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Running on Empty, Part IV

Running on Empty, Part IV

How the War between Russia and Ukraine is Destroying the Petrodollar System

Welcome to Part IV of Running on Empty, my four-part analysis of the Petrodollar system.

Part I of this series explained that the US dollar is the world’s first reserve currency that is not backed by precious metals. Instead it is backed by other people’s oil. Because of a secret treaty between the US and Saudi Arabia, petroleum can only be purchased with dollars. Every country needs oil, so everyone country needs dollars and sells imports to the US to get them. Demand for dollars has made the USD the primary American export, allowing the US to deindustrialize and financialize its economy.

Part II explained how the petrodollar has grossly enriched American asset holders (stocks, bonds, and real estate) and painfully impoverished American wage earners. Under the petrodollar system, dollars are created by private banks for profit. These dollars are recycled into the economy by OPEC nations, causing stocks, bonds, and real estate to rise. This profitable exchange is enforced by American military might, which punishes any country that seeks to exit the petrodollar system.

Part III explained that for the petrodollar system to function, America needs to be able to project power worldwide to secure international trade and enforce the system. America secures global commerce and projects military power by commanding the World Ocean, by which 90% of all goods are trafficked. To overcome America’s naval supremacy, both Russia and China have sought to establish control of the World Island, the Eurasian supercontinent that houses most of the world’s population and resources. The Russo-Ukraine War is a proxy war between the uncontested master of the World Ocean (America) and the would-be masters of the World Island (China and Russa).

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February Non-OPEC Oil Production Climbs

February Non-OPEC Oil Production Climbs

Below are a number of crude oil plus condensate (C + C ) production charts for Non-OPEC countries created from data provided by the EIA’s International Energy Statistics and updated to February 2022. This is the latest and most detailed world oil production information available. Information from other sources such as OPEC, the STEO and country specific sites such as Russia, Brazil, Norway and China is used to provide a short term outlook for future output and direction for a few countries and the world.

February Non-OPEC production increased by 303 kb/d to 49,926 kb/d. Of the 303 kb/d increase, the biggest increase came from Canada 225 kb/d. Offsetting the increase were decreases from Brazil 116 kb/d and China 92 kb/d. The Febuary 2022 output of 49,926 kb/d is 2,274 kb/d lower than the March pre-covid rate of 52,200 kb/d.

Using data from the June 2022 STEO, a projection for Non-OPEC oil output was made for the time period March 2022 to December 2023. (Red graph).  Output is expected to reach 51,038 kb/d in December 2023. This is a 536 kb/d increase over the level reported in the previous report. Note the production drop of 848 kb/d to 48,947 kb/d in April in the red graph is associated with a production drop in the former Soviet Union.

Above are listed the world’s 11th largest Non-OPEC producers. The original criteria for inclusion in the table was that all of the countries produced more than 1,000 kb/d. The UK has been below 1,000 kb/d since January 2021. 

In February 2022, these 11 countries produced 84.5% of the Non-OPEC oil. On a YoY basis, Non-OPEC production increased by 2,929 kb/d while on a MoM basis production, it increased by 303 kb/d. World YoY February output increased by 6,750 kb/d. 

Production by Country

The EIA reported Brazil’s February production decreased by 116 kb/d to 2,917 kb/d. Brazil’s National Petroleum Association reported that April’s output increased by 18 kb/d to 2,999 kb/d, reversing February’s decline. (Red Markers). 

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Running on Empty, Part II

Running on Empty, Part II

How the Petrodollar Poisoned Foreign Policy with Financial Profiteering

Welcome to Part II of Running on Empty, my three-part analysis of the Petrodollar system. Part I of this series explained what the petrodollar system is, how it came to be, and what its financial effects have been on the United States. In Part II, I’ll explain the petrodollar’s implications for foreign policy. In Part III, I’ll show how those implications paved the way for the Russo-Ukraine War, and why that’s causing the system to break down.

America’s Chief Export is the US Dollar

As explained in the previous installment, the petrodollar system is based on an agreement between the US and Saudi Arabia. Under the terms of the deal, the US guarantees the security of Saudi Arabia and in exchange, Saudi Arabia guarantees that all petroleum is sold by OPEC for US dollars, with the US dollars re-invested into America via petrodollar recycling. The result: Since everyone needs petroleum, everyone needs US dollars. Oil replaces gold as the hard backing for the dollar. 1

Since the petrodollar system was put in place, the US has enjoyed a comparative advantage in manufacturing currency that no other nation enjoys. Under conditions of free trade, a country produces and exports more of a good for which it a comparative advantage, and produces less and imports more of the goods for which it doesn’t. And that’s what has happened: Since the petrodollar system was put in place in 1973, America has produced more and more dollars and produced less and less of everything else. The dollar is today our nation’s #1 export.

How large is the circulation of US dollars? As of April 2022, the American money supply, which economists call M2, stands at $21,728 Billion Dollars. M2 includes three types of money:

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Running On Empty

Running On Empty

Well, we definitely seem to have passed a threshold of sorts. For most of the sixteen years since I started blogging, one of the things I had to point out constantly to my readers was the slow pace of historical change.  Whenever I posted an essay on the twilight of industrial society, I could count on fielding at least one comment from a reader who expected the entire modern world to crash and burn in the next few months.  I’d have to patiently remind them that Rome wasn’t sacked in a day—that it takes years of breathtakingly moronic decisions motivated by mindless greed, vicious partisan hatred, blind ideological dogmatism, and a total unwillingness to think about the long-term consequences of short-term decisions, to bring a civilization down.

Now of course all through the years while I was telling people this, decisions of the kind I’ve just described, guided by motives of the sort I’ve just characterized, were standard operating procedure throughout the industrial world.  Those proceeded to have their usual effect. I still don’t expect modern civilization to crash to ruin in the next few months, but it’s reached the point that I no longer have to tell people that the Long Descent won’t show up as soon as they think. No, at this point it’s my ironic duty to suggest that they make whatever preparations they have in mind sooner rather than later, because the world shows no signs of waiting for them.

As I write this, the most obvious set of problems has to do with the economies of the United States and its client states. Those of my readers who follow financial media already know that signs of economic trouble are elbowing one another out of the way to get to the front pages…

…click on the above link to read the rest of the article…

Russia’s Oil Output Is Plummeting, And It May Never Recover

Russia’s Oil Output Is Plummeting, And It May Never Recover

  • Russia’s oil output is plummeting, and the decline is expected to worsen in May.
  • OPEC recently warned that markets could see the loss of more than 7 million barrels per day of Russian oil and other liquids exports.
  • With many global producers constrained in their capacity to boost production fast, oil prices are likely to remain elevated for the foreseeable future.

Russian oil production is falling. In March, it shed half a million bpd, which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month. These barrels may not be returning to the market any time soon. As the European Union targeted a barrage of sanctions on Moscow, oil was excluded as a direct target but financial and maritime sanctions affected the industry. Now, the EU is proposing a full oil embargo, save for a handful of member states too dependent on Russian oil to comply, and this will mean a further loss of barrels at a time when the global oil market is already stretched thin.

“We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions,” the secretary-general of OPEC, Mohammed Barkindo, told the European Union last month.

This does not appear to have made any lasting impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo. Meanwhile, alternative suppliers would struggle to fill the void left by Russian oil.

…click on the above link to read the rest of the article…

OPEC Update, March 2022

OPEC Update, March 2022

The OPEC Monthly Oil Market Report (MOMR) for March 2022 was published this week. The last month reported in each of the charts that follow is February 2022 and output reported for OPEC nations is crude oil output in thousands of barrels per day (kb/d). In most of the charts that follow the blue line is monthly output and the red line is the centered twelve month average (CTMA) output.

Figure 1
Figure 2

OPEC output increased by 440 kb/d according to secondary souces in February. January 2022 output was revised higher by 52 kb/d from what was reported last month and December 2021 output was revised lower by 35 kb/d compared to the February 2022 MOMR. Most of the increase in OPEC output was from Saudi Arabia(141 kb/d) followed by Libya (105 kb/d), Iran (44 kb/d), Iraq (36 kb/d), and Kuwait (32 kb/d). Six OPEC members saw increases of less than 27 kb/d (total of 101 kb/d for that group of 6 nations). Only two OPEC nations had lower output in February with a total decrease of 19 kb/d.

In the chart below OPEC 13 crude and Russian C+C are shown, I expect that OPEC 13 crude plus Russian C + C will likely top out at about 40500 kb/d, if sanctions are not removed from Iran and Venezuela, potential future increase for OPEC 13 and Russia is about 1000 kb/d without Iranian sanctions relief. If Russia falters due to ongoing sanctions and cannot increase output from the February 2022 level, potential OPEC capacity is reduced to about 700 kb/d.

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Could The World Really Run Out Of Oil?

Could The World Really Run Out Of Oil?

Stop staring at your gains from the energy stocks for a second here. Take a seat in a nice quiet place and ask yourself this one really simple question: if oil demand continues to grow at ~1 million b/d for the next 8-10 years, where is the oil supply coming from to meet it?

Rystad Energy, along with many others, including my friend Tracy Shuchart as well as the work of Josh Young over at Bison, show that US oil production will peak in 2023/2024. Outside of OPEC’s core members, Saudi Arabia, UAE, and Kuwait, there’s no spare capacity (with the exception of Iran).

Part of the reason we’re in this situation is because of the shale boom. If it wasn’t for the Permian back in 2016, we would already be deep into an oil supply crisis. We need another Permian, and that’s unlikely. Furthermore, we also know that shale as an industry never produced a profit. Those investors who got in and didn’t get out in time (most) all lost their shirts. Trying to kick that dead horse back to life will require horse-sized steroids. They will come with higher oil prices, but it’s not gonna happen for some time and it’s not gonna solve the immediate problem.

oil rigsWithout demand destruction, this oil supply deficit is going to be hard to control, and with it, oil prices though due a pullback here and now are going higher and for longer than many think.

Just look at the broader landscape in the oil market today. You can list the number of countries that can actually grow oil production on one hand:

  • OPEC (Saudi, UAE, Kuwait), Iraq, and Russia are now tapped out (e.g. under compliance to OPEC+ agreement)
  • US
  • Canada
  • Brazil
  • Norway

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Oil Rally Fueled By OPEC Production Shortfall

Oil Rally Fueled By OPEC Production Shortfall

  • In December, OPEC+ added 253,000 barrels daily to its combined production falling well short of its 400,000-bpd target
  • OPEC’s underproduction fuels speculation about the cartel’s ability to ramp up production
  • Morgan Stanley: global spare oil production capacity will shrink from 6.5 million bpd at the moment to just 2 million barrels daily by the middle of the year

That OPEC’s spare oil production capacity was a problem that was only going to get worse with time became clear last year when the first reports began to emerge that the cartel and its partners led by Russia are not adding as much oil to their monthly output as agreed. Now, the gap between commitment and output has deepened, adding fuel to an already strong price rally.

In December, OPEC+ added 253,000 barrels daily to its combined production falling well short of its 400,000-bpd target for yet another month in a growing row. Naturally, this fueled concern about the security of global supply amid forecasts from the International Energy Agency that oil demand is going to exceed pre-pandemic levels later this year.

This latest forecast could be confusing to many who follow the agency’s output. In December, the IEA said that oil demand growth was going to slow down this year. It also forecasted a possible oversupply on the oil market for the current quarter, citing the effect of the Omicron variant on fuel consumption and rising non-OPEC production.

To be fair, the agency noted the oversupply would materialize if several things happen, among them, Saudi Arabia and Russia pumping at record rates as “remaining OPEC+ cuts are fully unwound.” Yet it appears to have greatly underestimated the resilience and strength of demand. No wonder a lot of other forecasters are talking about oil reaching and topping $100 per barrel.

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OPEC’s Joint Ministerial Monitoring Committee Is About To Begin: Here’s What To Expect

OPEC’s Joint Ministerial Monitoring Committee Is About To Begin: Here’s What To Expect

  • OPEC+ is expected to continue with its plan to increase its production quota 400k BPD
  • The Omicron variant impact is expected to be mild and short-lived, according to the JTC findings
  • The meeting is expected to be smooth, but the issue of underproduction by some states may cause some friction

OVERVIEW: Tuesday’s Joint Ministerial Monitoring Committee (JMMC) will start at 12:00GMT/07:00EST followed by the OPEC+ meeting at 13:00GMT/08:00EST. Delegates suggested OPEC+ is expected to maintain plans to increase its February output quota by 400k BPD. The Joint Technical Committee (JTC) reviewed market fundamentals and downplayed the demand impact from the Omicron variant. The meeting is expected to be straightforward, but the issue of underproduction by some states (amid maintenance and underinvestment) may cause some friction among producers.

DEMAND DEVELOPMENTS: The Omicron variant’s mild diagnosis so far has alleviated much of the initial fears seen in the earlier days of discovery. Some positive noises have also been emanating from some European countries – a Danish health chief remarked the Omicron variant is bringing about the end of the pandemic, whilst a German COVID expert suggested Omicron could take the pandemic into an endemic situation – more comparable to a common cold or flu. The UK and US meanwhile refrained from imposing much stricter measures, albeit China stands by its “zero-COVID” policy. Elsewhere, participants also keep the US winter storms on the radar impacting activity and potentially oil transit, whilst some airlines cancelled hundreds of flights amid the weather.

SUPPLY DEVELOPMENTS: Some OPEC+ members are struggling to meet their upped production quotas amid a mixture of maintenance, underinvestment and domestic unrest. The IEA last month suggested producers missed their targets by 730k BPD and 650k BPD respectively. Meanwhile, Libya – currently exempt from OPEC+ quotas – shuttered a further 200k BPD of production to fix a broken pipeline.

Running Out of Spare Capacity

Running Out of Spare Capacity

Global oil markets could not have looked grimmer than back in the summer of 2020. COVID cases were increasing again and further global economic lockdowns were being threatened. Only two months before, oil prices had crashed into negative territory for the first time in history as global inventories had surged and threatened to overflow. Between the never-ending pandemic and electric vehicles, common investment wisdom believed oil demand was in secular decline, bloated inventories would remain elevated forever, and oil prices would never recover.

At Goehring & Rozencwajg, we love to undertake in-depth insightful research that identifies newly developing investment trends and often comes up with conclusions that differ vastly from consensus opinion. Our goal is to share these results with our investment clients and partners at least twelve months before they become headline news in the financial press. This is an ambitious goal and we don’t always get it right. However, the satisfaction in recognizing trends long before the general investment community not only brings large profits to our investors, but a huge amount of professional pleasure to us as well.

To that end, we titled our 2Q2020 letter “On the Verge of an Energy Crisis”. At the time, no one agreed with us. Now headline after headline talks of an “unforeseen” energy panic. It looks like the energy crisis we discussed 14 months ago is now here.

If the energy crisis has arrived, where does Goehring & Rozencwajg see things 12 months from now? By the end of 2022, we believe global oil demand will have exceeded pumping capability for the first time in history. Just as no one agreed with our assessment of an emerging energy crisis this time last year, almost no one agrees us today either. Instead, conventional wisdom strongly believes OPEC spare capacity will be returned, eventually throwing the market into huge surplus in 2022.

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OPEC and Russia will pump more oil in January despite price plunge

OPEC and Russia will pump more oil in January despite price plunge

Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, attends the COP26 climate summit in Glasgow in November.

London (CNN Business)Saudi Arabia, Russia and other leading oil producers have decided to stick with plans to increase supply in January despite a recent plunge in prices driven by fears of a new glut.

The agreement was reached Thursday at a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and key allies, known as OPEC+. Global oil prices have fallen more than 20% since late October.
Brent crude futures, the global benchmark, had soared about 70% since the beginning of the year, but began falling in November when the United States and other major oil consuming nations agreed to release millions of barrels from their strategic reserves to try to cool gasoline prices and prevent a further boost to inflation.
The losses accelerated as Covid-19 cases surged in Europe and the Omicron variant emerged as a potential new threat to economic activity.
In its statement, OPEC+ said it would continue to take stock of the pandemic, monitor the oil market closely, and stood ready to make “immediate adjustments if required.” It has scheduled its next meeting for January 4.
Analysts had been expecting OPEC+ to pause an output increase of 400,000 barrels per day scheduled for January given the recent price fall and uncertainty over the trajectory of the pandemic and its impact on oil demand. Brent crude and US oil futures, which were trading higher earlier Thursday, turned negative on the announcement before recovering to trade about 1% higher at around $69 and $66 a barrel respectively…

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Pretty Please? US Trying To Persuade Russia To Lift Oil Output

Pretty Please? US Trying To Persuade Russia To Lift Oil Output

Interfax is reporting Thursday that the United States is urging Russia to raise oil output in order to lower global prices, following the Biden administration’s Tuesday announcement it plans release 50 million barrels of crude from the U.S. Strategic Petroleum Reserve, amid predictions of $100 oil.

“The US has been putting pressure on OPEC and its partners in recent weeks to raise oil output, overtures which have been rebuffed,” Bloomberg reports based on statements from the Russian Foreign Ministry indicating the ongoing US attempt to persuade Moscow.

“OPEC meets next week, and officials will be mulling whether to continue easing its output curbs by 400k BPD per month, or perhaps pause given nations of consumers will be releasing a total of 70-80mln barrels ahead,” the report notes.

Perhaps the Kremlin would be more willing to play nice at a moment Washington comes calling, hat in hand, if it weren’t subject of US sanctions against Russian officials and constant allegations of political ‘interference’ in the West, with Putin widely cast in American media as this decade’s big bad geopolitical bogeyman.

At the end of October Russian President Vladimir Putin hinted that the OPEC+ cartel might put out more barrels than was previously announced, but also noted “Not all countries are able to significantly raise oil production.”

“Currently, the OPEC+ countries are increasing production volumes, even slightly more than they agreed to do, but not everyone can do it. Not all oil-producing countries are able to quickly increase oil production. This is a long-term process, a long cycle,” Putin said at the time in front of the Valdai discussion forum.

He then took his familiar swipe at the European and Western hysteria and obsession with “going green”…

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The End Of Venezuela’s Oil Era

The End Of Venezuela’s Oil Era

Venezuela, once Latin America’s largest oil producer and a founding member of OPEC, has seen its economically vital oil industry collapse triggering one of the worst economic and humanitarian crises of the century. The pain is far from over for Venezuela’s people and the country’s failing economy. Before 1920, Venezuela was a poor agricultural country facing many of the developmental issues plaguing Latin America. The country’s journey to becoming a crude oil superpower, leading petroleum state, and founding OPEC member began in 1914 with the drilling of the Zumaque well in the Mene Grande field on the eastern shores of Lake Maracaibo. This was Venezuela’s first commercial oil well and it launched a monumental oil boom that transformed the country and by 1950 saw it become the world’s fourth wealthiest nation per capita. Venezuela was not only heralded as Latin America’s richest nation but also its most developed. By the 1970s, the country, which is now a socialist dictatorship, was lauded as Latin America’s most stable democracy at a time when most nations in the region were ruled by military dictatorships. By the 1980s, Venezuela’s democracy was unraveling because of a global recession and sharply weaker oil prices. These events weighed heavily on the economy, and government spending, causing the country to spiral into debt. By the late-1980s Caracas had turned to the International Monetary Fund for help. The IMF recommended market-oriented neoliberal economic reforms including savage budget cuts, primarily impacting social programs such as public health and education. When these reforms were implemented by Caracas, they triggered considerable civil unrest. The reforms also sparked runaway inflation which only worsened the suffering of every-day Venezuelans. Those events illustrated the substantial dependence of Venezuela’s economy on oil and the country’s vulnerability to weaker prices…

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California Gas Prices Reach New Record High

California Gas Prices Reach New Record High

The average price of a regular gallon of gasoline in California reached a record high on Monday as sticker shock continues to anger drivers paying more at the pump.

Monday’s average price for a gallon of regular unleaded gas in California rose to $4.682, according to the American Automobile Association. The price broke the previous record of $4.671 set in October 2012.

Mid-grade unleaded gasoline also rose to an average price of $4.868. Premium unleaded gasoline reached an average of $4.997, with diesel at $4.816.

The jump is most noticeable when compared with gasoline prices one year ago. In California, the average price at the same time in 2020 was just $2.125 per gallon for regular unleaded fuel.

The prices also make California, the most populated state in the nation, the state with the highest average gas prices in the nation, according to the data.

The Automobile Club of Southern California noted the price increases come as millions of people across the state prepare to travel for the Thanksgiving holiday.

“The Auto Club is projecting 4.4 million travelers for the Thanksgiving holiday, with 3.8 million of them driving to their holiday destinations,” Auto Club spokesman Jeffrey Spring said.

White House Press Secretary Jen Psaki said on Friday that increased gas prices show the federal government needs to invest more in green energy alternatives.

“Our view is that the rise in gas prices over the long term makes it an even stronger case for doubling down our investment and our focus on clean energy options so that we are not relying on the fluctuations and OPEC and their willingness to put more supply and meet the demands in the market.  That’s our view,” Psaki said.

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White House Putting Pressure on OPEC to Increase Oil Production Amid ‘Supply Issues,’ Rising Energy Prices

White House Putting Pressure on OPEC to Increase Oil Production Amid ‘Supply Issues,’ Rising Energy Prices

The White House on Tuesday promised to put pressure on members of the Organization of the Petroleum Exporting Countries (OPEC) to increase production amid declining supplies and rising energy prices.

Press secretary Jen Psaki told reports at a press briefing that the president is “mindful” of the increased prices consumers are facing when it comes to their energy bills and that he “reserves a range of options,” to combat the situation.

Psaki said the administration is focusing on raising its concern with “supply issues as it relates to oil” on the international stage.

“There’s a power of the president of the United States engaging on that front,” she said. “That issue has been raised at [national security adviser Jake Sullivan’s] level, at a range of levels throughout government, but certainly the supply … and putting additional pressure on OPEC is something that certainly our national security team will continue to do.”

The administration is “concerned” over the high gas prices and has asked the Federal Trade Commission (FTC) to investigate the matter, Psaki said.

“I will also note that as it relates to gas prices, we remain concerned about trends we have seen where even as supply has increased at times over the last several months, we’ve still seen heightened prices,” she said. “We’ve asked the FTC to look into that.”

Jerry Simmons, president of the Domestic Energy Producer Alliance (DEPA), has blamed Biden administration policies for hindering U.S. oil and gas companies from producing energy commodities, and securing American energy independence and lower prices for American families.

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Olduvai IV: Courage
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Olduvai II: Exodus
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