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Israel, Gaza, and the Struggle for Oil

Israel, Gaza, and the Struggle for Oil

Aerial View of Haifa oil refineries. Photo: Meronim, CC BY-SA 4.0 Deed.

It was the sign that got to me. I was standing with protesters outside the Burlington (VT) City Hall at a rally organized by Jewish Voice for Peace. To my left I spotted a man, grim-faced and silent, holding aloft a piece of cardboard with these words scratched in black:

“Jews against Genocide.”

“So it has finally come to this,” I said to myself.

Why, I wondered, would Israeli Prime Minister Benjamin Netanyahu and the Biden administration risk their standing in the world and ignore calls for a ceasefire? Did they have an unspoken agenda?

As  a chronicler of the endless post-9/11 wars in the Middle East, I concluded that the end game was likely connected to oil and natural gas, discovered off the coast of Gaza, Israel and Lebanon in 2000 and 2010 and estimated to be worth $500 billion. The discovery promised to fuel massive development schemes involving the US, Israel, and Saudi Arabia.

Also at stake was the transformation of the eastern Mediterranean into a heavily militarized energy corridor that could supply Europe with its energy needs as the war in Ukraine dragged on.

Here was the tinderbox waiting to explode that I had predicted in 2022. Now it was exploding before our very eyes. And at what cost in human lives?

Eastern Mediterranean, Oil and Gas Reserves

Map of the Eastern Mediterranean region showing the area included in the USGS Levant Basin Province assessment. Photo credit: USGS.

Reflections on the Israeli War on Gaza

The year 1975 was my last in beautiful, cosmopolitan Beirut, Lebanon, before it descended into 15 years of brutal civil war, killing 100,000 people.

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The Great Simplification Ahead

The Great Simplification Ahead

“Until debt tear us apart”

There is no denying that a major economic downturn is now in the books, and that lacking an energy miracle, the world economy is about to go through a major shift. After discussing the faulty nature of prevailing economic metrics (GDP) in last week’s essay, and understanding how economic growth has turned into stagnation 18 years ago already, let’s turn our eyes towards the future. What might the world economy look like after the onset of the coming crisis? How would world leaders react? Could gold or bitcoin save the day? Let’s dive in.


There is a yawning gap between real economic productivity and debt in the world economy. Despite the fact that GDP seems to be growing, real economic output (best measured by energy consumption) has been stagnating for almost two decades now. As a result Western nations have lost their dominance in the world economy, and now face a steep decline due to an ever worsening energy balance and their colossal import dependence.

You see, this is not a matter of money or the lack thereof. Governments all around the world had the chance to print all the money they wanted in the past two decades. There were two thing they could not conjure up, however: cheap raw materials and energy. Contrary to common wisdom, the green energy transition is not a miracle waiting to happen, only an expensive and utterly unsustainable addition to the existing fossil fuel energy infrastructure. Shale oil, the much heralded “solution” to peak oil, has also run its course and now is close to reaching its all time high… Only to embark on a steep decline afterwards. None of this is a monetary question, only a matter of geology and economics: resource depletion and the resulting cost increase. Printing money does not solve any of these issues, only creates more inflation.

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The Harsh Truth: We’re Using More Oil Than Ever

In this age of climate crisis, the world is consuming more crude than ever. Peak oil demand? Not yet. Maybe one day, perhaps even soon, around 2030. For now, however, the global economy still runs on oil.

It will take a while before governments certify it, but every piece of data points in the very same direction: In the past few weeks, global oil demand has surpassed the monthly peak set in 2019 before the Covid-19 pandemic.Expressed in barrels a day, the fresh record high in global oil consumption totals about 102.5 million, likely hit in the last few weeks in July and above the 102.3 million of August 2019. Picture this: We use enough crude to fill about 6,500 Olympic-size swimming pools every day. More than a third of those swimming pools would be needed to quench the thirst of two countries: the US and China.

It’s not unexpected.  The International Energy Agency, which compiles benchmark supply and demand statistics, has anticipated it for months. It was just a question of timing, since oil demand surges during the northern hemisphere summer, when millions of European and American families guzzle gasoline and jet fuel during their holidays. The wholesale cost of refined products, such as gasoline, is surging too.

Granted, the new demand milestone is just one flimsy data point. Global oil consumption statistics are routinely revised, and a final figure probably won’t be set in stone until next year, or even 2025. The margin of error is relatively wide, too, probably at least 1 million barrels a day. But experience indicates that demand is typically revised higher, rather than lower.

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OPEC+ Considering Additional 1 Million Barrel Oil Production Cut Amid Outrage Over Gaza War

OPEC+ Considering Additional 1 Million Barrel Oil Production Cut Amid Outrage Over Gaza War

Two days ago, JPMorgan’s head of energy strategy Christyan Malek warned that amid the recent plunge in oil prices, driven as much by shorting CTAs (who today are in full-blown short squeeze panic mode) as the BIden admin, the oil market was underestimating the chances of deeper supply cuts during this month’s Nov 26 OPEC+ meeting.

“The market’s probably assuming very little chance of that happening, I’d say it’s much higher than that – not as a base case but as a scenario” Malek told Bloomberg in an interview, adding that deeper curbs would be in order to get ahead of potential weakness in the first half of next year.”

“We may need to see” a cut “given where the balances are, particularly given the demand trending.” And while “there’s a view that Saudi is tapped out”, Malek said that he doesn’t believe that: “I think there’s more flex if they wish to cut. We could see them do sizable cuts from here; having said that, I think it’s more likely they’ll want to socialize them among their OPEC peers – a collective cut rather than one on their own.”

And so, from JPM’s strategist to OPEC+’s ears because moments ago the FT reported that what until recently was unthinkable, is suddenly all too possible and largely thanks to the (mostly) Arabic resentment at what Israel is doing in Palestine: according to the FT, not only is Saudi Arabia prepared to prolong oil production cuts well into next year but Opec+ is weighing further reductions in response to falling prices and rising anger over the Israel-Hamas war.

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The Sword of Damocles

The Sword of Damocles

An economic worst-case scenario for the Israeli-Palestine war (Free)

On Tuesday, I published a post on X (Twitter), which summarized an economic worst-case scenario for the Israeli-Palestine war. It included 10 points:

  1. The conflict escalates into a regional war with the U.S. becoming directly involved.
  2. OPEC responds with an oil embargo.
  3. Iran closes the strait of Hormuz.
  4. The price of oil reaches $300/barrel.
  5. Europe succumbs into a full-blown energy crisis due to LNG shortage.
  6. Massive spike in energy prices reinvigorates inflation with central banks responding accordingly.
  7. Financial markets and the global banking sector collapse.
  8. Debt crisis engulfs the U.S. forcing the Federal Reserve to enact yet another financial market bailout.
  9. Petrodollar trade collapses.
  10. Hyperinflation emerges.

In this entry, I go through each step.

History rhymes?

In October 1973, Israel fought the Yom Kippur War against a coalition of Arab States led by Egypt and Syria. As a result of this, the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo against western countries supporting Israel. In six months, the price of oil rose by nearly 300%, globally, and even more in the U.S., which at that time had become dependent on the Middle-Eastern oil.

In the current time, in the worst-case, Israel launches a major counter-offensive against Palestine leading to a declaration of war, to Israel, from Iran and Syria (others may join too). In this situation, the U.S. would be almost surely forced to respond and take part in the defense of Israel. The Ford carrier strike group (which includes world’s largest warship, USS Gerald R. Ford) has been dispatched to eastern Mediterranean and the Biden administration has been reported of considering sending another carrier strike group to eastern Mediterranean. There are also rumors of U.S. military cargo planes making routine trips to Israel.

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Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

It has recently become clear to me that heavy oil, which is needed to produce diesel and jet fuel, plays a far more significant role in the world economy than most people understand. We need heavy oil that can be extracted, processed, and transported inexpensively to be able to provide the category of fuels sometimes referred to as Middle Distillates if our modern economy is to continue. A transition to electricity doesn’t work for most heavy equipment that is powered by diesel or jet fuel.

A major concern is that the physics of our self-organizing economy plays an important role in determining what actually happens. Leaders may think that they are in charge, but their power to change the way the overall system works, in the chosen direction, is quite limited. The physics of the system tends to keep oil prices lower than heavy oil producers would prefer. It tends to cause debt bubbles to collapse. It tends to squeeze out “inefficient” uses of oil from the system in ways we wouldn’t expect. In the future, the physics of the system may keep parts of the world economy operating while other inefficient pieces get squeezed out.

In this post, I will try to explain some of the issues with oil limits as they seem to be playing out, particularly as they apply to diesel and jet fuel, the major components of Middle Distillates.

[1] The most serious issue with oil supply is that there seems to be plenty of oil in the ground, but the world economy cannot hold prices up sufficiently high, for long enough, to get this oil out.

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The Fed Cannot Fix Today’s Energy Inflation Problem

The Fed Cannot Fix Today’s Energy Inflation Problem

There is a reason for raising interest rates to try to fight inflation. This approach tends to squeeze out the most marginal players in the economy. Such businesses and governments tend to collapse, as interest rates rise, leaving less “demand” for oil and other energy products. The institutions that are squeezed out range from small businesses to financial institutions to governmental organizations. The lower demand tends to reduce inflationary pressure.

The amount of goods and services that the world’s economy can produce is largely determined by fossil fuel supplies, plus our ability to use “complexity” in many forms to produce the items that the world’s growing population requires. Adding debt helps add complexity of various types, such as more international trade, more advanced education, and more specialized tools. For a while, the combination of growing energy supplies and growing complexity have helped pull economies along.

Unfortunately, the world’s oil supply is no longer growing. Without an adequate oil supply, it becomes difficult to maintain complexity because complex solutions, such as international trade, require adequate oil supplies. Inasmuch as we seem to be reaching energy and complexity limits, nothing the regulators try to do to change the debt and money supplies–even reeling them back in–can fix the underlying oil (and total energy) problem.

I expect that the rich parts of the world, including the US, Europe, and Japan, are in line to be adversely affected by high interest rates this time. With their high levels of complexity, they are among the most vulnerable to disruption when there is not enough oil to go around.

Figure 1. World oil consumption divided into consuming areas, based on data of BP’s 2022 Statistical Review of World Energy. Europe excludes Estonia, Latvia, Lithuania, and Ukraine.

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Peak Oil Gets Admitted?

Photo by Adriana Lorena Benavides Estrada on Unsplash

“Oh man… the bullshit piled up so fast [in the energy business], you needed wings to stay above it.”

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Will Nuclear War, Debt Collapse or Energy Depletion Finish the World?

WILL NUCLEAR WAR, DEBT COLLAPSE OR ENERGY DEPLETION FINISH THE WORLD?

Fragility has probably never been greater in history. Just three words encapsulate the destiny of the world.

The THREE words are: WAR, DEBT, ENERGY

A FOURTH word will financially save the ones who understand its significance. It will also play a major role in the world’s future monetary system. The word is obviously GOLD. As the world moves from a fragile debt based Western system to a commodity and energy based system in the East and South, gold will assume a strategic role in the monetary system.

WAR – WWIII

War is obviously a potentially catastrophic threat since the sheer existence of the world and mankind is now at maximum risk. Wars are horrible whoever starts them. Since the beginning of mankind there have probably been over 100,000 important wars and conflicts.

Wars are horrible whoever starts them. Most wars end in major fatalities and injuries and a massive human and financial cost. And at the end of the war, the situation is often worse than when it started, like in for example Afghanistan, Vietnam, Iraq and Libya which countries the US invaded unprovoked. The same will most probably be the case in Ukraine.

There are always two sides to a war. I learnt many years ago that before we judge someone, we must walk three moon laps in his moccasins.

So let us first walk in Putin’s moccasins.

The whole West hates Russia and have personalised it to Putin. Few realise that many of the people behind Putin are extreme hardliners and much more dangerous. Historically, Ukraine (like many European countries) has had a motley existence. Since the late 1700s to 1991 Ukraine was part of Russia / Soviet Union with a brief interruption after the Bolshevik revolution in 1917.

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Oil To Face “Serious” Supply Problem In 2024 As Production Capacity Runs Out, Goldman Warns

Oil To Face “Serious” Supply Problem In 2024 As Production Capacity Runs Out, Goldman Warns

Heading into 2023, Goldman was bearish on most asset classes, except commodities where the bank forecast a 43% gain as “supply shortages bite.” Since then the commodity picture has ebbed and flowed, and after commodities experienced a modest bounce following China’s unexpected reopening, they have resumed sinking with oil trading just above the Biden admin’s (supposed) SPR refill floor of $72, despite a near consensus that Chinese oil demand will hit record highs in 2023.

So has the recent setback dented Goldman’s optimism? Not at all: in fact, according to Goldman chief commodity strategist, not only will oil rise back above $100 a barrel this year, it will rise much more in 2024 when it will face a serious supply problem as spare production capacity runs out.

Speaking on the sidelines of a conference in Riyadh, Saudi Arabia, on Sunday, Goldman chief commodity strategist Jeff Currie said that with sanctions likely to cause Russian oil exports to drop and Chinese demand expected to recover as the country ends its Covid Zero policy, prices will rise above $100 from their current level of around $80. Meanwhile, doubling down on his key long-term thesis, Currie said that a lack of spending in the industry on production needed to meet demand will also be a driver of higher prices, and this lack of capacity may become a big issue by 2024.

“The commodity super cycle is a sequence of price spikes with each high higher and each low higher,” said Currie, who predicted that by May, oil markets should flip to a deficit of supply compared to demand. That could use up much of the unused capacity global producers have, which will send prices higher.

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As West, Debt & Stocks Implode, East Gold & Oil Will Explode

AS WEST, DEBT & STOCKS IMPLODE, EAST GOLD & OIL WILL EXPLODE 

“The risk of over-tightening by the European Central Bank is nothing less than catastrophic” says Prof Kenneth Rogoff .

At Davos he also said: “Italy is extremely vulnerable. But this could pop anywhere. Global debt has gone up massively since the pandemic: public debt, corporate debt, everything.”

Rogoff believes that it is a miracle that the world averted a financial crisis in 2022, but the odds of a major accident are shortening as the delayed effects of past tightening feed through.

As Rogoff said: “We were very fortunate that we didn’t have a global systemic event in 2022, and we can count our blessings for that, but rates are still going higher and the risk keeps rising.”

But lurking in the murkiness is also the global financial assets/liabilities which is almost $500 trillion including the shadow banking system at 46% of the total. The shadow banking sector includes  pension funds, hedge funds and other financial institutions which are largely unregulated.

oil

Shadow banking is not subject to the normal mark-to-market rules. Thus no one knows what the real position or losses are. This means that central banks are in the dark when it comes to evaluation of the real risks of the system.

Clearly, I am not the only one harping on about the catastrophic global debt/liability situation.

And no one knows the extent of total global derivatives. But if they have grown in line with debt and also with the shadow banking system, they could easily be in excess of $3 quadrillion.

oil

Cultures don’t die overnight, but the US has been in decline since at least the Vietnam war in the 1960s. Interestingly, the US has not had a real Budget surplus since the early 1930s with a handful of years of exception.

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Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies

Rather than cheer the concept of a new currency, we’re better served to look at the velocity of that currency and the cycles of investing that currency in assets denominated in that currency for a low-risk return.

Longtime readers know not to expect me to rubber-stamp anything, be it the status quo or proposed alternatives. Our interests are best served by screening everything through the mesh of independent analysis, a.k.a. contrarianism. Which brings us to the two sources of alt-media excitement in the currency space, the petro-yuan and another wave of proposed <i<>gold-backed currencies.

I’m all for competing currencies. The more transparent and open the market for currencies, the better. In my view, everyone should be able to buy and trade whatever currencies they feel best suits their goals and purposes.

In all the excitement over de-dollarization, some basics tend to get overlooked.

1. The yuan remains pegged to the US dollar, so it remains a proxy for the USD. It will only become a true reserve currency when China lets the yuan float freely on the global FX market and yuan-denominated bonds also float freely on global bond markets. In other words, a currency can only be a reserve currency rather than a proxy if the price and risk of the currency is discovered by global markets, not centralized monetary/state authorities.

2. Most commentators stop on first base of the oil-currency cycle: China buys oil from exporting nations by exchanging yuan for oil. So far so good. But what can the oil exporters do with the yuan? That’s the tricky part: the petro-yuan has to work not just for China but for the oil exporters who will be accumulating billions of yuan.

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The Vital Connection Between Oil and the Economy Revealed in 2 Simple Charts

EU’s Oil Price Cap Creates a Price Cap… on Stupidity

EU’s Oil Price Cap Creates a Price Cap… on Stupidity

MOSCOW, RUSSIA – DECEMBER 1, 2021: Russia’s Foreign Ministry Spokesperson Maria Zakharova gives a weekly press briefing. Russian Foreign Ministry/TASS

The EU and the US went forward with their long-debated, long-telegraphed move to put a price cap on Russian oil at $60 per barrel.

By believing they can pressure suppliers into not hauling Russian oil lest they run afoul of the sanctions that support the price cap, they believe they can take only Russian oil off the market for the long run.

Because of the way oil is actually traded in the real world, versus the way it trades in Janet Yellen’s head, this policy is actually much harder to implement than it actually looks. You don’t buy oil at the crude oil counter at Target or Wal-Mart.

There isn’t a price tag you can look at and say yes or no too. As Tsvetana Paraskova at Oilprice points out, crude contracts are written based on a discount or premium to a benchmark price at a particular moment in time.

“Physical traders rarely trade on a fixed price,” John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg.

“It’s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows,” said Driscoll, who has more than 30 years of trading oil in Singapore.

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Zoltan Pozsar: Gold At $3,600 Is Not Improbable If US Refill Reserves With Russian Oil

In his latest dispatch, Credit Suisse contributor Zoltan Pozsar shifted focus on his ongoing series about Bretton Woods III where commodities will dictate the new world order.

Instead, the author zeroed in on the depleting Strategic Petroleum Reserve (SPR) of the United States, posing the query of what comes next after the White House shipped its last scheduled release.

“Now that SPR releases are over, production cuts by OPEC+, re-routing [of Russian crude oil from Europe to Asia], and price caps (not to mention the risk of China re-opening due to protests), the question for the U.S, becomes what to do with the SPR? Release more? Refill?” pondered Pozsar.

Back in September, as well, US President Joe Biden’s administration said it is looking at refilling its oil reserves should crude oil prices drop below US$80 a barrel. The prices have traversed the levels below that said mark but the White House moved the price target lower in October after it announced its plan to release 15 million barrels of oil more.

“The Administration is announcing its intent to use SPR repurchases to add to global crude oil demand at times when the price of West Texas Intermediate (WTI) crude oil is at or below about $67 to $72 per barrel,” the White House statement then read.

After the US Department of Energy sold the last batch of crude oil from the historic SPR release, the reserves continue to bleed in the hopes of managing rising inflation and local energy prices. The current level is now below the 400-million barrel-mark, poised to hit a nearly 4-decade low.

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Olduvai IV: Courage
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Olduvai II: Exodus
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