Wide Boundary News: The Iranian War, Rising Gas Prices, and the Single Point Failure | Frankly 130

Good morning. It is Tuesday, March 10th, 7.30 a.m. Central. I recorded the following video

yesterday morning about the wide boundary risks of the unfolding Iran war. My team worked

very hard to get it ready to release yesterday and then oil fell over $30 a barrel and President

Trump announced a press conference last night. So I delayed its release in case something dramatic

was announced. It wasn't. But this situation will likely be a roller coaster for a while and

the news in the markets may stay disconnected from real events on the ground. Either way the global

system has now fundamentally changed as a result of the events in Iran. So the points that follow

will stay relevant no matter what happens and the great simplification has likely gotten

closer. Here's yesterday's video. Lots going on in the world. For over 10 years I've been using

the Strait of Hormuz Dynamics as an example of how concentrated the spice is on our planet,

aka oil and gas. And how fragile the global human economic system really is.

But now that the Strait is blocked and we're at war with Iran, I have to say it's a different

thing to anticipate it than to see it and seeing it comes with emotion and reveals things that

anticipating it never could. What's happening is incredibly complex so much so that nobody has

the full picture and I will not be breaking any news on this story. My goal as usual is to widen

the lens because the second and third order effects are already being seen and the fourth to

end-thousand order effects are where the real damage and surprises tend to be. So here's this week's

wide-boundary news. As many are aware, the U.S. and Israel launched Operation Epic Fury against

Iran February 28th, the Strait of Hormuz. It's been effectively closed since March 2nd,

though some Chinese ships and Iranian ships with transponders are being led through.

Qatar declared force measure and halted LNG shipments.

Oil as of this recording is about a hundred dollars a barrel. It spiked to 120 overnight

before there was rumor of coordinated strategic petroleum reserve release. Russia has announced

they're no longer neutral in this war and are providing around targeting intel on U.S. military

operations. U.S. is still demanding unconditional surrender. Iran refused. There have been

attacks on water, diesel plants, refineries. There's been black rain and Tehran and the like. These

are but some of the headlines. So stepping back, here's how an economist might frame what's

happening in the Strait of Hormuz right now. About 20% of global oil consumption passes through

that narrow strait. And if it's closed, oil prices spike, but since energy is only about

3% of global GDP by cost, that's a meaningful but manageable disruption, a few percentage points

of GDP. I would argue that frameings like this are really narrow boundary, potentially

catastrophically so. Yes, energy is only a few percent of global GDP by expenditure.

But without it, we lose almost all GDP because modern life is a continuous conversion of fuel into

food, heat, motion and materials. Modern industrial civilization is not powered by financial capital

or human ingenuity. It's powered by those things coupled with a continuous, uninterrupted flow

of dense, portable, storeable and inexpensive energy in primarily oil and gas.

Every calorie of food that reaches your plate was grown, processed, refrigerated, packaged and

transported using fossil fuels. All of it runs on an energy substrate that we have as a civilization

decided to route through a narrow maritime corridor between Iran and Oman.

Modern global society is powered by the labor equivalent of 500 billion human workers

and a meaningful fraction of those may have just lost their metaphorical export visas.

My read is, just like the Ukraine war was for Europe, this incursion is going to remove the energy

blinders for a much wider portion of our society. We may now be facing an energy access problem.

And as a society, we have almost no intuition for what that actually means because we've trained

ourselves to think about energy in terms of cost. When we should have been thinking about it in

terms of benefits and dependency, we are energy blind. The second angle is related but also distinct.

Even people who understand the centrality of energy to our lives, who get that oil under pins

the physical economy, tend to think about this crisis in terms of the headlines, oil and gas

prices go up. Inflation rises, the economy slows down. That's accurate, but it's first order thinking.

Here's what second and third order issues might look like. Let's start with something almost,

no one is talking about sulfur. The majority of crude oil that passes through Hormuz is classified

as sour crude as a high sulfur content. And when you refine sour crude, you produce elemental

sulfur as a byproduct. You pull 17 million barrels a day plus or minus of sour crude off the market.

And we're not just losing fuel. We also are potentially losing sulfur. And sulfur is the feedstock

for sulfuric acid. And sulfuric acid is what we use to leach copper and cobalt out of the ground in

places like the DRC and Zambia, which the two of those together supply over a sixth of global copper

and more than 70% of global cobalt. So the little oil snafu in the state of Hormuz could lead to

no marginal copper or cobalt, no transformers, no transformers, no grid expansion, no grid expansion,

no data centers, which means no EV charging infrastructure, no AI build out and the like.

So this chain, Hormuz to sulfur, to acid, to copper, to transformers, to compute really has

very little to do with gasoline prices. But it's but one example of the complexity and risk of our

interconnected Justin time system, which I've labeled one of the four horsemen of the 2020s.

So here's another end-thorough effect, natural gas. Katar sits inside the Persian Gulf.

They're responsible for roughly 20% of all globally traded LNG. Europe spent two years after

Ukraine's invasion rewiring its entire energy import infrastructure away from Russian pipeline gas

towards US and Katari LNG. So their dependency now runs directly through this closed straight

and unlike oil, there is no overland alternative for LNG and the price spikes are already

hitting European importers and futures markets. There's also nitrogen fertilizer over 40 percent

of internationally traded nitrogen fertilizers originate from or are navigated through the Persian

Gulf. Nitrogen fertilizer starts with natural gas, which is then the feedstock for ammonia,

which becomes urea, which goes on the fields around the world. And a disrupted planting cycle could

translate into food price inflation very quickly within months. And food inflation in import

dependent nations that have very thin fiscal reserves like Egypt or Pakistan or Turkey

becomes political quite quickly. A recent guest on TGS Craig Tindale labeled the situation as a

potential globalized Arab spring. Beyond energy, fuel and inflation, there's also the supply chain

precursors for something like 6,000 distinct products that move through that straight. Thousands

of products from polyester to medical plastics to semiconductors, they all use petroleum as

precursors in their physical products or in the process that makes them. The wide boundary point

here is this. We're not watching an oil price shock. We're watching the exposure of a civilization

that organizes itself around maximum efficiency and zero redundancy and built a single point of

geopolitical failure into the center of a global physical economy. The straighter hormones

and the situation there is the most consequential single location on the planet for the foreseeable

future. Okay, wide boundary point number three in ecology and economics, stocks are what's accumulated

and flows are what moves through them. The problem is that flows feel infinite right up until the

stock runs out and I've referred to this as the slurping sound with respect to oil extraction.

Stocks and flows apply to military capacity as well. The United States has historically had the

most impressive offensive flow capacity. Shock and awe, precision strikes, the ability to put

bombs on target anywhere on earth within hours. But the stocks, particularly the stocks of things

like interceptor missiles may be getting dangerously low. I'm told by people who follow this closely

that the US and Israel have been firing five to seven interceptors for every incoming

uranium missile. And by the way, each of those interceptors cost millions of dollars and takes

months to manufacture. A PAC-3 interceptor costs like four million dollars in contrast to

Shaheed Drone made in Iran costs around 50K. That's a cost exchange ratio of 100 to one in Iran's

favor. So Iran doesn't need to win the air war outright. They probably just need to keep up

intermittent launches long enough to limit what we can shoot back with. And Secretary of State Rubio

said publicly that Iran is producing offensive weapons faster than the US and its allies can

manufacture interceptors to stop them. And Secretary of War suggested this war may go on for months.

So the US is historically structured for periodic high-intensity bursts, not sustained

engagement. The assumption has always been overwhelming force, short duration, then restock.

But that model does not hold if a conflict drags on, especially a large conflict.

So there is an unfolding military stock and flow problem in this war. And no one really knows

what Iran's stockpiles or launcher capacity is or will be. In my last wide boundary news,

I opined that the betting markets, Polly Market, was betting on war. And soon after that,

completely unrelated to my misive, of course, they disallowed betting on whether a nuclear bomb

would be used. And when they closed the market, it was a 24 percent chance that we would see a

nuke this year. I am afraid that because of the perilously low stocks of missiles that the US

and Israel may resort to tactical nukes to end this conflict, which would then open up another

Pandora's box. But there is another stock and flow story here, perhaps the most critical one.

It is the oil and gas sitting in the ground in the Middle East, where approximately 2 thirds of

the 60 to 65 percent of the world's remaining oil reserves reside. And what happens when the

bridge between those underground stocks and the global market flow gets severed? And that bridge

is, of course, storage capacity. JP Morgan had an analysis last week showing that many

Middle Eastern oil producers are approaching a full storage situation under current conditions.

Kuwait and United Arab Emirates are already reported to be shutting in production and Iraq may be

close. When storage is full, no matter the mechanism, the entire system has to rapidly reduce

production. That's what happened in March 2020 when oil prices turned negative. And here's where

this could get between interesting and catastrophic in a way that's not getting much attention.

And I want to be clear, this is speculative, but I do think it's plausible after conversations

I've had. Iraq's major oil fields are old. Many of them have been on continuous water injection

for decades, a process where you pump water into the reservoir to maintain pressure and push oil

towards the production wells. And these are not technologies you can simply turn off and turn

back on is when you shut in a field like this, the pressure gradients drop and the oil water

contacts shift. Then gas dissolved in the oil can come out of the solution and then potentially

reduce the permeability of the rock itself. And the concern from petroleum engineers I've talked

with is that shutting in a well of that type that's been on large scale water injection could cause

reservoir damage that might be difficult or even impossible to fix in the future. You might get

some of that production back eventually after months and significant investment. And in some cases,

you might not get that production back at all. And the time factor becomes extremely relevant.

So Iraq, especially Iraq, may face two choices if the straight stays closed.

Option one is a shut in with the risk of reservoir damage and a slow, expensive restart.

And I've heard this morning that flaring has stopped in Iraq, suggesting that that may be an option

that's unfolding. And option two is emergency disposal of some type. Flaring, dumping in the

desert or into the Persian Gulf, burning crude in country or anything that keeps pressures and flows

from collapsing. Each of those options is ugly with its own second and third order effects.

So there's an uncomfortable systems logic here. The shorter Iraq expects the straight closure to

last, the more rational the dump option may look. Because of Hormuz reopens in two or three weeks,

dumping oil as catastrophic as it would be ecologically and otherwise might preserve the reservoirs and allow

production to resume quickly. But shutting in by contrast, risk permanent damage that matters even

if the crisis is short. I'm not an expert on this, but the lack of storage in a just-in-time oil system

designed for continual flow and not interruption is a story that we should be watching.

And it's not only Iraq, many other oil producers as well. I'm highlighting Iraq because

their closest to full storage have old wells and happen to be the second largest producer in OPEC.

Let me shift to one of the more interesting long-term aspects of this unfolding gas prices.

At the state of the Union address, President Trump cited low gas prices as a triumph of the

administration's energy agenda and a key theme heading into November's mid-turn elections.

Here's a wide boundary take and I'll be transparent that this is my editorial opinion.

The political obsession with cheap gas prices is in my view one of the most ecologically and

economically counterproductive reflexes in our modern governance. I say this not from a moral high

ground, but from a systems one. Cheap oil and gas prices send a false intermediate and long-term

signal and they suggest the producers that the stocks underpinning our flows are abundant and

easily replaceable. And they suggest to citizens that our current patterns of consumption are

sustainable. They suggest to inventors and innovators that efficiency isn't urgent and alternatives

are not economically competitive. In the short run, you could argue that's okay, but in the intermediate

and longer term, all of those signals are wrong. Oil and gas are non-renewable, full stop,

and we're living off a rapidly depleting stock, not a flow. And the price at the pump doesn't

reflect the depletion rate of this underlying resource, nor the environmental cost of extraction

and combustion, nor as we're learning today the geopolitical risk premium that is detonating

in real time, or of course the cost of climate disruption that future generations and our

nieces, nephews, and cousins in nature are going to have to absorb. So higher energy prices,

if sustained and predictable and paired with support for people who can't afford such a transition,

which are all big ifs, could be one of the most powerful signals a transitioning economy

might receive, because they would trigger conservation and they would spur innovation with the right

prices and make alternatives competitive without subsidies. Instead, administrations across the

political spectrum continue to treat cheap gas as akin to a human right and a political sacrament.

The U.S. administration is not unique in this, but there's an irony that's hard to ignore.

The U.S.A. just launched a war that has, as one of its many second order effects, exposed how fragile

cheap energy civilization actually is, while simultaneously treating affordable gas as the primary

metric of our domestic success. Okay, here is a wide boundary, angle that the mainstream coverage of

this war isn't really touching at all, perhaps because it's too wide boundary. Every side in this

conflict appears to believe God is on their side, and not just in a vague bumper sticker sort of way,

but in a very specific end of times the Messiah is coming away. Let's start here in the U.S.A.

According to the Military Religious Freedom Foundation, since the strikes began on Iran,

over 200 complaints have been filed from troops across more than 30 military installations,

where some commanders are telling soldiers that this war is part of God's divine plan,

and one complaint quoted a commander saying that Trump had been anointed by Jesus to light

the signal fire in Iran to cause a armageddon and mark his return to earth. Okay, so that's one

vector, there are two more. In Israel, the Jerusalem Post ran a piece by a rabbi drawing a straight line

from the Iranian War to Gog and Magog prophecy in Ezekiel, and he quotes a Talmudic passage

suggesting that the West defeats Persia nine months before the arrival of Masiyah, the Jewish

version of Masiyah, pronounced it with a Wisconsin accent. And then there's the Iranian side,

when Supreme Leader Kamani was killed last week, the IRGC called Kamani the rightful deputy of

the Imam of the age, and his martyrdom, they said, was a sign of victory and approaching the goal.

In other words, the IRGC's official military response to losing their Supreme Leader appeared

to be this is on track with the prophecy, the Mahdi is coming. In 12 Hia Islam, which is the

dominant faith of Iran's ruling class, the 12th Imam has been in a state of divine hiding

since the 9th century, and he's believed to return during a time of global chaos,

and Iran's hardline clerics have been explicit for years. The existence of Israel

is seen as the main obstacle to his return. And senior IRGC clerics have said in speeches

recently that removing Israel is the most important preparation for the Mahdi's reappearance.

So we have American military commanders apparently framing strikes in Iran as a Christian Armageddon,

Israeli rabbis framing those same strikes as the nine month countdown to their Messiah coming,

and Iranian generals framing their own Supreme Leader's death as prophecy progress toward the

return of the Mahdi. Three different Messiahs, three different scripts, one war. So far that's the

narrow boundary story, three religious headlines. The wide boundary story is human belief itself.

Humans are a group survival species and shared sacred stories are one of the oldest coordination

technologies we have. They compress uncertainty and clarify who belongs in the in group,

and they turn fear into meaning and meaning into willingness to endure pain and sacrifices.

And those impulses are not unique to any religion. We see the symbols

and the machinery that underpins this in flags and ideologies and revolutions. The wide boundary

here isn't so much theological, it's human behavioral systems. Because when leadership

in all parties believe God is running the show, I am very concerned with who is actively looking

for the off-ramps in this war. There's a lot more that I could say, but I will close with a

civilizational warning. I want to invoke the War of 1812 as a reference point. Most Americans

have largely forgotten it. It was a war that the United States initiated under the belief that the

moment was right, that the enemy was distracted, and that the campaign would be quick and decisive.

Instead, the British burned Washington, the capital, the White House. We nearly lost the country

we had just founded. It was, by most historical assessments, one of the more reckless military

miscalculations in American history. And it came very close to costing the USA everything.

What we're watching unfold now in the Middle East, in my opinion, could potentially become the

worst military blunder for our nation since 1812, not because the US and Israeli militaries

lack capacity and intense capability, obviously they don't. But because military capability is not

the same as strategic wisdom and foresight, the second, third and end-order effects of a partially

closed trade of hormones, a destabilized Gulf region, depleting military stockpile,

a fragile global financial system, and especially a world accelerating its reorganization away

from American-centered trade and finance are all starting to combine and starting to be seen.

I fear this war has the potential to unravel the economic foundation of a civilization that took

two centuries to get to this point. And I hope I'm wrong about that. My appeal to anyone with

influence watching this, and this as soon as possible, before we find out what the third,

fourth, through end-order effects actually look and feel like.

In my role as analyst and scientist, I have a lot to say about this unfolding situation. We're now

at a point, past a point, where we need to respond, prepare, and engage as the great simplification

encroaches. I will continue wide boundary updates when they matter, but my focus and the focus of

this organization is shifting. The real work now is local coordination, ecological preparedness,

putting rocks in the river in communities so that we can slow the current and start rebuilding

capacity. If you want to do that work with us, please continue to tune in.

And that is the ultimate goal of this platform in our work.

I hope you're all well. May we live in interesting times. Talk soon.