Why the Supply Chain Will Not Go Back to 2019 According to a Geopolitical Strategist
With the impact of the disrupted supply chain, businesses are looking for information and insight more than ever. There are a variety of sources and opinions on how to navigate these uncertain times, and we are dedicated to gathering and sharing important resources to keep you more informed.
Peter Zeihan is a geopolitical strategist, New York Times bestselling author and expert on how “place” impacts financial, economic, cultural, political and military development.
On June 21, Border States invited Zeihan to speak on the future of global supply chains. His 90-minute presentation is worth watching for his timely, practical insights.
Below the video, you can read a summary of Zeihan’s main points. The summary explains why he believes the world will not return to the way it was in 2019 — and what the world can do about it.
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First, Zeihan predicts Russia will continue the war because Russia is a large, sparsely-populated country. To protect its borders from future invasions, Russia believes it must regain control of nine strategic access points.
- “Everything that Putin has done since [the Soviet Union collapsed], it’s all been about getting boots on the ground in those [nine points] again. And they’re about halfway there.”
- “It’s not that the Russians won’t stop until they have all of Ukraine. It’s that they will not stop when they have all of Ukraine.”
The war affects energy because if Russian pipelines that cross into Europe and Turkey are damaged or destroyed, flows can back up to the wellhead and cause permanent damage, especially in the permafrost area. At the same time, Russia’s options for shipping oil via the ocean are shrinking due to sanctions affecting maritime insurance.
- “One way or another, we’re looking at losing four to seven million barrels a day of crude.”
- “The Russian crude that goes offline, it’s not coming back. That will also happen this year, and that is also not priced in.”
The U.S. can pivot more easily than the rest of the world. According to Zeihan, a conventional oil and gas project takes three to eight years to build, while a shale project can be completed in six months.
- “If we triple oil and gas investment today, we won’t return to 2019 price levels until at least 2025 on a global basis.”
- However, the U.S. has significant shale deposits. “[Shale] is produced where we live and almost no one else [lives], so the United States can go its own way.”
What about going green? The challenge is that Russia, Ukraine and Belarus are key suppliers of raw materials used in electric vehicles and renewable energy technology, including uranium, neon, nickel, platinum, copper and aluminum.
“We can’t have commercially viable, economically affordable, globally accessible fossil fuels without the Russians. We also can’t do the green transition — at least not in most places.”
Why it matters: Shifts in energy supply affect the entire supply chain because energy is used in manufacturing and transporting goods.
- “Some of the price inflation that we’re feeling isn’t so much that prices have gone up here, it’s that production has collapsed elsewhere.”
- Oil-based materials, such as resin, and raw materials that require large amounts of electricity to produce, such as aluminum, are disproportionately impacted.
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China is likely the world’s fastest-aging country as a result of rapid industrialization, the one-child policy and increasing lifespans. And as their labor force shrinks, manufacturing costs are rising.
- “There is not a manufacturing sector in China where they are now the low-cost provider.”
- “If you’re still relying on the Chinese for your supply chains, wow, is it time to move on.”
COVID-19 lockdowns are also the new normal in China. Because China successfully limited the spread of the virus for the past two years, very few people in China have natural immunity. At the same time, the vaccine developed in China is not as effective, and they refuse to import U.S. vaccines — so, “lockdown is their only option.”
“They no longer see value in participating in international manufacturing supply chains. We have passed the peak of Chinese reliability in that space. It will only go down from here.”
Finally, Chairman Xi Jinping’s information-censoring policies have created an environment where key leaders don’t receive the information they need to make decisions.
Why it matters: China is the world’s largest manufacturer of countless materials, subcomponents and finished goods. Rising labor costs and persistent lockdowns are expected to change that.
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While we’re not aging as quickly as China, the U.S. is getting older, too. This impacts the economy because when people are young, they purchase houses, cars and items for raising their kids. Older populations spend less and save more until they retire and begin drawing from Social Security and Medicare.
- “We are in the process right now of transitioning from the cheapest, most liquid capital environment we have ever known to something that’s much closer to the opposite.”
- “There’s also a workforce problem: The Boomers are the largest generation we’ve ever had. They’re retiring. The replacement generation, the Zoomers, is the smallest generation we’ve ever had. That’s a shortage of 400,000 workers just this year.”
The best option for shifting supply chains to North America is Mexico. Not only is Mexico geographically close to the U.S., it has a relatively young population.
“Mexico has a larger labor force at a lower cost, at a higher skill level, with more advanced infrastructure and industrial plants than the entirety of Central Europe.”
Southeast Asia is another option to consider. Countries such as Vietnam, Indonesia, Malaysia and the Philippines are densely populated, and historically, they’ve stayed at peace with each other.
“You have a super saturated labor market at all these points, all at different skill sets. And that is what makes for a successful manufacturing supply chain system.”
Why it matters: While inflation and supply chain issues are unavoidable, the starting point for solving them is relocating manufacturing supply chains.
“We’re looking at 9%–15% inflation for the next five years. If [the U.S. fails] to build out the industrial supply system, we still have that inflationary level, and it does not end in five years.”
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Going forward
In short, Zeihan’s message is that the Russia-Ukraine war and uncertainty in China are indicative of fundamental, irreversible changes in the way the world works. He recommends that companies in the U.S. seek shorter supply chains closer to home — particularly in Mexico, but also in Southeast Asia — or we will see continued inflation and extended lead times.
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