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.

Prefer to read the transcript? Click here

Transcript

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.

Global Energy Stressors: Kazakh Oil Exports

Flag of Kazakhstan

Global energy markets are all over the place. So, we’re doing a short series on the major energy stressors across the globe and how this all is going to play out. Up first, let’s look at the Ukraine War’s impact on oil exports from Kazakhstan.

Ukraine is ramping up strikes on Russian energy infrastructure, but Kazakhstan depends on those same pipelines, processing facilities, and ports to get its oil out. Exports have already fallen off a cliff, and there’s no reprieve in sight.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here, coming to you from the lost wilderness near Denver in Colorado. I am on the lower ramparts of Bison Peak. Bison peaks right over there. That’s my next stop. And today we’re going to stitch together a few things that have come out in this past week that I think are worthy of discussion. First things first. The Kazakhs have published data about how much their exports have been hit by what’s going on with the Ukraine war. Quick recap is that over the course of March through June, the Ukrainians have gotten ever bolder in targeting Russian infrastructure pipes, pumping stations and especially ports. And this really matters for Kazakhstan because it’s landlocked. So it has to use the infrastructure of other people in order to get its stuff to market, by the way. We’re going through the Devil’s Playground area of Bison Peak right now. The key ones are on the Black Sea, specifically Tuapse, and especially Novorossiysk. That is where roughly under normal circumstances, about three quarters of Kazakhstan’s oil exports flow. In addition, the Ukrainians have hit things like processing centers on the Russian side of the Kazakh-Russian border and some of those processing facilities specifically for the Karachaganak field are ones that primarily actually process Kazakh throughput. And without those processing facilities, you can’t pull the sulfur or the natural gas out of the crude stream. And so you can’t put into the normal pipeline network. Anyway, all of these things and more have been hit over and over and over. And according to the Kazakhs, they’ve been looking at a 50 to 70% reduction in output from all of their major fields. So Karachaganak has been hit. The two big ones in the Caspian Sea area are Kashagan, and especially Tengiz and Tengiz actually dates back to the 80s, is the first foreign investment deal ever into the former Soviet Union. The companies that are most affected by this, are Russia’s Lukoil, which is now just an arm of the state, and America’s Chevron and Exxon, the three of those together, the majority of the output here. I’m not counting the Kazakh energy company because it doesn’t do anything it just takes a cut. Anyway, The problem is there are really no good options for the Kazakhs really at all. The in the last month, the Ukrainians have gone from simply attacking physical infrastructure to going after shadow fleet vessels directly both on the Sea of Azov and now in the Black Sea. So I would expect this 50 to 70% drop to be kind of the norm. And this is a country that used to export 2 million barrels a day. And by used to I mean like two months ago. There are really no good alternatives here. Kazakhstan does have a patched together Frankenstein system that exports some crude to China, basically from their eastern and southern regions, but that is typically only a quarter of a million barrels per day. Or on a really, really good day, they might reach a half a million. Everything is really the Black Sea or bust. There is a bypass pipeline in Azerbaijan called the BTC: Baku. Tbilisi Ceyhan starts in Baku. The capital on the Caspian Sea goes through the inner Caucasus zones to Tbilisi, the capital of Georgia, and then on to the Mediterranean port of Ceyhan on the Turkish coast. BTC can handle about a million barrels a day, but it’s primarily an Azerbaijani line and is always at least at half full. So if the Kazakhs were to ship tanker crude across the Caspian Sea, which is its own problem, they could offload at Baku and go to the BTC. But if you take that combined with a Chinese route on a really, really good day, they’re only looking at getting maybe, maybe, maybe, maybe three quarters of a million barrels out. Everything else is going to fall, and it’s highly unlikely that it’s ever going to come back, or at least until such time as the Ukraine war is over. Unlike the Biden administration, that was really hard ass with the Ukrainians about going after Russian infrastructure. The Trump administration really doesn’t care, even though we’re having problems over in the Persian Gulf. And so the Ukrainians are taking out anything they possibly can, and they’ve proven that they can track the tankers that the Russians are using at sea. And now that the ports have been damaged, especially the loading tanks, the tankers can only load up at roughly the pace that the crude is coming in. So it used to be that the tankers would pull up to a dock and you’d have 4 or 5 tanks that were full and they’d all drain down at the same time, and so the tankers could get out of there in just a couple of hours. Now it takes the better part of the day. And with that sort of scenario, the Ukrainians, just using commercial satellite photos know exactly where the tankers are and where to target. So we’re looking at over a million barrels per day going offline, probably permanently. And there’s really nothing we can do about that. That’s piece one.

A Canadian Pipe(line) Dream

Flag of Canada waving in the wind

The Canadians are fed up with being dependent on U.S. markets for their oil exports. So, they’re looking to diversify their export options.

The Canadian government has backed a pipeline project that would allow Alberta’s oil to reach overseas markets. With global demand rising, this project makes a lot of sense, but there are a few problems. No export terminal has been selected since all the potential sites face significant logistical challenges, and even on the most optimistic timelines, construction wouldn’t be completed until 2034.

Prefer to read the transcript? Click here

Transcript

Hey everybody. Peter Zeihan here, coming to you from Colorado. And today we’re going to talk about energy in Canada. Most of the energy production in Canada comes from the province of Alberta. And most of that is heavy, sour crude that has a limited market in the wider world. At the moment, most of it is transported by a combination of pipe and rail to the United States, specifically to refineries in the American mid-continent and down into Texas that were designed to run on heavy sludge. 

Most advanced refineries in the world, some of the worst crude in the world. However, Canada has always been frustrated. Alberta has always been frustrated with the price that they get because when you sell primarily via pipeline into a closed market, you’re kind of a price taker. And so there have been a number of times where while Burton Crude has sold it not just a discount, but sometimes like $25 a barrel. 

That’s before we have the diplomatic falling out between the Canadians and the Trump administration. And now Canadian-American relationships are at the worst since the arguably the War of 1812. So the Canadians are desperate to find any other outlet. The problem is, is that Alberta is landlocked, and not anybody else really wants Albertan crude, because they would have to retool the refineries. 

But there’s there’s a definitely beggars can’t be choosers situation going on in the world right now because with the Persian Gulf still majority offline and Russian crude and danger in Venezuelan crude questionable, any fresh crude source, no matter what it is or where it is, we’ll find a buyer if you can get the crude to them. So. Just last week, Prime Minister Kearney of Canada has dusted off a plan and says that there is now state backing for a 35 to $45 billion pipeline that will export crude from Alberta to the west coast of Canada in British Columbia, and then allow it to be sold wherever it happens to be. 

Now, there is already one of those pipelines in place, the Trans Mountain. It’s less than a million barrels a day. This new one is intended to be even bigger. But aspirations do not make policy, even though it has been announced by the Prime Minister. At the moment there is not a route. They have tried six different ports where this might technically be done. 

None of them worked out, so they just have a placeholder of a place called Delta, which is just to the south southeast of Vancouver. So if you were to export the Delta, you’d have to actually run the pipeline through the most densely populated part of British Columbia, including Vancouver proper, which is not exactly a conservative bastion. All that to get to a port that is not deep enough to handle a fully loaded supertanker. 

So at the moment they don’t have a port, they don’t have a destination. What they do have a state backing. And since you’ve got a prime minister who used to be a central bank chief who’s pretty good at the math, this is going to move a lot faster than previous projects, but they still have to worry about all the niggling details about how to get it to wherever they’re going to get it. 

This is still early stages. Best case scenario, they hope to begin construction in 2027. Best case scenario, they hope to finish construction by 2034. So if everything goes perfectly, this is an issue for the middle of next decade. Until then, Albertan crude stays mostly trapped within North America with all the negatives that come from that. And now I think you might be seeing why the Albertans keep talking about independence, because if they can get a different relationship with the United States, then all of a sudden a lot of that mechanical stuff just disappears. 

Anyway, that’s it for now. Take care.

U.S. Oil Export Restrictions Coming Soon

An oil tanker in the ocean sailing

If global energy supplies remain constrained, the U.S. government will prioritize U.S. consumers over international markets. This would take the form of export restrictions.

These restrictions could take several forms. The first would be halting U.S. crude exports, which would keep more oil at home, but would also strain storage capacity and hurt shale producers and refiners in the process. The more likely option would be taxing exports of refined products, which would lower domestic prices and push the burden onto global markets.

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Peter Zeihan here coming to you from above the valve at all in New Mexico. We’re coming up on golden hour, so I’m just going to sit here for a little bit. Anywho, today I am taking a question from the Patreon page. Specifically, do I think that the United States government is going to restrict energy exports in order to keep prices under control, as the international system basically loses energy?

And absolutely, absolutely, absolutely. The question is how there are a few options. None of them are great and all of them have side effects. But let’s start with the basics. As of the third week of June, we have somewhere between 1 and 1.3 billion barrels of crude that were never produced and delivered. That has drained global inventories to record lows.

And even if the strait were to open tomorrow, it’s going to be years before Persian Gulf producers can be producing again. So we’re going to have to have some demand destruction. That will probably involve a protracted, sharp price spike. And there is no way that a president is populist, as Donald Trump is going to let that pass without doing something.

So two options. The first one, the legal option is probably the least clean back under the Obama administration, Congress granted the president the right to end all oil exports just by saying so. That would trap the crude in the United States and probably send crude prices in the United States. Negative, because there’s just not enough storage. Well, Let me back up and take that back a little bit. Storage is running really low in the United States because of what’s going on in Iran. So step one would be to fill up all of that storage. And the question would be whether or not the shale wells, which fall off pretty quick, would fall off before the storage was filled.

You see a shale well, it can be brought online in just a few weeks, but half its lifetime production is produced in the first year. So if it takes, say, three months for the storage to fill up and nobody drills at all during that time, things might work out kind of kind of. I don’t want to. I don’t want to ever play that.

If not, prices are going to go negative because there’s just no where to put it. We had the negative price situation for a while in Covid, if you remember. That was all kinds of fun. If you were an oil producer. Anyway, what that does is it floods the system with crude. And if you are a US refiner, you now have basically a bottomless supply of light, sweet crude to shove through your refinery and make product.

However, US refineries don’t like light, sweet crude. They were designed for a different world where we imported a lot of cheap, heavy, sulfur laden crude. Ever since the shale revolution really got going back and say 2010. I mean, we got our first production back in

2007, 2008, and then it just exploded after that. US refineries have been changing their refineries.

Bit by bit by bit. But it’s been very slow. They’ve been fighting it at every step of the way. And in this circumstance, the ones that have basically been dragging their feet would be hosed, because you can damage your refinery if you run the wrong crude through it. And at a minimum, you’re going to have a really high refinery loss anyway.

That’ll go for a few weeks and then we’ll see basically an implosion in the shale fields, because nobody is going to want to produce if they can’t export. A lot of infrastructure is added, especially in Corpus Christi in the last decade to facilitate those exports. And if they go to zero, they go to zero. So probably you’re looking at at another one, maybe one and a half, maybe, if we’re really lucky, 2 million barrels per day of product, of which they will try to make more gasoline and diesel and jet fuel.

So that might, might be half of it, but that’s it. And everything else that’s in the surplus basically gets shut down because there’s nowhere to send it. So it would give a moderate boost to consumers over the mid and long term. Refiners would just be besides themselves with the damage to the refineries and producers would go out of business.

That’s option one. That’s the legal option. Option two is to do something to restrict fuel product exports. Right now, the United States exports about 5 million barrels per day of refined product, which is more than any other country on the planet has ever even exported of crude. And if you were to do something that it would strike that and trap that in the country, that would have an immediate effect on prices and an immediate effect on supplies to the global system, just like shutting off all exports would.

The problem here is that Congress has granted the presidency that power. And there’s a lot of questions as to how you would do it. Probably the most effective would be to just put a really fat export tax on it. I think that would play to Trump’s preferences. It would still result in higher prices in the United States, but nothing compared to everywhere else.

And we wouldn’t have a supply shortage anyway. Those are the two options. Probably find out within a couple of months which one the Trump administration is considering, because we’re getting really close.

Say Goodbye to Kazakhstan Oil

Flag of Kazakhstan

The Ukrainian strike on the Orenburg natural gas processing complex could impact more than just Russia. Unfortunately, Kazakhstan’s energy industry is highly dependent upon that facility.

Natural gas, propane, and oil from the Karachaganak field all flow through Orenburg. As these strikes continue, more and more of the energy projects that foreign companies have invested in throughout Kazakhstan will be threatened.

Russian infrastructure and transit networks remain critical to Kazakhstan’s energy industry. If these strikes continue, there are few viable alternative routes for Kazakh exports, which could end Kazakhstan’s ability to get energy products to global markets.

Prefer to read the transcript? Click here

Transcript

Peter Zeihan here, coming to you from Colorado today is 24th of June. In the news is the Ukrainians have just blown up part of the natural gas processing center at a place called Orenburg, which is in southern Russia, hard up on the Kazakh border. Now, Orenburg is not something that’s industrially central for the Russians, but it is for Kazakhstan. 

You see, when the Soviet system ended, there wasn’t a lot of oil or natural gas production in Kazakhstan proper. And as nobody wanted to go into Russia in the 1990s, Kazakhstan seemed a lot more stable. So ExxonMobil, ConocoPhillips, Chevron, all the big major companies and since then the Indians, the Chinese and others have all poured into Kazakhstan because they just find it easier to work with the Kazakhs than the Russians, because the Russians are always insisting on bribes and their infrastructure isn’t maintained, and the rule of law is weak. 

Not that Kazakhstan is, you know, Delaware or anything. It’s probably more like new Jersey, but it’s better anyway. Infrastructure was built out,bit by bit, while pipelines, wells, all that good stuff. But it can take decades to really build out a mature natural gas and oil industry, especially when some of the fields are more complicated. So across the border from Orenburg is a place called Karachaganak, which is one of my favorite words ever. 

It is a sour gas wet gas field that produces liquefied petroleum gas like propane as well as natural gas as well as. But all of it is really, really rich and sulfur. So you can’t just put it into a normal pipeline. So what they do is they put it into a cluster of short pipelines that go across the border to Orenburg in Russia, where the existing infrastructure from the Soviet period is already in place and it can pull the sulfur out of all the products. So once you do all the math, it comes out to about a quarter of a million barrels per day of crude and about 1,000,000,000 cubic feet of natural gas that get processed in Orenburg and then are shipped through the Russian network to the rest of the world. And now it’s on fire. 

What the Ukrainians are doing is basically systematically destroying any infrastructure that’s within about 700 miles of their borders, anything that gives the Russians any sort of economic wherewithal. And so what has been happening between Orenburg and Karachi is very simple. Crutch wouldn’t be viable without the Russians. And so the Russians take the lion’s share of the profits, because it has to go through their processes and facility and their infrastructure get to wider world. 

And honestly, almost all Kazakh and oil and natural gas output falls into that category. Foreigners do the investment, the Kazakhs own it technically, but most of the benefit goes to the Russians because they’re the interface with the wider world. Well, the Ukrainians have now decided that program no longer works. And so Orenburg is in flames, assuming for the moment that the Americans and the Europeans and others do not convince the Ukrainians to not do this, and so far everyone’s been silent, you should expect to see more and more attacks like this on Russian infrastructure that largely exists to serve Kazakh needs, and the single largest place where the Ukrainians can have an outsized impact is going to be something called the Caspian Pipeline Consortium, which takes crude oil from places like Tengiz and cash again on the Caspian Sea, ships it through Russian territory to export facilities on the Black Sea. And while as is only a quarter of a million barrels per day, Tengiz alone is over a million. And so we’re talking about secondary hits on Kazakh production that really has nowhere else to go. 

And that, more than anything that the Ukrainians have done to Russia direct, can just have a huge impact, because all they have to do is take out the pumping stations or section of the pipeline, or if they’re getting really chunky, some of the port facility in places like Novorossiysk, which they’ve already been hitting over and over and over. 

Bottom line, Kazakhstan’s oil and natural gas output was never going to last long term. It’s depended on too many pieces and too many countries and too many basins, because once the crude actually hits the Black Sea, it then has to go out of the Black Sea, through the Turkish Straits, through the Red sea, right by all the pirates in Somalia, across the entirety of the Indian Ocean basin to get Asia. So, you know, none of this was ever going to last. But the Ukrainians are proving that it can stop it almost right at the starting point. And we should see a lot more attacks like that in the days and weeks to come.

A Massive Energy Break Coming Soon

An Oil Tanker in the ocean

We’re slipping closer and closer to a major oil supply crunch. With the Persian Gulf still shut in, global inventories almost depleted, and threats to other oil supplies, the world doesn’t have enough oil to keep things running for much longer.

The Chinese have been able to substitute some of their oil demands with coal-based products, but this is just a band-aid. Eventually, oil prices will spike, and certain consumers will no longer be able to afford petroleum products, leading to demand destruction.

Northeast Asia will be hit hardest due to its heavy reliance on imported oil, but even Europe will have issues, despite having alternative supply sources.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. I wanted to give everyone an idea of just when the oil crisis is going to hit, because we’re about their short version is that since the Iran war started, we’ve had somewhere between nine and more, currently about 13 million barrels per day of Persian Gulf crude that isn’t even getting produced, much less exported to the wider world. 

And we are well past the point where the last tankers of exports pre-war have reached their destination. So everyone’s just been burning through stocks and at some point in either June or early July, we’re going to reach basically minimum operating levels for inventories and half the world, if not more. 

We’re looking already about 1.25 billion barrels of crude that haven’t been delivered. With every day goes by. That’s 10 to 13 million barrels of crude that have to be pulled from inventories. And because prices haven’t dropped, which is kind of weird. Demand really hasn’t dropped all that much. We’ve seen a little bit movement in some subsectors, like say, jet fuel and diesel, but for the most part, people are continuing to consume crude like this isn’t a long term problem. 

Oh my god. Anyway, at some point in June or early July, we’re going to hit the wall. The primary reasons why it hasn’t happened already is we’ve got two little factors in play. The first are the strategic reserve releases that the IEA approved two months ago. Now, in the case of the United States, this has really helped out Europe because the United States is a net exporter of crude and refined product by a large margin. 

So we don’t need the crude that is being released. So roughly 2 to 2.5 barrels a day of crude from our strategic petroleum reserve are just crossing the Atlantic and helping out the Europeans. And since the Europeans are so much more efficient at energy use than we are, that has really helped them kind of square the circle in the mid-term. 

It won’t last much longer, but for now it’s holding on the Asian side. Something else has helped out. That’s a little odd. 

When you make petrochemicals, you usually use a mix of feedstocks. You turn oil into something called naphtha. That’s your primary feedstock, but you also use liquefied petroleum gas like ethane and propane and butane. Some of these have partial substitutes, specifically the naphtha. 

And what the Chinese are doing is trying to cut out as much naphtha from their system as they can, and instead substitute it with a kind of processed liquefied coal. Now, this is wildly inefficient and expensive and especially polluting. But when you’re in a throughput driven system like the Chinese, it’s not so big of a deal. So headline. 

The Chinese petrochemical sector uses about 4 million barrels a day of product, of which about half, maybe a little less, is naphtha. And they’ve been able to substitute coal for maybe a third to half of that which is bought Asia. A little bit of wiggle room and has prevented the Chinese from having runaway price increases. You combine that with their large scale application of very, very, very small electric vehicles and a grid that primarily runs on coal anyway, and they’ve bought some more buffer that way too. 

But all of this is going to evaporate over the course of the next 3 to 6 weeks. So we’re very close to the break assuming nothing else goes wrong. And as we have seen in the past, that if we do get into a hot war situation again, the Iranians have easily demonstrated that they can hit any part of the export infrastructure from the Persian Gulf that bypasses the Strait of Hormuz, specifically the bypass pipelines of the United Arab Emirates and the Saudis have so were, ironically, in probably the best that can be hoped for right now. 

No hostilities, but the Persian Gulf still closed. If the Persian Gulf were to reopen tomorrow, it would be months before any new crude would flow, because it just takes that long to turn these fields back on and in some cases, years. So the late June and into July deadline is probably going to happen regardless of what happens with the negotiations that are ebbing and flowing back and forth. So get ready for a fun summer. 

How this usually happens is when you’ve got this sort of disruption. Prices go through the roof because there just isn’t any throughput. It’s not that people have cut refinery runs for the most part. It’s just that we’re not going to have feedstock. And when that happens, you get this lovely thing called demand destruction, where prices rise to a point that some parts of the economy, some people in some parts of the world simply can’t afford the crude derived products at all. 

And when that happens, their demand is destroyed. Till such time as prices fall back into line. The last time the world experienced this scale of disruption, it wasn’t the oil crises in the 70s or the 80s. It was World War two when everything got sunk. So historically unprecedented is the term. And keep in mind that with the global happened, some version of this was going to happen in a large scale. 

Regardless, the parts of the world are going to be most affected. At the top of the list is Northeast Asia, because this is an area that imports well over 90% of their crude. And until recently, all of that crude has really come from the Persian Gulf. They do get a little bit of a kicker from the former Soviet Union now, a little bit from the Western Hemisphere, but not enough to make a material difference. 

And the second worst will be Europe, where they also import 90% of their crude. But they have the potential of tapping more regions, most notably North America and North Africa and West Africa. So here we go.

America’s Leg Up on Petrochemicals

Petrochemical plant

The Iran War has caused a massive disruption in global petrochemical production. Since most of the world relies on oil-derived naptha, the ~12 million barrels/day shortage is taking a toll.

Many countries in Asia and Europe are beginning to feel the pressure, but the U.S. has a leg up on everyone else. Thanks to the shale revolution, America’s cheap and abundant natural gas is used to produce its petrochemicals. This has enabled the U.S. to avoid shortages and become a dominant global supplier of key petrochemical inputs.

Nearly every industry, from plastics to fertilizers, is impacted by these materials. So, the global industrial landscape is getting shaken up once again.

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Peter Zeihan here, coming to you from Walla Walla, Washington. Today we’re talking about the Iran war and the impact that it is having on petrochemicals. 

The way most of the world decides to make petrochemicals is they start with crude oil and then refine it into an intermediate product called naphtha and then naphtha. 

Then it goes on and is processed into tens of thousands of things that we all use every day. That’s not how it operates in the United States. In the United States, because of the shale revolution, we have basically a bottomless supply of natural gas. Based on whose math you’re using, roughly one third of the natural gas that is produced in the United States, it’s produced is a waste product, or at least as an associated production of oil, which means that in the United States, natural gas is significantly cheaper compared to the cost of oil. 

So in the rest of the world pre-war, the ratio between oil and natural gas on a point of view was about 5 to 1. In the United States, it’s closer to 2 to 1. So we use natural gas to produce products that, everyone else would use naphtha for. Well, what has happened? Two things. Number one, all that natural gas means that the United States can produce most petrochemicals at a significant cost advantage versus everyone else. 

Second, with the Iran war going on now, there’s a global shortage of oil to the tune of about 10 to 12 million barrels a day. So everyone else is hardware is designed to turn oil into naphtha, into petrochemical products. But all of a sudden, the price of oil on the availability of oil means that basically everyone in the East Asian rim, and very soon, everyone in Europe, simply can’t access the product they need at all, and they don’t have access to enough natural gas in the first place to switch over. 

And even if they did, they’d have to change their hardware to be able to do it. So the United States is becoming, from an economic point of view, the only real functional, large scale supplier of the butadiene and methyl groups, which is where we already had, huge advantage. And that’s things like, particleboard and silicones and octane for gasoline and nitrogen fertilizers and melamine, plastics, a lot of things like that. 

Whereas everybody else is now discovering that they don’t have the price structure that’s necessary to maintain competitive production of really any of this. Third problem, because the United States, is able to have an advantage now in all of the product sets. We’re seeing a significant shift in production quantities as well as qualities. So let me show you this chart here. 

If you start at the bottom left, that gray bars oil, you turn into naphtha, which goes on to make all the water products go to the right side. At the bottom you start with natural gas. You crack it to get ethylene, and then you turn that into products. But this whole set can be made with natural gas. 

And so the United States has not just a price advantage now, but just a huge advantage in the quantity, the type of products that can be made in mass. You play this forward for six months, two years, which is easily going to happen because of the Iran war. And we’re looking at a shattering of the petrochemical supply chains on a global basis outside of North America, and that’s going to have massive impacts downstream on pretty much every industrial sector.

Bring On the Jet Fuel Shortages

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

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

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

Prefer to read the transcript? Click here

Transcript

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

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

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

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

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

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

The Blockade of Iran Begins

A US aircraft carrier floating in water with dark storms behind

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

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

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

Prefer to read the transcript? Click here

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So You Want to Take Iran’s Oil…

Iranian Flag with oil barrels the color of the flag in it | Licensed by Envato elements: https://app.envato.com/search/photos/0866085e-7b36-418f-9531-40faadc100cf?itemType=photos&term=Iran+oil

Taking Iran’s Oil is far more complicated and dangerous than Trump has made it out to be. We’re talking about a humanitarian crisis and a full-blown ground invasion to actually control Iranian production.

Iran’s main energy resources are split between the South Pars gas field and Khuzestan. Seizing South Pars is the easier of the two, but the fallout would be horrendous. Controlling Khuzestan would require a ground invasion, fighting both local resistance and the broader Iranian military, forcing the U.S. to stay in the region…sound familiar?

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming to you from Colorado. Donald Trump is going on about taking in other countries oil again, specifically Iran. And, there’s no good way to do it. Let’s just start with that. But it is important, I think, to understand where the stuff is and what that would mean for a potential military occupation. 

So there are basically two large concentrations of petroleum in Iran. The first is kind of in the middle part of the Persian Gulf, directly opposite the country of gutter. That’s one of a kind of like a thumb sticking up on the south side of the Gulf. This is what the Iran’s call the South Pars field and the surrounding fields. It’s majority offshore. It is operated by a lot of foreign companies because the Iranians don’t know how to do it themselves. But this is responsible for somewhere between 70 and 80% of the country’s natural gas production. Now, Iran doesn’t really export natural gas in the conventional sense, and almost everything that come from South Pars is fed into the local pipeline network in order to be burned to generate electricity. 

So if the United States wanted to take over this zone, it would basically be shutting off the natural gas production because there’s no export capacity. The nearest country would be Turkey. There is a little pipeline there, but you’d have to go through a lot of Iran to get to it. And second, there’s no liquefied natural gas facility like exists on the south side of the Gulf. 

So if you take this thing, you’re just shutting it down and triggering, war crimes level of humanitarian disaster as you turn off the power in a country with roughly 90 million people, that’d be bad. The other one is easier in simply because it’s, you know, possible again, not an endorsement here. It’s in the province of Khuzestan, which is in the country’s southwest, hard up against the Iraq border, directly opposite from Basra. 

If you remember your war in Iraq days, Khuzestan has 70 to 80% of the country’s oil production. Generates a little bit of waste natural gas here and there, but it’s mostly about the oil. And this is the stuff that basically powers the Iranian economy. Oil from Khuzestan is consumed locally. It’s consumed throughout the rest of the country. It is sent to refineries, the country over, and a lot of it is exported through Kharg Island. Kharg Island is an island off the coast of the northern Gulf. It’s Iranian. And people have been talking about that a lot recently. Donald Trump even knows where it is. And he seems to think that if you take a car, you control the oil industry, too. 

No, no, no, you take Kharg, you can shut off Iran’s ability to export, but that doesn’t give you control over production. So if your goal is to take the oil, you have to basically capture all of Khuzestan Province in a little chunks of territory that are adjacent to it. Now, Kazakhstan is interesting for a number of reasons besides the oil. 

If you remember back to your, political geography days, Iran is a series of mountain nations, different ethnicities that bit by bit were amalgamated into the whole that we now call Iran or Persia, if you want to use the older term, Khuzestan is an outlier. There because it’s flat, it’s not mountainous. 

and the vast bulk of the population are Arabs instead of mountain peoples, or is Aries or Persians. So they are an oppressed minority living in the country, and they live on top of the oil, and they get so little of the money that comes from the oil that this is one of the few parts of Iran that’s actually experiencing population decline, because basically the Iranian government, Tehran, siphons off all the oil leaves, nothing for the Arabs, and they’re just kind of like wallowing in their own poverty. 

Before you think, oh, this is a great fifth column to, launch a rebellion against Tehran, keep in mind that the United States has tried that trick specifically before, just on the other side of the river in southern Iraq, where you have a Shia majority that used to be ruled by a Sunni government in Baghdad. And after 20 years. But the only thing that the Shia of Iraq could agree on is that they hated the United States more than everybody else. So I can guarantee you, in the time that the United States has been resting and recouping in the aftermath of the war on terror, we have not gotten any better at nation building. And when we were trying to occupy southern Iraq, which supposedly hit a restive political group that hated the central government that we had overthrown, it didn’t go nearly as well as we had hoped. 

And this time, if you do that in Khuzestan, there’s a lot more Iranians with a lot more weaponry and equipment that can be brought to bear, because in the case of Iraq, we overthrew the entire government, were the authority. In the case of Iran, we’d have tens of thousands of American troops on the ground, occupying the local population and then resisting the general forces of the rest of the country. 

Anyway, bottom line of all of this. It’s not that I think we can or should take Iran’s oil. Just to give you an idea of what is in play, it’s pretty clear that Donald Trump is planning some sort of ground offensive. He has never deployed troops to an area and not used them. And in this case, we’ve got two loads Marines with, the Marine Expeditionary units on their way. One of them with the Tripoli, is practically local now. They were in Diego Garcia last week. And the other group, the boxer, is approaching Southeast Asia and is expected to be in the Persian Gulf in 2 to 3 weeks. 

And of course, the, the airborne forces can be wherever they need to be. So we’re definitely moving forces in the Trump administration is definitely planning on using them. It will definitely be a disaster. And if the Trump administration decides to go after this target specifically, we’re going to be an occupation in the Middle East, just like we were for the bulk of the last 25 years. And we all remember how that went.