Upheaval of geopolitical tectonic plates

Date: 13 October, 2022 - Blog

Sino-American tensions were very high with Donald Trump, but the Covid, then the Russian invasion of Ukraine, definitively and permanently pushed aside the geopolitical tectonic plates. At least, we begin to perceive who is where. We have, for the moment, 3 separate plates: those of the Westerners and those of the aligned against the West, China, Russia, Iran and North Korea mainly.

Then, there is a third plate on which are countries, such as Turkey and India, which only manage their own interest. India signed a major military order with Russia after telling Vladimir Putin not to go to war. India buys Russian oil, whereas these imports of Russian energies were close to zero before the war, but India needs the United States in other fields, technological in particular. Turkey discusses with Russia, because their commercial relations are intense, but it delivers drones to the Ukrainian army. The Turkish priority is the regrouping of Kurdistan, split between Turkey, Syria and Iraq. Iraq is the new space for the deployment of the Turkish power. Turkey still views northern Iraq as lost territory and Iraq is a springboard for Ankara to relaunch its power ambitions in the Middle East and compete with Iran.

On this 3rd tectonic plate, there is also Saudi Arabia, which surprised by pushing for a reduction in oil production of 2 million barrels/day within OPEC+, far beyond what was expected. The United States tried to persuade Saudi Arabia, but its response was a reduction far beyond the expected 1 million bpd. This move now confirms the Saudi geopolitical position: it is detaching itself from the United States. The first justification for this reduction was the anticipation of a recession and a sharp reduction in demand. In fact, the reduction is purely (geo)political. Saudi Arabia has backtracked on Western plans to cap the price of Russian oil and European plans to cap the price of imported gas. The great fear of the Saudis is that a cartel of buyers will work; in this case, world energy prices would fall. The talk of a buyers’ cartel has been an alarm for OPEC+ to see wealthy Western countries taking control of the oil market. The message is clear: OPEC+ will never allow a buying cartel to be created to drive down prices.

Europe is not in a strong position

It accounts for only 14% of global oil demand.

Russia has geopoliticized its gas to Europe. Saudi Arabia seems to want to geopoliticize its oil. Saudi Arabia depended on American military support and decided to free itself from it in order to consider only its commercial and geopolitical interests. Joe Biden had called Saudi Arabia a “pariah” state following the assassination of journalist Jamal Khashoggi and the United States has never come to the aid of the Saudis in their regional conflict against Yemen despite their request or to strengthen their security vis-à-vis Iran. The White House has said Saudi Arabia is aligning itself with Russia.

Saudi Arabia needs a high and stable oil price to finance its colossal $500 billion Neom project. A futuristic megacity on the Red Sea 170 kilometers long, called The Line, which should see the light of day in 2030 and which will host the Asian Winter Games 2029 in the “winter” resort of Trojena. A huge industrial city, Oxagon, and a port are also planned.

This collision between the West and Saudi Arabia was predictable because of the divergent interests related to the climate emergency. The war in Ukraine made it real. We have entered a new world for the control of oil, gas and soon industrial metals, used for energy transition, planetary rearmament and the reindustrialization of Western countries. This argues for a Commodity Supercycle. In a multipolar and unstable world where everyone’s interests will dominate, energy, food and critical metals security will be an absolute priority. Producing countries will tend to hold back and, aware of their importance, they will be able to “play” with their dominant position by asking for higher prices, with voluntary under-capacity of production.

In the medium term, price tensions, shortages and the management of national interests alone could cause cracks within the Western alliance. The tired people are turning to conservative and nationalist right parties which are growing stronger in the United States and in Europe (Italy, Sweden, France, Spain).

  • Geopolitical tectonic plates are moving strongly
  • Energy, industrial and agricultural metals prices are in a Supercycle, with temporary cyclical weakness
  • Combined with energy transition and rearmament, the Saudi Neom project could cause disruptions in industrial metals
  • Europe does not seem the best equipped to deal with such upheavals. But will it strenghten with these major challenges?
  • Reindustrialization, energy transition, the costs of climate change and rearmament will be expensive. Who will pay in Western countries?