Russia vs. Europe, Iran vs. Saudi Arabia & an Asian Tanker War

We recently met with geopolitical strategist Peter Zeihan to discuss world events since the American election and his new book, “The Absent Superpower: The Shale Revolution and a World without America.” In the book, Peter credits energy and resource innovations with reshaping the global geopolitical environment.

We covered so much ground in our visit with Peter that we decided to break it into two reports. Last month in part 1, we covered the broad impact of the Shale Revolution, which he calls, “the greatest evolution of the American industrial space since 1970,” and which he expects to accelerate the breakdown of the global order as we know it. Today, in part 2, we examine the major global shifts in geopolitics that will result as the US moves into energy independence. Peter believes this will reshape global geopolitics, leading to three major conflicts. It is these conflicts we asked him to discuss in greater detail. We hope you enjoy the discussion.

GAVEKAL CAPITAL:We last left off discussing how the oil export ban could be rescinded if global geopolitical issues flare up. What are you on the lookout for?

PETER ZEIHAN:There are three big conflicts I see that could cause a major schism between what the US pays for oil and what the rest of the world pays for it. I’m talking about a potential global oil price of around $150 per barrel while the US pays only $50 per barrel thanks to shale oil in the US and a resumption of the ban on oil exports. The break-even cost in the United States is around $40. If you put the embargo back in place, you’ve got a functional ceiling on how high the price can be domestically. If shale overproduces and you can’t export the crude, then it’s a question of refining capacity which can’t be built out that quickly.

War number one is Russia vs Europe. The Russian demographic situation is already untenable and it’s moving into catastrophic. By the time we get to about 2020-2022, the size of the Russian army will be less than half of what it was last year. The post-Soviet Union baby bust was that sharp, so if they are going to use their military in an attempt to re-shape their world, they have to do it now. And in many ways they already are. Depending on which scenario plays out -I list several in my book -anywhere from two to seven million barrels per day of crude in the market goes offline. Former Soviet Union oil shipments are in danger in Estonia, Latvia, Lithuania, Eastern Poland, Belarus, Moldova, Ukraine, Northeast Romania, Azerbaijan, Armenia, and Georgia. That list is the entirety of Russia’s western energy exports. The Russians will either use oil as a political tool, or the targeted folks will say, “You’re not going to sell crude through us while you’re conquering us.” Either way it’s going offline. And because Russian energy production is in the permafrost it can’t be shut in safely. If you turn off the wells, they freeze solid and you have to re-drill them, so from the point that the Russians stop production in a field, it’s 10 years minimum to bring it back online.

One of the biggest mistakes I think people make when analyzing Russia is they don’t realize that the Russians are not thinking about money right now. The general consensus is that the Russians won’t do anything to disrupt the flow of oil because they need the oil income. That’s not how the Russians are thinking at all. Their current borders are completely unsustainable, and they only have a short window to do something about it. The Russians see the end of their country on the horizon, and they’d rather have that be 60 years from now than five years from now. There’s no route for withdrawal: they’ve got to get through to the Carpathians, the Caucasus and they’ve got to get to the Polish gap and the Baltic Sea.I believe Russia’s move to extend its border is going to fail, but if I were Putin right now, I wouldn’t have a better plan. And that will take, based on which scenario goes down, between two million and nine million barrels of crude offline, and five BCF and 12 BCF of natural gas.

GC:What do you think of the relationship between Trump and Putin?

PZ:For two men with egos as large and as fragile as Trump and Putin, I can’t imagine they’re going to get along for long. However, for 2017 both of them have a lot reasons to focus on other issues, so burying the hatchet for the moment makes a lot of sense. Also, the United States has no long-term rationale to get involved in a ground war with a nuclear-armed power who’s a shell of its former self, with nothing to lose and who is invading countries that aren’t even defending themselves. I expect the rhetoric to pick back up, but for 2017, I think it’s going to be pretty calm in bilateral relations. This will free up Russia to act more aggressively regionally. That means Ukraine is even more in play. That means breaking up the European Union. That means consolidating the former Soviet space. All of that is going to go into high gear this year and next.

GC:What’s Russia’s interest in breaking up Europe?

PZ:If the Europeans are squabbling –and it’s not a difficult task to get the Europeans to squabble –they can’t form a common front against the Russians unless they’re American-led. So if the Americans step back for their own reasons, and you can keep the Europeans at each other’s rhetorical throats, Russia can take advantage.

Shale

Shale

GC:What would be the bell that would ring that would announce to the world that Russia is on the move?

PZ:We have the French nationalists saying that the Russians are intervening in French national elections just like they did in the US. So the bells are ringing left, right and center. It’s happening. We’ve already had civil discontent in Latvia and Estonia caused by Russian efforts.

GC:Who goes to bat for these countries?

PZ:Well, if it’s not the United States, if you’re the Baltic countries, it’s Sweden. And I think they will. But Sweden can’t roll back the Russians by themselves. They can make it hurt like hell. For Poland, it’s Germany. The Poles just get the bad end of every stick throughout history, and they’re about to get another one. For Romania and the Caucasus, it might be Turkey. Although the Russians are doing everything they can to make sure that the Turks don’t want to get involved, and so far it’s working. Poland, plus Germany, plus the Scandinavians, plus the Brits are sufficient to roll the Russians back.

GC:Are you starting to see movement of personnel and material in anticipation of this?

PZ:All three of the Baltic states (Estonia, Latvia and Lithuania) have given up on conventional warfare. They have largely, for all practical purposes, disbanded their conventional militaries and they’re training their entire population in guerilla tactics. They know what’s coming. And the number one country

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