How Shale Is Reshaping The World: Three New Wars

Via The Gavekal USA Team,

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 - Russia vs. Europe, Iran vs. Saudi Arabia & an Asian Tanker War. 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GAVEKAL CAPITAL: We last left off discussing how the oil export ban could be rescinded if global geopolitical issues flare up.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.

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 to assist them with that is Sweden. The Finns are basically breaking out all their grandfathers’ equipment and getting ready for another Winter War.

GC:Geographically, is it easy to roll into the Baltic states and Poland?

PZ:Estonia and Latvia are nearly as easy to roll into as Poland. Lithuania is a little bit more difficult. There’s a lot of forest; it’s a bit more rugged. But rolling back the Russians on land has to be German-led, and the Germans don’t have an army right now. They’re the only ones who have the demography to potentially fill a force that could do it.

GC:What could Europe do that would be sufficient for Trump to want to get involved?

PZ:If they doubled defense spending in the next 12 months, that could at least get the conversation started. But if the free trade era is over, if Bretton Woods is over, why would you get involved if you are the US? It’s not a ridiculous position, even if Trump makes it sound that way sometimes.

GC:Does the US continue selling weapons to everyone?

PZ:Oh, of course, the US isn’t that crazy! The US will still pick sides, will still provide intelligence and might even rent out a bunch of drones. I don’t mean to suggest there’s no American role, but the idea of the US Army coming to the rescue, that’s off the table. As we discovered in Crimea, NATO’s rapid reaction divisions are only 500 troops each. In the aftermath of Crimea, only four divisions of 500 troops were sent. The US provided one, Canada provided one, Poland finally provided one, and the other one was all the other NATO counties put together.

GC:How many Russian troops are in Crimea, Ukraine, right now?

PZ:It is tough to know exactly but I’d say at least 15,000 Russian troops are in Crimea. On paper, the Russian military is still basically a million-man army. They are not, man for man, nearly as good as American troops, but they’re better than Spanish troops or Italian troops or Polish troops. In order for Russia to pull this off they probably need at least 100,000 troops. You’re talking about two million square miles and 70 million people. You’re not going to do that with 10,000 people.

GC:This is going to take a massive mobilization effort on Russia’s part, right?

PZ: Well, the mobilization won’t take as long as you’d think because there’s already at least 25,000 Russian troops on the Ukrainian border, not counting the ones that aren’t officially in Ukraine proper.

That process has already started. The Ukrainian military has basically been decapitated. You haven’t heard a lot about Ukraine recently because the Russians sent in a few special forces troops to bait the Ukrainians to send out their own best troops –their American-led, American-equipped troops –to the front. Then Russia used regular army and air force to kill all the commanders of all the best units. So all that Ukraine has left now are reservists. When the war comes, unless the Ukrainians resist to the last man, the regular, organized resistance is already over. It’s just a matter of how fast do the Russians want to push into Kiev.

Now, once they get to Kiev and the bridges over the Dnieper River, you enter a slightly different sort of war because you move into Western Ukraine which is not a Russified Ukraine. You’re more likely to have civilian resistance in Western Ukraine. But that first half, if that takes a month, I’d be really surprised. Belarus will welcome Russia in, and Estonia, Latvia and Lithuania combined are only six million people. Moldova can’t manage political opposition to Russia, and the Russians already have an active military base with 10,000 troops. So that just leaves Romania. If Romania and Poland are the great hope for the West in this war, then it is not looking good.

GC:Do you think that war starts this year?

PZ:I don’t know when it will officially begin, but with the way the political relationship is going, and with what I think is about to happen in Europe, it’s a golden opportunity. The Russians can’t maintain this tempo with the demographic situation for very long so the sooner they start it, the better. If you start it before the Europeans start to function like nation-states again, and if the Americans have already exited stage left, it’s a perfect opportunity. Once the ball gets rolling, this will take several years to play out. I think maybe the end play for Russia is to get the Germans to say, “Okay, you can have Ukraine, but you can’t have Poland. Okay, you can have Belarus, but you can’t have Poland. Okay, you can have Estonia, but you can’t have Poland. What? You took Poland? You can’t have Romania.” That’s basically what the Russians are hoping for. It’s not a stupid plan. That would be their preferred path. And it’s worked before. “Okay, you can have Eastern Poland but we draw the line at Western Poland.” That’s World War II.

GC: What is war number two?

PZ:So Russia vs. Europe starts on its own, not over energy security but energy is a clear casualty. Conflict number two is Iran vs. Saudi Arabia in the Persian Gulf. If the Americans remove themselves from keeping those two powers apart because America no longer cares about keeping oil flows out of the Persian Gulf safe then those two countries fall into direct competition. Eventually, that competition turns into an attempted Iranian invasion of Saudi Arabia.

GC: How does that play out?

PZ: There’s a 300-mile desert gap between Kuwait and the oil fields of Saudi Arabia, and it’s not clear that the Iranians can make it across. What the Saudis are doing right now in Yemen is target practice for that, they’re preparing, learning to use their military equipment, particularly their air force, to turn that northern desert buffer into a kill zone. Right now, they are doing it pretty well. Will it be enough? I don’t know. The Saudis would rather not face a war at all, but they know that in a post-Bretton Woods world, without American protection, over time the Iranians will bury them. So just as the Russians feel that they’re on a limited time scale to create more sustainable borders, the Saudis feel they’re on a limited time scale to crush Iran. The 2015-2016 oil price war then wasn’t really about shale, it was about Persia. And to be perfectly blunt, it hasn’t worked as well as the Saudis hoped.

GC: So will the Saudis try to develop nuclear weapons?

PZ: No, if it comes to that, Saudi Arabia will just buy them. They can get them from Pakistan and that conversation has already happened. Pakistan has 150 nuclear weapons, and if they can sell them for $1 billion a pop, they are happy to do it. The Saudis are already providing them with subsidized oil in order to make sure that those lines of communication never close. Assuming no one else gets caught in the crossfire, that’s potentially another 11 million barrels per day of crude off the market when these two countries go at it. And if other countries get caught in the crossfire, it goes up to 20 million barrels per day. So the Persian Gulf is War #2.

GC: Is it connected or disconnected from the Russian war?

PZ: Disconnected. It could start any time, it could start tomorrow. When the Iranians realize what the Saudis are up to and that it can kill them, that’s when this war begins. The Syrian war has taken a turn that is relatively pro-Iranian recently, so Iran isn’t feeling stressed. A year ago, it was going a very different direction. ISIS is probably the calmest, kindest sort of group that the Saudis will form over the next few years because it is proving that it wasn’t enough. Now, I don’t mean to suggest that the Saudis are pulling the strings of ISIS; they just formed it and then let it go off on its own. And as long as ISIS is killing Persians and Persian allies, the Saudis are totally fine with it. And the Saudis will form more groups, they’ve probably already formed a hundred groups in the last six years alone. Most of them are fighting in Syria but not exclusively, some of those groups like Jundallah are already in Iran.

GC: What is the third war?

PZ: The third war is dependent on one of the first two: it doesn’t matter which one happens first, either one will trigger the third war. If you have an oil shortage anywhere in the world — because Russia is on the move toward Europe or because Iran is invading Saudi Arabia — energy security and availability for the rest of the world becomes a question of transport routes. The world’s longest, most vulnerable transport routes are from the Persian Gulf to Northeast Asia. Based on whichever country you are in, that’s anywhere from 5,000 to 7,500 miles. If you have a shortage anywhere, Northeast Asia has to eat the entirety of the shortage because they are furthest from the wells. And, worst of all is that there’s not enough to go around for the Koreans, the Taiwanese, the Chinese and the Japanese. Somebody has to go without, and the country that goes without is the country that cannot physically defend crude oil on a convoy route from the Persian Gulf all the way home. So the third conflict is an Asian tanker war, and that triggers all kinds of different results.

GC: Who will be the winners and losers of the tanker war?

PZ: The countries that have the longest reach, like Japan, will probably be able to protect their transport routes the whole way so they should be OK. Japan has by far the strongest navy in that region of the world. Countries that have a deep and abiding experience at bribing people, such as Korea and Taiwan, will probably pay India to fly cover for them for the first part of the trip through the Indian Ocean. This could work out for them, but it comes with a lot of risks. The Chinese have a serious problem with naval power projection and are going to have to establish bases closer to the oil source. That means China will probably have to invade chunks of Vietnam and the Philippines so that they can turn the South China Sea into an internal lake. If they successfully do that, then that’s a 1,000 miles less they have to worry about transporting and protecting their energy supply.

Ultimately though, I would expect the Chinese to lose the tanker war because of how much oil they need and their relative lack of naval strength. I think the tanker war will be the shortest of the three wars, but it’ll be the most colorful, because it basically breaks down the entire structure that has sustained Northeast Asia’s economic ascension for the last 60 years.

By the end of these wars, I would expect us to see around $50 oil in the US, $150 oil in Paris and over $200 oil in Beijing (assuming any crude can make it to Beijing at all). The whole supply chain model that has made East Asia successful for the last 50 years will be gone. All that manufacturing capacity has to relocate, or because of the global demographic breakdown and the energy crisis, all that capacity may just disappear because of lack of demand.

Peter Zeihanis the best-selling author of “The Accidental Superpower.”

Martin Armstrong Warns "World War III Looms In Eastern European Tensions"

Submitted by Martin Armstrong via ArmstrongEconomics.com,

Europe could become the site of a new global war in the East as tensions build there against refugees and the economic decline fosters old wounds. The EU is deeply divided over the refugee issue and thus it is fueling its own demise and has failed to be a stabilizing force. After five days of demonstrations, Romania’s month-old government backed down and withdrew a decree that had decriminalized some corruption offenses. They were still acting like typical politicians and looking to line their pockets. After one month, the people have been rising up saying “We can’t trust this new government.”

On the eastern border of the EU, only a few hundred miles from Berlin as well as Vienna, there is a growing danger that the world will stumble into a global war. The leading cause is primarily stemming from through the incompetence of the politicians in the EU as well as in the East. The EU is more concerned about punishing Britain and trying to hold on to overpaid political jobs that to address the real issues facing Europe, while these seemingly regional disputes in the East are being ignored.

The problem with NATO has been that most members have not paid into the support of NATO that they had agreed to. The USA has been shouldering the majority of the cost of NATO, which would be like the EU funding US military. Then NATO leaders agreed back in 2016 to deploy military forces to the Baltic states and Eastern Poland for the first time and increase air and sea patrols to reassure new allies who use to be part of the Soviet bloc that they would defend them following Russia’s seizure of Crimea from Ukraine. This has merely increased the confrontations with Russia on the one hand but the Eastern countries themselves are not really aligned. The chaos inside the EU and the overreaching of NATO are the major factors inviting war. This also raises a most serious question: Exactly where does the power of NATO end and Russian power end? Effectively, where precisely is the border of influence?

This question cannot truly be answered in the midst of this chaos. Following the collapse of the Soviet Union, the agreement emerged whereby Belarus, Ukraine and Georgia were to form the buffer for Russia. NATO’s influence on the borders between Poland, the Czech Republic and Slovakia, Hungary, Romania and Bulgaria were to come to an end. Russia directly borders Estonia and Latvia, while Lithuania shares a common border with Belarus. Thereby, a meeting between the West and Russia developed in the 1990s with agreements between the EU and Moscow along with several treaties including the USA. Russia was to then enter the G7 making it now the G8. It was Obama who did his best to undo all of this.

The annexation of the Crimean peninsula by Russia in 2014 is seen as a trigger of the crisis and Russia is described as an aggressor. But Crimea was always Russian territory and it was given to Ukraine to manage back in 1954. What if Spain wanted Puerto Rico back? It is not part of the United States.

The predominant language in Crimea was Russian – not Ukrainian. Ukraine should have been split along the line of language and instead of funding military forces, offered the people to buy their property on either side who desired to move to the West or East. Instead, we have a cold war simply over territory and the people have no say. Politicians still act as if they are playing the board game RISK, but for real. This has always been about territory as if we are still living the dreams of Napoleon, Hitler, Genghis Khan, or Alexander the Great. There are people who live in these regions who are oblivious to the games politicians play. All wars are begun by politicians, ministers, or kings.

Politicians have been carving up the world for a very long time. People mean nothing. They carved up the Ottoman Empire and created the chaos of the Middle East. This is what Trump has been against – nation building. The so called “progressives” who protest against Trump would have been in the front lines of war under Hillary, who was simply keeping the game going. How many lives has it cost when politicians are so concerned over territory rather than the people living in such territories?

From 2004 onwards, NATO has sought to expand its sphere of influence beyond the bounds of peace and go right at the throat of Russia inviting World War III so they get to play with their toys. These activities were first conducted in Georgia. The President at that time was Mikhail Saakashvili from 2004 to 2013. He promoted an active pro-Western policy and was welcomed as a friend and partner of the West. At first, it was supposed to be about democracy, something the EU itself rejected in its new structure with all the power-players being UNELECTED officials, and economic cooperation with the EU and the USA. It did not take long to create the impression in Georgia that NATO would also help the country in an engagement with Russia. Then in the summer of 2008, the conflict escalated. Russia invaded Georgia and occupied the provinces of Abkhazia and Ossetia. These were dominated by Russians originally. Most people have no idea but Joseph Stalin was from Georgia.

NATO did not come to the aid of Georgia. There were no sanctions imposed for occupying Georgia as there were for the occupation of the Crimea. Why? What was the difference when Georgia was actually being solicited by the West and Crimea was not? Was it simply that Crimea was an important military base for Russia all along? It appears that the world politicians sitting at the table playing the game RISK were really just trying to end Russia’s port in the Black Sea and isolate it. That is certainly something the USA would have done in a second if the roles were reversed. The sanctions imposed against Russia were not to really protect Ukraine, but because the West was trying to take away Russia’s access to the Black Sea.

Economic cooperation with the West was accepted by Moscow under Reagan. The cold war had ended. Ronald Reagan worked hard to bring down the Berlin Wall. Why did Obama work so hard to reestablish the cold war? NATO has clearly raised hopes in Eastern Europe as they did in Georgia. Indeed, the Ukrainian crisis is in many ways a continuation of the events in Georgia. Since the “Orange Revolution” in 2004, Ukraine was seen as a knife to poke in the ribs of Russia. The pretend President Viktor Yanukovych was pro-Russia because he came from the East and spoke Russian. He could not even speak proper Ukrainian. But he and his sons sought to rule Ukraine like a Russian oligarch. Businesses had to pay protection money to even survive. The Ukrainian Revolution was real. The West’s politicians moved in to try to seize control of the new government, but the uprising was against corruption as we now see in Romania.

In November 2013, Yanukovych put a “freeze” on negotiations with the EU. As a result, the people began to rise up. The police were ruthless exploiting the people and were not there to protect the people from the State. Revolution began and since June 2014, Ukraine has sought a pro-Western course reaching treaties with the EU and with NATO. Indeed, once again, NATO gave the impression to Ukraine that it would implicitly defend it but Ukraine has not formally become a member of NATO.

The EU is no longer an economic community, but a political union that is closely linked to NATO. Most have overlooked the  Treaty of Lisbon (initially known as the Reform Treaty) which was an international agreement that amended the two previous treaties thereby creating the federalized constitutional basis of the European Union (EU) without ever putting that to a vote. The Treaty of Lisbon was signed by the EU member states on December 13th, 2007, and went into force on December 1st, 2009. This treaty has decisively altered the very core foundation of the EU transforming from 2009 onwards. This fact is always overlooked in the EU because few have read the text of the Treaty of Lisbon. Ever since, there have been closer ties between the EU which is now linked to NATO, which is why Trump says the USA should exit NATO and Le Pen is arguing the same in France. Additionally, Ukraine was given direct contracts with the EU with regard to a military alliance. This is a “soft” membership in NATO addition Ukraine but not really.

There is no way the US would give up its pacific military basis in Japan at Okinawa. Yet we impose sanction upon Russia for annexing its original territory pre-Ukraine where it maintain its Black Sea Fleet is stationed in the Crimea. The sanctions imposed upon Russia for Crimea are very hypocritical. From Russia’s perspective, the alternative would have been that Moscow’s Black Sea Fleet would be docked in a NATO country. That would present a circumstance that was totally unacceptable leaving the annexation of the Crimea a logical and obvious reaction that the USA would have done if the roles were reversed.

Ukrainian eastern region of the country remains a strategic concern. The IMF (International Monetary Fund) was willing to provide loans to Ukraine but demanding they engage Russia in the East. This demonstrated that the IMF was playing military politics – not economic. The fact that in the Eastern Ukraine is composed of Russian-speaking people, gives Moscow justification to protect its ethic citizens. This is why Ukraine should have simple been divided along the ethic lines and stop trying to poke Russia for the sake of military ambitions as was the case with Vietnam against China.

Ukraine assumes that NATO will intervene. This has not happened so far, but the danger remains that Russia could be forced into an invasion as was the case in Ukraine especially if the EU begins to break apart. Likewise, the border of Belarus against Russia also presents a potential power keg. Belarus is also now in conflict with Moscow. As in the case of Ukraine, Minsk and Moscow are also arguing about gas prices, oil supplies and disabilities in foreign trade. Additionally, Moscow imposed border controls, whereby a two-country agreement on open borders existed for twenty years. Belarus imposed a 5-day visas for citizens of 79 states, including all EU states and the US. This measure is seen in Moscow as the approach of Belarus to the West. Belarus has been courting the West with trade playing both sides of the world Russia v West.

Moreover, Belarus is now also breaking up, where border controls are apparently being carried out by Russia. We are witnessing the fragmentation of countries and governments all due to failing economic systems. We are looking at the Baltic countries opposing Russia. Estonia, Latvia and Lithuania are all full members of the EU and NATO. So where exactly does NATO end and Russian influence begins? This is becoming a very dangerous and grey area.

The new US Secretary of State Rex Tillerson may help and he was a wise choice on the part of Trump. NATO is the focus of attention right now. The military alliance is dominated by Washington yet this is actually contradictory to the Treaty of Lisbon. Donald Trump has questioned NATO as a whole, and the press do not fully explain what has evolved. Is the USA just paying the military bill for the EU yet the Treaty of Lisbon makes the NATO the national force of the EU?

The new US Secretary of State Rex Tillerson expressed it best: “Russia is dangerous, but predictable”. Tillerson does know Russia well and far better than any politician filling that role before. Tillerson could actually establish a dialogue with Russia to secure world peace. The machinations of Obama have merely ended dialogue and reestablished the cold war that took more than 30 years to thaw. Democrats are too preoccupied with trying to stop Trump and fueling protests to distract the press and the American people from the real risk of war the Obama administration has created.