Oil Archives - Zeihan on Geopolitics

The Pressure Is Dialing Up on Russia’s Oil Network

I’ve been discussing the potential for Russian crude supply shortages and a broader collapse of the Russian oil system since the Ukraine War started…so, is it finally happening?

Ukraine’s recent attacks on Russian energy infrastructure have brought a potential oil crisis within arm’s reach. The Ukrainians are getting smarter, striking critical nexus points and ports; refining capacity is dropping, crude is backing up, and storage capacity is running out. These bottlenecks create pressure in the pipelines and wells, and you can imagine what happens next. Should this extend into the winter, frozen wells could add onto the crisis.

Since much of the energy infrastructure in Russia relies upon Western-tech and labor, that leaves them with few options at resolving these issues in a timely manner (if at all). And then you factor in Ukraine’s strikes on the shadow fleet and things begin to get really spicy.

Hey, all Peter Zeihan here come to you from Colorado. And today we’re going to talk about the net effect of all of these recent waves of attacks by drones and by the Ukrainians on energy infrastructure in Russia. Now, this is following up to a video I did a couple of weeks ago talking about how we were starting to see some really very real damage in the energy complex of Russia, with somewhere between 15 and 20% of the refining capacity going offline.

Since then, the Ukrainians have massively upped their target set, going in and hitting things that are further away. Now, some of these attacks are more political and mine the ones that places like Moscow, where the political elite lives, or Sochi down in the Black Sea, where the political elite vacations. But the far more important attacks, from the two general categories.

The first one is the Ukrainians are showing that they can hit targets more than a thousand miles away from their borders. Specifically a place called Bashkortostan. It’s a province in western Siberia, eastern European Russia, populated by ethnic Bashkuri, who are, a Turkic minority. Pretty large one in the Russian space.

But the fun thing about Bashkortostan is it sits at a pipeline nexus that links pretty much all of the southern Siberian energy fields into the European pipeline network. And so if there’s meaningful damage in Bashkortostan and you’re not just looking at problems with refining their production, you’re talking about upwards of 3 million barrels a day that could get locked in.

And the Ukrainians have figured out that going after a pumping station is a really good idea if you want to disable some of the pumping infrastructure. That’s part one. Part two. Primorsk. Primorsk is a port on the Gulf of Finland, very close to Saint Petersburg. Gulf of Finland an arm of the Baltic Sea.

It is arguably, Russia’s top export destination. That the Gulf of Finland writ large. Not only is there Primorsk, there’s a place called Ust-Luga. Both of them have been hit recently, and both of them now are operating below half effectiveness. So Primorsk used to export about a million barrels a day. Now it’s about half that Ust-Luga.

It used to be about 700,000 barrels a day. Now it’s about half that. You put all this together, and the Russians are facing a crisis point in their energy sector that honestly, I’m a little surprised it hasn’t happened to this point. You see, the Russian energy sector has limited export points that are not well linked together. They’ve got a single spot out on the Far East that kind of has its own network and then out on the western side, they’ve got a few ports on the Baltic Sea and the Black Sea, and the rest are piped exports that go through Ukraine or Belarus into Europe proper.

Those pipelines have now been shut down. That just leaves the maritime ports. And if something happens, that would prevent crude from, say, reaching for some might be able to go to the Black Sea, but none of it could go out to the Far East. So the Russians are losing flexibility within their system. And now that we’ve got roughly three quarters of a million barrels per day of throughput on the Baltic Sea that can’t flow, and now that we have 20% of refining off line, all of a sudden there’s somewhere in the vicinity of about 2 million barrels a day of crude produced that can’t go anywhere.

Unlike the American system, where there’s massive tank farms in every major city, the Russians don’t have that. They’re used to producing crude, sending it to refineries, having it turned into fuel and consumed locally or exported. And the rest goes to an export point and is exported. If you have friction in that system where the fuel can’t be produced, then the crude has to go somewhere else.

It has to go to a port, and if the ports can’t take it, pressure builds up back in the pipeline system all the way back to the wellhead, which means if something doesn’t change in just the next 2 or 3 weeks, there’s going to be so much pressure in the system that either we’re going to have a rupture in the pipeline, which would be really, really bad for any number of reasons, or the Russians are going to have to shut down their production sites back at the wellhead and lock in a million barrels a day or more.

The problem is, it’s already late September. Winter is almost upon us. And if these pipes are shut down, or if those wells are shut in in the winter, the crude will freeze in the wellhead. And if they want to turn it back on, they can’t just flip a switch. They have to re drill the well. And a lot of these wells are either old or were produced with Western technology, which means it has to be done from scratch with what the Russians can do with themselves or import from the Chinese, which isn’t sufficient for the technology required in order to make it all work.

So we could be three years into this war, finally on the verge of a crude shortage, because the Russians just can’t play. Well, no. Real soon, repairing things like refineries takes time. Especially if you’re talking about this distillation columns that the Ukrainians have been hitting, the pressure testing that is required to make sure the thing doesn’t explode is something the Russians and the Chinese cannot do themselves.

They import all of that from the West. It’s going to be a problem getting the parts. And in the case of Primorsk, not only did the Ukrainians hit a pumping station, they also had a couple of ghost fleet tankers. So all of a sudden, whatever insurance the Russian government or the Indian government or the Chinese government has been providing to these ships all of a sudden has to be paid out.

And that hasn’t happened yet. And so, lo and behold, tankers aren’t going to risk in the volume that they need to be going if the pipeline system is going to stay online. We’ve been waiting for all of these things to happen, either one or the other, for three years, and all of a sudden they’re all happening at the same time.

It’s kind of exciting.

Ukraine Hammers Russian Oil Infrastructure

The Ukrainians have ramped up strikes on Russian energy infrastructure, sending ripples through Russia’s refining capacity and triggering fuel shortages. But what changes enabled this to occur?

Three big things have shifted, giving Ukraine political cover and better tools to disrupt Russian oil flows. These include opposition from the US diminishing, Europe cutting off Russian oil and gas (besides Hungary and Slovakia), and longer-range weapons to strike deeper into Russia.

This is allowing Kyiv to strike Russia’s most critical oil hubs; think the pipeline nexus Samara, or pumping stations that will force Novorossiysk to collapse, or even northern hubs serving the Baltic. Since oil remains the largest revenue source for the Russians, sustained attacks on this infrastructure threatens Moscow’s ability to fight this war.

Hey all Peter Zeihan here coming from Colorado on a foggy day. Today we’re gonna talk about what’s going on in Russia, specifically. Ukraine has severely ramped up its attacks on Russian energy infrastructure. This is something that the Ukrainians have been doing in bits and pieces for about a year and a half now, but it’s now taken on a whole new level, and we have somewhere between 15 and 20% of Russia’s oil processing capacity offline.

And it’s generating localized gasoline shortages throughout the Russian system, including in the capital, and certainly in the provinces that are closer to the actual front in the Ukraine war. So what has changed? Three things. First of all, Biden’s gone. Biden had this idea that attacks on energy infrastructure in, the Russian space would raise energy prices globally to a point that would be politically unpalatable for Americans.

Now, I was always on the other side of that equation, as a rule, gasoline markets, not to be confused with oil markets, trade differently. And so a disruption in one hemisphere does not automatically trigger a broad scale energy price increase in the other. But regardless, Biden has now gone. That argument is no longer being made in Washington.

And from Ukraine’s point of view, the gloves are off a little bit. Number two Europe, the Europeans are no longer taking any piped oil or natural gas from the Russians at all, aside from a small volumes that come into places like Hungary, which are basically operating as Russian parties. Which means that from Ukraine’s point of view, there’s no longer diplomatic or economic complication in Europe.

The deals to transit oil and natural gas across Ukrainian space expired at the beginning of the year. Everyone who was smart and saw the writing on the wall, moved away from the Russian sources completely again, Hungary being the standout exception. And now going after the infrastructure in any way, shape or form basically has the unofficial blessing of the European Union.

So the Hungarians and to the lesser degree the Slovaks, are screaming bloody murder. But Ukraine isn’t giving transit fees. They’re not taking any Russian energy. No one else in the EU is taking any of it either. So it’s okay to go after the infrastructure. We’ve actually seen a couple pumping stations get hit already. Third, the Ukrainians are much better at this.

They’ve been developing bit by bit heavier payloads and longer range weaponry that can strike further and further and harder and harder at Russian targets. And so now reliably, it’s to a range of about 1200 kilometers. The Ukrainians can be striking, and that’s about 700 miles. And that puts a lot in range of these potential weapons, including the entire Moscow region.

But Moscow is not the most important zone here when you’re talking about oil. There are a few pipeline hubs in the Russian system where several pipeline networks from different zones come together for focusing and refining, and then go on to export points. And in my opinion, the single most important of them is the city of Samara in southwestern Russia.

It’s basically roughly north of the Caspian Sea, maybe northwest a little bit. Anyway, something around 3 million barrels a day flows through there at any given time. Pipelines, of course, can be redirected to a degree. But we now have the Ukrainians targeting refineries in the Samara area. And when they do that, the crude can’t be refined. It needs to be kept in the pipeline and sent on, and the pipelines flow on can only take so much traffic.

So it’s put a real crimp in what the Russians can produce. And we’re already starting to see some reports, a few reports of shut in production because the pipelines can’t handle the flows to the volumes that are necessary because the refineries are offline. If and when the Ukrainians decide to go after the pumping stations on the pipelines themselves, then this whole part of the network breaks, and that will probably be the end of meaningful exports from Russian crude to the Black Sea port of Novorossiysk.

And as the Ukrainians continue to get better and better weapons, some of the distribution systems of the hubs in northern Russia will probably start getting hit as well. And that could really impinge upon the Baltic Pipeline system, which is where the Russians export crude from the Baltic Sea, from, near Saint Petersburg. The specific port escapes me at the moment.

Anyway, so with the politics changed and the economic dependencies shifted, and the Ukrainians all of a sudden a lot better at what they were doing, we should expect a lot more Russian crude going offline. So regardless of what happens with the Trump administration and sanctions and its effort to peel, say, the Indians and or the Chinese away from the Russians, if the crude can’t flow, the crude can’t flow, and the Russian economic situation with then become a lot more difficult because oil sales remain what they have always been for Moscow, their single biggest source of income, going all the way back to Soviet times.

The Highs and Lows of Burgum’s Energy Strategy

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.

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.

Oil Markets Aren’t Worried About Iran

With everything going on between Israel and Iran right now, I know what you’re thinking – it’s time to run to Costco and fill up the gas tank. Hear me out though, we don’t live in the same world we did a few decades ago.

Oil markets aren’t reacting to this conflict for a few reasons, but it boils down to where the crude is coming from. Between the US shale revolution and a diminishing importance of the Persian Gulf in oil markets, this conflict just doesn’t move the needle like it used to.

Sure, there could be a situation where I might start to worry. But that would require Iran closing the Strait of Hormuz (very unlikely) OR marching troops all the way to Saudi Arabia’s oil fields (also very unlikely). So, unless some dramatic military step is taken by Iran, we can all just fill up whenever it’s convenient.

Hey, all Peter Zeihan here. Coming to you from a somewhat breezy and drizzly Colorado. Today we’re going to talk about the attack that happened over the weekend in Iran. Israel’s basically bombing the crap out of Iran, going after the nuclear facilities. And, contrary to popular concern, oil prices really haven’t done all that much. They’ve moved less than 10%.

Why do they not care? Why do I not care? Now, if you back up 20, 30, 40, 50, 60 years ago, any sort of spat involving Israel in any way immediately sent oil prices through the roof. And if it involved Iran, oh boy howdy. Because the Persian Gulf remains, even today, the world’s largest producer of crude and by far the world’s largest exporter of the stuff.

And with in the modern day, the Europeans no longer taking crude from, Russia because of the Ukraine war, it’s become more important to global petroleum than it’s ever been before. However, however, however, there is another factor and that is the US shale revolution. The United States, in the last 20 years has gone from the world’s largest importer crude to, in gross terms, the second largest exporter, second only to Saudi Arabia. Does that mean we’re completely immune to what’s going on? But it does mean that we’re dumping more than 10 million barrels a day of crude into this market than what we did before, closer to 15, actually, now that I think about it.

And that changes the math for everything, because if we did have a sharp cut off of the very thing in the Persian Gulf, the United States would face some teething pains as we use some of the crude grades that we produce in refineries that weren’t designed for it. But overall, we’d be okay. And having that extra 10 or 15 million barrels a day of global production just means that in percentage terms, the Middle East doesn’t matter nearly as much as it used to.

Now, where does that take us? More specifically, what would make us worry? I am of the opinion now that even if Iran decided it wanted to shut down the shipping lanes in the Persian Gulf, it probably couldn’t. They’ve got a lot of small boats. A lot of them are really nothing more than, speedboats. It could do some damage.

But about the only thing that is going to get Iran any assistance, any sympathy in the international system is if it doesn’t shut down the energy line that allows countries like China to function. If it does, that really is all on its own, except for the Russians, who would be happy to see global energy go up in smoke, which means, it’s down to how good their military is.

And, you know, Iran has never, ever, ever in its history been a naval power. Probably the last battle that Iran was really noteworthy. It was like against Sparta. And if you’ve seen, you know, those movies, you know exactly what I’m talking about. It didn’t end well. What would make me care? Well, if Iran were to take its military and surge it into Iraq and south through Kuwait and go for the Saudi oil fields with the intention of taking them offline.

That would get my attention. Iraq plus Kuwait. You’re talking 5 to 6 million barrels a day. Once you talk about the Saudi oil fields, you’re talking about another ten. All of these Saudi oil fields are in the far east of the country, really close to gutter. In a Shia majority area, and in theory with the Iranians, who are also Shia religiously, would get along with these people.

So you could see some sort of rebellion happening at the same time. But for that to happen, that would be a big risk for Iran these days. One of the things we’ve seen with the Israeli attack is Iran no longer has any meaningful air defense whatsoever, and it’s generally easier to have static air defense in it. It has mobile air defense.

So if they take their army and throw it at Saudi Arabia, they would have no air cover at all. In addition, Iran does not have what we would consider to be a mechanized military. It’s an infantry heavy force. So you’d basically be sending, don’t know, 50,000 hundred thousand, 200,000 men marching through the desert, 500 miles. Leaving aside the logistical terrain, that would be easy pickings.

They would be completely open to the sky the entire way. And so even a successful operation would be hugely costly for them. And a failed operation would mean the end of the Iranian government, because the Iranian military wasn’t designed to fight other countries. It was designed to occupy all of the non Iranian non Persians in the country of Iran.

Only about half the population are ethnically Persian. So if if they were to do that, it would be incredibly risky. And unless they pull it off successfully, I still don’t care and neither should you.

What’s Up with the Middle East: Saudi Oil Slips

Oil has been the secret sauce for the Middle East for ages, but that’s beginning to change.

The Chinese are now the top importer and consumer of oil, driven by all that energy-intensive industrialization. US oil consumption is dropping, although exports of refined products have masked this a bit. The US shale boom has also made American energy independent and competitive, which isn’t great for Saudi manipulation and control of oil markets.

Which means Saudi Arabia is losing some of its influence; the US doesn’t need the crude, Saudi Arabia’s costs are rising, and more competitors continue to pump oil regardless of market signals. But the Saudis aren’t completely out of options…they could always just use a little terrorism to destabilize their rivals.

Hey, all, Peter Zeihan here coming to you from Zion National Park. This is Zion Canyon. That is the infamous Angel’s Landing, which I will not be doing a video from. But we continue our coverage in the Middle East today talking about what makes the whole region matter. And of course, that is oil. We’ve got a lot of crosscurrents going on, and international oil markets right now.

We’ll start with demand. Then we’ll go to supply. Demand is weird. The United States has largely completed its transition to a services economy. And so we’re becoming more and more efficient for every dollar of GDP that we make. And so in terms of actual oil demand, we’ve actually seen demand drop in the United States. I’d argue for the last 15 years.

Now, you’re not going to see that in the data, because the United States has massively increased its production and export of refined products. So technically, we’re still absorbing crude turned into things like jet film gasoline and then sending it out for a profit. But in terms of our normal consumption, it’s actually gone down by quite a bit.

The second big factor, of course, is China, which is pricing sensitive and factor insensitive. They basically expand their money supply in order to give everybody a job. Most of those jobs end up being in the industrial space, which is relatively energy intensive. And so they need every drop of the stuff they can get from everywhere. So China has overtaken the United States as the world’s largest oil importer by far.

And if you look at the numbers the way I do, they’re clearly the world’s largest oil consumer as well. But unlike, the Chinese, the United States has an ace in the hole, and that’s the shale revolution. So now we talk about supply. The United States has gone from producing less than 5 million barrels a day as recently as 20 years ago to, now, something closer to 15 million barrels a day.

Most of that increase has been in the shale fields, where it’s relatively light, relatively sweet, fairly easy to refine, but not necessarily geared towards the American preferences when it comes to refinery infrastructure. So we end up exporting a lot of that stuff as well, and then bringing in some heavier, more sour stuff from Canada in particular. From the Saudi point of view.

All of the math is out of whack. The Saudis are completely incapable of defending themselves in a real war. And their plan has always been to lean on the United States for security support. And they do that by making sure that the United States always has as much oil as it possibly wants. But now the U.S. really doesn’t care on a systemic basis about oil markets at all, because everything that we need to either get at home or within our continent, or worst case scenario, within our hemisphere, and the Saudis are kind of left dragging, they would love to have a new security guarantor, but it’s not clear who that

could be. The Chinese don’t have the reach or the longevity. The French and the Brits don’t have the punch. And the Turks may be closer, but they are on the wrong side of Mesopotamia to make it work. It leaves Saudis in quite a lurch. And the Saudis, from an economic point of view, are struggling with new problems.

It used to be 20 years ago that OPEC could dominate oil markets by increasing or decreasing. The Saudis always had problems getting countries to follow their quotas. But because Saudi Arabia and their relatively close ally, the United Arab Emirates, always basically agreed on oil policy. You had this huge chunk of spare capacity that could be turned on or off relatively quickly.

They’re facing two challenges to that now. First, the spare capacity is largely gone. Everyone’s been pumping full out for quite some time. And then second, with shale, you can bring on a new shale. Well, in a matter of weeks, as opposed to having pre invested billions of dollars into spare capacity in Saudi Arabia, which still takes months to turn on.

So any time that the Saudis would try to flood the market. The shale folks just proved to be a little bit more competitive than the Saudis would have liked. And whenever the Saudis tried to push up prices by gutting the market, the shale folks would just take the market share. And that happened over and over and over and over and over again.

Second problem the Saudis are facing are is the former Soviet Union, because while Saudi from time to time can bully some of the other producers, into changing their oil policy to meet with the Saudis, one and two, they’ve never been able to do that with the Russians. A lot of the Russian production is in Siberia. It’s very high cost to get out of the ground.

The Russians have no intention of ever turning it off. A big problem these days is Kazakhstan, where a couple major projects called Tengiz and Kasha gone have really come into their own and made Saudi Arabia more important to oil markets than Kuwait. And they’re never turning that stuff off either. And then Azerbaijan has finally hit its stride with its offshore production.

So you got three significant players that are just dumping more and more crude on the market. And there’s really not a lot that Saudi can do, which means it’s time for a different sort of strategy. Some people in Saudi thought they could build a giant linear city that everyone would come invest in. Well, that was a stupid idea.

And so now the Saudis are probably going to rediscover some of their militant roots that they put down in the 1980s with al-Qaida. We have a lot of moving parts in the Middle East. Syria’s one. Iran is one. But what the Saudis really need is for some major oil producers to go off line. And the only tool the Saudis have that is even remotely reliable outside of Europe, opening the spigots is terror attacks.

This is something the Saudis are very good at. Their own population is basically former horse raiders that decided to settle down and substitute mass rapes and killings for, domestic violence. And now they’re in a position where the only way in the midterm that they can drive oil prices up is to drive someone else out of the market.

They haven’t decided what the target is yet. But we should expect significant policy change out of Saudi Arabia over the course of the next year, especially now that it’s become apparent to the Saudis that the American relationship really is over.

When Donald Trump came to Riyadh, recently, he didn’t ask for crude. First time, an American president hasn’t had some conversation with the Saudi royal family about crude oil. He simply said, you need to invest money in the United States if you want us to be involved at all. $600 billion is my number. So I don’t have $600 billion. The idea of them being a cash cow for whatever project in the world is long gone.

Their population is much larger, their subsidy system for their population is much larger, and their cost for just holding the line are much larger. So the U.S. will be lucky if it gets 150 billion. And the Saudis simply need to change the rules of the game if they’re going to continue with their system in its current form.

Can Venezuela Help Out with a Middle East Oil Shortage?

With the increasing possibility of disruptions to the Middle East oil supply, I was asked an ~interesting~ question on how to solve it. Could foreign intervention in Venezuela open its oil supply as an alternative to Middle Eastern oil.

Before we look at Venezuela, we need to know who might be interested first. The US has its oil needs figured out, so it’s really only the Europeans that would consider this. There’s plenty of crude in Venezuela, but years of mismanagement have left infrastructure and fields in poor condition. Couple that with a host of security issues, political instability, and a heavily armed civilian population…and it’s definitely not a cakewalk.

Even if the Europeans were willing to make the massive investment to revamp the oil industry in Venezuela and put forth a substantial military presence to establish the order needed to make this possible, they would still need the sign off from the US…and that’s probably not going to happen without some major incentives.

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Hey everybody, Peter Zeihan here coming to you from the Golden Horn above Denver and it’s probably my last snow free day of the season. Anyway, We are. Oh.

Oh, deer.

Today we’re taking a question from the Patreon crowd. Specifically with everything in the Middle East starting to look very Middle Eastern again, would it be worth considering some sort of operation in operation?

To remove the government of Nicolas Maduro of Venezuela so that the world has another source of crude available for when the Persian Gulf becomes a place you really don’t want to be? Might sound a little neo imperialist, but that’s a pretty good question. You got 20 million barrels a day of crude that comes out of the, the Persian Gulf states.

And any meaningful conflict that involves Iran or Saudi Arabia, clearly is going to take a substantial percentage of that off line. And even if the oil fields in the United Arab Emirates and Saudi Arabia take no damage, and even if those two countries stand, and even if the bypass pipelines that get around Hormuz or go to the Red sea, operate at full capacity, you’re still talking about roughly how 12, 12 to 13 million barrels per day that’s under severe threat.

So the idea of being able to get some more crude out of Venezuela is a solid idea from a supply point of view. In addition, if you look back at history, the original oil embargoes that OPEC did, were Arab. They were not they didn’t involve all oil producers. And back in the day, Venezuela was not a participant in them.

So we saw more production out of Venezuela, which didn’t simply, cushion the blow.

But I would argue that over the period of several weeks to months, it actually broke the back of the embargo. So having Venezuela in play is obviously great. That said, the country that would do something like that is 100% not the United States.

While the United States does prefer heavy crude, Venezuela has been such an a sneaky producer for so many years, more than a decade now that, with the exception of a few incidental cargoes, U.S. refiners just don’t even want to take delivery of the stuff because they can’t plan on it. You tool your refineries step by day, week by week, by month, by month, year by year, based on what you anticipate, the blend of crudes coming in going to be.

And so if you can’t rely on a particular supplier, it’s better for you simply not to use it at all. And ever since the early days of Hugo Chavez, maybe going back to 2007, there have been very, very few refineries in the United States who have chosen to use Venezuelan crude. I know that doesn’t match the rhetoric.

It’s always about, oh, we’re not going to ship to the Americans anymore. Well, the Americans weren’t buying anymore. So if Venezuela were somehow magically to come back into the mix, its specific grade, a very heavy, very sour crude would have a hard time finding a local buyer. That’s problem one. Problem two. The middle row government is well, it’s like Zimbabwe levels of incompetent, Zimbabwe being a country that was one of the world’s great breadbasket until the government of Mugabe and his successor just drove it into the ground and made it a food importer, under first Hugo Chavez.

No, Nicolas Maduro, we’ve basically seen the, cronies of the government literally rip up everything, even if it was nailed down, and sell it oftentimes for scrap. So the country now imports 80% of its food. It used to be a food exporter. And, its total oil output is kind of bouncing back and forth between 500,000 million barrels per day based on what happens with, Chevron, the American company, which is really the only one that’s still operating there.

Most of the reservoirs have suffered extreme damage. The infrastructure hasn’t been maintained. And don’t get me started on the refineries. Oh, there’s like chunks in their gasoline now. But just for the record, chunks of gasoline is a bad thing. So, if you could wave a magic wand and change the government and change the investment strategy and, make them not klepto those.

Oh, yeah. Important detail. The Venezuelan government is not socialist. It is not communist. It’s a kleptocracy. And of course, we should be scared of that anyway,

If everything was perfect, it would still take probably an investment of 40 to $50 billion upfront just to get back to where they were five years ago when they were exporting, like, a million barrels a day, maybe producing something close to a million and a half.

Keep in mind that the fields that Venezuela has are old, they’re technically challenging, and they produce a very sludgy type of crude. So you really to know what you’re doing. And today, there’s only a handful of companies that have any experience working with that. One of the Chevron, the other ones, Conoco. And then there are some companies that say in Canada that work with the oil sands, which is probably the closest analog, but it’s even not a very good one.

And as a rule, the Canadian oil sands operators don’t operate anywhere except for the oil sands. So simply building up the skill set that would be necessary to attempt this would be huge. Third, most of the oil is in one of two places in the western part of the country. You’ve got a region called Maracaibo, which is about as anti Maduro and anti-trade as you can get, but the government’s efforts to basically destroy their own state have had a big impact there.

And Maracaibo itself is lawless, complete with pirates operating offshore. And in Maracaibo a lot of the crude is produced from offshore wells, most of which are in the process of going down to zero. So you have a split politically in the country that you’d have to deal with. The second part of the crude comes from the southern belt, the Orinoco Belt, which is super heavy, far more technically challenging, and a lot of that is just vanished from the market completely.

So if you want to bring either of these in, you don’t simply need to change the government. You need to restore basic security to the country. And then you’re talking minimum, bare minimum. Something like 50,000 troops. Remember, one of the things that Hugo Chavez did is he paid people to be on his side. And he didn’t just pay them with food and with fuel and with cash.

He paid them with AK 47. So arguably, of the countries in the world that are not actual war zones, the densest footprint of assault rifles in the population is in Venezuela now. So anyone who’s going to come in for any reason, even if the locals in general are welcoming the stability and they be able to get food, they’re going to be dealing with the significant population that is armed to the teeth and not with little pop guns.

Okay, you put all that together and the US is like, no, sir. The United States is now not just a net exporter of crude oil, but by the end of this calendar year, probably is going to be exporting 5 million barrels of refined product. That’s a greater volume of refined product exports than all but three countries in human history have ever produced as raw, crude.

So the idea that the United States is going to launch a war for oil is just silly. It’s going to happen. It’s going to be because countries in Europe realize that the Russians aren’t coming back to the table, not in the way that matters in the Middle East is as unstable as ever. Ergo, this conversation that means that we are left with the Europeans basically thinking, well, where else can we go?

And one of the very few options that is not West Africa or North Africa is going to be Venezuela. So they’re going to have a choice. Do they go into Libya, which is basically a stateless zone now on its own. Can’t even call it a civil war. Civil war requires a state. You can go into Nigeria where with over 100 million people, the chances of imposing a security environment on Nigeria that the Nigerians don’t want is silly.

So we’d have to be even done with partnership with them. So even with a lot of cash, you’re going to be dealing with a very corrupt system and slow growth of output, or you’re talking about a military occupation and enforceable reconstruction of Venezuela. Leaving aside the little issue that the Europeans are a little bit out of practice at that, they would have to get American permission as well.

Monroe Doctrine and all that. And for the United States to give the Italians, the Brits and the French and the Germans approval to invade, basically a country in the Western Hemisphere, let’s just say that whatever was being offered in exchange would have to be really nice. And I’m not sure there’s anything in Europe that we want that badly at the moment.

So interesting idea. The crude is there, but the country that would have the capacity to do something but the United States really doesn’t care. And the countries that do really care would have to build up a whole fresh set of tools and then bribe Washington in order to make it happen. So it’s an interesting exercise, but nothing that I think is going to go down this decade, next decade though, everything’s game.

Why Is Gas So Expensive in California?

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.

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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.

Trump’s New Grand Strategy

President Trump suggested that Europe should buy US oil and gas to address trade deficits and strengthen alliances. I have a few qualms with this.

Trump talks a big game, but backing it up is a whole different story (meaning I wouldn’t recommend holding your breath while we wait and see if this comes to fruition). That’s not my only concern here though. Europe is facing a whole lot of issues, and prioritizing energy exports to a struggling region isn’t in the best interest of the US.

Instead, America’s energy resources should be allocated to emerging economies in regions that the US could use as strategic footholds and partners down the road. I’m talking Southeast Asia rather than Europe. Carefully selecting allies as the world deglobalizes is going to be very important…so, let’s hope Trump can do more than Tweet about all this.

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Hey everybody. Peter Zeihan here coming to you from. Okay. Who are okay. Who are. Yeah, I think that’s it. On the Cape Brett track in Northland, New Zealand. Today we’re going to do a, something I’m not going to get in the habit of and commenting. And one of Trump’s threats, specifically says that the Europeans should purchase American oil and gas, in order to address their trade deficit, in order to cement the alliance.

Normally, I’m not going to do this because Trump says a lot of stuff, that usually just doesn’t survive the room. And he is packing his cabinet with functional incompetence. So the chances of any of his policies actually making it into, reality, whether it’s domestic, foreign, are pretty low. And this is no exception to that.

But, it’s an interesting hypothetical exercise to, think about because we are in a period where the world is reshaping and seemingly incoherent. Things like this actually could have an impact. So, the volume first, Europe. And I’m using Europe in the broadest sense. It includes the Balkans, includes Switzerland, includes the United Kingdom, as well as all of the European Union.

They use about 13 million barrels of crude a day. If you include refined product, as well as about 45,000,000,000 cubic feet of natural gas a day. And that’s roughly 50 to 60% of what the United States uses. They have more people than the United States has, significantly more. But their economy is smaller and it’s less energy intensive because they don’t have a lot of manufacturing.

And while the United States has been gone, going through this big Three industrialization boom, much of Europe is actually industrializing because they’re running out of energy because they’re under net of workers, because they’re running out of finance. It’s a demographic story as much as anything else. Anyway. If if, if the United States did decide that it wanted to fuel Europe, it would need to expand its oil production by like 2 or 3, 4 barrels a day, which is probably going to happen in the next five years anyway.

And for natural gas, we need to build out significant, LNG, liquefied natural gas export capacity. We have to double, almost triple what we have right now. And there are enough projects in the pipeline for that to happen over the next decade. So from a numbers point of view, it’s not a ridiculous idea. It would mean not sending product anywhere else.

And so problem number one with this plan is right now our number one energy destination for energy exports is Mexico. And without those exports, the lights go off. In Mexico, roughly half of Mexican electricity, for example, is generated by the use of American natural gas. And we send them over a million barrels a day of crude and refined product as well.

And that’s built into our manufacturing system. So if we were to send that somewhere else for, our number two destination is, Japan, which is a much tighter ally than many of the European countries. And in general, if you’re doing this to address a trade deficit, taking something we already sell and have no problem selling from one place and send it to another just generates a different numbers problem.

That’s part of the problem with Trump’s things is that, he assumes that every individual thing stands alone when it’s all usually interconnected anyway, let’s assume for the moment that Trump is serious that Trump’s team can make it happen, that the Europeans are amenable. The trade deficit isn’t the issue here. Never is. The issue is a strategic block.

We’re moving into a world where globalization is ending. And it’s not that I think the United States is going to have a problem finding takers for its commodity exports. Now, the issue is that not everyone will be able to afford or have the security situation. Well, that will allow them to access those materials. And if the United States were to make a strategic decision not based on the trade deficit, based on who we want to be our ally, who do we want to encourage to continue to exist in a globalizing world?

Europe is one of the places that should be considered, it keeps the Russians in a box. It gives you a foot in the Middle East without being in the Middle East. And there’s a lot of cultural history or baggage, if you prefer, with the European family, which is where the vast majority of Americans eventually trace the roots back to, there’s a very strong argument to be made that Europe is it. And that’s where we should play. And if the United States were to pour all of its energy exports because it would take all of it, then that is a viable bloc. And then you can talk about what comes from that agricultural fusion, manufacturing fusion, military fusion, and the idea that you have an American dominated system that includes the entire cultural West.

There’s an argument to be made that in a world that breaks into factions and regions, merging North America and Europe is arguably the most powerful option. Just keep in mind that if we do that, we no longer have the resources that are necessary to say, do the same thing with Korea and Japan, which are two advanced countries we currently have excellent relations with or with Southeast Asia, which is likely to be the most rapidly growing part of the world

Moving forward, the United States is going to have to do many of the things that other countries are going to have to do in a globalizing world. We’re going to have to make some choices. They’re going to be a little difficult. And choosing to pour all of our energy resources into Europe, which is a region that’s experience.

A demographic bomb might not be the biggest bang for the buck. Germany, for example. The industrial base is probably going to collapse within a decade because they won’t have a workforce in addition to their energy problems. A much better bet is probably Vietnam or Thailand or Myanmar or Indonesia. Malaysia, and I would expect that as the eurozone faces problems, because if you don’t have a consumption led economy, it’s really hard to have a currency as a eurozone prices problems.

The United States is going to be able to choose to work with individual European countries. France looks much more viable. The U.K. is much more viable. Spain is much more interesting. Central Europe will probably last longer than Germany, Italy in a worse demographic situation than Germany. But its geography is much more friendly for power projection. It’s easy to kind of break Italy off from the rest of Europe’s strategically.

So there’s a lot of ways you can cut this pie. And I applaud Trump for starting the conversation on what might be possible. But the specific idea that Europe buys American energy, the end. It doesn’t take us very far, but it does get us looking in the right direction.

Quick addendum from further down the trail. Because I know I’m gonna get some hate mail for that one. So let’s make sure that the hate mail is well informed. Hate mail. The reason I say that Polish is under Donald Trump just don’t tend to happen is, he tweets something out or whatever social media he’s using, and then he leaves the room, and usually that’s the end of it.

And that’s before you consider that he is appointing people to his cabinet who are functionally incompetent in their areas. It’s a little less true in foreign affairs. Some of the people look interesting. But the primary purpose of being on Donald Trump’s cabinet is to stroke his ego, to tell him he’s wonderful and to make him look good in public.

And the heartbeat that you step away from that, you lose your job. So in Trump’s first term, he went through more cabinet level secretaries, than any other three American presidents in history combined. There’s just not enough time for a meaningful policy to be discussed, formed, and put in practice before the person is kicked out. But even if that was not true, Trump is a horrible personnel manager.

One of the worst we’ve ever had. And the only other person in modern memory, who comes even close is Barack Obama, who was arguably the worst of the second worst. It’s just a difference of styles. Obama insisted on micromanaging every little thing, but then hated people and hated having conversations with them. So he never was available for anything to be managed.

So nothing happened. And so for eight years, we really only got one law consequence passed and we had no foreign policy whatsoever. Trump is of that caliber when it comes to outcomes. So you look at our last three presidents Trump, Biden, Obama. We’ve had 16 years where the world is falling apart, where globalization is ending. And decisions like this on regionalization really are important and do need to be made.

But we’ve had no one to lead the conversation or to carry it forward, or to turn it into policy. So kudos. Seriously, kudos to Trump for starting the conversation. And I will be pleasantly thrilled. Should the process proceed from here?

No Shale for Europe

The US oil industry has seen a massive boost thanks to the shale revolution, but can the Europeans replicate the success the US has seen?

Unfortunately for Europe, there are a lot of things working against them. Problem one is that Europe just doesn’t have the right geology to make this work. They are also missing the decentralized network of small companies that helped build out the shale network in the US, they lack innovation, and they don’t have a rapid regulatory approval system. Aaand there is no financial incentives for landowners due to the legal barriers in place.

In the short term, this doesn’t look very plausible for the Europeans. They would need to buildout all the infrastructure, under perfect conditions, and even then it would take a decade to MAYBE get one million barrels per day. So, oil imports from the Middle East and US will continue.

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Hey, everybody. Peter Zeihan here coming to you from a brisk Colorado. Today we’re going to take a entry from the Ask Peter forum. Specifically, what would it take for Europe to experience an American style shale revolution? The continent is a massive importer of oil and natural gas, and they don’t exactly have a lot of territory that is good for sun or wind either.

So their choices really are nuclear, which let’s just call that problematic in some places, or imported. And if you’re importing, then you’re at the mercy of whoever you’re buying the stuff from, as they discovered with the Ukraine war, when that is Russia, that’s a problem. And as I discovered in the 70s and 80s, when that’s the Middle East, that’s a problem.

And then, of course, most European countries don’t have a production base navy, so they can’t even patrol their own supply lines should someone in between decide to cut them off. So, you know, reasonable question. Well, there’s a couple things that they really can’t do much about. And then there’s a couple things that they can, but I doubt they will.

So let’s start with what they can’t fix. Geology. Yes yes, yes, 90% of known oil and natural gas is in unconventional rock formations like shale. But that doesn’t mean that all shale deposits are created equally. So if you consider the United States, we’ve got the Permian, which in some places has 20 different stacked layers, each with their own petroleum layer, little jumbled together, but for the most part, pretty easy to get to.

So you can drill down through one, do laterals go down to the next one, do laterals go down the next one? Do laterals and the whole thinking funnel up through a single point of extraction. It’s by far the best in the world of that geology, and it’s, as far as we know, the only one in the world, there are tiers.

The Marcellus, in the Pennsylvania area is still pretty good, but it’s mostly gas, whereas the Permian is mostly oil. You’ve got the Bakken in North Dakota. That’s somewhere between, and the Europeans just don’t have the type of deep sedimentary geology that the United States or that North America specifically has. So it’s not that there isn’t oil and gas to be had.

It’s just it’s probably not going to have the same bang for the buck, even if all else was equal. And of course, all else is not equal. The way the United States started its shale revolution was with hundreds, if not thousands of mom and pop companies. And so we developed the expertise as we went. But it started from kind of a baseline understanding, especially national lands in the United States.

Small mom, the pops are the wildcatters that basically drill or have rights to small chunks of acreage and drill whatever’s best in that acreage. And they’re constantly trying new things. And in doing so, eventually they crack the code on shale. In the last few years, that has evolved quite a bit. And now the super majors have taken everybody’s best practices and are now doing some really aggressive iterations using things like artificial intelligence.

And overall, since 2012, we’ve probably seen worker productivity in the area increased by 350 to 400%, which is by far the record for any subsector in any industry anywhere in the world. And that’s before you consider that, we’ve gotten much more efficient with the equipment. So we’re actually getting about two and a half times as much crude as we did ten years ago.

But with one third the number of drilling operators, if you’re going to do this in Europe, you basically have to create it from scratch. With the notable exception of the United Kingdom, there is no constellation, no environment of small and medium sized players. Get your big national players that are de facto monopolies, and that’s about it. And with the possible exception of France’s too Tall and to a lesser degree, BP and EA and I, you know, none of these guys or what I would consider at the technological edge.

So simply getting into shale in the first place would be a big leap. But at least that’s something you can do something about. The other issues are far more problematic, but luckily there is a little bit of hope here. The first one is proximity. One of the reasons why the U.S show revolution has been so successful is when the technologies were first pioneered, they were pioneered on the edges of projects that had already been in production places like the Marcellus in Pennsylvania or the Permian in Texas.

And so there was already significant takeaway capacity was just waiting to be used. All the legacy pipes from previous oil booms, we weren’t exactly dormant, but they were certainly had a lot of spare, space in the pipelines. And shale was able to flow right in there. And most of the expansion we’ve seen in the last eight years has been about expanding that takeaway capacity, because it’s all the old stuff been maxed out in Europe.

Their mature fields have been abandoned for decades. And so on the off chance that there is any infrastructure left, it’s probably going to have to be completely rehabilitated. In addition, a lot of the best geology we are aware of in Europe is directly under where people live. So, for example, we know there’s a good shale geology under the some of the lowest sections, lowest in elevation in the Netherlands.

But you know, if you get any land subsidence, you all of a sudden have lost part of your country. So the chances of drilling there are not very high. And the richest shale deposit we’re aware of is under Paris, specifically under the roof. So the idea that the jewel in the crown of French historical preservation is suddenly going to be an operating oil extraction site.

I don’t think so. This isn’t the United States where there’s still oil production on Wilshire Boulevard. They have a very different attitude towards things in Europe.

The final issue, which is arguably the single largest, obstacle is legal rights in the United States, unless something has been negotiated otherwise, under the land you live on or own our mineral rights that you also control.

So if somebody decides they want to come into your neighborhood and drill and they get your permission, you get a cut. Whereas there is no country in Europe where that is the case. So if somebody were to come in, they’d get permission of the National government, and then the national government would get not just the oil and gas, but all the money that would come from it.

And you get nothing. So you’ve set up a situation where you can guarantee very strong opposition from regional governments, local governments, landowners, renters, everybody, because they don’t see any of the immediate benefit, unlike how we have it here. Now, technically, that is a legal change that is up to the individual countries to shift, but doing so would be would be a bit of a heavy lift.

So even if in a perfect scenario, the Europeans could just wave a wand and change the legal structure without public opposition and all local landowners and adjacent interests were immediately on board. And if they started building out the infrastructure for takeaway capacity today, and if they retooled their entire educational system to generate the scads of workers, that they would need to do this at scale the soonest, that you would probably see a million barrels a day fresh output, from Europe as a whole, would probably be 8 to 10 years from now.

And to be perfectly blunt, I don’t have that kind of time. The only way that the Europeans are kind of holding things together right now is with imported oil from the Middle East, an imported natural gas from the United States, and liquefied form that is more stable than their previous import menu, which was Russia heavy. But to think that that has ten years to run, in an environment where so much geopolitically is so unstable and changing so quickly, they’re gonna have to figure out another way.

One more thing. Regulation. This is something that Europeans obviously can do something about. And I’m not talking about here about a relatively anti-business, pro-environment regulation. Obviously, if you’re going to have a robust energy sector. You have to make some compromises there. That’s not what I’m talking about. I’m talking about turnaround time. So the Texas Railroad Commission, which regulates the shale space in Texas, is famous for fast turnaround times.

They accept applications for drilling permits 24 hours a day, 365 days a year. And in Texas, people drill and Christmas and Thanksgiving and Easter and all the rest. And most of the operations at most of the wells are operating at least 16 hours a day. They just rotate crews. The two examples I can give you of countries in Europe that have attempted, to try shale are the United Kingdom, Poland, the United Kingdom basically drowned everybody in paperwork.

Very British. And as a result, getting things approved wasn’t measured in days or weeks, but months. Because there was always one more form. It was like working for the U.S. Defense Department. And when they discovered that the geology in the United Kingdom, is, the oil bearing stuff is less dense, it’s in smaller deposits and it’s more spread out, and it’s a lot deeper.

Everyone pretty much walked away. The other country that tried Poland, had a little bit better geology, but you still had a problem with just permitting. You could file for your permit between 9 and 5 Monday through Thursday. And, God forbid, it was a holiday because, you know, the Europeans have a bunch of those. And this is an a country that actually has a strong national security interest in independent energy production.

But foreign companies just couldn’t get it to work. And Exxon, you know, that dainty, demure company that never gets its way ultimately just threw up its hands and walked home? So unless you have that change in government culture, it’s really difficult to imagine this moving

While U.S. shale operations now are getting more and more oil out of each individual, well, now measured in the tens of thousands of barrels a day, often, if you’re going to start new, with a new sector, with little expertise and especially without, say, the Permian geology, you’re probably only going to be getting a few hundred barrels per day. So the barriers between you and your operation that the government puts up needs to be very low for it to be worth that effort. And right now, the incentives in the United States versus Europe are just completely flipped. Okay. Now I’m done.

Will Saudi Arabia Start an Oil Price War?

Image of the Nabawi Mosque, Madina, Saudi Arabia

My crystal ball is working overtime trying to figure out what the future of oil prices will look like. You’ve already heard one of the scenarios, but here’s another POTENTIAL way this could play out.

The Saudis could get frustrated with other oil producers not cutting production, and flood the market with oil. We’re talking 3 million barrels per day, which would drive prices down below $50 per barrel. This would have an outsized impact on higher cost producers like Angola, Venezuela, and Nigeria.

These countries could face economic instability because of this, but they’re not getting the worst of it. The Russian oil fields are hard and expensive to operate, should production drop during a price war, it may never recover. Oh, and the US will be fine thanks to low-cost shale production.

Okay, I’ll go get the popcorn and you grab the sodas.

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Hey everybody. Peter Zeihan here. Coming to you from Fort Worth, Texas. And, I spoke with you recently about what I consider to be the highest risk we’ve had in a long time to the Middle East for crude oil supplies. But remember that I pointed out the possibility of Iran striking at Saudi Arabia’s energy complex and Israel taking out Iran’s, for that matter.

I said 1 in 4 to 1 in 3 chance. It’s not that I think it’s a majority chance. In fact, you know, there’s obviously other scenarios. I’m going to share another one with you today, which takes us the absolute opposite direction and probably has about the same chance of happening just to confuse anyone who wants to play some money in the market.

So you know, you have fun with this. So the idea is that Saudi Arabia is getting a little cheesed off that it has been restricting its own production in an attempt to boost oil prices. Specific. While my hair is out of control here, in order to get prices up, above $100 a barrel. And with the exception of the United Arab Emirates, no one else in OPEC, much less this broader OPEC+ group, has been cutting production at all.

In fact, everyone else has been putting as many barrels in the market as they possibly can. And of course, the U.S. shale producers continue to produce. That’s something that by any other standards would be record levels. But by their standards, like, oh no, only went up a million barrels a day this year, which, you know, is bonkers that it is now and done that for eight of the last 15.

Anyway, the Saudis have very clearly gotten annoyed, and they’re indicating that they’re willing to put a lot more oil on the market, maybe as many as 3 million barrels a day, and that they’re going to try to drive prices down quite a bit in order to grab market share. And that the number of $50 a barrel or lower has been floated. Doing something like that is well within the Saudis’ capability, assuming that global politics are favorable, which is always a little touch and go anyway. Whenever the Saudis have done this, it causes a lot of ruckus around the world among all of the other oil producers, specifically those that

have higher breakeven costs. So places like Angola or Venezuela or Ecuador or Nigeria and especially in places that are really, really dependent on oil flows, like places like, say, Libya and Nigeria in that category, because if they’re getting a lot less income, you know, obviously they face social malcontent. And if their crude isn’t profitable at that point, then they have to shut those production levels in.

And sometimes it can take years, if not decades, for that to be rebuilt. One country I’m not worried about is the United States. We’re now in a situation where the vast, vast, vast—over 80%—majority of the oil that the U.S. produces comes out of a shale well, and pretty much everybody is profitable below 50.

In fact, you’d have to go down to below, probably 35, before you’d see a meaningful impact on existing production. Keep in mind that once you’ve drilled your shale well, its production costs for operating purposes drop below about $10-15 a barrel in most places. So you might not drill new wells, but you’re going to maintain what you’ve got.

In fact, it costs money to shut it in anyhow. The last three times that the Saudis have done something like this, we’ve seen a little blip, oftentimes, in American shale output. But then you see it surge back very quickly, because from the time that a shale operator starts working on a well to the time that it actually starts producing is usually only about two months or less. With some of the new technologies, that might be a little longer, but it’s still less than three months anyway.

So whenever you’ve got market share up for grabs, the Saudis, of course, try to take it, but the U.S. shale guys do as well. So the Saudis have to do all the work, and they don’t have to split the benefits with the U.S. shale players. Now, this time, there is one other thing in the mix that is going to make this particular potential price war a little bit more exciting.

And that is Russia. Russia’s fields are deep. They are thousands of miles from international markets. They require over a thousand miles of pipes. Even the ones that are close to international markets, most of them are in the permafrost. And the Russian educational system for generating petroleum engineers collapsed back in the 1980s. So the only people in Russia who are capable of doing the work are a small cadre of Russian citizens who, in the 2000s, were basically trained abroad.

There’s just a few dozen people, because of the Ukraine war, because of the sanctions regime. The people who would normally do this work, typically Americans, Brits, Dutch, and Germans, are all out, and the Chinese don’t have the capability to work in this sort of technically demanding environment. They just haven’t learned those skills yet. So if you have high-price producers like Russia who lose production, this time around, they’re actually out of the market for good.

A lot of the fields aren’t simply old and complicated and far away and deep; they’re also very, very mature. So it would take a huge amount of investment and technology the Russians simply don’t have in order to get it back up and running on the backside of any sort of trade war. And they can’t do that themselves.

So, how is that for two bookends for what can possibly happen? A conflict in the Persian Gulf that sends oil prices skyrocketing, or a price war that removes a major player from the market permanently? Both of these could happen. In fact, it’s entirely possible that we’re getting some mix of the two, where the Saudis start with the price war, and then the Iranians have an economic reason to take out Saudi energy prices.

And if this is just too wishy-washy for you, well, welcome to my world. This is what geopolitics often is.

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