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By Liam Denning (Bloomberg Opinion) — One pocket-sized symbol of globalization is the iPhone; that California-by-way-of-China apotheosis of ocean-spanning supply chains. Alternatively, there’s the 41,000-tonne USS Kearsarge, an amphibious assault ship currently deployed in the U.S. Navy’s Fifth-Fleet area, which takes in such tourist traps as the Strait of Hormuz and the waters off Yemen and the Horn of Africa.

Oil is the original global supply chain, exemplifying the free-trade arrangement struck at the end of World War II and backed by American naval muscle. Oil powers trade, relies on that trade, and straddles trade’s economic and geopolitical aspects.

Yet, as I wrote here, that essential element of U.S. sponsorship is now in doubt. Almost 50 years after President Richard Nixon began drawing China into the global system, the current U.S. administration is engaged in skirmishes with Beijing that threaten all-out trade war. The longstanding trend of ever-increasing globalization underpinned by U.S. engagement appears to have stalled. Secretary of State Mike Pompeo’s speech at a recent energy conference in Houston suggests we have entered an era of freedom fracks.

Denning: Winners and Losers From a Sea Change in Oil

It just so happens BP Plc inserted a “less globalization” scenario into the latest edition of the oil major’s annual long-term Energy Outlook. This outcome leads to lower projected energy consumption overall, as economic growth suffers.

More than two-thirds of the oil consumed today crosses borders, with roughly half shipped on tankers. It is highly unlikely global oil demand would have increased 10-fold in the past seven decades absent the Pax Americana. Without it, energy-security concerns intensify and the risk premium on traded energy rises.

The effect is particularly pronounced for natural gas, where market-share gains and the boom in liquefied cargoes should otherwise continue boosting that trade. Under the “less globalization” scenario, gas demand in 2040 would be lower than in BP’s central projection by about 33 billion cubic feet per day. That’s not only double the entire current demand of South America. It’s actually a slightly bigger bite than under BP’s “rapid transition” scenario, whereby carbon emissions, and therefore fossil-fuel demand, are cut more rapidly.

This makes sense, as natural gas should eat into coal’s market share, although the extent to which that happens remains very much up for debate. Under BP’s central projection, China accounts for roughly a quarter of the increase in natural gas demand by 2040, the biggest share of any country, and that leads to the biggest projected drop in coal consumption of any country.

Denning: Just How Big Is Oil’s Invisible Friend, Natural Gas?

Yet almost half that extra gas is expected to consist of imports. Liquefied natural gas, or LNG, cargoes struggle to compete with coal in Asia on price alone, with air-quality mandates playing an important role. A risk-premium associated with supply security wouldn’t help. Speaking at that same industry conference where Pompeo boasted about America’s energy-export leverage, a vice president at China National Petroleum Corporation made it clear that mitigating reliance on energy imports is top of mind in Beijing.

This complicates things for LNG developers. U.S. export projects account for more than a third of “high potential” new capacity — plants more likely to go ahead by 2030 — according to a recent analysis by the Boston Consulting Group’s Center for Energy Impact. Such projects look necessary not merely to help clear the glut of U.S. natural gas, but also to address a potential global supply deficit emerging in the 2020s.

On the flip-side, renewable energy appears more resistant to trade tiffs in BP’s scenario, with a marginal increase in consumption versus the base case. This isn’t surprising, as a risk premium on traded fuels is bound to favor domestically produced energy (notice hydropower and nuclear power also barely move). It also makes sense from a strategic point of view, as domestically “manufactured” energy can’t be cut off by hostile or unstable suppliers. China has as much incentive to invest in renewable technology, batteries and electric vehicles as it has in aircraft carriers.

Denning: Will Oil Majors Actually Sink Money Into America’s Waters?

U.S. tariffs on imported solar-power equipment appear to have slowed installations but, as expected, haven’t derailed them. Yet it’s worth remembering the crash in solar-power costs that has spurred the boom in deployment is largely a result of Chinese manufacturers targeting subsidized markets such as Germany’s. Trade made that boom happen.

We may be far enough down the curve on solar-equipment costs that even a trade spat wouldn’t stop the trend, but that’s just one dimension here. Renewable energy and storage technologies have their own supply chains and critical minerals, with concerns about the Democratic Republic of Congo’s cobalt mines and Chinese acquisitions of lithium resources early signs of a new arena for geopolitical rivalry taking shape. Meanwhile, further cost reductions are needed to make batteries and electric vehicles competitive. China looks like the ballgame when it comes to that. But trade barriers hampering the diffusion of technology and export opportunities for the country’s manufacturers could chill progress, especially if economic growth slowed in tandem.

If renewable-energy advocates shouldn’t be complacent about trade disruptions, however, it’s the old-school oil refiners that look especially vulnerable.

Denning: China’s Gas Tariffs Are a Permian-Size Problem

As it stands, BP’s central projection has demand for oil rising by about 10 million barrels a day between 2017 and 2040. Leave aside that this figure is exposed to a broad range of technological or policy-driven disruption. Of that growth, 70 percent relates to lighter products such as liquefied petroleum gas or other non-refined liquids such as biofuels. Only around 3 million a day relates to output from refineries. And that is dwarfed by an anticipated 9 million barrels a day of new refining capacity due to switch on by 2023, much of it Chinese, Indian and Middle Eastern plants geared toward exports. Good luck making your money back on those in a world of trade restrictions and subdued growth, unless vast swaths of the industry close down elsewhere (which is unlikely if trade barriers go up).

The energy transition will prove disruptive to incumbents as it is. That this coincides with a transition in the broader world order multiplies the risks for all involved.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.

© 2019 Bloomberg L.P

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