Markets Flash Back to the Past

Stock market candlesticks trending upwards

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

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

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

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Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Iran War Approaches a Tipping Point

Missiles with Iranian flags on them

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

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

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

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Transcript

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

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

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

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

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

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

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

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

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.

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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.

Italy Gives Trump the Cold Shoulder

Photo of Italian Parliament

Trump’s chaotic and isolated approach to the Iran War has caused rifts between the U.S. and many of its closest European allies. Topping that list is the Italians.

Trump went into the Iran War without consulting allies and determining how they could support, and then turned around and criticized each of those allies for not helping. This put unnecessary strain on long-standing partnerships with the UK, Spain, France, and Italy. And Trump portraying himself as Jesus Christ and arguing with the pope, doesn’t even help with the non-religious crowd in Italy.

As leaders like Giorgia Meloni begin withholding logistical and military cooperation, the U.S. will face major challenges in projecting military power abroad.

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Transcript

Hey, all. Peter Zeihan here coming to you from Prosser, Washington, where I’m at the Davin Law Winery, one of my all time favorites. Today we are going to talk about the end of the American alliance with Europe, specifically the Italians. Now, there are a lot of things going on in alliance politics right now that are really, really bad at the top of the list, of course, was Donald Trump saying that all of the allies are, quote, useless and powerless. 

Short version. Is it normally when you carry out a military operation, the United States, you consult with the allies and get as many countries on board as possible so that even if they’re not providing troops, they can provide logistical support. This may be a surprise, but the United States is in the Western Hemisphere, and most of its military operations are in the Eastern Hemisphere. 

And while the U.S does have a fully blue water navy, that doesn’t mean you can just sail a random ship into a random location and prosecute a conflict. There’s a logistical chain for fuel and people and medical and weapons that goes all the way back to the mainland. And if some of those steps can be carried by allies, then the operation is more effective, it’s more durable, it’s cheaper, it’s more likely to be successful. 

And so in every war, the United States has ever been going back to formation. Whenever we’ve operated beyond our shores, we’ve always done it hand-in-glove with some allies. Until this one. This is the first war in American history where the normal logistical chain was completely ignored. And so even countries like the United Kingdom, who have done everything with us hand in glove since World War two, weren’t even consulted. 

And so a month into the Iran war, when things started, look really sketchy from a security point of view, in a shipping point of view, Donald Trump started to make public appeals, not private, not through ambassadors, not democracies, not to their equivalent of our State Department, to their foreign ministries just publicly screaming at them for not doing more, even though not a single one of them was consulted on any aspect of the operation. 

And that’s brought us to the point where the Trump administration says it’s publicly considering removing itself from NATO because the allies have been useless. 

Problem number one. Problem number two, we’re not going to share the images because I’m not into that. But Donald Trump has posted a number of heretical, blasphemous things, basically claiming to be Jesus. We’re a friend of Jesus. 

How many, how many, how many affairs you have to have before that really doesn’t resonate with people anyway. Truly awful, awful graphics that he has shared with the world, about how he’s basically the, the Second coming, heretical, blasphemous. And in the United States, he has also become somewhat infamous for basically dumping on the Pope in quite egregious manners. 

Now, American Catholics and American evangelicals and AmericanChristians in general have to come to terms with that on their own, whether or not it affects their politics or their decisions about whether or not Donald Trump is a horrible, horrible human being or not, that’s their business. But abroad, in certain places, those statements, those images are really resonating. And nowhere more than in Italy, where Giorgia meloni, the prime minister, has been a fan of Trump, an ally of Trump in every way that matters. 

She’s on the right herself. But when you start shitting on the Pope and pretending Jesus, it changes things. And so Italy has gone from being in somewhat lockstep with Donald Trump’s foreign policies to, in just the last couple of weeks, has basically broken away from the United States, gone dead silent on things like Iran has stopped shipping weapons or providing logistical support to Israel. 

And for all intents and purposes, the alliance is now over. For the United States, this is going to be a big problem because we now have a number of European states. They weren’t consulted, they didn’t agree with. The war is hurting their economies. And the moral questions of what Donald Trump is are in such question that they are not allowing their equipment and their, their, their bases to participate in American logistics and military support. 

So we now have Italy and Spain and France and the United Kingdom that are giving the United States a cold shoulder in any number of ways. And that just leaves Germany. And if Germany goes, that is the entirety of the American ability to project power to the Middle East. So in the last two weeks, independent of the war, what Trump has done is shattered the moral fabric of the alliance. 

It is difficult to underline how bad this is, because while the United States does have a fully blue water navy, that doesn’t mean that each individual ship can operate from the homeland and operate in the Eastern hemisphere. Just the sailing time alone would be a problem. But when you talk about ships that are supporting, say, the super carriers, the super carriers are nuclear powered. 

They don’t have to stop to refuel, but they have to replenish. And all of their carrier rings are not necessarily nuclear powered, and they need fuel. So we’ve actually seen in just the last two weeks a collapse in the United States, its ability to function outside of home waters. And that is something that will resonate in American and global strategic thinking for decades to come.

Iran War Winners and Losers: North American Energy

Satellite view of north american lights and energy

As Persian Gulf and Russian exports collapse, global prices will rise, which should benefit the U.S. and Canada. However, if exports are halted to keep gasoline prices down, then North America would become oversupplied. This would effectively cap oil prices near production costs, despite the rest of the globe facing shortages and rising prices.

This means the producers wouldn’t see much upside, with refiners becoming the only real winners (even though they still have to retool to use that domestic light crude).

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Transcript

Hey all, Peter Zeihan here, coming to you from Colorado. And today we’re doing another one of our Open-Ended series on winners and losers in the Iran war. And today we’re talking about energy markets, specifically in North America, where the two big players are the American shale patch and Canadian producers primarily, although not exclusively, in Alberta. All right, first things first. Let’s get an understanding from where we were the day before the war. 

U.S. shale output is at record levels, and by itself is the single largest producer of crude in the world. But most of that crude is light and sweet. The issue is that in shale formations, there’s not a big pool of crude for you to stick a straw into. It’s tiny, microscopic little packs, and so you drill into it, inject liquid which cracks the rock. You inject sand, which then goes into the cracks. You pull the water out and the sand keeps the cracks propped open. So the facility then generates its own pressure as this stuff drains up. And because of that, the oil never migrated through a rock formation. So it’s very pure. It’s, very light, very sweet, low viscosity. 

Canada’s oil sands are very different. It’s basically Bitterman, or oil sand where you’ve got a relatively porous rock and the petroleum is migrated through a lot to kind of almost make it a sludgy gel. So it’s very thick and very heavy, and some of the crazy stuff is actually solid at room temperature. So they have to often inject steam in order to make it liquid so they can pump it up. 

Sometimes they literally electrify it, sometimes they strip mine it. Anyway, it’s a lot more energy intensive than what happens with U.S. shale, but in both cases, the cost per barrel is pretty high. It’s rare that it’s, under 30. Sometimes it’s over 60. So in both shale patches and the, Albertan oil sands, if prices are too low for too long, a lot of the work just stops. 

Anyway, on the surface, with having the Persian Gulf go away right now, we’re at 10 to 12 million barrels a day off line. even if the war ends tomorrow, that will remain that way for at least three months, because these fields can’t just be flipped back on. Some of them will take at least two years, probably more. 

And that assumes no additional damage, which, considering the path we’re on right now, is a laughable, scenario. We’re probably looking at the bulk of the 22 million barrels per day that comes out of here never coming back, or at least not within a decade. In that scenario, oil prices have nowhere to go but up and starting strongly, strongly, strongly. 

So. So it would appear that US shale and the Canadian shale patch are big winners here mid term. Because, you know, if the price of oil doubles or more and you production costs don’t change and you have access to the world’s largest market and you’re nowhere near the the shooting, it seems like all positives, right? Wrong. Because when oil prices go up, there’s another piece in play here. 

First the Ukrainians are taking out basically the western half of the Russian oil complex. They’ve already destroyed the ability of the Russians to export through the Baltic. They’re going to be working on the block very soon. That’s at least 3 million barrels a day of Russian crude, maybe as much as five. That simply isn’t going to come back either. 

So we’re looking at Persian Gulf crude and Russian crude disappearing from the market at the same time, which will send prices even higher, which again, is great for Canada shale. Right? Wrong. Because I don’t know if you guys noticed this, but the American president, Donald Trump, is pretty populist. And if we start getting $10 gasoline in places that you know, aren’t California, there’s going to be a bit of a rebellion. 

And this is something that Trump doesn’t have to stretch the law to deal with. Back in 2015, when shale oil was new, there was a big debate in Congress over solar and wind versus oil exports, what was necessary to push the American energy complex forward. And the compromise that was reached was that we would allow oil exports that used to be illegal, and we would subsidize the development of solar and wind, and to make sure that we had a stopgap, the president was given the authority without having to go back to Congress, without having to even have a hearing to end U.S. oil exports if market conditions argued for problems. 

However, he defines that, which means that the 5 million roughly barrels a day of crude that the United States exports right now could go to zero with the stroke of a pen. And if we enter in a situation where the American internal oil market gets really expensive, to the point that it becomes a political problem for Trump and an economic problem for the country, you bet your ass he’s going to do that. 

So now we’re looking at a scenario where Persian Gulf crude and Russian crude and American crude all go offline at the same time, sending prices sky high. So this sounds like it would be great for the Canadians, right? Wrong. Because most of the crude that Alberta produces is shipped south to the United States, and it can really only be refined in refineries that the United States operates. 

They do have a one pipeline that isn’t doing very well, by the way, called Trans Mountain, that goes out west to British Columbia. That one pipeline will obviously be filled up to its capacity in this scenario, and anyone can get the crude out that way. We’ll be able to sell to the global market at a high price. But with that one exception, most of this is actually probably going to be seen energy prices in the United States and Canada going down. 

Because in a scenario where you can’t export, we’re in an environment of super saturation. And as long as you can produce crude in the United States and Canada for $60 a barrel, that’s pretty much as high as prices can go when you’re in such a huge surplus situation. So we get a situation in North America where prices are kind of capped at 60 to 70. 

We get a price situation in the rest of the world where 200 is a good day, and that’s where we are. That doesn’t mean that there are winners in the North American energy complex. It’s just not in production. It’s in processing. You see, the restriction on U.S. exports doesn’t apply to crude, refined products just to raw crude itself. 

So if you operate a refinery and you have export options, you can export your naphtha, your crude or your gasoline, your diesel, whatever it happens to be to the wider market at inflated prices was just one little glitch. U.S. refiners for the last 30 years have steadily retooled their entire complex to run on heavy, sour, imported crude, for example, from Canada. 

But with the United States locking itself off, most non-Canadian sources of heavy crude are simply not going to be available anymore, and they’re going to be forced to deal with the light sweet that comes out of American fields. Now, this can be done. The modifications are easy. They’re actually going to be dumbing down the refineries to run on higher quality crude. 

But in the process of doing that, they’re writing off a lot of capital investment. At the same time, they have to invest in a different kind of fractionated system. It’s not that that’s particularly expensive. It’s not. But that takes a long time. But it is definitely going to cut into the rate in which they can benefit from these situations. 

And in the meantime, they’re probably going to be having runs that are going at significantly lower efficiencies than they would prefer. In the long run. It’ll be great. In the long run, they’ll be making more money, but they have to get to the long run first. So for the first year or two, there’s going to be a lot of stress on their hardware before they can change over some of the infrastructure. 

So again, just as we’ve discussed with almost every other country, the conventional wisdom that a lot of people saw in the first couple of weeks of the conflict really doesn’t apply. As soon as something happens, there’s a reaction and oftentimes it’s the second, third, and even fourth order effects that are the ones that really stick. That’s definitely how it is with this topic.

Bring On the Jet Fuel Shortages

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

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

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

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Transcript

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

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

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

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

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

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

The Blockade of Iran Begins

A US aircraft carrier floating in water with dark storms behind

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

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

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

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Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The End of the WTO

Globe with the World Trade Organization logo

A cornerstone of modern globalization, the World Trade Organization (WTO), is collapsing. Following the Cold War, the post-WWII system needed a legal system to enforce trade rules, so the WTO was born.

But the WTO was slow, and its court-based dispute system couldn’t enforce meaningful penalties. And its requirement for unanimous agreement made new trade deals nearly impossible. So, trade liberalization has stalled for decades.

Without the WTO, the world will revert to regional trading blocs. The issue is that this leaves several regions without balanced economies (you need production and consumption, and only a handful of areas have that). As the WTO falls apart, expect decades of economic instability and conflict.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. Today we’re gonna talk about the World Trade Organization or what used to be the World Trade Organization. 

The global rules of trade have evolved a lot over the last 70 years. But the key thing to remember that for the United States, this was never about the trade itself. It was about security. After World War two. The United States drew its allies together and said, look, we will defend you. We will use our Navy to allow your commerce to go to any part of the world. If in exchange, we can control your security policies. And that gave us the Cold War alliance that allowed us to defeat the Soviet Union. But it did come at an economic cost, because the United States basically agreed almost formally to serve as kind of a dumping ground for product. And in the aftermath of World War Two, when the United States economy was basically as large as everybody else has put together, that was a pretty easy, carry. 

But when you fast forward to the end of the Cold War 1992, everyone had grown and the math had changed. Also, the security environment had changed with the Soviet Union gone. The United States was starting to have conversations with itself about what’s next, and while we never carried any of those to fruition, there was a general agreement on both sides of the political aisle. that the old deal needed to be modified because people didn’t necessarily need protection anymore. So the United States was starting to want more economic, benefits from globalization in a way that it just wasn’t concerned with in the 50, 60, 70 or 80s. 

So this translated into the negotiations in the 1990s that birthed what we today know is the World Trade Organization. And the idea is you take all of the broad agreements that we had reached on trade liberalization over the last 40 years. You bundle them into a single pack. And that pact of WTO would have adjudication authority. So if there was a dispute among countries, you would take it to the WTO court, and the court would rule who was violating trade laws and what sort of punishment could be divvied out by the country that had been hurt? 

It’s a really interesting idea and governance. And the idea was that, you know, there were things that were allowed were things that were not allowed, and there had to be an impartial arbiter in order to determine how the disputes would be resolved. ultimately, we had two problems. So number one, it was a court based system. 

So it could take months, typically years to find out what was wrong. And by the time a country would win a court case, it would be able to actually retaliate the core situations that led to that circumstance generally, had changed. Probably the, the best example I can give you is the ongoing dispute between the European Union and the United States over aerospace, with Airbus getting huge amounts of EU subsidies and Boeing also being a defense contractor, which the European saw as subsidies. 

Now, maybe you as an American, I’m with the Americans on this one. But anyway, the point is that every year both sides would sue the other one. And we get these interlocking cases, which as a rule, the United States won. But the conditions, the penalties that were allowed for the United States to then punish the Europeans were typically so mild of the Europeans just sucked it up and moved on. 

So you had a court system that could rule, but it rarely was able to execute a ruling that was of sufficient severity to actually change the political math on the ground in the country where the violation happened. That was part one, part two. And this is what really killed it. The system works on unanimity. So if a single country opposes some extension of a pact, a renewal of a pact, a negotiation, a pact, the terms of a pact, the whole thing dies. 

So since 1998, when the WTO formally took effect, we functionally had no meaningful liberalization of trade ever since. And just this week, Jamison Greer, who’s the U.S. trade representative for the Trump administration, attended the most recent WTO ministerial. And at the end of the day, no one could agree on anything. And this will probably be the final WTO meeting, because at this point, it’s been 28 years. 

And that’s before you consider that the current American administration really just doesn’t care about international trade in the same way that groups before have. Now, will this have consequences? Duh. So step one if the world is completely unbound and unmoored, if the court can’t function at the WTO, if the WTO is no longer a place to negotiate how to prevent a trade war from getting worse, we’re going to have a lot more trade wars. 

That is unavoidable. And in a world where your typical manufactured product has hundreds of intermediate supply chain steps and, that’s going to be pretty rough. And that’s before you consider that, only about half the countries of the world have a young enough demographic to really serve as centers of consumption. So we’re looking at a break of the guns for butter deal that the United States cut under globalization, and then an end to the supply system and the manufacturing system, which has allowed the circulation that has made trade as we know it possible, that will be felt most dearly in manufacturing, because that is where most of the efforts to this point have been put in the negotiations. Second problem is a little bit broader is that if we’re going to move away from a system where trade is globalized, then by default we are going to be moving into a system where trade is regionalized. And if you’re talking about a regionalization of trade, you need to have a balance of industrial plant and consumption. 

And there’s really no part of the world that has that imbalance. In North America. We have the consumption, especially in places like the United States and Mexico. But the industrial plant needs to be roughly double, and you can do that, but you can’t do that in a short period of time. That’s a 30 year project. The Europeans are a little light on the industrial plant and very light on the consumption. 

So they’re in a situation where parts of Europe like, say, Germany, where the industrial plant is huge, have to export everything, but if they can’t export it to East Asia or North America, it has to be consumed locally. And that is going to have a horrific impact on the economies of states that don’t have the industrial plants. So we’re looking at a real problem here for short, medium and long term survival for the European Union on economic grounds. The third chunk is East Asia. North East Asia has more than enough industrial plant, probably twice, maybe even three times what they need in places like China. But these are the places where the demographic bomb is most advanced. This is the part of the world that most needs to export everything they do. 

And without the ability to do those exports, you’re looking at civilization ending events for some of these countries. Before you consider problems with agriculture or energy. The one part of the world where things are kind of in balance is Southeast Asia. The industrial plant is roughly right sized for their population, which is approaching and collectively about a billion people. 

And as a rule, among the countries that are not dirt poor, this is really the demographically youngest part of the country, with places like Vietnam and Indonesia in particular, having really young, energetic, upwardly mobile populations. So in a post WTO, a world, we’re going to see a lot of scrambling as economic models and the political models that are based on them just can’t function in this new system that we’re approaching. 

And really, Southeast Asia’s the only one that’s kind of in balance. That doesn’t mean it’s doom for everybody else, but they’re going to have to find radically different ways to operate in Europe. That means finding an economic model that’s not based on production or consumption. In Northeast Asia, it’s redefining the entire social model. But what it means to be a citizen, what it means to be a ruler. 

Historically speaking, when we had moments like this, we have a lot of conflicts among states within states, and it takes 30 to 40 years for everything to settle. 

I know everybody wants to talk about Iran these days, and there’s a lot going on there, but it’s actually the collapse of the WTO that is ushering in the real change. 

And the fact that most of you probably only heard about this here means that it’s not getting the attention that it really needs, because this is going to undermine the structure politically and economically of the vast majority of the world’s countries. And it’s going to do so real fast.

How to End American Power

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Trump’s latest statement telling countries to secure their own oil dismantles the very fabric of the global order. We’d be stepping away from the post-WWII system where the U.S. provided security for everyone, so economic growth could be the priority.

Forcing everyone to secure their own resources takes us back about a century, triggering conflicts and competition over resource control. This move weakens America’s global position, as power projection will be challenged and former allies turn into rivals.

This move jeopardizes America’s long-term strategic power and could lead to a collapse…comparable to the fall of the Soviet Union.

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Transcript

Hey, all Peter Zeihan here coming to you from Colorado. Today is the 31st of March, and we, we’re having some fun things. On Donald Trump’s truth social account. So the big news is that Trump has said, NATO is pretty much finished, and all of the countries that want crude from the Persian Gulf now need to come and get it themselves and just take it. 

If you read the line which will print here, basically what he’s asking for is a return to the colonial era when each individual country maintained its own independent military forces, especially naval forces, and in doing so, looked after its own, economic issues. 

The reason we do things today, the way we have been for the last 35 years, is we know that that model guarantees inter-state conflict. There’s two big layers to it. The first is that if you maintain colonies, you’re fighting to control those colonies. In the case of the Persian Gulf, this is actually probably one of the easier places to do it, because so much of the population is dependent upon physical infrastructure, like, say, desalination. 

And so maintaining a degree of control is relatively manpower light versus the economic assets you get. You’ll have to manage those populations. You might have to move some of those population. You may have to kill a lot of those populations. But, from a purely technical point of view, it’s not too bad. The second problem is that everyone will have their own preferences as to where the resources go, i.e. home. 

So you are guaranteeing a degree of inter-state conflict among the oil importers, because they will all now need to have their own naval forces in order to secure shipments from point of production in the Persian Gulf to points of consumption, primarily back in Europe or East Asia. 

One of the things that really worked about globalization is we basically told everybody, you don’t need a military anymore because we will take care of that. So if you do maintain a military, it doesn’t need to be big. And if there is a fight, we will defend you and we will take full control of what military forces you do have. 

And what that did is it cleared the board. And every major power in world history, with the exception of Russia, was now, for the first time, on the same side under the NATO flag or the American flag, based on where you were. And the United States basically made all the security decisions, with very little debate, I might add. 

Moving away from that system to a situation where each individual power has their own military and is looking out for their own economic interests, is going to take us back to what we had roughly in 1930 when we were industrialized. And so everyone realized they needed crude oil. 

But now, with a whole new layer of technologies and things like drones, it’s difficult to overstate how much of a tidal shift this is, because American military power for the last 75 years has been based on the concept or the sole decision making. We’re the sole arbiter, and what we say goes, what Trump is now doing is deliberately forcing all of the allies to establish an independent military posture with independent military forces to look after their independent economic needs, because he doesn’t want to do it himself, said so very, very explicitly. 

In that world, we will have taken every major power in world history that still exists today and forced them to move away from the American umbrella and to set up their own independent system. And no matter what version the future holds, we are never going to see eye to eye with all of them in that sort of scenario. 

What part of what made globalization work part of it for the American alliance system work is we removed the military side of the equation from their thinking so they could focus entirely on the economic. And if you want to undo that deal, that’s, you know, there’s a conversation to be had there, but abrogated in this way and basically forcing everybody to take up arms for their own economic issues. 

It’s turning the clock back to the weakest American security has ever been. And that’s in the 1930s. So the situation we have now is we’re not simply guaranteeing more colonial conflicts. We’re not simply guaranteeing more inter-state conflicts. We’re guaranteeing the fastest reduction in American strategic power in our lifetimes and arguably in the history of the Republic. Because while the US military may be first and foremost in the world, especially when it comes to the Navy deliberately ending the basing agreements, deliberately fostering demanding competition is going to land us in a world of hurt. 

Ten, 20, 30, 40, 50 years from now. And we’re only now in the early second year of this administration. There is a lot of time to make this truth social post, which Trump deeply believes is the right thing. There’s a lot of time to make it stick. And if you look at what has happened in the last year with Donald Trump threatening invasion of NATO allies because he couldn’t get a chunk of ice, I’m concerned that we’re already well past the point of no return, and we’re now in a situation where the US military has to figure out how to close down its entire constellation of bases on a global basis and start building contingency plans for fights with all of the countries that have been on our side for the last 75 years, at a minimum, best case scenario, none of those fights happen, but it still means a massive reduction in America’s military global footprint and its ability to project power beyond the Western Hemisphere. So we are at the beginning of the greatest collapse in strategic power that I have seen in my life, the only similar situation that comes even remotely close would be the Soviet collapse, at the end of the Cold War. 

But if you look at the Soviet empire at that time, it was not nearly as global. What the United States has now. Most of their retreats were far closer to home, say the loss of Central Europe, for example, we’re looking here at the United States becoming unwelcome, not just in the Middle East, but in Europe and probably in East Asia. 

And we’re actively pushing to create strategic competitors for a generation or two from now. That is quite possibly the most fucking stupid thing that we could do. And yet here, here we are.

So You Want to Take Iran’s Oil…

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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?

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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.