On April 30th, the June Brent contract expired (”rolled”) around $114/bbl while the July contract, which immediately became the headline benchmark, traded closer to $108/bbl. Within days, deferred Brent pricing moved lower still, toward the high-$90s. Casual observers saw “oil falling”. The physical market was signalling something rather different.

The June-July backwardation had already widened to roughly $5-10/bbl depending on the point observed during expiry week (much lower than the extremes seen a few weeks earlier1, but way above “normal”). This is an extraordinary premium for immediate barrels in a market supposedly expecting normalization only weeks later. Reports of prompt physical cargoes trading well above benchmark futures, in some cases north of $120/bbl and occasionally far higher, continued circulating through trading desks and shipping markets.

So the market is saying tight-ish supply now (although even $150/bbl oil would not be an inflation adjusted ATH - that would be more like $220/bbl), and what looks to me like a worrying degree of complacency about near months, and complete capitulation further out. Maybe it is all a big nothing burger?

The Something Burger

A decade or so (more!) ago, rumours of disruption would have moved the curve up, all the way out. higher prices now and higher prices later. Yes backwardation, but not steep. Today we have actual disruption - on a scale that has never been tested.

So what is different now?

The answer would appear to be a complex set of factors. There is the physical market and the much larger financial market - the fluffy bun of processed bread that is hiding the something burger.

Physical recovery operates on logistical rather than financial timescales. Even assuming full reopening tomorrow, the system does not magically reset. Tankers already displaced must complete round trips. Floating storage has been consumed. Strategic reserves that were drawn down require replenishment. Refineries have altered crude slates and product balances. Oil on water has effectively been borrowed from the future. Add in countries facing supply concerns may opt for new or increased existing strategic reserves in the near future.

Today the market faces actual sustained disruption, visible inventory depletion and mounting logistical strain, yet deferred Brent remains around $97/bbl.

The paper market appears to be pricing normalization faster than the physical system can plausibly deliver it.

Part of the explanation is structural. Futures markets are dominated by financial actors rather than physical buyers and sellers. The Brent curve is not a forecast; it is a probability-weighted clearing mechanism. The market may implicitly be pricing something like a 30% probability of prolonged $140+ oil against a larger probability of recession, political intervention, strategic reserve releases and eventual reopening.

Something like:

• 30% chance of $150 oil,

• 50% chance of rapid normalization,

• 20% chance of recessionary collapse.

The shale era also conditioned markets to believe that high prices self-correct quickly. Mean reversion has become deeply embedded in commodity trading psychology. High prices are assumed to produce rapid supply response and demand destruction.

But neither mechanism appears especially convincing at current price levels. Inflation-adjusted oil prices around $97-120/bbl are elevated but not historically extreme. More importantly, suppressed deferred pricing discourages the very upstream investment needed to restore future supply elasticity. Shale players are explicitly looking at shareholder returns not increased short-cycle drilling. Conventional oil does not sanction long-cycle drilling programmes based on temporary spot panic while the forward strip sits at the economics required for confidence.

In addition, for those who believe(d) that OPEC (as was) had lots of spare capacity - it is worth noting that this is almost on the wrong side of the Strait of Hormuz, so not exactly the cavalry waiting to charge over the hill.

At the same time, demand destruction is already appearing in some sectors, particularly aviation. That is notable because the destruction may not be price-led in the classic economic sense. Physical scarcity, product dislocation and logistical friction are beginning to constrain activity directly. That is a far more serious signal than consumers simply reacting to expensive gasoline.

Hot tip - if you want to fly - go via the UAE - great airlines and massive glut of (cheap) jet-fuel needing to be used.

Papering over the cracks

It is well known that the financial oil market is vastly larger and more liquid than the physical market it supposedly represents. In theory, that should improve price discovery. In practice, it may be disguising the underlying stresses.

Modern oil trading remains psychologically anchored to the shale-era, when supply shocks repeatedly proved temporary and high prices quickly self-corrected through short-cycle drilling bringing on more supply. Betting on prolonged scarcity has often been punished across recent US administrations - whatever the ideological grandstanding. Mean reversion became embedded into market psychology.

Most futures participants are also not physical oil actors. Pension funds, macro traders and systematic strategies increasingly dominate turnover. Many are trading inflation expectations, recession risk or positioning rather than tanker cycles, refinery balances or depleted inventories in the Gulf. The market therefore prices probability-weighted macro outcomes more than it prices molecules.

As a macro viewer, the paper market may believe economic weakness will reduce demand almost as quickly as disruption reduces supply. If aviation slows, petrochemical margins compress and industrial activity weakens, deferred demand falls. In that framework, subdued forward prices reflect expected recession as much as expected normalization (and as noted above - the “price” is a statistical outcome.

But reopening is not the same thing as normalization. Even if transit resumes tomorrow, inventories remain depleted, strategic reserves require rebuilding, tankers are displaced and refinery systems remain unbalanced. Physical systems recover on logistical timescales, not financial ones.

Liquidity itself may also be masking the strain. Benchmark futures remain highly tradable even as the underlying physical market fragments into opaque bilateral deals and regional scarcity pricing. The visible curve can therefore understate the true marginal cost of physical barrels.

The result is a widening divergence between the physical and financial views of the market. Physical markets are pricing scarcity and logistical stress. Financial markets continue pricing eventual normalization plus demand destruction.

My oil-guru echo chamber is screaming “crisis”, the market shrugs and screams “tech”.

Rolling in the deep

The likely outcome is a repeated rediscovery of scarcity. As each contract approaches expiry, prices converge upward toward immediate physical conditions. Then the market rolls forward again and resumes pricing reassurance. The saw-tooth behaviour seen during the April Brent roll may prove to be a structural feature of this market rather than a temporary anomaly.

The curve does not fully reprice upward. It repeatedly rediscovers reality one contract roll at a time.

Canada is routinely described, with some justification, as an energy superpower. Or at least, a potential Energy Superpower. It is one of the world’s largest producers of crude oil, the majority of which is exported, and has vast natural gas potential. Due to geography and some politics it is a reliable supplier to the United States providing significant volumes of heavy crude. Allied European and Indo-Pacific countries increasingly look to Canada as a stable democratic source of hydrocarbons and resources in a more fractured global system. Until very recently, the language of energy security has been framed around our ability to help with energy security for others. It has focused on export capacity, trade corridors, and the role Canada can play in supporting partners across the Atlantic and Pacific basins.

That framing is not wrong, but it is not the whole picture. Surprisingly, Canada itself has issues of energy security that are being brought into focus by current events half a world away.

Energy Security - but whose energy security?

When discussing energy security, there is an a priori heuristic that a country rich in resources is, by definition, secure in its own supply. In Canada’s case, that assumption deserves closer scrutiny.

We produce a lot of oil and gas, we export most of it and some would argue not enough. But Canada is big, really big - and linear projects are difficult. Geography and politics make west-east projects particularly hard. One consequence is that there are huge regional disparities.

A system that has worked fine in times of abundance will show cracks now that global supplies, particularly of oil, are more stressed. Regional distinctions matter now.

Disruption in the Middle East, particularly one that constrains flows through the Strait of Hormuz, does not simply raise a global benchmark price. It tightens the Atlantic Basin market for crude oil, refined products, and liquefied natural gas. In such conditions, the degree to which a country can rely on internal supply chains becomes a question of practical importance rather than theoretical interest.

If you are in Alberta, you are probably concerned to see the price of gasoline rising (it is still a global market) - but you are unlikely to be worried about gas stations running dry.

Alberta (indeed, “Western Canada”) produces more oil and gas than it needs and has ample refining capacity. For Canada, the question of energy security points east where it is potentially a different story.

Let’s look at why that is, and speculate on the consequences.

East or Eden

The Canadian oil system is not a single integrated network. It is a set of regional systems linked imperfectly across a large and complex geography. Western Canada, centred on Alberta and Saskatchewan, is the locus of production and has more than adequate refining capacity (Alberta alone has 570kbopd (c. 30%) of Canada’s refining capacity).

Central/Eastern1 Canada, centred on Ontario and Quebec are the locus of demand some 60% of Canada’s population reside in these two provinces. Further east again we have the more isolated Atlantic provinces - which have their own (lesser known) offshore oil production. Linking the West, the Centre and the East lies infrastructure that is functional but indirect, and in some respects inadequate.

Crude oil is the feedstock, but what we use are petrol, diesel, jet fuel and so on - refined products. Many countries are discovering belatedly that not having refining capacity in-country is more of an energy security risk than simply not having crude. To its credit, Canada has maintained a healthy refining capacity.

On the physical system:

• Ontario has four refineries, three in or around Sarnia and one in Nanticoke, with combined capacity of 402 kb/d. (source)

• Quebec has two large refineries, Suncor’s Montreal refinery at 137 kb/d and Valero’s Jean Gaulin refinery at Lévis at 265 kb/d, also 402 kb/d combined.

• New Brunswick has the Irving refinery at Saint John, Canada’s largest, at roughly 320 kb/d.

• Newfoundland’s Come By Chance plant is no longer a conventional crude refinery; it was closed in 2020 and converted to renewable diesel production, so Atlantic Canada has effectively lost that crude refining node. Go Green, Go Broke.

Sourcing Crude

Ontario and Quebec receive significant volumes of western Canadian crude. Yet much of that supply reaches them only after crossing into the United States and returning via cross-border pipelines. The Enbridge Mainline system delivers crude into the American Midwest before re-entering Canada at Sarnia. This arrangement works efficiently under normal conditions. It also embeds a structural dependence on cross-border transit for the supply of central Canada’s refining system.

Quebec occupies an intermediate position. It is connected to western supply via Line 9, which carries crude north east from Ontario into Montreal and onward to Lévis (south shore of Quebec City). At the same time, it retains a degree of marine exposure. Tanker imports continue to supplement pipeline volumes, particularly for the Valero refinery at Lévis, which has historically processed a mix of domestic and imported crude.

Further east, the system changes more fundamentally. The Irving refinery at Saint John (NB) is the largest in Canada, yet it is not connected by pipeline to western production. It is supplied by marine imports (oil tankers), drawing on global crude streams from the the Atlantic basin, reportedly, Russia and of course the Middle East. A substantial share of its refined output is exported to the U.S. Northeast (PADD 1 area).

In very close proximity is the Canaport LNG regasification terminal, which is seriously over dimensioned for Atlantic Canada’s needs (there is basically no distribution infrastructure for gas) - and a large part of the imported gas is on-sold to the NE USA.2

The broader Atlantic region relies on a combination of this refining capacity, imported products, and, in the case of natural gas, imports from the United States and globally sourced LNG regasified in New Brunswick.

Indeed, in the days prior to the war in Iran, the fact that Atlantic Canada was importing LNG from Australia was rightly making the headlines.

One Country, Three Energy Systems

Canada is not one energy system, but arguably three:

• Western surplus system (production + refining integrated)

• Central system (connected but via U.S. transit)

• Atlantic system (import dependent)

The West is fine.

The potential fragility of the Central area was highlighted around “Liberation Day” in 2025. Cutting petroleum exports to the USA was mooted as a counter to threats of tarrifs on Canadian products. This was a non-starter for many reasons, but one that was not widely appreciated was that Toronto and Southern Quebec would have been out of petrol, diesel and jet fuel in a few days (see notes on Enbridge Mainline and Line 9 above, also here “Retaliation - a MAD policy”).

Whilst the current Canadian administration seems to think that the USA is the Great Satan, the oil still flows both into the US and back up to Ontario and Quebec. Despite the diplomatic spats, this is less fragile than being exposed to current global markets.

A West-East pipeline entirely within Canada would be a whole lot better. Just sayin’

These arrangements are the product of geography, history, economics, and policy. They are not inherently inefficient. Indeed, they reflect the logic of continental integration and global trade. The difficulty is that they leave Atlantic Canada exposed to precisely the external markets that tighten most acutely in a global supply shock.

The point is not that Eastern Canada would immediately run short of fuel in a crisis. The evidence does not support that conclusion. The point is that it would face the full force of global price spikes and logistical tightening, without the buffering effect of a fully integrated national supply chain. In such circumstances, the question of internal energy security becomes more than an academic concern.

St John (NB)3 has the advantage of being right on the Atlantic (unlike Levis and Montreal which are a long way up the St Lawrence). However, this Atlantic-facing geography comes with the Atlantic basin pricing. With vast amounts of crude blocked on the wrong side of the Strait of Hormuz - the Atlantic benchmark or Brent has been trading at $135-$150/bbl for spot cargoes. West Canadian Select (that has no transport route to Atlantic Canada) is trading at $75/bbl. It is not exactly the same quality/spec, but the price differential is almost entirely due to logistics.

This big difference in feedstock pricing has not shown up (yet) in equivalent regional price disparities in refined products. This is because the price-at-the-pump is layered with other factors, notably taxes and refining margins. The WCS discount largely accrues to refiners, not consumers. That said, diesel is showing significant regional variation:

• Alberta: ~$1.50–$1.65/L (notably lower in some rack data)

• Ontario / Quebec: ~$2.55–$2.60/L

• Atlantic Canada: ~$2.60–$2.80/L

Connecting The Dots

It is at this point that history re-enters the discussion.

The Energy East project, proposed in the previous decade, sought to create a continuous west to east crude oil pipeline linking Alberta to Quebec and New Brunswick. It was conceived partly as an export route, providing access to tidewater for western producers. It was also, implicitly, a nation-building project. By connecting western supply directly to eastern refineries, it would have reduced reliance on imported crude and cross-border transit.

The project did not proceed. Regulatory uncertainty, environmental opposition, changing market conditions, and shifting political priorities combined to halt it. In retrospect, Energy East can be understood as an attempt to solve several problems simultaneously: diversification of markets for Western producers, supply security for consumers, and national integration through infrastructure. Its cancellation reflects not a single decision but a broader set of trade-offs made during a period when the global elites were in thrall to the idea of “Peak Demand” and the Energy Transition. Global supply appeared ample and the costs of disconnection were not immediately visible, and oil was dead anyway.... so who cares?

That period of apparent abundance may now be ending.

Future Shock - Now

In considering how Canada might respond to a supply shock affecting Eastern markets, one often-cited option is rail. Crude-by-rail played a significant role during earlier periods when pipeline capacity was constrained. Rail terminals exist in Quebec, Ontario, and New Brunswick. In principle, crude and refined products can be moved eastward in greater volumes if required.

In practice, rail is an imperfect substitute for pipeline infrastructure. Capacity is limited, equipment availability is variable, and logistics are complex. More importantly, rail transport carries higher costs and greater risks. The Lac-Mégantic disaster in 2013 remains a stark reminder of those risks. Forty-seven people lost their lives when a crude oil train derailed and exploded in the centre of a Quebec town. Moving large volumes of hydrocarbons by rail is both more expensive and less safe than moving them by pipeline.

Rail can provide flexibility. It cannot provide the foundation of a national energy system.

Major Projects Maybe

This brings the discussion to the question of nation building. Canada is once again considering large-scale infrastructure investments framed in those terms. The proposed high-speed rail corridor linking Toronto, Ottawa, Montreal, and Quebec City is a prominent example. Given the density of population and economic activity in that corridor, the case for improved passenger transport is strong. It promises gains in productivity, connectivity, and environmental performance.

At the same time, it raises questions of regional balance. The benefits of such a project would accrue primarily to Central Canada. The costs would be borne nationally. In a federation already sensitive to east-west disparities, this dynamic is not trivial.

A west-east4 pipeline would present a different kind of nation-building project. Like the original transcontinental railway, it would connect regions with distinct economic roles into a more unified system. It would be both symbolic and practical. Symbolically, it would represent a commitment to national integration. Practically, it would reduce reliance on external supply chains for a critical commodity.

The comparison should not be overstated. A pipeline is not a substitute for passenger rail, nor is rail a substitute for energy infrastructure. The two serve different purposes. The more relevant point is that Canada’s recent conception of nation building has focused on mobility within its most densely populated corridor, while leaving unresolved the question of how its core resource base connects to its largest centres of demand.

Energy Security - Internal and External

Canada is increasingly viewed by its allies as a supplier of last resort (actually, it would be a supplier of first choice if it could get its shit together!). It is asked to provide oil, gas, and other resources to partners in Europe and the Indo-Pacific. With minor exceptions it has failed to build the infrastructure to serve those external markets. Canada has missed an opportunity to strengthen its role in global energy security.

At the same time, it has not ensured that its internal energy system is as robust as it should be.

In a period of abundance, that distinction could be overlooked. Market mechanisms, cross-border trade, and global supply chains compensate for gaps in domestic connectivity. Fractures are beginning to show.

The conflict in the Middle East has been described like an air-bubble coursing through the veins of the energy system. The energy embolism and infarctus are ahead.

Canada possesses the means to provide energy security for itself and to its allies. Neither are optimized for a “dangerous and divided world” (copyright M Carney).

That is the essence of the unmade energy nation.

Europe: “Hold my beer”

This is not because the USA has “energy independence” (it sort of doesn’t). Crude oil is globally traded and broadly priced off the same benchmarks, so the underlying input cost is shared across these markets.

What differs is everything layered on top: fuel taxes, carbon pricing, refining structure, distribution costs, and regulatory design. That is why California, despite sitting within the US system, prices closer to Europe than to Texas, and why European markets cluster at the top end.

Over time, these higher costs have been introduced incrementally and absorbed. What would register as a political shock in the United States has, in Europe, become routine through gradual adjustment.

Much like the apocryphal frog that does not react to steadily warming water.

I was reminded of this by a tweet (that appears to have been rapidly deleted) that was questioning, innocently enough, what the light source was for the photos that Artemis captured of the dark side of the moon.

You can see why this might be confusing - it is the “dark side” after all, and suddenly we have photos of it lit up like a British tourist on a beach in Greece.

You can also guess why the original poster rapidly binned the tweet.

The “Dark Side” isn’t of course dark. It is however, always facing away from us - so in terms of information it is “dark”. Incidentally, this is one of the explanations for the naming of the European “Dark Ages” - that it has almost no records - so is also “dark” in an information sense. With the mystery of the light source sorted1 we can marvel at the fact that the rotation of the moon around the earth is such that only one side is always facing us, and it is not simply spinning like a camembert on ecstasy.

The Far Side and Synchronous Rotation

The idea of a permanently dark hemisphere is a misnomer; indeed, in the original post above, the photo is captioned “far side” not “dark side”.

The Moon is tidally locked to Earth, meaning it rotates once on its axis in the same time it takes to orbit, so the same face is always turned toward us. This seems like a wildly unlikely coincidence, but sadly for the woo-woo moon worshipers it is not a coincidence but the outcome of gravitational interaction over long periods, which has dissipated rotational energy and settled the system into a stable configuration.

The far side is therefore not dark; it experiences day and night just as the near side does, receiving the same sunlight over time. The distinction is not between light and darkness, but between what is visible from Earth and what is not.

Tides and Time

Since I am never far from thinking about energy, it is amusing to note that the attractive but unlikely-to-ever-scale-beyond-a-few-pilot-projects Tidal Power is an exception in that the energy is lunar rather than solar. The tides are driven primarily by the gravitational pull of the Moon, with the Sun playing a secondary role in shaping the amplitude. Almost everything else in our energy system traces back, directly or indirectly, to solar input. Oil, gas, and coal are stored sunlight via photosynthesis and geological time. Wind is driven by solar heating of the atmosphere. Solar is, well solar. Even hydroelectric power depends on the solar-driven water cycle.

The only other major exception to this solar framework is nuclear, where the energy stored in uranium is of a fundamentally different origin. It is not energy recently captured from the Sun, but energy bound within the atomic nucleus, forged in ancient astrophysical events that predate the formation of the solar system. Heavy elements such as uranium were created in extreme environments, most likely supernovae or neutron star collisions, and incorporated into the material from which Earth formed. In that sense, nuclear energy is not part of the current solar income but a drawdown of a much older inheritance, a residual from the same cosmic processes that followed the Big Bang and seeded the universe with the elements.

Tides

The other interaction of the moon on my energy journey was quite unexpected. When exploration oil wells are drilled you can detect the presence of hydrocarbons through a series of indirect measurements (“logging”) in the well bore. Whilst expensive and somewhat risky, flowing oil to the surface is the gold-standard for proving up an exploration well. As part of this process, the extraction of even relatively small volumes of fluid perturbs the pressure regime. Shutting in the flow and measuring the pressure build up can tell you a lot about the connected volumes, the permeability and so on. The pressure variations are often very small, so the analysis is done on the derivatives of the time and pressure. Many fields around the world show tidal variations in the pressure build up curves2.

When I saw this I was working offshore Angola, and assumed it was the tide affecting the 1500m of water overlying the 800m of sediment. It turns out that tidal effects are seen in onshore fields also. The moon’s gravitational pull affects the fluids locked in the porosity of the subsurface directly. Pretty wild.

Well, That Fits

Another “fun Moon fact” is the apparent match in size between the Moon and the Sun. When we witness a solar eclipse, it is remarkable just how perfectly the moon “fits” over the sun. For this to occur you need there to be a nice match of distance and size so there is an appearance of size equality. If the moon were much bigger or smaller, or closer or further away it wouldn’t work.

This coincidence is real enough to produce total solar eclipses, but it is neither exact nor permanent. Both bodies subtend roughly half a degree in the sky, which allows the Moon to cover the Sun’s disk from Earth, yet small variations in distance mean that sometimes the Moon is too small and a ring of sunlight remains (an annular eclipse). Damn that eliptical orbit.

For those who enjoy total eclipses, get some soon. The Moon is receding from Earth by a few centimetres each year, so in the distant past eclipses would have been uniformly total, while in the distant future they will be exclusively annular. What looks like a finely tuned balance is better understood as a moment we happen to inhabit.

And that is a happy coincidence

The invention of the Davy Safety Lamp in the early nineteenth century marked a turning point in mine safety, replacing the effective but somewhat crude reliance on canaries1 which were carried underground to warn of invisible danger. For generations, miners had depended on these birds as living detectors of toxic gases, a fragile but effective safeguard in a dangerous environment. The great danger was carbon monoxide which is colourless and odourless but highly poisonous.

The Davy lamp brought a measure of control and technological assurance, yet it did not change the underlying reality that danger manifests first in the most vulnerable.

The canary died before the miners even knew there was a problem, which was great for the miners - not so great for the canaries.

In the fast changing energy landscape, New Zealand and Australia appear to be modern canaries - they sit at the wrong end of long hydrocarbon supply chains. This is true at least for oil and refined products. NZ used to have a lot of natural gas and Australia still has lots of coal and natural gas, but these are unfortunately coupled with equal amounts of terrible energy policy. Whilst oil and refined products are generally fungible, the extreme distances for shipping fuels means that most will originate in the Middle East, typically on the “wrong side” of the Strait of Hormuz, and then be refined in SE Asia - Malaysia being one example - with onward shipments of refined products. The transit time is important as we will see below

As noted in my piece 10 days ago “Unrefined Behaviour” - New Zealand has zero refineries (Marsden Point closed in 2022) and Australia is down to its last two - from 8 not so long ago. Thus, imports are critical - and given the lack of local production and local refining, not to mention the relative isolation of Aus and NZ, you would be forgiven for thinking that they would have massive Strategic Reserves…

Under the IEA’s emergency response framework, all member countries are required to hold oil stocks equivalent to at least 90 days of net oil imports. This obligation dates back to the aftermath of the 1973 oil crisis, when energy security became a formal policy priority across advanced economies. Australia and New Zealand have, for years, optimised for cost and efficiency over redundancy. A long-standing policy preference for lowest-cost supply via global markets rather than maintaining domestic redundancy. In addition, the idea of being Net Zero by 20XX led to the dangerous thinking that oil was not really important, and certainly not wanted. Don’t even get me started on nuclear.

In 2013, a retired Air Vice-Marshal named John Blackburn wrote a report for the NRMA warning that Australia had adopted a “she’ll be right” approach to fuel security.
He warned that a conflict in the Middle East would disrupt supply chains and leave Australia exposed within weeks.
He warned that without adequate liquid fuel, food production and distribution would be severely curtailed, most businesses could not operate, and our Defence Forces could not function
He warned that Australia was the only IEA member noncompliant on the 90 day reserve requirement, and that actual usable supply was closer to 23 days.

(X.com,@van00sa)

Of course, nobody listened - too busy giving Greta an audience.

On the 12th March our friends at New Zealand Energy noted that NZ had 52 days of cover - but they also noted that this includes oil products “on the water” or “in transit”. In theory, these are contracted in and should arrive - but just as we saw with LNG destined for Pakistan in the 2022 gas crisis, contracts can be broken if someone is willing to pay for the cargo and the break fee.

Guess what….

Which leads back to the idea of transit times:

Normally a diesel, mogas or jet cargo takes only 14 days to sail from Singapore to Botany Bay, 15 days if from Ulsan, South Korea.
Now if Singapore refineries are not running enough crude and South Korea is imposing mandatory product export caps, Australia needs to find supply elsewhere as the country is 90% reliant on imports with only 2 refineries online domestically.

USGC2 is generally long products. So the supply from USGC is kind of a no-brainer in the current climate. But the time taken for the voyage from Houston to Botany Bay is 32 days. So existing stock inventories need to hold till resupply comes.

(X.com, @JuneGoh_Sparta)

It is not considered polite to watch a train-wreck unfold in real time, and it is generally even less polite to stand nearby and say “I told you so”. Good manners would suggest looking away, or at least remaining silent. Yet there are moments when the data makes you look, and the implications too important, to ignore3.

This is a real time view of fuel cover in Australia and New Zealand, for those who prefer to watch the numbers as they move and draw their own conclusions.

NZ Fuel Reserves Monitor (you can check Aus also by the click of a button.)

Just wish it had a canary-yellow colour palette, not doomsday black,

but then again….

Then it spread - a cluster in Italy. Hospitals under pressure. Northern towns closing down. It was discussed, but alongside everything else. Football results, politics, the usual background noise of daily life. There was a sense that it was serious for them, but not necessarily for us.

COVID did not arrive all at once. Airports stayed open. Flights continued. Offices were full. Plans were made. It crept in through fragments of information, then burst on us with lockdowns and all bizzare rules, guidelines and regulations.

In those early days there was a growing awareness - somewhere in the background. A quiet thought that this might travel, that it might not stop where it was. But it remained abstract. Each new headline was absorbed, then set aside.

With hindsight this seems odd - and whatever one’s views on the severity/not of COVID and on the reasonablness/not of the responses - in the early days it could have been an existential pandemic and yet the initial reaction was kind of a shrug.

One factor that might explain this is the Normalcy Bias - a core instinct is simple: things will continue roughly as they have before. We are not conditioned to see massive changes - Black Swan events - the Unknown Unknowns..

In addition we are pretty good at the Ostrich trick of “head in the sand”. This refers to the tendency to avoid negative information when it becomes too uncomfortable or threatening. Wilful Blindness, selective attention, availability heuristic; people simply stop looking too closely. Too hard to get one’s head around.

We also tend to think in terms of linear change and not discontinuities or exponential threats. These are just not common place - so again, normalcy bias.

When lockdowns and all came home, it was so different that the word “unprecedented” became the most incorrectly1 over-used word ever.

That Was Then, This Is Now

The energy situation is now earning the moniker of “unprecedented”.

Contagion

Is this hyperbole, or a warning that our understanding of the world is about to crumble?

A disruption in a shipping lane may not seem so bad. A delay here, a price move there. Reports of LPG shortages in India, panic buying in Thailand, restrictions on refined product exports, and now both Australia and New Zealand - sitting uncomfortably at the end of a long supply chain start worrying about Days of Cover for their diesel and petrol stocks. Seems a bit like the early days of COVID?

Better informed commentators have noted that this is not just oil and products, but is directly impacting global supply of fertilizer, LNG, sulphur and so on. The “second and third order effects are lining up.

A major escalation this week has seen the direct targeting of oil and gas production facilities - notably the strike on South Pars and retaliation on Qatar’s LNG (its the same giant field that sits across the gulf).

Normal, Until It Isn’t.

Watching the world with energy security glasses on is scary as hell at the moment - and I am known for being a catastrophist - so big pinches of salt all round. But..

But…

But planning birthday parties, following sports events (Go Habs!), thinking about summer vacation and indeed business investments all seem slighly unreal at the moment. It is as if a monster has been awoken: we can hear it howling but can’t see it yet, so life goes on as rumours of outlying villages being razed filter in.

In our village the markets are clearly not yet spooked. Oil at $105/bbl seems ludicrously low given the disruption to supply. Significant backwardation indicates lower prices a couple of months out - which seems unlikely, but hey “wisdom of the crowds” and all that. Maybe someone knows something - a miraculous spell to put the monster back to bed?

The aspects that worry me the most are those second, third and forth order effects - classic non-linear disruption. Rationing of energy, lack of fertilizer, massive inflation - especially in food - which always leads to social unrest. Last time this happened it was closely linked to the “Arab Spring”, conflict and mass migration. These are the ones we can “see”. What of the unknowns? Whilst a repeat is possible with pain focused on poorer countries, it is also worth considering the fact that most “OECD” countries are not as rich as they think they are - vast piles of debt will become more than just balance sheet liabilities.

It may be a coincidence, but as the early stages of this energy crisis unfold - the UK’s cost of borrowing has hit an 18 year high. Bad as this is, it is compounded by the fact that the absolute amount of borrowing is massively greater than in 2008.

Back then UK debt was ~£0.7 trillion or roughly £700–750 billion, which was about 40–45% of GDP. Today (2025–2026) it is ~£2.6–2.7 trillion which is 95-100% of GDP.

An energy crisis will quickly morph into a debt crisis.

Signals and Noise

COVID thankfully was not the pandemic to end all pandemics, but it potentially holds a lesson for us in how we should view the signal in all the noise.

The defining feature of complacency is that it coexists with awareness. We can hear the noise, see the early signs, and still carry on. Indeed, it is human to “just carry on”. The system is still working, so it feels safe to assume it will continue to muddle through as it always has.

Normalcy Bias tells us that muddling through is the most likely outcome, but recognizing a discontinuity when things are already broken is going to be kind-of “too late”. The key is recognizing the point at which they are no longer as stable as they appear, or as stable as we are used to - and I suspect that is now.

Good Luck out there!

This phase, later known as the Phoney War, fostered a dangerous complacency by masking the scale and inevitability of the crisis that was already underway. Today’s commodity markets present a similar paradox. The great “Known Unknown” - major disruption in the Strait of Hormuz has happened: oil, LNG, LPG, fertilizer, sulphur, PetChem, refined products like diesel and jet fuel - all are seriously restricted. These are the oxygen of modern industrial (and urban) societies and they are literally being choked off.

Yet prices remain relatively subdued and the signals are widely dismissed as noise.

Just as in 1939, the lack of immediate escalation may not indicate stability, but rather a temporary calm before a far more significant rupture.

The Signs Are There

On Monday morning petrol prices jumped 20c/liter in Quebec - it was noticeable but still affordable. This is the Phoney War. Elsewhere, the drumbeats of approaching crisis are more obvious - hardest hit so far is SE Asia with knock on effects in Australia and New Zealand. Europe is also seeing price effects on struggling economies.

“The escalating war with Iran is pushing parts of the world into energy triage, forcing governments to choose where to cut demand or absorb costs, while prioritizing dwindling supplies.” (Iran war pushes countries into energy triage as they conserve power and curb soaring prices - AP)

Current signals point to a system tightening in ways that are not yet fully reflected in price. What is emerging is not demand destruction driven by higher costs, but physical scarcity appearing first in the most politically sensitive fuels.

The pressure is most visible downstream, where refining constraints and product shortages are binding more tightly than crude supply. At the same time, export restrictions and policy interventions are beginning to fragment what had been a broadly fungible global market. This fragmentation is going to be a major theme - and one I have predicted previously as a “theoretical” (here).

Substitution into alternative fuels (notably coal) is increasing, a sign that stress is already well advanced in some parts of the system. All of this is occurring against a backdrop of thin inventories and limited buffers, leaving little margin for disruption to escalate.

If this does not end up as an existential crisis - we can confidently predict that for all the talk of renewables, most sane countries will look to build bigger and better storage, as well as more diversified supplies.

1. LPG and gas shortages (India, South & Southeast Asia)

• India is already facing an acute LPG shortage, hitting households, restaurants, and small industry.

• Governments are prioritizing household supply, forcing cutbacks elsewhere in the economy.

• Across Asia, gas outages and rationing behaviour (hoarding, panic buying) are emerging.

2. Refined product shortages (diesel, jet fuel, gasoline)

• Diesel and jet fuel markets are tightening far more than crude, with sharp price spikes and constrained availability.

• Australia is:

  • Releasing strategic stocks

  • Relaxing fuel standards

  • Warning of regional shortages, especially diesel1

• Countries dependent on imports (Australia, Philippines, Bangladesh) are scrambling for replacement supply.

3. Export restrictions (refined products and energy nationalism)

• China: temporary ban on diesel, gasoline, and jet fuel exports

• Thailand: curbing exports to protect domestic supply

• South Korea: reducing refinery output / limiting exports

• India & Japan: becoming more cautious with exports

4. Coal substitution and price spikes

• Coal demand is rising as LPG shortages force fuel switching.

• Prices in India have jumped 20%+ in weeks due to substitution demand.

• More broadly, gas/LPG disruptions are pushing structural demand into coal markets.

5. Low inventory buffers and emergency measures

• India: ~20–25 days of reserves2

• Indonesia: ~20 days of fuel reserves

• Australia: ~30–36 days of fuel

Governments responding with:

• Strategic reserve releases

• Demand suppression (shorter work weeks, energy limits)

Without labouring the point, this does not stop with oil, LNG and refined products but spills over into many “second order” areas. For example sulphur is used in:

• Fertilizers (phosphates, sulphuric acid)

• Metals processing (copper leaching)

And petrochemicals

• Refining constraints imply tighter feedstocks for:

  • Plastics

  • Chemicals

  • Industrial intermediates

One lever many western countries have is to reduce fuel (and/or carbon) taxes - this will help the affordability issue, but is unlikely to happen. Firstly, governments hate losing tax revenues. Secondly, there is a messaging issue - this kind of says that fuel/carbon taxes are part of a luxury belief system - only necessary when everything is smooth sailing3. Lastly, and probably most critical is that moderating the price of fuel would encourage usage - and if we believe that the price rises are a signal about future/imminent scarcity - using price to limit demand would seem tempting.

Unfortunately that logic can be pushed too far - a completely shut economy needs no fuel - but that is not a good outcome for obvious reasons.

More likely is they will use “price caps” - which delay the problem by shifting the cost to general taxation - where it is less visible, but remains toxic to the general economic health.

Transport Disruption vs Attacking Production

With a few minor exceptions the current energy crisis is currently one of transportation4. Some oil is still transiting the SoH - notably oil heading for China. Incidentally, China has been stockpiling oil for the last 18 months - so despite needing 11 million bbls/day of imports it probably has over 100 days of cover (unlike most western countries who have bought into the “Just Stop Oil” BS).

Unwinding transport bottlenecks is relatively doable. The next phase is hitting the upstream (and mid-stream) infrastructure.

If/when this conflict escalates - attacks on oil and gas production facilities in the broader Gulf will be the start of the next phase. Maybe the end of the beginning? Certainly the end of the Phoney War.

Even as I am writing, it appears that this new phase may have started.

Those fuel price-caps are going to get expensive quickly.

When I lived in Angola in the mid 1990s, my doctor was Cuban, as was my friend’s music teacher. Cuban cigars were cheap and plentiful - at time when you couldn’t even buy basics, unless a container had been raided at the port and suddenly tomatoes and toilet paper were for sale at every road junction.

Cuba once stood at the center of Cold War geopolitics, projecting influence far beyond its size. The Cuban Missile Crisis brought the world to the brink of nuclear war, a stark reminder of the island’s strategic clout just 90 miles from the United States. Havana later extended its reach into Africa, deploying tens of thousands of troops in the Angolan Civil War in support of Soviet-aligned forces1. By about 1988 Cuba had circa 60,000 troops supported by large civilian contingents in Angola; many (including my doctor) stayed on after the war more-or-less ended.

For decades, Cuba was a persistent geopolitical irritant to Washington, a nearby outpost of rival ideology. Today, that influence has faded sharply. The country that once exported revolution now struggles to sustain its own basic infrastructure, with an electricity system that can no longer reliably keep the lights on.

Cuba’s latest nationwide blackout is not simply a failure of generation or transformers, it is a structural artifact. For decades Cuba’s ideological leanings gave it access to plentiful and cheap oil. As such, it is one of the few countries whose electricity generation is heavily dependent on burning oil2.

“All Of This Is Really Very Bad”

Grid failure is not just the lights going out, it is the failure of the system that allows an economy to function. Electricity underpins food distribution, healthcare, transport, communications, and industrial output. When the grid collapses, refrigeration fails, supply chains stall, and productive activity halts within hours. Cuba is used to blackouts, but that doesn’t mean they are is trivial. There is an effect of cumulative immiseration.

Coupled with shortages of food and medicine, the situation has triggered rare public dissent in the form of street protests, which continued with people banging pots and pans in central Havana on Monday.

Unauthorised demonstrations are illegal in Cuba and those who defy the ban risk being jailed.

“It is not just the blackout,” 26-year-old Havana resident Lázaro Hernández told news agency Reuters.

“There is no water because there is no electricity to run the pumps. There is no electricity, no food, no oil, no fuel, and private businesses have high prices because everything is going up now, since they have to move their goods by truck and transport.

All of this is really very bad.”

(BBC)

For decades, that system rested on imported hydrocarbons. Cuba’s domestic production covers only a fraction of its needs, leaving oil-fired generation dominant. The island relied heavily on subsidized crude and refined products from Venezuela, at times exceeding 30,000 barrels per day, with Mexico acting as a secondary supplier when Venezuelan flows weakened. Those flows have now largely disappeared. Since the removal of Maduro in January, Venezuelan shipments have effectively ceased, while Mexican deliveries have dwindled to sporadic cargoes under strong US pressure.

Washington’s role sits at the center of this squeeze. The United States has enforced a de facto oil blockade, halting Venezuelan supply and discouraging third countries from filling the gap through the threat of economic penalties. The legal framing is contested. Broad economic sanctions that materially affect civilian access to energy, food, and medicine raise longstanding questions under international humanitarian principles, particularly around collective punishment3.

The United States, however, situates its policy within a national security framework rooted in a long historical arc. The logic echoes the Monroe Doctrine, updated through contemporary strategy documents (notably “The Trump Corollary” - set out in the National Security Strategy - Oct 2025) that emphasize hemispheric primacy and the exclusion of rival powers, alongside a more assertive modern interpretation.

Attention is currently fixed on instability in the Arabian/Persian Gulf and broader energy markets, yet in that shadow a different system may be nearing its end. Cuba’s economic model has endured years of strain, but the removal of its energy lifeline creates a hard stop.

My guess is that there will be a Venezuela style “reconciliation” with the USA - where a compliant regime (of mostly the same people) work with, rather than against, US interests in exchange for trade4. Liberation Day 2.0

Whatever one feels about the pros and cons of Cuba’s communist experiment, and whatever one feels about the morality/legality of the strangulation of the Cuban energy system - the lesson that every world leader should take from this is that energy security is national security.

As Thucydides said: "The energy-strong do what they can, and the energy-poor suffer what they must."5

Could it be made more clear?

The IEA has rallied countries to announce the biggest ever release of crude from strategic reserves.

Headlines would have you believe that the oil price crisis is here.

Notwithstanding the above, the current oil price does not reflect a crisis, at least, not yet.

Adjusting for Inflation

Brent is trading at US$ 103 - breaching the psychological $100 barrier. But as the aphorism has it, “a hundred dollars just ain’t what it used to be”.

In inflation-adjusted terms, $100 today is equivalent to roughly $66 in 2008 dollars and $70 in 2012 dollars. Put differently, the market is not experiencing the kind of oil prices that defined those periods. The 2008 peak of $147/bbl would be c. $222/bbl today. Today’s $100 oil is closer to $65–70 oil in early-2010s purchasing power.

In the early 2010s no one panicked when oil hit $70/bbl, so why the biggest strategic release in history?

Disruption, Dissonance and Denominators

At the same time as we see this quite muted oil-price response, it is clear that the supply disruption is anything but muted.

By some estimates something like 18 millions barrels/day could be being disrupted - out of a total demand of circa 104 mmbbls/day. That would imply a massive 17% of all oil. Oil prices on the marginal barrel and the current run-up in prices would seem to be discounting his level of disruption.

However, these headline numbers don’t tell the real story. Many countries produce AND CONSUME a lot of oil - so the real denominator should be the global export volumes, not the total oil consumed globally.

When we do this, the numbers are truly terrifying - Seaborne crude trade is about ~62 mb/d but this includes all seaborne flows (some double-counted flows etc.).

The true export market for crude + condensate is roughly ≈ 40–45 mb/d.

Thus, one way of looking at the current disruption is 18/43 = 42% of all export volumes.

This is clearly not reflected in the oil price. Not even close.

There are caveats - the E-W pipeline in Saudi Arabia is being ramped up, there is (some) oil in storage, and there is of course the IEA “emergency release”. The latter is a non-event, because the 400mmbbls can only be released at about 2mmbbls/d - so is marginal if disrupted barrels are north of 10mmbbls/day (recall that oil prices on the marginal barrels). One other caveat is that some countries reportedly have “spare capacity” to bring online. The problem here is that almost all of this is on the wrond side of the Strait of Hormuz.

With no end in sight for the conflict in the Gulf I am left baffled by the current oil price.

I sincerely hope that I am missing something here, because the implication is that oil should be pricing very differently1, and as I have often noted in my musings - very high oil prices are catastrophic for the global economy.

In the meantime we have to deal with narratives and political point scoring. One current area of discussion is the Strategic Petroleum Reserve (“SPR”).

In the US, the Biden administration was criticized for draining the Strategic Petroleum Reserves to buffer an oil price shock related to Russia’s invasion of Ukraine, and not subsequently refilling it.

Two hunderd and ninety one million (291mm) barrels were sold from the SPR between Biden’s inauguration in 2021 and mid-2023 (Forbes).

The Biden Administration then started to refill, totalling about 55mmbbls through to 2025. As an aside, we can note that they sold at c. $100/bbl and bought back at $65-$70 (round numbers) - so was a good “trade” in some senses.

That the SPR hasn’t been filled much more since then is a different question which can be seen as either “a failing of the Trump administration” - or as a reflection of a new reality.

What Purpose the SPR?

Back when the US was a major importer of oil - the key metric on the SPR was “Days of Cover” - how many days of import requirements would the SPR volume cover? This metric has to be taken with care - as it is sometimes misused (to make political arguments) to cover days of total oil use. Clearly, a stored volume compared to daily use of 20 mmbbls/d would look insufficient, whereas the same volume compared to net imports of 2.2 mmbbls/day would show cover that is 10x better. Comparison to imports is the key. But what imports?

The question of whether the US is “oil independent” is complex. On pure crude-oil terms the US still imports a “net” 2.2mmbls/day. The actual imports are quite a lot higher - this is because US refineries are not tooled to handle lots of light sweet crude (the shale oil) - so the US imports heavier crudes from Canada, Venezuela and Brazil to the tune of about 5.5-6.5 mmbbl/d. Simultaneously, it exports light crude and Natural Gas Liquids (propane and ethane). When it comes to total petroleum liquids (including refined products), the US is a net exporter1.

One way to look at this is the US has a small net import need, and therefore the SPR is a less “strategic” in terms of Days of Cover than it was when the US was importing 12.5 mmbbls/day (2005). Comparing the SPR volumes to the “net” imports is comforting, but as noted above reality is more complex because much bigger volumes need to be imported on a daily basis to ensure the refining industry can work.

Because the US produces more light sweet crude than it needs, unsurprisingly the SPR holds heavier more sour crude that is needed for blending into refinery feedstocks. Thus, in reality the Days of Cover should be covering the essential heavier crude (gross) imports not simply net imports.

A Good Neighbourhood

One reason the US can look at its gross imports with a degree of security, is that the bulk of the actual imports necessary for balancing its refining come from Canada. it is hard to imagine any scenario in which these would stop. In the most extreme case in which - for whatever reason - Canada turned off the taps, the US would simply take the oil if not having it was an existential threat to the US. I am not saying this is even remotely likely, but just a cold hard fact. In addition, the US has pretty much secured heavy oil from Venezuela, and Brazil needs a market.

Probably the best way to think of this is that North America2 (or NA+ if we include Venezuela) is entirely oil self-sufficient. In this view, the SPR is nowadays strategically unnecessary, albeit a useful tool to help smooth temporary price spikes.

And this then leads back to the though-experiment that there could one-day be a schism in the global oil markets, with Fortress North America banning exports and setting an internal price that would be enough to make the industry profitable, but would be disconnected from global markets. The rest of the world would have to deal with the very uneven geographical spread of oil resources as best they could. Essentially, a declining Europe competing with a rising Asia for Middle Eastern, Russian (FSU) and African resources. See linked article “The World in 2040, Part 2” below

All that said, if it was me, I’d be much happier going into the Fog of War with the SPR filled to the brim...

As an example, a recent post on X by @Rickaus75 (worth a read to see the extensive list of export products that would halt as/when Australia runs out of diesel).

The post highlights just how inscure Australia is with regards to refined products.

A quick search and it would appear that Australia can produce only about 20% of its needs from its two remaining refineries, and imports the other 80%.

As recently as the early 2010s Australia had around eight refineries, with capacity of 800,000 bopd. Currently it can refine about 240,000 bopd from the remaining two.

In normal times this is unremarkable, but we are not in normal times.

As the X post noted - in the case of Australia a fuel shortage would have immediate knock on effects in almost all areas of mining and exports of products the world needs. Second order effects leading to third order effects.

Lean and Mean

When they were built, many refineries in Europe, North America, and Australasia were large by the standards of their local markets, processing 100,000–200,000 barrels per day. Today, however, the global oil market has grown dramatically, and new mega-refineries in Asia and the Middle East, often 2–3 times larger and integrated with petrochemical complexes, can produce fuels much more cheaply.

As with most other aspects of globalization, the invisble hand was hard at work, with consumers enjoying the cheapest products, and politicians thinking about getting reelected, not about national energy security. For many industries the invisble hand meant offshoring labour. For others it meant offshoring envionmental costs and for refined products it meant losing energy security as imports came to dominate over domestic production.

Unable to compete at this scale, many older Western plants have closed, leaving domestic markets increasingly dependent on imports. Ireland and New Zealand no longer have any local refining capacity. Australia, as noted above, has reduced significantly. The UK has reduced from a peak of 2.1mm bopd to c. 1 mm bopd. France from 1.9 mmbopd to 1.2 mmbopd and so on.

For countries that don’t produce oil, one could argue that importing crude to be refined, or importing refined products has a similar security risk. However, importing crude and refining locally offers more flexibility and buffer, while relying on imported refined products exposes a country to greater short-term supply risk, even if total volumes are theoretically the same. A local refinery can be thought of as a “shock absorber” to supply side disruptions. It is notable in the press cuttings below that several coutries have continued to export crude, even as they close down exports of refined products (fuel).

The decline of Western refineries is a stark reflection of the prioritization of cost over security. This was a net positive, until it wasn’t.

The war in Iran has lifted the mask on the fragility of the refined products space. Jet fuels has soared (pun intended) in price, and countries are enacting, or thinking about, export restrictions.

Of course the very large Middle East refineries that are the wrong site of the Strait of Hormuz are not exporting at all.

Beyond just the economic arguments of shutting smaller, less profitable local refineries - I am sure that there were two other key factors. The ever-present Political-Environmental-Green-Blob have longtimes hydrocarbons in their sights.

• Firstly, because, well these are hydrocarbons and are thus the root of all evil, and

• Secondly, because we will be 100% renewable by [pick your favourite date] and refineries will be stranded assets - so there is no point even thinking about maintaining them.

I honestly can’t be bothered to reserach this for a “short-form” article, but will leave this here as speculation.

I have no clue how this war will play out, but one can only hope that it is a wake-up call on energy security that goes beyond the knee-jerk “proof that we must just stop using oil and gas”.

The image below is stunning with the near perfect inverse correlation of the USDEUR FX rate and the global oil price. What this means in practice is that when oil is expensive, it is even more expensive for Europeans. I don’t have a complex economic model to explain this, but intuitively countries (regions) that are net importers of energy will see their economies shrink as more and more capital is dedicated to paying for those imports. Whilst the direct negative economic effect is probably seen in months and years, in the high velocity FX markets this translates a rapid weakening of the currency. Which, in turn, makes those imports more expensive. An Energy Death Spiral.

US consumers (and Mid-Term voters) will feel the oil price at the pump. It was only a couple of short weeks ago that President Trump was lauding low gas (petrol) prices in his State of the Union speech, as well as in earlier speeches.

“Slashing energy costs is among the most important actions we can take to bring down prices for American consumers,” Trump said in a February speech in Texas just before the U.S. and Israel attacked Iran. “Because when you cut the cost of energy, you really cut -- you just cut the cost of everything.” The president has repeatedly told Americans that keeping gas costs low would be key to defeating inflation. (bnbloomberg)

The current spike in oil prices (which may, or may not, go up, down or sideways1) is clearly a concern, but the US administration is pulling out all the stops to try and supress any “panic”. Today (March 9th), that seems to be working - but what if this doesn’t have a quick and clean ending? Global exports seem to be having serious logistical issues - which would justify much higher oil prices in a normal world.

Supply constraints should (and will, if they continue) lead to much higher oil prices, which will quickly reignite inflation. Energy rich countries (especially those who export) will benefit, everyone else will suffer.

Higher inflation would logically lead to higher interest rates (to “cool” the economy) - which would strengthen the local currency. However, if the inflation is an external shock - a “cost-push” inflation, higher interest rates would curb aggregate demand, slow economic activity, and thereby moderate inflation - through a form of energy driven price rationing. Slowing economic activity at a time of high energy prices seems like a realy bad idea for energy importing nations. And once again, the main release valve would be the currency.

Fortress North America

Extrapolating somewhat from this weeks supply shocks and one could see a case where the US might re-impose an export ban on oil. You may not recall this, but before US shale came to dominate swing production the US had an export ban (1975) that was only repealed under Obama (2015). If that were to happen - and with a little bit of arm-twisting on Mexico and Canada - North America could become islanded for oil and gas. Total energy independence, and let the rest of the world fight over the everything else.

Clearly, this would have far-reaching consequences - notably the US would lose almost all its customers for pretty much everything as European and Asian economies collapse. So this is not a prediction.

But if we do start to hear about export controls on oil or gas from the USA, everyone should be very nervous indeed.

Moreover, in the current conflict, we may find that oil is the short-term show, but the disruption to gas has longer term negative consequence. But more on that Anon.

$100, $150, $250… do I hear $500 from the expert in the beige anorak at the back?

Someone will be right and there will be a new Oil Price Guru - but one thing I am convinced of is that the upper bounds are way lower that $500, and likely lower that $250/bbl. Before getting into why, let’s just note two variables (1) inflation and, (2) FX

These are related (which is why some people try to look at oil in terms of gold, but this has other issues) - and the FX is important for Europe, UK etc, but is a separate subject for a follow-up note. So let us start with inflation.

Historically, the highest oil price in nominal (and real) terms was c. $147/bbl recorded on the July 11, 2008. This would be $222/bbl in inflation adjusted (real) 2026 USD2. The conventional wisdom is that in mid-2008, the Sub-Prime mortgage lending Ponzi scheme imploded and that caused the Great Financial Crisis.

When you look at the world through energy economics not-very-rose-tinted glasses, you might point the finger at unsustainably high energy prices, and suggest these led to the GFC - and that the sub-prime Ponzi was impossible to maintain when the economy was being constrained by higher energy prices.

Absolute oil price is also possibly an incorrect metric - oil price as a % of GDP is a better indicator. That said, when GDP is inflated by a Tech bubble and gazillions of debt, one has to wonder if this is indeed in any way relevant, even if useful in the past.

When You Can’t Afford Oil, or Anything

Without turning this into a mini-thesis, I would simply note that energy is not coffee. If the price of coffee goes up, people can chose to continue drinking it, or they can price-ration. It does not affect the rest of the economy. Energy is different as it is the economy. Or rather, surplus energy is the economy. If the price of oil hits $500/bbl, it would impact everything from shipping, to farming, to mining. Oil is used in transport and in millions of unseen (usually diesel) engines powering the modern industrial world. The cost of embedded energy is invisible but not inconsequential

The counter argument is that energy costs are only small parts of business costs - and as such increases can be adsorbed. But again, this is like saying energy costs for a household are just you heating and lighting bills - ignoring that every aspect of your lifestyle is based on cheap energy. When you eat food, you are eating oil and gas. The cost of embedded energy is the best trick the Devil ever played.

If this were not true, then one could say oil can go to any price. Why not $1000/bbl?

Simply because the economy can’t afford it.

High Oil Prices Lead To Conflict

Whilst we are looking at how conflict leads to high oil prices, it is also worth noting that the inverse is also true. High oil (and now also gas) prices cause rationing of energy, which rapidly causes inflation in food prices. Rich countries out bid poor ones, which causes social unrest and… conflict.

The point is not that oil prices cannot spike in a crisis. They can, and they will. Tankers can be delayed, supply can be disrupted and panic can drive markets far beyond fundamentals for short periods. But there is a hard economic ceiling that sits far below the numbers now being thrown around in commentary.

Long before $500 oil arrives, the system that consumes oil will break. Demand destruction is simply a polite phrase for recession, financial stress and social unrest. The lesson from 2008 is that energy does not merely respond to the economy; it constrains it. When energy becomes too expensive, the world does not adapt smoothly. It contracts.

There is a very real danger that this crisis is some kind of tipping point for the global economy which has been muddling along with a growing disconnect between the financial economy and the physical world of recources and energy.

I was lucky to get invited to watch the All Blacks play England at Eden Park in 1998. England was lucky that the score was only 40-10 to New Zealand. The All Blacks are no longer utterly dominant1 and by stretching the metaphor way beyond anything reasonable, New Zealand’s oil and gas industry has tumbled from a lofty perch.

The question for 2026 is whether the NZ Black Gold industry (OK, so it is mostly gas not oil, but you get it) can stage a stunning come-back now that it has new management and new coaching? What happens in NZ should be watched closely by the UK.

My guess is that any return to upstream oil and gas activity will be slow at best. When you undermine “stability” with political flip-flops, investors generally take time to return (unless you have massive resources, in which case their principles can be more flexible). A U-turn from the destructive policies of yore is a good start - but investors look for stability. Election cycles are not good for energy infra spending.

Going Global

Whilst NZ is never headlining global news, it was punching well above its weight with the rise of “Progressive” (“woke”) politics in western nations. The ever smiling Jacinda was just 37 years old when she was elected in 2017 - this was probably the only period in history in which a random European could name the Prime Minister of NZ. A new generation, female and very liberal - what was not to like? The hero the global left needed.

Let’s look at that first news story - and the intro: “The leader of the first Labour government in New Zealand for a decade shares the explicit left agenda for investment in health, education, climate action, public housing and social justice. Ardern’s pledge to build “a kind and equitable nation where children thrive, and success is measured not only by the nation’s GDP but by better lives lived by its people” is the ancient standard of our side.” (The Guardian 2018, being nicely objective and impartial)

Which reminds me of the old joke:

“Why are there no socialist economists?” “Because if you understand economics, you are not a socialist”

Other People’s Money

What is on the other side of the ledger? Only the boring old revenues that will pay for all this investment. As regular readers will know, I always view these questions through the lens of energy - and not just any old energy, but affordable energy that is the oxygen of the industrial economy. NZ has many natural resources (some of the best geothermal on the planet) and has had a decent oil and gas industry - being self-sufficient in gas (actually having enough excess to create new industries like Methanex) and was a modest producer of oil. At its peak oil production in 2008 NZ produced about 60,000 bopd contrasted to an average consumption of about 160,000 bopd equivalent in products. Not self-sufficient in oil, but not trivial either. A buoyant oil and gas industry creates direct revenues for the government, creates real well-paid jobs (not like the much-lauded ones in Green Energy that exist thanks to subsidies) which create indirect income (income and corporate taxes), helps the national balance of payments and creates new industries. For much more detail on NZ energy - check out Larry’s work at the excellent substack.

New Zealand Energy

Gas Supply & Demand Study

The Gas Industry Company (GIC) works alongside the industry and the government in a type of soft regulatory capacity. They interface with the industry on supply, looking at demand trends and then recommending policy positions to the government to best manage this critical resource. They also keep a wealth of data that is interesting and worth a visit to…

Read more

2 years ago · 5 likes · 3 comments · New Zealand Energy

Transitioning

Historically, New Zealand’s regulatory framework supported oil and gas exploration through open licensing regimes to encourage investment and development. Prior to 2018, the government issued petroleum exploration permits under the Crown Minerals Act 1991, facilitating activity in both onshore and offshore areas, with taxation primarily involving royalties (typically 5-20% on profits) and corporate taxes without major restrictive changes. This enabled significant growth, particularly in the Taranaki region, attracting international operators.

Commercial exploration accelerated in the 1950s following the discovery of the Kapuni gas field in 1959, which marked the beginning of modern production. Key international companies that operated historically include Shell, BP, ExxonMobil, Chevron, OMV (Austria), Anadarko (United States), and Australian firms such as Woodside Energy and Santos, which participated in exploration and development, particularly in the Taranaki Basin. Local companies have included Todd Energy (a New Zealand family-owned entity with origins in the 1920s), Greymouth Petroleum, and New Zealand Oil & Gas (NZOG).

In 2018, the Labour-led government under Prime Minister Jacinda Ardern introduced a ban on new offshore oil and gas exploration permits, restricting licensing to existing onshore Taranaki permits only. This policy shift, aimed at transitioning to a low-carbon economy, effectively halted the oil and gas industry - which went into “managed decline”.

Which, to the amazement of many (but not you, dear reader) was followed by an energy crisis, as sure as night follows day.

U-Turn

More recently (2024), the centre-right government reversed this policy, announcing amendments to the Crown Minerals Act to lift the ban on petroleum exploration beyond onshore Taranaki. By July 2025, legislation was passed to reinstate offshore exploration, and in September 2025, applications for nationwide oil and gas exploration were opened to boost reserves and address supply shortfalls. Budget 2025 allocated $200 million over four years for Crown co-investment in new domestic gas fields, signaling a re-enabling of the industry through enhanced licensing incentives. Taxation remains largely unchanged, with emphasis on regulatory facilitation rather than fiscal adjustments. But will they come?

This is what we will be watching in 2026 - will these policy shifts and co-investment funds be enough to overcome the instability inherent in flip-flopping governement policy?

Energy is the Economy

The mismanagement of New Zealand’s oil and gas industry, has contributed significantly to the nation’s energy crisis. This policy led to soaring electricity prices, with wholesale spikes in 2024 exacerbating economic pressures and resulting in an estimated $300 million in lost exports. High energy costs have compounded broader economic stagnation, including reduced productivity and job losses in manufacturing sectors, prompting a record exodus of young people seeking better opportunities abroad. Provisional data indicate that 73,900 New Zealand citizens departed in the year to August 2025, with nearly 40 percent aged 18 to 30, driven by limited job prospects and rising living expenses.

The standard joke is that this flow increases the IQ of both NZ and Australia similtaneously. Such poor and dark humour tries to hide a real brain drain, which can only have negative consequences long-term.

We can see parallels in the United Kingdom, where the North Sea oil and gas sector faces accelerated decline due to a 78 percent tax burden, including the infamous “windfall” levy extended to 2030, which has deterred investment and triggered capital flight. This has resulted in high energy prices amid global volatility, contributing to economic challenges and a significant brain drain, with 693,000 individuals emigrating in the year to June 20252, including 174,000 aged 16 to 34.

One cannot make a direct link between the windfall tax and emigration - there are many variables, and as many reasons to emigrate as there are emigrants. However, a country that has the highest electricity prices in the world, increasing energy (and absolute) poverty, obvious deindustrialization and loss of jobs, all on an increasingly crowded island - clearly lacks the “audacity of hope” that the progressive policies promise.

Suboptimal resource management, which not only elevates energy costs and stifles growth but also perpetuates demographic shifts that weaken future economic resilience. Policymakers must prioritize stable, forward-looking strategies to balance energy transitions with domestic needs, thereby retaining talent and fostering sustainable prosperity. In the UK the uniparty system pushed the Net Zero narrative - creating an illusion of consensus and stability. It is now heading to the U-turn phase - but this itself is exactly the instability that investors shun. Rock and a hard place: the damage is done.

Let’s watch NZ and see if/how investors return to the sector. I hope for all my friends in NZ that it would be so.

ISO New England (“ISO.NE”1) is of particular interest because it has a dominantly left leaning electorate, big divisions between the very elite urban areas and the surprisingly rural hinterland. New England has followed (led?) the Net-Zero playbook, phasing out coal, subsidising solar and wind, blocking gas pipelines that could easily connect the region to one of the biggest gas plays in the world (Marcellus/Utica), and shutting those lovely low-carbon nuclear plants (Indian Point in NY, Vermont Yankee in, er, Vermont and others).

The result of this decade long ideological re-jigging of the electricity grid is odd even by Western nation Net-Zero oddities. ISO.NE relies on burning oil to make electricity in the depths of winter. In the past we have seen c. 20% coming from oil - the current cold snap is pushing this - with it reaching north of 40%.

As I have noted on previous occasions, this puts New England in the illustrious company of Iran, Saudi Arabia, Russia, Venezuela and Cuba. The difference with these bastions of Not Zero is that all of them (apart from Cuba2) are major producers of oil - so they have it at hand, “on tap” so to speak.

So What?

One can argue that a few winter days on oil is a small price to pay for all those glorious spring and summer days with renewables doing the heavy-lifting. From an emissions point of view that might have coherent math - although replacing the oil with pipeline gas would improve that math. From a system cost perspective, it almost certainly doesn’t.

By a cold-weather induced coincidence, my home heating had a wobble over the weekend. The old house we bought a couple of years ago has an eco-friendly “Bi-Energy” system, which runs the very old fashioned hot-water-in-radiators from our superb hydro-generated electricity most of the time. Unless it gets really cold, (it did) and then it flips to an oil furnace. On this occasion it flipped and the furnace didn’t wake up - a rather timely illustration of how having machinery “on standby” is not automatically “energy-security”. Given my lack of familiarity with this system I called the pervious owner, who kindly walked me through the concept - and, as an interesting parallel to the Grid - the Capex for the installation of the Bi-Energy Eco system was subsidised by the province in its drive to Net Zero. The Opex - furnace maintenance and fuel costs are all mine. My house has a net-zero dual energy system3. How amusing.

Whilst working out how to set the system back to all electric (duh. a simple switch!) I noted the oil tank was very low. Time for a top-up - how embarrassing would it be for me to not have energy security at home given how much I bang on about it at the regional/national level here?

As a next step, I could replace the old oil furnace (when will they be banned?) with a gas furnace - we have gas in the building for cooking already (hopefully not banned anytime soon). Ignoring the additional capex, we can simply note that gas is piped in - not stored in a big tank.4 With a full oil-tank you have a notion of security of supply; you can see the fuel sitting there. With gas, any disruption to the pipeline system and you are alone and cold. This is the 3rd Leg of Meredith Angwin’s Fatal Trifecta ( …over reliance on natural gas). ISO.NE has been able to cunningly avoid this thanks to NY blocking pipeline construction - but the alternative for security in mid-winter is something you can store in volume, on site. Coal, Oil or Uranium. Nuclear has been unnecessarily shut - but thankfully still provides a steady 3.3GW from the remaining plants. Coal is literally worse than Hitler - so oil it is.

Of note - when oil was peaking at 43% one of the drivers was a lack of imports. NE lives in a fantasy world in which Quebec (which means Quebec + Newfoundland and Labrador) have unlimited excess capacity - which can be used as a giant battery for those pesky days when renewables are throwing a sicky.5 This is eerily similar to the German/UK/other assumed reliance on Norwegian hydro power.

But when the going gets tough - we start to understand the phrase “fair-weather friends”. Ask again in the spring.

The 7 day outlook suggests that circa 2GW of imports are expected to be available at peak demand. The “Projected Surplus” will start to look pretty skinny if this is not available - and I note that some of this is probably contractual and fairly secure, not just market driven - the details of these arrangements I am not familiar with.

ISO.NE Oil Tank

So far, I kind of know what I have been talking about - hereafter, this gets speculative and I would welcome better informed viewpoints in the comments.

Up here in Quebec it has been colder-than-usual since early December - Montreal is doing its Nth snow removal works today - where N was the total number done across the 2024-25 winter, and we are not even close to the end of winter.

Given this, one can assume that not only has ISO.NE been using oil more (40% vs 19% in previous years) - but more often and for longer. So I get to wondering about “days of supply” - and how their oil stocks look.

The answer is (with the caveat that I know not of what I speak) - it looks pretty robust.

ISO.NE looks at how the oil reserves would deplete if all systems were running at capacity and if there was NO replenishment (which is an edge-case for sure).

With oil running at 43% - it was circa 7.6GW - from the above graph we can infer that oil could do over 12GW (albeit briefly). So running at 7.6GW one would expect well over 10 days continuous operation with no resupply (which would depend on where the oil is relative to each power station’s usage/storage capacity). The 7.6 GW was a peak and was not continuous - so this seems robust.

Elsewhere we can see that total reserves stand (stood) at about 2 million barrels - which, again, seems robust.

Forecasting is Hard

That said, just 2 weeks ago, the current winter storm was not in the forecast - look at 25-27th January from this 14th January report. Temperatures are normal and load forecast is 13-18GW

Roll forward one week and the incoming winter storm is clearly visible - temperatures plummet and the demand is expected to shift up to circa. 15-20GW. Not a huge increase - but recall those reserve margins and reliance on imports noted above? Of course “reliance on neighbors” is the 2nd leg of Meredith’s Fatal Trifecta.

Whilst it may be shocking that New England burns oil for electricity in winter - it is the inevitable outcome of wishing-on-a-star for a Net Zero grid. Building out renewables, shutting nuclear baseload, relying on Quebec - which is itself running tight reserve margins in winter, banning gas pipelines from nearby domestic sources and never-ever coal - leads inexorably to using imported oil. Oil is easy to transport, can be stored safely and in volume on site, and has high energy density.

Not quite the outcome a lot of blue state politicians were expecting when they embarked on the “transition”.

Carney Does Davos1… and gets a standing ovation. The European political class loves their guy. The best speech at Davos, the best speech ever at Davos, the best speech ever…. or so we read.

On the one hand Mark Carney has old-school gravitas, cultivated sophistication and genuinely is very “statesman like....”, in a boring bankery kind of way. On the other he is remarkably un-self-aware. Perhaps the least important point of this speech is the bit that got my goat.

He started by butchering Vaclav Havel’s greengrocer analogy about preference falsification (my current shiny toy). This moralizing coming from someone who was hook, line and sinker in the Net Zero/Climate cult, in which everyone had to kiss the ring, had to “put signs in the window” or be cast-out as a “denier”. Indeed the modus operandi of the Progressive left is exactly the kind of authoritarian imposed conformism that Havel was writing against. But beyond Carney’s past (and ever changing) “Values” - there is further irony in using Havel’s words to defend the consensus elite - and I could never do better than this post on X by James E Thorne, so here it is verbatim.

Mark Carney went to Davos, quoted Václav Havel, and declared that the old rules‑based order is over and that it is time to stop “living within a lie.” On the surface, that sounds like moral clarity; underneath, the irony is hard to miss. Havel wrote about dismantling systems where ideology hides power, where conformity is sold as responsibility, and where ordinary people are nudged into acting out loyalty they do not really feel.

Carney, by contrast, is the polished face of that very world: a former central banker and global insider, standing on the main stage of elite technocracy, calling for a renovated version of the same expert‑run order, this time wrapped in tougher talk about resilience, security and “middle‑power coalitions.” Whether people see the irony will depend on whether investors actually go back and read Havel.

As more investors rediscover his work, many will notice how odd it is to watch a former central banker use Havel’s language to justify reinventing the system through new technocratic institutions, for example on climate change, where sweeping constraints on capital and everyday life are presented as neutral “technical” necessity rather than contested political choice.

Havel’s greengrocer wasn’t a pitch for upgraded global governance. It was a call for ordinary people to stop playing along with systems that demand ritual slogans while hoarding real power elsewhere. In that light, Carney invoking Havel at the WEF starts to look less like homage and more like a system trying to wash itself clean, on climate policy and beyond, using the language of one of its sharpest moral critics. (source)

Good. Rant over.

Beyond the Thunderdome

Now with that critique off my chest, one can also see why the speech was wildly popular at Davos and in the media.

It was an eloquent and dare I say it, sophisticated and statesmanlike, speech. Talk of solidarity, a call for “resistance”, veiled taunts of OrangeManBad - all notably finely-tuned to the immediate audience.

Much of the content was debatable or cherry picked (you’ll find a bazillion critiques online)2 but that didn’t matter - it plugged into a feeling of “needing to do something” to “stand up to the bully”. And to be fair, the idea of a broad coalition of middle-powers3 is sensible. Indeed, coordination among countries that still value open trade and institutional stability is quietly useful when done with restraint and clarity of purpose.

Unfortunately, Mark Carney’s speech came hot on the heels of his visit and “New World Order” trade deal with China. That sequencing all but guarantees the speech will be read in Washington as provocation rather than prudence, turning a call for cooperation into an unnecessary geopolitical signal.

A signal that came across as a challenge, maybe worse, a taunt. We just saw that taunting DJT didn’t work out well for Maduro. Just saying.

Our Biggest Threat

In some ways the “fighting talk” from Carney’s speech, which is to most observers just words, with a distinct lack of actions to back them up, may be more damaging than the actual action of his New World Order partnership with China just the week before. You know, that China, the one he called “our biggest threat4”.

For sure, the world has changed - and if politicians didn’t adapt they would rightly be criticized. Who could have imagined this headline a couple of years ago?

Loose Lips Sink Ships

As Louise Blais, (formerly Canada’s Ambassador and Deputy Permanent Representative to the United Nations in New York from 2017 to 2021), just said on Mat Galloway’s surprisngly well balanced CBC radio show5

“Antagonizing him, especially in public has a price”

Maybe that is why Carney got a standing ovation from his like-minded Euro hosts? Was it that they really bought into this vision (easy to do when it is just words)? Or was it that Carney and by default, Canada, had stuck their head above the parapet. Was the applause just a huge wave of relief that someone else had gone and done it? In the school playground analogy, this is the lone voice that confronts the bully - everyone is in awe, fully supportive (from a distance) and SO happy that someone (else) did it. Politics is not a Disney film - and based on my experience of the English comprehensive school system (lol), the lone challenger will get punched in the face for his/her trouble, and the adoring crowd will melt away like spring snow.

So I question the wisdom of the Carney speech. That said, the current White House is impossible to play - there is no clear winning strategy with Trump. You do what he says and you are a patsy to be exploited, go against him and sometimes he’ll “respect” your strength, other times he’ll see it as provocation.

So whilst “Compliance will not buy safety” (M. Carney, Davos) is certainly true, what will overt and public challenge buy?

Grandstanding

As noted above, the speech played well to the Davos Old World Order crowd and will play well with Carney’s Liberal base in Canada (the “Elbows Up” National Defence Force)6 . Indeed, there even may be some method in the madness. Carney overturned a big conservative lead in the polls last year by riding a wave of anti-American (anti Trump) feeling, which oddly, Trump aided and abetted with his “51st State” jabs. Is Carney (re)creating a narrative to try and win a full majority soon? If so, it will be at a significant cost to Canada.

The Eurocrats and the Canadian public were not the only ones listening. The White House delegation was obviously studying every word.

“Canada gets a lot of freebies from us, by the way. They should be grateful also, but they’re not. I watched your Prime Minister yesterday, he wasn’t so grateful. They should be grateful to US, Canada. Canada lives because of the United States. Remember that Mark, the next time you make your statements.” - President Trump, Davos

This is an interesting contrast to Trumps reaction to Carney’s trade deal with China last week - which was:

“That’s OK. That’s what he should be doing. It’s a good thing for him to sign a trade deal. If you can get a deal with China, you should do that.”

One might have expected the trade deal to have been a bigger issue. My guess is that trade deals come and go and that this one was not really consequential. The bigger picture is that the current US administration is focused on an existential threat to America and the West - which needs to be countered on multiple fronts (the current US Security Strategy and the Trump Corollary). This is the line that can’t be crossed.

The Line In The Snow

Rallying the “resistance” would appear to have crossed this line, with unknown consequences.

We got more fine words, fighting talk, from Prime Minister Carney yesterday:

But Canada doesn’t “live because of the United States”. Canada thrives because we are Canadian. We are masters in our own house. This is our country. This is our future. The choice is ours. We choose a bright future, worthy of the ground on which we stand. We choose Canada.

With the vast majority of our trade happening with the USA, with a 8,900km border(s), massively integrated supply chains, power systems etc - one can argue that staying onside should be a major consideration. Equally, quietly diversifying to work more with “middle powers” makes a ton of sense - but the key here is “quietly”. Are we really “masters in our own house”? Even staying well short of confrontation, the USA wields a big stick. We need more diplomacy.

The real risk is no longer about confrontation but about marginalization for Canada. We really must avoid inviting pressures and also being treated as an annoyance, a peon by the world power, or worse… but what worries me is there is a credibility gap between our ambitions of what he says the future should look like for Canada and our ability to withstand pressure until we get there. (also Louise Blais, former diplomat from the CBC discussion)

The Big Stick

Canada has already suffered the slings and arrows of outrageous tariffs. However, behind the headlines, Canada has been largely protected by the CUSMA7 trade agreement. CUSMA was signed on January 29, 2020, during the official signing ceremony, Trump stated:

“The USMCA is the largest, most significant, modern, and balanced trade agreement in history. All of our countries will benefit greatly.”

He also referred to it as a “terrific” deal for all three nations and the “best agreement we’ve ever made” at that time. But now, the mandatory six-year review of the deal approaches - in July 2026. Oh wait, that’s 6 months from now.

U.S. Commerce Secretary Howard Lutnick looked almost gleeful in this interview when pointing out the juxtaposition of the China trade deal, the Davos speech and the upcoming CUSMA renegotiation….

It is possible that Mark Carney has had a side conversation with President Trump and agreed that he would do some political grandstanding for the Canadian audience, and that “all is good”. Maybe, Lets hope so! If not, negotiations in July are going to be painful indeed.

6

Might even be serious….

Over the past year, something that has stood out to me is the disconnect between how energy policy is changing (for the better) but at the same time, the language around energy policy is stuck. Words are carefully chosen, endlessly repeated, and designed to preserve the appearance of consensus even as belief quietly drains away.

This is familiar territory. In a longer piece, I described the political science version of The Emperor’s New Clothes: the Preference Cascade, where a supposedly settled worldview collapses once a few credible voices say aloud what many already believe privately. On Net Zero, that moment has clearly begun, but the cascade has not cascaded anywhere near enough.

Acceptance that Net Zero is unrealistic is spreading, yet not nearly fast or loudly enough to free politicians, institutions, and corporations from the obligation to keep talking the talk.

And so we enter a prolonged in-between phase characterised by an outward fidelity to Net Zero language but paired with an inward recognition that it will not, and cannot, be delivered as advertised.

What to watch for in 2026 and beyond is not dramatic reversals, but a widening functional gap between the Talk and the Walk—between what is said and what actually happens in the absurdly named “Race to Net Zero”.

Survival over “Nice To Have” Renewables

I was reminded of this gap when researching last month’s piece on the Yukon - in which I read their 72 page (2020 vintage) Road Map “Our Clean Future A Yukon strategy for climate change, energy and a green economy”. What was striking about it was the usual word-salads of good intentions - “A green economy is also resilient..”, “powered by renewable energy”1 , “A green economy creates economic prosperity…” etc.

The word “target” appears 66 times, the word “winter” only once (in the actual text, 4 times in total).

I have no doubt that many (most) people working on this paper (and countless other similar policy-papers all over the world) felt that mapping a path to a green economy was a high calling. I also have no doubt that in the case of the Yukon, there was at least one person (and likely more) who recognized that keeping people alive in mid-winter was the only important objective.

This provides the contrast of the Talk and the Walk

The whole document reads a bit like a school science project - with noble intentions and great aspirational sound-bites but lacking in concrete measures and untethered to physical reality.

Our vision is to come together as leaders to address climate change by building thriving, resilient communities powered by renewable energy and supported by a sustainable green economy that protects and restores our natural environment.

Thankfully, reality does reappear…

To make sure the lights turn on when we need them and that we are able to heat our homes – even on the coldest days of winter – we will also have the necessary backup power on hand. Today, fossil fuels like diesel and natural gas are best suited for backup power because they are quick and reliable. (Yukon Energy)

The Hydrogen Economy - another Nobel Objective

A couple of months ago I participated in a Chatham House Rules forum on energy trade partnerships between Canada and various allied nations (who will remain nameless due to CHR). The discussion focused on natural gas and LNG exports - something that Canada is very well place to do, and is clearly sorely needed. But asking for LNG on long-term contracts is hard to reconcile with a country’s Net Zero ambitions (LOL - looking at you Germany!)

The participants at the forum were diplomats and trade ambassadors - so there was a dissonance that needed to be bridged. This came in the form of a very well practiced and rote: “well of course we only want LNG as a bridge fuel, we still believe in the Hydrogen Economy to achieve our Net Zero objectives”. (my paraphrasing).

In a room full of energy professionals and energy diplomats, you could see the body language - nobody believed a word of it, but understood the need for this political air-cover - Preference Falsification… or just Little White Lies told to keep that nice warm Net Zero fuzzy feeling.

That said, there are many people for whom the continuation of Energy Transition / Net Zero and associated ESG programs is very real and vital to them. The unravelling of the “consensus” on Net Zero is very problematic because the cause has become identity (for true believers). This is a whole other subject that is outside of my wheelhouse - but can be seen in many areas of the politics and makes debate polarised.

Good luck to them, but in the immortal words of The Man in Black2:

A Pattern Of Adjustments

Close to home, the trajectory of Mark Carney offers a useful illustration of how hard it is to walk the talk.

Prior to being PM of Canada Mark Carney sure did a lot of talking. After his tenure as Governor of the Bank of Canada and the Bank of England, Mark Carney was UN Special Envoy for Climate Action and Finance. Carney has long positioned himself as a champion of sustainable finance. His leadership in initiatives like the Glasgow Financial Alliance for Net Zero (GFANZ) emphasized the imperative of aligning global capital with climate goals. The Grandiose Failed Attempt for Net Zero3.

Since assuming the role of Prime Minister in 2025, Carney’s administration has implemented measures that have “surprised” his liberal base. Notable actions include the cancellation of the federal carbon tax, a pause on electric vehicle mandates, and the MOU on a new oil pipeline from Alberta to tidewater, decisions rationalized as necessary for “equitable transitions” amid economic pressures. These steps have alienated former environmental allies, who rightly view them as a retreat from prior commitments. Yet, Carney’s rhetoric persists in affirming climate’s centrality, often through the lens of “climate competitiveness” which has to be my favourite bit of post-Greta wordsmithing.

Climate competitiveness is (in theory) a strategy that promotes Canadian resources, including oil, as viable in a low-carbon future due to their purported efficiency and lower risk profile4. This framing positions fossil fuels not as obstacles but as competitive assets, enabling policy flexibility while preserving the appearance of alignment with global climate objectives.

I’m going to write about the oxymoronic “Climate Competitiveness” separately as it is a such a fun topic….

This is a tactical approach of professing dedication to climate imperatives while adapting policies to real-world constraints. This is the world of the Inbetweeners5

The Inbetweeners

The First Phase: The Nirvana Fallacy: The inaugural phase of Net Zero rhetoric embodied the Nirvana Fallacy, presenting an idealized, carbon-free future as the only viable path while rejecting any compromises as inadequate. This approach, evident in early policy documents, often ignored practical constraints like energy reliability, fostering an aspirational narrative that invited eventual disillusionment. Sadly, the UK under the energy leadership of Ed Miliband is stuck in this phase, even the EU is stumbling/bumbling into Phase 2.

The Second (Current) Phase: Pragmatic Policy Couched in Politically Acceptable Words. The current phase in most developed economies is pragmatic adjustments, such as extending fossil fuel timelines, masked by palatable terms like “resilient pathways” and “bridge to Net Zero”, allowing stakeholders to adapt without overtly renouncing Net Zero ideals. This linguistic strategy maintains institutional consensus, even as it embeds dependencies on traditional energy sources.6

The Third Phase: Economic and Political Power Front and Center. The third phase, introduced abruptly and unapologetically by the current U.S. administration, has put economic and political power front and centre and has dismissed the word-smithing and diplomatic language in favor of direct policies that expand fossil fuel and nuclear production7.

Buckle-up Buttercup.

And again, maybe flogging a dead horse - but lining up 2-3mmbbls/d additional production for 2027-2030 would be a lot easier (and cheaper) by investing in Canada - finish Keystone XL, fund public or private companies and reduce interference from Ottawa (by persuasion or under threats). Easy. Was it really about the oil?

There is a massive question of “What’s Next” for Venezuela. Maybe there is a cunning plan, maybe not.

But there is also a massive question of “What’s Next” for everyone else as the Rules Based Order gets torched.

The "Domino Theory" was a US Cold War geopolitical concept, that suggested if one country fell to communism, neighboring countries would inevitably follow, like a row of dominoes toppling over.

Is this the New World (dis)Order, and who are the dominoes?

Greenland

In case Venezuela was not enough confusion and chaos, attention turns to Greenland1 Again we have talk of critical minerals conflated with national security. I can see/understand the strategic argument - but seriously, if the US wants more air and navy bases2 in Greenland, asking nicely would probably work.

Likewise minerals - just get US companies in and mining. Why the talk of military intervention? - Maybe that “talk” is the big stick and hopefully just a negotation tactic.

Or maybe it is as Doomberg said recently - Greenland is a “trophy” so needs to be taken, not negotiated. President Trump has done a good job of focusing NATO minds on defense spending, not just relying on the US umbrella - is this really the moment to break NATO for something that could be an easy cooperation?

Cuba (and Mexico)

The most obvious “Next” is Cuba - there is a strong Cuba Libre movement in the Trump inner circle and a very large diaspora who have been dreaming of a collapse of the Cuban regime for decades.

Whilst Cuba has had great statistics on education and healthcare this has been paid for by huge support from the former allies. During the Cold War era, the Soviet Union provided extensive economic aid to Cuba, amounting to billions in subsidies, low-interest loans, and preferential trade agreements. This support included the supply of petroleum at below-market prices, which was critical for Cuba’s energy needs3, as well as technical assistance and military aid that constituted a significant portion of the Cuban budget. Following the USSR’s dissolution in 1991, Russia continued this assistance on a reduced scale, offering debt relief and limited oil shipments, though the level of support has steadily declined amid Russia’s own economic challenges.

Venezuela has played a pivotal role in Cuba’s funding since the early 2000s, particularly through a barter agreement initiated under Hugo Chávez, wherein Venezuela supplied subsidized oil in exchange for Cuban medical professionals, educators, and military/intelligence services (the latter denied until it was laid bare in the US raid to get Maduro) . This oil has been essential for generating electricity in Cuba’s power plants, helping to avert (worse) energy crises, while also providing a vital economic lifeline amid U.S. sanctions.

Interestingly, with increasing US sanctions on Venezuela, Cuba turned to Mexico for oil and support.

Katherine Dueholm, principal deputy assistant secretary for western hemisphere affairs, last month lashed out at Mexico, telling a congressional sub-committee that Sheinbaum’s government “has frequently acted in ways that run counter to . . . US objectives”.

She urged Mexico “to reconsider” its stance on Cuba.

And with a pivotal free trade agreement between the US, Mexico and Canada due for review in 2026, Giménez warned of “serious consequences for trade between our countries” if Sheinbaum “continues to undermine US policy by sending oil to the murderous dictatorship in Cuba”. By Jude Weber ft.com

The renegotiation of the United States-Mexico-Canada Agreement (USMCA, or CUSMA) should happen in 2026 - we can only imagine that it will be fraught (see also Canada, below).

It is unlikely that Cuba is “the hill that Mexico will die on”, and as such, one can see Mexico looking after its own interests first - and Cuba’s collapse precipitated by the US’s Venezuela policy - without even needing a specific intervention.

Iran

Then there is Iran, which is clearly under pressure from having economic (and water) issues at home - which are morphing into large scale civil protests. The multi-decade spending on backing direct and indirect proxies is looking like a poor investment strategy as these proxies are depleted and Iran’s influence is reduced. Likewise the destruction of Iran’s air defenses and the US and Israel having a free-fly zone all over Iran, was not exactly a poster for administrative competence. Whilst of lot of this activity might have flown under the Trump radar, the defiant nuclear program and more topically, Iran’s large presence in Venezuela, have drawn focus.

It remains to be seen if President Trump follows up on his words concerning intervention in Iran if protestors are killed (they are). The news-cycle is so fast at the moment that this question may be obsolete by the time I click “publish”.

Russia

Clearly registering your shadow-fleet tanker as “Russian” is no longer the guarantee of safe passage that it once was.

The United States just seized two oil tankers (January 7, 2026), including the Russian-flagged Marinera (formerly Bella 1) in the North Atlantic, as part of efforts to enforce sanctions against Venezuelan oil exports. Reports noted the presence of a Russian submarine and accompanying naval vessels in the vicinity to escort the tanker, underscoring this seizure as a significant challenge to Russian interests.

And this is the parallel with Iran - how does this play to the domestic audience who have been propagandised on the Russia-Global-Superpower story? Russia is bogged down in its 3-day Special Military Operation in Ukraine, it was rather unceremoniously evicted from Syria (and lost its warm-water access at the Tartus Navel base), has struggled to impose its will in Armenia and has lost influence in various African arenas. Iraq has just nationalized Lukoils interests in-country. Maduro was a long time Russian ally, with significant spending on Russian arms. His removal is yet another snub to Russia’s global reach. This can’t play well at home.

Who/Where Else?

Canada should be very concerned. We are no longer playing in a G7 or G20 world where there is debate between peers - the Trump 2.0 USA is now at best “first amongst equals”. As with Mexico, Canada is facing tariffs and the necessity to renegotiate CUSMA.

Mark Carney and most Canadians are behaving as if Canada is an independent pole in a multipolar order, when the world he actually inhabits is a hierarchy being brutally clarified by Washington. Trump’s revamped National Security Strategy and the “Trump Corollary” — asserted through the seizure of Nicolás Maduro and open threats toward Cuba and Colombia, make plain that the United States now treats the Western Hemisphere as an American security estate, not a debating society among equals.

In that framework, Canada is not a co‑author of the rules. It is a dependency inside the U.S. sphere, structurally lashed to American markets, finance and supply chains. AND after decades without a serious sovereign industrial or energy strategy, Canada is at best a weak Middle Power, that has for decades squandered its competitive advantage through proformative politics and virtue signalling.

In this era, the Western Hemisphere is now a “secure production platform” for American industry and technology, defined not by territorial control but by ownership, access and compliance. The Trump doctrine logic is clear and blunt yet internally coherent: if the Western Hemispheres natural resources and supply chains are secured, the economic and geopolitical dividends will follow.

Carney’s answer to the Trump Doctrine, however, remains the same “City‑of‑London” orthodoxy that produced him: more proformative political grandstanding, more process, more declarations, more meetings, and more boondoggles. James E Thorne on X

This week Mark Carney is travelling to China - and the idea of “diversifying” away from Canada’s economic dependence on the USA may sound good in Ottawa - but given the events of the last week - one would think that this is a red rag to a bull.

The US has already signaled deep concerns about Chinese influence/penetration in Canadian politics, economy and civil society. Hopefully Mark Carney is well advised.

Then there are Panama, Colombia and Peru.

Panama Upon his re-election, President Trump immediately focused on the Panama Canal, declaring it under undue Chinese influence and pressuring Panama to compel the Hong Kong-based Hutchison Ports to divest its operations at key terminals on both ends of the canal, culminating in a U.S.-led consortium’s acquisition to mitigate Beijing’s strategic control. The United States upholds its historical oversight of the canal, transferred to Panama in 1999, while the Trump administration has intensified diplomatic and security measures to counteract foreign encroachments, emphasizing the canal’s critical role in global trade and hemispheric defense.

Colombia has been named by Trump already - it has a left-leaning administration and has a very porous border with Venezuela. One to watch for sure.

Peru is new to my list - but China has established substantial control over Peru’s mining sector, with Chinese firms holding approximately 30 percent of the country’s total mining portfolio and operating seven major companies that dominate exports of minerals such as copper, which constitute a significant portion of Peru’s shipments to China. Moreover, China has invested heavily in Peruvian ports, most notably through the Chancay megaport project, majority-owned by the state-backed Cosco Shipping, which serves as a strategic gateway for enhancing trade routes and resource exports across South America. China’s growing economic influence in Peru, focused on critical resources and infrastructure will not go unnoticed.

The World in 2040

I guess I got Greenland wrong back in 2023….

In a separate post I will look at the difficulties of undoing decades of damage and negligence to the oil fields and infrastructure.

Here I want to simply suggest that if this was about the oil there are less risky, cheaper and simpler solutions - notably working with Canada and getting the Keystone XL pipeline finished.

So if not oil, then what?

My first question is: is this just Trump being Trump “He’s a very nasty man” where “he” is Maduro – or is it a much broader strategic play? Those with TDS1 will assume the former.

However, there is a reasonable argument that Trump 2.0 has in place a robust team that is far more organised, capable of planning and being, yes, strategic than say Trump 1.0, or indeed Bush with its regime change in Iraq with no planning of the “what’s next” phase (and we know how that turned out). Clearly, I have no knowledge of the inner workings of the US administration - and so time will judge on this one, but I am hoping that this is strategic and well planned.

On the assumption that this was a strategic move – then what is the threat?

In my world view it is related to the “narco-state” narrative. Yes the drugs are a problem, but the strategic play is much deeper and more insidious – and we can find the answer in the National Security Strategy published in November 2025 in which the Monroe Doctrine was brought up to date with what they termed “The Trump Corollary”

We want to

• ensure that the Western Hemisphere remains reasonably stable and well-governed enough to prevent and discourage mass migration to the United States;

• we want a Hemisphere whose governments cooperate with us against narco-terrorists, cartels, and other transnational criminal organizations;

• we want a Hemisphere that remains free of hostile foreign incursion or ownership of key assets, and that supports critical supply chains;

• and we want to ensure our continued access to key strategic locations.

In other words, we will assert and enforce a “Trump Corollary” to the Monroe Doctrine;

On December 30, 2025, the U.S. Department of State announced sanctions targeting ten entities and individuals in Iran and Venezuela for Iran’s proliferation of unmanned aerial vehicles (drones) to Venezuela. The statement noted:

Iran’s ongoing provision of conventional weapons to Caracas is a threat to U.S. interests in our region.

Today’s action highlights the importance of the re-imposition of sanctions and other restrictions on Iran pursuant to UN Security Council resolutions. The entities and individuals designated today demonstrate Iran is actively proliferating its combat UAVs and continues to procure missile-related items in violation of UN restrictions.

As President Trump has made clear in National Security Presidential Memorandum 2 (NSPM-2), the United States will take action to curtail Iran’s ballistic missile program, counter Iran’s development of other asymmetric and conventional weapons capabilities, deny Iran a nuclear weapon, and deny the Islamic Revolutionary Guard Corps (IRGC) access to assets and resources that sustain their destabilizing activities. We will not hesitate to hold accountable anyone who supports Tehran’s proliferation activities.

Iran, along with its proxies Hezbollah /Hamas, use failed states like Venezuela to run transnational criminal businesses (drugs, money laundering) that then have dual purposes (a) finance proxies and provide hard currency at home, whilst also (b) creating chaos via drugs and gangs in the US. There are also reports that Iran has not just supplied drones2, but has built a drone manufacturing hub in Venezuela. This is “Bay of Pigs” level provocation.

China has had a growing influence – including supplying military hardware and possibly facilitating the Iranian activities. Moreover, there is another angle – that of critical minerals – whereby China, which dominates processing was also “owning assets” and mining in Venezuela – at the same time as putting export restrictions on these same (processed) minerals which are critical in western military hardware. Remember this bit: “free of hostile foreign incursion or ownership of key assets, and that supports critical supply chains; “?

Russia: A Russian pro-state podcaster was saying just recently that the reason that Trump was negotiating with Maduro was that the US was now aware of the (hint Russian) hardware in Venezuela and would not dare to attack – given that the hardware could sink the US fleet in “minutes”.

It is well known that there have been Russian military advisors in Venezuela – some of whom bring direct experience from the Ukraine SMO.

There is of course a simpler explanation – that the video of Maduro shouting “hey, you know where I am, I am in Miraflores, come and get me you coward” was enough to trigger the notoriously thin-skinned Trump. If so that has to be one of the biggest FAFO moments in history.

Epilogue

In such a fast moving, fluid, situation we can, and should, focus on Venezuela and the “What Next?”. Whilst that is a legitimate question - we should look more broadly also.

Cuba - the lights have been kept on by shipments of crude from Venezuela (which is burned to make electricity). That was already precarious with the US navy enforcing a tanker ban - now it must be close to an existential threat.

Iran - Trump has made very explicit promises in the FAFO category - what we have seen with Venezuela is that these are not just words.

Maybe just a coincidence…

This year we were together as a family at our cottage in the hills - warm and brightly lit thanks to Quebec’s massive hydro-electric dams (and a small wood fire). I greatly appreciate my time offshore on oil rigs. Great people, lots of learning by doing and a real sense of doing a “proper job” - not just pushing paper.2 Moreover, it has given me a perspective on the intricate network of professionals who combine to keep the lights on in mid-winter, to have gas (petrol) in my car and gas (gas) in my stove.

As New Year comes and goes - some musing on appreciation

The Invisible Hand

When do people notice electricity? Only when it is not there. In Quebec we lose power locally due to storms (wind or ice) taking down power lines, there is (touch wood) no systemic risk being built into our electric system. That said, capacity is pretty much topped out with Quebec importing (nuclear) energy from Ontario in the depths of winter (whilst exporting electrons (under contract) to the NE USA).

But when the power does go down, you can be sure that teams will be working, whatever the weather, to get it up and running again. In the big summer storm of 2022, crews of linesmen came from far-flung Atlantic and Prairie provinces as well as from the US to get half a million homes back online.

When Persephone descends to the underworld, ushering in the barren grip of winter, a whole suite of additional difficulties arise. Seeing the work being done, my guess is its going to be a while before these guys are replaced by AI. This is not just a “tough” job, it is also objectively one of the most dangerous in North America. How often have you just driven by without a thought, or maybe a curse that the road is blocked? Spare a thought!

This isn’t the invisible hand of the market - this is a planned utility. But it is the invisble hand of the engineers and technicians who quietly go about their work, and get things done. Christmas Day, New Year’s day - everyday

The Sons (and Daughters) of Martha

This post is certainly not original in its thesis - my draft was kicked back into life by seeing the Ayn Rand quote (below) on a LinkedIn post recently and the comment by a like-minded peer (Thanks Steven!) noting the similarity to the Kipling poem Sons of Martha, which has been adopted as part of the Graduation ceremony for Engineers the “The Ritual of the Calling Of An Engineer”

The Sons of Martha is based on a New Testament account of Jesus visiting the home of two sisters, Martha and Mary, as recorded in the Gospel of Luke 10:38–42.

The narrative contrasts active service (Martha) with contemplative listening (Mary), with Jesus affirming the priority of devotion to his words. Kipling’s poem extends this metaphorically, portraying the “Sons of Martha” as those who bear the burdens of practical labor to sustain the world, enabling others (the “Sons of Mary”) to enjoy contemplation and its rewards.

Whilst I am no bible scholar, I find the original story to be suggesting that the listening/contemplation is of a higher value than the active service - and I (of course) prefer Kiplings adaptation, in which the active service enables, or even, creates the environment in which the higher callings can be practiced. One can be reductive and suggest that if the engineers and farmers (the doers and makers) don’t overcome the lowest levels of Maslow’s Hierarchy of Needs, then the rest of society can’t function.

I was triggered (to use a word befitting of modern higher education) by seeing the following post on LinkedIn. Agree, disagree - whatever.

What troubles me is not the substance of the criticism itself, but the apparent detachment from the underlying realities: the academic environment permits unrestricted scrutiny of decisions that navigate complex economic and energy imperatives, yet rarely acknowledges that the luxury of such critique depends on the successful management of those same imperatives to sustain a society where universities and research positions can thrive.

This is a subject I will return to in a future post.

“Men have been taught that the highest virtue is not to achieve, but to give. Yet one cannot give that which has not been created. Creation comes before distribution—or there will be nothing to distribute. The need of the creator comes before the need of any possible beneficiary. Yet we are taught to admire the second-hander who dispenses gifts he has not produced above the man who made the gifts possible. We praise an act of charity. We shrug at an act of achievement.” Ayn Rand - The Fountainhead

And in keeping with poems and literature - I’ll leave you with some lyrics from the weird and sometimes wonderful Hadestown musical. Which, of course, paints everything industrial as bad and “against nature”, yawn.

I rather liked Hades, he definitely had the best tunes.