Look Forward | Episode 4: Understanding Global Tensions: Geopolitics, Trade, and the Energy Transition

View Full Transcript

Andy Critchlow: (00:00:00) Hello, my name's Andy Critchlow. I'm head of news at S&P Global Commodity Insights, and welcome to the Look Forward Podcast from S&P Global. In today's rapidly shifting Markets success depends on anticipating what's next. The professionals who excel are those who can spot emerging trends before they fully materialize.

Look Forward podcast delivers exactly that insights to help you prepare for tomorrow's opportunities and challenges. We bring you expert perspectives on macroeconomic trends, capital markets, energy transition, and global trade. A sharp focus on what these developments mean for the decisions that will shape your tomorrow.

This podcast connects you with S&P Global's Look Forward council bringing cutting edge research on long-term trends and transformative (00:01:00) market shifts. Together we are committed to providing the forward-looking intelligence you need to navigate uncertainty with confidence. So welcome to this episode of Look Forward podcast.

My name's Andy Critchlow. I'm head of news at S&P Global Commodity Insights, and it is my pleasure to be joined today by Carlos Pascual. Senior Vice President for, geopolitics, global Geopolitics and International Affairs at S&P Global Commodity Insights, and a man who has a CV that actually reads like a character from Jason Bourne film. Former US Ambassador to Mexico, former US Ambassador to the Ukraine, special assistant to the President of the United States and Senior Director for Russia, Ukraine, and Eurasia at the National Security Council. (00:02:00) Just to name a few of the, sort of critically central roles that you've played Carlos, in the world of geopolitics and international relations, and I guess to kind of open the podcast, you know, we, we, you know, off air, we talked about, you know, this is an angry world and you know, I think that few people.

Certainly a few people that we've spoken to on this podcast can really comment on kind of what that means, you know, like you can, from your experiences, both in terms of international affairs and your career and, and now in your role at S&P Global.

Carlos Pascual: Andy first, thank you for having me on the podcast.

It's a pleasure to join you and thank you for having this conversation. I think this question of anger in the world of alienation of polarization is one that we really have to stare in the face and deal with in a very explicit way. We faced it for a long period of time where there are groups of people within countries that have felt that they have not had the benefit of (00:03:00) rising with economic growth.

It's been an issue with globalization. It's been a question about how income is distributed and job opportunities are distributed internally within countries. It's an international issue on how the opportunities globally are spread across countries and it's an issue that's affected global institutions, the, the UN, the world trade organizations and others.

It's affected their credibility. And now Andy, I think we face another set of challenges where we've had over the past eight decades, a global international order, fractured as it is with the anger that we've had that has been focused on the concept of rules of interdependence on globalization to one now driven by the United States, which is focused on being transactional of doing deals.

Of being nationalistic. It's Make America Great again. It's not looking at (00:04:00) what is good for the world and it's protectionist, it's focused around tariffs. As President Trump has indicated, that's his favorite tool, and as a result of that, it puts us into an environment where that transactionalism and the individual negotiations create an environment of.

Breaking apart relationships because Andy, I'm a lot more effective when I'm negotiating with you and breaking you apart from your team than really dealing with it together. And it means that being anti-alliance anti-agreement is part of that transactional world. So we're now dealing with that added element.

On top of an angry world and the, the, the type of, fracturing and polarization that we've had in the past. So great challenges that we're facing economically, politically, in the world of diplomacy.

Andy Critchlow: So you mentioned tariffs and you know, the transactional nature of the administration under President (00:05:00) Trump.

You know, we've seen the latest round, recently, ranging from 10 to 50% targeting over 60 trading partners. And, you know, it really is a dramatic escalation. In, you know, this shift in policy, which you me, mentioned this shift towards protectionism. I guess the first thing that I wanted to ask is how long do you think, you know, what is the transmission period now for this to start to really impact markets for it to feed through to, you know, people's pockets in terms of inflation, and some of the wider economic impacts that, you know, potentially could be seen by this, you know, this process that you see of the, the erosion of.

Of multilateralism to a more transactional based form of diplomacy and you know, specifically trade negotiations.

Carlos Pascual: Andy, the impact period begins right now. It began yesterday and the day before. So (00:06:00) let's really understand what the implications of that are as a result of the indication that President Trump had that we would be increasing.

The United States would be increasing tariffs. There's a huge import surge into the United States in the first quarter, over a period of time, over a period of months. The United States has been drawing on those inventories and build and drawing them down. As a result of that, we didn't see as much of the inflationary impact, the price impact that one might have expected otherwise, but we're coming to the end of that period.

We're coming to the beginning of a period where tariffs. Where now the United States is at an average of about 18% tariffs. That's the highest level that the United States has had since the 1930s. And so when you think about what that means, some have said, well, think about an 18% tax imposed on all of the imports that are coming to the United States, because one way or another, you have to charge (00:07:00) this or see it reflected or else the tariffs aren't effective.

Right? And so is it gonna be absorbed, by the businesses that are involved. And if they do absorb it, are they then going to be, less effective and cash viable? Is their cash flow gonna suffer or do you pass that through already to the consumer? What we're already beginning to see as far as the inflation statistics in June by the Bureau of Labor Statistics is that we're starting to see some of that pass through in prices.

We've also seen a softening in the labor market. It's created its own set of controversies because president Trump fired the head of Bureau Labor Statistics, and that's become its own internal debate in the United States. But what we need to now understand is that we have a world in which there have been some trade agreements that have been done, but have many exemption, exemptions and many questions that need to be settled.

The (00:08:00) biggest trading relationships. In Mexico, in China and Canada are still not completely set. So we have to understand how that's gonna play out. And just thinking about Mexico and Canada, how that affects the integration of the industrial economy of the United States and where it goes into the future.

All of those things are gonna play out. So yes, we're gonna start to feel it, but in fact, there are a whole series of questions that still are not clear, and we're gonna continue to see this play out for many, many months ahead

Andy Critchlow: Because President Trump's taken a major risk here pushing through these tariffs in such a way ahead of the midterm elections, especially when, you know, he wasn't voted in to raise prices.

It was actually the opposite. Reduced prices, reduce inflation. You know that, that. You, you, why do you think he's taken that risk?

Carlos Pascual: Well, I think that President Trump feels that, and, and rightly so. One of the big issues that was a factor in his (00:09:00) reelection was that he called for the re-industrialization of the United States to bring back jobs back to the US and in particular to the, to the midland, to the heart of the United States over time.

And so the idea of tariffs is to provide a protective environment that allows American companies to invest in the production of manufacturing in the United States and restrains imports that might be competitive for a period of time. Right? And so the challenge is gonna become, how effective is that gonna be?

How quickly can that come? And in what industries is it gonna come? And can you still attract Americans to work in those jobs? Or are they jobs that are gonna pay such low wages that it's gonna be difficult to attract Americans to work in them? We've seen announcements, by Apple, for example, of an intent to invest a hundred billion dollars in the United States.

But what we've also seen is that companies are holding (00:10:00) back on investment because they're unsure of the tariff environment, what their costs are gonna be. Supply chains have been disrupted because of the tariff environment, and so, we have these factors playing themselves out, the intent of re-industrialization, the uncertainty about investments in supply chains.

And then finally the other point that you're raising Andy, which is that of prices. And inevitably we're gonna see some price rises. Some will argue that it's not inflation, but that it's a one-time price rise that you get as a result of these tariffs going up. But here is another issue that President Trump will have to contend with.

Just as with Joe Biden, when the price of a gallon of milk went up, he began to control inflation, but the price of that gallon of milk never went down, right? If you have prices that are higher. They're not gonna go down going into the future. And how will that play into the midterms? You're putting (00:11:00) your finger exactly on some of the economic and political issues that are gonna play themselves out over the next year.

Andy Critchlow: So we have the, the, the tariffs pillar on, on, holding up one side of this, this scenario and linked to that prices and the, the, the, the wider picture for the global economy. And then the other pillar to this dynamic of a shifting world from multilateralism to transactional diplomacy. The erosion of these and, and assault in some ways of these,

critical intergovernmental organizations which have underpinned so much of the world in, in post 1945, whether that's the World Bank, the IMF, NATO, and you know, now we're seeing that that's being challenged. But, to bring this back to, you know, the other side of that equation and, and to the administration.

At the same time, the administration has, (00:12:00) has attacked some of the new sort of challenging intergovernmental organizations like The BRICS, which have been incredibly, sort of more influential probably over the last five years due to their resource rich economies and the the fast growing economies that they have.

If we look at this fragmentation, we look at at countries like Brazil and and India, how do you see this new? Sort of reshaping of global governance and energy diplomacy working out for some of these nations.

Carlos Pascual: Good question, Andy. So the BRICS, Brazil, Russia, India, China, South Africa. For everybody to get us on the same page, Brazil currently has the presidency of the bricks. Just yesterday, president Lula reached out to both China and India and called for a meeting or a conference of the BRICS countries to begin to discuss this issue of American tariffs and how the BRICS countries respond. Brazil has received a (00:13:00) 50% tariff. That tariff is very much linked as President Trump has said to Brazil's actions with former President Bolsonaro, who's being brought into a Supreme Court hearing for seeking to promote a coup d'état after he lost his election.

All right, so there's a political dimension to this as well as the economic dimension. India has been a key factor, and just yesterday they saw on top of a previous 25% tariff, a new tariff of 25%. That has been justified by the administration as being imposed because India is purchasing russian Energy products, particularly oil, and as a result of that, is having an impact indirectly on the negotiations between Russia and Ukraine and reaching a ceasefire agreement.

And so you, you get the picture here that for Brazil, for (00:14:00) India, for China, where we've known about the trade conflicts. There's one common theme and the theme that they had they can unify around is against the hegemony to use their words, the hegemony of the United States. That is the common purpose that they would have.

One of the common elements that they have begun to experiment with is, are there payment mechanisms that they can have in local currency? So that they can avoid the use of the dollar in their transactions and attempt to isolate themselves from being vulnerable to the American banking system. Those have been specific issues that President Trump has been concerned about and has threatened to oppose additional tariffs because of that.

The question one has to ask is, do these countries represent a vision of what the world would be, an alternative vision of what, how it could function and it could (00:15:00) operate. China and Russia have said that they would like to offer a different vision that's not based on the American liberal democratic system, but India is still a democracy.

Brazil is still a democracy, and so one becomes when we one starts to ask, is there a broader alternative that they offer that becomes less clear. And what we're beginning to see is that these tariff arrangements can break apart institutions. They can hurt relationships. In the case of India, a good example, a country that was so fundamental to the American relationship in creating a bulwark in Asia against China.

Now it's in a direct confrontation. So these issues are gonna take themselves. Some time to play out. There is going to be some tension and some conflict. There are gonna be the fledglings of alternative (00:16:00) relationships. I'm consciously using that word instead of institutions where countries will want to hedge against their dependence on the United States, but at the same time, the United States will be rich and it will be powerful and it will not disappear.

So I think there's gonna be a time when we're gonna see more confusion rather than actually less.

Andy Critchlow: How does this tip the balance between the US and China, if this was a, you know, if we're talking about a game here is, is has China actually turned this to its advantage?

Carlos Pascual: You've hit a, on a, a central question, that goes into the world of politics, security, economics, trade, global influence, global images.

But I'll, I'll bring it back to one example. In May of this year, the United States Auto Industry raised a flag (00:17:00) when Stellantis, GM and Ford said that they would begin to have to close plants because they cannot get access to rare earth and high powered magnets from China. Without those magnets, they cannot produce an automobile and they would begin to have to close plants. That reality led the United States to call for the tariff negotiations with China after it had increased the tariffs on China to 145%. They needed a truce, and one of the things that we found out afterwards that ended up being part of that deal, is that China has been given access again to NVIDIA's H 20 chips. Which are part of the AI infrastructure.

They're not the most high powered chips, but it's an important capability. So who would've imagined that magnets and China's (00:18:00) control of them and AI chips would've become at the center of the trading relationship between the United States and China and that this can become such a critical geopolitical factor in how the negotiations would go forward.

It can go much further and it gets into issues that are central to energy security, and we can talk about them if you want, but China's dominance in critical minerals. Its dominance in batteries, in electric vehicles and solar panels. And wind turbines and electrolyzers are creating a divergence where China is trying to establish itself as the leader in technology, technology dominance going into the future.

The United States in energy dominance. Specifically defined as hydrocarbon dominance. How are these issues gonna play themselves out in near term energy (00:19:00) security? The United States has a critical role as a supplier of hydrocarbons in terms of the future supply of clean energy and what will be the cheapest energy sources.

China's making a big bet that the focus on renewable energies is going to reduce its dependence on hydrocarbon imports and allow it to be a lower cost competitor in the future.

Andy Critchlow: It, that does conveniently bring us to that, the third pillar as I see it, which is the energy transition and, and the global race for resources.

And you know, you mentioned there. You know, China's, you know, dominance in some of these key areas you mentioned as well the US dominance in key areas around fossil fuels. How do you see though, more broadly this shift from the multilateral world to a more transactional form of diplomacy impacting, you know, issues around energy security, and as (00:20:00) well.

You know, the global fight against climate change and the trajectory of, of energy transition going forward.

Carlos Pascual: Look, I think one of the things that one has to start with a recognition is that the changing nature of the use of types of energy and fuels has to be linked, not just to the supply, but also to the demand.

And right now there's still strong demand for hydrocarbons and for oil, and we're gonna see that going into the future. And as a result of that, the American capacity to produce significant barrels of oil at a relatively low price will make the United States an important player in global energy security.

There's also a reality that over time we've seen the cost of renewable energies drop dramatically in solar and wind. It's moving in that direction. In electrolyzers, it's being translated into that in electric (00:21:00) vehicles for China. This is not a question of climate change. It's not a question of pollution, it's a question of national security.

It was reducing its dependence. On the vulnerability of oil and gas transiting through the Strait of Hormuz, the Strait of Malacca, and potentially having supplies being shut off. When they saw what happened, when Russia cut off gas supplies to Europe, they took other measures. Even with everything that they're investing in renewable energy, they increased their investments in coal even as a standby capacity factor to ensure that they would not be vulnerable if in the future, let's say there were actions on Taiwan and there were threats against the China's access to hydrocarbons in the future.

And so what we've seen is that China has taken a comprehensive set of actions on renewable energies, on electric vehicles, on (00:22:00) critical minerals, on the production of batteries that have put it in a dominant position on technology going into the future, even on electric vehicles. Our estimate as a company in a study that we did in 2022, was that there would be a growth of about 12 million electric vehicles by the time that we by this time, right now, in 2025, we've surpassed that.

It's gone over 16 and the bulk of that difference, 4.1 million of those vehicles of that overproduction has been in China. To give you a sense of how big it's become, China has already passed peak demand on gasoline. It's going to reach peak demand in oil in the next year and a half, and it's gonna become a critical supplier of clean technology to Southeast Asia in particular, which is the highest growing primary energy demand.

So (00:23:00) these are issues that are gonna play themselves out. The United States is not out of this picture on hydrocarbons. There's still a, a strong, strong market in the United States for clean tech. The incentives of that obviously are changing, with the changes in the inflation reduction act. But I think we need to have very wide open eyes.

On what's happening in China and measures that they're taking, because China today is investing as much in clean technologies as the entire OACD combined.

Andy Critchlow: And the really interesting thing there, you mentioned, energy security. It's actual mine security now in metal security. With the rise of electric vehicles, what are you gonna need?

You're gonna need more metals, specifically, aluminum as well as battery metals, but also really importantly copper. And I know this is an area that you've taken a great interest in, and can you just kind of explain to us how that will play out?

Carlos Pascual: Andy, this is an issue (00:24:00) that, is helpful to look at through the lens of artificial intelligence through AI, for both the United States and China.

AI, again, has become a national security issue. It's linked to getting military advantages, defense advantages, and then commercial advantages as well. To advance AI, you need data centers. For data centers to run, they need massive amounts of electricity. In the United States, we've estimated that if you look at the difference between 2024 to 2030, the amount of electricity demand measured in terawatt hours is going to triple.

Right. To be able to do that, you need copper. Copper is the metal of electrification. You need it in the data centers. You need it for all transmission and distributions. You need it internally within batteries. You (00:25:00) need it in electric vehicles. And so now there has arisen another critical question of who wins in this race for AI's.

And that race has been critically attached to the, ability to supply the energy to drive it, the cost of that energy and the access to the minerals that are necessary to be able to do it. Today, China has 45% of the processing capacity, for copper. The United States cannot process all of the copper that we produce.

We export about 45% of it to be processed in other countries. And so that is one of the reasons why as S&P in a cross divisional initiative, we're undertaking a study called Copper in the Age of AI, where we're gonna look at the demand for it, where the supply is gonna come from. Where the processing is gonna come from and what are the implications (00:26:00) for the future?

No one has studied this in the depth that we're about to do so today, but what we can say for certain is that what happens with copper and electrification is gonna be critical in who wins the race for AI and how it plays out in the geopolitical race between the United States and China as well.

Andy Critchlow: And that's reflected in the price.

If you look at the surging prices of copper. Recently, certainly over the last year, and you compare that to oil. One of the things I found fascinating with the amount of geo-political risk in the market, you mentioned the Gulf. We had the 12 day war, between Iran and Israel. some pretty unprecedented, events that happened, this year around that.

And, you know, the intervention of the United States. But we didn't get that huge spike in, in in oil prices. Oil prices have been a long way from testing that $147 a barrel record high that we saw back, I think (00:27:00) back to 2007. Under very far more benign sets of circumstances, and it just seems that, you know, when you compare that to some of these critical minerals, some of these battery metals, and you mentioned copper, which is a fascinating story, gets into all these access to resources, finite, supply of that mineral and this huge rising demand around, you know, AI I guess to finish, it's, it's, you know, one of the, the, the kind of pervasive themes of, of my career as a, a journalist has been.

This, the, the Carter Doctrine. And I spent a lot of time in the Middle East as a journalist, and this assumption that the US would intervene at any point to protect energy resources out of the Middle East. We saw it in the 12 day war, with the bomb bombing of Iran, arguably, but we didn't see it back in 2015 when we had the attacks on Abqaiq.

What's changed? And as a final point, does the Carter (00:28:00) doctrine still exist or is it in a different form.

Carlos Pascual: Doctrine is changing. Global geopolitical realities are changing. Let me take you to one fundamental change that one has to understand in order to understand the dynamics of what's happened in the Middle East and what's happened on oil prices. 2019,

china brokered a relationship between, excuse me, 2020. I'm getting my dates mixed up. You'll correct me later on. The point is, yeah, China brokered a relationship, a resumption of diplomatic relationships between Saudi Arabia and Iran. The principle customer for oil out of coming out of the Gulf is China.

That affects Iran. It affects Saudi Arabia. It is, it has to be absolutely clear that China has to have communicated to Iran. We do not want you to block the Strait of Hormuz. (00:29:00) Iran, if they block the Strait of the Hormuz, they cannot export oil. China is the principle buyer. It's the principle source of Iran's income.

In the meantime, China's principle economic relationship in the Middle East, is in Saudi Arabia. China's invested in Saudi Arabia and vice versa. And that dynamic has changed the, the politics of the Gulf, where in the past, what we have seen that has caused a huge escalation of prices is when the Gulf, where there's 20% of the world's oil.

Is potentially blocked in supplying national, international supply. There was no blockage of the Strait of Hormuz. In the pictures that we took in our mint service, the afternoon afterwards, you can still see the ships flowing, and one week later, the drop in actual oil tankers that were flowing out of the Gulf only went down from 324 to 307.

The point is there was a shift in the (00:30:00) change in the politics. Globally within China, Iran, Saudi Arabia, that had an impact on the Gulf that had an impact on prices. And in addition to that, you had another reality, which is shale oil in the United States, the US as a major producer, and all of this happening at a point in time when there were reevaluation of OPEC prices and OPEC even bringing more supply onto the market.

So the impact has been that there hasn't been an increase in price. And in fact, when all of that OPEC oil does come onto the market, you're gonna see inventories build and price is actually gonna come down. A comment real quick on copper, the price of copper surged when there is a belief that there is going to be an American 50% tariff on refined copper.

Prices shot up. When that tariff was adjusted from refined copper, which would've been the bulk of copper that goes (00:31:00) into the United States. It was focused on semi-finished products. Boom. The price just plummeted overnight and it's backed down to the London Metal Exchange, price. And you don't see a difference differential in pricing in the United States.

My point here is tariffs have an impact. There are a lot of uncertainties that we're gonna continue to see. There are 232 tariffs that are still, to come 232 is related to national security tariffs. There are some on pharmaceuticals, there are some on steel products that are still in the process.

And as a result of that, we're gonna see changes coming in the future. And, there are even court appeals, for example, in the Court of International trade on the use of the International Emergency Economic Powers Act in order to impose reciprocal tariffs. Unclear where that's gonna go as well. We're gonna see changes in the (00:32:00) future.

This is not the end of uncertainty. We're gonna keep working through this together. And Andy, I bet we're gonna have a conversation in the future.

Andy Critchlow: I look forward to it. A great, note to finish on Carlos, thank you so much for your time. And to all our listeners, look forward to our next episode of the Look Forward Podcast.

Thank you.