Chris’ note: This week at the Cut, we’re spotlighting the big-picture insights of Peter Zeihan.
He’s a geopolitical strategist and New York Times bestselling author. His fourth book, The End of the World Is Just the Beginning, hit shelves this summer. And it’s a fascinating read.
It tracks the death of globalization. And it maps a new global order in which countries will have to make their own goods… grow their own food… secure their own energy… fight their own wars… and do it all with shrinking, aging populations.
They discuss what Russia’s weaponization of oil means for Russia and the U.S… China’s vulnerabilities as globalization collapses… and why the U.S. has all it needs to thrive.
Nomi: Your new book charts the breakdown of globalization… and the new global order that will emerge. One of the major fault lines is Russia’s war against Ukraine and its energy war against Europe. So let’s start there. How is Russia’s war impacting global energy markets?
Peter: Look at oil, for example. Russian oil isn’t like U.S. oil in Texas. If it gets cold, Texans lose their minds. But oil production there, broadly speaking, is fine. If you have to shut in a well, you can turn it back on in a couple of weeks when the weather improves.
It doesn’t work that way in the permafrost. As anyone who’s from the north understands, as long as you’re moving, you’re okay. But if you stop, you freeze to death. It’s the same with oil.
So if they have to stop production at the wells due to sanctions, they have to shut it in. They inject a thick mud into the wellhead to stop the flow of oil. And pressure builds up all the way back to the wellhead.
Then everything stops moving in the permafrost, which means it freezes. So you get cracks throughout the entire system – the valves, the wellhead, the pipes.
And you then have to go out and manually fix everything.
The last time the Russian network went offline was in 1992, after the Soviet Union collapsed. This killed off the Soviet industrial base. And there was no more demand for the crude.
It took them 30 years and several tens of thousands of foreign engineers working nonstop to fix. That’s no longer an option. Halliburton, ExxonMobil, BP… they’ve all left. And they’re not coming back.
So, we’re looking at 4 to 6 million barrels a day of Russian – and probably Kazakh – oil going away and never coming back. That’s about 4% to 6% of global daily oil consumption.
Nomi: We’ll talk about what this means for America in a moment. But first, what does this mean for big energy importers such as China? In your book, you’re quite bearish on China’s prospects in the coming post-globalized world.
Peter: The demographic trends in China are terminal. Its population is shrinking at an astonishing rate.
In 2000, the Chinese already had the fastest-aging workforce – ever. They’ve now released data from their 2020 census. And they’ve admitted they overcounted their population by more than 100 million people. Almost all of them were aged below 35. And most of them were women.
So most of those overcounted millions would have been of childbearing age. There’s no way the Chinese can regenerate their population without them.
But back to your question, China imports about three-quarters of its oil. And about three-quarters of that foreign supply comes from the Persian Gulf or farther afield. Most of the balance comes from Russia.
But that Russian oil comes from those permafrost wells in Eastern Siberia. And the Russians don’t know how to keep the wells open.
Or look at agriculture. Most Chinese land is crap. And a lot of it is drying out thanks to droughts there. So China depends on imports to feed its 1.4 billion people.
Nothing about this works. Throw in a cult of personality around Chinese leader Xi Jinping that deepens by the day, and the Chinese can’t change any policies.
They’re hitting their heads into the wall over and over until something cracks. And the something that cracks won’t be the rest of the world.
Nomi: That’s a refreshing view. There’s a widely held idea that China will steal our lunch. How does the U.S. come out of all of this?
Peter: The U.S. is in almost the opposite situation to China. We’re the world’s largest oil producer. We’re also the world’s largest exporter of refined crude oil products.
We’ll argue over the details because we’re Americans. That’s just how it goes. But I predict the Biden administration will dust off the authority Congress gave the executive branch in 2015 to shut off U.S. exports.
This will keep a lot of shale oil within the U.S. and force our refineries to retool to process it. It will bring down the costs of most refined products – including gasoline. And it will give the U.S. more energy security.
There’s also a push from both U.S. political parties to re-shore as much manufacturing as we can.
We have a good chance to do that relatively successfully. And when you’re building out domestic supply chains, you’re increasing your industrial capacity. And we need to double ours within the next five years.
That’s inflationary. But it also means growth. And when you get to the other side of this – once we build that new capacity and re-shore our supply chains – we’ll have a disinflationary trend. That will benefit all Americans.
But every piece of the supply chain the U.S. brings home is a loss to our trading partners. Whether it’s in energy, food, or manufacturing, we’ll see increased security for Americans. And it will leave everyone else to fend for themselves.
Nomi: What does this mean for the U.S. dollar? It recently became as strong as the euro for the first time in 20 years. And it’s towering over other currencies.
Peter: You’re right. It’s all going to happen against the backdrop of a currency system that’s becoming singular.
The U.S. dollar is the world’s reserve currency. And we’ve always thought of the euro as the world’s No. 2 reserve currency. After all, the euro zone is world’s third largest economy, after the U.S. and China. But the demographic decline there was terminal two or three decades ago.
Now, we’re reaching the point where Germany and Italy – two of the largest economies in the euro zone – are aging into mass retirement with about a quarter of the population over the age of 60.
As the globalized world fractures, it’s important to remember that not all pieces are created equal.
When globalization breaks down, you get countries with less reach, fewer materials, less manufacturing, and smaller markets. But that’s not true for everyone. Some are larger and have access to more essentials than others.
Nomi: And you’re saying the U.S. is in that second category?
Peter: Absolutely. NAFTA – the trade bloc made up of the U.S., Canada, and Mexico – is roughly one-third of the global economy. And it’s largely self-sufficient in everything you need to make the global economy work.
The U.S. has the military capacity to access raw materials that, for whatever reason, we don’t make domestically. For example, lithium, which goes into electric vehicle batteries. We could easily reach out to foreign sources such Argentina and Chile.
I’m not saying the next five years will be easy. But the U.S. has access to everything it needs – raw materials, agriculture, a powerful domestic consumer base, finances, access to friendly international markets – to make a go of it.
Chris here again. Tomorrow we’ll take a closer look at Peter’s new book, The End of the World Is Just the Beginning. You can snag your own copy here.
And if you’re one of Nomi’s Distortion Report subscribers, or a Legacy Elite subscriber, you can catch Nomi’s full interview with Peter here.