← The Human Action Podcast
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This is the Human Action Podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy, everybody. Welcome back to the Human Action Podcast. Today I am going to walk through some geopolitics, but there'll be plenty of economics mixed in. Don't worry, folks. And the way to make this cater to a specifically Austro libertarian audience is I'm going to be arguing that I think some Austro libertarians have been so focused on the inappropriate economic policies coming out of, for example, the Trump administration, as well as some other governments around the world, that they're not understanding why certain government actions are being undertaken. Okay, so that doesn't mean. Oh, geez, if you just knew more of the context, then you should be in favor of these things. That's not what I'm saying. But I think some libertarian critics of the Trump administration or the Israeli government and whatnot, they're. They're not fully grasping the strategic context of some of these policies. Okay? And so that. And so ironically, what ends up happening is, for example, I've seen some defenders of the Trump administration saying a lot of people are blaming the war against Iran on Israel, undue Israeli influence on US Politics, when, no, this is all about China. And I know that when I first heard that argument, I recoiled and I said, no, that doesn't make any sense. This isn't helping the US Vis a vis China. And in fact, what's the problem? Like, you know, we. We should have peace with all nations, and the way to really help Americans is to not be so belligerent. Right. And I still agree with that, but I think I was so quick to recoil from the worldview that generated that kind of a statement where someone was in favor of what President Trump was doing because they thought this is. We're going to really stick it to the Chinese. That again, because I disagreed with that premise. I didn't give enough time to the claim that if one thought that what the US Government has been doing since Trump came back in was largely to try to contain China, that a lot of these policies make more sense. Again, it doesn't mean they're, quote, good or even that they're going to succeed in what they're. The. The aims of the planners are, but at least it's more comprehensible as opposed to just what the heck is this? This is crazy. All right? And I promise, folks, I will give at least two examples of the kind of thing, I mean, as we go through this, just so you'll See, I'm not attacking a straw man. Okay. Let me just say as a one more caveat before we dive in, this is definitely going to be an episode where if you can be watching this at your computer because, and see, because I'm going to be flashing a lot of visuals and they're even going to be some video clips that I'm going to play. And so I think it'll be more enjoyable and informative for you if you, besides hearing my soothing voice, if you can also see the video. Okay, so let's go ahead and jump right in. So my overall thesis is that I think you can make more sense of what's been happening on the global stage since Trump came back into office. If you view the US Government as throwing a Hail Mary pass. Right. That what they're doing is unlikely to succeed. But you can understand why they feel they have no choice, given how much time is left on the clock in the game and what the scoreboard is showing. They got to throw a Hail Mary pass. Right. So if you just think about that for a second, like, is a Hail Mary pass likely to result in a touchdown? No. But that doesn't mean it's a dumb thing to do. Right? It'd be a dumb thing to do your first possession in a game and say, what do you, what you that for? But if again, you got eight seconds left and it's fourth down and you know you're down by five points, okay, then it might make sense. Okay, so that's my claim. A historical analogy, it occurs to me, is the Japanese government attacking Pearl Harbor? Right. That from. In one sense, duh, that was dumb. You wake in the sleeping giant, now you're really going to lose the war. You bring the US into it. What are you doing? But on the other hand, if you get into it and look at some of the internal deliberations among Japanese military planners and whatnot, the US Government certainly was not being neutral and just trying to stay out of the war. They were clearly, you know, helping the British and doing various things that were choking off the Japanese, such that I think the Japanese realized this can continue. If we just continue with our current policy and we don't do something against the US we're going to lose for sure. If we do a quick strike and knock out their navy or a big chunk of it and keep them on the sidelines where they really can't interfere, maybe we can get this thing wrapped up before the US can recover from a surprise attack. All right, so I think that was the, the idea. Now, in practice, it didn't work, but it wasn't as crazy a move as it might seem. Certainly the way FDR explained it to the American people at the time. Yeah, we're just, they're mining our own business in this, you know, unprovoked. They that will live in infamy, you know, attack that. What the Japanese were doing made more sense once you understood the situation they found themselves in. Yeah. Doesn't mean it was the correct thing for them to do. Certainly wasn't moral. Right. They shouldn't have been in that situation in the first place. But you get the point I'm trying to make. Okay. So I'm not going to keep belaboring what I'm doing here in the mindset, but I want to say likewise, just as it would have been just doing a disservice. And there's no point in studying this stuff if you're not going to try to understand why people are doing what they're doing. To look at the Japanese and just, oh, yeah, they were just reckless and dumb and bloodthirsty. I guess they just like to attack and play people for no reason. Well, they picked the wrong person to mess with on that date. Huh? The likewise. I've seen some people just saying, yeah, you know, Trump and his advisor are just a bunch of buffoons and they have no clue what they're doing. And they're just. And I think you're missing what's going on. Okay, again, that doesn't mean this is the last disclaimer I'll make and then I'll get into the content. I just want to be clear. I don't want to lose people up front. It doesn't mean that what they're doing is going to work or that it even makes sense on their own terms. Just like attacking Pearl harbor in retrospect was a really bad idea from the Japanese point of view, but nonetheless, you can understand why they might have thought that was their only option. Likewise here as I go through some of this stuff, I think you may gain more appreciation for all. That's why the US Government has been doing what it's been doing the last year. Okay. So first of all, well, the big picture is, and I'm going to go ahead and just give you some pieces of evidence to make this case, is that I think if there were a group of people who liked the US Being by far the global superpower that they realized on, you know, as current trends continue and unfold here, we are going to lose that status pretty soon. And so they had to take rapid action. And I think realized by our last shot at this is now we've got Donald Trump in the White House, you know, a sympathetic ear to our point of view. And so we need to, we need to do it right now because if we wait, it's going to be too late. Right. I think that's the overarching motivation or mindset. And so let me go ahead and give you some evidence for that as to why China is going to be unstoppable if action isn't taken in the near future. Again, I don't think like this. I'm a pacifist. Right. And also, I'm not saying China poses a threat in the sense that, yes, you need the US And Israel and the UK or whoever to stand up to China, otherwise they're going to bulldoze everybody that no, I think, you know, classical liberalism, the ideas advanced by Ludwig von Mises, that would have been better. And if the US Government and the Europeans and more, more governments around the world followed the type of advice that Mises laid out in, you know, his works on classical liberalism. Or better yet, if every nation, meaning like the peoples read Rothwords for a new liberty and they all became anarcho capitalists, that'd be even better. But in any event, that, that isn't what happened. And so let's just walk through how this could have been perceived by people of the mindset that it's really important that we maintain U.S. hegemony. Okay, so just basic fact of raw economic output that the Chinese economy arguably has been bigger than the US economy since 2014. All right, so when you here, I'll, I'll spend a bit of time on this point just to make sure you're getting your economic theory fix from this episode. Because after all, the human action podcast is supposed to be about economics. When you are asking, hey, there's two countries, which one has the bigger economy? So one thing is you got to figure out, well, how are you going to measure something like that? So let's use gdp. A bunch of problems with that even given one country. And you're gonna, you know, just take its money for granted. But there's an extra problem when you say just let not worry about the problems of measuring output with gdp. Let's just say GDP is what it is. And then you want to say, okay, the US has its GDP measured in US Dollars, China has its GDP measured in yuan. And so how do you compare those two? And so there's there's two main ways that economists use to put them on an equal footing. And so the, the more obvious, straightforward approach is just to say, well, you go to the 4x markets where $US dollars are trade against Chinese yuan, and you just see what's the exchange rate. And then whatever that is, that's how you convert from one currency to the other. Right? Just like if you were buying barrels of oil or you're doing some other sort of financial transaction where the currencies changed hands and you needed to price the thing in a common unit, you would just use market exchange rates. Of course you would. And so using that approach, the US still has the largest economy in the world and China's number two. And specifically with that approach, the US is about 1.5 times the size of China right now. Okay. However, it's not obvious that that really is the best metric if what you're really trying to establish is the output of the entire country. If you somehow you had to quantify that economically, how does that compare to the output of this other giant country? Okay, because where the market exchange rate is clearly the appropriate conversion rate is if we're talking about goods that can be traded internationally. Because, you know, if some, if some other country, you know, Great Britain wants to import goods from the US or from China and they're trying to figure out which country do you want to buy from, clearly the foreign exchange rate between dollars and yuan is the relevant thing to figure out. Like, you know, I want to buy some electronic goods or something, and I need to compare the prices to put it on a common footing. You do that clearly. But there are a lot of goods and services that can't be shipped internationally. All right? So if, like haircuts, if, for some reason, like if you looked at the local price of a haircut measured in yuan in China and then using market exchange rates, it was like, oh, that's cheaper than a haircut of comparable quality in Boise, Idaho. So you say, well, so how come somebody doesn't just import the haircut from China and deliver it and undercut the haircutters in Boise? And the answer is, because you can't ship a haircut. Right? So there's plenty of stuff like that where standard arguments about arbitrage in which, yes, for sure the market exchange rate would be the correct way to put everything on an equal footing, doesn't apply. All right? And so an alternate measure is what's called purchasing power parity or PPP that you may have seen right when you're, when you're assessing different countries in their, in their GDP levels. Sometimes they'll rank, you know, countries by economic output and they'll either say market exchange rate or they'll say in parentheses. And what's funny is a lot of economists, when they're doing that sort of thing, like to just rank countries globally especially, they're going to do like a list. We use PPP by default. Like a lot of economists think, in general, that's the more appropriate measure for a task like that. Okay, and so what does that mean? Just real quickly, the idea is, yes, you, you get like a basket of goods and services, and then you say, you know, locally, you go around to Beijing or whatever other cities and you figure out, like, how much do haircuts cost? How much does a meal at a restaurant cost, how much does whatever, a unit of natural gas cost, blah, blah, blah, apartment rents, things like that. And you get a sense, okay, so how many yuan, you know, do the people need to spend to get that? And then you construct a similar basket of goods and services in the United States and say, how many US Dollars do Americans need to spend to get that? And then you, you know, wait the things appropriately, do whatever tricks you want to use and then use that to try to come up with in a, you know, an exchange rate of between dollars and yuan. And again, that's, that's not going to be the same rate is the foreign exchange rate. Because again, you can't. The arbitrage doesn't work. It's not that. Oh yeah, if the apartment rents are higher or lower in Beijing versus New York, then you would just ship the apartment across the ocean. Right? You see what I'm saying? Like, that doesn't work. Whereas again, with tradable, internationally tradable goods, it does work. And so there, the prices do, you know, follow. You know, the, the, the ratio of the sticker prices for yuan versus US Dollars does match up with the market exchange rate in the forex markets. Okay. But again, in general, that doesn't need to be the case. So if you use that technique to say, how should we weight US Dollars versus Yuan? Using purchasing power parity, then with that approach, China's economy has been bigger than the United States since 2014. And, and as of right now, it's about 1.4 times the size. Okay? So again, using market exchange rates, the U.S. economy right now is about 50% bigger. But if you use purchasing power parity, China's economy right now is 40% bigger than the U.S. okay, this was also ironic back when, right Wing conservative types were accusing the Chinese government of currency manipulation. You may remember that. I think that was big. Like in the mid-2000s was when that claim was really going around. Because what was happening is for a period there, the Chinese government was accumulating U.S. treasuries. And so the, the accusation was, oh, they're, they're taking their yuan and going and buying US Dollars with it and then going and buying treasuries with, with the dollars. And so they're artificially making their currency weaker vis a vis the dollar. And so that's how they're promoting their exports. And that's not fair. That's currency manipulation. Right. Whatever you think of those accusations, my point is if you thought they were artificially weakening the yuan, then that was artificially making the US Economy bigger. If you were using the market exchange rate technique. Right, because in other words, GDP measured in the local currencies is whatever it is. And so to then go from one to the other and say, well, how do we make USD vs Yuan on an equal footing? If you're using the foreign exchange rate while you're claiming, oh, yeah, the Chinese authorities are manipulating it and they're making the dollar artificially strong. And that's how. Well, that's why we can't export, because they're, they're making our currency artificially stronger than it should be. Okay, but then that means. Oh, so in reality, the Chinese economy is bigger or not necessarily like overall, but it's bigger than it appears to be. Right. If you thought that, okay, either way, whichever one you think is appropriate, or maybe think it's a blend, in which case maybe you're gonna say, yeah, maybe it's. They're about even right now. Either way, the growth rate, China is growing right now about twice as fast as the U.S. right. So specifically, the U.S. gDP growth is like 2.1%, whereas China's 4.2. You know, I'm rounding, but. Right, so it's literally double. So whatever you think about the correct way to assess the two for the foreseeable future, China is either going to solidify its or extend its lead or it's going to catch up. All right, so on that front. There you go. All right, let me just show you some other examples. As I mentioned to you, it used to be that China was a large holder of U.S. treasuries. And I distinctly remember after the financial crisis hit and guys like me and Peter Schiff and Glenn Beck and where we were worried or warning about quantitative easing, the rounds of QE that the Fed was engaged in and the huge deficits that the Obama administration was running. And among other things that we warned about, we were saying, hey, at some point these foreign holders of treasury debt might start unloading. And I remember a lot of people calling us Chicken Littles and saying things like no, no, no, when if you owe the bank a million dollars, that's your problem. If you owe the bank a billion dollars, that's the bank's problem. Right. They were using those kind of, you know, cliches. And what their point was is that no, no, we've got China just where we want it because they have so much of our debt that if they did try to unload it, they would crash the dollar and, and thus ruin, you know, the, the economic value of their asset. So hahaha jokes on you. Ch well, look at this. So here I'm showing, I think this is from a Congressional Research Service study. But in any event, this is showing it's between December 2021 and December 2025. Right? So a four year move back at the end of 2021, if you looked at the top foreign holders of US federal debt, number one was Japan. They had 1.3 trillion in treasuries in China was ranked number two and they had just over a trillion. Four years later, December 2025, Japan still number one. They've shed a little bit. They're at 1.2 trillion, but China's fallen to number three. But it's not so much the ranking that's the big move, it's the absolute amount that they're holding right now. Or as of December, China was only holding 684 billion in treasuries. Right. So in the course of four years, from 2021 to 2025, December, both times China went from holding 1 trillion to 684 billion. All right, so basically a drop and it's holding by about a third in just four years. And again I'm saying that that's noteworthy because I was distinctly told by lots of people that they would never do that because they couldn't. They'd painted themselves into a corner and they have done it. Okay, so you might say, all right, well if China's not holding Treasuries, what are they holding? Gold. All right, so here's a table I constructed for an article a few years ago. So that's why my latest data points only go up to 2022. But this is showing official gold reserves by various country, by select and in select years. And so why don't I cover Russia as well? So back in 2000, Russia had. These are, you know, the official statistics, by the way, Dominic Frisbee. I interviewed him once, but he's been on Tom Wood's show a bunch of times. He makes the case, I think convincingly that number one, the US Gold reserves are overstated, like the official reserves that they claim they have. He doesn't think they have them, but more important, he thinks the Chinese authorities are deliberately downplaying what they actually hold. Right? That they want to be flying under the radar and not have it be so obvious of how much gold they've actually accumulated. And he gives a bunch of evidence, you know, indirect measures and things of more micro data to say, no, no, they have to have more than what the official, they're, you know, reporting. But in any event, even just taking the official numbers at face value, you can see 2000, the Russian Federation had 384 tons by 2010 up to 789, and then by 2022 up to 2,333. Whereas China back in 2000 had 395 tons of gold. 2010 went up to 1054 and by 2022 doubled yet again to 2011. Okay, and all along, you know, officially the US is still top dog with 8100 or so tons. But you can see officially that number has been the same since 2000. All right, and then just another one, the China's Cross Border Interbank Payment System, or kips, this is their replacement, if you will, for the Swift System. Right. So in case you don't know, banks, when they're banks in different countries have to clear transactions. They use what's called the Swift system. You know, it's an acronym that was started I, I think in Brussels in like 1973ish. But the US clearly dominates. The US government clearly dominates that. And that is the vehicle by which, for example, if some country's doing something the US government doesn't like, short of just dropping bombs, they can just flip a switch and keep that country out of international finance and just say that, yeah, your banks can't interact with other banks, things like that. So it's a very powerful club. And so I think a lot of governments around the world, even if they weren't particularly hostile with the U.S. we're like, hey, we better wean ourselves from reliance on this US dollar system. And so one measure of that growing ability to secede from the US dollar system is the amount of transactions on this SIPs system. So in 2019, the total volume was about 5 trillion in the number of transactions. Sideball on the chart was about 1.8 million. And you can see it just rose steadily such that in 2024 looks like the total volume was around 24 trillion with 8 million transactions. Right. So that's, you know, very small still relative to the whole SWIFT system, you know, the global US dollar dominated financial system, don't get me wrong. But you can see this is growing rapidly, you know, in some years more than doubling from the prior year. All right, so that's just. It is the kind of thing with this stuff where money obviously has network effects. And so in the beginning, just like I told you, I remember in 2009, 2010, when I was going around warning about US profligacy and the Fed's reckless monetary policies, a lot of people were saying, well, yeah, they're in absolute terms what the US authorities are doing, nuts. But hey, they're the, you know, the cleanest shirt in the dirty hamper. You know that they're using metaphors like that, like where else, where else are investors going to go? You know, the BRICS countries can't do that. BRICS country has been trying to come up with an alternate alternative to the US dollar for decades. They can't do anything. And more and more we're seeing that that dominance is slipping. It's the kind of thing, like I say, where once there's a viable alternative and a few people starts moving over almost symbolically or like, you know, Iran has to in Russia because they've been iced out. But as more and more people start getting in Pakistan or whoever, then it's going to be a snowball effect and it'll be really quick. Sort of like housing prices kept going up and more and more people, you know, in the mid-2000s and more and more people were saying, this is crazy. US real estate's overvalued. But hey, it just keeps going up. But then once it crashes, everyone's like, oh yeah, of course that was gonna happen, duh, right? So I think it's the same, same kind of thing here. If and when the US dollar and Treasuries crash, there's not gonna be any mystery as to why that happened. It's just, you know, some people might be wondering, why did it take so long? Folks, we here at the Mises Institute want to remind you that Throughout May of 2026, we are celebrating the year of Rothbard by giving away a free copy of the Anatomy of the State. So if you go Ahead and go to the link by May 31st. You can get your free copy. Go to mises.org ha pod free. That's mises.org h a p O D F R E E to get your free copy of Murray Rothbard's Anatomy of the State in celebration of his 100th birthday. Okay, let me. So there, I've just laid out some of the, the economic indicators. Let me now switch over to more military evidence. So here this comes from. I'll put a link in the show notes page, if you're curious. For my personal podcast, the Bob Murphy show, aptly named for my personal podcast. A few months ago, I did this like fake briefing for the President, right? And I, I was trying to be cute with it in the beginning and I said, you know, folks, we got a special episode here at the Bob Murphy Show. I've, I've obtained this briefing. Somebody recorded it that was recently given by a member of the Rand Corporation to Donald Trump. And let's, let's take a listen. And then people in the YouTube comments thought I was serious. So I didn't want the Secret Service showing up. And so I clarified. No, no, I'm just, this is me trying to get in the head of what's going on the Trump officials. And so I made all this up like the, you know, this public data and I'm just pretending that I'm giving this presentation to the President. All right. So from that, and I'll link, like I say to that if you're curious. Incidentally, in there in this, I think I posted that either in late January or early February. It was, it was after the Venezuela operation for sure, but it was before the attack in Iran. And I just said as a matter of course that of course that they're going to close the straight of Hormuz when we hit Iran. Again, like that was just obvious. Right. And so let me just mention that, you know, I don't know what was told to President Trump. So maybe when he says in press conferences he had no idea that they were going to do that, maybe he's being earnest. But clearly the people involved in the Israeli US Strikes on Iran knew full well they were going to close the straight Hormuz. Right? That's, that's not a surprise to anybody. Okay, so let me just walk you through some of these slides again. This is just a, a quick portion of my hypothetical briefing that I gave. So this is US China, naval competition. And here I just grabbed this from DoD and congressional research Service and other like, sort of military, you know, like defense periodicals and things. All, all publicly available data. So you can see the current fleet comparison. So again, this was as of early 2026 public data. US carriers 11 versus China's 3. US had 73 destroyers versus China's 50 submarines. US had 68, China had 79. But the US had more nuclear powered subs, frigates or corvettes. China had a significant advantage. Total fleet. The US only had 299 vessels versus China's 528. However, the US ships were bigger. Here we're talking their navies. We're not just, you know, this isn't like commercial fleet. And so the US tonnage was 4.6 million against China's 2.5 million. All right, so the next, you know, this slide and the ones I'm going to show you here, to me really make the case as to why if you wanted to maintain US hegemony on the global stage, you would think we need to strike right now. Because you can see from this right now the U.S. has the advantage. You know, the U.S. navy is stronger than the Chinese navy and certainly can project force, you know, because they have 11 carriers versus the Chinese three. However, this situation is rapidly deteriorating because in terms of their annual shipbuilding capabilities, the US can only produce about 85,000 tons per year, whereas China can produce 280,000 tons per year. Okay, and in recent years, so there's like a 3.3 times advantage for the Chinese. And in recent years, I think this was a three year stretch. China had commissioned 25 to 32 vessels per year, whereas the U.S. only 7 to 10. Over the past decade, from specifically from 2015 through 2024, the U.S. added 730,000 tons, the equivalent of 7 to 8 aircraft carriers, whereas China added 2,000 and change tons, the equivalent of 20 aircraft carriers. Okay, and then the last one I'll show you from this presentation was. So there we were just looking at actual, you know, naval vessels, you know, military grade ships. But just if you broaden it and ask more generally the ability to build ships, period, including commercial vessels, it's then it's crazy, the gap. Then it's a 232 to 1 advantage to China. All right, so the US only has four major military shipyards, has a bottleneck and producing submarines can only make about 1.5 a year. Their commercial shipbuilding is basically extinct at this point. Whereas China has 150 plus shipbuilding facilities. 40% of global commercial shipbuilding comes from China. Rapid build times. And you know, the point being they could switch that over if they got into a hot war or a hot war seemed more and more likely, it would be easy for them to switch that over. Kind of like the US in World War II changed over. Like the factories that had been cranking out cars for civilians could be refitted to be cranking out tanks and, you know, armored vehicles and things. So likewise here, it's not merely in practice that the China Chinese have produced basically 3 to 1 more naval vessels in the recent past than the US but that if they really wanted to, they could, you know, vastly outproduce the US in terms of naval vessels with just refitting their industrial base, whereas the US really would be starting largely from scratch. And also, I don't even have this kind of stuff quantified here. But as the current hostilities in the Middle east have underscored, a lot of the components necessary for the, like cruise missiles and Patriot defenders and things like that, that the US has the drones. A lot of the critical ingredients for those come from China. So if, if we ever got into a situation with them and we've already depleted a lot of those stocks in the war with Iran, then the US Is not in a good position. Okay, okay. So again, more evidence as to why I think there were a lot of the types of people who were in a position to influence U.S. foreign policy, may have made the case to President Trump and his subordinates that we have a ticking clock here. We have a shrinking window where we can do something and alter world events. We need to move now. Okay, let me now play some clips from this fantastic video I came across recently talking about the. Railway connecting China to Tehran going through Kazakhstan and Turkmenistan. So it's 10,400 kilometers, and it's a, you know, China, Iran railway that doesn't go through any Western allied countries. And you'll see the significance of this. Let me just play some clips here.
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On May 25, 2025, China sent 32 containers of cargo to Iran 10,400 kilometers away. Not on a ship, not through any ocean, on a freight train that rolled through scorching deserts, cut across mountain ranges, passed through four separate countries, and arrived in just 15 days. The same journey by sea takes up to 40 days. That is not just an engineering achievement, that is a statement. For years, America's most powerful weapon against countries like Iran had nothing to do with missiles or soldiers. It was economic strangulation. Block a country's oil sales, freeze its bank accounts, cut it off from global markets, and watch it slowly run out of options. That strategy works because America controls the ocean, and if you need to move something in large quantities, you almost always have to use those waters. For Iran, every attempt to break free from that grip got pushed back until a freight train quietly proved that you do not need the ocean at all. China built a route that runs entirely over land, through territory no Western navy can patrol. Arriving in Iran without a single dollar changing hands. The economic fence that took decades to build just had a massive hole punched through it, and that hole is only getting bigger. By the end of this video, you will understand how this railway was built, what it means for Iran's economy, and what China is really planning beyond this single route. There is a five nation expansion plan already moving forward, a frozen Arctic route being developed in parallel, and a long term strategy designed to shift global trade away from Western control. The railway is just the opening move. China needed a route that no navy could throw threaten, no sanctions could reach, and no blockade could close. The answer was to leave the ocean behind entirely and build across land instead. And the only country whose geography made that possible was Iran. The railway nobody could block. Building a railway from China to Iran sounds straightforward on paper. In reality, it means crossing some of the most punishing terrain on earth. Massive open deserts where sand shifts constantly beneath the surface. Mountain ranges sitting in earthquake prone zones where the ground itself cannot always be trusted. Temperatures that crack concrete and warp metal. And the route passes through four different countries, each with its own borders, customs rules, and railway gauges that were never, never originally designed to connect with each other. None of that stopped the builders. The railway begins in western China and heads westward across Kazakhstan, then through Uzbekistan and Turkmenistan, before finally crossing into Iran and arriving at the apron dry port near Tehran. 10,400 km of connected track through terrain that most engineering teams would walk away from. To give that distance some context. It is roughly the same as flying from London to Los Angeles and still having hundreds of kilometers left to cover. The project cost upward of $2 billion. Funding came from Chinese policy banks, the Asian Infrastructure Investment bank, and a mix of bilateral loan agreements. Solving the gauge mismatch between countries was itself a major engineering undertaking. Russia and Central Asia use a broader gauge than China, which means cargo either needs to be physically transferred to different carriages at borders, or specialized bogey exchange systems have to be installed so the same container can roll across different track widths. Automated bogey exchange stations were built at key border crossings specifically for this corridor, cutting the time lost at transitions from out hours to under 30 minutes because the terrain was so dangerous. In certain sections, key stretches of the railway in Iran were built underground, not just to handle extreme weather, but to protect the line from potential airstrikes.
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Okay, so did you note when they first completed? And by the way, it's kind of like with the transcontinental railroad in the United States that met at Promontory Point, Utah, you might remember that learned that wasn't like there were already existing rail networks that then they just connected to other ones, you know what I mean? Like they didn't literally start from scratch with there's no railroads and start from one point in Boston or something and then go to San Francisco. That's not what it meant. So it's likewise here. There were already other things that they kind of linked up with. But the point being when did was that durable high grade railway connecting China to Tan, when was that finished? Did you catch it? May 25, 2025. Huh. That's kind of a coincidence. And of course the point being that you know the railroad by itself that can't replace shipping over water just you just see the size of those cargo ships, those super tankers. I think they have like 2 million barrels of crude on them. But you can see how that trend really negates the US advantage of controlling the seas. And in a situation like right now. And by the way, what made me go look up this particulars that railway. You know, I had heard about the Belt and Road initiative. I'm sure lots of you have heard that. But it wasn't fully on my radar until I heard recently some military analysts like on Judge Napolitano show or Glenn Deason, I think the guy's name is explained as a matter of fact. Oh yeah. Now the US is bombing the the railroad but you know you can, you can fix a railroad pretty fast that connects to because the Iranians can be exporting their oil to China. So in terms of the big picture, if the point is oh yeah, we're gonna blockade, you know they're gonna close the straight well, we're gonna put a blockade. So aha. Iran. Now your oil is going to be overflowing because you can't get it out. And we're really sticking it to China. Right. Like people arguing that this is and overlooking the well. Yeah, but that railroad lets China still get access to a lot of that oil. Okay. So you can see the strategic significance of that and why, huh? Maybe that had something to do with the 12 day war that started whatever a couple weeks after that railroad was finished. Okay, let me now show you. Since the stray of Hormuz has been closed. Here is the, the source of U.S. crude imports. All right, let me take a moment with President Trump saying at various points recently, yeah, you know, we don't need the straight of Hormuz. We're, we're self sufficient. You know, the US Produces more crude oil than we need. In fact, you Europeans, you can go clear the straight if you want it. Or better yet, why don't you just buy the oil from us? Right. And other people may have said that the US Is now a net oil exporter. All right, I've said that. And this conflict made me get more precise. When we say that the US now is a net oil exporter, it means if you include petroleum products in the, you know, when you say oil, if you're just talking about crude oil per se. No, the US Is not a net oil exporter. We still import more than we export. And even what's more important for the current discussion, what happened was that. The, I GUESS in the 2010s, there was an explosion in us a good explosion, meaning a movement upward, not literally things blowing up, a sharp increase in U.S. crude output because of the so called fracking revolution. Right. So hydraulic fracturing, also it was sideways drilling. It wasn't just the fracking that allowed for a huge increase in production from the Permian basin. Right. And so that's when there was the, I think it was in 2015, there had been an export ban that was lifted. Right. So for a long time it was literally illegal for the US to export oil because, hey, no, we got to keep it all at home. And they lifted that because we were just cranking out all this oil. But the nuance is the shale boom was light sweet oil, crude oil, whereas US refineries were configured to process medium to heavy sour crude from Mexico and South America and Saudi Arabia. Okay. So that's partly why they'd say, well, let's just export, you know, this, this new boom in, you know, the Shell has produced drill baby, drill. Okay. And so that's why the US Is still importing more. And then also now let's flash up this table here. You can see since, so that the 227, the, the top there is showing the week ending and then it gives the date. Right? So these columns are weekly averages. And so the week ending of February 2027, remember the, this recent war with Iran started, or hostilities that are not a war that's already been won, this war that was never a war that's already been won, as I'm recording this several times, has been won. So 2:20. The week ending 227 is right before the thing started. Okay? And you can see Saudi Arabia was sending five. And these are thousands of barrels per day average for the week. So Saudi Arabia was sending 520,000 barrels a day. And you can see it increased over time. And we're going to come back to that point in a minute. But you can see Venezuela was 143. And then it zoomed up like it peaked at 549,000. And then the last data point I've gotten here is the week ending April 17th, it was 499,000. Okay, so tripling more than tripling. Okay, and so let me now make two points related to that. So first, the Saudi Arabia point. How is it that we're still getting oil from Saudi Arabia, in fact, we increased what we've been taking in from them once this conflict started? Well, because here we're flashing up this map here they have, yeah, the Strait of Hormuz is closed there on the right. But Saudi Arabia has an east west pipeline that ends up in Yanbu on the Red Sea. All right? And so that's how they've been getting their oil out. And they. Iran hit that, and the Saudis is like, repaired. It really rips. The Saudis were ready. So as far as my overarching thesis that some of the players on the global stage had reasons for doing what they did besides just stupidity or wickedness, you may remember there was a long conflict, Saudi Arabia with Yemen. And I think probably what was, you know, one big component of that was that they knew, yeah, eventually the US Is going to war with Iran and they're going to close the Strait, and we got to make sure we can keep shipping out of the Red Sea. And so we got to keep these Houthis under control, all right, because the Houthis would be able to stop that export choke point if, you know, if they were running roughshod. Okay, so again, that. That doesn't mean the libertarians, you know, guys like Scott Horton, Dave Smith in particular, that was for a while, that was like Dave's thing that he was bringing up when he was getting spots on popular TV shows several years ago, and he would bring up the horrible war against yen, and that the US Was complicit in the Saudis were waging. And obviously from a libertarian, let alone just a, you know, Christian point of view, I'm not saying Dave's Christian. His points were all valid, But I'm saying it was more like you could just Understand like why are they doing that? They just like starving people and blowing people? No, they were doing it presumably because they looked ahead and saw this coming. And then the last point I'll make here is likewise with again, just to remind you, the shipments from Venezuela, oh, and you can even see I include in this table a year ago, so March, the week ending March 7th of 2025, just to give a frame of reference, it was 148,000 barrels a day that we got. And then again, you can see how it's much higher once this, this crisis hit. And so I think it makes sense for, you know, oh well, the, the Maduro operation. And so here, let me again just say, understand like who I'm, what I'm trying to explain and say let's, let's think more about this folks here. Let me just. Not to pick on David Stockman, but he, right when that operation occurred, he was saying things like this.
- [50:41]
C
You watch the news right now and everybody is saying, well look, they got the biggest oil reserves in the world, 300 billion barrels, even more than Saudi Arabia, and that the Chinese are monkeying around down there and we can't let the Chinese in get some of that oil. And there's four or five Russians there, maybe 10. We can't let them get involved either, which is totally ridiculous because Russia has all the oil it needs and can't even find a market for what it wants to sell because of the sanctions. But in any case, what I'm going after here is the, the so called 303 billion barrels of reserves in Venezuela ain't what is cracked up to be because it's, you know, all crude oil is not created equal, even, you know, notionally. So once you look at the cost curve and what you have here, it's the highest cost, high, low gravity, high sulfur crude oil deposits on the planet that cost upwards of $95 a barrel to get it out of the ground, transport it to the refinery refineries, refine it and put it into product form. On the other hand, when you do that, this is even more significant. When you do that, you end up with a slate of products that is very inferior. In other words, out of a refinery you get really valuable things like gasoline or jet fuel. And then you get a lot of really low value products like, you know, heavy, heavy residual oil and almost tar and coke and so forth. Now the point I'm making here is the oil In Venezuela, maybe 303 billion barrels as they count abstractly reserves, but it generates a much less Valuable slave. So if the world price, let's say has been for the most part $70 a barrel on WTI West Texas Intermediate, which is the sort of marker grade of crude, if it's been $70 a barrel, you only get about $45 a barrel for this heavy, low gravity gunk oil that comes out of the Orinoco belt in Venezuela, the so called ultra heavy crude. Now here's a little dilemma for Venezuela which shows this isn't just a socialist problem, that their industry is ailing and falling apart and declining. It's a market problem as well. To make it real simple, they get $45 a barrel for the inferior slate that comes out of a barrel of crude from the Orinoco. And the cost to bring it to market is 95. Okay, so effectively the economic loss per barrel at the standard of where the world market is, people know crude oil has been as high as 150 and some moments during the pandemic it dropped way down into the 30s or less. But $70, if you look at the charts over time, is a pretty good steady state. So when the world is at steady state on the marker crude of $70 a barrel, Venezuela Heavy is generating $45 of revenue and $95 of cost, $50 a barrel of loss.
- [54:47]
A
Okay, so again, Stockman is correct. From a, you know, libertarian perspective. If you had George Washington for the President, then yes, and we had just peaceful commerce with everybody and strategically, you know, entangling alliances with nobody, what he's saying would make perfect sense. And oil is fungible and it doesn't really make sense to say like oh no, we're going to try to keep this oil away from China and whatever. But given what's happened since then, you can see why those objections don't really hold up, right, that, you know, to say, oh well, but the global price would need to be such and such. And the war players like, well, yeah, we know we're going to hit Iran in a month, so don't worry, global prices will jump to make this quote, make sense, be economic. And you can see that they're doing it. And again, also just to make sure you're getting the refinery point, US Motorists rely on medium to heavy sour crude such as is produced by Venezuela and Saudi Arabia, Mexico, Canada. Whereas the, you know, the, the huge boom in US output from Shell fields is light, sweet that they can't use in the long run. They can retool. But I'm just saying right now, if you got to wage a big war against Iran now and they're going to close the straight Hormuz. And what's going to happen, you can see it makes more sense. Oh, that's probably why they did the Maduro thing first get that locked down and now proceed to the bigger target. And again, not because, you know, some inexplicable reason this tiny little country in the Middle east seemed to control our government, but also that this will help in the strategic jostling to try to contain China, which if we don't do something quick, they're going to get so far ahead of us we can't touch them. Right. So I'll stop there. I hope I've made my case. Again, just one last attempt to avoid misunderstanding. Not saying the U.S. government's moves, quote, make sense, but I think they're more understandable. And if you weren't aware of some of the facts that I just showed you in this episode, at least now I think you'll have a better appreciation. And, ah, now what's been going on is at least more comprehensible. And a lot of these people that I thought maybe were bumbling idiots now maybe you think, oh, no, they're just, they have values different from my own. That's what you might think. Okay, thanks for attention, everybody. See you next time. Check back next week for a new episode of the Human Action Podcast.
- [57:29]
B
In the meantime, you can find more
- [57:31]
A
content like this on mises.org.