Would a deal with the devil to ease the energy crunch even work?

Hello from Fort England Air Force Base in Florida where it’s super sunny and all conversations are of golf.

There’s been all kinds of news that has been out in the last 48 hours about the Biden Administration’s efforts to thaw relations with Venezuela, Iran, and Saudi Arabia in an attempt mitigate, what is turning out to be a huge surge in oil prices.

We’re looking at somewhere between four and five million barrels of Russian crude potentially falling off the market in the next few weeks.

That is gonna have a catastrophic impact on global prices.

And the idea is that by loosening relations with these three countries that we might be able to shave off some of the worst of the pain, and there there’s some logic there. But, of course, there are political enemies and even allies of the Biden Administration who are saying, you know, how dare you open relations with a despot like Nicolas Maduro of Venezuela, or a guy who likes to hack journalists apart, Mohammed bin Salman in Saudi Arabia, or of course, the Mullahs of Iran?

To be perfectly blunt, it’s very, very American.

The United States has always played the divide and conquer game, particularly when it comes to great power politics.

We supported Stalin against Hitler. We supported Mao against Stalin. It’s always about finding the weaker player, and setting them against the stronger player, and then backing the weaker player. So the idea that the United States could cut deals with people like Stalin and Mao, but wouldn’t deal with a gaggle of Shia clerics who are yammering on about something that happened in the fifties or a pouty prince in Saudi Arabia who likes to get rid of bodies at barbecues or an incompetent bus driver in Venezuela, it really doesn’t fit our pattern.

We totally do that. So being outraged about it is, not very useful.

Now if you want to evaluate, this on the merits, that’s a completely different question.

So let’s start with Iran. Oil production in Iran is low not really because of sanctions, but because the Iranians don’t know how to run an investment regime, and they tend to penalize the people who do invest with them. So even if sanctions were lifted completely tomorrow, and the United States stepped back and let Iran do whatever it wanted, you’d be unlikely to see more than a half a million new barrels come to the market over the course of the next 12 months. I’m sorry. That’s just not very much. That’s certainly not very fast.

Second, Venezuela. Oh my God, that country has driven itself into the ground. So deep. Bringing new crude online in Venezuela is extraordinarily expensive. Venezuelans really can’t do it themselves and they need top notch American workers in order to do the technical stuff. And you’re talking about needing 10, 20, 30 billion dollars over the course of the decade to get a million or a million and a half barrels.

So there’s no solution there either.

Saudi Arabia may be a little bit better. The Saudis are really one of only two countries in the world, United Arab Emirates being the other one, that maintains any spare production capacity whatsoever. So they might, might, might be able to bring on a half a million barrels within six months and maybe that much again within 12, but all of that together is at most one quarter of what we would actually need.

U.S. shale can help, of course. And we were already on track to add about a million barrels per day of new capacity over the next 12 months. But there’s shortages in pipe. There’s shortages in metal. There’s shortages in sand. There’s shortages in labor. And that assumes, of course, that the financial system, was pro-shale overnight. Even in the most successful expansion U.S. shale seen, it has never added more than about 2.2 million barrels in a single calendar year.

So no matter how this goes down, even if all of these sources managed to pitch in, we’re really only at a little bit more than half of what we would need to avoid a heat explosion in oil prices. So I don’t think that’s gonna happen. And I certainly don’t think the geopolitics is gonna line up that quickly, which limits the options of the Biden Administration for what’s coming. Gasoline prices are already $4. That’s kind of a politically sensitive point where we’re at record levels now.

And if you are Biden, there’s really only one card you have to play here. In the 2015 omnibus bill, which is, we used to be called the energy bill, the Biden Administration, any American president has the legal authority to cancel any exports of raw crude from the United States to the rest of the world. That’s a card that Biden can play in a day, and in doing so, it would sever the U.S. pricing model from global pricing for oil.

And in the case of the United States, that would leave a lot of shell crude trapped. The refiners would be howling with fury, but it would mean that we wouldn’t be in shortage and the pricing system between the United States and the rest of the world would break, going back to something that was a lot more similar to what we had before World War II.

Biggest downside of that isn’t for the United States, it would be that the rest of the world would lose access to Russian crude and American crude at the same time. So you could easily envision an American system where $70 becomes the functional ceiling and a global price where $150 becomes the best case scenario for a floor with, in some parts of the world, such as China at the end of very, very long supply lines, probably never dropping below $200 again. That’s where this is headed.

Okay. That’s it from me. Hope you see everybody’s shiny faces the next time we talk, take care.