Geopolitics Unplugged

Episode 8: Saudi Arabia as swing producer and Saudi Claims of Increase Production: Why you should care?

Summary:
 In this episode we analyze Saudi Arabia's recent announcement to increase oil production. We highlight how this decision seems to have been made without OPEC+ consensus, is a "punitive" move and how it may be interpreted as a move to try to discipline US shale producers, who have been overproducing oil. Is Saudi Arabia, frustrated by the US shale industry's lack of price coordination and inability to reach a $100 barrel price goal, attempting to lower prices to force American producers to curtail their production? We highlight the significant difference in break-even costs between US shale oil and Saudi Arabian oil, suggesting that Saudi Arabia is willing to take a hit to its own profitability to achieve its objective.
 Questions to consider as you read/listen: 
What are the key factors driving Saudi Arabia's decision to increase oil production?
How will Saudi Arabia's production strategy impact the US shale oil industry?
What are the potential consequences of Saudi Arabia's move on global oil markets?
 Long format:
 Saudi Arabia as swing producer and Saudi Claims of Increase Production: Why you should care?
 Today (October 18) news reports abound with the announcement by Saudi Arabia to increase its production levels.
 For as far back as for all practical purposes, Saudi Arabia has been a “swing producer” of international crude. You can think the Shah of Iran for this. The Shah of Iran was a man that was known far and wide for his enjoyment of the fine things in life. The fine things in life are quite expensive. There was never a period of under production in his reign. If one wants to control the price of crude, one must control production. In 1982, Saudi Arabia fully embraced its reluctant role as swing producer. 
 Prior to the shale revolution, and also the discovery of outside of the Middle East large deposits like those in the now being shuttered North Shore of the UK and in the now over producing American shale sector, OPEC and eventually OPEC+ were the dominant players in the crude market. It is only recently as measured by decades that oil prices were segmented into the dozens of individual spot prices that we now have today due to the diversity of global choice due to diverse production areas (and sweet versus sour choice)
 A swing producer is a supplier that can increase or decrease production of a commodity at a low cost, and can use this to influence prices and balance markets. Ever since the formation of OPEC, Saudi Arabia has reluctantly found itself in this role. Saudi Arabia is a swing producer because of its large oil reserves, its large share of global oil production, and its position as one the world's largest POTENTIAL petroleum exporter. Keyword is potential. Saudi Arabia's oil and gas sector accounts for about 50% of its GDP and 85% of its export earnings. If Saudi Arabia “takes one for the team” and underproduces while others don’t concomitantly reduce, it hurts. They feel it. 
 Now I don’t hang out with MBS or Prince Abdulaziz bin Salman but I know through one degree of separation folks who do. 
 This move to produce and produce punitively is being done so far without the “blessing” of OPEC+ as I understand it. I could be wrong but that’s my information. 
 Those folks I know who know folks say that people (not necessarily MBS or the Prince) that the people who swim in that circle have been really fed up with a lot of things. The complete blow up of the normalization of relations with Israel. The internal hardening of factions. The Israel-Iran thing. And never being able to hit $100 barrel price goal. But most importantly, they are quite upset with US shale producers. 
 This move by The Kingdom from “swing (producer) mode” to what is technically referred to as “punitive mode” where Saudi Arabia increases production to punish other producers and re-establish its position in the market is largely due to frustration not so much with its neighbors as it is with American shale. This is what I’m told anyway. 
 As I see from reports and published production rates, the compliance by OPEC+ countries to the set agreed upon production limits is as good as it has ever been historically. 
 https://oilprice.com/Energy/Crude-Oil/This-Is-About-As-Bearish-As-Oil-Has-Been-Since-the-2008-Financial-Crisis.html
 And guess what? Even as a small time US NOWI, I agree with him. The US is overproducing. 
 Why can’t America discipline themselves? 
 God I would love it if we could. But meetings among companies to manipulate prices is strictly prohibited under US antitrust laws, meaning any coordinated effort to fix crude prices could face legal action from regulatory bodies like the Federal Trade Commission. The diverse nature of the shale industry with many independent players really hurts any non coordinated action. Recall, according to available data, major oil companies produce a relatively small percentage of US oil, with independent producers contributing significantly more; estimates suggest that major oil companies account for around 17% of total US oil production, with independent producers responsible for the remaining majority. Just ask Scott Sheffield how real this potential FTC and criminal case for colluding can be. (https://amp.cnn.com/cnn/2024/05/02/energy/oil-ceo-opec-scott-sheffield)
 PZ’s analysis of domestic (American) break even points is correct generally. I can give you the average break even points for my 9 wells. I have two others fully drilled but not fracked and therefore no free flow because of futures prices. 
 The notion of break even point does not have a standard definition in the industry. It depends if you include the start up costs and how or whether you amortize them as laid out in the AFE (completion cost report) or not. It depends on if you amortize artificial lift. Do you include the very handsome tax write offs of tangible/intangible costs?
 The average break-even cost for US shale oil which is in my experience as low as $25-35-45 per barrel and on the upper end of that when it is a legacy or vertical well or if artificial lift is used. So it’s low. 
 For comparison according to a May of 2023 report of the International Monetary Fund forecast the Saudi Arabia’s breakeven oil price at $80.90 per barrel. In 2023, the Russian budget assumed a breakeven price of $70.1 per barrel for Urals. In 2022, Bahrain's breakeven external oil price was $39.38 per barrel, and in 2024 it was projected to be $45.70 per barrel. In 2022, Iran's breakeven external oil price was $48.79 per barrel, and in 2024 it was projected to be $44.11 per barrel. In 2022, Iraq's breakeven external oil price was $75.68 per barrel, and in 2024 it was projected to be $76.54 per barrel. In 2022, Kazakhstan's breakeven external oil price was $65.78 per barrel, and in 2024 it was projected to be $96.18 per barrel. ( https://prosperitydata360.worldbank.org/en/indicator/IMF+MCDREO+PZPIOILBE_B_USD )
 So Saudi Arabia is Walmarting the US shale play. Just like when Walmart comes into a small town, they are taking a hit to their profitability driving price down to the level where no reasonable NOWI or operator will drill a new site or where no reasonable NOWI or operator will invest in artificial lift. US shale is going to be getting a hair cut. 
 Each horizontal well costs about $5m on the AFE to drill to free flow. It takes us 2 months or so to get the drilling rig on site once ordered depending on how much demand there is. From spudding to free flow is 2-3 months. But there’s also a period of time (weeks) to get the frac fluid out to get to volume production. So it’s not overnight. 
 While yes the operating costs you get on the JIB after free flow does drop off, the rate of flow does too quite a bit. After about year 2 or so, it just sinks. 
 Here’s a pretty good production chart:
https://www.energy-cg.com/USA/Wyoming/PRB/Unconventional_LTO_prod_well_exam11_plot_1x1_EnergyConsutlingGroup_web.png
 Don’t just take my word for it, here’s a good study to consider. 
 https://www.energy-cg.com/economicsofshaleplays.html
 And it’s this precipitous drop off that causes us to use artificial lift products (the pump jacks y’all think of when think of an oil field is indicative of an older oil field that’s past free flow, Electric submersible pumps (ESPs), Progressive cavity pumps (PCPs), condensers, artificial gas lift like CO2 or water, etc). But no rational person will invest in artificial lift when the price is low.
 In my opinion (and that’s all it is an opinion) and for what it’s worth, this seemingly unilateral move is motivated to some degree to try to force discipline on the US shale market. Is it the prime motive? Dunno. Probably not. But is it a factor? Absolutely. 
 The open question what actual impact will this have in the WTI futures market and what will people like me do?
 Right now, I hear words (and yes they have me thinking) but I look at the futures market and see it “only” down to $67.91 for July 2025 right now. https://www.marketwatch.com/investing/future/cl.1
 Hedging or let it run? Dunno. Fun stuff. 

EP07: Comments on France commissioning a new nuclear aircraft carrier and the essential need for becoming a blue water navy

Summary:
In this episode, we discuss France's recent commissioning of a new nuclear aircraft carrier and how it signifies its commitment to remaining a blue-water navy, a powerful naval force capable of operating across vast distances. This move comes as the world experiences a shift away from full-scale globalization and a return to reshoring industries. A blue-water navy is critical for projecting military power, influencing global maritime affairs, and safeguarding vital sea lanes. France's investment in this new carrier underscores its ambition to remain a major player on the international stage.
 Questions to consider as you read/listen: 
What are the key characteristics of a "blue-water" navy, and how do they differ from "green water" and "brown water" naval forces?
How does the commissioning of France's new nuclear aircraft carrier illustrate the strategic importance of having a blue-water navy in the context of globalization and global power dynamics?
How is France's commitment to a blue-water navy reflected in their broader foreign policy goals and regional security interests?
  
Long format:
France commissions a new nuclear aircraft carrier and the essential need for becoming a blue water navy
 In the news today (October 18, 2024 was the announcement that France had commissioned a new nuclear aircraft carrier to replace the aging Charles de Gaulle.
 What does this mean and why is it noteworthy?
 A blue-water navy is a naval force that can deploy ships across the open ocean and support them from a distance. The term refers to the ships themselves, as well as the sailors who operate them. 
 A blue-water navy has several characteristics, including:
 Force protection: The ability to protect against threats from underwater, surface, and aerial warfare
 Logistic reach: The ability to sustain a presence at long range with alliances made to long distant foreign ports that will allow for restocking of consumable resources at a reasonable cost.
 Replenishment at sea: The ability to conduct replenishment while at sea
 Submarine protection: The ability to protect against enemy submarines, either with its own submarines or other means. 
 In contrast, "green water" refers to coastal waters, ports, and harbors, and "brown water" refers to navigable rivers and their estuaries.
 Currently worldwide, the only true blue water navies are the US, France and Japan. There is debate over the UK with a lot of folks pointing to the lack of reliable operating aircraft carriers and its historical loss of naval capabilities as making it less than a full blue water navy. 
 China, Russia and India clearly have aspirations to be true blue water navies but are not there yet. 
 A Bluewater navy is important for a country because it allows them to project military power far from their home shores, enabling them to influence global maritime affairs, protect vital sea lanes, deter potential adversaries, and respond to crises in distant regions, essentially establishing them as a significant player on the international stage. A strong Bluewater navy can control vital sea lanes, safeguarding trade routes and ensuring the free flow of goods.  It is the free passage safely of the seas that made globalization possible and profitable for everyone. 
 As we the world continues to decouple and there continues to be a retreat from full scale globalization, having a true blue water navy becomes essential. 
 With today’s announcement of commissioning a new nuclear aircraft carrier, France continues to show its commitment to this key future orientated necessity as the world continues to decouple and nations reshore industry and manufacturing with the retreat from full globalization. 
  https://armyrecognition.com/news/navy-news/2024/new-nuclear-aircraft-carrier-for-france-order-confirmed-for-2025
 
Sources:
 https://nationalinterest.org/blog/reboot/what-makes-real-blue-water-navy-heres-list-183441#:~:text=Analysts%20and%20politicians%20throw%20around,important%20parts%20of%20their%20job

EP06: North Korea gets a nuclear sub? Why you should care

Summary:
 In this episode we discuss North Korea's increasing nuclear capabilities, particularly the possibility of developing a nuclear-powered submarine. We provide information about North Korea's existing submarine fleet and the recent launch of the Hero Kim Kun Ok, a diesel-powered submarine equipped with missile capabilities. We focus on reports from South Korea, indicating that North Korea is constructing a new, larger submarine that may be nuclear-powered. We highlight the potential threat posed by North Korea's submarine program, as a nuclear-powered submarine would be more stealthy and could launch missiles with much shorter response times, creating a significant challenge for US defenses.
  Questions to consider as you read/listen:
What are the implications of North Korea potentially developing a nuclear submarine for the global security landscape?
How does the development of a North Korean nuclear submarine impact the effectiveness of the existing US nuclear deterrence system?
What are the potential strategies and countermeasures that the US and its allies could employ to address the threat posed by a North Korean nuclear submarine?
  
Long format:
 Is North Korea developing a nuclear submarine?
 Per the article below, it is.
 First let’s look at the current state of their fleet, quoted directly from the article below:
The fleet includes a large number of conventionally powered submarines, with estimates suggesting around 70 to 90 vessels. While many of these are older models, like the Soviet-era Romeo-class submarines, North Korea has been modifying and upgrading them for more advanced roles, including missile delivery.
 A key recent development is the unveiling of the Hero Kim Kun Ok submarine, which was launched in September 2023. This vessel represents a significant modification of the Romeo class, with the addition of a missile compartment designed to carry up to 10 missiles.
 Although termed a "tactical nuclear attack submarine" by North Korea, it is still diesel-powered, not nuclear-propelled. The Hero Kim Kun Ok is believed to be capable of launching both submarine-launched ballistic missiles (SLBMs) and potentially cruise missiles.
 ——-end quote——-
 A nuclear submarine has a significant advantage over a diesel-powered submarine in terms of its underwater endurance, allowing it to stay submerged for much longer periods without needing to surface for air, due to its nuclear reactor which provides virtually unlimited power compared to the limited battery capacity of a diesel submarine; this also enables greater speed and operational range at depth, making it far more stealthy and effective in combat situations. Higher speed. Prolonged loitering. Greater operational range. Stealthier. Quite a step up. 
 What makes NK so scary is that every other nation lets each other know pre launch where, when and for what reason a launch will happen. For example, Russia will state date, time, where from and the reason such as a new communications satellite.
 NK does not let the world know when, where and for what reason it launches. Each launch detection is nailed biter. 
 The math for the flight of a ICBM from NK to the US is 24 minutes. And as it works the way through the detection to decision time (Single Integrated Operational Plan) is as follows:
 -4/10 second after launch: SBIRS (Space-Based Infrared System) detection
-1 to 3 seconds after launch: raw data to National Reconnaissance Office at the Buckley Space Force Base in Aurora, CO (Aerospace Data Facility or Space Delta 4) and DEFSMAC in Fort Meade, MD
-6 seconds: alert to National Military Command Center in the Pentagon 
-15 seconds: Space Delta 4 informs NORAD, NORTHCOM and STRATCOM to seek secondary confirmation 
-20 seconds: Clear Space Force Station in Alaska use of Long Range Discrimination Radar to further analyze and confirm 
-30 seconds: Cheyenne Mountain Complex Missile Warning Center
-60 seconds: US Strategic Command (STRATCOM) kicks into overdrive (STRATCOM is the most important but perhaps least publicly known aspect of the nuclear response ecosphere)
-1m 30 seconds: NORAD uses Advanced Extremely High Frequency System to start connecting to various command and control centers
-2 minutes: National Military Command Center is now fully “awake”
-2 minutes 30 seconds: STRATCOM Global Operations Center is in full swing looking to establish the red clock and blue clock, Doomsday planes all spun up
-2 minutes 45 seconds: still awaiting necessary confirmation by ground radar of an actual missile inbound. 
-3 minutes: confirmation by first ground radar and the trajectory confirmed inbound to US
-3 minutes and 15 seconds: POTUS informed. POTUS has less than 6 minutes to go through use the biscuit, Permissive Action Link and nuclear football and make a choice of retaliation efforts. 
-the missile is still in boost phase until 5 minutes then it turns to midcourse
-5 minutes: The US Missile Defense Agency in Fort Belvoir , MD is provided data to try to engage the Ground-Based Midcourse Defense System (despite popular belief it is very very hard to shoot down ICBMs) using the SBX launching from US Army Space and Missle Defense Command in Fort Greeley, Alaska
  
<<<A fantastic read is Nuclear War by Anne Jacobson>>>
 With SLBMs the decision to react time is significantly reduced. If for example if a North Korean sub with nuclear SLBMs were stationed 1000 km (621 miles) from our west coast, the flight time for the SLBM would be less than seven minutes to hit Washington DC. So all of the above long SIOP is totally frustrated. No decision time and no escape time.
 A true bolt out of the blue attack is more devastating and effective with a nuclear submarine and nuclear SLBM. 
 Source:
 https://armyrecognition.com/news/navy-news/2024/north-korea-begins-construction-of-large-submarine-possibly-nuclear-powered
 
 Per the article “According to information published by Yonhap News Agency on August 8, 2024, the South Korean military has confirmed that North Korea has initiated the construction…
 On October 8th, officials revealed that analysis is underway to determine whether the vessel could potentially be nuclear-powered, a significant development given North Korea's past aspirations for such technology.
 According to reports, the new submarine is notably larger than the existing ones in North Korea's fleet.” 
 As PZ himself says he finds SK military reports to not be generally wrong or exaggerated. Recall his recent discussion about SK military reports that NK has sent troops to Ukraine. 
 I used a little transitive property logic there. Good for PZ is good for me.

EP05: Moldova and Russia: Why should you care

Summary:
In this episode, we examine the possibility that if Russia had its way, would it move beyond Ukraine to conquer other countries, focusing on Moldova. We focus our discussion on similarities between the pre-text to the Ukraine invasions and Transnistria, a region that broke away from Moldova with Russian support, as a potential target, citing a recent appeal from pro-Russian separatists in the region for Moscow's protection. We draw parallels between this appeal and similar requests from Ukraine that preceded Russia's annexation of Crimea in 2014 and parts of the Donbas in 2022, suggesting a potential pattern of Russian aggression. We discuss the Russian ops and tactics used against Moldova and its vulnerability to Russian information warfare and what Russia perceives as an existential threat which is Moldova moving towards European integration.
 Questions to consider as you read/listen:
What are the key similarities and differences between Russia's actions in Transnistria and Ukraine?
How does Russia's information warfare tactics in Moldova influence its broader strategic goals?
What are the potential consequences of Russia's involvement in Moldova for the country's European integration?
 
 Long format:
 Moldova and Russia
 I have long been following closely Russian actions and ops in Moldova as a way to gauge whether or not there is any validity to the thought that Russia will or will not be simply satisfied with conquering Ukraine. In other words, will they stop? 
 I am not a smart man, but I can use pattern recognition, right?
 Transnistria was a region that broke away from Moldova around 30 years ago with Russia’s support. In February, pro-Russian separatist leaders of Transnistria issued an appeal to Moscow for protection. That echoed similar ‘appeals’ from inside Ukraine which set in motion the illegal Russian annexations of its territories: the Crimean Peninsula in 2014, and the Luhansk and Donetsk regions in 2022.
 Again, pattern recognition, right?
As far as data points in trying to figure that out the whole "will they stop" issue, I offer the following articles that I liked for consideration:
 
https://www.fpri.org/article/2024/10/russias-information-war-in-moldova/
 
https://www.politico.eu/article/moldova-eu-referendum-vote-russian-interference-enlargement-accession/
 
https://understandingwar.org/backgrounder/russia-poses-long-term-threats-moldova%E2%80%99s-european-integration-beyond-october-elections
 
https://www.chathamhouse.org/2024/03/moldova-new-battleground-russias-war

EP04 Updates on AI, Semiconductors, future power demand and Quantum Computing

Summary:
In this episode, we discuss the growing need for energy to support advancements in artificial intelligence (AI) and semiconductors. We expresses concern about the potential energy shortage that could arise as the U.S. increases its domestic production of semiconductors and AI technology. This is compounded by the ongoing transition to less energy-dense, intermittent renewable energy sources. We highlight quantum computing (QC) as a promising solution to reduce energy consumption in AI, emphasizing its potential to revolutionize machine learning and significantly increase computational efficiency. While QC technology is still in its early stages, we expresses optimism about its rapid development and potential to alleviate the energy challenge.
 Questions to consider as you read/listen:
 How will the increasing energy demands of AI and semiconductors impact the transition to renewable energy?
What are the potential benefits and challenges of quantum computing for accelerating the development of AI and solving complex problems?
What is the current state of quantum computing, and what are the key factors driving its development and potential for widespread adoption?
 
Long format:
  
Updates on AI, Semiconductors, future energy demands and Quantum Computing 
 Over the last few days we have seen a positive uptake in all things having to do with reshoring America’s semiconductor and AI efforts. 
 Between 
 1 the funding of WolfSpeed (see my earlier post yesterday on SiC technology)
 2 continued big Ai user deals with nuclear (see my post last week on Microsoft and yesterday on Google)
 3 the Spruce Pine facility not to be terminally destroyed
 We can add two more events
 4 DOE announces the opening of applications for up to $900 million in funding to support the initial domestic deployment of Generation III+ (Gen III+) small modular reactor (SMR) technologies (https://www.energy.gov/articles/biden-harris-administration-announces-900-million-build-and-deploy-next-generation-nuclear#:~:text=WASHINGTON%2C%20D.C.%20%E2%80%94%20As%20part%20of,modular%20reactor%20(SMR)%20technologies)
 5 And more advancements in the technology involved in the quest for quantum computing and the energy sector’s acknowledgment of how much energy AI will take and how investing in QC will potentially drive that down (up to 100 times more efficient). https://oilprice.com/Energy/Energy-General/Can-Quantum-Computing-Solve-AIs-Energy-Crisis.html 
 According to this article and quoting from it…
 By 2030, AI is expected to represent 3.5 percent of the global electricity consumption, and 9 percent of electricity generation in the United States (a sharp increase from the country’s current rate of around 3.5 percent  – already a hefty amount). Put together, electric vehicles and AI are on track to add 290 terawatt hours of electricity demand to the United States energy grid by the end of the decade according to projections by Rystad Energy.
 End quote
 It is refreshing to see folks start to wake up and realize that we are in a near emergent situation because where do we get all of our future energy from as AI and semiconductors and ancillary technology will gobble up and enormous amount of energy especially considering our growth and unprecedented reshoring efforts due to the US’s retreat from globalization and further massively complicated by our political commitment to move from power dense sources to intermittent very low energy/power density (yet clean) sources. 
 Folks, we simply cannot continue on this path. There’s not enough energy. 
 We have a very long way in QC but the pace of development is encouraging. 
 For background Quantum Computers will be a great accelerator of AI, and quantum computing has the potential to revolutionize machine learning and solve problems that were once viewed as impossible. 
 A quantum computer (QC) is a new computer architecture that uses quantum mechanics to perform certain kinds of computation much more efficiently than a classical computer can. 
 Oversimplified, classical computers are based on “bits“. A bit is like a switch. It could be either zero (if off) or one (if on). Instead of bits, QC use quantum bits, or qubits, which are typically subatomic particles such as electrons or photons. Qubits follow principles of quantum mechanics regarding how atomic and subatomic particles behave, which include unusual properties that give them super processing capabilities.
 The first property is superposition, or the capability for each qubit to be in multiple states at any given time. This allows multiple qubits in superposition to process a vast number of outcomes simultaneously. 
 If you ask AI on a classical computer to figure out how to win a game, very oversimplified and not entirely 100% accurate but close, it will try various moves and take them back in its “head” until it finds a winning path. But an AI built on QC will try all moves, extremely efficiently, holding uncertainty in its head, resulting in an exponential reduction of complexity. 
 The second unusual properties that give them super processing capabilities and superiority over classical computers is entanglement, which means two qubits remain connected so the actions performed on one affect the other, even one separated by great distances. Thanks to entanglement every qubit added to a quantum machine EXPONENTIALLY increases its computer power. To double a $100 million classical super computer you’d have to spend another $100 million. To double your quantum computing, you just need to add one more qubit.
 <<<QC is very fragile in the sense that even slight vibrations, electrical interferences, temperature changes, or magnetic waves can cause super position to decay or even disappear. To make a workable and scalable QC, researchers have to invent new technologies and build unprecedented vacuum Chambers, super conductors, and super cooling refrigerators to minimize these losses in quantum coherence, or decoherence, caused by environment.>>>
 Because of these challenges, it is taking a long time for scientists to increase the number qubits in QC – from two in 1998 to 65 and 2020, which is still too few to do anything useful. However, even on a few dozen, some computing task can be accomplished with QC over 1 million times faster than classical computers. IBM’s roadmap shows the number of qubits more than doubling every year for the next three years. 
 Finally to know, quantum computers are programmed differently from computers, algorithms will need to be invented, and new software tools will need to be built.
 As of today, quantum computing is considered to be in the "noisy intermediate-scale quantum (NISQ)" era, meaning that while significant progress has been made, current quantum computers are still prone to errors, relatively small in scale, and not yet capable of performing complex calculations without significant error correction, making them largely experimental and not yet ready for widespread practical applications.
 As of today, the state-of-the-art in qubit technology involves processors with several hundred qubits, with companies like IBM recently achieving over 400 qubits on their "Osprey" chip, but significant challenges remain in terms of error correction and scaling up to truly useful quantum computing applications, often requiring thousands of high-quality qubits to create a single reliable "logical qubit" through error correction techniques; further research is needed to address these limitations.
 
——//Opinion time//——-
 Again, in my opinion (and that’s all it is) and for what it is worth, this semiconductor/AI war is the conflict that must be won. We must reshore every component from silicon crucibles to fabrications of chips to design and production to lithography (very very tough nut to crack due to Dutch dominance) to then to actual use. 
 We can’t be on the final stretch and run out of energy/power!!!! That is my fear. 
 PZ beats the drum way way before it was popular that China was going to decline and is destined to have a supreme reversal of fortunes. I’m beating the drum of where are we getting the energy given our three competing interests (AI/Chips, general reshoring, moving to less energy dense intermittents). 
 Events like WolfSpeed and SiC and QC give me hope that it’s not going to be as bad. 
 All of these recent announcements and articles are very encouraging to me. 
 To do otherwise than to do what we are doing makes it so America runs the risk of losing its position as top of the Global Value Chain (GVC) in my opinion. 
 
Sources:
 https://medium.com/edge-elections/the-state-of-the-art-in-quantum-computing-cffd654c363f#:~:text=According%20to%20this%20roadmap%2C%20IBM,scaling%20without%20physics%20limitations'%E2%80%9D.
 
https://www.orfonline.org/research/quantum-computing-current-scenario-and-future-prospects#:~:text=According%20to%20recent%20estimates%2C%20each%20functional%20or,progress%20being%20made%20on%20a%20continual%20basis.&text=In%202021%2C%20IBM%20developed%20a%20127%2Dqubit%20chip,followed%20by%20the%20433%2Dqubit%20Osprey%20in%202022
 
https://www.nature.com/articles/d41586-023-01692-9#:~:text=Some%20firms%20are%20so%20optimistic,at%20the%20University%20of%20Helsinki
 
https://link.springer.com/article/10.1007/s13222-024-00467-4#:~:text=The%20current%20state%20of%20quantum,of%20continuous%20quantum%20error%20correction
 
https://theconversation.com/quantum-computers-in-2023-how-they-work-what-they-do-and-where-theyre-heading-215804#:~:text=What%20is%20the%20current%20landscape,still%20some%20way%20from%20perfection.&text=Today's%20machines%20are%20of%20modest,goal%20via%20diverse%20technological%20approaches
 
https://crsreports.congress.gov/product/pdf/R/R47685#:~:text=Since%20the%20enactment%20of%20the%20NQI%20Act%20in%202018%2C%20researchers,support%20under%20the%20NQI%20Act

EP03 SiC technology and WolfSpeed: Why should you care?

Summary:
 In this episode we discuss Wolfspeed, a company that manufactures silicon carbide (SiC) semiconductors, has secured $750 million in funding from the US CHIPS Act and an additional $750 million from an investment group. SiC is a type of wide bandgap (WBG) semiconductor that offers significant advantages over traditional silicon semiconductors. These advantages include higher efficiency, better heat dissipation, and the ability to operate at higher voltages. This makes SiC ideal for use in power electronics applications, such as electric vehicles and AI chips. The funding will allow Wolfspeed to expand its silicon carbide manufacturing in the United States, potentially leading to further advances in these areas. 
Questions to Consider while reading/listening:
 1. What are the key benefits of silicon carbide (SiC) in semiconductor technology, particularly in relation to advanced AI chips and electric vehicles?
2. How does the US CHIPS and Science Act support the development and deployment of SiC-based semiconductor technologies, and what are the potential economic and geopolitical implications?
3. What are the challenges and opportunities facing the SiC semiconductor industry, and how is the industry evolving to meet these challenges?
 
Long Form:
SiC
Wolfspeed announces $750m in proposed funding from US CHIPS Act plus $750m from investment group
What happened… (quoted from article source below)
Wolfspeed has signed a non-binding preliminary memorandum of terms (PMT) for up to $750m in proposed direct funding under the US CHIPS and Science Act.
Wolfspeed expects to receive $1bn of cash tax refunds from the advanced manufacturing tax credit under the CHIPS and Science Act (section 48D), giving the company, in total, access to up to $2.5bn of expected capital to support the expansion of silicon carbide manufacturing in the USA.
End quote
Why does this funding matter?
Wolfspeed makes silicon carbide (SiC). SiC is a type of Wide Band Gap (WBG) technology that some say is the future of semiconductors. 
Technically, SiC is a robust, hexagonal structure chemical compound offering wide band-gap semiconductor properties. What the f does that mean?
Silicon carbide (SiC) is a compound semiconductor material made of silicon and carbon, crucial for AI and semiconductors due to its exceptional properties like high thermal conductivity, wide bandgap, and ability to operate under extreme temperatures, making it ideal for power electronics applications where high efficiency and heat dissipation are critical, especially in advanced AI chips requiring significant processing power. The wide bandage property allows SiC to operate at higher voltages with lower leakage current, resulting in improved energy efficiency. SiC’s WBG feature has a 3x improvement over the traditional silicon performance. As AI chips demand increasingly powerful processing capabilities, SiC semiconductors are being explored to enhance power efficiency and enable denser chip designs, leading to better performance in AI applications. A 10 to 15 percent greater range for electric vehicles can be achieved by SiC semiconductors because they convert energy more efficiently. As a result, car manufacturers can install smaller batteries in their electric vehicles. This is a win-win for the manufacturers and could provide a boost to the industry.
 It sure seems very promising and more evidence that we (US taxpayers) are going all in on the “chip war”.
<<<<As a total geek aside, the process to make SiC is wild. SiC is a complex material to create because it requires a controlled environment that's about half the temperature of the sun using an Acheson Graphite electric resistance Furnace (AGF). AGF is a furnace that uses graphite rods and direct electric current to produce products through a process called graphitization. The furnace works by passing an electric current through graphite rods that are surrounded by a mixture of sand, carbon, and salt. The heat generated by the current transforms the mixture into a cylinder of silicon carbide (SiC) around the graphite electrode. It's also the second hardest material known to man. Very cool to this geek. The energy consumption to do this is not insignificant >>>>
Sources:
 https://www.semiconductor-today.com/news_items/2024/oct/wolfspeed-151024.shtml
 
https://www.eag.com/blog/silicon-carbide-powerful-semiconductor/#:~:text=Silicon%20carbide%20is%20increasingly%20considered,and%20tolerate%20much%20more%20heat
 
https://www.rohm.com/electronics-basics/sic/sic_what1#:~:text=SiC%20(silicon%20carbide)%20is%20a%20compound%20semiconductor,and%20n%2Dtype%20control%20required%20for%20device%20construction
 
https://navitassemi.com/silicon-carbide-the-facts/#:~:text=Combining%20silicon%20(atomic%20number%2014,wide%20band%2Dgap%20semiconductor%20properties
 
https://link.springer.com/article/10.1007/s11027-023-10100-6#:~:text=The%20theoretical%20energy%20requirement%20per,furnace%20run%20(Guichelaar%201996)
 

EP02 Where are we going to get the energy folks?

Summary:
In this episode, we explore the growing energy demands facing the United States, highlighting three key contributors: reshoring manufacturing, the AI/Chip war, and the transition from high-density to low-density energy sources. We discuss how reshoring efforts are driving significant infrastructure development as well as new manufacturing facilities, requiring substantial energy consumption. The AI/Chip war, characterized by a surge in computing power and semiconductor fabrication, also demands substantial energy. Furthermore, the shift towards intermittent energy sources like wind and solar presents challenges due to their lower energy density and intermittency. We conclude by emphasizing the growing energy needs and the potential dangers of a mismatch between increasing demand and the transition to less reliable and less dense energy sources.
 
Questions to consider as you read/listen:
 
What are the competing priorities driving increased energy demand in the United States?
How will the shift to lower energy density power sources impact the ability to meet future energy demands?
What are the potential consequences of these trends for the US economy and standard of living?
 
Long format:
 
In January 1848, historian, philosopher and statesman Alexis de Tocqueville addressed the French parliament regarding unease in Paris: “I believe that we are at this moment sleeping on a volcano.“
 
I fear that we, the US, are sitting on top of a volcano. The volcano is a confluence of three separate and distinct priorities that are competing for one finite thing: energy/power.
 
The three competing interests are: reshoring, AI/CHIP war and political desire to move from high density sources of power to low density intermittent sources of power.
 
RESHORING
 
Currently, we are in a period of rapid and truly unprecedented growth in America because we have made a decision to reshore our manufacturing and to try to be less dependent upon far-flung supply chains involving countries that we prefer not to involved with. This decoupling and reshoring to bring back manufacturing to the US requires a lot of build-out. As of February 2024, annual investment in new manufacturing facilities hit nearly $225 billion dollars, a record high even after adjusting for inflation.
 
But there is more because of the truly amazing infrastructure rebuilding we are underway with in America as well. That of course takes a lot of energy/power too. Just a quick look at one small subset of the scope of this buildout can be seen in that spending on new road construction will reach approximately 153 billion U.S. dollars by 2027. This does not include any other or exiting infrastructure just new roads.
 
The era of flat power demand is over. According to FERC filings in 2023, grid planners forecast peak demand to increase to 4.7% over the next five years with many analysts calling this a gross underestimate. (https://gridstrategiesllc.com/wp-content/uploads/2023/12/National-Load-Growth-Report-2023.pdf) This an 81% jump over the previous forecast. Staggering. A lot of it has to do with construction and buildout.
 
 
AI/CHIP WAR
 
By 2030, AI is expected to represent 3.5 percent of the global electricity consumption, and 9 percent of electricity generation in the United States (a sharp increase from the country’s current rate of around 3.5 percent  – already a hefty amount). Put together, electric vehicles and AI are on track to add 290 terawatt hours of electricity demand to the United States energy grid by the end of the decade according to projections by Rystad Energy.
 
Yet even those who all “see” and agree on this have no concept at all how much energy AI sucks up or sure act like they don’t.
 
For example, Microsoft and OpenAI are planning on building a $100 billion data center, according to reports. Initial reporting suggests it may require five gigawatts of power, or roughly the equivalent of five nuclear reactors. Five! That’s just one project at the dawn of this race. Right now, in Chantilly, VA the AI center used by our government and contractors already takes up 2% of the entire US grid’s worth of energy. 2% already! 
 
The amount of energy that chip fabrication takes is likewise astonishing. The world's leading semiconductor manufacturer, TSMC, consumes more electricity than some U.S. states. Taiwan already faces its own electricity challenges because of semiconductor manufacturing. Experts predict the island’s reserve capacity may dip below the recommended 10% emergency margin the government says is necessary. We can use that as a model as we are trying to rival or replace them by building our own fab sites here in the US. All in all, Taiwan Semiconductor Manufacturing Company (TSMC) consumed nearly 25,000 gigawatt-hours of energy in 2023, which was a 10.4% increase from 2022. TSMC is one of Taiwan's largest consumers of power, accounting for about 9% of the island's electricity.Let’s consider just one of the 21 scheduled fabrication plants planned for construction in the US. Just the first phase of TSMC’s Phoenix facility will create 200 megawatts of demand, the equivalent of powering nearly 30,000 households. The manufacturing giant plans to build up to five additional fabs on the same site. Information from the Arizona Public Service Company (APS) places the final demand from plant operations at an eyewatering 1,200 megawatts.
 
AI chip fabrication and AI use, that is a lot of energy.
 
SWITCH FROM HIGH DENSITY RICH SOURCES OF POWER TO LOW DENSITY INTERMITTENT SOURCES OF POWER
 
A beautiful book on this that is a real eye opener that will explain these concepts and provide all that you need to know on energy and power density and why it matters is Power Density: A Key to Understanding Energy Sources and Uses (MIT Press) by Vaclav Smil. I CANNOT recommend this book highly enough. After you are done reading all of Peter Zeihan’s books first, of course.Smil argues that the high energy/power density of fossil fuels like coal and oil has been a key factor in the rapid development of modern society due to their ability to deliver large amounts of energy in a compact form.
 
Simplified significantly, higher energy/power density means more energy stored in a smaller space or more power generated in a smaller physical area.
 
Power density is calculated by dividing the total power output by the volume it occupies.
 
Approximate power densities (in MJ/kg): 
 
Nuclear: ~ 80,000
Hydrogen: ~ 120 in theory
Natural Gas: ~ 50
Gasoline: ~ 45
Kerosene: ~ 43
Propane: ~ 26
Coal: ~ 24
Geothermal  ~ 10-20
Hydroelectric: ~ 0.01
Wind Turbines: ~ 0.01
Solar: ~ 0.001
 
Why does switching from high density rich sources of power to low density intermittent sources of power matter?
 
Intermittents (wind and solar), as politically popular as they are, are not the solution as they are truly intermittent energy sources and what people don’t understand is the concept of energy (power) density, transmission, availability, start-up time, consistency, un-subsidized cost of energy per MJ, and energy loss from conversion/transmission and basic physical restrictions of where it works versus where it’s needed. But it is our political decision in the US. Less power density, intermittency coupled with an overwhelming need for more and more power is a formula for disaster.
 
BOTTOM LINE
 
With these three competing interests, where are we getting the energy folks? How do we keep our current standard of living, re-shore, grow and “win” the AI race and transform to lower energy density?
 
Sources:
 
https://ketiv.com/blog/whats-driving-manufacturing-reshoring-and-is-it-in-americas-best-interests/#:~:text=The%20trend%20towards%20manufacturing%20reshoring,return%20home%20for%20many%20manufacturers
 
https://www.jec.senate.gov/public/index.cfm/democrats/2024/4/fact-sheet-the-manufacturing-renaissance-that-will-drive-the-economy-of-the-future
 
https://www.utilitydive.com/news/electricity-load-growing-twice-as-fast-as-expected-Grid-Strategies-report/702366/
 
https://www.statista.com/statistics/1312965/tsmc-energy-consumption-by-source/#:~:text=Published%20by,of%20water%20saved%20also%20increased
 
https://english.cw.com.tw/article/article.action?id=3766#:~:text=The%20number%20at%20the%20end,dipped%20by%201%25%20in%202023

EP01 What is the Global Value Chain and Why is it important to be on top

Summary:
 
In this episode, we discuss the concept of the Global Value Chain (GVC) and its importance in the global economy. We explain that the GVC refers to the different stages of production and distribution of a product, with the "top" of the chain representing activities like research and development, design, and marketing. We discuss and emphasize that these top-level or highest value add activities generate the highest value and control over the chain, often concentrated in developed economies. We explore the importance of AI chip technology in securing a country's position at the top of the GCV, as controlling this critical technology would grant significant economic and political power. But we also discuss and acknowledge the growing trend of economic decoupling, which could lead to the formation of regional value chains, potentially disrupting the traditional global model and ending the concept of the GVC and the concept of the top of the GVC.
 
Questions to consider as you read/listen:
 
What are the economic advantages of a country being at the top of the global value chain?
How does the development of AI technology change the nature of the global value chain?
What are the potential consequences of a single country dominating the production of AI chips?
 
Long format:
 
What do we mean by being at the top of the global value chain and why is it important?
 
The "top" of a global value chain refers to the stage where the highest value-added activities occur, typically involving advanced technology, research and development, design, marketing, and branding, usually concentrated in developed economies; it's important because it represents the most profitable and influential part of the production process, allowing countries and companies participating at this level to capture greater economic benefits and exert more control over the overall value chain.
 
High-value activities:This stage includes activities like complex product design, intellectual property development, sophisticated manufacturing processes, and high-end marketing strategies.
Knowledge-intensive:Companies at the top of the value chain often possess advanced technological knowledge and expertise, which gives them a competitive advantage.
Greater profit margins:Due to the high value-added nature of these activities, companies operating at the top of the chain tend to have higher profit margins.
Economic impact:Countries that can successfully position themselves at the top of global value chains tend to experience higher economic growth, increased employment in high-skilled jobs, and greater technological advancement
 
“Winning” the AI chip war would secure a country's position at the top of the global value chain by giving them control over a critical technology that powers the future of many industries, including healthcare, finance, and defense, essentially allowing them to dictate the pace of innovation and influence the global economy through their access to the most advanced AI capabilities, while potentially limiting other nations' access to these technologies.
 
 
Sources:
 
https://www.globalvaluechains.org/about/gvc-intro/#:~:text=This%20is%20much%20more%20extensive,be%20a%20critical%20entry%20barrier
 
https://www.worldbank.org/en/topic/global-value-chains#:~:text=The%20international%2C%20inter%2Dfirm%20flow,bad%E2%80%9D%20jobs%20in%20the%20South
 
https://www.freedomlab.com/posts/the-ai-chips-race-part-i#:~:text=The%20ability%20to%20develop%2C%20produce%2C%20and%20control,hawkish%20on%20owning%20their%20own%20AI%20chips
 
https://www.aei.org/economics/waging-the-high-stakes-chip-war-my-long-read-qa-with-chris-miller/#:~:text=Enterprise%20Institute%20%2D%20AEI-,Waging%20the%20High%2DStakes%20%E2%80%9CChip%20War%E2%80%9D:%20My%20Long,Read%20Q&A%20with%20Chris%20Miller&text=Computer%20chips%20are%20the%20driving,the%20Foreign%20Policy%20Research%20Institute
 
 
The key words for me in the above is "global", and a global value chain is only guaranteed if there is a monopoly somewhere along the chain is where all global trade has to pass through a single step, otherwise we can by definition create completing "regional" value chains.
 
Applying the same logic to AI chips, we see that there is only a guaranteed global value chain if someone "wins" the chip war and corners the market.
 
But "global" is no longer the world we are living. Economic decoupling is the trend at present and AI will accelerate that, particularly in IT, but also across the top level of value chains. A lot of the reason companies/countries have remained at top so long is because it wasn't possible to replace them with low-cost alternatives, and a large amount of that is from the from the education of your workforce. AI is unique in its possibility of replacing a college degree, it's going to significantly reduce the barrier to entry that has traditionally existed; or at least it would if allowed run unchecked.