SSGA: Geopolitics of Energy Transition Remains Fraught

SSGA: Geopolitics of Energy Transition Remains Fraught

June 28, 2023

Energy Transition
Olie Grondstoffen

A structural shortfall in oil supply awaits us unless the energy transition is accelerated so that global oil demand does not outpace supply.

The warning comes from Simona Mocuta, Chief Economist of State Street Global Advisors. This acceleration requires ‘a continued expansion of renewable energy capacity, which is itself tied to a limited set of natural resource inputs. An evaluation by the US Department of Energy found that 55% of the top 22 metals are viewed as both very important to the future energy complex as well as highly vulnerable to supply disruption.

The simplistic geopolitical conclusion would be that areas with large deposits of these metals and minerals are likely to face increased tensions as the respective power blocs wrestle over control or access.’ However, Mocuta emphasizes that this analysis might be oversimplified as it ignores the following points:

‘We do not know the actual elasticity of supply for many of these materials. Until recently, they were relatively niche and did not attract large capital. This is rapidly changing, and numerous new deposits are being discovered across the metals landscape.’

Geopolitical troubles more a feature of fossil

‘Even those that face genuine low supply elasticity may not maintain the criticality in energy they carry today. In plain English, oil is oil, but batteries are not batteries. The latter have substitutability, e.g., switching from Lithium-Ion to Nickel-Cobalt if the economics in one no longer work.

The big lesson from the shale revolution is that the current assessment is based on 2023 technology. There is enormous R&D across the renewables sector, which is likely to fuel – pun intended – both gains in supply capacity as well as demand, by optimizing usage of these metals. The magnitude of this innovation is unknown, but the direction is clearly toward less dependency than currently imagined.

The good news is that geopolitical troubles will remain a feature of fossil fuels more than post-fossil energy. But none of this is to say that this will be cheap. It will not. The energy transition will lift the floor on fossil fuels and the various supply squeezes in key metals will episodically push inflation for renewable inputs. This will find expression in structurally higher commodity prices, though beware the traps of metals most exposed to substitutability. And finally, fundamental analysts will do well to identify the growth assets positioned to capture future innovation.’

 

 

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