WPC: Challenging geopolitical trends heighten the year of elections

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Challenging geopolitical and energy transition dynamics take over the market outlook for 2024 at the World Petrochemical Conference by S&P Global held in Houston, Texas. As the world economies level out from the post-COVID-19 surge, it appears there will be enough runway for soft landings across the map, just in time for a massive year of elections in 2024.

With nearly half the world partaking in an election — over 70 countries — progress toward the energy transition, curbing climate change and stabilizing geopolitical relationships could be caught in a logjam, S&P Global Commodity Insights leaders said during the opening session of WPC’s executive conference on March 20.

Year of elections
Most eyes will be on the US election in November, Carlos Pascual, S&P Global Commodity Insights’ senior vice president, geopolitics and international affairs, said. "The number one geopolitical risk around the world right now is what will happen in the US elections," Pascual said. "The entire spectrum of American politics and economics has become polarized, even foreign policy issues, which at one time were considered sacrosanct in the US, such as supporting Ukraine or NATO."

Pascual points to the COP29, running from Nov. 11 to Nov. 24 in Baku, Azerbaijan, as being an open question based on US elections. One of former President Trump’s first actions as president was to pull the US out of the Paris Agreement. "Imagine the task of negotiators who are seeking greater commitments from countries at a point in time when they don't know who the US president might be," Pascual said.

The Biden administration’s Inflation Reduction Act (IRA) has heralded an investment boom in the energy transition and across the US. The expectation is that no matter who ends up in the White House on Nov. 5, most of the IRA will remain resilient, as the biggest benefactors of the legislation are typically red or swing states. Coupled with the Bipartisan Infrastructure Law, a foundation for a bipartisan look at a new energy economy is surfacing.

Another major bipartisan issue in the US continues to be China-US relations, especially with the latest pressure from mainland China toward Taiwan. "The issue is not whether there will be a reunification of China and Taiwan, but when," Pascual said. He pointed toward China’s import reliance on Taiwan for 90% of its semiconductors as a major sticking point, as semiconductors are needed to develop the more recent megatrends in AI and supercomputing. "Talks between the two countries’ presidents last November wanted to stabilize the relationship, but it is not stable. And the tension that exists in the US for [this year’s] electoral process, will continue to threaten that relationship," Pascual said.

The next few years are going to be important, especially in the US-China joust for technology and leadership and how that will pertain to the energy transition. "[Out of this] there are going to be geopolitical shocks that we have to prepare for, especially in the stability of today’s energy economy supply. … We’re going to be seeing a shifting in our supply chains. There’s going to be greater [resource] nationalism," Pascual said.

An uneven soft landing
On the economics end, the expectation for 2024 is a soft landing for most of the big economies, except Germany, which looks to face a "borderline" recession, Paul Gruenwald, S&P Global Ratings’ global chief economist, said. "If the labor markets hold up, we think it’s going to be a softish landing. That doesn’t mean no adjustment, it just means the adjustment will take place over a longer period."

The US economy, Gruenwald said, "is almost defying gravity." Of all its Western peers, the US GDP is the only one to have continued accelerating from 2022 to 2023, and Gruenwald expects it to grow 2.4% in 2024, nearly double the growth across the eurozone and behind only China’s 4.6% growth rate and India’s 6.4%. Gruenwald points to the US’ geographical separation from the two ongoing wars and its fuel and food price turbulence, as well as having more "fiscal juice," as reasons for the country’s economic overperformance.

The IRA continues to be a big windfall for the country. "It’s been a big tailwind for US investment, US new firm formation and US productivity. We’re not seeing [these] anywhere else in the world. If your productivity is going up, that means your pie is getting bigger," Gruenwald said. However, Gruenwald warned that the US is in a "classic overheating scenario."

Elsewhere, the eurozone seems to have stalled, even if geopolitical risks to its growth have not materialized as significant as feared. China’s growth out of the COVID-19 pandemic continues to be slow, and Gruenwald finds that "India will be taking the growth baton from China," as it is expected to have GDP growth rates of about 7% for the rest of the decade. "[India’s] secret sauce is private investment. Confidence is high … [India] is in a good geopolitical spot and they are building out not just services but manufacturing infrastructure. The stars are all aligning for India."

Inflationary pressures continue to lessen, Gruenwald said, after the peak in late 2022, with Europe looking to have bottomed out already. Core inflation remains above target, and a drop in US inflation from 3% to 2% will be tough to achieve if the economy remains hot.

The US dollar also looks to remain strong, which may present risk for the rest of the world as it will steer financing flows away from emerging markets. As always, Gruenwald said, escalation from the two ongoing wars opens the door for potential bigger risks in the macroeconomic forecast.

Energy transition logjam
Coming out of the COVID-19 pandemic and into a geopolitical entanglement of the Russia-Ukraine war has stagnated energy transition progress over the last two years. The optimistic ideology that followed global environmental events in 2021 has turned into bitter pragmatism, Atul Arya, S&P Global Commodity Insights’ senior vice president and chief energy strategist, said.

"China’s net zero goal is 2060, India targets 2070, and Indonesia’s is 2060. So how do we have a global 2050 target? That’s just not realistic. … The 1.5-degree temperature goal, we’re going to surpass that. That’s the reality."

Costs to complete the energy transition total more than $275 trillion, a number that will continue to balloon as 80% of the world is still developing their economies. "You can’t tell 80% of the population that you can’t consume more energy," Arya said, "Economic growth will always be priority number one." For these countries, coal is still king. "[N]o single fuel has ever been retired in the history of energy. And coal’s journey toward retirement will be very long and very difficult."

Energy security continues to be paramount, especially during the ongoing Russia-Ukraine conflict, and that too may hinder the renewable energy timeline. "The world has to carbonize to decarbonize."

But Arya noted there is some good news as renewable adoption continues to grow. Solar photovoltaic (PV), wind and electrolyzers grew 85%, 60% and over 300%, respectively, from 2022 to 2023. "Renewables are growing around the world, and they are good for ‘all seasons,’" Arya said.

And while the ambitious net-zero goals of 2050 may not be attainable, the technology to deliver emission reductions is already here. In the near term the focus is on coal-to-gas switching and renewable deployments. After 2030, carbon capture and storage (CCUS) is going to scale up to billions of metric tons to help decarbonize steel, cement and chemical industries; however, current capacity needs to scale up by at least 150 times by 2050 to reach net-zero targets. Electrification and low-carbon hydrogen are also in the mix of technologies in the medium- and long-term plan for decarbonization.

Energy transition is a complex and layered issue, and the way forward is only possible, Arya added, with good, strong policy such as the US IRA, which has been a stimulus for US growth and a target for foreign investment in the US. "There’s good policy and bad policy, and we need a lot of good policy to accelerate the transition. This will be a big challenge as the political cycle in most countries is very short."

Oil in a steady state
Since 2013, the crude oil supply has been firmly in a surplus, with prices per barrel dropping from over $120 in 2012 to about $80 per barrel in 2022. The surplus has been mainly driven by the strength of shale in the US, and even the two ongoing wars — Russian’s invasion of Ukraine and the Israel-Hamas conflict — have only caused temporary increases in barrel costs.

Jim Burkhard, S&P Global Commodity Insights’ vice president and head of research for oil markets, energy and mobility, expects the surplus to continue to at least 2026. Looking ahead, supply growth in Russia and Saudi Arabia is expected to stagnate through 2024 and 2025, with North American supply forecast to grow by 1 million b/d for 2024 and 800,000 b/d in 2025.

"Relative to demand growth, all the supply growth for 2024 will come from sources outside of OPEC+. And demand growth isn’t weak, although it is decelerating," Burkhard said. And while most of the supply growth will come from North America, West Africa will add an additional 250,000 b/d in growth for 2024.

As for the advent of electric vehicles (EVs), especially in China, cutting into oil demand, Burkhard estimates that today EVs have lowered oil demand by nearly 1 million b/d, and by 2030, EVs will lower demand by between 3 million and 4 million b/d. "Demand for oil won’t drop [because of EVs] but it just won’t go up as much as it otherwise would; it’s starting to have a discernible impact."

This article was first published in chemweek.com.

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