1/ Since disorder is spontaneous, the human endeavor is a constant, unrelenting struggle against the forces of entropy. We are a highly ordered species – a true miracle of the universe. Beating back entropy requires energy. Ergo, energy is life.
2/ The literal definition of your standard of living is how much order you can impose on your local environment. Your home is a highly ordered system, filled with right angles, straight lines, electrical wires, and so on. These do not spontaneously appear. They require energy.
3/ As a general rule, all humans everywhere want a higher standard of living. Those struggling to get by would like the ability to do so more easily. Those lucky enough to be living in the developed world would like a bigger house, a better car, and maybe a vacation home.
4/ The more energy we can harness in any particular period as a society, the higher the “total standard of living” we can distribute. Since energy is life, energy is the real money, and getting energy commodities right as a national strategy is critically important.
5/ Of course, it takes energy just to maintain the current standard of living we have (disorder is spontaneous), so if we don’t produce enough energy (or we distribute it unevenly) many will see a decrease in their standard of living. Political upheaval usually follows.
6/ The purpose of a currency is to overlay our energy transactions in a way that organizes humanity to efficiently and (hopefully) equitably share our collective energy bounty. Currency reserves are – in the most literal sense possible – claims on future energy.
7/ During times of energy abundance, countries geared more towards value-added work tend to see their currencies appreciate. During times of energy scarcity, countries that produce excess primary energy have the advantage. We are experiencing a period of scarcity today.
8/ Because we are in a period of energy scarcity, Japan, Korea, Britain, and the European Union are all seeing their currencies weaken in this environment. They are all deeply short primary energy.
9/ Which brings us to the Russian Ruble. Much to the literal disbelief of many otherwise brilliant people on Twitter, the Ruble has strengthened against the dollar compared to the pre-war period. Why is this so?
10/ Here are two simple axioms: Putin is funding his war effort by exporting energy, and the world cannot live without Russia’s energy. While the first axiom is obvious and explains the motivation to block Putin’s ability to transact, the reality of the second seems lost many.
11/ If we successfully blocked all of Russia’s energy from reaching the market, the global economy (yes, including the US) would collapse, billions would suffer devastating hardship, governments the world over would be overthrown, and unimaginable anarchy would result.
12/ If the choice given to countries like China, India, and Brazil – whose combined population exceeds 3 billion – is self-immolation or risk annoying Noted Scientist™ John Kerry, we are presenting them with no choice whatsoever.
13/ To be sure, Russian oil is selling at a discount compared to the WTI and Brent benchmarks, but it is still moving, and the higher those benchmarks go the more money Putin rakes in. Putin holds the cards, and shame on us for giving them to him.
14/ Instead of attacking the supply of Putin’s energy, we should be doing everything in our power to increase ours. That is the only way to lower price and materially impact the funding of his war machine.
15/ For highly inelastic products like oil and natural gas, price action works both ways. It does not take significant undersupply for prices to skyrocket, nor does it take significant oversupply for prices to crash.
16/ If oil were $20 a barrel today, would that help or hurt Putin? The answer is obvious. To be as straightforward as possible: Actions that result in a higher global supply of energy hurt Putin, whereas actions that result in a lower global supply of energy enable him!
17/ If we choked off half of Putin’s energy, the price of energy would more than double. Putin would come out better for it, at least in the short term. It is not “unpatriotic” or “pro-Putin” to point out this uncomfortable reality. It is the opposite.
18/ The following actions enable Putin: Threatening windfall profit taxes on energy producers, denying permits for new energy production, shutting down existing nuclear power plants during an energy crisis, and writing nonsensical letters to refiners. These steps will backfire.
19/ Putin is funding his war by selling energy. Energy is in chronically short supply and selling at historically high prices. The response of many to this dilemma is to deny the reality on the screens in front of them - the Ruble is fake! That’s a losing mindset. <fin>
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