The Coming Oil Crisis

At just the time that the Ukraine War began, the leaders of the West, principally the European Union, Great Britain, and the United States, decided that the laws of economics no longer applied. These countries, which are significant oil importers, agreed that they, and not the oil producers, would set the oil price.

It's a remarkable turn of events. In the history of finance, never has a buyer of goods tried to set the price. Yes, a buyer may limit what they're willing to spend. But that comes with the understanding that if their price is too low, they will not be able to buy that item. As consumers, we often do that kind of exercise. We set a maximum price limit, a budget price if you will, but if we are too far from the market, we know we won't purchase it.

Who sets the price is fundamental. A child learns every time they walk into a toy store. Some toys your parents will buy for you, but others are too expensive.

It was a lesson that the G-20 Economic Leadership missed. The leadership of the G-20 includes significant oil importers like the United States, Japan, and most of Europe. The G-20 declared that the maximum price they would pay for a barrel of Russian oil is $60. That Price Cap is $22 per barrel below the current market for equivalent Brent North Sea Oil.

In other words, the Collective West, consisting primarily of oil-importing countries, believes they can set Russia's oil prices to 27% less this year than last.

How would you react if you were the Russia Oil company?

You're right; Russia has begun cutting back on its exports to the G-20. Initially cutting production by 2 million barrels last year, and now scheduling another half million barrel cut in daily production beginning in March.

If you've ever run a business with one major client, you know Russia's difficult position. If they could, I'm sure that Russia would cut off exports to the entire Collective West. But they don't have enough demand from their new customers, China, India, Brazil, and South Africa, the BRICS Nations, to replace the Collective West. But wait, that's coming. Those countries represent most of the World's Population, and increasing demand is just a matter of time. And then we'll likely see Russia replace its existing oil customers with these new BRICS customers.

However, Russia will need to be cautious until that time arrives, keeping the existing Western Customers and taking a 27% haircut on their revenue. While gradually courting these new customers.

In the meantime, the Collective West looks to continue on their insane strategy of self-strangulation. Cutting off Russia from supplying just the oil we need to operate a prosperous economy.

Currently, the Price Cap applies only to oil transported by ship. But now, with the Nordstream Pipeline gone, some in Brussels would like to see the Cap on all Russian oil. And US Treasury Secretary Janet Yellen is right there. In November of last year, Secretary Yellen made it illegal for any American to participate in the transportation of Russian oil. This enforced boycott will prove particularly problematic for international oil companies Exxon and Chevron, which have extensive operations in Europe. These two companies will likely have to audit the oil they transport to comply with the new regulation.

That is consistent with the Biden Administration's effort to make the free and open oil flow as tricky as possible. And it all points to why an oil crisis is approaching.

So how is America's supply of oil?

World Oil states US-proven oil reserves have declined about 19% since the Pandemic. While President Biden has drawn down nearly half of our Strategic Petroleum Reserve since his inauguration, the very resource that was intended for tough times like we're about to face.

Let's review some of President Biden's actions since assuming office. He canceled the Keystone XL Pipeline, drew down the Strategic Petroleum Reserve (SPR) to a level that makes these reserves unavailable, and canceled new exploration on Federal Lands on his first day in office. He cancels all Russian imports of oil, representing about 10% of our oil supply. Add them all, no matter how you feel about some of these decisions individually. He has put America in a dangerous position, with the real threat of reduced supply and higher prices.

The President is in an altercation with our chief oil supplier Saudi Arabia. A recent cutback in production by the Saudis lead to a stinging rebuke by the President. The President felt that the Saudis should supply as much oil as possible to lower the current price of oil and reduce inflation. The Saudis responded by opening their oil sales to any currency, not just the Dollar. And as we've discussed, this poses a real threat to the US Dollar's Reserve status.

The United States, like Europe and the rest of the collective West, have built its economies on cheap imported oil. And we rely on the good graces of the oil-producing countries to supply that oil. These countries are halfway around the world and often have very different goals and values.

For more than half a century, the collective West has dictated the terms of oil sales. But it is foolishness to believe that we, as the chief oil buyers, can set oil prices. That is and always has been the function of the seller, as it will be shortly in the oil market.

From Moscow to Riyadh, that message is coming that the oil producers will set the price, and those prices should arrive in America for summer drive-time.


"As Long As It Takes," The Ukrainian War Of Attrition

Yesterday, U.S. President Joe Biden flew to Kyiv to reaffirm America's commitment to continue with the War in Ukraine. In the President's words: "I thought it was critical that there not be any doubt, none whatsoever, about U.S. Support for Ukraine in the war."

As Biden has often repeated, the U.S. is committed to this War for "as long as it takes." Likewise, Vladimir Putin, President of the Russian Federation, is also committed to seeing his country's role in the War through to the end.

So, as we pass the first anniversary of the conflicts, we should prepare ourselves for a war that will continue for some time. The military analysis calls this kind of conflict: a war of att where each side must dig deep to supply the provisions, men, and equipment to keep the battle going for months and perhaps longer.

The support for the War will come from each country's economy. Each nation must manufacture the guns, ammunition, supplies, and equipment needed to fight. From a big-picture (MACRO) perspective, it looks like no contest.

The United States has the world's largest economy (nominally), at ten times the size of Russia. The financial and economic reach of America is prodigious. And Americaerica can count on the firm support of the European Union and NATO.

It looks like a hopeless task for tiny Russia to defeat the collective West in the Ukraine Battlefields, and yet there are certain advantages that Russia has amassed.

Like the United States in World War II, Russian factories and plants have been busy producing the battlefield supplies needed to pursue the conflict. There are extensive reports that Russian munitions factories are working around the clock, in three shifts, to supply the bullets, missiles, and bombs needed to attack. Chief among these is that Russia has already converted its economy into a "War Economy."

On the other hand, the United States has "farmed out" its military production to a select group of Defense Contractors. And although there have been some negotiations to have those Contractors increase production, no increase has yet occurred. Numerous reports show that U.S. Stockpiles of weapons and munitions are rapidly depleting. And one Navy Admiral reports that we are running dangerously low on our supplies.

To put it bluntly, Russia is at War while the United States is "studying the situation."

However, things are not all smooth sailing for Russia, far from it. Yesterday, as we said, Russia reported its latest GDP Growth for 2022. It showed that their economy declined by 2.1%. This decline is primarily due to the Economic Sanctions imposed on Russia by the U.S. and E.U.

On the other hand, on Thursday, the U.S. will provide its second estimate of its GDP Growth rate, expected to be nearly the 3% growth rate shown in Estimate number 1.

Both countries are going through a high-inflation period, with inflation in the U.S. at 6.4% and in Russia at 11.8%.

But then we come to some financial measures showing that the U.S. current financial position could be much stronger—first, trade. Last year Russia, despite the sanctions, had a trade surplus of $21 billion, while the U.S. had a trade deficit of $67 billion. Russia has cash-on-hand (their current account) of $21 billion, while the U.S. has a deficit of $217 billion. And finally, the Russian Government costs just 2.3% of its GDP, while the U.S. Government Budget costs 129%.

Those are staggering numbers and imply that even the United States may be coming to the end of its ability to finance its debt.

The map is a definitive measure of how this War of attrition is proceeding. Before the Russian Special Military Operation, they occupied 16,000 square miles of Ukraine. Today, by the most conservative estimates, and after much back and forth, it is estimated that Russia now controls an estimated 34,000 square miles, or more than double its initial position. As brutal and rough an estimate as that is, it indicates Russian progress in the War.

Europe is a place renowned for its extended conflicts. In the 14th and 15th Centuries, the War between England and France became known as the 100-Year War. We hope and pray that the conflict in Ukraine does not follow a similar path and may end quickly so that the continuing loss of life will end.

But for that to happen, one leader must begin the negotiation process. A President from either country could ask to talk. To ask the other side to negotiate would not be a sign of weakness, but it might begin a de-escalation. Instead of declaring that he'll fight for as "long as it takes," perhaps President Biden could suggest to President Putin that he'd be willing to talk as soon as possible.


The Grinch At 1600 Pennsylvania Avenue

Not since the Grinch stole all of the presents in Whoville have we seen such a wanton disregard for people's welfare. Last week President Joe Biden turned down FEMA aid for the people in Palestine, Ohio.

Palestine, as you may know, suffered the worst ecological disaster in our nation's history. A fully loaded freight train de-railed in their small town, discharging, among other toxic chemicals, Vinyl Chloride. When it burns, it oxidizes into Hydrochloric Acid.

Hydrochloric Acid is one of the most toxic and potentially deadly chemicals. After suffering for days with suffocating fumes and pervasive soil and groundwater pollution, the people in Palestine appealed to the President for aid.

"Out of the question," came the response from the White House Grinch. The people of Palestine are not eligible to receive funds from the Federal Emergency Management Agency, FEMA. That door is closed.

FEMA is the key that unlocks the chief source of Federal Relief during any disaster. And it's not like they're short. FEMA dishes out relief packages like they are going out of style. That's FEMA's principal function. As we speak, FEMA is still cleaning up the situation in my old hometown of Santa Barbara.

Along with Montecito, it endured major flooding just a couple of months ago. And the locals report that FEMA is still there, seeing that everything is ship shape and bristol fashion. FEMA has even opened a local office to ensure that the likes of Oprah, the Sussex, and all the other Hollywood types are well taken care of.

But not the residents of Palestine, Ohio.

On Tuesday, the 436th Aerial Port Squadron flew halfway around the world, from Dover Air Force Base, Delaware, to Incirlik Air Base, Turkey, to aid in the recovery from the earthquake. Indeed, that's entirely appropriate. It's just the type of action people worldwide expect from the United States. Our country has been renowned for aiding and assisting those in need around the globe.

But not in Palestine, Ohio.

There is a tendency to feel that there is something personal in Biden's harsh response to Palestine, Ohio.

Palestine, Ohio, is like the many small burbs and towns you'll find from Pennsylvania through West Virginia and on to Ohio. Small out-of-the-way towns are the heart of the "Rust Belt," a part of the country reliant on coal, steel, and oil—all things this President wants to curtail.

Like many of the towns in this part of the country, its original name was: Mechanicsburg. A "roll-up-your-sleeves" hard-working kind of town. Originally Palestine was home to a Ceramics Factory, a Tire Factory, and several local foundries. All undoubtedly used the local coal as their principal source of heat and energy, all the more reason for President Biden to look the other way when they found themselves in trouble.

When Biden was Vice President under then-President Obama, these were the same people who found their local coal mines and coal-fired powered plants shut down. My local power plant was also closed back then.

I'm sure that the then Vice President never considered the people of East Palestine or any other villages and towns in the Rust Belt when he and Obama elected to close down their principal source of heat and energy.

For two generations, the people of the Rust Belt, including East Palestine, Ohio, have been forgotten.

And they are still forgotten.

This massive train derailment must have been a horrific event to live through. Not just the explosions, fire, and noise. But the acrid, choking smoke, the fear that you might not be able to breathe.

Suffocation is a terrible way to die. But for two long weeks, no Federal Agencies came to help. To their credit, state and local officials have come to town, including US Senator Sherrod Brown. But no one from the Biden Administration. And especially no one from FEMA, whose endorsement would provide real aid from Washington.

Many experts are beginning to speak out and let the public know how serious this situation is. Its been called the "American Chernobyl" after the nuclear meltdown in Ukraine.

Two streams flow through East Palestine, the Leslie Run and the ironically named "Sulfur Run." Both are reporting that the contamination is now downstream from the town. Both streams are part of the Ohio River watershed, the principal water source for 5 million people downstream from Palestine, Ohio.

Like Chernobyl, like Fukushima, and like so many environmental disasters, their stories become written over many months and often years. The harrowing stories of peoples' suffering and fear are eventually heard. Often months after the crisis appeared to be over, radiation, groundwater pollution, and contamination linger. Our leaders may feel that they can lay railroad tracks over the top, and their troubles will fade away. But not at Chernobyl, not at Fukushima, where both remain radioactive.

And not, I fear at East Palestine, Ohio, where the full ramification of groundwater pollution and contamination are also likely to linger for months if not years.


The Ukraine Tell

In the game of poker, it's called a tell. A tiny twitch, a blink, or slight movement tells the seasoned observer that something is not as it appears. The master-card-players can use these unconscious movements and habits to read their opponent and gain a competitive advantage over their foe.

In times like this, it is a unique skill when so many are trying to deceive. The War in Ukraine is a particularly dark place if you're trying to find the truth of the matter. All parties involved in this conflict, from Ukraine to Russia, to the United States and NATO, are utilizing spin to paint their situation in the best possible light. The capabilities on both sides of the conflict are, no doubt, enhanced.

Earlier this week, Politico reported that the United States is reluctant to supply Ukraine with ATCAMS missiles. Principally because to do so would reduce our supplies to levels needed for our defense in case of War. We need more of these missiles.

And it is more than missiles that we're running short on. Recently the State Department provided a complete list of all the arms and equipment that the US has supplied to Ukraine (https://www.state.gov/u-s-security-cooperation-with-ukraine/): 1,600 Stinger anti-Aircraft Systems, 8,500 Javelin anti-armor systems, 50,000 other anti-armor systems, and over a million 155mm artillery rounds.

The 155mm rounds are standard for the United States and the NATO States. They are used in substantial numbers for the training of those armies. Combine this everyday use of the rounds with the over one million sent to Ukraine, and you can see that the US has had to deplete its existing reserves. Worse, the US decided to curtail the 155mm Howitzer production. The Army and Marines upgraded their 155mm systems to more advanced Missile Launchers as part of their Force Design 2030 program. The likely result is that Ukraine and NATO will run out of this critical battlefield weapon in the next few months.

So here lies the difference between the United States' approach to War and Russia's. The United States relies on the most advanced military technology for its fighting capability. It will phase out the tired and true 115mm Howitzers for the more advanced, precise field missile systems. You may recall the incredible videos from the Iraqi War, demonstrating precision-guided missiles obliterating entire buildings. It was as high-tech a demonstration of modern warfare as we've ever seen.

Russia is more than willing to use every weapon, from traditional howitzers, like the 155mm, to the propeller-driving, long-range bomber, the Tupolev TU-95. Russia employs an eclectic range of weapons for its War with Ukraine.

This difference in military equipment has dramatically changed how the two superpowers approach the War.

The United States has been willing to provide Ukraine with some of the most advanced weapons in its arsenal. American Military leaders believed advanced technology would make all the difference in the battle.

So the United States has sent Ukraine a complete Patriot Air Defense Battle System, 31 Abrams Battle Tanks, Two Harpoon Coastal Defense Systems, and 20 High Mobility Artillery Rocket Systems (HIMARS).

The principal issue is that these high-tech systems require high-tech operators, with weeks, sometimes months of training to become fully competent. Unfortunately, the constraints of the Ukraine War do not provide the time or resources to allow enough Ukraine Army personnel to become fully trained before they are thrust into battle.

On the other hand, Russia has used a quantity-over-quality approach to its battle plans. It is not unusual to see Russia lunch 75 to 100 missiles and drones against Ukraine. Perhaps these missiles don't have the payload of the individual missiles seen in the Iraq War, but the sheer numbers provide a much broader scope to their attack. Additionally, the more low-tech weapons require less training of their soldiers to become fully proficient.

Finally, there is a critical distinction between the United States' approach to the Ukraine War and the Russian approach. The United States relies on a select group of Military Contractors to provide the weapons and munitions from our high-tech factories producing advanced weapons. But there is a limit to this kind of production.

So far, the US has provided Ukraine with well over half a million 115mm. But at the same time, the US only produces roughly one hundred thousand per year. Consequently, we must dig deep into our inventory to supply rounds to Ukraine. And this is happening with other munitions and equipment.

Reducing production, just as it was needed the most. To cut expenses, the US cut back on military production levels just before the War began. We were caught off guard and completely flat-footed.

On the other hand, Russia has been ramping up its economy to a proper War-Time footing. Estimates are that Russia is producing virtually all the provisions needed to continue the War. Missiles, drones, and equipment are being manufactured in Russian factories as required.

These Russian production levels do not bode well for the continued pursuit of the conflict. In comparison, the US has announced that it will not be able to supply all the needed provisions for Ukraine. While Russia does not have such issues, they appear to be entirely self-sufficient.


Joe Biden Enterprise Manager

When we start a new job, much is expected of us. We should show up on time, perform our duties, not harm other employees, and so on. The Human Resources person explains everything thoroughly as we go through orientation. It’s basic stuff.

However, as much as the company has expectations for its workers, those workers have expectations for their managers. Managers must provide a safe working space free from abuse or discrimination. The company’s managers are expected to maintain a viable working operation that carries a good reputation and can compete in whatever marketplace they serve.

All basic stuff.

One of the strengths of America has been our ability to turn out outstanding Managers, due in no small part to recognizing that Management is a skill that can be taught. When Harvard began the MBA (Masters in Business Administration) program over a hundred years ago, it was a recognition that one of the essential skills in any operation is Management.

Indeed, as measured by the number of employees, one of the largest employers is the Federal Government, with over 2 million on its payroll. Only Wal-Martrt comes close, and I suspect the Feds will take the top spot during the next recession because Walmart will likely lay off workers while the Federal Government remains immune to the business cycle.

Now, if you don’t perform up to the standards required by your employer, you can be fired. But there are two sides to this coin. It can be sued if your company’s Management does not live up to its fiduciary standards. You are entitled to compensation for any company that fails to keep you safe, protected, and free from various forms of discrimination.

So let’s review the performance of our “Manager-in-Chief, Joe Biden, as any business school graduate would.

Joe Biden, Financial Manager.

The Federal Government’s Surplus or Deficit is analogous to a private corporation’s earnings. Although the government does not have sales, instead, it has taxes. We can assess how the Government under Manager Biden manages its income (taxes) versus its expenditures.

First, a little background, before the Great Financial Crisis of 2008–09, the nation had never known a $1 Trillion Deficit. It hadn’t known even a half-a-trillion deficit. But the Great Financial Recession caused nearly $ 1.5 trillion in the Federal Government’s Deficit.

The second external event that hammered government finances was the Covid-19 Pandemic. Beginning in 2020, the Federal Deficit reached an incredible $3 trillion, double that of the Great Financial Crisis 12 years before. By 2021, under then-President Trump, the Deficit was still huge at $2 ½ trillion.

Enter Financial Manager Biden. In 2022, the deficit “fell” to $1.4 Trillion. Certainly much better than the two prior years. And Biden was off to a good start but had a long way to go back to those old deficits of less than $1/2 trillion.

But then came a look at our future. According to the Congressional Budget Office, the nation’s financial accountant, Financial Manager Biden, has set us up for $1 Trillion deficits for as far as the eye can see. Because of unfunded programs such as the Build Back Better Law or the Inflation Reduction Law and their corresponding expenditures, the CBO estimates that between now and 2032, the Federal Government Deficits will average $1.6 trillion. And yes, this does include the added demographic expenses due to Social Security and Medica. Still, the CBO has nearly doubled its prior deficit estimates since Biden has been in the White House.

Yesterday, the Congressional Budget Office again looked into their Crystal Ball and estimated that the Country would have a yearly deficit of not $1.6 Trillion but $2 trillion annually beginning in 2024. Needless to say, this is a major adjustment in their projection and an indication of how troubled our Government’s finances are becoming. Put simply, Joe Biden is digging a financial hole for the country that is four times larger than just 5 years ago.

Joe Biden, Strategic Relationship Manager.

One of the most important organizational management tasks is to guide and control outside relationships. These include relationships with vendors, clients, and other vital parties not part of your enterprise.

At the recently completed conference of the World Economic Forum in Davos, Switzerland, Saudi Arabia’s Finance Minister, Mohammed Al-Jaadan, announced that the Kingdom was severing its exclusive arrangement with the United States to price all oil sales in the Dollar. It is a stunning blow that cannot be overstated.

Its probable result will be the loss of the Dollar’s status as the world’s reserve currency.

Because as Al-Jadaan stated, the Saudis will now accept payment for oil in any currency, thus negating the Dollar’s position as the exclusive price mechanism for that critical fossil fuel.

For more background on this move by the Saudis, I refer you to our January 20 podcast and article.

The new pricing policy is a significant blow to the UnitStates preeminent position in International Finance. And a major misstep by President Biden.

Finally, Joe Biden, Financial Planner.

One of the critical responsibilities of any financial manager is to plan for the future. A good manager leaves their organization in a better place than they found. Planning for the future is critical. But this is a foreign concept to the Biden Administration. There are several examples of their absence of future planning. The current shortfall in military supplies, particularly ammunition, or the inability to manage the flood of illegal immigrants, but perhaps the most visible lack of future planning is the wanton sale of oil from the Strategic Petroleum Reserve.

When established, the SPR’s purpose was to protect the country from a situation like the OPEC Oil embargo. If OPEC cuts off our external supply of oil, then the SPR could be tapped to fill in the shortfall. Unfortunately, in 2015, Congress changed the original law to allow oil to be sold out of reserve to fund Federal Programs.

Past presidents sold just slight amounts of oil at a time. Manager Biden changed all that. Believing that he could influence the international price of oil, incidentally, that’s not me talking. July 26, 2022, the White House Fact Sheet says the purpose of the sale was to lower the price of oil. And just like that, Biden began to sell reserves at a record rate.

Financial Planner Biden has sold off nearly half of the reserve. What’s left is a reserve that will provide less than three weeks of our oil needs.

And why are these oil reserves so low? The aim was for the President to lower the international oil price and curb inflation. But ask any significant speculator from the Hunt Brothers forward; manipulating the price of any commodity is a fool’s errand.

So there you have it, a review of Joe Biden as Enterprise Manager.

This Administration’s policies are likely to increase government spending substantially and, therefore, deficits for the foreseeable future (at least through 2032).

Their inability to maintain the relationship with Saudi Arabia will likely mean the loss of the International Reserve Status for the Dollar. And finally, the inability to manage the country’s supplies, especially our oil reserves, places us in a particularly vulnerable position.

It’s doubtful that any Professor at Harvard or other top Business Schools would give Manager Biden a passing grade.

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