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.

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.

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.