October 19, 2022 • 40 mins
This week highlights from Coin Bureau’s YouTube channel focus on two critical macroeconomic issues - China and its stance on Taiwan and concerns around global oil prices. Both of these factors will be weighing on any investor’s portfolio in some way.
You’ll almost certainly be aware of the fact that China has long coveted Taiwan and aims to unite the two countries - by force, if necessary. This dispute has rumbled on for decades, but tensions are currently higher than they have been for a long time. As Chinese president Xi Jinping consolidates his absolute power by securing a third term in office - meaning he is effectively president for life if he so chooses - the likelihood that China will make its move is becoming uncomfortably high.
In the first part of today’s episode, we look at some of the main reasons as to why China could be on the brink of invading Taiwan. As US president Joe Biden has repeatedly pledged military support for Taiwan in such an eventuality, the stakes could not be higher for all three countries and the wider world. As we’ll see, there are many reasons why China could be readying for a strike and just as many reasons why such a move would have dire consequences for the world.
Next up, we take a look at why oil prices are also something we should all be concerned about (there’s not much in the way of good news this week, sadly). The Organisation of the Petroleum Exporting Countries - OPEC - the powerful international cartel that sets global oil prices, recently decided to cut production by 2 million barrels a day, meaning the price of oil is set to climb. This obviously has serious consequences for the global economy.
There’s also the uncomfortable fact that the US has recently tapped its Strategic Petroleum Reserve - SPR - to make up for the disruption to oil production caused by Russia’s invasion of Ukraine. This has helped to combat inflation caused by rising energy costs and insulate Americans from higher prices at the pump. But it also means that the US has decreasing amounts of oil in reserve for an emergency, such as, for instance, a war with China over Taiwan.
So, find a safe spot behind the sofa and have a listen.
We hope you enjoy the show.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hello everyone, and welcome to the latest episode from the
midweek edition of the coin Bureau podcast. Every week, I
pick out two of my favorite videos from coin Bureau's
YouTube channel to present to you in podcast form. The
audio you're about to hear is from those videos I've
chosen this week. Many of you have been in touch
to ask whether it's possible to listen to our videos
in podcast format, and so your wish is my command.
(00:23):
This week, I've selected our videos looking at the tensions
between China and Taiwan and the oil price crisis that
likewise threatens global security. When Russia launched its invasion of
Ukraine back in February, many feared that China could follow
suit and use the situation as an opportunity to make
a similar move against its neighbor, Taiwan. China has long
(00:45):
coveted the island, which it regards as sovereign territory, and
has ratcheted up its belligerent rhetoric in recent months. Meanwhile,
the US has pledged to defend Taiwan if it is attacked,
leading to fears that Chinese aggression could precipitate a wider
conflict between the world's two superpowers. The matter is further
complicated by the fact that Taiwan manufactures the vast majority
(01:09):
of the world semiconductors, meaning an attack on the island
would paralyze global trade. If the China Taiwan issue isn't
on your radar yet, well it should be. In the
first part of today's episode, we look at the likelihood
of China making a move against its neighbor and what
such an action could mean for the world. There are
a number of reasons why China could be seriously weighing
(01:31):
up such a step, and even though it would likely
cause global chaos or worse, it unfortunately cannot be discounted.
Taiwan troubles aside, the global macro economic picture continues to
get more and more worrying. In the second part of
this episode, will also look at the issue surrounding oil prices,
which have a huge effect on all economies. The Organization
(01:54):
of the Petroleum Exporting Countries or OPEC, recently announced a
two million barrels per day cut in oil production, a
move calculated to keep prices high. This at a time
when rising inflation and continued supply chain issues to name
but two, are already dragging on the global economy. It's
a worrying development, but made more so by the fact
(02:15):
that the United States has been draining its Strategic Petroleum
Reserve or SPR in order to try and tame inflation
and keep pump prices low, all with an eye on
the mid term elections in just a few weeks time. Meanwhile,
guess which country has been adding to its strategic reserves
of oil. Have a listen, and all will be revealed.
(02:37):
I hope you enjoyed listening to these two pieces, and
I'll be back talking crypto with Mike very soon, So
be sure to stay tuned, and if you want even
more content from coin Bureau, be sure to subscribe to
our YouTube channel and visit us on social media too.
(03:11):
In less than twenty four hours, the twentieth National Congress
of the Chinese Communist Party will begin. This one week
event only happens every five years, and the twentieth edition
is said to be extra special. That's because Chinese President
Zi Jingping is expected to be re elected and designated
(03:31):
as the People's Leader. Now. This title was originally given
to Mao Zadong, who founded the People's Republic of China.
This has led to speculation that China could finally do
the unthinkable and invade Taiwan. So in today's video, I'll
tell you why this seems more likely than ever and
(03:51):
the domino effect it could have around the world. Now,
I want to start by saying that most of what's
in this video is based on circumstantial evidence. Even though
this evidence is compelling when it's put together, it doesn't
mean necessarily that China will invade Taiwan anytime soon. That's
(04:12):
simply because the CCP has proven over time that it
plays the long game. If the CCP knows that it
can take Taiwan without starting a kinetic war, then that's
the route the CCP will take, regardless of how much
time it takes. Note that I'm also not an expert
in geopolitics. I just listened to lots of podcasts and
(04:33):
read lots of news from a whole slew of sources. Now,
funnily enough, the first bit of circumstantial evidence that China
could soon invade Taiwan actually relates to the CCP strategy
of playing the long game. You see, the CCP can
play the long game because it's the only political party
in China. That means it can implement policies that take
(04:55):
decades to complete without having to worry about interference. There's
no other political party that can be elected which will
pause the policy or remove its funding or whatever else.
This is in stark contrast to basically every democracy in existence.
What the CCP and political parties in Western countries have
(05:15):
in common, however, is that their highest ranking officials are
generally getting on a bit, including their leaders. In the
CCPs case, Z is sixty nine years old. That means
that he doesn't have the luxury of playing the long
game on a personal level. As much as Z is
committed to the future of the CCP, his actions have
(05:36):
arguably proven that he's more concerned with cementing himself as
the most powerful leader that China has ever seen. To
my mind, taking back Taiwan would be the best way
to do that, and I reckon Z is hyper aware
of this as well. That's because being elevated to the
same level as Chairman Mao within the CCP is almost
(05:56):
certainly not enough. After all, it's a title there was
also given to Mao's successor, Huago Feng. It doesn't really
make the title that special, then, because it's far from
being one of a kind and therefore could make Z forgettable.
Being labeled as the man who reunified China. However, now
that's a title that would make Z immortal within the CCP.
(06:20):
More importantly, it's a title that nobody else would ever
be able to hold, at least not unless China and
Taiwan are split up and then reunited again sometime far
in the future. Now this ties into the second bit
of circumstantial evidence, and that's the fact that over the
last year or so, almost every single major Western economy
(06:41):
has announced that it will begin creating its own microchip
manufacturing facilities. For context, the Taiwan Semiconductor Manufacturing Company t
SMC manufactures most of the world's microchips and manufactures almost
all the specialized chips that are used in, say, military equipment.
This is basically why Taiwan is so important to the
(07:04):
United States and its allies. It's the reason why the
sudden moves by these countries to establish their own microchip
manufacturing facilities aren't so significant for starters. Creating domestic microchip
facilities means that Western countries will be less reliant on
Taiwanese chips. This, in turn will increase the likelihood that
(07:25):
Western countries will intervene if China invades Taiwan. If Western
countries don't need Taiwan's chips, then they won't have a
reason to intervene militarily. This fact would increase the likelihood
that China will invade Taiwan since there's no fear of
a kinetic war. Again, this doesn't necessarily mean China will
(07:46):
invade Taiwan anytime soon. That's because it's still going to
be years before all these new microchip facilities are built.
Even so, it looks like they will all be complete
within the decade, and at that point China will have
a clearer path to take Taiwan. Now, I talked about
the Taiwanese semiconductor industry in much more detail in a
(08:07):
previous video which will be in the description for you
and pro tip. If TSMC stock starts to completely collapse,
then chances are shit is about to hit the fan. Now,
this relates to the third bit of circumstantial evidence, and
that's that Taiwan is not part of the North Atlantic
Treaty Organization or NATO. This means that Western countries are
(08:30):
under no obligation to defend the country if China attacks. Obviously,
this doesn't mean that Western countries couldn't help in other ways.
Ukraine isn't part of NATO either, yet it's received about
as much support as NATO can give without putting actual
boots on the ground. The thing is that it's not
clear just how far NATO would go to defend Taiwan,
(08:54):
especially once many of its members have set up their
own microchip manufacturing facilities. Note that the United States and
others art technically neutral towards Taiwan's affairs. That said, US
President Joe Biden has mentioned on many occasions that the
US would respond with military force, but it looks like
these statements have been walked back by the White House
(09:17):
every time. That's probably because they know that war with
China over Taiwan wouldn't be worth it. Now, this pertains
to the fourth bit of circumstantial evidence, and that is
the ongoing war in Ukraine. There's no question that China
has been watching the West's sanctions against Russia very closely.
(09:38):
In fact, there's lots of evidence to suggest that China
has been funding Russia's war in Ukraine. I mean, how
else could Russia's economy survive these unprecedented sanctions. This begs
the question of whether China provided these funding guarantees prior
to Russia's invasion of Ukraine. The answer must be yes,
(10:00):
because there's no way Russia would have invaded without China's
economic support. Call me crazy, but I think Putin is
sane enough to have made that calculation. Now this begs
a second question, and that's what China would stand to
gain by supporting Russia financially. Clearly, whatever China stands to
gain must be significant, since it's supporting Russia economically would
(10:24):
result in serious scrutiny from Western countries. In fact, that's
exactly what's been happening. As a wise man once said,
if you want to know why something is happening, examine
who benefits. In this case, there seemed to be four
big benefits for China, and all of them assist with
the CCPs vision and end game. The first benefit is
(10:46):
unrestricted access to Ukraine. Believe it or not, but China
actually has a strategic interest in Ukraine due to its
Belt and Road initiative. For those who don't know, the
Belt and Road initiative is China's global infrastruct your project.
When it's complete, it will run through most countries in Asia,
Europe and Africa, and this includes Ukraine. Now, the second
(11:09):
benefit is the ability to see how the West will
respond to the invasion of a significant yet non NATO ally.
To be clear, Ukraine and Taiwan are two different countries
in two different situations. Even so, the response is likely
to be similar, at least similar enough to allow for
(11:30):
a meaningful analysis. Now, the third game for China is
that many Western countries have sent most and in some
cases all, their significant military equipment to Ukraine. This leaves
such countries less equipped to assist with other significant conflicts
should they arise, be they in Taiwan or elsewhere. The
fourth gain is perhaps the most important, and that's that
(11:52):
the West sanctions against Russia are also doing a lot
of damage to them as well. The most acute effect
is inflation, which is leading to widespread discontent within these countries.
In the case of Europe, most of this inflation is
coming from energy and fuel shortages caused in large part
by the sanctions against Russia. If these energy and fuel
(12:14):
shortages are not addressed soon, you can bet that Europeans
will be overthrowing their governments for continuing to push their
green agendas. The practical effect of this is that these
countries will probably not respond if China invades Taiwan. The
scarier thing to consider is that these countries may not
even respond if Russia launches a counter offensive against Ukraine
(12:37):
in the dead of winter. Let's not go there. This
brings me to the fifth bit of circumstantial evidence, and
that's the United States. The US midterm elections will happen
in about a month's time, and it's believed that they're
going to be the most contentious set of elections to date.
Case and point, Bill Gates recently said that quote, We're
(12:59):
going to have a hung election and a civil war,
straight up. That's what he said. One side will disagree
with the outcome regardless, and people will take to the
streets and start fighting each other. And Bill isn't just
making this stuff up either. Poles show that most American
voters believe there is a high chance of a civil war.
(13:21):
This is true regardless of political affiliation. More than the
third of American voters also believe that it's time for
the country to be split up into blue states and
red states. That is some extreme polarization and all the
inflation that Americans are experiencing is probably making things worse.
(13:42):
When people don't have enough money to pay for rent
or food, riots tend to be the outcome, I reckon
the midterms could provide the perfect spark for these riots.
As with Europe, a domestic crisis of confidence in the
United States means it will be much less likely to
intervene if China invades Taiwan. Some would say that war
(14:04):
tends to be a great unifier, but I would say
that in today's information age, people know which wars are
worth fighting, it turns out most aren't. Now if I'm
wrong and the United States does somehow ralli at citizens
around going to war with China, then it could be
presented with a second issue, and that's the Strategic Petroleum
(14:24):
Reserve or SPR. If you watched our recent video about
the SPR, you'll know it's at its lowest level since
nineteen eighty four. That's because the current administration has been
dumping the SPR into the domestic economy to keep inflation
and petrol prices in the United States low. The SPR
has been draining fast, and OPEC's recent decision to cut
(14:48):
oil production by two million barrels a day will only
cause it to drain even faster. Given that the SPR
is intended for emergencies such as a war, the United
States might not have the energy resources it needs to
defend Taiwan if China invades. You can have the most
powerful military in the world, but if you have no
(15:09):
fuel for all your jets and ships, then you don't
really have a military at all. Now. To be honest,
I actually don't know how important the SPR is for
the U s military's operations. Based on my research, the
US military only uses around two hundred and fifty thousand
barrels of oil per day. This means that the United
(15:29):
States should theoretically have the capacity to supply its military
even without the SPR. One thing is for sure, though,
and that's that the SPR being at a multi year
low is literally a once in a lifetime opportunity. It's
unlikely that the United States will be in such a
vulnerable position energy wise. Ever, Again, you can bet this
(15:52):
is something that c c P is hyper aware of.
Oh and did you know that before and during the
Ukrainian invasion the Chinese have been filling up their strategic
reserves with a lot of Russian oil mm hmm. Speaking
of interesting energy issues. The sixth bit of circumstantial evidence
relates to China's pandemic policy, It's peculiar actions during the pandemic,
(16:16):
it's economic situation, and its demographics. A lot to break
down here, so bear with me. As many of you
will know, China has had a strict zero COVID policy
since the start of the pandemic. Now, there are many
theories as to why this is. One is that the
CCP wants to prove it can handle a pandemic better
(16:38):
than the West. This theory is questionable, given China could
very easily fudge the numbers. That's why the theory that
the CCP wants to cause inflation in the West by
locking down its supply chains has been the more popular
one over the last year. From what I've seen and heard,
it's been taken as a fact among macro analysts at
(16:59):
this point. Still, maybe the c c P really just
is that crazy. The thing about these theories is that
they're not mutually exclusive, and I reckon the sum truth
to both. It's also true that the CCP cannot continue
its zero COVID policy indefinitely. At some point it will
have to stop, and the speculation that this will happen
(17:21):
during or after the twentieth c CP Congress. Once this happens,
then all of China's manufacturing will come back online. This
will create a surge in oil demand at a time
when there are energy shortages around the world. Recall that
OPEQ just cut its output and Europe is already running
(17:41):
dangerously low on oil and gas. Logically, this will only
add to inflation. On the flip side, there are many
who believe that China is intent on continuing its zero
pandemic policy indefinitely. Their evidence for this is that China
continues to build isolation for abilities and continue stockpiling record
(18:03):
levels of food, which is also adding to inflation around
the world. But what if these isolation facilities are not
intended for those who test positive in the future, And
what if the primary purpose of stockpiling all this food
isn't to cause inflation without the pandemic. These actions look
like a country that's preparing for a serious war. Prisons
(18:26):
for dissenters, food for the army. Then there's the economic element.
In case you missed the memo, China's economy is kind
of in the toilet. It's housing market is falling apart.
People are getting locked out of their bank accounts, institutions
aren't investing, and those pandemic restrictions are doing serious economic
(18:47):
damage as well. If you watched one of our older
videos about how to prepare for a bear market, you
might recall that one of the ways to get out
of a crappy economic situation is to start a war.
What's annoying is that only the CCP knows whether China's
economic situation is bad enough to justify this kind of solution.
(19:08):
What we do know is that China has at least
thirty five million more extra men than women. This is
because of China's infamous one child policy, which resulted in
families choosing to have boys over girls. China's gender imbalance
has since become a big problem, and it's going to
become an even bigger problem. That's because young and middle
(19:31):
aged men tend to be the ones who start riots
and revolutions. With the c c P constantly on a
shaky footing, having such a large portion of the population
that's willing and able to fight is not ideal. An
easy way to get rid of all these men would
be to send them all to war. On that note,
the seventh bit of circumstantial evidence relates to what would
(19:55):
happen between other countries if China invaded Taiwan. While China
has a large number of extra men, it's actually in
second place. The first placed country in this contest is India,
with over fifty five million more extra men. As it
so happens, India has some territorial disputes of its own,
(20:15):
Although the most well known of these involved Pakistan, India
actually has a few territorial disputes with China as well.
The idea that India would make a move in the
southeast could be a part of why the CCP hasn't
moved on Taiwan just yet. It's not just China or
India either. There are dozens of countries with disputed territories.
(20:37):
All these countries are facing their own sets of internal
issues that their politicians know they could solve by going
to war with their enemies next door. The only thing
stopping them is the World Police a k a. The West.
But as I mentioned a few moments ago, Europe is
more or less guaranteed to be in crisis, and it's
(20:58):
more than likely that the United States will experience some
internal strife in the next month or so. Does this
mean we will see more territorial conflicts emerge. Possibly, but
that would be guaranteed if China invades Taiwan. That's because
all the other countries with disputed territories will know, or
(21:18):
rather assume that the United States will focus its military
attention on Taiwan. If China invades, as such, it will
make it the perfect time for all these countries to
go to war with their neighbors. Now, the reason I
say assume is because there's a very real possibility the
United States would focus its military attention on another ally
(21:40):
if all hell breaks loose. Israel is the elephant in
the room, and it looks like the U s intelligence
agencies are already at work to undermine Iran so that
it doesn't attack Israel. That's because the US military knows
damn well that it would not be a world war
where it's East versus West. It will be a series
(22:01):
of long held territorial disputes evolving into kinetic war. That's
just because the information age has once again made this
kind of two sided global war impossible. Going to war
against a hated neighbor. However, that's still possible in the
information age, and that's what the next world war will
look like. The question is which hat will be the
(22:24):
first to drop. Will it be China versus Taiwan, or
will there be another significant conflict that comes first to
light the spark. To my mind, it's only a matter
of time before one of these sparks comes around. China
versus Taiwan will then be one of many conflicts, and
there would be no way for anyone to stop them all.
(22:45):
What happens after that is anyone's guess. For what it's worth,
we probably won't see many, if any, nukes get used
in local conflicts in some then it's arguably not a
question of if China invades Taiwan on But when circumstances
are about as favorable as they could be for the CCP,
(23:06):
the next few weeks will present the perfect opportunity to
take advantage of these circumstances, as most of them will
be reaching their apex. For Z, it will be the
only opportunity. Oil is a country's lifeblood. It's what powers
(23:28):
the economy, and those with limited supplies of it are
at a strategic and material disadvantage. This is why the
United States has the Strategic Petroleum Reserve or SPR. However,
in recent weeks the SPR has been at dangerously low levels,
levels not seen since. It's gotten so low that there
(23:50):
are many wondering if it could threaten America's security. This
is exactly what I'm going to cover in this video today,
So don't go anywhere. Okay, before we go any further,
we need a bit of an intro into the SPR.
Back in the nineteen seventies, there was an oil price crisis,
unlike any scene before. This was caused by the Organization
(24:12):
of the Petroleum Exporting Countries or OPEC, deciding to cut
off supplies to all those countries that supported Israel during
the Yom Kippur War. This played out in nineteen seventy three,
when the price of oil tripled in less than a year.
It got so bad that in November President Richard Nixon
asked citizens to lower their thermostats, refrain from driving on Sundays,
(24:36):
and go easy on their Christmas light displays, not too
dissimilar from some of the policies being suggested in Europe
right now. Any who. The result of this crisis was
that the US embarked on a strategy of energy independence,
and part of that initiative was the creation of the
Strategic Petroleum Reserve. The SPR consists of federally controlled oil
(24:59):
stocks that are stored in huge underground salt cabins at
four sites along the coastline of the Gulf of Mexico.
The total storage limit of the SPR is over seven
hundred and fourteen million barrels, and because of its location
near big US refineries, the SPR can ship up to
four point four million barrels per day. By some estimates,
(25:23):
it can take only thirteen days from a presidential say
so for the first oil to enter the US market. Now,
in terms of the mechanics of how it all works,
the Energy Department usually holds an online auction in which
energy companies will bid on the oil. There are also
separate swap agreements where oil companies will take the crude,
(25:44):
but they are required to return at plus interest. The
SPR was originally conceived to address supply shortages, but it
has increasingly been used as a price suppression tool. Oil
has been released from the SPR on three previous occasions.
These were in ninety one during the First Gulf War
two thousand and five in the wake of Hurricane Katrina
(26:07):
and twenty eleven during the war in Libya. I should
also note that the United States is not alone in
its storage of strategic oil. Other members of the i
e A or International Energy Agency, such as Britain, German, EA, Japan,
and Australia, are required to hold ninety days worth of
net oil imports in reserve. China, the world's second largest
(26:30):
oil consumer, also created its SPR fifteen years ago, Speaking
of which, China has been filling up its reserves at
an increasingly frenetic pace. It may interest you to know
that back in February of this year, just before the
invasion of Ukraine, the Chinese were doing exactly this at
a time when the rest of the world was frantically
(26:50):
releasing its stocks in order to stave off rising prices. Now,
moves like this are generally coordinated between countries, but not
this time so effectively. We had a situation in which
China was buying while the rest of the world was selling,
almost as if they knew something the rest of us
didn't m HM. So that brings us to late March.
(27:14):
With the war in Ukraine by now in full swing,
the price of oil was skyrocketing and even breached the
one and thirty dollars a barrel level. Not only that,
but the sanctions being rolled out against Russia were leading
to even further disruptions in the oil market, as countries
in Europe were severely restricted from buying Russian oil. More
about that in the description. The impact of these higher
(27:38):
oil prices was that consumers around the world started feeling
the pinch at the pump, and global leaders started needing
to come up with solutions. The quickest and easiest option was,
of course, to turn to their strategic oil reserves, and
that is exactly what they did. The White House announced
that it would release one million barrels a day for
(27:59):
a period of over six months. According to the press
release from the White House at the time, quote, the
scale of this release is unprecedented. The world has never
had a release of oil reserves at this one million
per day rate for this length of time. This record
release will provide a historic amount of supply to serve
(28:19):
as a bridge until the end of the year when
domestic production ramps up. This wasn't just bluster by the
White House either, It was indeed an unprecedented release of reserves.
The release had a notable impact on the price of oil,
yet fell by almost five percent on the day as
the markets digested the exact impact the White House's decision
(28:42):
would have going forward. The thing is that this was
supposed to be a temporary release that would hold the
country over for the next six months, as noted by
Goldman Sacks though quote this would remain, however, a release
of oil infantries, not a persistent of supply for coming years.
Such a release would therefore not resolve the structural supply
(29:06):
deficit years in the making. So, quite simply, there were
structural issues in US supply that wouldn't be able to
make up for the shortfall in the longer term. Why
is that exactly, Well, it's the result of a combination
of factors which mostly come down to either market dynamics
(29:26):
or politics. From the market dynamics perspective, during the COVID pandemic,
oil demand was completely crushed, which sent prices through the floor.
And I mean that quite literally. There was a point
at which the price of oil actually went negative for
a period of time. Many energy companies went under as
(29:46):
a result of this, while many more decided to completely
curtail any further investment in new energy supply. This meant
that US oil production had fallen to below ten million
barrels a day, and there was no incentive to source
new supply. So that was the impact on demand from
the pandemic. But then, of course you also had the
(30:09):
political slant. There is no doubt that the new US
administration wasn't in favor of policies that would boost fossil
fuel production. With climate change in mind, sustainable energy initiatives
were pursued at the expense of the oil and gas industry.
For example, producers claim that limits on fracking by states
(30:29):
and the closing of certain coastlines such as Alaska and California,
have also impeded their ability to drill new wells. Not
only that, but the Biden administration froze new oil and
gas leases earlier this year. This amid a legal battle
over the cost of climate change. The crux of the
issue was the quote social cost of carbon, a metric
(30:52):
that uses economic models to put a value on each
ton of carbon dioxide emitted. Speaking of which you can
watch our video on individual carbon credits, which will be
linked to in the description for you any who. The
goal of this measure was to quantify the economic harm
caused by the climate crisis from the likes of sea
level rise, more destructive hurricanes, extreme wildfire seasons, and flooding.
(31:16):
The only issue was that a federal judge found this
tool to be illegal and issued an injunction. As a
result of that, the administration decided to freeze the issuance
until there was clarity around the measure. This all took
place in early February, just a few weeks before Russia
invaded Ukraine. Talk about bad timing. Then, of course, there's
(31:38):
the much larger, more pressing question of the infamous Keystone Pipeline.
For those unfamiliar, the Keystone Pipeline was a nine billion
dollar project that was expected to bring at least nine
hundred thousand barrels a day from Alberta to Nebraska, of
the amount released from the strategic reserves earlier this year.
By the way, this has been a hot political issue
(32:01):
for almost twelve years and was constantly delayed on environmental grounds. However,
matters reached fever pitch last year when Biden officially canceled
a key permit. Many had expected this, given that he'd
made it a key campaign promise. However, once it was done,
there were many who pointed out how this could threaten
(32:22):
energy security. That's because, according to the US State Department,
back in America's energy system had a need for more
heavy crude from Canada to replace declining volumes from Mexico
and Venezuela, the latter not a country you want to
have to rely on for oil imports, and paradoxically, that
oil coming from Canada has to be brought down to
(32:44):
the refineries using either trucks or rail, which cause a
fair bit of environmental harm themselves. I'll leave a link
to this Forbes article in the description, which goes into
it all in a lot more detail. Now, I don't
want to get into the politics of all this. My
point is that US domestic energy production and imports have
not been able to keep up with demand, which means
(33:06):
that the administration has had to tap that strategic reserve
more often than absolutely needed. The latest release from the
SPR came last week when OPEC announced that they would
be cutting oil production by two million barrels per day
from November. This was the largest supply cut since and
(33:26):
is equivalent to about two per cent of global supply. Now,
the White House pushed hard to prevent the OPEC cut.
For example, three months ago, Biden made his first official
visit to Saudi Arabia and was seen fist bumping the
crown Prince pretty awkward. But more recently there has been
intense lobbying by the US government behind the scenes to
(33:50):
try and prevent the cut. Officials from across the administration
were involved in reaching out to OPEC members. Even Janet
Yellen herself made the case for not cutting oil production,
explaining that it could be damaging to the global economy.
Of course, one can't dismiss the ulterior motives here. The
U S is about to head into a midterm election
(34:12):
and high gas prices don't sit well with the voting public.
The U S administration is also trying to reduce Russia's revenue,
so Biden and co. Weren't too happy with OPEX move,
and it could further strain relations between the White House
and Saudi Arabia's royal family. Indeed, given the Biden visited
(34:33):
the kingdom in July, it could have been seen as
a personal slight. Now, whatever the politics behind the move,
the cut happened, and that sent oil prices up on
the day and at a local level. In the US,
gas prices were already starting to creep up in a
number of states. For example, last week, the national average
(34:53):
breached three dollars eight year gallon, the second straight week
of increases. This, of course, prompt to the government to
dip into those savings again. On Friday last week, Biden
said that he would release another ten million barrels from
the SPR. Here you can see a graph of the
SPR releases over the past thirty five years. As you
(35:15):
can see, twenty two has been a bumper year for
releases and has seen almost two hundred million barrels drained,
and based on the current trajectory, it's possible that the
SPR could be completely drained by November three. Crazy that's
also assuming that there aren't even larger releases later this year.
(35:38):
Note that the Russian oil price cap has officially been
signed off, Essentially, any country that buys Russian oil above
the cap risks being sanctioned. Of course, Russia isn't going
to take that well and has threatened to restrict supply
to any country that engages with the cap. Less supply
higher prices, more strategic leases from a rapidly depleting reserve
(36:03):
the picture doesn't look good. Why is that? Well, the
world is becoming seemingly more dangerous by the day. Russia
has threatened to use nuclear weapons in Ukraine, while China
is adopting an increasingly aggressive stance towards Taiwan. This latter
point is particularly concerning because of China's own stockpiling of
(36:24):
oil and fun fact, some Chinese companies have also bought
oil from the US Strategic Reserve. This caused political uproar
in the States, and some Republican politicians introduced a bill
to stop the administration from selling oil to foreign enemies.
There's also the broader question of whether using the Strategic
(36:46):
Reserve as a method of price control is a wise one.
That's because the sprs original intent was to address shortages
that threatened energy security. However, by using the SPR to
drive down prices are effectively meddling with the free markets
allocation of resources. For example, shale oil drillers and other
(37:07):
companies in the US are less incentivized to drill for
new supply if the price is artificially controlled. The end
result is a more precarious longer term position, especially if
the SPR runs out under investment brings the supply down
still further supply that would be sorely needed if, for instance,
a war were to break out. So the lesson here
(37:30):
is clear. Don't raid the rainy day fund because you
never know when a thunderstorm may hit. Okay, time for
some of my personal thoughts on this. If there's one
thing that the past few months has taught us is
that energy security should be paramount. Europe is learning that
(37:51):
the hard way, and other countries should sit up and
take note when it comes to the United States, and
under investment in oil exploration and transportation means that it
could be held hostage by OPEC. Indeed, the intense lobbying
actions of the Biden administration prior to the cut are
proof that they desperately needed to avoid these cuts, especially
(38:12):
with the midterms around the corner. Now that OPEC has
snubbed the US government, those spr reserves are being tapped
once again. However, it's only a finite supply and it's
at risk of eventually running dry. The nation's energy security
should not be compromised by using an emergency tool to
lower gas prices, especially if the ends are potential votes
(38:35):
in an election. Not only that, but the price suppression
caused by tapping the spr could lead to further under
investment at a time when that is sorely needed. The
world has become an increasingly dangerous place, and America's enemies
have been working to secure their own oil supplies. They
have no issue buying Russian oil and stockpiling it in
(38:57):
their own reserves. In a time of war, any oil
will be a scarce commodity, and whether that came from
a sanctioned country or not won't be of concern. So
then what do we do Well, It's a tricky one.
OPEC still wields an outsize control on the global oil markets,
and investment into sourcing new supply takes time. However, there
(39:20):
is no time like the present. Perhaps they should once
again consider the potential merits of the Keystone pipeline. Is
shelving that project really in America's best interests at a
time like this. I also think that politicians should allow
the dynamics of supply and demand to address supply shortages.
Price increases are unpalatable, yes, but they are a necessary
(39:44):
evil to source new supply. In the longer term, we
could have a situation whereby more sustainable prices are possible
without having to rely on the goodwill of OPEC. Those
are just my opinions, though you may think otherwise. Thank
you so much for listening to the coin Bureau podcast.
If you'd like to learn more about cryptocurrency, you can
(40:05):
visit our YouTube channel at YouTube dot com forward slash
coin Bureau. You can also go to coin bureau dot
com for loads more information about all things crypto. You
can follow me on Twitter at at coin burea or
one word, and I'm also active on TikTok and Instagram too.
Hello everyone, and welcome to the latest episode from the
midweek edition of the coin Bureau podcast. Every week, I
pick out two of my favorite videos from coin Bureau's
YouTube channel to present to you in podcast form. The
audio you're about to hear is from those videos I've
chosen this week. Many of you have been in touch
to ask whether it's possible to listen to our videos
in podcast format, and so your wish is my command.
(00:23):
This week, I've selected our videos looking at the tensions
between China and Taiwan and the oil price crisis that
likewise threatens global security. When Russia launched its invasion of
Ukraine back in February, many feared that China could follow
suit and use the situation as an opportunity to make
a similar move against its neighbor, Taiwan. China has long
(00:45):
coveted the island, which it regards as sovereign territory, and
has ratcheted up its belligerent rhetoric in recent months. Meanwhile,
the US has pledged to defend Taiwan if it is attacked,
leading to fears that Chinese aggression could precipitate a wider
conflict between the world's two superpowers. The matter is further
complicated by the fact that Taiwan manufactures the vast majority
(01:09):
of the world semiconductors, meaning an attack on the island
would paralyze global trade. If the China Taiwan issue isn't
on your radar yet, well it should be. In the
first part of today's episode, we look at the likelihood
of China making a move against its neighbor and what
such an action could mean for the world. There are
a number of reasons why China could be seriously weighing
(01:31):
up such a step, and even though it would likely
cause global chaos or worse, it unfortunately cannot be discounted.
Taiwan troubles aside, the global macro economic picture continues to
get more and more worrying. In the second part of
this episode, will also look at the issue surrounding oil prices,
which have a huge effect on all economies. The Organization
(01:54):
of the Petroleum Exporting Countries or OPEC, recently announced a
two million barrels per day cut in oil production, a
move calculated to keep prices high. This at a time
when rising inflation and continued supply chain issues to name
but two, are already dragging on the global economy. It's
a worrying development, but made more so by the fact
(02:15):
that the United States has been draining its Strategic Petroleum
Reserve or SPR in order to try and tame inflation
and keep pump prices low, all with an eye on
the mid term elections in just a few weeks time. Meanwhile,
guess which country has been adding to its strategic reserves
of oil. Have a listen, and all will be revealed.
(02:37):
I hope you enjoyed listening to these two pieces, and
I'll be back talking crypto with Mike very soon, So
be sure to stay tuned, and if you want even
more content from coin Bureau, be sure to subscribe to
our YouTube channel and visit us on social media too.
(03:11):
In less than twenty four hours, the twentieth National Congress
of the Chinese Communist Party will begin. This one week
event only happens every five years, and the twentieth edition
is said to be extra special. That's because Chinese President
Zi Jingping is expected to be re elected and designated
(03:31):
as the People's Leader. Now. This title was originally given
to Mao Zadong, who founded the People's Republic of China.
This has led to speculation that China could finally do
the unthinkable and invade Taiwan. So in today's video, I'll
tell you why this seems more likely than ever and
(03:51):
the domino effect it could have around the world. Now,
I want to start by saying that most of what's
in this video is based on circumstantial evidence. Even though
this evidence is compelling when it's put together, it doesn't
mean necessarily that China will invade Taiwan anytime soon. That's
(04:12):
simply because the CCP has proven over time that it
plays the long game. If the CCP knows that it
can take Taiwan without starting a kinetic war, then that's
the route the CCP will take, regardless of how much
time it takes. Note that I'm also not an expert
in geopolitics. I just listened to lots of podcasts and
(04:33):
read lots of news from a whole slew of sources. Now,
funnily enough, the first bit of circumstantial evidence that China
could soon invade Taiwan actually relates to the CCP strategy
of playing the long game. You see, the CCP can
play the long game because it's the only political party
in China. That means it can implement policies that take
(04:55):
decades to complete without having to worry about interference. There's
no other political party that can be elected which will
pause the policy or remove its funding or whatever else.
This is in stark contrast to basically every democracy in existence.
What the CCP and political parties in Western countries have
(05:15):
in common, however, is that their highest ranking officials are
generally getting on a bit, including their leaders. In the
CCPs case, Z is sixty nine years old. That means
that he doesn't have the luxury of playing the long
game on a personal level. As much as Z is
committed to the future of the CCP, his actions have
(05:36):
arguably proven that he's more concerned with cementing himself as
the most powerful leader that China has ever seen. To
my mind, taking back Taiwan would be the best way
to do that, and I reckon Z is hyper aware
of this as well. That's because being elevated to the
same level as Chairman Mao within the CCP is almost
(05:56):
certainly not enough. After all, it's a title there was
also given to Mao's successor, Huago Feng. It doesn't really
make the title that special, then, because it's far from
being one of a kind and therefore could make Z forgettable.
Being labeled as the man who reunified China. However, now
that's a title that would make Z immortal within the CCP.
(06:20):
More importantly, it's a title that nobody else would ever
be able to hold, at least not unless China and
Taiwan are split up and then reunited again sometime far
in the future. Now this ties into the second bit
of circumstantial evidence, and that's the fact that over the
last year or so, almost every single major Western economy
(06:41):
has announced that it will begin creating its own microchip
manufacturing facilities. For context, the Taiwan Semiconductor Manufacturing Company t
SMC manufactures most of the world's microchips and manufactures almost
all the specialized chips that are used in, say, military equipment.
This is basically why Taiwan is so important to the
(07:04):
United States and its allies. It's the reason why the
sudden moves by these countries to establish their own microchip
manufacturing facilities aren't so significant for starters. Creating domestic microchip
facilities means that Western countries will be less reliant on
Taiwanese chips. This, in turn will increase the likelihood that
(07:25):
Western countries will intervene if China invades Taiwan. If Western
countries don't need Taiwan's chips, then they won't have a
reason to intervene militarily. This fact would increase the likelihood
that China will invade Taiwan since there's no fear of
a kinetic war. Again, this doesn't necessarily mean China will
(07:46):
invade Taiwan anytime soon. That's because it's still going to
be years before all these new microchip facilities are built.
Even so, it looks like they will all be complete
within the decade, and at that point China will have
a clearer path to take Taiwan. Now, I talked about
the Taiwanese semiconductor industry in much more detail in a
(08:07):
previous video which will be in the description for you
and pro tip. If TSMC stock starts to completely collapse,
then chances are shit is about to hit the fan. Now,
this relates to the third bit of circumstantial evidence, and
that's that Taiwan is not part of the North Atlantic
Treaty Organization or NATO. This means that Western countries are
(08:30):
under no obligation to defend the country if China attacks. Obviously,
this doesn't mean that Western countries couldn't help in other ways.
Ukraine isn't part of NATO either, yet it's received about
as much support as NATO can give without putting actual
boots on the ground. The thing is that it's not
clear just how far NATO would go to defend Taiwan,
(08:54):
especially once many of its members have set up their
own microchip manufacturing facilities. Note that the United States and
others art technically neutral towards Taiwan's affairs. That said, US
President Joe Biden has mentioned on many occasions that the
US would respond with military force, but it looks like
these statements have been walked back by the White House
(09:17):
every time. That's probably because they know that war with
China over Taiwan wouldn't be worth it. Now, this pertains
to the fourth bit of circumstantial evidence, and that is
the ongoing war in Ukraine. There's no question that China
has been watching the West's sanctions against Russia very closely.
(09:38):
In fact, there's lots of evidence to suggest that China
has been funding Russia's war in Ukraine. I mean, how
else could Russia's economy survive these unprecedented sanctions. This begs
the question of whether China provided these funding guarantees prior
to Russia's invasion of Ukraine. The answer must be yes,
(10:00):
because there's no way Russia would have invaded without China's
economic support. Call me crazy, but I think Putin is
sane enough to have made that calculation. Now this begs
a second question, and that's what China would stand to
gain by supporting Russia financially. Clearly, whatever China stands to
gain must be significant, since it's supporting Russia economically would
(10:24):
result in serious scrutiny from Western countries. In fact, that's
exactly what's been happening. As a wise man once said,
if you want to know why something is happening, examine
who benefits. In this case, there seemed to be four
big benefits for China, and all of them assist with
the CCPs vision and end game. The first benefit is
(10:46):
unrestricted access to Ukraine. Believe it or not, but China
actually has a strategic interest in Ukraine due to its
Belt and Road initiative. For those who don't know, the
Belt and Road initiative is China's global infrastruct your project.
When it's complete, it will run through most countries in Asia,
Europe and Africa, and this includes Ukraine. Now, the second
(11:09):
benefit is the ability to see how the West will
respond to the invasion of a significant yet non NATO ally.
To be clear, Ukraine and Taiwan are two different countries
in two different situations. Even so, the response is likely
to be similar, at least similar enough to allow for
(11:30):
a meaningful analysis. Now, the third game for China is
that many Western countries have sent most and in some
cases all, their significant military equipment to Ukraine. This leaves
such countries less equipped to assist with other significant conflicts
should they arise, be they in Taiwan or elsewhere. The
fourth gain is perhaps the most important, and that's that
(11:52):
the West sanctions against Russia are also doing a lot
of damage to them as well. The most acute effect
is inflation, which is leading to widespread discontent within these countries.
In the case of Europe, most of this inflation is
coming from energy and fuel shortages caused in large part
by the sanctions against Russia. If these energy and fuel
(12:14):
shortages are not addressed soon, you can bet that Europeans
will be overthrowing their governments for continuing to push their
green agendas. The practical effect of this is that these
countries will probably not respond if China invades Taiwan. The
scarier thing to consider is that these countries may not
even respond if Russia launches a counter offensive against Ukraine
(12:37):
in the dead of winter. Let's not go there. This
brings me to the fifth bit of circumstantial evidence, and
that's the United States. The US midterm elections will happen
in about a month's time, and it's believed that they're
going to be the most contentious set of elections to date.
Case and point, Bill Gates recently said that quote, We're
(12:59):
going to have a hung election and a civil war,
straight up. That's what he said. One side will disagree
with the outcome regardless, and people will take to the
streets and start fighting each other. And Bill isn't just
making this stuff up either. Poles show that most American
voters believe there is a high chance of a civil war.
(13:21):
This is true regardless of political affiliation. More than the
third of American voters also believe that it's time for
the country to be split up into blue states and
red states. That is some extreme polarization and all the
inflation that Americans are experiencing is probably making things worse.
(13:42):
When people don't have enough money to pay for rent
or food, riots tend to be the outcome, I reckon
the midterms could provide the perfect spark for these riots.
As with Europe, a domestic crisis of confidence in the
United States means it will be much less likely to
intervene if China invades Taiwan. Some would say that war
(14:04):
tends to be a great unifier, but I would say
that in today's information age, people know which wars are
worth fighting, it turns out most aren't. Now if I'm
wrong and the United States does somehow ralli at citizens
around going to war with China, then it could be
presented with a second issue, and that's the Strategic Petroleum
(14:24):
Reserve or SPR. If you watched our recent video about
the SPR, you'll know it's at its lowest level since
nineteen eighty four. That's because the current administration has been
dumping the SPR into the domestic economy to keep inflation
and petrol prices in the United States low. The SPR
has been draining fast, and OPEC's recent decision to cut
(14:48):
oil production by two million barrels a day will only
cause it to drain even faster. Given that the SPR
is intended for emergencies such as a war, the United
States might not have the energy resources it needs to
defend Taiwan if China invades. You can have the most
powerful military in the world, but if you have no
(15:09):
fuel for all your jets and ships, then you don't
really have a military at all. Now. To be honest,
I actually don't know how important the SPR is for
the U s military's operations. Based on my research, the
US military only uses around two hundred and fifty thousand
barrels of oil per day. This means that the United
(15:29):
States should theoretically have the capacity to supply its military
even without the SPR. One thing is for sure, though,
and that's that the SPR being at a multi year
low is literally a once in a lifetime opportunity. It's
unlikely that the United States will be in such a
vulnerable position energy wise. Ever, Again, you can bet this
(15:52):
is something that c c P is hyper aware of.
Oh and did you know that before and during the
Ukrainian invasion the Chinese have been filling up their strategic
reserves with a lot of Russian oil mm hmm. Speaking
of interesting energy issues. The sixth bit of circumstantial evidence
relates to China's pandemic policy, It's peculiar actions during the pandemic,
(16:16):
it's economic situation, and its demographics. A lot to break
down here, so bear with me. As many of you
will know, China has had a strict zero COVID policy
since the start of the pandemic. Now, there are many
theories as to why this is. One is that the
CCP wants to prove it can handle a pandemic better
(16:38):
than the West. This theory is questionable, given China could
very easily fudge the numbers. That's why the theory that
the CCP wants to cause inflation in the West by
locking down its supply chains has been the more popular
one over the last year. From what I've seen and heard,
it's been taken as a fact among macro analysts at
(16:59):
this point. Still, maybe the c c P really just
is that crazy. The thing about these theories is that
they're not mutually exclusive, and I reckon the sum truth
to both. It's also true that the CCP cannot continue
its zero COVID policy indefinitely. At some point it will
have to stop, and the speculation that this will happen
(17:21):
during or after the twentieth c CP Congress. Once this happens,
then all of China's manufacturing will come back online. This
will create a surge in oil demand at a time
when there are energy shortages around the world. Recall that
OPEQ just cut its output and Europe is already running
(17:41):
dangerously low on oil and gas. Logically, this will only
add to inflation. On the flip side, there are many
who believe that China is intent on continuing its zero
pandemic policy indefinitely. Their evidence for this is that China
continues to build isolation for abilities and continue stockpiling record
(18:03):
levels of food, which is also adding to inflation around
the world. But what if these isolation facilities are not
intended for those who test positive in the future, And
what if the primary purpose of stockpiling all this food
isn't to cause inflation without the pandemic. These actions look
like a country that's preparing for a serious war. Prisons
(18:26):
for dissenters, food for the army. Then there's the economic element.
In case you missed the memo, China's economy is kind
of in the toilet. It's housing market is falling apart.
People are getting locked out of their bank accounts, institutions
aren't investing, and those pandemic restrictions are doing serious economic
(18:47):
damage as well. If you watched one of our older
videos about how to prepare for a bear market, you
might recall that one of the ways to get out
of a crappy economic situation is to start a war.
What's annoying is that only the CCP knows whether China's
economic situation is bad enough to justify this kind of solution.
(19:08):
What we do know is that China has at least
thirty five million more extra men than women. This is
because of China's infamous one child policy, which resulted in
families choosing to have boys over girls. China's gender imbalance
has since become a big problem, and it's going to
become an even bigger problem. That's because young and middle
(19:31):
aged men tend to be the ones who start riots
and revolutions. With the c c P constantly on a
shaky footing, having such a large portion of the population
that's willing and able to fight is not ideal. An
easy way to get rid of all these men would
be to send them all to war. On that note,
the seventh bit of circumstantial evidence relates to what would
(19:55):
happen between other countries if China invaded Taiwan. While China
has a large number of extra men, it's actually in
second place. The first placed country in this contest is India,
with over fifty five million more extra men. As it
so happens, India has some territorial disputes of its own,
(20:15):
Although the most well known of these involved Pakistan, India
actually has a few territorial disputes with China as well.
The idea that India would make a move in the
southeast could be a part of why the CCP hasn't
moved on Taiwan just yet. It's not just China or
India either. There are dozens of countries with disputed territories.
(20:37):
All these countries are facing their own sets of internal
issues that their politicians know they could solve by going
to war with their enemies next door. The only thing
stopping them is the World Police a k a. The West.
But as I mentioned a few moments ago, Europe is
more or less guaranteed to be in crisis, and it's
(20:58):
more than likely that the United States will experience some
internal strife in the next month or so. Does this
mean we will see more territorial conflicts emerge. Possibly, but
that would be guaranteed if China invades Taiwan. That's because
all the other countries with disputed territories will know, or
(21:18):
rather assume that the United States will focus its military
attention on Taiwan. If China invades, as such, it will
make it the perfect time for all these countries to
go to war with their neighbors. Now, the reason I
say assume is because there's a very real possibility the
United States would focus its military attention on another ally
(21:40):
if all hell breaks loose. Israel is the elephant in
the room, and it looks like the U s intelligence
agencies are already at work to undermine Iran so that
it doesn't attack Israel. That's because the US military knows
damn well that it would not be a world war
where it's East versus West. It will be a series
(22:01):
of long held territorial disputes evolving into kinetic war. That's
just because the information age has once again made this
kind of two sided global war impossible. Going to war
against a hated neighbor. However, that's still possible in the
information age, and that's what the next world war will
look like. The question is which hat will be the
(22:24):
first to drop. Will it be China versus Taiwan, or
will there be another significant conflict that comes first to
light the spark. To my mind, it's only a matter
of time before one of these sparks comes around. China
versus Taiwan will then be one of many conflicts, and
there would be no way for anyone to stop them all.
(22:45):
What happens after that is anyone's guess. For what it's worth,
we probably won't see many, if any, nukes get used
in local conflicts in some then it's arguably not a
question of if China invades Taiwan on But when circumstances
are about as favorable as they could be for the CCP,
(23:06):
the next few weeks will present the perfect opportunity to
take advantage of these circumstances, as most of them will
be reaching their apex. For Z, it will be the
only opportunity. Oil is a country's lifeblood. It's what powers
(23:28):
the economy, and those with limited supplies of it are
at a strategic and material disadvantage. This is why the
United States has the Strategic Petroleum Reserve or SPR. However,
in recent weeks the SPR has been at dangerously low levels,
levels not seen since. It's gotten so low that there
(23:50):
are many wondering if it could threaten America's security. This
is exactly what I'm going to cover in this video today,
So don't go anywhere. Okay, before we go any further,
we need a bit of an intro into the SPR.
Back in the nineteen seventies, there was an oil price crisis,
unlike any scene before. This was caused by the Organization
(24:12):
of the Petroleum Exporting Countries or OPEC, deciding to cut
off supplies to all those countries that supported Israel during
the Yom Kippur War. This played out in nineteen seventy three,
when the price of oil tripled in less than a year.
It got so bad that in November President Richard Nixon
asked citizens to lower their thermostats, refrain from driving on Sundays,
(24:36):
and go easy on their Christmas light displays, not too
dissimilar from some of the policies being suggested in Europe
right now. Any who. The result of this crisis was
that the US embarked on a strategy of energy independence,
and part of that initiative was the creation of the
Strategic Petroleum Reserve. The SPR consists of federally controlled oil
(24:59):
stocks that are stored in huge underground salt cabins at
four sites along the coastline of the Gulf of Mexico.
The total storage limit of the SPR is over seven
hundred and fourteen million barrels, and because of its location
near big US refineries, the SPR can ship up to
four point four million barrels per day. By some estimates,
(25:23):
it can take only thirteen days from a presidential say
so for the first oil to enter the US market. Now,
in terms of the mechanics of how it all works,
the Energy Department usually holds an online auction in which
energy companies will bid on the oil. There are also
separate swap agreements where oil companies will take the crude,
(25:44):
but they are required to return at plus interest. The
SPR was originally conceived to address supply shortages, but it
has increasingly been used as a price suppression tool. Oil
has been released from the SPR on three previous occasions.
These were in ninety one during the First Gulf War
two thousand and five in the wake of Hurricane Katrina
(26:07):
and twenty eleven during the war in Libya. I should
also note that the United States is not alone in
its storage of strategic oil. Other members of the i
e A or International Energy Agency, such as Britain, German, EA, Japan,
and Australia, are required to hold ninety days worth of
net oil imports in reserve. China, the world's second largest
(26:30):
oil consumer, also created its SPR fifteen years ago, Speaking
of which, China has been filling up its reserves at
an increasingly frenetic pace. It may interest you to know
that back in February of this year, just before the
invasion of Ukraine, the Chinese were doing exactly this at
a time when the rest of the world was frantically
(26:50):
releasing its stocks in order to stave off rising prices. Now,
moves like this are generally coordinated between countries, but not
this time so effectively. We had a situation in which
China was buying while the rest of the world was selling,
almost as if they knew something the rest of us
didn't m HM. So that brings us to late March.
(27:14):
With the war in Ukraine by now in full swing,
the price of oil was skyrocketing and even breached the
one and thirty dollars a barrel level. Not only that,
but the sanctions being rolled out against Russia were leading
to even further disruptions in the oil market, as countries
in Europe were severely restricted from buying Russian oil. More
about that in the description. The impact of these higher
(27:38):
oil prices was that consumers around the world started feeling
the pinch at the pump, and global leaders started needing
to come up with solutions. The quickest and easiest option was,
of course, to turn to their strategic oil reserves, and
that is exactly what they did. The White House announced
that it would release one million barrels a day for
(27:59):
a period of over six months. According to the press
release from the White House at the time, quote, the
scale of this release is unprecedented. The world has never
had a release of oil reserves at this one million
per day rate for this length of time. This record
release will provide a historic amount of supply to serve
(28:19):
as a bridge until the end of the year when
domestic production ramps up. This wasn't just bluster by the
White House either, It was indeed an unprecedented release of reserves.
The release had a notable impact on the price of oil,
yet fell by almost five percent on the day as
the markets digested the exact impact the White House's decision
(28:42):
would have going forward. The thing is that this was
supposed to be a temporary release that would hold the
country over for the next six months, as noted by
Goldman Sacks though quote this would remain, however, a release
of oil infantries, not a persistent of supply for coming years.
Such a release would therefore not resolve the structural supply
(29:06):
deficit years in the making. So, quite simply, there were
structural issues in US supply that wouldn't be able to
make up for the shortfall in the longer term. Why
is that exactly, Well, it's the result of a combination
of factors which mostly come down to either market dynamics
(29:26):
or politics. From the market dynamics perspective, during the COVID pandemic,
oil demand was completely crushed, which sent prices through the floor.
And I mean that quite literally. There was a point
at which the price of oil actually went negative for
a period of time. Many energy companies went under as
(29:46):
a result of this, while many more decided to completely
curtail any further investment in new energy supply. This meant
that US oil production had fallen to below ten million
barrels a day, and there was no incentive to source
new supply. So that was the impact on demand from
the pandemic. But then, of course you also had the
(30:09):
political slant. There is no doubt that the new US
administration wasn't in favor of policies that would boost fossil
fuel production. With climate change in mind, sustainable energy initiatives
were pursued at the expense of the oil and gas industry.
For example, producers claim that limits on fracking by states
(30:29):
and the closing of certain coastlines such as Alaska and California,
have also impeded their ability to drill new wells. Not
only that, but the Biden administration froze new oil and
gas leases earlier this year. This amid a legal battle
over the cost of climate change. The crux of the
issue was the quote social cost of carbon, a metric
(30:52):
that uses economic models to put a value on each
ton of carbon dioxide emitted. Speaking of which you can
watch our video on individual carbon credits, which will be
linked to in the description for you any who. The
goal of this measure was to quantify the economic harm
caused by the climate crisis from the likes of sea
level rise, more destructive hurricanes, extreme wildfire seasons, and flooding.
(31:16):
The only issue was that a federal judge found this
tool to be illegal and issued an injunction. As a
result of that, the administration decided to freeze the issuance
until there was clarity around the measure. This all took
place in early February, just a few weeks before Russia
invaded Ukraine. Talk about bad timing. Then, of course, there's
(31:38):
the much larger, more pressing question of the infamous Keystone Pipeline.
For those unfamiliar, the Keystone Pipeline was a nine billion
dollar project that was expected to bring at least nine
hundred thousand barrels a day from Alberta to Nebraska, of
the amount released from the strategic reserves earlier this year.
By the way, this has been a hot political issue
(32:01):
for almost twelve years and was constantly delayed on environmental grounds. However,
matters reached fever pitch last year when Biden officially canceled
a key permit. Many had expected this, given that he'd
made it a key campaign promise. However, once it was done,
there were many who pointed out how this could threaten
(32:22):
energy security. That's because, according to the US State Department,
back in America's energy system had a need for more
heavy crude from Canada to replace declining volumes from Mexico
and Venezuela, the latter not a country you want to
have to rely on for oil imports, and paradoxically, that
oil coming from Canada has to be brought down to
(32:44):
the refineries using either trucks or rail, which cause a
fair bit of environmental harm themselves. I'll leave a link
to this Forbes article in the description, which goes into
it all in a lot more detail. Now, I don't
want to get into the politics of all this. My
point is that US domestic energy production and imports have
not been able to keep up with demand, which means
(33:06):
that the administration has had to tap that strategic reserve
more often than absolutely needed. The latest release from the
SPR came last week when OPEC announced that they would
be cutting oil production by two million barrels per day
from November. This was the largest supply cut since and
(33:26):
is equivalent to about two per cent of global supply. Now,
the White House pushed hard to prevent the OPEC cut.
For example, three months ago, Biden made his first official
visit to Saudi Arabia and was seen fist bumping the
crown Prince pretty awkward. But more recently there has been
intense lobbying by the US government behind the scenes to
(33:50):
try and prevent the cut. Officials from across the administration
were involved in reaching out to OPEC members. Even Janet
Yellen herself made the case for not cutting oil production,
explaining that it could be damaging to the global economy.
Of course, one can't dismiss the ulterior motives here. The
U S is about to head into a midterm election
(34:12):
and high gas prices don't sit well with the voting public.
The U S administration is also trying to reduce Russia's revenue,
so Biden and co. Weren't too happy with OPEX move,
and it could further strain relations between the White House
and Saudi Arabia's royal family. Indeed, given the Biden visited
(34:33):
the kingdom in July, it could have been seen as
a personal slight. Now, whatever the politics behind the move,
the cut happened, and that sent oil prices up on
the day and at a local level. In the US,
gas prices were already starting to creep up in a
number of states. For example, last week, the national average
(34:53):
breached three dollars eight year gallon, the second straight week
of increases. This, of course, prompt to the government to
dip into those savings again. On Friday last week, Biden
said that he would release another ten million barrels from
the SPR. Here you can see a graph of the
SPR releases over the past thirty five years. As you
(35:15):
can see, twenty two has been a bumper year for
releases and has seen almost two hundred million barrels drained,
and based on the current trajectory, it's possible that the
SPR could be completely drained by November three. Crazy that's
also assuming that there aren't even larger releases later this year.
(35:38):
Note that the Russian oil price cap has officially been
signed off, Essentially, any country that buys Russian oil above
the cap risks being sanctioned. Of course, Russia isn't going
to take that well and has threatened to restrict supply
to any country that engages with the cap. Less supply
higher prices, more strategic leases from a rapidly depleting reserve
(36:03):
the picture doesn't look good. Why is that? Well, the
world is becoming seemingly more dangerous by the day. Russia
has threatened to use nuclear weapons in Ukraine, while China
is adopting an increasingly aggressive stance towards Taiwan. This latter
point is particularly concerning because of China's own stockpiling of
(36:24):
oil and fun fact, some Chinese companies have also bought
oil from the US Strategic Reserve. This caused political uproar
in the States, and some Republican politicians introduced a bill
to stop the administration from selling oil to foreign enemies.
There's also the broader question of whether using the Strategic
(36:46):
Reserve as a method of price control is a wise one.
That's because the sprs original intent was to address shortages
that threatened energy security. However, by using the SPR to
drive down prices are effectively meddling with the free markets
allocation of resources. For example, shale oil drillers and other
(37:07):
companies in the US are less incentivized to drill for
new supply if the price is artificially controlled. The end
result is a more precarious longer term position, especially if
the SPR runs out under investment brings the supply down
still further supply that would be sorely needed if, for instance,
a war were to break out. So the lesson here
(37:30):
is clear. Don't raid the rainy day fund because you
never know when a thunderstorm may hit. Okay, time for
some of my personal thoughts on this. If there's one
thing that the past few months has taught us is
that energy security should be paramount. Europe is learning that
(37:51):
the hard way, and other countries should sit up and
take note when it comes to the United States, and
under investment in oil exploration and transportation means that it
could be held hostage by OPEC. Indeed, the intense lobbying
actions of the Biden administration prior to the cut are
proof that they desperately needed to avoid these cuts, especially
(38:12):
with the midterms around the corner. Now that OPEC has
snubbed the US government, those spr reserves are being tapped
once again. However, it's only a finite supply and it's
at risk of eventually running dry. The nation's energy security
should not be compromised by using an emergency tool to
lower gas prices, especially if the ends are potential votes
(38:35):
in an election. Not only that, but the price suppression
caused by tapping the spr could lead to further under
investment at a time when that is sorely needed. The
world has become an increasingly dangerous place, and America's enemies
have been working to secure their own oil supplies. They
have no issue buying Russian oil and stockpiling it in
(38:57):
their own reserves. In a time of war, any oil
will be a scarce commodity, and whether that came from
a sanctioned country or not won't be of concern. So
then what do we do Well, It's a tricky one.
OPEC still wields an outsize control on the global oil markets,
and investment into sourcing new supply takes time. However, there
(39:20):
is no time like the present. Perhaps they should once
again consider the potential merits of the Keystone pipeline. Is
shelving that project really in America's best interests at a
time like this. I also think that politicians should allow
the dynamics of supply and demand to address supply shortages.
Price increases are unpalatable, yes, but they are a necessary
(39:44):
evil to source new supply. In the longer term, we
could have a situation whereby more sustainable prices are possible
without having to rely on the goodwill of OPEC. Those
are just my opinions, though you may think otherwise. Thank
you so much for listening to the coin Bureau podcast.
If you'd like to learn more about cryptocurrency, you can
(40:05):
visit our YouTube channel at YouTube dot com forward slash
coin Bureau. You can also go to coin bureau dot
com for loads more information about all things crypto. You
can follow me on Twitter at at coin burea or
one word, and I'm also active on TikTok and Instagram too.
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