The last oil war?

Last week Chinese president Xi Jinping toted his updated Silk Road plans to the world. Thanks to a new age of international Chinese infrastructure investment, trade across Africa, Asia and Europe will flourish. Ports, airports and rail links will be revamped with Chinese money, allowing a seamless flow of goods and services across three continents.

The cracks are already appearing. Having reassured his partners from Timor-Leste to Slovenia that China’s trade policy relied on geopolitical harmony, Xi then went on to threaten one of them with outright war.

The Philippine president Rodrigo Duterte notified his Chinese counterpart of the country’s intent to drill for oil in a disputed part of the South China Sea. The Chinese response was pretty straightforward, although we are relying on Duterte’s version of events: “Well, if you force this, we’ll be forced to tell you the truth. We will go to war. We will fight you,” he claims Xi said.

This is a stark reminder that the peaceful and cooperative nature of capitalism can create the sort of wealth that governments go to war over. Especially when it comes to oil.

The Third Reich needed Romanian oil, the British and Americans have been meddling in the Middle East since it became the centre of the oil world, and war broke out in the Pacific after the American oil embargo on Japan.

These days, deep sea drilling has turned the world’s oceans into hot property. Claiming ownership of a wet rock in the middle of nowhere can generate billions in future tax revenue.

It may seem ridiculous to think an oil drilling dispute between Manila and Beijing could spark a major conflict. But it’s a far more plausible idea than you’d think.

Duterte is brash and audacious while Xi is pushing Chinese dominance over the region and must make an example of any upstarts. The Philippines considers itself protected by the US, so they’re willing to push the envelope.

And there’s no shortage of military build-up in the area thanks to North Korea, which launched another missile at the weekend. Not that anyone at last night’s family gathering and barbeque here in Japan seemed to care.

On the other hand, the Philippines has chalked up a huge amount of Chinese investment, including a great deal under the Belt and Road initiative. Perhaps Duterte is merely pitching for more attention from China and the US.

Either way, disputes over underwater oil fields will only get worse as technology improves our ability to get at that oil. Unless oil itself is replaced.

The last oil war?

Whatever happens to the oil in the South China Sea, there’s a deeper question facing us: what will the world fight over when we don’t need oil?

When the economy transitions to whatever technology replaces the combustion engine, we may no longer face the same types of resource uncertainty thanks to oil’s geopolitics. That could nullify the most important geopolitical risk factor of the last 100 years – who controls the world’s oil and the vital sea lanes it travels by.

Imagine a world without Opec’s stranglehold on the economy. Without Middle Eastern oil money funding arms, wars and terrorism. Without Iran’s threats over the Strait of Hormuz. Without Russian threats over eastern Europe’s gas supplies. Without pirates in Malacca or Somalia threatening oil flows.

Abandoning oil would douse many of the world’s tinder boxes, and spikes in energy costs could be a thing of the past. The economy and investing would be fundamentally different. The world would be a safer place.

One of the things you’ll notice about the potential replacements for oil is that they don’t present many geopolitical problems. Electricity generation and storage requires commodities that are far more evenly spread in far more stable countries. The sun shines everywhere (except the UK). Uranium, hydropower, tidal power and our many other options are not something anyone will go to war over. At least not for generating electricity.

Our potential energy futures are also far more easy for you to profit from than oil was 100 years ago. You can take a position in a solar company or take a punt on the future of Tesla’s electric cars at the click of a button.

But my friend Nick O’Connor has his eyes on a far better angle. He explains the details here.

If ending our dependence on oil changes the world into a far less risky place, what else will change?

The last great arms deal?

Will it be possible to justify large militaries in a world where we don’t need to protect our “foreign interests”? The British and American navies spend much of their time policing oil’s sea lanes and the oil world’s cashed-up troublemakers.

Without oil money and oil infrastructure, of what benefit will the West’s rule of the waves be? Far less. And so we’ll spend far less money on it.

Declining populations around the world will nullify another reason to spend vast amounts of our GDP on pointing guns at each other “just in case”.

Disarmament is just the sort of economic boost the world needs. But it will have winners and losers in the investing world.

Instead of reducing military spending, the world powers are selling arms at an alarming rate. The biggest arms deal ever was signed by Donald Trump and the Saudi Arabian government days ago. $110 billion in weapons plus two times that in other investments are expected to flow to the Arabian Peninsula when the details are finalised.

Perhaps a record arms deal is just the sort of signal you should be looking for to tell you the oil world has reached the height of its power and influence. From here on in the oil world’s power is in decline.

Are you part of the replacement?

Until next time,

Nick Hubble
Capital & Conflict

Category: Geopolitics

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