The intersection of geopolitics and energy offers sober reflection
After attending an event where a leading Russian expert gave a presentation on Russia and the Ukraine crisis, I will share my thoughts on how this crisis intersects with energy trends. I promised readers that. A few selected ideas follow, but Chatham House rules apply:
One of the most resounding messages from this non-US-centric perspective was that Putin’s Russia had been planning Russia’s comeback since the early 2000s. The West has been deaf to intentions and ongoing signs of road. This idea has also been circulating recently among geopolitical analysts.
Putin’s grand strategy, difficult to implement, is inherent in Russia’s positioning. While many commentators focus on Russia’s past empire-oriented aspirations and Cold War framework, the strategy is more forward-looking. Its contours reflect a different geopolitical reality that also views Asia’s economic rise as anything. Russia wants to be seen as important in this changing paradigm of the 21st century. Another pressure point for Russia has been the increase in US hydrocarbon production, impacting its budget and adding another geoeconomic factor. Western allies through NATO have expanded over time, and Russia has responded to inflection points. It’s a part of the gist that drives me to be cautious in my assumptions.
I’m free to associate here afterwards. First, there are many reasons why Saudi Arabia has not been as warm to the United States as in the past due to wavering support, its Asian-oriented markets, uncertainty regarding energy transition policies and the diversification of the national economy. Think geopolitics and geoeconomics. Russia is the other counterweight to OPEC-plus, although there have been times when Putin made the wrong choice, for example during the pandemic. (I referenced this in an April 2020 article “…OPEC+ agrees to cut $10 million over next few months.”) This expanded pact is working well for OPEC, Russia, and the role of the cartel in setting the hydrocarbon agenda as a counterweight to the United States and Australia and other free market players.
In The Economist article from March 26, they note that Saudi Aramco (ARMCO) is increasing its investments to around $40-50 billion this year, up from $32 billion in 2021.
Add to that:
“Saudi Aramco (ARMCO), which produces 12.8 million barrels of oil equivalent per day, has just reached a market value of over $2.3 billion, making it the second largest listed company after Apple (AAPL).”
The two most valuable companies are now Saudi Aramco and Apple: an early hydrocarbon exporter in 1939 and a leading technology innovator founded in 1976, respectively. Thirty-seven years separate their creation of value.
But the world has changed again. Energy innovation has been around for decades, and not just with the advent of ESG and climate change. It depends on entrepreneurs, scientists, governments and other types of people willing to place bets. Putin placed his. And now, geopolitics and geoeconomics are changing in different ways. Europe is accelerating its diversification of energy sources. US natural gas exports will now play a bigger role than expected. What might have been considered a fringe project a few years ago is more likely to happen, such as Tellurian’s (TELL) Driftwood LNG facility.
Despite the damage to Russia’s role in the world, its vast hydrocarbon assets are significant and valuable. According to Nikos Tsafos of a DC think tank:
“Russia is at the heart of the world’s energy system. It is the world’s largest exporter of oil, accounting for around 8% of the world market. And it supplies Europe with 45% of its natural gas, 45% of its coal and 25 % of its its oil. Similarly, hydrocarbons are the lifeline of the Russian economy. In 2019, before the drop in prices due to COVID-19, oil and natural gas revenues accounted for 40% of the federal budget of the country. And oil and gas accounted for nearly half of Russia’s total goods exports in 2021.”
So my theme is about inversions and a propensity for consensual thinking that obscures clarity about what’s going on. Admittedly, this is a tough call and an even tougher perspective to maintain when world peace and good deeds are at stake. Here are some basic observations at stake in the present.
1) Europe’s diversification of its energy mix will be favorable to American oil and gas production. Other new business is concluded. But OPEC-plus isn’t going anywhere just yet.
2) But the energy transition is also at stake. The interaction of these two forces is unclear. I don’t have a clear line of sight regardless of current capital flows with many moving parts and mixed messages in terms of political, geopolitical and energy security realities. Everyone is talking about his book.
My book is the intersection of real economics (as well as real politics), the practical side, with a thesis on sustainability and doing good with capital. The world is so interconnected that it would be time consuming and unhelpful to disentangle the country exposure of the many fund constituents. This period is marked by uncertainty, but conviction can and does play a constructive role.
A diversified energy portfolio in oil and gas, with a mix of US-based production and progressive majors, and low-carbon energy and sustainable resource-based infrastructure is my optimal mix. This has been my mantra for many years now. In my portfolio, a slight increase in holdings – such as US natural gas-weighted producer Range Resources (RRC), added on February 24, and a select energy ETF (PXE) with major US oil producers in November – made sense. held trend lines.
As an attentive viewer of geopolitics and energy, I am affected by the developments. It gives food for thought. Nevertheless, investors must invest, players must play.