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.
