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The Unstable World of The Geopolitics of Energy

Ukraine is giving the media their next Covid-level dose of excitement, but highlights just how quickly events creep up on markets. Unwise decisions years ago by western governments in terms of energy security and global priorities have created the current crisis. It will have massive effects on energy transition, global growth and bodes ill for European stability.

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Back in the real world:

Blain’s Morning Porridge – February 2nd 2022: The Unstable World of The Geopolitics of Energy

“The strongest of all warriors are these two: time and patience.”

This morning: Ukraine is giving the media their next Covid-level dose of excitement, but highlights just how quickly events creep up on markets. Unwise decisions years ago by western governments in terms of energy security and global priorities have created the current crisis. It will have massive effects on energy transition, global growth and bodes ill for European stability.

The Unstable World of The Geopolitics of Energy

One of the services offered by the Morning Porridge is to worry about stuff you maybe aren’t worrying enough about… Markets are fixated on day-to-day noise, so it’s sometimes easy to miss the big stuff – especially when it’s remained out of sight, festering over the horizon and unnoticed until comparatively recently.

It was just a few months ago I warned Energy Security was the critical stress point for the global economy in a Porridge Special –  The Looming Energy Crisis: People Are Going to Die This Winter. Since September 2021 that Energy Security narrative has come to dominate the threat board. Now it is morphing into a geopolitical crisis for the West; across relationships across the Atlantic and within Europe – and has long term consequences for climate-change energy transition, the stability of the Euro, and global growth.

The Geopolitics of Energy, of which the Nord2 pipeline is just a footnote, are perhaps a bigger threat to market stability than Ukraine, Inflation or Rates. These are binary problems – but the repercussions of a breakdown in the Global economy’s traditional order, the relationships between Europe and the US as highlighted by current unravelling crisis, is something we haven’t seen in decades.

In terms of energy transition, we blithely assumed we could build windfarms, solar power and shut down fossil fuel overnight. Wrong. It’s a 30-50 year process for which the West has done almost zero planning. And as for wind farms – well, the latest climate data shows wind speeds have fallen significantly (10-15%) over the last 20 years, and are predicted to fall further.

The current gas price spike highlights energy insecurity and potential fracture points in the closely connected global economy. These have massive implications for future growth and alignment, and how global markets develop and reopen. As ever it’s a case of consequences, consequences, but I will caveat it with my No2 market mantra: “Things are never as bad as you fear, but seldom as good as you hope.”

There are two sides to every divorce…

Generally, Americans are staggered at just how stupid European nations have been in their energy policies, furious they have engaged directly with Putin’s Russia, and have abandoned the shared vision with the USA of Democracy and Capitalism that has been was so successful since the war.

The key culprits are perceived as Europe’s two leading nations – while both have failed to secure their energy, the French are playing up their diplomatic pretentions by setting up Europe to deal direct with Russia sans USA, and the Germans are playing their own naked self-interest with both Russia and China. Oh, and blame the Brits for pulling out and destabilising the whole thing..

Americans tend to believe the perfidious Europeans have betrayed their holy alliance with the USA.

Bollchocks says Europe..

They blame the disintegrating Atlantic Alliance on America. It’s Europe feeling betrayed by the USA. Successive US administrations have left Europe marginalised. Bush regarded them as second tier allies to be bullied. Obama’s Asia pivot proved he was disinterested in the continent. Trump was downright rude and insulting, which Germany and France particularly will never forget. Biden looks weak. He will likely be followed by some iteration of Trump version 2.0 – which will spell deeper aggressive protectionism and the de-facto end of the Atlantic alliance.

Game, set and match to China and Russia?

It could all have been so different….

In the 2010s I wrote about how the shale and fracking revolution raised the prospect of the US becoming a net exporter of cheap oil and gas. That could have heralded a major strengthening of relationships across the pond, and become a key positive factor for European growth freed from reliance on less worthy suppliers. In her role as Obama’s Secretary of State Hillary Clinton pushed hard for European Energy Security – and many European states including Spain, the UK, Poland and France built new LNG regassification import facilities – but plans to develop LNG as a key strategic resource never really developed.

Of course, it doesn’t help that Angela Merkel doomed Germany to energy insecurity by shutting Nuclear power, and disinvested Germany from the LNG project in favour of Russian gas, leaving Germany now dependant on firing up coal stations.  (The Brits aren’t much better, deciding to trust energy security to the market rather than maintain gas storage facilities.) Today, its doesn’t help that Germany’s new government has the political maturity of a 3 year old child – with little commonality on priorities between the parties.

Ukraine is the epicentre as the tectonics of energy politics shift. Call it blackmail, or call it business.. but Russia doesn’t need Europe’s gas market.. its got a willing new partner in China. Long-term no one hates socialists as much as socialists, so I don’t expect the Russia/China partnership to last long… but long enough to change the world, and cause ructions in the West.

Like all unanticipated consequences, we haven’t figured out just how significant the breakdown in Energy politics between Europe and the US could prove to be.

Even more worrying is the fault lines Germany and energy security have exposed within Europe. Whatever Brussels thinks there is no consensus among the nations of the European Union on basic matters such as common voice in diplomacy, and certainly not in Energy Security. It’s exposed the problem at the core of Europe: Europe needs to speak with a single clear voice, but no nation is willing to compromise its Sovereignty.

The only commonality between Euro members is their apparent ability to get their energy security wrong. There is very little alignment on trade policy either – meaning Germany is dancing to its own tunes with China and Russia, while other nations don’t have a clue what happens next. UK arms shipments to Ukraine are being flown around Germany just in case the new German traffic light government coalition gets upset at the prospect of upsetting Russia… The Ukrainians will be very greatful for 5000 second hand Landwehr helmets.

Europe was always unfinished business, but the hope was that since the European Sovereign Debt crisis 10-years ago, and the success of ECB head Mario Draghi’s “do whatever it takes” policies, the continent was coming together in a workable consensus fashion. Instead, it’s more likely we see fault-lines widen.

This year all the inconsistencies at the heart of the European problem will likely be exposed. Especially in debt. Brussels is flexing its muscles over its control of European financial sovereignty – making clear to financial wastrels like Italy that access to European bailout/recovery funds come at a cost of meeting Brussel’s targets.

Italy has increased it’s national debt by 21% over the past two years despite promising to reduce it. Greece is up 20%, while Spain’s debt grew by 26%. In Italy’s case youth unemployment remains over 25% with the full unemployment level stuck at 10% in a no-growth economy where the size of the untaxed black economy is over Euro189 bln!  Nothing is fixed – and Germany remains unwilling to pay Italian and French pensions, and will insist on higher rates and austerity.

Last night I watched hours of pre-match analysis on the coming Ukraine/Russia war. Scary stuff.. and it struck me very clearly..  Putin doesn’t need to invade Ukraine. The damage is done.

No Time for Five Stories today…

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital

9 Comments

  1. Very perceptive analysis : I especially liked the conclusion : “Putin does not need to invade Ukraine, the dammage has already been done”. The incapacity of the EU to speak with one voice must inevitably lead to the breakup of the € in due course. The consequences will be a crisisl of unbelievable depth and breadth that will shatter any predictions over market behaviour. This will be a remarquable victory f or Russia and China. The solution remains entirely in the hands of the EU Member States but their inability to align on the energy crisis does not lead to any great optimism!

  2. I think you are overoptimistic about Yoorp. All y’all brits should feel smugger and smugger, as time marches on, about getting out while the getting was good. And please don’t get me started about Socialists trying to out-Social each other, sheesh. A possible solution has been floated by others for Greece, though: Bring the Olympics back there permanently. I mean, it’s called the “Olympics” for a reason, right?

  3. The only good news is China will never treat Russia as an equal. Putin’s ego will chafe and their combined power will never be fully realized.

  4. AS INFO: TRUSTEDINSIGHT – https://www.indianpunchline.com/why-russia-china-partnership-is-effective/

    “The illusion that mainstream western analysis propagated has been that the Russian-Chinese alliance is weak and transitory and is always available as a target for a “reverse Kissinger” (an effort to draw Russia away from China) as if the two countries were pieces in a Lego set — “fixed in shape, and easy to handle,” as an Estonian think tanker at the Brussels-based European Council for Foreign Relations wrote last December.

    This illusion is also at the root of the present crisis between the US and Russia. Washington is still stuck in the groove that Madeline Albright and Strobe Talbott had cut during the 1990s. Admittedly, when it comes to China, succinctly put, given the US-China interdependency, the mode of Washington’s containment strategy was different.

    It was not unilinear, as in the case with Russia. But the competition-cum-cooperation was predicated on the notion that China at the very core prioritised the relationship with the US over Russia and therefore, its partnership with Moscow was a mere marriage of convenience devoid of strategic intent.

    This resulted in the delusional thinking that China will be “neutral” in the US’ current standoff with Russia. It explains the US Secretary of State Antony Blinken’s audacious call with Chinese state councilor and foreign minister Wang Yi on January 27 to solicit Beijing’s help.

    The clarity and firmness of Wang’s response would have been a rude awakening for Blinken. Wang cited President Biden’s retraction from assurances given to President Xi Jinping and accused the Biden Administration of “still sticking with erroneous words and deeds related to China, which have dealt a new blow to bilateral relations.”

    Wang reminded Blinken: “The burning issue is that the United States should stop interfering with the Olympic Winter Games Beijing 2022, stop playing with fire on the Taiwan issue, and stop creating various anti-China “small cliques.”

    Wang then underscored that Beijing endorses the principles underlying the Russian position — the earnest implementation of the Minsk Agreement, the indivisibility of security, the futility of “strengthening or even expanding military blocs” for security, and the imperative need to address “Russia’s legitimate security concerns.”

    China has since fleshed out its position in the statement made by its permanent representative to the UN Ambassador Zhang Jun at the Security Council Open Meeting on Ukraine on Monday. Beijing stood shoulder to shoulder with Moscow.

    We need to revisit at this point an important remark by President Xi during his virtual meeting with Putin on December 15 (the same day, interestingly, that Moscow delivered its draft bilateral treaty on security matters to the US.) Xi said, “this relationship even exceeds an alliance in its closeness and effectiveness.” This is the crux of the matter.

    An alliance in international politics is usually defined as a formal agreement between states for mutual support in case of war. Contemporary alliances provide for combined action and are generally defensive in nature, obligating allies to join forces if one of them is attacked. Even informal alliances are typically formalised by a treaty of alliance, “the most critical clauses of which are those that define the casus foederis, or the circumstances under which the treaty obligates an ally to aid a fellow member.” (Britannica)

    Clearly, the Russian-Chinese partnership does not fit into the above definition. For a start, It is not about wartime contingencies. Rather, it is built on commonality of interests dating back to the early years of the post-cold war era and is far from a time-serving alliance of limited objectives. It is built on the principles of equality, mutual respect and on the complementarity between their political economies. Unsurprisingly, an exceptional “closeness” developed in course of time between the two countries.

    The mutual trust and confidence grew as it was a pragmatic and flexible arrangement of good-neighbourliness where neither side prescribed norms of behaviour, and both allowed space and the freedom to manoeuvre for each side. It did not put obligations on the other side — so much so that China did not support Russia over the emergence of Abkhazia and South Ossetia as independent states (2008) or over the referendum in Crimea to become part of Russian Federation (2014).

    Indeed, the congruence of interests became broad-based over time and the core concerns and aspirations of the two countries being so similar, their comprehensive partnership has come to acquire a multiplier effect on their respective national strategies and in turn have provided a support system.”

  5. Capitalism. Every country for themselves!

    The lack of some sacrifice for the common good, whether at the individual level or at the nation level, may doom democracy.

  6. If it were not for the nature of its government I would have a huge amount of sympathy for the Russian position on gas supply and marketing.

    Clearly the time for discussion about the wisdom of building a second pipeline across the Baltic to bypass the Ukraine was long before they had invested in excess of $9bln. Now that the project is complete the Russians need to start seeing some remuneration for their investment, and in seeking to do so they are in an extremely strong position, in that they are refusing to sign long term contracts for the supply of gas through the existing pipelines and are instead relying on the spot market where the volumes are completely within their own control. Hence the historically high gas price being experienced both within the EU and the UK.

    Not only that, but as a consequence it is only the Russians themselves who have been is a position to divert significant flows to the major storage facilities in Germany and Austria. So having gotten the EU by the short & curlies, they are in a position to squeeze a lot harder whenever they choose to.

    But of course they won’t because eventually the Germans will eventually be forced to approve the use of NS2 and to sign long term contracts for its use.

    As it happens I also have a lot of sympathy for the Russian position vis a vis the Ukraine’s relationship with the West. There is no doubt that the break-up of the Soviet Union took place in a very untidy fashion with a lot of loose ends which if it were not for the nature of the Russian government could have been tidied up long ago.

    Until after the revolution the Ukraine was seen as an integral part of “Mother Russia”, just as Kent is seen as an integral part of England. It wasn’t until the 30’s that Ukraine was identified as a separate entity within the Soviet system and Stalin carries a huge amount of blame for the repression inflicted during the very lean years of the poor harvests in that decade.

    What should be recognised, but is never mentioned in the Western Press, is that even after Stalin created the separate soviet republic of Ukraine, the Crimean Peninsula remained an integral part of homeland Russia. It remained so until Kruschev gave it to the Ukraine to simplify the administration. After Stalin had the ethnic Tartars expelled to Siberia, post WWII the populace of the Crimea was 95%+ not only Russian speaking but regard themselves purely as Russians.

    The idea of the Ukraine joining NATO and taking the Russian speakers in the Donbas with them is therefore a complete anathema!

  7. Excellent summary of where we stand early in the year. All I would add is that empires built by countries blessed (cursed?) with the world’s reserve currency have all withered away as their currency was supplanted by the next kid on the block. As the US sinks in the west the Chinese would do well to remember the lessons of history. Is a world reserve currency independent of any state achievable? The Euro is not a good template.

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