from their delivery routes from before the blockade, dozens could get stuck waiting to get home.

Now, I’m not one to give targeting advice, but if the U.S. needed to do something that would force Iran to the negotiating table…I can think of a couple of really appealing targets.

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Transcript

Hey, all. Peter Zeihan here. Coming to you from Utah today. Today we’re going to talk about an aspect of the energy crisis is going on in the Middle East and a possible partial solution. I don’t want to oversell. It has to do with what you go after. Now, I don’t provide military targeting data. Oh my God, no. But if I were to, this is where I would nudge things. 

It has to do with tankers. We know that with the double blockade in place, the Iranians are losing access to places to put crude. Normally they export about 2 million barrels a day, mostly on shadow tankers, mostly in violation of sanctions. That goes out of the Strait of Hormuz to India, around India, around the Strait of Malacca and up into Northeast Asia, primarily China, but also a little bit to Taiwan, Korean time and Japan. 

Anyway, that is currently blocked for them. So they’re pulling tankers out of mothballs, parking them near Kharg Island, which is their primary export point in the northern extremes of the Persian Gulf, and loading them up to use as floating storage. They can do this until they run out of tankers. Here’s part two. The type of tankers that the Iranians use are very large. 

You either have the literally VCs, very large crude tankers that can carry up to 2 million barrels, or even a few ultra large crude carriers. It can carry up to 4 million barrels. Now, when those things take this trip, they can’t go through Malacca, especially the ulcers, because the strait isn’t deep enough. And the draft of these ships, when fully loaded, makes them detour further east around a place called Lombok. 

Well, getting from Cargo Island out of the strait around the subcontinent, through Lombok and up to Northeast Asia, that takes about 28 to 30 days and then about five days for them to kind of turn around and queue into port, unload everything, and then come back, usually come back through Malacca because they’re not as heavy then. You do that time frame and you look at the point where the US really started the, blockade, and next week is when the last of those tankers comes back. 

So what we’re seeing is the development of a tanker parking lot off the coast of Iranian parts in the Indian Ocean, which means there’s already about 20 there. We’ll probably have another ten there next week, and then that’ll be all of them. Well, these are all Iranian government owned. These are all shadow tankers. And if something were to happen to them, then the Iranians, even if the sanctions were lessened, couldn’t export without using unsanctioned tankers. 

So if you’re looking for a way to force the Iranians to accept a deal that also closes down the shadow fleet, this is probably the way to go. And since these tankers are being held out in the Indian Ocean well away from population centers in Iran, you also wouldn’t face the same degree of damage or threat from Iranian military capabilities if they were to all be seized and relocated. 

So again, I don’t provide targeting information, but if you’re looking for an economic way to force Iran to the table in a more serious way, going after the royal production is probably not the right way. But if you take away their transport options, then they really don’t have another choice.

This Ain’t Your Father’s Tanker War

Navy warship with guns facing forward

No, the U.S. can’t escort tankers in the Persian Gulf today as it did during the 1980s Tanker War.

Back in the 80s, the U.S. swooped into a regional conflict where attacks on shipping were limited, and the Strait remained open. Neither of those is the case with the Iran War. The U.S. Navy has fewer ships today than it did back then, so widespread protection is a much different conversation (especially with thousands of commercial ships trapped). And of course, modern warfare has evolved. We’re dealing with drones and missiles that leave the U.S. Navy much more vulnerable.

You add all that up, and we’re looking at a very different Tanker War than the one your daddy saw in the 80s. So, the only path forward is likely a political one.

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Transcript

Morning everybody, from a foggy Colorado. Today we’re taking a question from the Patreon crowd specifically why the US can’t escort tankers and civilian ships like them to and from the Persian Gulf like we did back in the 1980s during the Tanker war? Well, three big differences. Number one, first, the nature of the conflict. 

The last time around in the tanker war, the United States was a late comer. It was originally a conflict that was a subset of the Iran-Iraq War of 1980 to 1988, and by the time we got to the town of that conflict, both sides were trying to destroy the other’s economic opportunities. And since they lacked the military capability to make a meaningful pushes towards oil production, they went after concentrations like the tankers. 

And so you had Iraqi aircraft that were Iranian tankers, and the Iranians would use a combination of surface ships, speedboats and missiles like the Chinese Silkworm to go after Iraqi and everyone else in the street was just kind of caught in the crossfire. 

Most of the damage done, most of the attacks were in the northern part of the Gulf, where most of the was originally exported. And so the United States came in with an aircraft carrier battle group, put it in the Gulf along with multiple task forces. And at any time involving 40 to 80 ships and some ships like Kuwaiti tankers would be reflagged and others would just be escorted in. Each cluster typically had five destroyers and a number of Coast Guard cutters assigned to it, and they would go in big convoys. 

That’s all different this time. This time it’s a direct conflict between the United States and Iran. And Iran has chosen shutting down the strait as a direct means of attack in the United States has chosen shutting down Iranian shipments as a direct means of attack. So unlike last time when the strait itself was open and the Iranians and the Iraqis were selective in their targets, now are on is willing to attack, pretty much anything in the United States is blocking all shipments from all Iranian ports. 

So that’s the first big difference. The nature of the conflict is very, very, very different. Second, the the nature of the US Navy is very, very different. Back then the United States had a 500 plus ship Navy. Today we’re under 300. And while today ships are faster and tougher and far more lethal, they are fewer in number. And so putting as many vessels into the Persian Gulf is just not an option. 

Also, something that was present back then was the Coast Guard. But the Coast Guard has been steadily whittled down over the course of the last 40 years and doesn’t have enough ships to spare. In addition, the US ships that are involved are tend to be larger and tougher, and if they’re going to slow down in order to convoy, that’s a bit of a problem. 

So remember, there were like 60 ships at any given time that were part of the escort effort last time. Today we only have 60 destroyers, and half of those at any given time are designed to protect the carriers and United States under Donald Trump, I think, wisely, has chosen to not put a carrier in the Gulf. Yes, you would be able to use closer munitions that are cheaper and easier to replace, and that’s our very real consideration. 

But it also means that a carrier could be attacked by the third difference, which is a new generation of warfare. Back then, Iran was only emerging. I was on the tail end of a really long, grueling war with Iraq. Its weapons choices were somewhat limited. You had the Chinese silkworms that had a range of about 50 miles and 1,000 pound warhead, and the Persian Gulf isn’t 50 miles wide. So it was pretty easy for something like a carrier to be over the horizon, be basically immune to anything that the Iranians can do. That’s not where we are anymore. Today’s drones might need GPS targeting, but we now have a series of things called super heads, which don’t, which means that they can choose their own target when they get close. 

And if there was a carrier in the Gulf, I can guarantee you that the United States would be under constant missile bombardment. And as we’ve seen with the Arabian side of the Persian Gulf, the U.S. is basically run out of interceptors, and the ability to protect its own ships would be limited. Over the weekend, when we saw the first effort by the United States to escort vessels, that was really the first time we’d seen major surface combatants from the United States in the Gulf at all. 

In this conflict, we’ve been doing everything at arm’s length. That means we’re running out of long range munitions, which is a problem. But it also underscores the degree to which that this is contested space now. And the United States can’t just sail in and break it open. In addition, when we did this in the 1980s, you were talking about typically 11 ships at a time as part of the convoy group. 

There’s 2000 ships trapped in the Gulf right now. So we’ve got different ships. It’s a different kind of conflict. We don’t have the numbers, and the numbers that need to be moved are just massive. The only way to open the Gulf is with a political solution with Tehran. And again, talks have yet to begin on that topic. 

About the only good news I can give you is that we’re now seeing early signs that the Iranians are starting to shut in oil production because they don’t have anywhere to put it. Just keep in mind that the Iranians do consume a couple million barrels a day themselves, and that will never get shut in. So they can be selective about what they’re shutting in. 

It’s not like you just flip a switch tomorrow and all of a sudden they’re out of money. But for the first time in the conflict, we are now seeing economic pressure on the elements of the regime that are making the security decisions. That is encouraging conversation. Those conversations just haven’t really started yet. The biggest takeaway is that the United States is the world’s most powerful navy, with the best projection power in human history, and we now know for the mix of geographic reasons and economic reasons and technical reasons, that the US Navy no longer has the ability to impose a strategic reality on a local basis against a to be perfectly blunt, fourth rate security power. This is a big change in how the world works. It is very, very, very easy to deny civilian access now. And it is very, very difficult to restore it. And you can play this specific scenario out on almost any place in the Eastern hemisphere. And it’s difficult to see the US Navy doing any better. So if we do get into a fight with a real country in the future, we should count on those waterways being closed for at least the duration of the fighting.

Markets Flash Back to the Past

Stock market candlesticks trending upwards

Before you get too excited, NO, I’m not giving away any financial advice. However, whatever the global markets are doing right now doesn’t match the physical reality of the Iran war.

We’re seeing major disruptions, yet prices and trading patterns reflect high confidence that everything is fine. That’s far from the truth. A quarter of globally traded oil is gone. Key industrial inputs are gone. Refineries in Europe and Asia are stuttering due to supply issues. Commercial and strategic inventories have been tapped.

The discrepancy comes from the way markets are designed; they’re meant to respond to marginal changes, not a catastrophic loss in production capacity. Markets just don’t know how to factor that in and price it appropriately. And sooner or later, reality is going to catch up to everyone…

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Transcript

Hey, all Peter Zeihan here, coming to you from Colorado. Today we’re going to do something a little different and talk about markets. Don’t worry, there’s no trading advice in this. I don’t do that. But markets have been very, very strange since the Iran wars started. They’ve been gyrating but really have not shown any understanding of the threat that we have been facing. 

We have roughly one quarter of all internationally traded oil that floats on the water that has not simply been disrupted, but is gone. Even if the war were to end the second, most of that’s not going to come back on before the end of the year. Some of it will be gone for a couple of years. That’s before you consider natural gas or alumina or aluminum or fertilizer or the various products that come out of gutters, natural gas processing facilities, these things, these things are gone. 

We now have a weapon system in place that has a reliable range of 600 miles, which is triple what they need in order to disrupt things on the other side of the Gulf. They are difficult to jam, they are difficult to intercept. And with the technologies in place and in existence at the time, it can’t be done at cost in any sort of reasonable cost. 

The markets are pretending to themselves that we are simply hours away from peace and going back to things as they were before, and with every Trump troop social post, we get gyrations up and then something like, say, the United States hijacking a supertanker comes along and we barely get a response. This degree of retardation in the markets makes very little sense to me. 

And then I thought about it a little bit more. It is because the markets are being presented with something they’ve never been presented with before. You see, since 1945, we’ve had a globalized system where the United States upholds what makes it all work. And I remember that whenever I walk into a room full of finance people explaining that the world after 1945 is based on American security guarantee, this is something that surprises them. 

In the United States, the idea that economics for the US is a subset of security is something that really never gets processed, and the financial crowd is arguably either the top or the second most globalized of America’s industries. So for them, the idea that the entire underpinning of their sector is now gone is something that really takes a while to get their mind around. 

And so the money keeps flowing. So stock markets are stable to up all prices despite the gyrations have been trading within a reasonable band. And we haven’t seen anything like the disruptions in oil markets like that we saw back in 2007 at the dawn of that financial crisis, and those disruptions were largely non-existent. The ones now are permanent. 

So what is going on here for real, and what should we expect? Well, let me give you a few items. Just kind of file away in the back of your head. Number one, we are seeing reduced refinery runs across Europe and across East and southern Asia. This is not demand destruction. Demand destruction is when prices reach a certain point that people change their economic activity because they can’t afford the energy or what product, whatever it happens to be, that’s not what we’re seeing. 

We’re nowhere near those 2007 highs that triggered real demand destruction. And that’s before you consider inflation index terms were barely half of that level. No, the refineries aren’t slowing down operations because there’s no demand. They’re slowing down operations because there’s no feedstock. We’ve had such a deep and ongoing disruption to energy outflows from the Gulf that over half a trillion barrels of crude now have not been produced, have not been shipped to port, have not been loaded on tankers, have not sailed out of the Strait of Hormuz, have not gone to their end destinations. 

Which means that if we’re seeing refinery runs reduced, it’s not just that there’s not enough crude making it out of the Gulf, it’s that the crude oil reserves of the various companies and countries are being depleted to the point that it’s affecting refinery operations. We’re also seeing already reductions in things in shipping, most notably diesel. In the case of trucks in places like Australia or China or Europe, and jet fuel pretty much everywhere except for the United States. 

That means that these shortages aren’t just a throughput issue. They’re not just a reserve issue. It’s a commercial inventory of refined product issue. And that sort of breakdown is something we have never seen in the post-World War II environment, not once. And markets don’t know how to price that, because how do you price a barrel of crude that is never produced in the first place? 

What modern markets do is they look for price signals, slight changes in supply or demand from this market or that market or that subsector, whatever it happens to be. And then the price of crude adjusts around that, and that provides forward price signaling for things like producers. We are not seeing that because that is not happening. We have seen a gross dislocation of the structure of production and transport, and they don’t know how to price that. 

Under normal circumstances, higher prices would stimulate more production. But most fields take somewhere between 4 and 11 years to come online. In the United States, that has shrunk down because of the shell revolution to weeks to months. But that just is at the wellhead. If you want to export crude to a world that can’t get enough of it. 

Well, then you need export infrastructure. And you don’t do that in a day or in a month or in a year. Which means at some point in this year, we have a fundamental break between the reality of what’s going on in the ground with energy and this facsimile that exists in the financial markets. What we’ll look on the other side of that break, don’t know. 

But two things. Number one, it’s coming soon because we’re reaching the point. There just isn’t enough product to carry out normal activity. And number two, I can guarantee you it’s going to involve rationing. And rationing is not something the market does well. That’s something that requires government intervention. And when that happens the question is what our markets what is their purpose then it’s supposed to be about the efficient allocation of capital. 

But that’s not the world we’re about to be in. We’re going to be in a world of absolute energy scarcity and the financial markets arguably not going to be a player in that. Now, whether that’s a buy or sell trade, I will leave up to you. I don’t think it really matters at this point. One of the things that most people forget is over the long run of global history and the period before World War two, it was the nature of almost every market in existence to ultimately go to zero, as the foundations that allowed it to exist broke. Well, get ready return to the past later this year.

The Iran War Approaches a Tipping Point

Missiles with Iranian flags on them

The Iran war is approaching a painful tipping point this week. Global energy flows remain in a chokehold, and economic conditions are worsening worldwide.

This week’s shift will be caused by Iran’s oil storage reaching capacity. Once that happens, Iran will have to shut in wells, which will cause long-term damage to production capacity. The fallout from that will be sure to get the IRGC riled up.

Now that the real decision-makers will feel the pressure, there will be an opening for policy change. The outcome, however, remains uncertain.

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Transcript

Hey, all. Peter Zeihan here coming to you from Nashville. You are going to see this video on Monday the 27th. And this week is going to be a big week in the Iran war. We’re in this painful economic state where both the Iranians and the United States are blockading traffic in and out of the Strait of Hormuz, which has caused any number of problems downstream, whether it’s jet fuel shortages or just general economic dislocation, it’s bad. 

It’s getting worse. It will continue to get worse for months. This is not something we’re going to fix this year or probably even next year. But for the first time, by the end of this week, the people in Iran who matter will finally feel some pain. One of the aspects of the American blockade is to make sure that the Iranians cannot get crude out. 

Now, normally, Iran only exports about a million barrels a day, but based on buffers in their storage system at a place called Kharg Island, they can surge out if they have stuff that’s already on site. What that does mean, however, is that once the blockade is in, that storage starts to fill up. Most people estimate that they have between 30 and 35 million barrels of storage and Kharg. 

And that’s really all the storage they have in the country for crude. And now that we’ve had the blockade in place for quite a bit, we’re probably going to see that storage hit full capacity this week, probably on Thursday or Friday, which means for the first time, it’s not an issue of short term income disruption. It’s a question of the Iranians then having to forcibly shut in their wells. 

You see, it’s one thing to cut off their day to day income for a few days, a few weeks, a few months, a few years, whatever happens to be if they know they can ultimately still get it out. But if you clog up the system and prevent exports completely, then they have to shut in wells, and those wells will never come back on in the same way. 

And they might have to do some redrawing, which means a long term degradation of their capacity to generate income at all over the years to come. Now, the people who are calling most of the shots right now are with the IRGC. That’s the paramilitary organization that enforces security, that controls the missile force that has been doing most of the drone attacks, and they make their money by a combination of smuggling and oil sales. 

So for the first time in this war, they actually have a reason to change policy. Is that something that is going to happen? You know, who knows. But this is the first time they will actually feel pain. And if there is going to be something that the Trump administration is going to do to take advantage of that, we get the beginnings of that strategy by the end of this week. 

Way too soon to suggest that there’s going to be success or failure in any particular direction. But this is the first thing that the United States has done for long enough that matters to the people who are actually making the decisions.

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.

Bring On the Jet Fuel Shortages

Even if the Iran ceasefire holds, the world already has a months-long jet fuel shortage baked in. So, start saving for those summer vacation flights.

These shortages will hit harder in the Asia-Pacific regions, but everyone will feel the heat. The problem is that Middle Eastern crude from Kuwait, Iraq, and Saudi Arabia (now offline) is ideal for jet fuel…and there’s no real substitute for the product.

Flights well into the future are already being canceled in countries like China, Japan, India, and Australia.

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Transcript

Peter Zeihan, here. Coming to you from Savannah, Georgia, one of my favorite cities in the country. 

Anyway, today we’re talking about one of the after effects of the Iran war. Even if the ceasefire holds, which, we are looking at a months long shortage of jet fuel on a global basis, most heavily concentrated on the South Asian, Southeast Asian, Australasian and Northeast Asian zone. Problem is that jet fuel is very exacting, in terms of its production. Whereas diesel or gasoline have a broader band that you can produce them with in the distillation columns in a refinery. In addition, the type of crude which kind of a medium heavy sour, that is your preferred feedstock for most refineries that make jet fuel, is heavily concentrated. 

Its production in places like Kuwait and Iraq and Saudi Arabia and all that stuff is off line. That was all Gulf facing crude that couldn’t be redirected somewhere else. We’ve now had a half a billion barrels of oil not be produced and delivered. And the refiners have already taken the last delivery from pre-war shipments. 

We’re not going to see new shipments come out in the next 2 to 3 months, minimum. Probably considering that a lot of the stuff is Kuwaiti and Iraqi, for over a year. So that means that we’re already seeing airlines in China and Japan and Australia and New Zealand and the Philippines and Vietnam and India, all canceling flights, not just for like the next few weeks, but the next few months. 

There is no good substitute here, because if you say run low on gasoline, some vehicles can switch to diesel. Or more importantly, the cargo can switch to diesel. And if you run low in diesel, you can always put some of the cargo on trains or on ships. Jet fuel is for jets, and that’s it. So with a relative bottleneck on the feedstock and a relative bottleneck at the refineries and the lack of substitutions, we’re just out. 

And so we’re going to see this cling to the system for at least a year, assuming no new shooting. There will probably be more shooting.

The Blockade of Iran Begins

A US aircraft carrier floating in water with dark storms behind

The blockade of Iran has officially begun. The first day was a bit slow, but this remains a monumental move by the U.S.

The most critical component of the blockade is that it finally puts pressure on the group actually controlling things, the Islamic Revolutionary Guard Corps. And since the IRGC gets most of its funding from oil exports and smuggling, the pressure is on.

This is a good thing overall, but it could provoke attacks on nearby Gulf states. And sure, there are several ways to bypass the blockade, but those costly routes add time. A blockade like this can only be effective through sustained enforcement, so we’ll continue to watch the Strait closely.

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Transcript

Hey, all Peter Zeihan here coming to you from Colorado. We are on April 15th now. And so happy tax day. But it also means that we’re in the second full day of the American blockade of the Persian Gulf. Specifically, the United States has said that any ship that is planning to dock at any Iranian port or is coming from any Iranian port is not allowed. 

Passage and naval assets, at least in theory, are in position to, potentially board vessels that decide to run the blockade. In the first day, no one really tried. Really. Only one ship came through ignoring the blockade. The United States didn’t do anything, but it was the first day. So, you know, whatever. That could mean anything moving forward. 

What the Trump administration has done is really, for the first time in the conflict, actually put a price on the powers that be in Iran. You see, when the first waves of attacks went in and the bulk of the Iranian leadership was killed, yes, that killed the current decision makers. But when you’ve got a political class of mullahs, it’s 10,000 people. 

Power just went to the next wave. And when it comes to operating in a war scenario, the people who are making the decisions were the IRGC, the Islamic Revolutionary Guard. These guys operate differently because they don’t necessarily garner their power from control of the military or the economy or taxes. Most of their income comes from either oil sales directly or smuggling. 

So when you’re looking to punish these people, the attacks at the United States and Israel did for five weeks did very, very little to actually hurt them. It destroyed large portions of the aboveground Iranian economy. And in a normal state situation, that could have been crushing. But those weren’t the people that, were running the military strategy at the time or now by blockading the ports, however, the 2 million barrels a day that the IRGC was able to export has now gone to zero. 

And their ability to import product, to then control smuggling networks has gone to zero as well. So whether or not this is on purpose or not, the white House has stumbled across a strategy that actually puts pressure on the people who need to be pressured. There are still a thousand questions about how this will be done, whether it really will be done, or if it’s just a truth social post. 

But the fact that the assets are actually in place now is promising. That promising, however, doesn’t mean it’s going to work. Promising doesn’t mean that it’s going to be sustained long enough to make a difference. And that doesn’t mean that it comes with no side effects. Because if you really do start pressuring these people, they will strike. 

And these are the people who control the bulk of the Iranian missile fleets and all of the drones, and have demonstrated over and over and over and over again that they have more than enough capacity to strike any energy asset on the Arab side of the Persian Gulf. That’s above the west side. 

Anyway, the other reason that the blockade seems to me to be a necessary move is hardware. The Iranians don’t have a huge manufacturing base, and almost all of the parts and all of their missiles and all of their drones come from China. And we were in this weird situation throughout the war where the Chinese could ship whatever components in Iran could import whatever components they wanted. 

But the, the strait was shut down to Allied shipping. Now we’re in a situation where that seems to have finally flipped. There are still plenty of drones, thousands of drones, maybe tens of thousands of drones in Iran. So it’s hardly a short cutoff. But it does matter. 

Now there are two things to keep in mind and to watch for in the days ahead. First of all, maintaining a blockade on the Persian Gulf is pretty easy. You put a few ships across the mouth of the Strait of Hormuz. You can see everything without any sophisticated equipment. That’s the easy part. But Iran does have one port, Chabahar, that is out east in the Gulf of Oman, where it turns into the Arabian Sea just shy of the Pakistani border. 

Chabahar would require a separate naval blockade in order to prevent access. And that means American splitting its forces. Otherwise, you can ship in containers full of drones to and they can be trucked elsewhere in the country. 

Second, there’s nothing about the northern or eastern borders of Iran that can be blockaded because it’s land. 

So the Chinese could, rail or truck stuff through Pakistan or Central Asia into northern or eastern, Iran and get things in that way. Now, that takes longer. That is much more expensive. If they started that process today, the first new components aren’t going to arrive in Iran for about three weeks. And there’s a lot of things can go down in three weeks. 

And a situation where basically both sides have been negotiating in bad faith since the very beginning of this process. But those are the things to watch. The naval side of this for the United States is actually pretty straightforward, even if it does require an extra task force to cover Chabahar. But there we are. 

So, next steps. Watch those two places. Watch to see a second phase of negotiations. Watch to see if either side is willing to give in or not. I think we’re well past the point where Donald Trump can simply declare victory and go home, because if he does that, he basically hands Iran control of the Strait of Hormuz, allows them to continue their nuclear program, allows them to continue supporting militant groups throughout the United States. 

Basically, the United States would be in a worse position in that scenario. In the aftermath of the war than it was before. And so many people are now saying that among the Republican Party that I think it really has sunk in doesn’t mean that there’s a good strategy here. But if there is a path to pressuring Iran to do something different, you have to hit the interests of the IRGC. 

And so far, the blockade is the first thing the United States has done that has done that.