Why Talks on the Global Economy Need More Energy

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• Are we in a period of deglobalization? Despite the Western rhetoric on moving away from Russia and China, the reality is more complicated.
• Cambridge economist Helen Thompson says energy is at the center of the current geopolitical landscape, touching everything from new industrial policies to China’s dealings in the Middle East.
• Oil prices are something of a trap for the global economy. What’s good for energy consumers has negative systemic consequences.

What’s the most significant world event of the past ten years? The pandemic? The invasion of Ukraine? The rise of populist nationalism or the global migration crisis? Central to all of these is a critical, often overlooked market: Energy.

“You need to think about energy macroeconomically,” says University of Cambridge Professor of Political Economy Helen Thompson. “But just as importantly, you need to think about it geopolitically.”

Helen is the author of “Disorder: Hard Times in the 21st Century,” a long history of the current global political turbulence through the lenses of geopolitics, economics, and Western democracies. Notably, Helen highlights the role of energy in some of the most tectonic events of the past ten years, and she predicts that a green transition will still encounter many of the problems originating from fossil fuels.

It’s a bold claim. Nearly every stump speech in the Western world has some mention of net-zero or clean energy or breaking the reliance on Russian natural gas and Middle Eastern oil. But while the “going green” narrative is straightforward on the surface, it has a complicated and often contradictory underlying structure.

Low-carbon energy still has a supply chain, and the roads go through China. Wind and solar power may not be as self-sufficient as they first appear, nor are they without macroeconomic implications.

To untangle this geopolitical web of energy commodities, Helen joined host Alan Dunne on a Global Macro edition of Top Traders Unplugged for a fascinating conversation about the volatile state of our world, providing a narrative to make sense of the chaos.

Seeking energy independence

Following the financial crisis of 2007-2008, the American shale oil boom saw a ballooning of natural gas production closely aligned with new investments in American industry and the onshoring of manufacturing processes. Dubbed the shale revolution, the new fracking endeavors of the 2010s catapulted the U.S. to become the world’s top producer of natural gas and spearheaded a nationalist movement most notably characterized by Donald Trump’s surprise ascension to the presidency.

“I had an awakening,” Helen says, “as I realized just how central energy was to everything, in terms of the way we live our lives and to the political economy.”

Low-cost capital thanks to the rock-bottom interest rates following the Great Recession was certainly a driver of new natural gas infrastructure, but Helen observes a sociopolitical factor as well. It was celebrated as a movement away from foreign energy dependence.

It’s a timely discussion topic given the European Union’s grappling with its overreliance on natural gas imports, particularly from Russia. The Suez Canal blockage in March 2021 dramatically highlighted Europe’s foreign energy demand, and well before that, we see the push for onshore renewable energy sourcing. Since the invasion of Ukraine, the EU can’t race fast enough to diversify its energy portfolio. 

Maybe it’s working. Russian natural gas accounted for less than 15% of EU imports in early 2023, a sharp decrease from 45% in 2021. Certainly, many Europeans expected a continental energy crisis last winter, but it never really materialized. 

As temperatures will soon be dropping again, Alan asks, “Where do you see Europe’s oil dependence now?” 

The dark side of oil markets

Helen says that, from a Eurocentric viewpoint, “bad news is good news” has largely been the theme of the last few years.

“There were several things that helped the world economy very considerably [in 2022],” she points out. China had its lockdown-heavy, zero-COVID policies for much of the year, decreasing its demand for oil. The Biden administration opened the Strategic Petroleum Reserve, taking the U.S. stockpile to its lowest levels since the mid-’80s.

The flood of oil into a global market with relatively eased demand helped keep prices low. But Helen says this overshadows the irony that much of the EU’s petroleum was still coming from Russia despite the loud calls to back off from Russian crude.

“European companies were buying refined oil as petroleum products, particularly from India,” Helen explains. Here’s the catch — Indian refined oil starts as crude oil from Russia.

“India went from a country that was scarcely buying any Russian crude prior to Russia's invasion of Ukraine to a country that is a significant part of Russia's crude oil market.”

Meanwhile, the EU’s imports of liquid natural gas (LNG) from Russia actually increased in 2022 — again, in part due to the lower price given China’s downsized market. Helen tells us that some LNG companies broke their contracts with Asian nations to meet the European demand.

“While Europe got through [last winter] in this respect,” she says, “it did it on the back of really quite significant pain being inflicted on poor countries. And I don't think that that should be forgotten.” 

New national industrial policies

This is typically when renewable energy enters the chat. If the world weren’t so reliant on oil, maybe we wouldn’t have these lose-lose arrangements in global trade. In fact, the green transition is often associated with deglobalization. Frankly, Europe’s current economic system puts them at a significant disadvantage to the U.S.

Case in point, Alan invites Helen to a quick game of “would you rather”: Is it better to have a self-sufficient domestic supply of shale oil or the incredibly expensive maritime imports of LNG? Certainly, the imports seem far worse.

Look no further than BASF, the world’s largest chemical company. The German-based corporation closed an ammonia-production plant earlier this year as higher energy costs made it cheaper to import fertilizer rather than manufacture it.

“I’m not sure I go as far as thinking that Germany is deindustrializing,” Helen remarks, “but it’s pretty clear that the end of pipeline Russian gas for [BASF] was a major business shock.”

Whether it’s couched in terms of addressing the climate crisis or as a national industrial policy, many European states are leaning into renewable energy sources. The REPowerEU Plan, a $315.8 billion (300 billion euros) initiative from the European Commission, aims to diversify Europe’s energy suppliers and invest in renewable sources, particularly solar and wind.

Marketing for the program highlights the creation of jobs in the EU, energy independence and the stockpiling of energy stores for a rainy (or should we say wintry) day.

As much as it sounds like a brilliant solution, once again, the reality is more complicated.

The geopolitics of renewable energy

Even with its oil reserves, the U.S, has made similar moves toward renewables in recent years — especially through the Inflation Reduction Act (IRA) — such as offering consumer tax credits and subsidies for electric vehicle (EV) production. Earlier this year, the Biden administration announced a $2 billion investment into the domestic manufacturing of EVs.

Helen says there are more forces at play than just environmental sustainability. There are certainly components of inflation reduction and stimulating the economy, but she adds that it’s also a geopolitical move against China.

“It’s driven by the knowledge that China is dominating the low-carbon energy supply chains,” she says, “not least in relation to metal extraction, and, in particular, metal processing.” 

Wind and solar-generated electricity require rare earth minerals and other goods and materials, many of which the U.S. imports from China. If oil imports signal a dependence on the Middle East, in some respects, clean energy investments could signal a dependence on China.

“That’s a completely unsatisfactory state of affairs,” Helen says. “In Washington, they’re not willing to let China win the geopolitical game around [low-carbon] energy.”

Reshoring manufacturing, especially controlling all aspects of the EV supply chain, is an enticing value proposition. It has both climate justice elements and a championing of economic nationalism — self-sustaining, with no reliance on Beijing.

Why decoupling from China isn’t easy

It’s easy to forget that just twenty years ago, many in the West held the idea that rapid Chinese economic development would lead to greater freedoms and a shift toward democracy. Looking back, was this idea naive?

Yes and no, says Helen. “It was a mixture of naivety and interests,” she explains. “There was a class of people who benefited from the arrangements that were made with China.”

Take Apple, for instance. The company’s iPhones famously bear the label, “Designed by Apple in California, Assembled in China.” While the tech giant purports a made-in-America feel, the reality is that Apple’s trajectory would look much different without its behemoth Chinese manufacturing network.

For much of the 2000s, China and the U.S. were economically interdependent — China as America’s largest creditor and America as China’s largest export market. But especially since the pandemic, it seems many of those checks and balances are no longer in place. Alan wonders if this interlocking dynamic still exists.

“You can see lots of pressure being put on companies to decouple [from China],” Helen says, “but are they really doing that?” 

It’s hard to imagine American manufacturers making a clean break from China anytime soon. Meanwhile, the beleaguered BASF recently broke ground on its new China plant. The new facility in Zhanjiang will be about as big as the company’s largest plant in Germany.

Impacts of Chinese growth

COVID showed that a weaker, stagnant China decreases global energy demand and keeps gas prices low. But in macroeconomic terms, China’s growth is necessary for the global manufacturing supply chain. Helen calls it an economic trap.

“Something beneficial happens, but then the systemic consequence is negative.” 

Alan asks how this plays out in China’s warming relations with Saudi Arabia and Iran. As Helen sees it, China is not content with the American maritime prominence in the Persian Gulf.

“Certainly when [China is] allied with Russia,” Helen explains, “the Middle East is a lot more difficult for the U.S. than it was six or seven years ago.”

“I don’t think that China can really challenge the dollar’s primacy in this respect,” Helen clarifies, but the drastic increase in Asian energy consumption over the past few decades has reshaped the market. 

Does a shift toward renewable energy in the G7 nations open the door for China, Russia and India to perform a hard reset on global energy trade and international monetary policy? Helen’s forecast has more disorder on the horizon.

Is civil discontent the new normal? 

If Western leaders are in this geopolitical trap, consider the social impacts. For example, look at Trump’s campaign roadmap in 2016 and Biden’s current appeal to working-class voters and pro-growth fiscal policies.

“It’s difficult to see how [the 2024 U.S. election] can be anything but a destabilizing experience,” Helen remarks. The rhetoric on either side will likely only become more extreme.

No matter which party wins, they’ll have their work cut out to make order from the chaos.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.