Geopolitics of the Clean Energy Transition

How metals and minerals will replace oil & gas as the world’s most valuable resources.

Why is the price of lithium soaring this year?

⛏️Why are the US Government backing a potentially highly polluting refining process in Texas and the Pentagon investigating so called biomining to secure supplies of rare earth metals?

📈Why is the demand for copper projected to rise rapidly in the next few decades?

The world economy is facing its biggest ever transformation as countries attempt to rapidly decarbonise in a bid to prevent runaway climate change. There will be a global energy transition from fossil fuels to renewable energy. This means solar and wind, but also hydrogen, geothermal and possibly nuclear all displacing oil, gas and coal.

Energy transition will bring in its wake huge shifts in geopolitical power. For many this transition will be painful. Many nations such as Saudi Arabia, Algeria and Norway will see the central pillar of their economy disappear along with it much of their power, influence and wealth. The countries that rapidly adopt new technology and adapt to this new world will emerge the winners.

Energy transition

⚡🛢️⛽Coal, oil, and natural gas remain the cornerstone of global energy. But change is happening, the global energy transition is well under way.

  • The falling cost and efficiency of wind and solar power, plus the emergence of other alternatives such hydrogen means that a clean energy future is possible.
  • Banks are turning away from fossil fuels as the long terms risks and costs become clear.

Energy transition means closing dirty coal fired power stations, refineries, and oil wells in favour of offshore wind farms, replacing petrol cars with electric and peppering roofs with solar panels.  

Of course this change will be slower than many would like. The transition will be a bumpy ride, but it does now feel inevitable.

Rather than relying on physical inputs of coal, gas, and oil renewable energy is technology based. Solar panels with silicone cells, ever more efficient wind turbines and electric batteries.

Tech Competition

🔋China leads the race in terms of electric batteries. In 2021, 148 of the world’s 200 lithium-ion battery megafactories in the pipeline are located in China. Whereas Europe and North America have only 21 and 11 megafactories in the pipeline.

Electric batteries and the components for wind and solar require metals and minerals, from lithium, copper, cobalt, nickel, manganese and a host of rare earth metals. As the world scales up its use of clean energy demand for these materials will rise rapidly. Demand for lithium is expected to rise 40 fold by 2040 as the global energy transition accelerates.

The world will move from an energy intensive world to a mineral intensive one.

This fundamental change has massive consequences for mining, energy and geopolitics. The world can go from harvesting and processing 13 billion tonnes of fossil fuels a year to mining 43 million tonnes of critical minerals.

Currently the production of these critical materials is focused in just a few countries. Cobalt mining is 60 – 70 percent concentrated in China and the Democratic Republic of Congo (DRC). China dominates the dirty, polluting rare earth metal refining sector (90 percent of the market).

Rare Earth Materials

🪙Realising China’s dominance in the rare earth metals sector represents a major strategic weakness, forcing the US to react. US Presidential Executive Orders and the recent US$ 1 trillion infrastructure bill have identified and attempted to rectify these supply chain weaknesses. The government recently pledged US$ 30 million towards a rare earth refining facility in Texas. Other measures are sure to follow.

Tensions over mineral rights have surfaced in Greenland and Brazil where US and Chinese interests have clashed over the supply of minerals.

Any country that dominates the supply of critical materials can if it chooses cut or restrict the supply of materials. This would cripple the green tech industries of any opponents or rivals.

Global Competition

🌏Overseas the US and western allies are looking to secure supplies of critical metals and minerals. Countries from Kazakhstan, Mongolia, to Tanzania, Zimbabwe and Malawi all have potential for mining rare earth minerals. The competition between the US and China means that any potential location will be carefully vetted as a future geopolitical flashpoint.

South America and Lithium

🌎South America is also a rich source of lithium. The metal is in demand thanks to its use in electric car batteries. Mining companies have flocked to the so-called lithium triangle of Chile, Bolivia, and Argentina to secure mineral rights in the region. Large and relatively easy to reach deposits made the region a hotspot for both western and Chinese firms.

However, South American nations are not passive hosts. Resource nationalism will always raise its head to thanks to the decades of accusations of exploitation aimed at US firms. As lithium rises in value governments will more tempted to take more control over such an important asset.

Despite being a relative newcomer China is the biggest trade partner for many countries in South America. Chinese firms will compete hard against US or Western interests for mineral resources, particularly those which feed critical industries back home.

King Copper

⚡Copper is also essential for the global energy transition. In order to meet decarbonisation targets the world needs to electrify rapidly. Plugging growing energy demand into a renewable powered grid can decarbonise power sectors rapidly. An easy win for green targets. Electrification also means heavy use of copper for wiring.

No surprise then that copper demand is expected to rise by over the next decades. Wood Mackenzie estimates this will take US$130 billion to provide another 6.5 million tonnes per year. Major copper producers are already predicted to see falling market share.

The race is on to locate new sources to match future demand. The problem is that mining is a very slow drawn out process. The planning and development of any mining project can take years or decades until anything is actually produced.

Metal Heads

Geographical concentration of production could put lithium and other metals in the hands of just a few producers. This will give the miners and refiners significant monopoly power, potentially allowing them to control the supply and price of critical materials. In turn this will push up the cost of global energy transition.

Another big problem of concentration is that any disruption through conflict, trade disputes and increasingly extreme weather events could disrupt the flow of metals to factories. Any disruption has a knock on effect delaying global energy transition.

Dirty Dangerous and Difficult

🌲Global energy transition is supposed to be environmentally friendly. Cutting out fossil fuels from the global energy mix will be decarbonise the sector, but what about other environmental factors? Unfortunately, mining is a notoriously polluting sector.

Monitoring and measuring the sustainability of supply chains and mines will come under ever greater scrutiny. The pollution and human cost of refining rare earth metals is one reason countries have not flocked to host these facilities. Inner Mongolia in China is host to huge toxic lakes full of black sludge, the by-products of rare earth metal refining.

Manufacturers of green tech do not want their credentials undermined by dirty polluting mines that abuse labour. This should put pressure on miners to clean up their act, but this could also push up the cost of extraction. However. these constraints will also spur innovation.

Recycling the electrical revolution

Recycling electric batteries, wind turbines and electrical goods has become an industry in itself as entrepreneurs try to salvage the most valuable parts of clean energy technology. An industry that is pushing sustainability does not want a dirty underbelly of waste.

At the same time demand for transition metals and minerals will push mining companies to look for new sources in different regions. This will lead to a hunt for metals and minerals that feed the energy transition that will be complicated by geopolitical competition.

Geopolitics of global energy transition

🌏The geopolitics of a mineral intense world will also look very different.

Firstly, marginal oil producers where production is expensive are likely to go out of business first when oil demand finally wanes. Places like Venezuela where the cost of production is high and the quality of oil low will be first to go and along with it any oil based geopolitical leverage.

Supply chain disruptions will not be severe as seesawing oil demand. A tight lithium supply will only impact building new electric batteries not existing vehicles. Oil requires near constant supplies to avoid disruption.

Shifting countries away from being petro-states will help them in the long run. Oil often poisons the politics of a country and creates a parasitic mono-economy.

Saudi Arabia and Gulf states will retain their power the longest. The cost of production in this region is much lower, so oil production can be sustained for longer.

What comes next?

What will replace the era of fossil fuel geopolitics. Countries that control the mining and refining of critical minerals such as lithium, cobalt and copper will gain newfound power in the energy transition. Rocketing demand and concentration of supply will create lots of talk about the “Saudi Arabia’s of lithium”.

The shift to a mineral intensive world will hand greater power to the countries and companies that can control the supply and processing of critical minerals and metals. The rest of the world will be keen to ensure that there are reliable supplies of critical materials to ensure a smooth transition.

Key Takeaways:

  • Demand for the raw materials that will build a climate economy: Copper, cobalt, lithium, graphite and rare earth metals will enjoy unprecedented demand over the coming decades. More solar panels, electric batteries and electrification means more mining for critical materials and less fossil fuels.
  • Mining is a dirty business. There will be major opportunities to help mining companies improve their environmental and social performance.
  • There is a risk that a lack of or the high cost of raw materials such as copper will stop the world from hitting decarbonisation targets. Copper projects can take years to become productive.
  • Demand for metals such as lithium combined with falling demand for oil and gas will shift global geopolitics. Lithium producers will enjoy greater bargaining power as China and western countries compete over supplies. Key oil producers such as the Gulf States will see their power grow in the medium term as marginal oil producers are forced out of business as demand falls.

The Fight for Blue Gold: Water and Geopolitical Risk

In June 2020 the Egyptian Minister of Foreign Affairs Sameh Shoukry warned the UN that Egypt faced an existential threat. That threat and regional geopolitical risk is the Ethiopian Renaissance Dam. The construction of the dam threatens to dramatically cut the flow of the Nile to Egypt.

Less water reaching Egypt will could ruin the livelihoods of its farmers and people. Cairo claims that the dam will inflict permanent damage to Egyptian society, but for Ethiopia it promises power to provide light and power for one of Africa’s most populous countries.

Egypt urged the UN Security Council to adopt a resolution that would give international backing to reach a compromise agreement. Ethiopia has rejected the resolution and announced the filling of the dam would begin in the next two weeks.

Egypt has hinted that a military solution could be used if an agreement is not reached. The gravity of the situation has been recognised by the USA, which is attempting to broker a deal between the two countries.

Resource Conflict and Geopolitical Risk

The dispute highlights how conflicts over resources can morph into geopolitical risks. Water wars have long been predicted by analysts. Conflict over water and other resources is as old as civilisation itself. Now the world’s freshwater supplies are under huge strain as rising populations and economic growth drink up ever more water.

Climate change will compound this problem. Rising temperatures will melt glaciers reducing the flow of water from many mountains, drying lakes and allowing sea water to salinate rivers. Control over water by itself may not cause conflict but may act as a catalyst. India and Pakistan are already have a frosty relationship. Disputes over water could put relations between the two into a deep freeze.

Melting Glaciers

Disappearing glaciers in the Himalayas will soon reduce the flow of mighty rivers like the Indus, Ganges and Brahmaputra making the Indian sub-continent one of the most exposed to drought.

Control over the remaining water in the Indus will make the battle around Kashmir where the river emerges more acute. Pakistan and India have been gone to war over the divided province three times and tensions remain high between the two nations.

Pakistan is highly dependent on the flow of the Indus for its agriculture and freshwater supplies. Any attempt by India to exert control over the water will face major resistance from its nuclear armed neighbour.

India recently completed the Kishanganga dam. This has led to an on-going dispute with Pakistan around the Indus River Treaty which has been handed to the World Bank to settle.

The Cradle of Civilisation

The Tigris-Euphrates river is called the cradle of civilisation as it is where the Sumerians and Akkians built some of the earliest recorded cities. Since then the river has been the lifeblood of many countries, cities and empires.

In more recent years the Turkish have built dams which control the flow of water to Iraq and Syria. If Turkey continues to take more water or drought reduces the river’s flow it could cut water flow to Iraqi and Syrian farmers and cities. If crops start failing and cities experience water shortages, Turkey could be the scapegoat.

Somalia and Syria

Internal conflict is another source for potential water wars. As the climate changes and regions used to plentiful rainfall find themselves dry and arid. Farmers and pastoralists are forced off the land it can lead to famine and social breakdown.

People forced to move into new areas often sparks new conflicts. Climate change is at least partly behind conflict in Syria. A long lasting drought in the country forced thousands into cities and new regions. This new poverty stricken population helped to spark protests against the government, which in turn transformed (combined with other factors) into a devastating civil war.

In Somalia a long lasting drought in many regions has hampered the recovery the country and pushed many into food insecurity. Economic uncertainty is a fertile breeding ground for the terrorists, pirates and militants that have plagued the country.

Even developed regions will not be immune to water conflict. Last year Cape Town came close to running out of water after years of low rainfall and rising demand for water for agriculture and domestic use.

Where are the Solutions?

As fresh water faces multiple threats, pollution, climate change and overuse, are there any solutions to a growing crisis? Firstly: humans can be pushed to use less water through efficiency measures and improved infrastructure such as fixing leaky pipes.

Secondly: desalination is currently an expensive option for the energy rich. But there is hope that new techniques can make it a viable and economical option in the future.

Thirdly: its hoped that scarcity will force humans to be more careful with water and treat as a valuable commodity. However, billions of people already experience water scarcity in the present day.

So in the future it is likely that the middle classes will continue to ensure good access to water. While those on the margins will continue to suffer from climate change driven water shortages.

The Geopolitics of Renewable Energy

The freezing tundra and glaciers of Greenland have become host to a new geopolitical struggle. China has stepped up its interest in the island through Chinese firm Shenghe Resources share in the Kvanefjed mining project in the south of the country.

President Trump reportedly took an interest in buying the island from Denmark (which controls Greenland’s foreign relations) last year but was firmly rebuffed. However the US has made it clear to Denmark that China should be kept out of Greenland.

In 2018 China wanted to invest in an abandoned US naval base called Grønnedal in Greenland. Copenhagen was quickly warned off any such deal by Washington. Now the US is stepping up investment in Greenland in an attempt to build more influence in the region.

Rare Earth Metals

Greenland and the Kvanefjed mine is home to rare earth metals which are used to build mobile phones, tech and batteries. Access to these metals is a key part of modern manufacturing. As a result China has tried to corner the market in rare earth metals to gain leverage over its rivals. This market is what led China to Greenland and the Kvanefjed mine.

For its part US is trying to prevent this by prioritising the supply of rare earth metals through a strategic stockpile. This battle may become more common place as renewables and the batteries that store their energy overnight become more commonplace.

Much of the globe is still addicted to oil but renewable technology has cut into the energy market. Renewables offer the promise of clean energy and a chance to avoid the messy geopolitical risks of the Middle East.

A Changing World

Right now the world stands on the edge of great change. A dramatic fall in cost of renewable energy has made them truly competitive with fossil fuels. This change has been driven by ever more efficient solar and wind technologies, as well as government policies to encourage their use.

At the same time industrial scale electric batteries are becoming a reality. Successful large scale battery use solves the issue of energy storage which is a major constraint on renewables. Despite these advances fossil fuels have retained their grip on world energy output until now.

“Coal consumption will be crushed in 2020”

Benjamin Nelson – Moodys

The Covid crisis crushed demand for energy, pushing down the price of oil and coal as a result.

Covid-19 has sparked many geopolitical risks, but threatening the future of coal was perhaps a surprise. Moody’s predict that coal demand in the US is set to fall 50% in 2020 devastating the industry.

Already under pressure from renewable energy and policy initiatives like the Paris Agreement and the Task Force on Climate Related Financial Disclosures TCFD. These changes have been encouraged by many businesses. The Coal industry will struggle to recover from these double blows. The oil industry could be next.

The Dawn of the Renewable Age?

The rise of renewable technology will also have a major impact on world politics. The oil and geopolitical risk has been a constant theme of the 20th century. Oil drove European Powers to dominate the Middle East and other parts of the world.

Many oil rich states have experienced years of war and conflict thanks to the wealth and influence that oil represents.

The Curse of Oil

Oil wealth has often primarily enriched elites, particularly in poorly governed countries such as Nigeria and Equatorial Guinea. These same nations have often become dependent on oil, unable or unwilling to diversify.

This dependency has stifled their economies and created conflict within and between countries as factions vie for control of a valuable resource.

If you take oil out of the equation then these nations will be forced to adopt new economic models. This could be painful for the elites but may result in more balanced, less corrupt governments.

The Renewable Political Revolution?

But what happens when you take oil out of the equation. The world will look very different as the advent of renewable energy transforms the geopolitical landscape in new and unpredictable ways.

Of course renewable technology does require some resources. Lithium and other rare metals are key components in electric car batteries. If these continue to replace combustion engines as then the supply of these metals will become an important political and economic consideration the same way the supply and production of oil is today.

Metal Super-powers?

While China is currently the world’s biggest producer of lithium and the largest electric vehicle battery maker. Countries like Bolivia and Chile are also major producers of the metal. Could this make Bolivia the future Saudi Arabia’s of electric batteries, the world dependent on their supplies of the metal?

Maybe, but it is also likely that as demand for lithium and other metals rise so will the search for, discovery and mining of these resources. Eventually diversifying the global supply of the metal.

The other wild card is an environmentally friendly one, the potential for recycling these metals is yet largely untapped. Apple has committed to using only recycled lithium in the future.

This trend could continue as demand rises and concerns about the effect of lithium mining and the damage caused by discarded batteries increases. All this could yet ruin Bolivia’s dream of becoming a lithium powerhouse.

The Fall of the Fossil fuel producers

As reality bites the producers of oil, coal and even gas could suffer new crises. Already prone to political instability the authority of the House of Saud, the Gulf monarchies and many African dictators could crumble. If they see their main source of revenue dry up and with it their ability to support key institutions like the military, as well continue the patronage of the political elites that support them.

This time may come sooner than people realise. Even if fossil fuels remain dominant for a long time but renewables look more favourable in the longer term. Companies will realise that the oil and coal reserves have a fast declining long term value and could soon become stranded assets.

Producers may also rationally try to cut production and increase prices to order to gain higher revenues in the short term. However, this would of course make renewables look more attractive. These oil dependent nations benefit from a shift to solar and wind energy.

Many Gulf countries can become solar power giants in their own right. The move away from resource dependency will create more diverse economies and perhaps even transform their political climates for the better.

Technology Rules

Renewables are fundamentally different from fossil fuels in that first and foremost they are technology based. While renewables may depend on the wind and sunlight they do not require the movement of enormous tankers of gas and coal from a mine, or oil from a well.

Instead what matters is which country can manufacture the most efficient and cost effective solar modules and wind turbines. This means that the quality of intellectual property, patents and production centres will determine the winners of the renewable age.

Right now European countries arguably have an edge on solar and turbine technology and the race to build batteries for cars, homes and the grid continues.

Of course that is not the only part of the story, countries can easily buy renewable energy components and set up a network based on overseas technology. But many like Turkey and Brazil feel that this would place them at a long term disadvantage.

Renewable Protectionism

To help overcome this technology gap certain countries have enacted laws which determine that a certain percentage of renewable energy installations have to be built with domestic panels or turbines. The idea being that this will help create local production centres, even if it means increasing the construction costs of renewable installations in the short run.

This has already led to conflicts as countries like the USA seek to restrict cheap Chinese solar module imports to in order to protect its own manufacturers. However, for producers and users of energy, cheap Chinese imports are preferable as they keep capital costs lower.

The Looming Threat of Climate Change

Perhaps the most important geopolitical impact of renewables is if and how quickly they replace fossil fuels. The sooner this happens the more likely catastrophic climate change will be prevented.

Climate change is the most dangerous long term geopolitical risk facing the world. Widely predicted is mass crop failure, water shortages, uninhabitable cities and extreme weather. This new world will certaintly lead to mass migration and widespread conflict and will throw the geo-political framework we know and understand now into chaos.

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