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A shattered global order: Hard truths for energy and climate

Wars, polarization and political divides will challenge governments and the private sector to secure energy supplies while also navigating investments for energy transition.


Carlos Pascual
SVP,
Geopolitics & International Affairs,
S&P Global Commodity Insights
carlos.pascual@spglobal.com
Carlos Pascual
SVP,
Geopolitics & International Affairs,
S&P Global Commodity Insights
carlos.pascual@spglobal.com

Published: March 13, 2024

Highlights

In 2024, we expect the risk of miscalculation and deepening conflict in the Middle East, China and the US, Russia and Ukraine, and across the North-South divide to intensify.

A politically brutal US presidential campaign in 2024 will increase polarization in the country and globally. Support from US states may preserve the Inflation Reduction Act.

The US and China pledged in November 2023 to avoid veering into conflict. The real test for energy may be competition over clean energy technology and mineral supply chains.

The world has no clear path on how to end the wars in Ukraine and Gaza, which will raise the stakes for oil production and market stability in the face of political risk.

For the developing world, a gap between economic aspirations and access to resources, capital and technology has fueled a North-South divide that demands a multidimensional energy transition reflecting national resources and incomes.



An eroding international order and geopolitical competition are making politics and commerce increasingly unpredictable at a time when the world needs confidence in governance to transform the global energy economy. Scaling up private investment in innovation and technology is key to bridge political divides and deliver viable pathways for decarbonization.

The eroding world order, energy security and climate change are deeply intertwined

Global crises are redefining how the world understands the future of energy. Yet much more than energy is at stake. The international order that emerged after World War II for security, trade and energy has lost sway and impact. Nations and industries must navigate this shattered equilibrium and make strategic investments. In 2024, we expect the risk of miscalculation and deepening conflict in the Middle East, China and the US, Russia and Ukraine, and across the North-South divide to intensify (see chart).   

The international order that emerged after World War II for security, trade and energy has lost sway and impact.

Five hard truths confront industry and countries on geopolitics and energy.   

Global conflicts could disrupt capital flows and destroy confidence 

The eroding global order will make it hard to leverage massive capital flows to achieve energy security and build an energy system for a net-zero world. Shocks to the international system are pervasive. The UN and major powers could not prevent or stop the wars in Ukraine and Gaza. Trade disruptions since the COVID-19 pandemic have exposed the world to commodity shocks, breaking supply chains for energy, food, metals and minerals. Concerns over energy security and clashing perspectives on climate between developed and developing nations have remerged. 

While estimates vary wildly, the world needs to leverage trillions of dollars more in private capital annually to transform its energy systems. Capital flows must double or triple. Despite an estimated $6 trillion invested globally in renewables in the past decade, the share of hydrocarbons in the energy mix has barely budged from 82% to 80%. Achieving net-zero goals will entail unprecedented transformations in the global economy, energy technology, consumer behavior and national politics. Conflicts and polarization in 2024 will further erode confidence in a splintered international order at a time when the demand for clear policy and reliable resource flows is nothing short of historic. 

Achieving net-zero goals will entail unprecedented transformations in the global economy, energy technology, consumer behavior and national politics.

Volatile political landscape could mar US influence 

What promises to be a politically brutal US presidential campaign in 2024 will increase polarization in the country and globally. The US political system risks falling into a dysfunctional stalemate. Every few months, Congress faces a crisis over funding its own government, despite the distress for the national economy. Divided internally, the US will increasingly lack the credibility to unite others amid deepening international polarization.  

What may not be at risk, however, is the Inflation Reduction Act — or at least most of it. Republican and swing electoral states such as Texas, North Carolina, Georgia, Ohio and Florida have major stakes in renewable energy, electric vehicles, carbon capture and hydrogen. Industries will drive bottom-up demand for the Inflation Reduction Act, even if a future government seeks to slow its implementation. Still, energy politics — the role of oil and gas, LNG exports, EVs, infrastructure permitting, and environmental regulation — will remain a major campaign issue. Inevitably, domestic policy ambiguities will cause US influence on energy and climate policy to wane internationally. 

US-China competition could deteriorate or accelerate innovation

The world is watching anxiously to see whether Presidents Xi Jinping and Joe Biden can rescue the relationship between the US and China. Trade restrictions on mainland China’s access to advanced semiconductors, 90% originating in Taiwan, hinder its path to supercomputing and AI applications (including in defense). The risk of disruption affecting global supply chains led the presidents to meet in November 2023. Biden said, “We have to ensure that competition does not veer into conflict.” Xi took the point further: “Planet Earth is big enough for the two countries to succeed, and one country’s success is an opportunity for the other.” (Source: “Remarks by President Biden and President Xi Jinping of the People’s Republic of China Before Bilateral Meeting | Woodside, CA.” The White House.)

But will their pledges hold? At the COP28 UN climate change conference in Dubai, the US and China took the stage together to pledge action to curtail methane. Perhaps the real energy test will be on supply chains, where China dominates the manufacturing of technologies such as solar panels, batteries and EVs as well as the processing of many minerals needed for the energy transition, such as lithium, rare earths, graphite, cobalt and copper. Here, the push for diversification is nonnegotiable for the US. This will fuel competition for mineral access and processing worldwide as well as a race for chemical substitutes and reinvention of mining techniques.

Wars in Ukraine and Gaza could spread into wider conflicts 

The world has no clear path to end the wars in Ukraine and Gaza. As these persist, expect further confrontations to gain military and political advantage. Europe and other global markets have suffered the impact of curtailed Russian gas exports since 2022, although robust LNG supplies and curtailed demand mitigated what could have become energy crises. Russia’s oil exports have been redirected to Asia. The Middle East and others increasingly supply oil to Europe. We expect oil supplies outside the OPEC+ countries to continue to outpace the growth of oil demand. These strong balances may keep oil in a price band of $75-$90 per barrel. But one cannot assume away risks — to oil flows directly or to maritime transit. 

For Ukraine, the biggest risk may be the inability of US Congress to agree on how to fund military and economic aid. Europe remains committed, pledging €50 billion in aid over the next four years. Countering perceptions of a stalemate, Ukraine has driven the Russian navy out of Crimea, reopening its access to the Black Sea. However, shortages in air defense missiles and artillery leave Ukraine increasingly vulnerable as Russia intensifies attacks on civilian infrastructure, especially energy installations. In 2024, neither side has an appetite for diplomatic settlement.

In Gaza, ending the war and risk of a wider conflict are intertwined. For Israel and the people of Gaza, this war is a humanitarian tragedy. But ending a conflict in a dense urban zone where over 27,000 have died and 80% of the population has been displaced requires a security paradigm without precedent. Recall that the withdrawal of US troops in Iraq and Afghanistan led to ISIS emerging and the Taliban returning. A continued Israeli security presence in Gaza will provoke retaliations. No country will volunteer a peacekeeping force without a political agreement on the future of Gaza that provides a point of exit for Israeli troops, and eventually their own. 

Iran has perhaps gained the most in portraying itself as the defender of the Palestinian cause. Attacks from Iranian-backed militias on Israel and US interests have sought to raise the stakes of continuing the conflict without falling into a wider war. Most visibly, Houthi rebel attacks on ships in the Red Sea have diverted 80% of shipping containers away from the Suez Canal.  

Roughly 7 million to 8 million barrels of oil continue to move daily through the Suez Canal, mostly from Russia to Asia. The Houthis have not attacked Russian ships, but insurance costs, freight rates and crew fees are rising. Non-Russian tankers traversing the Cape of Good Hope could face two to three weeks of additional voyage time and fuel costs. Diesel and jet transit from Asia and the Middle East are raising costs for European refiners; indeed, exports shut down completely for three days after US retaliations on Iran-backed militias. 

Reflecting these developments, the price of dated Brent, despite robust oil supplies, rose $5/b in early February. Escalating or prolonging Red Sea attacks could drive more shippers to circumvent the Suez Canal. The unexpected signpost to watch may be China’s reaction. Although no country is more affected by a threat to shipping lanes and the militarization of choke points, China has rejected US appeals to engage Iran to avoid a wider regional conflict. Could China reconsider?   

The Global South needs access to capital and technology

The fifth hard truth is the need to respond to the Global South’s cries for an international order that helps developing countries access resources for jobs, education, healthcare and energy security. The challenges cited in this article — wars and conflicts, political polarization, and leveraging capital — are deepening the North-South divide. Energy and climate are especially poignant because they cut across national economies and can trigger regional conflicts and migration.  

Energy and climate are especially poignant because they cut across national economies and can trigger regional conflicts and migration.

The international community must realign around the needs of a Global South, which encompasses 80% of the world’s population. The demands are clear: energy access, climate adaptation, loss and damage compensation, debt rescheduling, blended finance to lower capital costs, and access to technology. International public funds alone cannot fill the financing gaps, estimated by the UN at $200 billion to $300 billion annually for climate adaptation alone. The Loss and Damage Fund launched at COP28, for example, was seeded with just $700 million. While that will grow, it will face competition for public financing to reduce debts and mitigate risk on private capital.  

COP28 brought the private sector directly into tackling climate change, including pledges for $85 billion in private finance and yet more in company commitments. The United Arab Emirates invested $30 billion to seed a private fund to leverage $250 billion. More broadly, Organisation for Economic Co-operation and Development countries met an overdue pledge to finance $100 billion annually through 2025 for climate mitigation and adaptation. The measures at COP28 to close the North-South divide are just a starting point.      

Looking forward

Politics and policy as we have known them will not be enough. Without resource transfers and wider access to technologies, energy politics will be a source of tension, not unity. The goal is to transform innovation and technology into a bridge for political divides. Governments need to embrace industry’s capacity to innovate and operate at scale. Industry must advance technology breakthroughs that deliver energy security and decarbonization. It sounds aspirational, but the hard truths for geopolitics reveal that relying solely on politics and diplomacy, without a partnership with industry, will be folly.  

 

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