You may not know this. It wasn’t widely reported. Clearly, this is something the elites in Davos do not want to admit.
At the end of 2023, the U.S. Energy Information Administration reported that U.S. crude oil production had reached an all-time high. arrival 13.25 million barrels per day September 2023.
What is particularly notable about this new all-time high is that as recently as 2010, monthly U.S. crude oil production was only 5 million barrels per day.
We all know the story of this incredible transformation. Advances in oil extraction technology in hydraulic fracturing and horizontal drilling have enabled U.S. oil producers to supply abundant oil to consumers.
These improvements in drilling efficiency have enabled record production at competitive prices while using fewer oil rigs. Moreover, this record production was achieved despite the Biden administration’s restrictive oil and gas policies.
This abundance of American oil and the prices it brings to market has led to increased exports to Europe and Asia. In fact, increased U.S. crude oil exports to Asia were a major factor in Saudi Arabia’s decision last year to lower oil prices for Asian buyers. Intense competition from U.S. oil producers has left Saudi Arabia fighting for market share.
Given the many geopolitical challenges facing the United States, including the Russia-Ukraine war and the Israel-Hamas war, record U.S. crude oil production is an important reason why oil prices will remain moderate throughout 2023. This essentially neutralized oil price leverage. Saudi Arabia and Russia surrounding the oil market. OPEC+ has lost control of international oil prices.
Now OPEC+ is repeating its 2014 strategy of flooding oil markets, sending oil prices crashing and forcing dozens of U.S. drillers into bankruptcy. But at this point, U.S. drillers have already significantly reduced production costs and will likely be much more resilient to this strategy.
In summary, record US oil production in 2023 was a mitigating force in what would have been a very difficult year for the global economy. But as the year ended, a new challenge to its ancient origins arose.
God’s Supporter
More than 3,000 years ago, Moses probably parted the Red Sea so that the Israelites could escape the Egyptians and wander through the desert for 40 years in search of the Promised Land. Nonetheless, the Red Sea and its coastal countries remain a site of ongoing conflict.
The Red Sea practically connects the Mediterranean Sea with the Arabian Sea. The final transit point is the Suez Canal, Egypt’s artificial sea-level waterway that connects the Mediterranean Sea with the Red Sea. More importantly, it serves as a major trade route between Europe and Asia.
The Red Sea, located between Saudi Arabia, Egypt and Sudan, is one of the world’s important trade corridors, controlling approximately 12% of world trade and nearly a third of global container shipping. About 19,000 ships pass through the Suez Canal every year. Inlets are strategic pressure points for energy and raw materials trade.
The Houthi movement, also known as Ansar Allah (God’s Supporters), is one aspect of Yemen’s civil war that has raged for decades.
Shin, supported by the Houthis, is descended from Abraham’s son Ishmael, who was exiled to the desert. Naturally, the great rift between Ishmael and his brother Isaac continues to this day.
The Houthis are backed by Iran and form part of Iran’s “Axis of Resistance” – an Iran-led alliance of anti-Israel and anti-Western regional militias.
As you know, in December 2023, Houthi missile and drone attacks targeted numerous container ships in the Red Sea. This was followed by threats to target all ships heading to Israel, regardless of whether they were Israeli-owned or operated.
To avoid the same fate, major energy and shipping companies including BP and Maersk have suspended operations through the Red Sea and Suez Canal.
If this continues for an extended period of time, it will have serious implications for global trade, consumer price inflation, and the stability of oil and gas markets.
The Empire Strikes Back
Major shipping companies quickly diverted their vessels from the Red Sea in late December 2023. An alternative route is a much longer route around the Cape of Good Hope.
This adds 7 to 15 days and approximately 6,500 km to the trip. It also increases demand for bunker fuel to move shipments and reduces the availability of ships and containers as ships are tied up for longer periods of time to transport the same amount of cargo.
Large-scale changes to trade routes may disrupt supply chain links in the short term. This is already driving up shipping costs and impacting consumer prices.
If you remember, the six-day blockage of the Suez Canal in 2021 demonstrated the importance of this major shipping route. When the Ever-Given container ship ran aground in the waterway in March 2021, it resulted in delays in shipments of consumer goods from Asia to Europe and North America and severe damage to global supply chains.
In addition to delays and increased transport costs, rerouting around the Cape of Good Hope could have secondary impacts on the economy. It all depends on how long the confrontation in the Red Sea lasts. With this, any hope of safe passage around the cape faded.
The Pentagon’s initial plan to repel Houthi attacks, Operation Prosperity Guardian, had little success. Houthi drone attacks on container ships continued.
Then, on Thursday, January 11, without a declaration from Congress, President Biden launched a large-scale retaliatory strike against Houthi rebels in Yemen. The attacks targeted munitions warehouses, launch systems, production facilities, and air defense radar systems.
Additional U.S. strikes against Houthi rebel targets in Yemen occurred this week. In return, the Houthis have continued their Red Sea drone and missile attacks.
Where this all leads is a point of speculation. It’s no exaggeration to say that it’s going to be an ugly place.
Rapid Closing of America’s Technology Gap
Regardless of how the war escalates and its ultimate impact on global supply chains, the Red Sea crisis demonstrates the limits of the United States’ ability to project power and monitor vital trade routes. Maybe you shouldn’t do this in the first place.
In the larger picture, the Houthi rebels’ use of drone strikes is drawing attention as it could significantly bridge the technological gap that the United States and Europe have enjoyed around the world for the past 250 years. Simply put, the technological power gap that the United States experiences today is much thinner than the gap it had at the end of World War II.
The attacks on ships in the Red Sea were carried out by long-range drones operated by the Houthi. This includes the Samad family of drones. Specifically, Samad-1, Samad-2, and Samad-3. The Houthis claim to have designed and manufactured the Samad family of drones. They are believed to have originated from Yemen with support from Iran.
The Samad drone costs roughly $20,000 to produce, much cheaper than the existing $500,000 missiles used to shoot it down. It is much cheaper than a fighter jet. For example, Lockheed Martin’s F35A costs $82.4 million.
After four decades of rapid globalization, more and more of America’s adversaries, or potential adversaries, have the know-how and resources to compete for technological supremacy. With each iteration of the Samad drone, the technology gap and the costs to fill it plummet.
In fact, long-range drones like the Colt 45 from the late 19th century are great equalizers.
Perhaps the Red Sea crisis may end quickly with an Israel-Hamas peace deal. Nonetheless, this incident revealed that America’s skills gap is rapidly narrowing. It is only a matter of time before new attacks against American interests begin.
Clearly, there are investment opportunities in U.S. military contractors. But the actual opportunity presented is much more basic. It can be found in the real source of strength and may also be highlighted at the beginning of this letter.
You can thank me later.
[Editor’s note: No investing strategy is complete without considering geopolitical factors. For this reason, I just put the finishing touches on a unique Special Report. It’s called “Power Gap Cost Plunge: How to Hedge Against Geopolitical Chaos in 2024.” You can access a copy here for less than a penny.]
thank you,
minnesota gordon
for economic prism
A return to the economic prism in the rapid closing of America’s technological gap.
