Professor Scott Smitson and I met at West Point 2 years ago, where we both presented policy papers on various aspects of National Security, and we have since collaborated on multiple projects (see section at end for links).

When Scott asked me to guest lecture to his class at Denison University on “The Geopolitics of Energy: Commodities, Competition, and Global Supply Chains,” I was thrilled and honored to accept.

We adopted a podcast interview format, followed by some student Q&A. Given the recent escalation between Israel and Iran, this was a highly topical conversation.

Detailed Show Notes are included below along with additional in-line reading recommendations. Please enjoy.

Context of Current Middle East Escalation

* This is NOT the Oil Market of 1973:

* 1970’s:

* 1973 Arab Oil Embargo quadrupled Oil Prices

* 1979 Iranian Revolution almost tripled Oil Prices

* Hard Supply Inelasticity

* No US Shale

* Extreme dependency on Middle East

* Relative Demand Inelasticity

* Oil is ST Inelastic but LT Elastic

* Today:

* Some Macro Context:

* World produces/consumes 102 mmbpd

* OPEC+ supplies ~ 45 mmbpd

* KSA supplies 9 mmbpd (down from 11-12 mmbpd)

* Russia supplies 10 mmbpd

* Iran supplies 4 mmbpd

* US supplies > 13 mmbpd

* “Soft” Supply Inelasticity — It’s artificial thanks to KSA’s unilateral cuts

* KSA has ~3 mmbpd Spare Capacity

* Both Fed & OPEC+ tools are blunt instruments

* Both are Demand Restrictive

* OPEC+ tool perversely keeps Fed more vigilant/locked into H4L even while being Demand Restrictive

* KSA’s premature unilateral cuts have left them no viable Exit Strategy

* Will Atlas Shrug?

* Entire world has 6-7 mmbpd Spare Capacity

* US is now largest Oil Supplier

* Relative Demand Elasticity

* Rise of EVs/Uber/more alternatives gives far more Substitution Alternatives

US vs. China: A Comparison of Resources and Policies

* US has Resource Strengths but Policy Weaknesses:

* RESOURCE Strengths

* US is “Long Oil”

* USD is GRC and Oil is USD-denominated

* “Energy Independent” (OIL)

* US Supplies almost 14 mmbpd

* US Consumes 19 mmbpd

* US Exports 4 mmbpd

* US still IMPORTS 6.5 mmbpd

* POLICY Weaknesses

* Export Ban threats misunderstand that Refineries need to import Heavy Grades but US Shale produces Light Grades

* Draining SPR for vote pandering vs. true emergency is a poor choice for National Energy Security

* I wrote this piece a while back detailing the Biden DOE’s missteps:

* Capital Misallocation due to “Green Energy” Politics

* Favoring High Cost & Intermittent Solar/Wind (without considering Externalities)

* Disfavoring Coal/Nuclear/Oil

* WE NEED TO DEVELOP ALL SOURCES OF ENERGY

* China has Resource Weaknesses But Policy Strengths:

* RESOURCE Weaknesses

* China is “Short Oil”

* Oil is USD-denominated

* Oil’s route to China is Geopolitically fraught

* “Malacca Dilemma”

* OBOR is a costly hedge against poor Geography

* This piece goes into detail on how expensive and difficult it is for China to replicate the natural Geographic/Resource Advantages of the US through its “OBOR Hedges”:

* “Energy Dependent” (OIL)

* China Supplies only ~4 mmbpd

* China Consumes >17 mmbpd

* China imports ~12 mmbpd

* POLICY Strengths

* Building SPR at our expense

* Good Energy Capital Allocation (although major Capital Misallocation elsewhere)

* Massively expanding Coal/Nuclear

* Rapid Electrification

The Role of Economic Warfare

* Chinese playbook of “Unrestricted Warfare”:

* Everything is fair game in war, not just Kinetic Escalation

* My interview with General Robert Spalding does a deep dive on Unrestricted Warfare:

* China is adept at “Gray Zone Tactics”

* My interview with Oriana Mastro talks about China’s “Gray Zone Tactics”:

* Even China’s Climate Policies are an aspect of “Unrestricted Warfare”:

* China Talks the Green Energy Talk but does not Walk the Green Energy Walk

* Coal Comparison:

* US is phasing Coal out:

* 170 of remaining 210 coal fired plants to be phased out by 2030

* 174 GW currently

* China is ADDING 41 GW of new coal-fired capacity in 1H24 alone, and looking to add another 80 GW by YE24

* Had 1142 coal plants as of July 2023

* ~1100 GW currently

* Nuclear Comparison:

* US:

* Still largest producer with 54 plants accounting 30% of global nuclear electricity production

* ~100 GW currently

* China:

* Catching up with 55 plants currently, 22 under construction and another 70 planned

* ~52 GW currently

* Aiming for 200 GW by 2035!

* THE US IS SHOOTING ITSELF IN THE FOOT BY HANDICAPPING ITS RESOURCE STRENGTHS WITH THESE SELF-INFLICTED POLICY WEAKNESSES.

* Our West Point Paper, entitled “USD Primacy In An Age of Economic Warfare,” gives specific policy recommendations aimed at countering China’s “Unrestricted Warfare”:

* Over-reliance of Sanctions forces search for alternatives to USD

* Strong USD accomplishes multiple Geopolitical Objectives while also serving as an Equilibrating Mechanism for Inflation

Q&A

* Nuclear

* Still stymied in the US by irrational fear and NIMBYism

* Shorting The Grid by Meredith Angwin illustrates importance of STABLE BASELOAD

* Only energy source that can truly supplant hydrocarbons

* Energy Security vs. Green Energy Initiatives

* China talking the Green Energy Talk without Walking the Walk

* Part of Unrestricted Warfare baiting

* Problem for the West more than autocratic system of China

* Chinese Demographic Crisis

* This was a comprehensive summary of the US/China Summit that I referenced and has detailed information on Demographics of both the US and China:

* US doesn’t have a lack of interest in immigration — unlike China.

* Peter Zeihan: “Robots don’t eat.”

* China’s massive Reverse Wealth Effect is making it impossible for China to have Consumer Economy even with 1.4B people currently

* What will happen with 800 mm people? Some estimate China’s population to dip below 500 mm by 2100!

* Problem with Top-Down GDP Targeting Economic System

* Runaway Assembly Line MUST NOT STOP

* My most recent piece talks about China’s Runaway Assembly Line as a matter of existential importance to the CCP:

* Green Tech Initiatives vs. Energy Security Initiatives

* World is still Energy Starved

* We need to pursue ALL SOURCES of energy

* Solar — Lack of focus on EXTERNALITIES

* “Nature has already created the most efficient Solar Battery — it is called the HYDROCARBON MOLECULE.”

* This past piece on ESG Fallacies addresses some of these issues:

* See this DEEP DIVE from the past on how the Climate Change Debate is solving for the wrong variable (CO2):

Past collaborations with Scott Smitson:

In addition to teaching Geopolitics at Denison, Scott is also a Geopolitical Strategist. Grant Williams and I interviewed him back in KAOS THEORY 3 on the topic of Alliance Management:

Scott interviewed me this time on the Lykeion Channel about the Geopolitics of Oil:

Further Resources:

This was the West Point Paper I referenced multiple times, entitled “USD Primacy In An Era of Economic Warfare,” that I co-wrote and co-presented at West Point almost two years ago:

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