Obviously, the ongoing morass in eastern Europe continues to dominate global headlines. That and the recent spike in crude oil prices, especially after the US Administration (and other countries) announced a ban on Russian crude. The fear is China won’t be able absorb this sudden availability, largely due to the relative inefficiency of the Russian pipeline networks. Essentially, those in the east don’t really connect to those in the west like you think they might.
Why is that?
There are a number of reasons, economic, societal, and political. However, you can’t discount the sheer size of Putin’s realm. Even if you think you might know something about Russia, the distances between point A and point B are hard to fathom.
Consider this: the 4,857 km long Eastern Siberia Pacific Ocean (ESBO) pipeline exports crude oil from Russia to Japan, China, and Korea. It starts in a faraway place named Tayshet, and terminates somewhere called Kozmino, which is a port on the Sea of Japan.
Well, so what? Am I right?
Fair enough. However, please know the distance from Tayshet and Przemysl (which is close to the Poland/Ukraine border) is 5,930 km. That works out to be 3,685 miles, or a little bit longer than the distance from Key West to Vancouver. That would be quite the pipeline addition in a compressed period of time.
Even more mind-boggling is the length of the Trans-Siberian Railway, which starts in the port city of Vladivostok and ends in Moscow. Care to guess how long that is? It is a length of 5,772 miles, which is about 1,500 miles longer than the distance between Key West and Utqiagvik (Barrow) Alaska, our country’s northernmost city.
Essentially, building out infrastructure over such a vast, underpopulated expanse is a very expensive feat of engineering. While not impossible, it certainly isn’t going to happen between now and the time you have booked for your family trip this summer. This presents a problem, doesn’t it? Just how expensive will gasoline be this summer?
Wow…I am going there, am I?
Let me disappoint you straight out of the gates: no one knows for sure. However, as with most things in life, the worst case scenario rarely happens. This is why we call it the worst case scenario, as opposed to the probable case.
Whenever I think about such things, worst case scenarios and the like, I remember back to a meeting I attended way back in the middle of 1999. While that doesn’t seem like that long ago to me, most of today’s college seniors weren’t even born then. In any event, we were discussing the dreaded Y2K bug, and how all the world’s computers were going read 1/1/2000 as 1/1/1900. I am not going to go into the reasoning for this; just trust me.
One person in the meeting was extremely concerned about this prospect, which was more the norm than the exception. So much so, they said: “what is going to happen when the mortgage company or the bank says you owe 100 years’ worth of interest? I mean people are going to lose their homes!” This one of the more common worries, believe it or not. However, another person at the meeting said the following: “Don’t pay it. You have a contract with a start date and end date on it. No one is going to throw you out in the streets. This is all going to be a fizzle.”
The point of the preceding paragraph isn’t to disregard the current unpleasantness or not to worry. After all, what is going on over there is far more than a fizzle. No. The message is to not focus on illogical outcomes.
First things first, IF the situation in Ukraine isn’t revolved, one way or the other, in, say, a month, we will probably have much bigger worries than the cost of a tank of gas. Secondly, there is no way additional supply won’t make into the global markets at the current price levels, if not higher. Zero. Third, in an election year, there is no way the ruling party in the United States won’t find some additional supply in order to drive down prices. Zero.
Oh ho, don’t ask how the supply got there; just be happy it did, and don’t question the discounted prices the figures in the shadows paid for it. Finally, a few sentences from the Administration would cause crude oil to fall, perhaps significantly: “we are going to consider moving forward with the Keystone pipeline project and reopen ANWR for drilling.” That would likely drive a lot of speculators out of the futures market, at least for the time being.
In short, while no one knows for certain exactly what gas prices will be this summer, they shouldn’t come anywhere close to that worst case scenario which is dancing about in your head. If they are, the ruling party will face a very hostile voting public in November, which is the last thing it wants to do. That will be a very powerful incentive.
Going back to Russia and its pipeline shortfalls, I strongly suspect this situation will cause Moscow to: 1) rapidly complete its Power of Siberia 2 natural gas pipeline with China; 2) increase overall capacity at the port in Kozmino; 3) build an increased number of rail tanker cars, a lot of them, and; 4) be diligent in connecting its east-west pipelines, at least to Tayshet. Of course, this will take a lot of money the Russians don’t currently have, at least from what we know, but that likely won’t stop them from getting it done…and Washington won’t be able to do much about it.
In essence, the immediate probable end to the conflict in Ukraine will be a shift in Russian focus and development to central Asia and the Far East. These areas will be the biggest potential markets for its output moving forward. The question will be whether the west is willing to sanction those countries which do business with the Russians. At this point in time, this would be an extremely difficult thing to do.
In the end, due to a variety of factors, China likely isn’t able to absorb all of Russia’s excess crude in the short-term. However, that won’t stop it from trickling into the global economy, and trickle in it will. Finally, all of this will likely cause Russia to look more eastward to the future than it has in a very long time…which will present a whole new set of issues for the US State Department.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well; may your blessings outweigh your sorrows not only on this day but on every day, and may the conflict and bloodshed in Ukraine end quickly.
Please not, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.