The Geopolitics of New Energy

With an old wave of fossil fuel "thinking" back in the White House, it is worth thinking about the impact of new clean energy, fossil fuels and the potential threat to relative stability of the post World War II order.

Nadim Chaudhry
October 12, 2016
5 min read
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With the election of Trump (see previous post) bringing an old wave of fossil fuel "thinking" back into the White House with the former CEO of ExxonMobil as the Secretary of State, climate denialist Scott Pruit as head of the EPA (fox and hen house analogy applicable here) and Vice President Pence's well documented links to the Koch Brothers. I thought it would be worth thinking about the impact of new clean energy, fossil fuels and the potential threat to relative stability of the post World War II order.

The New Energy Threats to Russia

On the 2nd November 2016 the Chief Financial Officer of oil major Shell said that peak oil demand could be reached within 5 years. It is worth spending a second to take that statement in.

General Motors have just launched the Bolt, an electric vehicle (EV) with a 380 km range on just one charge for a price of $37,000 (in the US $7.5k rebate is available)– if you drive it for a 100 miles a day one way commute for 5 days a week, the car would reduce your weekly fuel bill from $135.20 to $34.50. That’s an amazing $5000 a year saving. Within 5 years it is highly likely that EV's will be less expensive for purchase price in every class, small compact, mid range saloon, SUV etc. So when a car is cheaper to buy, 75% cheaper to fuel and there is no range anxiety, what happens? As EV’s ramp up how will that impact the prices of oil markets? Who is going to invest in risky new oil exploration?

Meanwhile over in the power electricity markets the LCOE of solar PV fell 58% between 2010-15, making it increasingly competitive at utility scale. According to the recent IRENA cost report the global average solar utility price is now down to 13¢/kWh and projections for the next 10 years (2015-25) are they decrease another 59% to circa 6¢/kWh on average. According to the recent Lazard's LCOE study, natural gas varies from 6.8¢/kWh to 10.1¢/kWh (and can vary far more according to location, global demand/supply).

However already in August 2016, Solarpack set a new record-low unsubsidised solar bid at 2.91¢/kWh ($29.1/MWh) in Chile where the Atacama desert provides near perfect solar conditions. That beats the 2.99¢/kWh bid a Masdar Consortium provided for an 800 MW solar power project in Dubai earlier this year. In the US prices of 3 ¢/kWh for solar (with subsidy) have begun to disrupt the market. Prices that are already sub $3 unsubsidised are astonishing for solar and, think what happens if according to IRENA those locations can half their costs in the next 10 years of technology improvement, economies and efficiencies of scale. Certainly we will see more and more solar utility scale come online in the sun belt countries as even with additional battery costs it will be cheaper than all other energy sources.

Wind too is tracking similar economics of scale, efficiency and technology and has doubled in size 4 times in the past 15 years. Each time it doubles the cost of onshore wind reduces by about 19%. Indeed even "expensive" offshore wind has recently already reached a price of just 6.7¢/kWh for a project in Denmark. How will the coming tide of all these renewable projects impact gas market prices?

Russia relies on oil and gas for 44% of their fiscal revenue

In 2001 Putin addressed the Russian Parliament that Russia had to diversify it’s economy which was then 30% reliant on oil and gas revenue. Russia now relies on oil and gas for 44% of their fiscal revenue. Therefore cheap oil dramatically weakens the Russian economy, it also causes its national currency, the rouble, to depreciate (coupled with the impact of the sanctions applied following the seizure of the Crimea).

Russia spends 4.5% of it’s GDP on defence and despite increasing this in roubles in 2015, Russia still had to cut spending (in $) due to the currency devaluation. Russia has for the first time slipped to 4th in the global defence spending league and now spends less than Saudi Arabia. Russia's annual deficit is also set to be widening from 2% to 6% in 2016.

Russia is not powerful, outside of its nuclear capability it has little to show for being the World's largest country by landmass. It is an oligarchic kleptocracy with poor democratic institutions, poor governance and wide abuses of power. Outside of a handful of lavish cities, Russians live in desolate villages ravaged by corruption, poverty, bad roads, and substance abuse. With all of its vast, fertile territory, Russia is a net importer of food, having failed to make investments in agriculture and consumer goods that could as much as feed its own comparatively small population of 142m. The country that builds nuclear missiles cannot even raise chickens. Instead, Putin spends the people’s money on ego projects like the Sochi Olympics, a Football World Cup and military forays like the Crimean annexation.

Demographically Russia has declined 4% over the last 20 years and it is set to decline by another 5m people to 138m by 2020 as a low birth rate and high ageing population gathers pace. Within the statistics, ethnic Russia's are set to decline by as much as 20% over the next 15 years, offset by greater immigration which could see ethnic Russian's only making up less than 50% of the population by 2050. In terms of labour quality the amount of university students has declined 40% since 2009 from 7.3m to just 4.2m in 2013. With poor attempts at racial integration, widespread racism and little societal cohesion this will be a huge threat to the state.

With these severe economic and social threats coming to Russia what can Putin do? How can he actually stop the movement to EV’s and renewables eroding gas and oil revenues? What will happen if their budget deficit widens? What options will Putin consider? According to an analysis of Putin, he is deeply scarred by the break up of the Soviet Union, the Yeltsin years of hyperinflation and the national humiliation of NATO expanding eastwards into former communist countries. What will he do to prevent the break up of Putinism, maintain power and avoid Russia collapsing into a failed state? A master of media, we have seen his manipulation/creation of enemies, provocation and conflict situations. [as a caveat to that there is a fascinating response from Putin to BBC Journalist John Simpson's pretty gutsy question on Russia's new policy on close flying, stating his view and bringing up Russian encirclement]. I also strongly recommend Tobias Stone's article on a possible future scenario in what happens next? and looking at the wikipedia entry for the Russian nationalist book "Foundation of Geopolitics". It basically lists all of Putin's recent political interventions: Ukraine, South Ossetia, US Election, UK EU Referendum, Lega Nord Italy, Marine le Pen etc,

Meanwhile in Saudi Arabia, the newly installed World’s 3rd biggest defence spender with an astonishing 10% of their GDP spent on defence. What happens when their oil revenues start declining? Saudi Arabia a country that provided the majority of 9/11 terrorists? A country whose specific form of islam, Wahabism, an islam made in the harsh desert that, funded by oil, has spread across the Islamic world via religious schools (this is no more visibly seen than the adoption of clothing culturally developed for weathering desert sandstorms, the niqab and burqa being adopted by more and more Islamic women). What happens to all the middle eastern governments when oil revenues start permanently declining? What happens when climate change further impacts water tables and weather patterns? How can they avoid collapsing into failed states?

EV’s are starting to look very disruptive and threatening, very threatening indeed. If the Shell CFO is right on the earliest date of peak oil, then these threats are set to imminent and set to materialise very quickly. Luckily we have a steady hand in the US Presidency and the EU is not under the threat of fragmentation....

Further Reading and Sources

Russia's Political Playbook

A fascinating book in Russia is the Foundation of Geopolitics is bascially mapping out all of Putin's moves from destabilising the US, separating the EU and Britain, Ossetia, Ukraine. How Russia deals with China is one area that I dont see Russia getting any traction against their One Belt Strategy and China's highly successful diversified industrial strategy (solar, electric vehicles, wind power and battery storage).

What Happens Next?

GM’s Bolt 2017

Putin takes the Baltic States

In 60 hours, NATO would have limited time to act – especially now that Trump has questioned the legitimacy of member countries with sub 2% GDP defence budgets – see )

Putin setting up new strongmen in Eastern Europe

How does cheap oil impact Russia

Future of Solar and Wind LCOE Prices