The Invisible Gorilla in the Room, from Stefan Jovanovich

That is the creature Hugh Hendry - the Acid Capitalist - says we have to find in order to profit from our speculations.

The events in Ukraine are that gorilla. They are predicting the likelihood that Trump, Putin and the Muslim oil producers will establish a Drill, Baby, Drill world of orderly energy production and supply priced in U.S. $. The effects on the European and Asian consumers will be comparable to what happened to the German-speaking world and its silver standard when the French fulfilled the terms of the Treaty of Frankfurt by paying their reparations in gold.

Big Al needs some help:

Perplexity answers the question, "What happened to the German-speaking world and its silver standard when the French fulfilled the terms of the Treaty of Frankfurt by paying their reparations in gold?"

Malcolm Lui asks:

Who are the “they” in “They are predicting the likelihood …” ? And why would Muslim oil producers favor increasing production? The Muslim OPEC producers historically favored limiting production to keep prices high and stable. If they wanted to increase production, they have had plenty of opportunities to do that.

Stefan Jovanovich answers:

They = "events, dear boy". The prediction is that the new cartel of oil and gas exporters will establish "orderly production" that manages the risks of overproduction in the same artful manner that OPEC once operated before the invention of fracking.

William Huggins responds:

So you are suggesting us producers will submit to directives from moscow or Riyadh to limit their production? No evidence of anything but predation among those players but somehow trump purs them all on the same page? I have a bridge for sale….

Malcolm Lui writes:

To me, it’s not clear who wins and who loses under the Gorilla scenario described by Stefan. Europe will continue to reduce their dependency on Russian gas supply. Just like how US consumers shifted to high mileage fuel efficient cars and away from gas guzzlers in the gas price spike in the 70s. So where will Russian sell their gas? Natural gas is much more costly to ship outside of pipelines.

Also, lower oil prices from increased production can spur consumption, but at same time it also reduces the number of oil fields that can be run profitably. Oil prices can only fall so much before oil fields are taken offline.

Does Trump want to see reduced oil production and lost oil jobs in the US, or lower gas prices for the consumer? Based on his actions regarding tariffs, the US consumer is not his priority at the moment. But this might change if his favorability / popularity rating continues to fall.

Larry Williams states:

Inflation is priority; drop in energy drops inflation and offsets bump in tariffs.

William Huggins continues:

But again, fo you actually think trump could force coordination between independents americans and the state owned majors of the other two? What mechanism will he use to force then to hold back? Without a central planning authority I cant imagine his "moral suasion" would be enough to convince us producers to take losses to help support russian producers.

Dump NATO but run a new OPEC? After America's double cross I cant imagine the Saudis or russians lining up to get screwed when America's mood changes.

Laurel Kenner writes:

Drill, baby, drill. When the president speaks, specs do well to listen. Remember when Obama said soon after taking office in 2009 that investing in stocks would be a good thing to do?

Stefan Jovanovich continues:

Larry puts it beautifully. David Levenson agrees; he believes that Trump's primary goal is to increase the real net incomes and wealth of the 70% of American voters whose only assets are their homes, cars and trucks, and small savings in bank accounts. If he does that successfully, he succeeds in holding the House of Representatives in next year's election no matter what happens to the stock market. Mortgage rates decline (Levenson's theory is that this unleashes a surge in refinancings; his favorite company is Rocket Mortgage), the 70% see their taxes actually go down, and DOGE and a closed border/increase deportation reduce marginal Democrat votes in the swing districts.

There is no reason for the Russians, Iranians and others not to agree to a new OPEC. They share the same risks that all major energy producers have - increased marginal production will crater pricing. They have every incentive to want to be - as William puts it - "screwed" in a deal that will trade a peace treaty for Ukraine and limitation of uranium use to domestic energy development for the end of sanctions. Trump and Bessent have every reason to want such a deal because it will support the $ by removing all incentives for the Russians and Iranians and others to work out barter deals with India, Japan and China that only exist because of the sanctions. They (Trump and Bessent) will be happy to have Russia and Iran become the buyers of Treasuries to replace the Chinese; the Russians and Iranians will be happy to become buyers because it will mean the end of sanctions. (We propagandists for Russia think that all the nonsense about Ukraine's winning on the battlefield has obscured the fact that the financial sanctions have worked as well as the British ones did against the United States in the War of 1812. Russia's development of an internal investment economy has been as thoroughly destroyed as American finance was when the (Second) Bank of the United States had its first bankruptcy.

Carder Dimitroff wonders:

I’m confused. I hope this group can help educate me. Why is “drill-baby-drill” a priority issue for this administration and its free-market constituents? Since the thread primarily focuses on natural gas, how is drilling for more natural gas helpful to the average American? Here’s what I thought I knew:

1. The globe is awash in massive amounts of natural gas. The problem is that most natural gas reserves are far from marketplaces and consumers.
2. Developers must identify ways to move natural gas from remote places to marketplaces. Today, developers have only two choices: building pipelines or LNG export facilities. Either decision presents time, money, and risk challenges to developers.
3. Globally, most natural gas reserves are not found in the US. The US is not a low-cost producer and is unlikely to become one anytime soon. At the same time, low-cost producers have been reluctant to add capacity.
4. For the last several years, the US has been a net exporter of natural gas. The US previously approved several more export facilities. As of today, the market has not taken advantage of those approvals. While few federal regulations prevent developers from drilling more wells, the development of new export facilities in the US has been stalled.
5. Domestically, US pipeline capacity cannot handle more natural gas, particularly during peak periods. The natural gas industry has been unwilling to build new interstate pipelines under free-market conditions. Consequently, some regions must occasionally purchase LNG from foreign sources to meet consumer demand (including power plants).
6. The bases differential between the wellhead and the Citygate can be substantial. There are several reasons for high delivery costs, but with historically low average hub prices in 2023 and 2024, pipeline constraints are not solved by producing more natural gas at the wellhead.

For me, the market is speaking. Developers will invest when they believe there are potential profits in the making. Until then, bulk natural gas in the US has been a free-market commodity responding to market forces. Consequently, the chanting of “drill-baby-drill” seems mystifying.

What am I missing? Why is it a federal priority to help the private sector punch more holes in the ground? Why don’t they do it by themselves?

Stefan Jovanovich writes:

For Carder and those very few others who know as much as he does about natural gas and energy, "Drill, baby, drill" has to make no sense as a policy or a practical program. There is no reason why it should. It is completely a political slogan that MAGA polling endorses as a nearly perfect call to arms for the Republicans and Independents who hate government regulation. It has no substance, and it sells. I offered it as an example of how successful Trump II has been in using inflammatory messaging as camouflage.

I doubt that President Polk cared any more about the piece of western Canada above the 49th parallel than Trump does about the rig count, but Polk repeated 54 40 or Fight every moment from he began campaigning for the 1844 election until the very moment that the Oregon Treaty of 1846 was signed.

William Huggins asks:

are you suggesting that his sloganeering is the basis of a new international framework? because once again, i don't see american wildcats lining up behind mbs or sechin's production decisions.

Easan Katir comments:

Yes, as LW succinctly points out, looks like the admin plan is to increase oil production which will lower oil and therefore gas prices, which is a component of all delivered goods, so prices will fall, as eggs have fallen already.

Next, the reciprocal tariffs equalize fairly — the current admin didn't start a trade war, they are attempting to win the trade war US has been losing for decades. The next few moves of the economic chess game: countries will sit down with US reps, look at each other and realize it is stupid to charge each other equal amounts, and consequently will reduce tariffs and the US will reciprocate. That will help US companies sell more to the world. Overall, bullish, imho.

Anatoly Veltman counters:

overall Bullish is meaningless outside of "timeframe considered"

Malcolm Lui wonders:

A world with zero tariffs would increase global consumption. But it wouldn’t move manufacturing back to the US on its own, which is one of the stated reasons for the US tariffs. It took decades to build the supply chains outside the US, probably will take even longer to build them in US due to lack of low cost labor to do the work, which will require building automated factories. This will require Trump and Trump-like successors to hold office for several consecutive terms. Is this likely to happen?

Asindu Drileba asks:

I am assuming this conjecture holds within the 4 year Trump II regime?

Doug Martin agrees:

Time frame brings up a GREAT point. I'm generally optimistic that Trump's "bully strategy" will yield some favorable outcomes to ultimately lower friction/tariffs globally. The question that I have is will the USA's largest adversaries want the success and goal Trump is focused on? Could these adversaries simply hold off for 14 months which would likely dampen the economy and flip congress weakening Trump globally?

Arguably thus far the near term outcome is risk off USA and risk on China/EU…. why would they want to disrupt this new trend and will they slow roll Trump's success to flip congress? Trump's goal is to resolve this quickly, where perhaps China/EU/CAD may leverage time to create a different outcome.

On the Bullish side…Perhaps it will be resolved quickly because Trump has signaled in my opinion soft tone on resolution for Ukraine Assets and potentially soft tone on Taiwan outcome. Will this tone speed up Trump's goals and is this a negotiated factor/signal? Lot's of questions with multiple trajectories.

Archives

Resources & Links

Search