Let’s take a quick trip down memory lane. All the way back in 1996 and newly married I went back to the US from Russia. We decided to settle (for the time being) in the US because it was bad times in Russia and good times in the US (also for the time being). Having watched the USSR collapse, a question spontaneously arose in my mind: when will the US collapse? To answer this question, I looked at oil and a phenomenon known as Peak Oil because, surely, it would knock out the most oil-depleted and oil-addicted economy in the world would before others. Back then, Peak Oil was forecast for the year 2000, but then technology improvements (deepwater drilling, horizontal drilling, secondary and tertiary recovery) delayed it until 2008. Shortly thereafter, the US indeed suffered a financial collapse, in response to which it opened up the money spigot with the inevitable result that interest payments on the federal debt are second in size only to Social Security, and even that not for long.

But then another technology improvement happened. The Americans rediscovered an old method of extracting hydrocarbons from shale rock formations using a technique called hydrofracturing. It was first tried by scientists in the Soviet Union in 1952. It made sense to try something like that, given that Russia sits atop Bazhenovskaya Svita, an oil-bearing shale formation that sits under 1.2 million square kilometers, running vertically from the island of Novaya Zemlya in the Arctic Ocean to the border with Kazakhstan. But Russia had (and still has) oil resources that are much easier to exploit, and so the hydrofracturing was shelved. But after 2008 the Americans, being almost completely out of more promising oil resources, embraced hydrofracturing (a.k.a. “fracking”) with gusto and became the largest oil producers in the world. Shale oil wells also produce prodigious quantities of natural gas, which has made it possible for the US to become a liquefied natural gas exporter.

But now, in 2026, US shale oil has more or less peaked. Meaningful production growth ended a couple of years ago and has been on an undulating plateau. It may still be physically possible to goose up the production a bit, and this may actually happen, given very high oil prices over an extended period of time, but shale oil production in the US is set to decline over time because the remaining resources are technologically more difficult, more uncertain and therefore very expensive to exploit. It is in the nature of all oil provinces that the sweet spots are exploited first while the passed-over dregs may be uneconomic given any price of oil, with the result that roughly half the oil is left in the ground for all time, and shale oil provinces such as the Permian are unlikely to be an exception.

We must also bear in mind that shale oil is not exactly oil. It is not the thick black substance that gushes out of the ground but gas that is forced out using powerful pumps and condenses into a liquid called, correspondingly, condensate. Condensate is far too light to make the most valuable transportation fuels — jet fuel and diesel. For that, it has to be blended with heavier varieties of crude oil, which the US has to import. This is an important point: although the US can produce absolutely huge amounts of shale oil, this will not make it energy independent: it is still dependent on a steady stream of oil tankers from faraway lands in addition to the 3 million barrels a day of heavy oil it imports from Canada via a pipeline.

And here we currently have a bit of a problem. As a result of the US-Israeli attack on Iran, the global oil market is in a bad state. Recently, analysts from S&P Global Energy and Goldman Sachs released their expert opinions, which were then publicized by the Financial Times. Here are the facts they present:

• In April, global oil reserves fell by approximately 200 million barrels, a record decline;

• Inventories decreased by 6.6 million barrels per day, although oil demand also fell sharply — by approximately 5 million barrels per day;

• Due to the blockade of the Strait of Hormuz, the market has already lost approximately 1 billion barrels of oil (over a period of two months);

• Global oil reserves are approaching their lowest level in the past eight years;

• Total global above-ground reserves are estimated at approximately 4 billion barrels, but not all of them are immediately accessible.

It is immediately apparent that the oil market is much tighter than oil prices would suggest. It is also worth noting that the current prices are still affordable for the global economy, although they have already caused a slight reduction in consumption — of 5 million barrels per day, down from approximately 103 million barrels per day before the Hormuz blockage.

Furthermore, based on the figures provided, we can conclude that global oil production fell by 14.6 million barrels per day in April. Previously, there was a production surplus: production was at 106 million barrels per day while consumption was at 103 million barrels per day. (These 3 million barrels per day of excess production were bought up mostly by China at reasonable prices, so that now China has half a year’s worth of reserves.) Add to the 3 million another 6.6 million barrels withdrawn from storage, the 5 million barrels of reduced global oil consumption, and you get 14.6 million barrels. This is indirectly confirmed by the figure that the market lost 1 billion barrels: 14.6 million barrels times 65 days gets you reasonably close to that number.

And there we have it: over the past two months, 14% of the global oil market has gone missing. The effect was cushioned by the fact that over much of this duration a considerable amount of oil was at sea, in tankers, in transit to its destination. But now all of that oil has been delivered and the flow through Hormuz still hasn’t resumed in full. Furthermore, even if it does resume in full, it will be another month or so until the oil tankers currently tapped in the Persian Gulf arrive in at their destinations and are unloaded. In the meantime, it is reasonable to expect prices will rise significantly and will leave the $100-$120 per barrel range, which is acceptable for most buyers, and enter the $120-$150 range, which will be quite uncomfortable for just about everybody. Economies around the world will crash and the most oil-addicted and the most heavily indebted economies — I am pointing at you, Americans — should reasonably be expected to crash the hardest.

Where does leave the rest of the world? China is sitting on half a year’s worth of consumption and has the ability to shift quite a bit of its energy consumption from oil to coal, which it still has in abundance, although with the depth of its average coal mine heading toward 1000 meters it is becoming harder to mine. China is also shifting its economy from export-driven to domestic consumption-driven. Nevertheless, the decline of China’s export markets, as economies around the world crash, is likely to affect it as well.

Iran should be expected to be one of the winners in all of this. Not only will it receive plenty of money for its oil exports, but it also now has a toll booth on the Strait of Hormuz, providing it with a million dollars for every tanker that passes through. This valuable concession will make it easier for Iran to rebuild the thousands of buildings that were damaged by US-Israeli bombardment. I will leave up to you the task of imagining the creative ways in which Iran will avenge the deaths of thousands of its civilians who died in the course of that bombardment.

Another beneficiary will be Russia, which uses oil and gas exports mainly to keep its tax rates low, filling the state’s coffers with taxes on oil and gas export revenue. But what Russia gets as a result is foreign currency reserves, which are rather useless to it. Russia’s biggest problem is skilled labor shortage, what with several million Russian men tied up in one way or another with the slow-motion dismemberment of the former Ukraine. Russia runs a systemic trade surplus and already has enough foreign currency reserves to pay for three years’ worth of imports — much more than should be reasonable. Given the much higher energy prices, Russia will have the geopolitical luxury of cutting its energy exports to countries that are not friendly to it — such as the ones in the EU, which are continuing to support Ukrainian terrorist attacks on Russian territory.

As an example of such a development, on May 1st Russia shut down the Druzhba oil pipeline, which runs through Belarus and Poland to Germany. The pipeline supplied 43 thousand barrels per day to the PCK Schwedt refinery, which, in turn, supplies jet fuel to Lufthansa and transportation fuels to Berlin and the eastern portion of the country. To add an interesting twist, PCK Schwedt is majority owned by Russia’s Rosneft but was “nationalized” by Germany in 2022. To add another interesting twist, the oil in question is nominally from Kazakhstan, but there is a rather large country that sits squarely between Kazakhstan and Germany and that country happens to be Russia. This is an interesting development and probably a harbinger of things to come, and so I will discuss it in detail next.