How To Ban Diesel Exports

Large Red Tanker Ship Docks at an Oil Terminal

A ban on American crude or diesel exports isn’t going to improve energy security; if anything, it will reduce domestic production. The problem lies in geography.

Most U.S. production and refining is concentrated in places like Texas and Louisiana, which are quite far from the demand centers in California and the Northeast. So for crude, export bans would oversaturate producing regions and discourage drilling. For diesel, the bans are futile without expanding infrastructure and changing the transport systems.

Export bans only make sense if paired with major changes to accompany them.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. And today I wanted to talk about something that has been in the news a lot of late, and that is bans on exports of energy products from the United States. There’s two topics here, one that’s old and one that’s new. The old one is about exporting crude in general, and the newer one is about diesel specifically. So let’s start with the older topic, then move to the newer. 

So here’s the problem. The United States is a physically large country, while places like Canada and China and Russia are larger, most of those countries are completely uninhabitable. Whereas the United States has a relatively broad population distribution across its entire territory. So a lot of internal American economic issues, especially when it comes to energy, are based on distribution. The mechanics of how we move things from A to B determines what our economic policy should be. And then whenever we deviate from that, we generate problems for ourselves. So start with oil. Obviously the bigger players are Texas, Louisiana, New Mexico, a little bit of Alabama, a bunch out of North Dakota, some out of Colorado, little bit out of California, and then places like Ohio and the Appalachians, Pennsylvania. And that’s great because we’ve got people in all of those places. But our densest population footprints in places like the American Northeast or Florida or the bulk of California, are not proximate to where the energy is produced. So you need to pipe it, the crude, from wherever it’s produced to a refinery. In places like the American Gulf Coast, you get these natural concentrations because Texas is all one political unit. So they can build pipelines without too much of a problem. They don’t have to go to federal authorities for permits or anything like that for the most part. And so you get these huge concentrations of crude in places that may have people, but aren’t necessarily enough people to consume the crude. So Texas, for example, produces more than enough crude for not just Texas, but the entire American West Coast, which doesn’t have a lot. 

So when you start talking about a crude export ban, what you’re saying is we’re going to create these massive pools of oversaturation in certain markets. And when you do that, without the infrastructure in place to ship the crude easily to where the people live, then all you’ve done is really disincentivize the crude producers from producing. So if you were to do a crude oil export ban tomorrow and have no mitigating policies, you would see crude production in places like North Dakota and Texas fall off a cliff very, very quickly because they produce far more crude than they can use locally. We also don’t have enough refining capacity in the country as a whole to process everything that we produce. So the only way to then square the market is to reduce supply. And that means the United States goes from exporting somewhere between 20 and 25 million barrels a day, to probably something closer to 10 to 15 million barrels a day over a couple of years. 

And it would happen that fast, because the vast majority of American oil production these days comes from the shale fields, and most shale wells generate somewhere around 70% of their total output over the 25 year lifespan in the first 12 months. So it would happen very, very quick, and the result would be less energy security rather than more. 

Something similar happens with refining and diesel fuel. Again, there are some dense concentrations of refineries where we turn crude oil into fuels that we use with, again, the Texas-Louisiana section being the densest. We’ve got secondary centers that are roughly matched to demand in places like the Midwest. But when you look at California and especially the American Northeast and certainly Florida, there’s just nothing. And the United States decided a century ago, more than a century ago, to favor truck transport over train and especially ship. Even though they’re much more efficient, especially for the American geography, which means we have a large built in demand for diesel fuel. Even though our geography argues that we should be doing other things. Anyway, this all combines. So if we were to have a diesel ban tomorrow, again, you would have a catastrophic change in prices in Texas and Louisiana, where diesel prices would go through the floor because of oversaturation. And the only way to fix that is to reduce diesel runs. And all of a sudden, the United States has less diesel than it had before. 

Now, of course, the Trump administration, being the Trump administration, is now openly discussing how to make this happen, the diesel ban, specifically. The energy secretary, Chris Wright, is against it because he knows energy economics. And the Interior secretary, Doug Burger, is against it because it used to be the governor of North Dakota, one of the states that would be oversaturated. So he understands what’s going on. But every time that those two have tried to inject a little bit of economic rationality and reasonable forecasting into the white House, they’ve been slapped down and they will be on this situation to. Now does that mean that an oil export ban or a diesel ban are just uniformly bad ideas? No, no, no, that’s not what I’m saying. I’m saying if you think you can do a once and done policy and then move on, that is stupid because that will guarantee that the problem gets worse. And we reduce not just global supplies, but American supplies of these things. 

What you have to do is pair a ban, if that’s what you want to call it, with other things. So, for example, on the crude oil front, most of the crude that is produced by the US shale fields is super light and super sweet. It’s not viscous at all. It has very few contaminants. And that is not what the American Refining complex is designed for, because going back to the 1970s, we became convinced that the world had run out of this sort of light, sweet, crude. And so we started retooling our refineries to work on ever dirtier, ever thicker crude. Shale revolution came along in the mid 2000s, changed the math for the United States. But the refineries have been slow to shift because they’re the most advanced refineries in the world. And they spent 100s of billions of dollars getting ready for the world that then ultimately for the United States didn’t happen. So what happens is the United States exports the light, sweet stuff and imports heavy, dirty stuff. So if you want an oil export ban to mean something without damaging American energy security, you have to force the refineries to change what they do to use local crude. And if you do that, then all of a sudden we have the flow through that we need for fuels, and then it’s a distribution problem. 

If you want to look at the diesel situation, it’s somewhat similar. If we get these dense concentrations of supersaturation, the only way to fix that is to improve distribution. And that means product pipelines. Right now, we really only have one, the Colonial Pipeline that takes refined fuels from the Gulf Coast up to the American Northeast. And that’s it. Everything else is shipped by rail or more likely, truck. So what you have to do is build a nationwide distribution system, or maybe even mandate the creation of refineries in places where there aren’t concentrations of them. Or here’s a crazy idea maybe ship it by water and amend the interstate commerce act or the Jones Act so it’s easier to move stuff around the continental United States. 

Bans by themselves sound good. Because it means that the stuff will be trapped here, but it’s trapped in the wrong places. It’s still a distribution problem, and a distribution problem means you have to address the distribution system. And unless and until you do that, the conversation is just in the wrong place.

The Diesel Shortage Hits America

Hand shown pumping diesel fuel with a Shell logo on nozzle

With Ukrainian attacks limiting Russian refining capacity and the Persian Gulf conflict restricting exports through Hormuz and the Red Sea, a diesel shortage is imminent.

While the U.S. should be able to weather this storm without issue, the poorly connected domestic distribution system will be a major source of problems. Unless the U.S. can move away from its heavy reliance on diesel trucks for shipping, the next 18 months will be full of shortages and rising transportation costs.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from a drizzly Colorado today. We’re going to talk about diesel and what is almost certainly going to be diesel shortages in the United States, which is going to reverberate through the entire American economy for months. 

Okay. So on the front end, the approximate causes are two fold. Number one, we’ve got the Ukrainians basically taking out Russian refining capacity. Russia used to be the world’s largest exporter of diesel. And now it is a net importer pulling from the United States, India, South Korea, lots of places. That is not going to change anytime soon. Even if the Ukrainians were to stop attacking, the Russians no longer have the capacity to repair all of this infrastructure in a short period of time. And so they will probably be net importers at least through the remainder of the year, probably through the remainder of next year. And that assumes that Ukrainians stop attacking, which is highly unlikely. Number two, of course, is the Persian Gulf conflict. We now have the Saudis basically largely removed from oil markets. We’re probably near the very end of their ability to use pre-positioned crude on the Red sea to export that direction, because the pipeline has been taken offline. It’s a bypass pipeline that used to bring crude from the eastern part of the country, where the oil fields are to the western part of the country. That is not dependent on Hormuz, but it’s been bombed. So who knows how long that’s going to be offline, and it can always be bombed again. In addition, the Strait of Hormuz remains mostly closed. At the best, in the last three months, we’ve seen maybe 20 ships go through a day, down from what used to be about 150. And as of Wednesday, only three ships came through. So the ability of the Iranians to shut that on and off is pretty, pretty strict. And that means we’re looking at roughly 20 million barrels of crude that can’t get out. And that’s going to hit energy at every level, including diesel. 

Anyway in the United States, we’ve got a couple of things going on. First of all, it’s bringing this to my attention. So there have been a lot of social media posts in places like California and Texas of gas stations saying that they’re just out of diesel. I wouldn’t worry too much about that at the moment. Having weekly outages here and there. Throughout the country is a normal thing. And the number of outages is not of a number that suggests that it breaks from the norm. The problem is price, because now we’ve got this pressure in the international system, and every time somebody exports a cargo of diesel from anywhere in the world, everybody is trying to buy it. So that is putting upward pressure, even on domestic prices here in the United States, even though we are diesel exporters. But there’s also a regional breakdown issue. The Californians, for example, have closed most of the refineries. So the only way that they have to get diesel in is by ship. And that’s typically a Jones Act certified shipped from Texas. So in the United States, we’ve got this incredibly stupid law on the books that dates back to the 1920s, called the Jones Act, or the Interstate Commerce Act, which says that any cargo that is going to be transported between any two American ports has to be on a boat that is built in America, owned by an American, captained by an American, and crewed by Americans. And as a result, the cost of maritime transport in the United States is increased by a factor of five compared to the world average. Which is just idiotic. Anyway. So we’ve got that restriction. There’s only a limited number of Jones Act vessels, and they have to take the stuff all the way from the Gulf Coast, through Panama, on up to California. So the entire West Coast, California specific is facing what is about to be just astronomically high diesel prices. It’s not much better on the East Coast. They do have something called the Colonial Pipeline that goes from the Gulf Coast, Texas/Louisiana area and sends fuel directly into the American northeast. But the volume isn’t sufficient for the needs. So they also use Jones Act. Go further down the Atlantic coast into places like South Carolina, Georgia and Florida. You’re talking purely Jones Act or truck. Trucks use diesel, so you’re using the thing you’re running out of in order to ship the thing that you’re running out of to places that can’t make it themselves. In the middle, you’ve got the Rocky Mountains, the Mountain West and the Midwest, who for the most part produce most of the diesel that they need. And we’re not seeing any shortages there. And then, of course, the place with the surplus is the Gulf Coast, Texas, Louisiana. And that’s where most U.S. exports come from as well. The problem is these various regions are not linked together very well. There aren’t a lot of pieces of infrastructure like colonial, and so most of the stuff has to be shipped by truck or by train, both of which use diesel. 

All of that combined means regional shortages are pretty much guaranteed. And that’s before you get to the real problem. Because of the Jones Act, the United States a century ago made the unconscious decision to move away from water transport and even rail transport to truck transport. Now, trucks have certain advantages. They can go to places where you couldn’t run a rail line because it’s too steep, important in the mountain west, but they cost a lot more and trucks use diesel. So by ton mile, the majority of U.S. cargo is shipped by truck. You see the problem here? 

Nearly unique in the world, the United States has the best maritime transport system possible, but has instead opted for the most expensive transport system possible. Shipping things by water costs less than one tenth of shipping them by truck. And so we should be using our water network to the fullest extent, which would also minimize our diesel demand. Instead, we’ve done the opposite. And now with shortages on a global basis, guaranteed even in the United States, which is a net exporter, even in the United States, which is the largest net exporter of refined product, we’re going to be facing problems in our transport system, which will affect every single thing that has to be moved throughout the entire country for at least the next 18 months.

The Venezuela Oil Deal Is Just the Start

A chevron Gas sign against a dark night

The recent series of U.S.-Venezuela oil deals is not quite as significant as it was made out to be.

The main highlights are Chevron’s investment and the U.S. putting its stamp of approval on NABEP. While NABEP lacks much of what it takes to expand production, U.S. backing gives the company credibility to attract outside investment.

This is just the beginning of a long road to recovery, but it’s better than nothing.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. Today we’re going to look at something that happened while I was away at Yosemite. The oil deals between the United States and Venezuela. There’s been a lot of hyperbolic conversation about them. The reality is much more muted. 

We’ve got three things. First of all, Chevron, which is an American company that never left Venezuela, has announced a series of investments with the aim of increasing output by 300,000 barrels over the next five years. This is probably the upper level of what Chevron can do. Not that Chevron’s not capable, but that the crude in Venezuela, as a rule, is very difficult to work with. You basically have three regions, one in the East that has some more conventional crude, one in the west around Maracaibo that’s heavy crude. And then down in the south in a place called the Orinoco Belt, where it’s super heavy, crude and is actually a physical solid at room temperature, and it has to be heated up and mixed with other liquids in order to be able to put into a pipeline. Anyway, Chevron has operations throughout the area. They’re basically taking the fields that they already have, putting in some more money and trying to increase recovery rates. So really not doing anything new. So 300,000, that’s about all you’re going to get. 

The second one is Americas Hunt Oil, which is taking over two small fields in the east of the country…that are small. And if they do really well, you know, maybe they’ll get 100,000 barrels out of that over ten years. Again, not very interesting. Remember, this is a country that at the height was producing 4 million barrels a day back in the 1980s and 1990s. And then Chavez and Maduro, it just…..until it fell into under a million barrels a day, where it is now. 

The third one. The third deal is the one that’s getting really interesting with a company called NABEP and NABEP is the successor that has been renamed a few times, for a firm that started operating back in the 20 tens that at the time was called Petrozamora, run by a guy by the name of Alejandro Betancourt López. This guy is somebody who is tightly affiliated with the Russian government. And when the United States put sanctions on the Chavez-Maduro regime, the Russians basically came in to do what they could. But Russian technology sucks in the type of fields that Venezuela has. So Betancourt was able to basically bring in a few people from outside the Russian sphere and actually operate a few fields. But then when you get to 2020, if you remember back to 2020, you know, Covid year, it was kind of rough in Venezuela as well because they had elections and it looked for a hot minute like this guy from the outside was going to take over. He never did. But Betancourt sided with him, and it came to light that he had also been embezzling a lot of money from the Venezuelan state oil company, and so he got kicked out of the country. And Petrozamora (fell apart) until it was only producing like 100,000, maybe even 50,000 barrels a day. Well, fast forward to calendar year 2023. And a woman by the name of Rodriguez, who is now the acting president of Venezuela, brought him back in because the oil sector in Venezuela had just tanked in the intervening three years and started bringing the company back. I think it produces about 200,000 barrels a day right now. Anyway, this new deal with the United States is with the successor to Petrozamora, with Betancourt personally. They’ve renamed the company NABEP, and they’re basically taking all of the Russian concessions and all of the Chinese concessions and giving them to this new company. Now, this new company does not have the staffing, much less the expertise and the volume and the drilling rigs that are necessary to operate all these fields. You probably need about 90 rigs to really make it all work. They’ve got two. In addition, the United States has taken a theoretical not not actual theoretical share in NABEP and has theoretically the ability to assign people to their board. And theoretically, if the U.S. Defense Department specifically wants to take the crude that NABEP produces, it gets rights of first refusal, the first 20% they get at a huge discount, basically production cost and the other 80% they can get at market costs. But all of this is in theory. Unless and until someone else comes in and provides the funding and the staffing and the equipment, NABEP really isn’t going to go anywhere. The point of this deal, however, is for the U.S. government to put a stamp of approval on this one firm so that others who are willing to take more risk can come in, invest in the firm, and then maybe turn it into something that can turn Venezuela’s oil fortunes around. It’s a necessary first step. I don’t begrudge the U.S. administration or the acting Venezuelan government for that. But there’s no money here. There’s no skill transfer here. There’s no equipment coming in at yet. The Chevron deal really is at the moment, the only one that matters at all. And that’s 300,000 barrels over five years. Not a big deal. 

But if if if if if if all of those things happen, then you are talking about the very, very beginning of a renaissance in Venezuela. You still have to change the laws, because right now foreign ownership is an issue. You still have to change the reparations route, because right now it’s not clear how the money gets to the investors. But at the very minimum, we now have at least one entity operating in Venezuela that actually has the right to develop fields, that isn’t the state. That is a step in the right direction. But let’s not get too crazy. Let’s not get ahead of ourselves.

The End of U.S. Strategic Petroleum Reserve

Photo of a pumping station at sunset

The U.S. Strategic Petroleum Reserve (SPR) was created in the 70s as a safeguard against major disruptions in oil imports. Well, those 700 million barrels were never used for its intended purpose.

As the U.S. became one of the world’s largest producers and exporters, the SPR was retasked. It’s been used a few dozen times by various presidents to influence oil prices and stabilize markets. But it was never made for that. The geologic makeup of the SPR caverns means that each time a drawdown occurs, the structures are weakened.

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. Today I wanted to talk about the American Strategic Petroleum Reserve. There’s been a lot of reports in the news that it’s nearing the end of its life, and it’s starting to break down, and there is some concern there. But let me explain why it was created the way it was, and how that’s inappropriate for the way we’ve actually used it. 

So it started back in the 1970s in the aftermath of the first Arab oil embargo. Congress legislated the creation of the reserve to hold 700 million barrels of crude, which, you know, we use about 20 million barrels a day. So that’s a couple of months of import cover, even in the worst case scenario. The thing is, over the course of the 80s and the 90s, when we saw our demand going up and our ability to produce go down, it became even more important. 

So we eventually filled it up pretty close to the max. But then we got into the 2000, we had the shale oil revolution, and by the time we got into the 2010s, the United States was a significant net exporter, and today we’re the world’s largest exporter of refined product. So how does the SPR fit into that? Well, not great. And part of it is geologic of all things. 

See, unlike most countries’ oil reserves which are held on the surface in tanks, which is corrosive to the tanks and the equipment and the crude starts to separate unless you stir it. So there’s a high maintenance cost. We don’t do it that way in the United States, down on the Gulf Coast, we have a unique geological feature, nearly unique, called salt domes, where you just have these massive salt caverns down below and salt and oil don’t mix. So it’s a really great barrier for keeping oil contained. So what we do is we drill down into the salt dome and we inject water, and that water dissolves some of the salt and makes the cavern bigger. Then we put another pipe in there, and we pump in the crude. And oil is lighter than water. So it rises to the top of the salt dome. And all you have to do in order to regulate the level of the oil is to pump in water, which pushes some crude out or pump in more crude, which pushes the water out because your pipes are there at different levels, tapping different things. 

Anyway, it’s a really clever thing and the maintenance cost is next to zero, but it has been a half century. And equipment does wear down, and especially since we’re not using it the way it was designed. You see, we designed it for big drawdowns in cases of a global and especially a national emergency, when we knew we were going to need hundreds of millions of barrels because we assumed that the Middle East was going to go offline and we were the world’s largest oil importer. 

Well, we never really used the system in that way. And every time you do a drawdown, big or small, you basically are putting more water into the cavern, which is dissolving more salt, which is overall weakening the overall system. So these caverns were only designed to be used five times total for big drawdowns. We’ve never really had a giant drawdown of that scale. What we’ve had are three dozen little drawdowns, which keeps putting water in and out, in and out and dissolving more and more salt. And we’ve now reached the point where the salt gnomes are starting to show signs of damage. And if we did a rapid drawdown again today, we’d probably have several of them break. So we’re at the end of the lifespan of the SPR and without significant re-engineering, which I’m not even sure is possible since so many of the pieces are geologic rather than mechanical. 

We’re probably going to be seeing the end of the reserve in the not too distant future unless we find new salt domes, establish a new system, or do what everybody else does and does those expensive above ground tanks. So we really are losing that tool. Now, this is not a disaster. Again, the United States is the world’s largest exporter of refined product and now the second largest exporter of raw crude. It’s not like this is something that we’ve needed, but it gives you an idea of where the break is, because this was designed for a national emergency for a country that was a major importer. Instead, in those three dozen drawdowns. Presidents not just Trump, also Biden, also Obama, Also W, use them to regulate oil markets and to try to influence prices. And that’s why there’s been 37 discrete drawdowns rather than the big five that the system was designed for. So we’ve gotten to the same place repeated usage is functionally ending the salt domes useful life span. But now we have a situation where we have to get all that crude out of there and put it on the market or store it some other way, because we’re simply not going to be able to maintain it in its current form. 

So either we have a new multibillion dollar project authorized by Congress to establish an entirely new reserve, or the United States has to do something else in order to regulate markets. That’s not something the United States government, historically speaking, has been a very good at. I think if you look back on the history of these 37 disbursements, you can argue that they didn’t do a good job of it either. But this tool is just about done.

Global Shipping Comes Under Attack

Cargo ship with containers

While oil is still moving through the Strait of Hormuz, flows remain a fraction of pre-war levels.

Some tankers have made it through by using tactics similar to the shadow fleet, obscuring their movements to avoid detection. Once the tankers clear the Strait, they conduct sea-to-sea transfers under American protection. But this strategy is extremely expensive, and the U.S. cannot sustain it indefinitely.

More importantly, it demonstrates how difficult it is for even the world’s most powerful navy to protect critical maritime chokepoints from relatively small-scale disruptions.

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Transcript

Hey everybody, Peter Zeihan here. Coming to you from the Denver International Airport. Before I get on a plane, I just wanted to give people an idea of what was going on at the Strait of Hormuz, because there’s been a lot of confusion lately. Statements from the administration, from the Iranian government. It’s kind of a mess. Short version is that some crude is getting out. The Trump administration says it’s 9 million barrels a day. The Iranians say it’s something closer to zero. The truth is undoubtedly someplace in between. I don’t have a number for you. Independent Western consultants that track traffic say it’s probably in the 3 to 5 million barrels a day range, which is, you know, better than nothing. But this is down from 20 million barrels a day, 22 million barrels a day at the start of the war. And even if you include all the bypass pipes running at full capacity, we’re still somewhere between 4 and 10 million barrels per day short, based on whoever’s numbers you’re using. Still more than enough for an energy crisis. Anyway. A few things. 

Number one, what’s happening is that the United States is providing overwatch for tankers that are going through, if they originate in countries on the Arab side of the Persian Gulf. So that’s Kuwait, Saudi Arabia, Qatar, United Arab Emirates. Second, what’s going on is kind of an echo of what the Russians and the Iranians did with the shadow fleet. So the shadow fleet is a bunch of tankers, thousands at this point, that run with the transponders off. Their ownership is obscured through shell companies, and you never know where they’re going to be. And oftentimes they will do sea-to-sea transfers to mix their crude with somebody else’s crude, to obscure where it came from in order to evade sanctions. Well, what we’re seeing in the Persian Gulf is that local state companies, whether it’s Kuwait or Saudi or the others, are using their own tankers to load up their own crude and then sailing with the transponders off under American Watch through the southern approaches to the Strait of Hormuz, as far from Iran as they can get. And then when they get on to the Indian Ocean, the Gulf of Aden, they will then do a sea to sea transfer to a buyer, which is India, China, whoever else. So basically, the United States is encouraging, kind of an echo of the shadow fleet happening in the Persian Gulf. And so far that has succeeded in getting some crude out. Again, the specific numbers are in question by everyone. Third. This is not something the United States can sustain indefinitely. The cost to the United States is in probably the dozens of millions of dollars a day, because we’re basically having a carrier anchored task force basically just parked in an area. And as long as it is there, it can’t do anything else. And since it’s not involved in combat, at least at the moment, this is a really high cost, low utility approach for using American military power. The Trump administration says that, you know, only do this into Iran completely capitulates. But if Iran was going to completely capitulate, it probably would have done so in the four decades before now, at some point. So if you want Persian Gulf crude to get out, you basically need a force of this size all the time. Which brings us to the next point. 

There are eight major transit chokepoints in the world, like the Strait of Hormuz, like the Bab-al-Mandab, like Malacca, like Panama. No country has the ability to defend all of them at the same time. The U.S. can probably manage 2 or 3, but that would consume all of its deployable assets, meaning that the world’s largest and history’s largest expeditionary power would be locked down to a couple of footprints, which would be strategically, incredibly stupid. So I wouldn’t count on that happening. In addition, the United States can’t do this very well. So, for example, Hormuz is a problem, but the United States is not making any effort to keep the Bab-al-Mandab open, even though the Yemenis are now launching attacks on shipping there. And we even have Somali pirates back in the action. What we discovered with the Somali pirates over the last 20 years is if the United States anchors an international force to patrol the area and everybody joins, including China, then the Somali pirates basically go away. But the amount of territory here is extreme. You’re talking about a territory roughly the size of Texas, and the US Navy just doesn’t have that kind of capability. And so even though it’s just at the next checkpoint over in Hormuz, we’re now starting to see piracy again. This is going to be our new normal. 

No country, including the United States, no coalition of countries can keep the seas safe any longer. So it’s just a question of when and how and where it breaks down first. I do want to hold one other little bit of information out there, however, before I sign off. And that’s that keep in mind, while protecting sea lanes, patrolling them, convoying ships is very, very hard and very, very expensive and very, very naval ship heavy. Interrupting those flows is very easy. And so, yes, the United States lacks the ability to patrol the world’s oceans and to keep the checkpoint safe, but it perfectly, perfectly, easily can disrupt all of them at the same time, should it so choose. It’s basically an echo of what we’re seeing with drone warfare. Defense is really hard, but if you just want to stick it to someone, you can do that in an afternoon.

The Shadow Fleet Is Sinking

a ship sinking in the ocean

The first of Russia and Iran’s aging shadow fleet is sinking. The tanker is carrying ~1 million barrels of crude bound for India, but that oil is already leaking into the water off the Omani coast.

Beyond the environmental disaster, the next question is that of insurance. Since the shadow fleet is “covered” by Russia’s state-backed insurance system, whether they pay out or not will determine just how much longer the decrepit shadow fleet can operate.

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Transcript

Hey everybody. Peter Zeihan here, coming to you from the peak of Sheridan. But today we’re going to talk about the Russian and Iranian shadow fleets and a ship that is in the process of sinking off the Omani coast in the Middle East. If you remember, we’ve got sanctions on Iran, we’ve got sanctions on Russia. And so both countries have turned to what are called shadow fleets, unregistered vessels that are old and were destined to be scrapped, that take out insurance from the Russian government. And the first one of them is now actually sinking. And we’re honestly pretty lucky here. It’s been four years since the Ukraine war got going, and in that time you would expect more of these things to go down. But it wasn’t until recently that Ukraine just started to openly attack the shadow fleet in the Black Sea, and so far they haven’t actually tried to sink anything. Now we’ve got one that is on its own, that is taking Russian crude to India. It is now sinking. Its the Caroline Bezengi, I believe is the name. Carries about a million barrels a day or carries about a million barrels. And it is now sinking off the coast of Oman, already in oil spill, it’s about 400km², and we’re already seeing oil starting to make landfall on some of the Omani islands. 

It’s in the last 48 hours, it’s condition has deteriorated significantly and it is very clearly taking on water. I can’t tell you when it’s going to sink, but there’s really no hope that it’s going to make it to its destination at this point. And so we’re talking about an ecological disaster that is at least three times as bad as what happened with the Exxon Valdez. 

It’s an open question whether anyone will let this thing dock because it’s just going to leak in port then. But at least one of the compartments is damaged to the point that the ship going down. Anyway, a couple of things to keep in mind moving forward. Number one, since this is the first real incident with a shadow fleet vessel, we don’t know how the insurance system is going to work. Normally, if you had a fleet of vessels in this sort of condition and one of them then sunk on its own without getting shot at, you would see an explosion in insurance rates that would probably lead to the decommissioning of every ship of its class. That’s not going to happen this time, because these are ships that should have been decommissioned already. So it’s an open question how Russian insurance is going to pay out because the state created the insurance policy specifically to evade what everybody else normally does on the high seas. And it will be interesting to see if the Russian government actually pays out to cover the environmental solution that will be required for example, for the Omanis. The second thing to watch is the degree to which the Russians do or do not act, will shape what the Ukrainians do and do not do. 

Because if the Russians do not honor their own insurance policy at all, then it’s up to the Ukrainians to probably sink a couple directly. And when that happens, no one’s going to allow these ships anywhere near any of their ports. So we’ve been talking about since the early part of this year how countries are getting more and more aggressive with the shadow fleet. Now we’re seeing the decrepit nature of the vessels probably being their own worst enemy. And as the shadow fleet gets retired, we’re looking at another couple million barrels a day just disappearing. It’s really hard to get a grip on Russian exports right now because the Ukrainians are attacking so much energy infrastructure. But at its peak it was about 5 million barrels a day of raw crude, plus another 2 million barrels a day from Iran. 

We’re looking at losing all of that as this year draws on. So, you know, exciting times. Take care.

Is This the End of U.S. Biofuels?

A green lit gas station with an oil tanker

The U.S. ethanol mandate in the early aughts reshaped American agriculture by tying corn production to fuel production; this saw corn demand double, with roughly half the corn crop now tied to biofuels. So, the case for diverting large amounts of U.S. corn into fuel production is now becoming less clear.

U.S. energy has become independent following the shale revolution. The environmental benefit has been refuted and moving forward, food security will be far more important than biofuels. Allocating large amounts of U.S. corn for fuel production becomes economically and politically difficult when it’s needed (and more profitable) to use for human consumption.

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Transcript

Hey all. Peter Zeihan here, coming to you from a snowy Colorado in May. Because that’s what happens in the mountains. Today we’re taking a question from the Patreon crowd, specifically how I see US agriculture evolving over the next several years, specifically in light of the balance among corn and soy and biofuels, with, of course, ethanol being at the top of the list. 

Real quick history lesson for those of you not familiar with the space, the United States has used gasoline and diesel for pretty much everything for transport for the entire industrial age. Until we got to the early 2000, when we got a fuel mandate from the federal government. That said, a certain percentage of most gasoline that you pump has to have a certain percentage of ethanol. 

In most states, it’s in the 10 to 15% range. Now, lots of people have bitched and moan about this for multiple reasons, but basically it took the single largest commodity class that the United States had fuel and cross-referenced it with. The second largest of the United States has, which is row crops, specifically corn. So if you go back to the 80s, a few states in the Midwest, Iowa, of course, did have their own state ethanol mandates. 

But now we had a national one. And from roughly 2004 until today, The total need for corn grown in the United States is roughly doubled, because about half of it is now used for biofuels. Now, that’s not that’s a bit of a blanket statement. The leftover, once you extract the bit that can be turned into ethanol can still be used for animal feed. 

But what it has done is it’s radically changed the agricultural situation of the world’s largest agricultural producer, taking a large chunk of land away from producing stuff for food to instead it being available for fuel that is directly responsible for a lot of the increases around the world. We saw in food prices in the late 2000, because it took ten years for American farmers to produce the volume of crop required, as well as for the United States to build up the infrastructure required. 

Because you don’t take corn to an oil refinery, you have your own ethanol refinery, and then you blend that ethanol in with the fuels at another location. Anyway, in the world that we’re moving into, where agricultural supply chains break down on a global basis, we’re going to be seeing a world that isn’t able to feed itself. And with six or what are we, 7.5 billion people, whatever the number happens to be billions of people. 

And if you have half of the corn crop in the United States going towards fuel instead of human consumption, you can see how this is going to be a problem. It’s just that there aren’t very many countries in the world that have easy access to the inputs, whether it’s the manufactured product, the financial products, or the fertilizer products that are necessary to grow food at scale. 

The United States is by far the largest of them. And if you look at some of the other major producers around the world, most notably China and Brazil, they can’t be agricultural producers without globalization. They import too many of the things that allow agriculture to work. So in a post globalized scenario, if we’re lucky, we’ll only lose a billion people. 

Which brings us back to ethanol. Ethanol is the mandate, because you had a lot of folks in the farm states that were looking for a way to bolster rural incomes in general, and farmers in particular, and the mandate for ethanol and a new one that seems to be being gestating for soy diesel follows similar patterns. But if you remove this, call it conservatively, one third of global food production, then all of a sudden food prices are going to skyrocket. 

And the argument that the United States government should subsidize agriculture to make biofuels kind of falls away. You see, when this all started, the ethanol mandate had a three piece alliance. The farm states obvious environmentalists who thought since it was grown from the ground, it would have a lower carbon footprint. And national security folks who saw this as a way to break our dependance on the Middle East. 

Well, 2026 is not 2000, because now the United States has had the shale revolution. And it’s not just the world’s largest producer of crude oil, and the world’s largest producer of gasoline were the world’s largest exporter of refined product in general. So the national security folks have just kind of faded from this conversation. The environmentalist, who sometimes are a little squeaky with their math, did the math and realize that at best it’s a wash, because the process of growing that amount of corn and moving that amount of corn is actually generating just as much CO2 as what you have to do for gasoline. 

So they went away. So now it’s just the agriculture folks. And if it’s just the agricultural folks, it’s also ultimately going to be about farm income. And if you move into a world where a third of food production falls offline, all of a sudden farmers will be earning less growing food corn for the ethanol mandate than they would growing food for human consumption. 

So regardless of where you are on this equation and what argument you may have had in the past, the macroeconomic situation that led us to doing ethanol at scale is fading pretty quickly. One of the many, many, many outcomes of the Iran wars. We realize just how vulnerable global supply chains were in everything from semiconductors to tractors, because one part of the world produces a lot of the base materials that are used somewhere else. 

That is something that’s going to be reverberating for the rest of the year, and it is something that is really just the tip of the iceberg compared to what is coming. Ethanol was fine in a highly globalized world where there were lots of options. Pretty soon that’s not where we’re going to be.

Global Energy Stressors: Can Anybody Help?

An oil rig on the sunset

Are there any countries that might be able to ease the global energy stress?

Saudi Arabia might be able to ramp up output, but Houthi attacks could take that away in an instant. Producers like Guyana, Brazil, Venezuela, and Canada can only add small, incremental volumes, but most major expansion projects are years away.

So, where does that leave us? The global oil deficit is only going to worsen over the next few months. And with oil market data becoming increasingly unreliable, things are likely already worse than we think…

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Transcript

I guess I have a 3.5. This is the backside of that crown. Let’s talk about who might be putting other little volumes in. It’s not a lot. First of all, secondary peak of Bison. Most spare capacity in the world comes from OPEC, specifically from Saudi Arabia or the United Arab Emirates before it left OPEC this year. They’re the only ones who really maintain fields that can turn on off with that in mind. These are all countries that are constrained within, you know, the Saudis would probably be the ones with the best bet. But now that they have to export everything through the Red Sea and the Houthis are regularly attacking ships, most notably tankers, we should actually expect more Saudi crude to go offline rather than come online.

In the Western Hemisphere, we’ve got Guyana, which is a new producer, but their big boost was over the last three years. It’s again only incremental gains, 100,000 here and there, maybe. Venezuela. We, in the best case scenario, now that Maduro has gone might have gotten a fresh million. But now because of the earthquake, if they get half that it’ll be a really good day. Really good year. Brazil no, incremental again. Who am I forgetting? Canada. Canada has audacious plans to massively expand their export capacity, but these plans will not happen this year, next year or the year after. The heavy oil sands of Alberta take years, if not decades, to bring online as well. So the pipeline is only one part of the project.

About the only thing that we might see earlier is that Keystone is being resurrected, and it probably will be built this time, but not this year and probably not next year either. So that’s an issue for 2028, where we might see a half a million to 1 million fresh barrels. That’s not going to help this summer. The only other thing I can think of is Angola.

But Angola is all offshore. It’s all deep and it is failing. So actually the incremental gains that we get out of the Western Hemisphere this year might be enough to compensate for losses out of Angola, but really not much else. It all adds up to a pretty bleak picture for energy markets. I would love to give you pricing advice.

That’s a lie. I’ve no intention of giving you pricing advice, because what’s going on in the markets right now makes very little sense. Keep in mind that oil traders take their price cues from data and the data sucks. Iran doesn’t tell us what they’re producing or what they’re shipping. We’ve got the shadow fleet out of Russia. The Russians aren’t even generating data anymore that you can then look at.

And of course, the Chinese are a bit of a black hole. We know they’ve had a little demand obstruction. We know they’ve had a little fuel switching, but mostly they just don’t publish anything anymore. And it’s unclear if they’re even collecting the data. About the only thing

we can tell is that they have reduced their exports of refined oil product, which has impacted everybody in the Pacific Rim.

And that’s really the end of what we know. Best guess is that the shortage of 10 to 12 million barrels per day is going to go up over the next three months, for the reasons I’ve already talked about. Plus, of course, the Houthis. So the world has significantly less of a buffer now than it did a month ago or three months ago or five months ago.

And at some point that’s going to lead to some sort of market reaction. And when that happens, then we get some of the biggest demand destruction that we’ve seen, at least since the price spikes of 2007 to 2009. So something to look forward to.

Global Energy Stressors: Can Shale Save the World

Close up of shale rock | Licensed by Envato Elements: https://app.envato.com/search/photos/65f10818-30c9-4aa2-8207-5b9626ee65ae?itemType=photos&term=shale

The U.S. shale revolution transformed global energy, but that period of explosive growth is over. Existing pipelines and export infrastructure have reached capacity, meaning future output increases will take a bit of time.

With domestic electricity demand on the rise, U.S. exports will diminish over the coming years. That means America’s ability to offset global energy disruptions is dwindling. Couple that with Asian countries paying premiums for the remaining U.S. LNG, and Europe’s energy picture is only getting worse.

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Transcript

Okay. Now. Part three from near the top. Bison peak and all its weird greatness. And then behind me, we’ve got the ten mile range. And the mosquito range. So like quandaries over here and Sherman Sheridan over there. Maybe there…somewhere. Anyway, part three, the United States. Okay. The US shale revolution is different from every other period in energy history, primarily because of the geology.

In a normal Petroleum industry, you’re going to drill through something that’s called a caprock, which is a non-porous rock formation. I got to sit down again so you can see the crown behind me. It’s a non-porous rock formation, ironically. Like these. This is a red granite that oil cannot percolate through, so it builds up pressure behind it. So when you punch through the cap rock, you release that pressure and the well flows, and you maybe get a gusher if you’re lucky.

And even if you’re not, you can always create artificial pressure by pumping water or natural gas or CO2 or something else into the formation to force the oil to the surface. That’s not how a shale revolution well works. In shale, the crude is trapped at the moment of formation into a Petra carbon within the actual rock strata itself. It can’t migrate by definition. So you drill laterally through the formation, have holes in that pipe, and then you pump in pressurized water and sand to crack open the rock. The sand goes into the cracks, and then the little bits of pressure, trillions of little bits of pressure push the water out and back to the surface and it flows by itself.

You can’t do enhanced recovery on a shale. Well, for the most part, there’s some exceptions in there. There’s some gray areas. But anyway, what that means is that instead of the months to years to decades that it takes to bring a conventional well online and then the capital that is required to keep it producing beyond a few years.

Shale is really cheap. It’s up front. All of your costs basically goes into the frack itself, and then you’re done. The downside is that if the shale is in an area where you don’t have existing infrastructure, you have to build a really robust gathering network because you’re going to have a lot more wells traditionally than you will in a traditional field.

You know, there are some of the super fields out there that only have like a dozen wells total. Like that big one offshore in Mexico, which I can’t remember. Cantarell. Cantarell. Ghawar in Saudi Arabia, somewhat similar, whereas you can have dozens, hundreds, thousands of shale wells because they’re only producing a few barrels a day.

That’s gotten better over time, but overall, the logic still holds. Anyway, the United States has been fortunate to this point in that most of the places where we have shale formations, or at least the ones we’ve tapped so far, we also have preexisting infrastructure. So the Permian Basin in West Texas is the best example because it’s been producing crude for

well over a century. But we only started putting shale wells in there in the early 2000. The Bakken in North Dakota. Same general concept. Anyway, what that means is this infrastructure to gather and especially to transport. The crude has been there for decades. And even though those fields by conventional terms have been in decline for decades, as soon as shale came along. There was all this spare capacity and you could just shove whatever you wanted in there. And it wasn’t until about 15, ten years ago that it got so full that we had to actually build new infrastructure. So if you go back and look at the data in some of the early years, we were adding a million barrels per day plus a couple of years I think we even had 2 million barrels per day. That doesn’t happen anymore because now all of the gathering infrastructure, all the transport infrastructure is completely maxed out. And so for the United States to step in and add more oil or natural gas or whatever into the system, we first have to build an entirely new gathering network and then entirely new trunk lines to take it to the ports, and then, in many cases, new ports in order to load it up and send it overseas or refineries or whatever it happens to be.

So the explosive period of U.S. shale oil and natural gas output is now behind us, and we’re now in an incremental phase. And even if that was not the case for specifically for natural gas, we face another problem. Because of the artificial intelligence era, the United States needs massively more electricity. And that’s before you consider preparing for the end of globalization and all the new manufacturing that we’re going to need, and well-being and building things just uses more electricity than digits and numbers.

So whatever spare natural gas production we have right now, we can’t chill down into liquefied form and export because we need to burn it to generate power locally. So what the United States can do to help the world recover or cope with the Iran war and the Ukraine war has already been done, and you’re only going to get incremental increases in US exports from now on, assuming for the moment we even have stuff to export because our power demand is going through the roof.

At the moment, the Asians are bidding up the prices of things like liquefied natural gas. Now, the reason for that is pretty straightforward. Historically speaking, this is a region, especially in Northeast Asia. So China, Japan, Korea, Taiwan that imports 90% of their energy no matter what the form happens to be. And because they import so much, they have to pay more because they just don’t have any good options within 3000 miles.

And so there’s always been this price premium for anyone willing to ship or natural gas to Northeast Asia. The Europeans have always had an easier time of it because they got stuff from Norway and stuff from Libya and stuff from Algeria and stuff from the Russians and stuff from the Middle East. And so their prices have always been at a significant discount to the, the Asians.

And then, of course, the United States has the cheapest energy in the developed world. Well, now that the US stuff is all spoken for, that premium that the Asians have is probably going to spread to Europe, but it just hasn’t yet. So what we’ve seen this year is the Asians paying through the nose. And because they’re paying premiums, all the natural gas and some of the crude that would have normally gone to Europe has made the long trip all the way to Northeast Asia.

But as the Russians vanished from the scene and the Persian Gulf doesn’t recover, we’re looking at that premium spreading to Europe, and we’re looking at prices coming to Europe that they just haven’t seen for the bulk of these past five years, and they’re not ready for it. And it will lead to more deindustrialization impacts and an energy crisis, especially this winter.

And there’s really not a lot that anyone can do about it except for pray that it’s a mild winter, which has happened in the last five years for the Europeans, thank God. But that is a thin reed to base energy security on.

Global Energy Stressors: Europe’s Oil Supply Problem

Oil barrels surrounded by a European flag. Licensed by Envato Elements

As Europe shifts away from Russian natural gas, they have turned to LNG from Qatar to fill the void. Unfortunately, that pivot has brought on its own set of problems.

The Iran War has impacted Qatari exports, leaving the Europeans in a sticky situation. With current storage levels well below average for Europe and Qatar’s force majeure extended to September, the winter months could bring a harsh energy shortage for Europe.

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Okay, still in bison, peaking on the upper ramparts. That is a McCurdy peak. The double one over there, and I’m now above above Devil’s Playground in just a bunch of really big rocks. Phase two, let’s talk neutral gas, specifically Europe. The Europeans used to get the plurality of their natural gas in piped form from the Russian Federation.

And over the course of the last five years, they’ve been phasing that down to zero. And with a couple of exceptions, they’ve been successful. But that comes at a cost. Not just financial but also security, because things have been so disruptive with the Iran war that the normal path that they had developed to survive in the post Ukraine war environment has been to tap liquefied natural gas from the Persian Gulf, specifically from Qatar.

And Qatar is having some problems. So normally most natural gas in the world, something like 85-90% of it is shipped by pipe. Because it’s a gas, you have to compress it, and it’s difficult to put that into any other form of transport. The one exception, which can get a little ugly from a logistics point of view, by the way, that’s Bison Peak. That’s where we’ll do part three.

A little messy from a logistical point of view is to liquefy it, which basically means you get a metric but ton of electricity, and you operate what is, in essence, a cryogenic freezer and freeze the gas down to something like -270, -300 based on which scale you’re using. And if you do that, it will condense into a liquid.

And then you can put that onto specially designed tankers and send it to any facility that has the technology necessary to regasify it, which isn’t too hard. And then you can treat it like any other normal piped gas within your system. So the Europeans have basically cut Russian pipe gas out and gotten Qatari liquefied natural gas in. One of the reasons this worked is they basically shut down everything in their economy that used natural gas for anything but electricity.

So, for example, the German chemicals industry is basically nosedived, and the combination of switching out supplies and reducing their demand has succeeded. The problem is with Persian Gulf close Qatar’s offline. Qatar got hit very, very hard in the war by Iranian attacks. The specific facility Ras Laffan, that does the natural gas condensation and liquefaction got hit hard. And when the Qataris tried to turn things back on in June, there were several explosions and a lot of people died.

Natural gas is naturally flammable and explosive, and you can imagine what happens with this sort of industrial infrastructure that’s required to turn billions and billions of cubic meters of the stuff into something that you can pour. Since the war began in February, exactly one cargo of Qatari LNG has made it out of the Persian Gulf. That was about three

weeks ago, when we had this nice little moment when traffic in and out of the Gulf reached something like three quarters of what had been pre-war.

We’ve never reached that number again. Most days were less than 10%, with single digits of ships coming or going. There’s no reason to expect that to change anytime soon. It’s going to take a lot more than a cease fire for that to pick back up. And unlike oil, which is relatively easy to produce and store in basically a tank.

Liquefied natural gas, you really can’t do that, especially when there’s a chance that missiles or cruise missiles might hit your storage facility. So Ras Laffan, for all intents and purposes, remains offline. The Qatari this week this, past week declared force majeure extended their force majeure through the end of September. And now we’re talking winter. And right now the winter storage for the Europeans for gas is less than half the normal. It’s the lowest it’s ever been going into a winter. Russian gas is gone, Qatari gas is gone. And as we will talk about in part three, the United States cannot ride to the rescue on this one.