A New Map of Global Energy*

Just before Covid 19 hit the USA in February 2020, US oil production hit an all-time high of 13 million barrels a day, more than Saudi Arabia or Russia, and triple the level of 2008.  This single statistic illustrates how global geopolitics has been upended by a dramatic and rapid shift in the oil industry, and reduced the importance of the Middle East.  In his new book, Daniel Yergin brilliantly analyzes the impact of the new global energy “map” on the USA, Russia, China, and the Middle East, with additional chapters on climate change and electric cars.  It is clear that the outcome of the US Presidential Election, on November 3rd, will be particularly important for the oil and gas industry, since Biden has embraced the “Green New Deal” program of the more radical Democrats. 

China is, of course, our special focus in these monthly letters, given its economic and market importance.  China also represents, today, almost 25% of world energy consumption, including coal, which is 60% of its total energy, compared to 11% in the USA.   China, today, is the biggest consumer for oil flowing out of the Persian Gulf, and through the South China Sea – hence, the importance to China of the “9 Dash Map,” and their historic claims to the Spratly and Paracel Islands, which (illustrated with Map overleaf) they have now militarized – a claim that is rejected by the US, Vietnam, Philippines, Malaysia (and the World Court in the Hague).

Source: The New Map: energy, climate and the clash of nations.  David Yergin

In Chart 2, showing emissions by country, it is clear that China, with nearly 30% of global CO2 emissions, is, by far, the worst pollutant on the planet, double the USA, almost 3 times the EU, and 4 times India.  The “Green New Deal” in the USA, and Ursula von der Leyen’s plan for “zero carbon” Europe by 2050, will make very little difference, unless China does something radical.   (At the UN on September 22, Xi JinPing said China would try to achieve “zero carbon” by 2060.)

Source: The New Map: energy, climate and the clash of nations.  David Yergin

About half the electric vehicles sold worldwide are in China; but, in Chart 3 one can see that cars only represent 11% of emissions, compared with electricity and heat at 42%; and electric vehicles increase the demand for (often coal-generated) electricity.  Electric cars are not the end of the oil era.   China is also aiming at 250 airports by 2030, and already has over 25,000 km. of railways, and 130,000 km. of highways.  Through the “One Belt One Road” strategy, China is exporting massive energy-intensive projects to countries like Pakistan.  Electricity demand is growing 8% p.a. in China (it is flat in US and EU), and air pollution is still a massive problem.

Source: The New Map: energy, climate and the clash of nations.  David Yergin

In relative Terms, China has had a good pandemic, which has accelerated the shift in the economic balance away from the west and towards Asia.  China’s economy will be the only major one to record +3% growth in 2020, whereas, for instance, Spain (-20%) and India (-15%) have contracted sharply.  China has, moreover, not employed massive government money printing, or direct subsidies to the unemployed, as Europe and the US have done.  China’s export share has grown, with a strong balance of payments, and a strengthening Renminbi.  Since Trump was elected in 2016, China’s trade surplus with the USA has grown 25%.

This means that China’s economy will reach almost $12 Trillion this year, or 70% of the USA, and is likely to reach parity by 2028.  But this optimistic scenario may depend on how successfully China navigates a world trade slowdown, a large domestic debt rescheduling, and an increased dependence on the Chinese consumer.

The major theme of 2020 has been the “Return of the Stock Picker,” instead of ETFs and index funds, which have prevailed since 2009.  With a month to go until the US Presidential Election, investors are busy hedging their bets.  The US dollar remains weak, with corresponding strength in precious metals.  Asian markets are out-performing.  Their economies are in healthier condition than Europe or the USA.  Led by China, they are coming out of the virus lockdown, and resuming normal business.  In our regional Asian strategy, which has gained 22% year-to-date, we have our major overweight in China, Taiwan, and Korea (72% of the Fund) with a focus on technology and healthcare.

This month, we must focus on Japan, in which Prime Minister Abe stepped down after nearly a decade in the job, to be succeeded by Mr. Suga.  The challenge for Japan’s leaders remains the same — a declining population, and a rising China.  Japan’s population is shrinking rapidly, from 127 million in 2014, to less than 100 million by 2050 (or 25% in 30 years).  Deflation has gripped the Japanese economy since 1990, though the Bank of Japan has cut rates below zero, and purchased most of the JGBs (Japanese Government Bonds), or $760 bn. p.a., so that Bank of Japan now owns nearly 50% of the country’s outstanding debt.  The Central Bank has also bought a large amount of Japanese shares, so that its balance sheet is now larger than Japan’s GDP.  Is this the future of Western economies?  Could the Bank of Japan, or Government of Japan, simply cancel half their outstanding debt and, thus, recover the stimulus of economic growth from under a mountain of debt (250% of GDP).  In the meantime, it is not only Warren Buffett who has spotted “value” in Japan’s old established “Zaibatsu” or trading companies, such as Mitsui, Mitsubishi, and Sumitomo.  Japan’s dividend payouts are rising, as are share buy backs:  there is a real bargain for investors in this forgotten market, and, indeed, in the Yen.

In 2021, the world will benefit far less than in 2009 from China’s recovery, as the country turns inward for the first time since the 1970s.  Another familiar echo of that decade may be the return of inflation.  Despite the dramatic pivot by Jerome Powell at Jackson Hole in August, towards lower rates for longer (and 2.5% inflation), the market may look further than the Central Bank (The bank of England is now openly contemplating negative interest rates on gilts).  Volatility will become more pronounced in all asset classes in the face of this uncertainty about the dollar, and about interest rates.

The Supreme Court has suddenly been thrust into this highly charged election, with the death of the much respected Ruth Bader Ginsburg.  At this stage, it is impossible to predict, first, whether the Republicans can force through a new Superior Court Justice in the next 2 months, or what effect this will have on what is expected to be a close, and perhaps, contested US Presidential election.

Source: IMF World Economic Outlook, June 2020 Update

We remain positive on the outlook for Asia in 2021, when we see a strong recovery from the virus-dominated economy of 2020.

*(Review of David Yergin’s new book, The New Map)

Hong Kong

1 October 2020