Good Friday Morning! I hope your week is going better than the side of Chris Rock’s face. I’m pretty certain I spent half the week scrolling through memes, jokes and more relating to the best Oscars show ever. The only way that moment could have been better was if Will Smith pulled out a glove, slapped Rock with it, and challenged him to a duel. An old-fashioned duel would improve Oscar ratings in my mind.
Onto more serious matters: I’m continuing to wade through all the news and scenarios relating to the Ukraine/Russia conflict and the geopolitical fallout. If you read last week, you were well-informed heading into this week as the West and Russia ratcheted up rhetoric around oil. We’ll get more into that below, links to follow.
Where you can find me this week
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[04/01/2022] Biden’s New Oil Policies Make Things Worse – Conservative Institute
Russia is off the mat, and Biden is out of his league.
Hitting technical issues in the middle of writing is never fun to kick things off. But I’m writing this differently because my website service provider went down about 30 minutes before I sat down to compose this piece. If you usually read on the website, that may get delayed. Check back over the weekend.
I’ve spent my time writing about the Ukraine/Russia conflict and its downstream impacts over the last few weeks. I plan on continuing that theme today because the story I told you was important last week has blown up. Russian demands that Germany and other European countries pay for oil in rubles is the pivot for all US policy.
“The US will be releasing one million barrels of oil a day from the country’s Strategic Petroleum Reserve for the next six months, in an effort to mitigate high gas prices, President Biden announced Thursday. The move comes as Americans face gas prices north of $5 in some parts of the country, due to factors like low domestic oil production and Russia’s invasion of Ukraine.”
“The president said he can’t offer firm answers on how much gas prices will dip, or how soon, but estimates prices could come down between 10 and 35 cents a gallon. The White House hopes the release from the reserves will help bridge the gap until US oil producers ramp up production later this year.”
It’s difficult to fully react to that speech because it depends on how Vladimir Putin reacts. The demand that Europe pay in rubles got met with total rejection from Western countries. But Putin’s charges are serious. Putin signed an order that requires countries to pay their gas bills in rubles, starting in April.
Biden made his sudden announcement on releasing reserves from the Strategic Petroleum Reserves on March 31. Meanwhile, Germany and other European countries announced they were preparing for gas rationing. In sum, the US and Europe are preparing for Putin to shut off the energy pipeline to some European countries — at least those unwilling to pay in rubles.
“The quick rebound of the ruble surprised some who expected that Western sanctions targeting Russia’s financial system would cause prolonged weakness in the currency. On the eve of Russia’s invasion of Ukraine, the ruble traded at 81 to the dollar. By early March, it tumbled past 150 before strengthening in recent days. One dollar bought 82 rubles in international trading Thursday and 83 rubles in Russian domestic markets.”
“The ruble’s ricochet occurred after Russia capped the amount of dollars that residents can withdraw from foreign-currency bank accounts and barred banks from selling foreign currencies to customers for six months. The central bank also doubled interest rates to 20% to keep rubles in the banking system.”
“Western sanctions capped the Russian central bank’s ability to sell its reserves denominated in dollars and euros to support the ruble’s value. But carve-outs in the sanctions allow Europe to continue buying Russian energy and ensured dollars and euros continue to flow. Russia ordered its exporters, such as oil and gas companies, to sell 80% of their foreign-currency revenues and buy rubles, helping the currency appreciate.”
“One possible factor for the ruble’s strength in recent days: Energy payments are often made at the quarter-end. Companies also tend to convert foreign currencies into rubles to pay taxes at month and quarter end, according to analysts at Renaissance Capital, an emerging and frontier markets investment bank.”
Second, Russia has diversified its client base with the ruble shrugging off sanctions and returning to its initial value. Both India and China have sought cheap oil deals with Russia, where they pay below-market rates for oil. Saudi Arabia is joining this push by deepening its ties with China. In short, Russia and OPEC are cutting deals with India and China to offset losses in Europe and the United States.
If Putin were ever to push an advantage with Europe, now would be the suitable time. I’m writing at a disadvantage here because it’s March 31 for me, and we’ll learn about Putin’s decisions starting tomorrow. But the actions of the Biden administration and West speak for themselves: they expect the tap to get turned off. Putin’s reverse sanctions could have harsh economic impacts.
I also believe we’re watching a shift in tactics from the Russians to buy time. Albert Marko at Intelligence Quarterly raised this point on the weather:
“Additionally, at the moment the time conditions on the ground are not good for operations. When the war began, it was cold and the ground was ice and they could travel over the swamps easily. At the moment, it lightly starts melting and you have a mess there. This is the situation in the northern parts of Ukraine. They need at least a month to six weeks for the ground to dry and become more operable for battle. Right now, the Russians cannot dig in where they are because when they start digging they hit the swamp and it’s a mess. This makes it impossible to do anything meaningful on the ground leaving them with two options, air and possibly maritime operations. Around the middle of May the ground will once again be dry. They will use this time to concentrate resources (new soldiers, recruits, relocate a few divisions from Siberia, etc.). As a result, they will be ready to resume operations.”
The Atlantic Council doesn’t mention the weather in its assessment of Russian troop movements. Still, they do agree that Russia is consolidating. Given that weather and supplies were an issue before the invasion began, it’s rational to believe those factors are playing a role now.
Ukraine believes Russian troops “withdrawing” from the field is an attempt to mislead. Factor that in with convenient timing on new negotiations between Russia and Ukraine, and it appears this is a diversion for later movements.
Further, Russia needs time to train new conscripts. Reports say that Russia has conscripted 134,500 new soldiers in its military. While there are promises these soldiers will not go to Ukraine, that seems unlikely. And even if that is true, the new conscripts can be used to move more experienced Russian troops out of places like Syria and Africa and into Ukraine.
In the meantime, Putin can squeeze the West for April through energy. The ruble has recovered, Russia has other buyers for oil, and he’s willing to give the West energy if it pays in rubles. If a few countries break, Putin can refill his coffers to start going after Ukraine again in May when conditions improve.
Putin could also kick off May by increasing the Ukrainian invasion and throttling fuel supplies in Europe even further. By that point, we should see the outlines of how food shortages will play out in both Ukraine and the world. Reuters has exclusive photographic evidence showing the Russian military targeting grain storage in Ukraine. On a related note, the manufacturer of Oreo cookies said one of its factories was severely damaged. If you combine Russia’s explicit targeting of nuclear power plants with food factories (from grain to cookies), it underscores their overall objective of laying siege to Ukraine.
As I suggested last week, the war in Ukraine has shifted from Russia needing a quick victory to the West needing a rapid conclusion to hostilities. Putin is directly challenging the West’s statements that Ukraine is necessary and whether or not everyone is willing to experience economic pain and hardships to stand with Ukraine. It’s all about breaking apart the western alliance in pieces.
That brings me to Biden’s speech on releasing a million barrels of oil a day from the Strategic Petroleum Reserve reserves. In my Friday Conservative Institute column, I went through why all the ideas Democrats are throwing out won’t work. I want to touch on the last point in that column and connect it with the broader themes about Russia and the geopolitical strategy we’ve discussed here.
“Thus far, these actions are crippling Russia’s economy, isolating Putin from the world, and helping Ukrainians fight for their country and ease their suffering.”
About a month ago, there was a moment when the isolation comment was correct. It is no longer valid. The ruble has recovered, Biden has mismanaged our relationships with India and the Saudis and pushed them in the direction of Russia and China.
As an aside, both Russian and Chinese diplomats visited India this week. The same day that Russia was in Mumbai, India’s embassy in Poland and Lithuania released a statement asking all Indian nationals in those countries to check in with the Indian embassy. The request is the kind that a country makes of its citizens if they need to conduct emergency evacuations. It could be nothing, as I don’t see Russia invading NATO countries. But it’s also a red flag worth noting for future reference should things really go south.
Back to Biden, his statements on oil companies are where I want to focus. They’re just wildly out of touch with reality. Here’s that segment of the speech:
And the bottom line is: If we want lower gas prices, we need to have more oil supply right now.
For U.S. oil companies that are recording their largest profits in years, they have a choice. One, they can put those profits to productive use by producing more oil, restarting idle wells, or producing on the sites they already are leasing — giving the American people a break by passing some of the savings on to their customers and lowering the price at the pump.
Or they can, as some of them are doing, exploit the situation: sit back, ship those profits to their investors, and — while American families struggle to make ends meet.
Look, this is a moment of consequence and peril for the world and pain at the pump for American families.
It’s also a moment of patriotism. I want to acknowledge those companies that have already announced they’re increasing immediate production. They’re investing money to produce more oil and also clean technologies we need to reduce our dependence on oil in the future.
They have everything they need. Nothing is standing in their way. And they’ve indicated they will be producing an extra 1 million barrels of oil per day, probably starting as early as this fall. That’s progress.
I’ve bolded the two lines on which I want to focus your attention. I’d remind you that Biden campaigned non-stop for an end to drilling on federal lands during his campaign. He’s now demanding that they start digging or get penalized for not acting on those permits.
If you’re a company getting those kinds of mixed messages, you might hold back any new investment. But that’s not why I think these companies are holding back. Let’s look at where the economy stands.
The Federal Reserve is raising interest rates to tackle interest rates. Markets have responded to those actions by showing inverted yield signals in US treasuries. When the yield curve inverts in certain asset classes, a recession will soon follow. It’s one of the sure-fire indicators we have of a downturn.
Further, the factors driving up prices are 1) increased demand post-COVID, 2) the war in Ukraine, and 3) various supply-chain issues. None of these factors is an economic fundamental that suggests long-term higher prices. These are transitory factors that most investors know will pass eventually.
The point of the Federal Reserve raising interest rates is to kill the demand curve of the economy, which in turn reduces inflationary demands. What is the prudent course of action if you’re an oil and gas investor facing reduced demand, higher credit, and a high likelihood of a recession in less than 18 months? Do you increase investment and oil drilling while believing the market won’t be there when you’re done? Or do you save up for a rainy day to survive an economic downturn?
A healthy chunk of these companies are taking the rainy day option. The upsurge in oil prices has presented oil companies with the best shot they’ve had in a decade to recoup losses. Biden’s declaration that “nothing is standing in their way” is mind-numbing. The entire economic outlook is negative right now.
Last point: if oil and gas companies understand these dynamics, it’s easy to see Putin sees it too. The United States is facing the prospect of recession. When you’re trying to enforce economic pain on Russia, that’s not where you want to be. Putin is pushing his advantages when he gets them. The United States is not.
Last week, I quoted Niall Ferguson’s essay on how the Biden administration misread history in pushing for a long war to drain Russia. We’re already seeing that play out now, as the US faces unclear economic headwinds while Russia gets off the mat.
Leadership matters and Biden is blowing it.
Links of the week
The U.S.-ASEAN Summit stumble – Politico
[Diesel is vital in farming] Rationing Looms As Diesel Crisis Goes Global – OilPrice
Why I believe a freight recession is imminent – Craig Fuller, CEO at FreightWaves
“This Shouldn’t Happen”: Inside the Virus-Hunting Nonprofit at the Center of the Lab-Leak Controversy: Chasing scientific renown, grant dollars, and approval from Dr. Anthony Fauci, Peter Daszak transformed the environmental nonprofit EcoHealth Alliance into a government-funded sponsor of risky, cutting-edge virus research in both the U.S. and Wuhan, China. Drawing on more than 100,000 leaked documents, a V.F. investigation shows how an organization dedicated to preventing the next pandemic found itself suspected of helping start one. – Katherine Eban, Vanity Fair
[More inflation fuel] Senators reach tentative deal on $10 billion in additional Covid funding, Romney says – CNBC
Electric cars have a very dirty secret: The technological flaws of battery-powered vehicles have not gone away – Andrew Orlowski, The Telegraph
Twitter Thread(s) of the week
Satire of the week
‘Not To Be That Guy,’ Begins That Guy – Reductress
Thanks for reading!