When do the wheels fall completely off?

 "Happiness in intelligent people is the rarest thing I know." - Ernest Hemingway

Not a stoic quote, but an insightful one.  See the world much differently than others, but still have to deal with people who buy into the most absurd narratives (flat-earthers, etc).  See the world falling apart and yet people are focused on frivolous stuff.  Aware of threats that others don't seem to recognize - scorned and laughed at for pointing them out.  Called a pessimist over legitimate threats.  Now that everyone is fearful of everything, called a denialist or worse.  Hemingway is right, to an extent.

OK you bus-riding, lentil-eating losers!  Listen up!  One moment please.  I have to get my bus ticket punched for a transfer.  OK, now listen up.

 

It's time to discuss briefly the invasion of Ukraine by Russia, and the narrative surrounding that.  

Afterwards we will move on to much more important ripple effects that we are just beginning to feel, and see if we can predict some others that will be coming along shortly.  History doesn't repeat, but it rhymes, so we will be looking back to the 1970's to provide some guidance for what we may soon be experiencing.

First, the Narrative - which does not even matter, although it's all the news will provide.  "The Narrative": Putin is evil, Putin is insane, Russia bad, etc.  From my perspective, it's less important to demonize the leader than to assess the situation we are in, rather than get worked up about a country on the other side of the world.  That emotive stuff is for vacuous hand-waving social media influencers and the media.  

You've all seen "The Narrative" in action before: Saddam was evil incarnate.  So was Khaddafi, Milosovec, Kim Il Jong, Castro, Idi Amin, Iran's Ayatollahs, etc etc etc.  I'll leave the two minutes hate against various of heads of state to the media.  I'm more concerned about how to navigate some real bullshit that is very likely coming our way.

In case you weren't aware, the history of Ukraine goes back further than two months, so feel free to inform yourself about how the warring factions have so recently arrived where they are.  Both governments are shitheads, and neither one deserves your pity or support - the civilians caught up in the conflict deserve our pity and support though.  The situation is very complex, and it's unlikely to be resolved by warfare, nor is there any likelihood that US or NATO involvement will improve things.  To the contrary.  As I said earlier, The Narrative doesn't matter.  It's just perception management, and we are here to discuss *reality*.  End of "The Narrative" section of this post.

Let's step back emotionally from that freak-show now, and see how this BS affects those of us who aren't personally being sucked into an unnecessary conflict.  We are the remaining souls who while not being directly involved in a military conflict, still get to experience a rapidly declining standard of living!  

 Let's assess the situation dispassionately and rationally - unlike anyone else right now.

The world is currently in the initial phase of a nasty global energy supply shock.  An energy shock happens when there is a sudden and lengthy disruption in the normal supply of fossil fuel.  

Many people alive today haven't experienced this sort of thing, and I expect that this energy shock will hit the Millenial generation particularly hard.  A significant number of Millenials were still under their parent's wing when the financial crisis of 2007-2008 happened, so a lot of them have never been exposed to a really vicious economic downturn.  A lot of them seem to like driving enormous trucks and enjoy frequent travel to faraway places.  Those habits might be changing shortly.

How many people do you know that will be prepared for what you see below?  Even grumpy old boomers like me are not happy about the prospect. 

When I was a young fella - too young to drive - the 1973 Arab Oil Embargo happened.  You don't forget stuff like that - it affected society, the economy, and the world.  The oil embargo was punishment by the Arab nations against the US for supporting Israel following the Yom Kippur War.  One might call the use of oil as a weapon "Sanctions".  Some things never change.

The Oil Embargo triggered the 1973 Oil Crisis.  People who had been used to being able cheaply refill gas-guzzling behemoths from Detroit were suddenly reduced to having to pay very high prices for gasoline - if they could find gasoline at all.  There was a sense of entitlement, anger, and hysteria from people who felt they deserved inexpensive gasoline any time they wanted it, but were no longer able to purchase it.

It was a real shit-show, the severity of which I was only dimly aware at the time.  We were poor to begin with, so it wasn't like our standard of living fell or anything.  However, it hurt a lot of people with more to lose.  The US dollar was forced to come off the gold standard, and there was a stock market crash.  There were federally mandated wage and price freezes.  The national maximum speed limit was reduced from 70 mph to 55 mph, accompanied by a great deal of anger from truckers and the general public.  

To help offset increased energy costs and a rapidly declining economy, the Federal Reserve reduced interest rates.  The unexpected result was known as "stagflation" - a period of high inflation and unemployment, with a stalled economy in a long recession.

I'm anticipating a similar outcome from the energy shock of 2022, which has yet to be fully felt.  The trigger for this energy shock is the sanctions imposed on Russia by the West (led by the US) following Russia's invasion of Ukraine on February 24, 2022.  Russian oil - among other things - has been sanctioned by the US, and also by the European Union.  This restriction of the oil supply to Western nations is going to have some unfortunate downstream effects that are probably not well understood by most people outside of the oil refining industry.

Let's discuss Diesel.

Diesel is the fuel of transportation and industry - it's the lifeblood of the economy.  There is no other fuel to replace diesel energy in the global economy.  It's wishful thinking that Tesla or some other company will be able to replace the heavy industrial machinery that burns diesel in any reasonable time-frame.  Until that time, diesel fuel must be cheap and plentiful for the economy to function smoothly - that's just stating a fact of life.

Below:  This ore truck is powered by a V-20 engine equipped with four turbochargers, and requires a 2000 gallon fuel tank - that likely needs to be refilled each shift.

Why do most heavy industrial engines use diesel?  Diesel molecules are larger and more complex than gasoline molecules, and as a result these molecules contain more hydrogen bonds.  Because there are more hydrogen bonds available to break, diesel contains about 20% more energy than an equivalent weight of gasoline.  Diesel engines are also thermodynamically more efficient than gasoline engines.  On the other hand, gasoline is well suited for, and primarily used for personal transportation and other small engine applications where emissions are a concern.

Trains, big rigs, bulldozers, backhoes, farm tractors, and harvesters all run on diesel fuel.  When diesel becomes scarce, its price increases, and as a result, the cost of everything else increases.  Anything that requires transportation or manufacture from raw materials has the cost of diesel fuel hidden in the price.  Expensive and scarce diesel is very bad for inflation, because it increases the price of nearly everything.  

Below is a chart of cargo ship fuel consumption vs ship speed.  Cargo ships use a heavier refined oil than diesel called bunker oil.  These things burn *tons* of fuel per day, and there are hundreds of them transiting the oceans each day.

 How is diesel made?  Diesel is a medium refining fraction from crude oil.  Heavy and medium crude oil, like that from Venezuela, Iran, and Russia, produces a larger fraction of diesel than light crude oil.  Lighter crude oil, like that found in Texas and in fracking operations, contains mostly lighter hydrocarbons.  These lighter hydrocarbons will yield more gasoline, and less diesel.  Thanks to sanctions, the US now has less access to heavy crude oil to refine into diesel (and bunker oil).

The price of diesel is normally slightly higher than that of gasoline, due to the extra energy content of the fuel.  We are beginning to see a larger split in the price between gas and diesel fuel, possibly indicating the beginnings of a shortage.

 Diesel is now nearly one dollar more per gallon than gasoline in the US, and the situation is about to become very dire in Great Britain, where most of their fuel has been imported from Russia.  Energy commodity traders are warning that there may well be rationing, due to the lack of available heavier crude oil on the market.  Politicians (who are insane and out of touch), claim that there will be no rationing.  Reality will determine whose outlook is correct - assuming that things continue on the current course.  In the US, I am anticipating diesel prices reaching $7-8 gallon or so by the end of summer, and potential diesel fuel rationing.  Also in the US, gasoline will likely get quite expensive, but it should still be available.

At some point, demand destruction should set in, due in part to a deep economic recession.  The price of fuel will then fall somewhat, as people lose their jobs and no longer have to commute.  People will also get fed up with (or unable to pay) high prices for fuel, and they will have to adjust their driving habits accordingly.  One thing I predict will *not* happen in the US:  The recognition, acceptance, and promotion of the notion that an excellent public transit system that could improve the situation.

Back in the mid and late 1970's, I clearly remember used car lots awash in muscle cars and bloated sedans that people had traded in for fuel efficient vehicles.  Think about that:  The level of financial pain that people were experiencing - not just in fuel prices, but in *everything* - convinced them to give up their beloved hot rods.  People traded in their Firebirds, Camaros, GTOs, 'Cudas and Mustangs - for Pintos, Vegas, Civics and Corollas.  Yes, people deeply loved their fast cars back then, but the financial pain of that period far outweighed the enjoyment of driving one daily. 

The current shortage of heavy crude oil helps to explain why the US government has decided that they can suddenly stop sanctioning Venezuela, and quickly agree to a nuclear treaty with Iran.  The US is suddenly scrambling to find heavier crude oil that can be refined into diesel and home heating oil, while also maintaining sanctions on Russian heavy crude oil.  

Sadly, those alternative sources of heavy crude oil won't come online quickly, because both of these countries have *also* been under crippling US sanctions for years.  Their oilfields aren't in a condition to be able produce high volumes of oil quickly.  The process of reviving their oil patches into consistent high production will take months or years, and it's likely if they were at full production, this wouldn't cover the loss of Russian crude oil from the West's oil supply.

One of the most troubling secondary effects of high priced and scarce diesel (and ammonia-based fertilizer, which is made from natural gas) is the price of food.  To grow a crop for profit, the farmer or agribusiness has to assume the risk that the future market for the crop will cover all of the input expenses - diesel and fertilizer mainly.  Both of these prices are through the roof, so what will become of food prices?

Hunger is widely understood to initiate unrest and war - and war initiates hunger.  A vicious cycle that topples governments and leads to mass migration.  We can expect quite a bit of war and hunger in the near future - particularly since Russia and Ukraine are the #1 and #6 historical wheat exporters in the world (1995-2018).  

If, due to war, this wheat doesn't get planted, harvested and distributed, we are looking at major global unrest due to hunger in many wheat-importing countries.  This will be a tragic and large scale famine, which will fall hardest on children.  If your innocent child is hungry and starving, and you cannot obtain food for them, you will become murder-level pissed off.  Just stating a fact.  One might expect to see famine and war erupt in some of these wheat-importing countries:

Lastly, I want to discuss another problem that I briefly touched on in another post - near the middle.  This was where I mentioned "just in time" manufacturing, and offshoring of all our industry, placing our economy in an unnecessarily fragile condition.  It also has the effect of increasing "tight coupling" - that is the tendency of a hiccup in one part of the economy to get all out of hand in other wide-ranging and barely related parts of the economy.  

Who knew microchip shortages would cripple auto manufacturing?  Sure, it's visible with hindsight, but it didn't seem inevitable initially.  And what has that done to the tire industry, glass manufacturing, the paint industry, or the company that supplies cow hides for the seats?  See how everything is tied together in a complex web, and it only becomes obvious because of a microchip shortage?  

We have no buffer against tight coupling in our complex economy - as in warehouses full of spare parts, because that would cost money that belongs in the CEO's pocket!  If you doubt this, look at this past year when there were bare shelves in many sections at the supermarket, or when you had to wait a month for a car part that previously would have been delivered in a day or two.

Lastly, we need to be aware that global trade and power centers seem to be shifting significantly, in ways that might bring unforeseen or even catastrophic change.  There is a distinct possibility that attempts to strong-arm non-aligned nations like China into joining Western sanctions against Russia will backfire.  China and other non-aligned nations like India might continue to trade with Russia to the detriment of Western nations, and specifically the US.  It's possible that the US Dollar will lose its status as the global reserve currency.  How that would play out is anyone's guess.   The US will still have a massive military, but it won't have the economic freedom to support the kind of military adventurism that it has been used to, without global currency dominance.  The US no longer has the manufacturing base or raw material reserves to pay as it goes. 

For all of the reasons above, I'm anticipating a difficult year or several ahead.  

UPDATE HERE.  People in the media have finally begun to notice.