Peter Zeihan: Get Ready for Summer Oil Crunch
Financial Sense and Zeihan on Geopolitics
Geopolitical strategist Peter Zeihan joins Jim Puplava to break down the fragile Iran peace agreement and what it really means for global energy markets.
Chapters
00:00:00 – Introduction
00:01:39 – Oil Market Analysis
00:03:30 – Impact of Geopolitical Events on Oil
00:08:18 – Geopolitical Analysis: Israel, Iran, and the U.S.
00:12:52 – Potential Outcomes
00:15:10 – Analysis of Iranian Drone Attacks
00:17:17 – Impact on U.S. Government
00:18:35 – Effect on Oil Prices
00:20:15 – Potential U.S. Actions and Consequences
00:23:25 – Impact on U.S. Prestige
00:27:00 – Conclusion and Peter’s New Book
Transcript
Financial Sense News Hour: Peter Zeihan on Iran, Oil Markets, and the Ceasefire
Jim Puplava: Well, there’s hope — we finally came to a peace agreement. A lot of questions remain about whether it will actually hold. Today we’re going to be discussing what’s going on with Iran and what the likely outcome is. Joining me on the program is Peter Zeihan, one of the world’s foremost geopolitical strategists, combining a deep understanding of geography, demography, and energy — which is why I wanted to have him on the show.
Peter, one of the things that strikes me is that you sign a peace agreement, and I guess magically those billion barrels of oil we’ve lost reappear. Nobody seems to be talking about that. So let’s begin there — how much have we actually lost?
I’m looking at a graph on my Bloomberg terminal of the Strategic Petroleum Reserve — it’s the lowest it’s been since ’83. I’ve got inventories at Cushing below 20 million barrels, where futures contracts settle. And oil prices were down across the board today.
Peter Zeihan: Let’s start by saying I have no idea what’s going on with oil prices — I’m not that kind of analyst. But yes, it doesn’t make a lot of sense to me either. We’ve been down somewhere between 10 and 14 million barrels per day for the better part of four months, and the numbers keep getting squishy. So we’re talking about roughly a billion and a quarter barrels that were never produced and delivered to market.
Now, there’s a lot of fine print within that. For example, the Saudis were able to redirect almost all of their crude exports to their Yanbu port via the Petroline, which crosses the peninsula. The Emiratis were able to redirect a good portion of their exports through a bypass pipeline system as well. But Qatar has taken extreme damage, some UAE fields have taken damage, Iraq is a real problem, and Kuwait is completely offline.
What people are hoping for now is, step one, that the production sitting in storage tanks at the ports can finally get out — that would be a big shot in the arm. No argument there. Step two, they’re hoping all the fields that went offline can restart production within days to weeks. That’s overly optimistic — and that’s just the part we actually know. The part we don’t know is that the Chinese don’t publish much statistical data anymore about anything, and the Russian shadow fleet has always been something of a black hole. So there’s a lot of wiggle room in the data, but it’s really hard to add up all the mitigating factors and get anywhere close to a billion barrels.
So yeah, I’m still expecting something of an oil crunch, if not a full-on crisis — maybe even an energy-induced slowdown over the course of the summer, as it becomes obvious that all these little patches here and there just aren’t enough.
Puplava: And when you look at it, I want to bring up insurance rates too. If I were Lloyd’s of London — we signed a peace agreement, and a week later they were shooting at each other again. If I were Lloyd’s of London, I don’t know that I’d want to insure a tanker going through the Gulf right now. And if I did, the rates would add a significant cost to the price of oil — not to mention that they now want to charge fees to go through the Strait.
Zeihan: Actually, I’m not too worried about the insurance issue. It’s a real cost, and I don’t mean to minimize that, but there’s a huge difference between “high cost” and “you just can’t get the crude.” One requires an economic adjustment — moving things around on your balance sheet, finding money from somewhere else — and the other is simply not possible.
The Strategic Petroleum Reserve release the U.S. did, in conjunction with the rest of the OECD, bought us a minimum of 35 days, and that’s great. But it’s now been four months, and that flow is completely gone. We don’t have a good read on how much storage is available in the Persian Gulf right now — I believe it’s another 60 to 80 million barrels, but I’m not 100% sure.
What we need to watch for is crude carriers actually going into the Gulf, because we had a thousand ships trapped in there, and most of the traffic we’ve seen in the last month since the peace deal has been about getting those ships out. Yes, they bring crude with them — but until tankers go back in, we haven’t reestablished the actual flows. On June 30th, for the first time, five VLCCs went in — about half of what’s normal — but then there was shooting later that day, and it stopped. We didn’t have any go in yesterday. Until we’re at a position where we have at least eight, preferably ten to twelve, going in every single day, able to load up and come out without being attacked, we’re not getting closer to normal. We’re getting further away.
Puplava: So let me bring up something. If I were a country — especially one of those countries in Asia that went to rationing — seeing how this conflict and peace deal have played out, I’d want to replenish my reserves. Of course the big question is China. I think they had about 1.5 billion barrels going into this and weren’t importing as much, so that helped them. But if I were China, or any other country, I’d want to build my reserves, because it doesn’t look like the shooting is going to stop permanently anytime soon.
Zeihan: Yeah. The problem is, if you want to fill your reserves — which is obviously wise — you’re supposed to do that before there’s a shortage. There’s really nowhere to pull barrels from now. A couple of the normal sources the world would turn to just aren’t available, or won’t be available soon.
Number one, Venezuela. Luckily the earthquakes didn’t damage oil production directly, but they took out the power grid — and without the power grid, you can’t lift crude out of the Orinoco, you can’t process it to get it into a pipeline, you can’t pump it to the port, and you can’t load it at the port. So for the moment, Venezuela’s roughly one million barrels a day are offline.
Second is Russia. The Ukrainians have fielded a new type of drone where the terminal guidance is decided onboard from a decision tree loaded into memory, which means it can’t be jammed — it can only be kinetically intercepted, and that’s much more difficult, especially with a hundred of them coming at you at once. Right now, the Ukrainians have stopped targeting the ports and are going after the entire refinery backbone instead, because the Russians actually refine more product than they export as crude. That’s forcing pressure to build up throughout the pipeline network, with the intent of forcing the Russians to shut in production at the source — and it’s been pretty successful. So while Russian crude exports have actually gone up over the last 30 days, there’s a very real danger that by the end of the summer the Russians won’t be producing nearly as much crude as they used to, because they won’t have the ability to process it within their own system. Just as it becomes clear the Persian Gulf situation is nowhere near resolved, the Russians might fall off the market too.
Puplava: Well, I know there was a conference where executives from Chevron and Exxon were talking about much higher prices. Then, of course, we had the peace deal, and the media said, “Okay, we’re going back to $50 or $60.” I just don’t know if this peace is going to hold. What’s your take on this from a geopolitical point of view?
Zeihan: Let’s look at it from three different angles.
First, the Israeli angle. Netanyahu is an embattled leader who isn’t particularly popular in his own country. The reason he’s been at the forefront of Israeli politics for so long is that he’s very, very good at building coalitions with people the mainstream doesn’t necessarily care for. For him, having the looming threat of war — regardless of the reason — is actually good for his political future. If there are elections later this year, as is supposedly the plan, he has a vested interest in keeping this as hot as possible. So Netanyahu is definitely on the warpath for personal reasons.
Second, the Iranians. They’ve emerged from this conflict with more consolidated leadership and more geopolitical reach than they’ve had in the last ten years — especially given how rough the last five years have been for the Islamic Republic. They’ve seen Hezbollah gutted, they’ve seen the American sanctions regime hurt their economy badly, and they were working with an ever-shrinking pool of power. But because the Israelis and Americans assassinated some of the political leadership — the moderates, I might add — the hardliners are now in power without any limitations from other political factions. They can do things they couldn’t do before, and they don’t particularly care about their own population, because they control a force of hundreds of thousands of soldiers they can use to suppress it — and they do that very well. Now there’s open discussion in the world about Iran charging tolls or service fees, giving them leverage they’ve never had before. And the fact that a couple of Arab states — most notably the UAE — have grudgingly sided with the Israelis has actually opened up the Arab street around the world to a more pro-Iranian position. So yes, Iran got bombed, Iran took a lot of damage, and it’ll take a decade to recover. But strategically, they’re in a much better position now than they were back at the beginning of February.
Third, the United States. When Trump was president the first time, he was genuinely surprised he won — he’d expected to spend the rest of his days lambasting Hillary Clinton for beating him. That was his shtick. So when he won, he had no staff in waiting to take over cabinet positions or any government roles, and the Republican Party tapped people who followed Republican orthodoxy. What Trump discovered within three months was that these people broadly knew what they were doing and were very knowledgeable — and he hated being in a room with them because he wasn’t the smartest person there and had to sit and listen. So he fired more cabinet secretaries in his first term than any three American presidents combined, including across their full terms. While he was out of power, he took control of the Republican Party apparatus and dismantled its recruitment arm so no talented people could rise up to challenge him, and dismantled its policy arm too, so he’d always be the smartest person in the room. When he won a second time, he didn’t draw staff from the Republican Party or what was left of it — he only tapped people who had shown him loyalty during the four years he was out of power. So he’s now surrounded by the least capable, least knowledgeable, most sycophantic leadership in American history.
So when Netanyahu showed up at the White House on February 11th to make the same pitch he’d made to four other presidents — asking the United States to fight a war for him — Trump thought it was a great idea, and there was no one in the room to say otherwise. The carriers were given the order to sail that same day. That’s all the deliberation that happened. The moment they arrived in the region, the war started. Trump isn’t using the CIA to inform him, and he isn’t using the State Department to lead or participate in negotiations. It’s just him — and some horrible mistakes are being made. This week may finally bring real negotiations, but we haven’t even had an American in the room for the talks up to this point, because Trump doesn’t trust anybody.
Puplava: Given all that, and the fragility of this whole agreement — since he doesn’t have the right people around him — what’s the likely outcome?
Zeihan: In Trump’s own words, the talks are becoming “boring,” and he just wants to be done with them — that’s pretty much a direct quote. If you look at the text of the deal as it currently stands: Iran gets a $300 billion compensation fund, all sanctions are lifted, the blockade is lifted, Iran gets technical assistance, Iran keeps its nuclear program, and after 60 days Iran can start tolling the Persian Gulf. Trump just wants out, and he doesn’t care how, or about the long-term damage to anyone. So we basically have the United States — which owns the naval hammer of the world — wielded by someone who’s completely disinterested in what happens the next day. That could mean another round of strikes, although we’re running low on long-range munitions; we used over half of what we had in this war, which makes the next war that much more complicated.
Separately, I think it’s more likely the United States simply declares victory, packs up, and goes home, leaving the region to do whatever it’s going to do. If that’s how this plays out, there’s no way oil exports from the region ever return to 20 million barrels a day, because the Iranians have already proven they can not only close the strait, but they have the range to hit the ports at the end of those bypass pipelines — Fujairah in the UAE and Yanbu on the Red Sea. If the Iranians choose to, for whatever reason, they can take it all offline.
Puplava: Right, and there was that bypass — the Saudis and a couple of other countries have been routing around it through pipelines, but pipelines are vulnerable to drone attacks.
Zeihan: And the Iranians hit the Petroline in Saudi Arabia a couple of times just to prove they could. They also hit the loading facility in Yanbu just to prove they could, and the same in Fujairah. They also hit our military bases in the region — twice. Details on that are sketchy for national security reasons, but it looks like the facility in Bahrain took significant damage.
Most Iranian drones don’t even have optics — they follow the equivalent of a GPS transponder and fly in a straight line from launch to impact. They’re dumb, but that doesn’t mean they’re harmless — there’s just only so much they can do. But as the Ukrainians have shown us starting in late February, and especially in March, there’s a new type of drone out there — a “memory drone” — where you load in a decision tree, it has some optics, and when it reaches its assigned zone, it looks around, sees what it can see, weighs that against its decision tree, and makes one decision: what to target. Once it locks on, it can’t be jammed. Best guess is the Iranians had at least a couple dozen of those, and those are what hit the U.S. facilities — because U.S. facilities are under heavy jamming, and a GPS-driven drone should have had no chance of hitting anything there. They didn’t just strike randomly — they hit with precision on very sensitive positions, like radar installations. That doesn’t happen in a heavily jammed electromagnetic environment.
Puplava: Given all this — and with midterms coming up — I can see why Trump would want to walk away. He doesn’t want to be dropping bombs come October.
Zeihan: I really don’t think he cares. The chances of Democrats getting a two-thirds majority in the House are negligible, and in the Senate it’s zero. Unless there’s a two-thirds majority against him, impeachment isn’t meaningfully on the table. And he hasn’t gone to Congress even when he controlled it — why would he go to Congress now, when he doesn’t?
Puplava: So what do you think he does — just walks away and lets the other countries sort it out? I saw a Bloomberg story that Europeans are coming to grips with the fact that they may end up paying fees since they’ll be getting their energy from the Middle East.
Zeihan: Yes — and that’s the United States, for all intents and purposes, functioning as a government that’s largely offline. Of the top 6,000 positions in government, Trump fired essentially all of them when he came in — which is legal — but he’s only reappointed about a fifth. So the leadership apparatus required to actually carry out policy decisions isn’t there. Trump is ruling by executive order, which may or may not get overruled in court, but he isn’t actually capable of pushing things through the system in a durable way. And that’s before you factor in that Congress has become largely nonfunctional — especially this week, with some of the most die-hard Trump loyalists bringing everything to a standstill unless his election bill gets pushed through, something House and Senate leadership think is a bad idea.
So Congress is offline, the bureaucracy is offline, we’ve used up half our long-range munitions — the tools the president has to actually impose his will on the system now really just amount to throwing monkey wrenches. And that’s exactly what’s happening. For example, in the NAFTA talks we’re now on an annual review basis, which means no American manufacturer can make long-term plans for their supply chains. So the steady decline we’ve seen in manufacturing under this administration is about to fall off a cliff.
Puplava: So let’s get back to the price of oil. Today we’ve got WTI at 67, Brent a little over 70 — once again missing a billion barrels that isn’t going to show up magically, and traffic coming out of Hormuz likely won’t be what it was before the war. So what do you see happening?
Zeihan: I see higher oil prices ahead. I’m not going to put a number on it, because this is such an unprecedented situation, but I can’t see how it does anything but go up in the medium term, until we either get large-scale demand destruction or a major new source of crude — which usually takes half a decade or more to develop. I don’t see another way out of it.
Puplava: Especially with the unfortunate situation in Venezuela from the earthquake.
Zeihan: Yes — you lose lives, obviously, but as you said, if you lose your electrical grid, how are you going to run a refinery, or a loading dock, or anything else you need to move product? Keep in mind, after 20 years of mismanagement and underinvestment in Venezuela, we still don’t have a real damage assessment. The people producing crude there say the facilities themselves are intact, and I tend to believe them, but there’s so much other damage in the country that they simply don’t know the full picture yet, and digging out is going to take a long time. Getting the power grid back up is one of the first priorities, but again, after 20 years of minimal investment, I don’t think that’s something that can be turned back on in a matter of weeks. I think we’re looking at the remainder of the year, at a minimum.
Puplava: Well, I know the president, when talks aren’t going well, always throws out the threat that he can “bomb the heck out of you.” What’s the likelihood he’d actually do that again with Iran, versus just walking away and washing his hands of it?
Zeihan: To Iran specifically — for the first time ever, this was a nonstandard war in terms of standoff distance. In the past, whenever we’ve had military activity in the Gulf, regardless of the target, we’d park a carrier in the Gulf itself and conduct close-in strikes. This time, the administration decided that given how much the Iranians have developed their drone capability over the last 15 years, that wouldn’t be wise — we can debate that decision, but that’s what was made. So one carrier stayed in the Red Sea, and another never even entered the Gulf, staying out in the Gulf of Oman. Most strikes were carried out from nearly a thousand miles away, which changes the type of weapons you can use. Normally the U.S. would fly fighter-bombers and drop things like JDAMs from relatively close range, relying on speed and stealth. But to make sure the ships had zero chance of taking a hit, we used long-range missiles and fighters flying at higher altitude, dropping from much farther away. That depleted the long-range munitions we’d been stockpiling for 15 years for a potential conflict with China — we used over half of them. We also used over half our interceptors, specifically the PAC-3s and THAADs, the ones designed to intercept intercontinental ballistic missiles aimed at the homeland.
So if there’s another conflict, regardless of who it’s with, we’re looking at running our primary long-range offensive and defensive capabilities essentially dry. Strategically, what we spent on Iran was the height of irresponsibility, and doing it a second time would basically mean the United States loses all capability to fight a long-range conflict. If we then got into a conflict with a real power like China, we wouldn’t be able to stay out of sight of shore — we’d have to operate very close in, within a lot of their offensive weapons envelopes, and we’d lose ships. So strategically, a second round with Iran is completely off the table right now. That said, they’ve already restocked their drones, so it doesn’t mean it won’t happen again — it’s already happened once.
Puplava: Given that — and given how it’s being portrayed in the media, that “we won the war,” that we blew up a lot of stuff in Iran — when you listen to Trump, he’s always talking about winning. But if you’d really won, you wouldn’t be giving away as much as this deal gives away, at least in my opinion. Do you think that’s really how this plays out — he walks away, but leaves a mess behind?
Zeihan: “I blew up the sandbox, and now I’m going home” does appear to be the direction we’re headed. One more thing to add: the Iranian nuclear program never actually approached having a weapon, because they calculated that if they had one, they’d be inviting a war. Their approach was to run a program that made minimal, steady progress year after year for 30 years — that was their deterrent. Now they know that calculation was wrong. So now they have no choice but to actually build a weapon. If we simply withdraw, they’ll likely have a nuclear weapon within a year. That’s another problem just over the horizon. But yes, that does appear to be the path we’re on. The people who actually understand how energy politics, energy shipments, and logistics work aren’t even allowed in the room — Trump isn’t being briefed by them. His defense secretary is, to put it kindly, not up to the job, and he keeps Secretary of State and National Security Advisor Marco Rubio — one of the only people with any real concept of how the world works — out of the room, only letting him into the White House occasionally. So there’s no meaningful debate happening.
A friend of mine who knows senior military people told me that normally, before entering a conflict, you run war games — scenario planning, “how would this play out, what would we do, how would we respond.” None of that happened here. Netanyahu came in on the morning of February 11th; by that afternoon the carriers were dispatched. That was the entire deliberation process.
Puplava: Wow. So where does that leave us on price?
Zeihan: In my estimation, we’re looking at higher prices. Like you, I won’t try to put a number on how high. We’ve got people in the industry — Exxon and Chevron executives — saying it’s going much, much higher. I don’t think we’re going back to $50 or $60 and staying there. I do find it interesting that the companies who actually live and breathe production and shipping logistics are somewhat panicked, while the financial houses are acting like we’re heading into a glut.
It’s remarkable — the IEA put out what we call the “missing barrels” thesis. Last year they said we were producing 2 million barrels more per day than we were consuming. The logical question is: if you’re producing more than you’re consuming, where does that inventory show up? And it wasn’t showing up anywhere. That’s the missing barrels thesis, and that’s what the financial markets are betting on — if you read the Wall Street Journal, it’s “we’re heading back to a glut, we’re going to be flooded with supply.” I just don’t see it. In their defense, there are a lot of reserve systems, commercial and government, that go unreported, so 2 million barrels a day can disappear into the couch cushions, so to speak, for a period of up to a year. But when you’re starting from a billion-barrel shortage, production remains offline, and tankers can’t even get to port, you’re in a very different situation — one I don’t think the financial press has fully absorbed.
Puplava: We’ll have to see what happens. Before we close, Peter, tell our listeners about the new book you’ve written — I understand it’s different from your previous work.
Zeihan: Very different. Let me see if I can bring up the cover — not sure how well that’ll come through on video. Anyway, it’s called Acceptable Range. My nonfiction work has been about how geography and demographics are going to remake the world, and how we deal — or fail to deal — with that will determine our future for the next several decades. Acceptable Range takes that same premise and builds a fictional plot around it, involving tech, manufacturing, raw commodities, and superpower rivalry, all from the point of view of someone caught in the middle of it. I had a blast writing it, and my editor liked it enough to immediately sign me up for a couple more — book two just went to primary edit. Book one publishes at the end of this year.
Puplava: Well, Peter, as always, it’s a pleasure speaking with you. I look forward to reading the book when it comes out.
Zeihan: All right, thank you.
Puplava: To speak with our financial planning and wealth management team, visit us at Financial Sense Wealth. And if you aren’t already a subscriber to our weekday podcast, go to Financial Sense and hit subscribe to hear more of our content throughout the week.
