Boycotts are not the only reason for Russia’s oil backup

Peter Zeihan here coming to you on March 8th still. A couple updates on what’s going on with energy.

We hit $130 odd dollars yesterday. Crude is back down about $1.20 something today, but we’re not done going up.

There’s a lot of discussion going on in the United States and Europe, both about boycotting Russian energy sales completely. But honestly, that’s just catching up to where we are.

What’s going on is that insurers are not covering ships that are going to pick up crude at Russia’s Black Sea ports. Captains don’t want the stuff on their boats, so they’re not sailing to even ports that are allowed. And even if you do get Russian product out of the country, you then have to find a place where the dock workers will actually unload it. And that’s just not happening almost anywhere in the European sphere.

We’re even hearing some reports that the Russians are starting to have problems selling crude out of their Pacific loading port.

Now, all this has led to a lot of speculation that the Chinese are going to be able to swoop in and just grab 100% market share from everything that other folks are not buying. With some products, there might be some truth to that, but not with oil. 

The problem is infrastructure. The pipes that supply the Chinese with Russian crude tap different fields than the pipes that supply the Europeans with Russian crude. And if you can’t get Russian crude from the west onto a tanker, there is no way to get it to China. It just gets shut in. In fact, we might see Chinese imports of Russian oil and natural gas drop.

I’d estimate that about half of the oil and natural gas production in Russia is only possible because Western companies have come in and showed the Russians how to do it, especially with newer fields in Eastern Siberia, the ones that are critical for China.

Well, every American and European super major has withdrawn, and the next rounds of sanctions, while they might not necessarily target energy sales, they’re certainly gonna make it more difficult for the services firms, like Halliburton, to get and carry out normal operations in Russia.

The only question is whether or not the drop off in Russian output is going to be gradual or steep. I’d argue it’s going to be steep.

One of the things we saw back in 1989, when the Russian system, the Soviet system, collapsed is when there wasn’t enough demand in Russian industry, pressure started building up in the pipes from the point of consumption or the point of sale all the way to the wellhead, and they had to shut the whole thing down.

Because Russia’s weather is erratic and harsh, and because most Russian production is in the permafrost, even a short-term shutdown can mean you can never use that well again.

It took ’em 32 years to repair that damage and get back to production levels that they had back in 1989. They had only gotten there like a quarter ago, and now they have to go through it all over again.

So is it China, a beneficiary of this? I don’t see it, but it doesn’t really mean that anyone else is either.

Oil prices are going up. And if you remove Russia’s 5 million barrels of crude exports a day from the market, if we go, if we stop at $200, I’d consider us lucky. Well, that’s kind of a sad note to end on, but until next time.