The Peter Zeihan Podcast Series - Why We Can't Quit Russian Oil: The 10% That Holds the West Hostage || Peter Zeihan

Episode Date: July 3, 2024

Despite most countries in the West wanting to rid themselves of any involvement with the Russians, the oil revenues continue to flow into Russian pockets. So why haven't Western countries dropped the hammer on Russian oil exports? Full Newsletter: https://mailchi.mp/zeihan/why-the-west-cant-quit-russian-oil

Hey everyone, Peter Zine here, coming to you from the French-Italian border on the Mediterranean. And today we're going to take an entry from the Ask Peter Forum, specifically, if the goal of the West in Ukraine is to ultimately break the Russian military, then wouldn't it make sense to simply go after the what are currently the legal oil revenues, put them under full sanction, and actually interrupt the flows. Right now, the official policy of the Western nations is to keep the oil flow. flowing from Russia, but do so in a way that prevents the Russians from overly profiting from it. There are two ways that the Russians get their crude to market. Number one is in compliance with the sanctions, where other people provide insurance, other people provide shipping. And the second is via something called the Shadow Fleet,

which may be as many as 20% of the tankers that are out there now that are no longer registered to anyone. They simply shuttle crude back and forth doing CTC transfers, taking them from Russian ports direct to third parties. who don't care about the sanctions very much and allowing the Russians to circumvent things like price caps. It's a reasonable question. And if, if, if this war is ever going to end in a way that actually breaks Russian power, Russian income has to be destroyed as part of that process.

But to make that happen, there's going to be a lot of collateral damage along the way. So a couple things to keep in mind. First of all, if you're going to take this stuff offline, there's a lot of it to go. Russia exports roughly 5.3 million barrels of crude per day and about 2.6 million barrels per day of refined product. Of that, only about 1 million barrels of crude is exported by pipe to China direct and maybe 300 to 400,000 barrels a day of refined product is railed to China. The rest of it has to hit a port somewhere and then be part of this shadow fleet or the sanctions regime system. So you're talking about a disruption of at least 6 million barrels per day of oil and oil products. That's huge.

That is well over 10% of globally traded energy product by volume. And for those of you guys who have forgotten your basic economics, oil demand and fuel oil demand is inelastic. So if you only have a disruption of, say, 5 to 10% in terms of output and production, you can get a price increase of 50 to 100% or more. because if you don't have the crude, if you don't have the gasoline, you just can't carry out normal economic activity, so you'll pay whatever you have to. That's one of the reasons why the recessions in the 70s and the 80s were so severe because everyone was dependent on this stuff, and when some of it, not even very much, went away, well, the shit hit the fan. So if, if,

if this were to happen, you would deal with a major price shock. In the case of a populist government like Joe Biden's here in the United States, that means inflation, and that means that his perception is that the political floor would fall out from under him and any chance he had of re-election would go away. So this is something that has not been seriously considered most Western capitals, most notably in the United States. There is one way you can get around that, and that is to use existing power that Congress has already granted the president to sever the United States from global energy markets. Right now, actually for nine years now, ever since I think it was the 2015 omnibis bill, Congress has granted the president the authority to

end oil exports. And if you did that, since the U.S. is a net exporter now, you'd have a super saturated oil market in North America, Anglo America specifically, while you would also have a removal of another three to five million barrels a day of crude and refined product from the rest of the world. So basically, you double down on the elasticity problem for the rest of the world and cause a massive global depression, at the same time, North America has a few problems with crude quality. It is la-di-da is on its own way. If, if that were to happen, you could probably kiss the Western Alliance largely goodbye because the White House would have consciously chosen to favor its own domestic political issues and some economic issues, to be perfectly honest, against the security

and economic needs in the long term of basically the entire alliance structure. Then there's also the issue of enforcement. You can't just like wave your hand and say no. this stuff isn't allowed, you have to do something about it. And your options are to go in and bomb Russian ports, which would trigger, let's just say, other issues, or to go after the shadow fleet itself to take those ships out of circulation. I mean, they're all basically owned by the Russians at this point, but they're shipping crude primarily to China and India. So if you basically declare, or have an undeclared economic war against those two countries, that complicates a lot of things very, very quickly. Now, will we get there in the end?

yeah, probably. But that requires pulling out all the stops and a lot of strategic questions that would occupy a great deal of political bandwidth for any government. In the end, if the United States really, if the goal really is to break Russia, then there needs to be changes to military policy to make sure that the Ukrainians can strike logistical hubs within Russia. And it means an end to Russian energy exports at a large enough. scale to break the income flows that are necessary to keep the Russian military machine running. We are not there yet.

I'm not saying we're not going to get there. In fact, I would argue we are. But that requires a significant change in the political and economic calculus of all the Western capitals, first and foremost, the United States. So good question. Not yet.