Vlad-the-Bad’s Energy War is resetting Geopolitics – but the West remains the likely winner.

Blain’s Morning Porridge Oct 7^th 2022 – Vlad-the-Bad’s Energy War is resetting Geopolitics – but the West remains the likely winner.

“And so they shot him till he was dead… Oh, those Russians.”

This Morning: The last few days have confirmed we are in a Global Economic Energy War. It is remaking the global order – and will have significant long-term effects on Global Markets. As the sides shift, there will be winners and losers.

The key to this Morning’s Porridge rant is a quote from Jeff Currie, Goldman’s head of commodities research from earlier this week: “$3.8 trillion of investment in renewables moved fossil fuels from 82% to 81% of overall energy consumption.” These numbers will change over time, but for now they highlight and confirm how the Energy War is all about access to oil and gas.

Market confidence and direction are subject to many forces. We’ve just seen a spectacular demonstration of political policy mistakes unravelling UK markets. Such mistakes are recoverable. Geopolitics is an order of magnitude greater, and wars are less simple to reverse and undo.

There are three linked geopolitical issues dominating the global stage and markets:

• China and the expectations of a “Thucydides Trap” showdown with the USA – the current global hegemon,
• Russia versus the West, and
• The Rest of the World choosing sides…

Some say there is a fourth: Europe seeking its own identity outside the conventional notion of the West – buts let’s just assume the interest and objectives of Europe remain closely aligned with Anglo-Saxon alliance of the USA and sidekicks, the UK and its’ former colonies.

This week’s OPEC+ declaration of intent versus the West confirms just how dramatically global energy chains are shifting.  Whatever we think of ourselves in terms of our democratic liberties and freedoms in the West, our views are not necessarily reciprocated by the rest of the world. The oil-snub delivered by OPEC cutting production by 2 million barrels per day reflects how what we once called non-aligned nations are now being aligned against us.

It looks like betrayal: after all we’ve done for them, how could Saudi Arabia’s bone-saw favouring Prince MBS align himself with Vlad the Bad, Tzar of All the Russia?

The takeaways are clear: weaponizing oil prices as the global economy struggles with energy inflation and recession, and just ahead of a critical US mid-term election is a deliberate destabilization. Putin just sucker punched Biden, who mistakenly thought he’s fist bumped MBS back into line. It puts the deliberate sabotage of the Nordstream Gas pipelines into context – further demonstrating how tightly Russia’s noose is tied around Europe’s neck. (Remember: Gazprom is hinting Nordstream 2 could become functional very quickly if Europe caves in.)

The Americans are furious – calling for action as their strategic reserves dip, which may force export cuts at a time when Europe is increasingly desperate for Energy. Nice play Vlad.

It looks like Saudi has thrown its lot in with Russia – but the reality is the USA is no longer Saudi’s key petro-customer. That’s China. Saudi needs to maximise its oil revenues to drive any chance of transitioning its economy – an impossible legacy of Autocracy, bureaucracy, patronage, and state dependence to the degree most young Saudis don’t bother to work. Its military is among the highest spending on the planet – but is not well regarded. A host of young underemployed (and under-educated) Saudi population are stuck in sink-estates on the edges of the major cities – vulnerable to Wahhabi fundamentalism. MBS may be volatile – but it’s likely he sees the risks.

Directly challenging the West is a gamble. (Many analysts think MBS is reacting emotionally to the slights of the West against him.) By supporting Russia’s efforts to coerce Europe into surrendering Ukraine he’s upped the stakes. Currently the US provides massive military support to Saudi to “foster stability in the Gulf”, but it’s there to preserve the House of Saud lest something even less stable and more radical replaces them. Saudi as a failed fundamentalist state would create a massive hole in global energy – and raise the prospects of genuinely frightening Middle-East Jihad against any and all unbelievers.

The announced OPEC cut will be 2 million barrels a day – officially to keep the market stable, but in reality to push up prices. It will raise inflation and make recession more likely. The actual cut will be considerably less – less than 1 million barrels – as many inefficient OPEC+ members produce less than their allotted quotas. The vast bulk of the cuts will be made by Kuwait, Saudi Arabia and the UAE. After two gulf wars to support these nations, the West is not impressed.

(On the eve of the Soccer World Cup in Qatar, you can understand why the Emir will be concerned – having bought David Beckham, and spent over $200 bln on the most expensive PR campaign of all time, it doesn’t help if his neighbours have decided to prioritise Russia.)

It’s not just Saudi prepared to challenge the West. The UAE, India and others are also testing just how far they can push. All of them are watching shifting geopolitics and looking for who the winners and losers will be.

Russia and China are not aligned. Russia’s energy war is useful for China – the longer Russia is forced to sell its oil and gas cheap to China the better. It will balance rising oil prices when Chairman Xi decides to reopen the Chinese economy from repeated Covid lockdowns. China now sees Saudi as a key strategic partner as its premier oil supplier – potentially another trigger point with the USA.

Putin has played what cards he has left well. His armies have let him down, but his energy offensive is working. It is time limited. If Europe can survive the winter – he potentially loses. Europe will be able to bring new energy supplies on line  – which is why Putin’s plan is to keep energy unstable! That will have the added benefit Western economies suffer as much as Russia’s is under sanctions.

But, Russia vs the West is not a Thucydides Trap moment. There is zero chance Russia will ever replace the US and/or the West as a global hegemon.

The current energy conflict is more in the mould of the Punic Wars; Carthage versus Rome. In the first War evenly matched Carthage and Rome fought it out for Mediterranean trade dominance with Rome the winner seizing Sicily. The second was Hannibal rampaging through Spain, Gaul and Italy, but defeated at Zama as much by internal dissent as Rome’ Fabian strategies of wearing down its enemy paid off. (Even as Rome was beating Carthage, it also found the time and resources to conquer Greece.)

Carthage became little more than a client state under Rome. The Third Punic war was the most significant – the now mighty Rome crushed and demolished Carthage, sewed the fields with salt, but incorporated it into the Empire where it thrived for next seven centuries.

Russia faces much the same fate. The Cold War saw Russia decisively beaten by the economic might of the West. It simply could not compete. Putin is no Hannibal, but he will lose this war as tensions in Russia rise and Western money grinds his armies and economy down. Ultimately, Russia faces the choice – become an appendage of China to be milked dry for its resources, or join the West where it’s more likely to be offered rehabilitation and a place within a stable and prosperous Europe.

Where does that leave MBS and Saudi? The shock troops of Carthage were its’ Nubian mercenary calvary – like most mercs, they went where the pay and prospects were best, switching sides at the critical moments. Perhaps MBS just needs a gentle reminder of where his interests will be best served. Go ahead – replace American arms with Russian. It’s not as if Russian weaponry has proved itself in Ukraine….  And the few weapons Russia can still produce are going straight to the Western Front. Or maybe the Wagner group will defend Saudi…

Five Things To Read This Weekend:

FT – Five Ideas that might actually boost UK Growth

Businessweek – Even After $100 Billion Self-Driving Cars Are Going Nowhere

New Scientist – Can Britain avoid winter blackouts amid European energy crisis?

Torygraph – Brace yourself for nasty surprises from the financial system

WSJ – The Coffee Machine That Ate My Kitchen

Out of time, and off sailing this weekend so I shall be wonderfully relaxed, happy and motivated next week to make the world a better place..

Have a great weekend.

Bill Blain

Shard Capital.