The global economy: pragmatism rules
Russia’s rapid isolation from many of the world’s major economies is hugely disruptive. But Russia will not become a pariah - its ample natural resources preclude this. However, no economy faces a greater challenge when it comes to substituting imports and diverting exports.
Asia will be key, but Russia may find avenues closed as some prefer not to swim against the current of much of the global economy. Pragmatism rules: the G7 plus remaining EU accounted for 42% and 38% of China’s and India’s exports, respectively, in 2021. China will put its own interests ahead of its ‘no limits’ friendship with Russia, while India walks the line between courtship by the west and historical ties with Russia.
This isn’t the end of globalisation, but it is a structural shift as global trade becomes more regionalised and increasingly defined by politically aligned trading blocs. And while some stand to gain from import substitution, most notably Southeast Asia, Africa and South America, the net economic impact is negative. Wood Mackenzie estimates that a cumulative US$9.3 trillion could be wiped off global GDP by 2030.
Russia’s war on Ukraine has reshaped the commodities world and catapulted energy security to the top of the global political agenda. Energy trade flows are being transformed, investment in new LNG supply looks more compelling and the pace and cost of the energy transition is changing. Governments, companies and investors must respond.
Governments - Countries with domestic hydrocarbon and critical mineral resources will need a twin-track approach: maximising production of their resources in the short term while stepping up investment in low-carbon energy supply to meet future demand in the long term. The huge challenges facing global supply chains can only be resolved by governments supporting strategic investments to overcome bottlenecks.
Investors - Investment opportunities are widening. Energy transition investments will be more expensive, but higher commodity and power prices mean they remain competitive. European wind and solar looks a solid bet. Energy security priorities will ensure returns remain attractive for hydrocarbons and, increasingly, critical infrastructure. US LNG looks the most attractive option, capable of being delivered to market quickly and with limited capital exposure. However, the era of mega oil and gas projects is not coming back.
Companies - Hydrocarbons will be tremendous money spinners for some time to come. We continue to see attractive opportunities for low-cost, low-carbon supply of oil and gas from the national oil companies (NOCs). But large-scale investment by IOCs in traditional oil and gas projects, as well as international miners in coal projects, will be increasingly displaced by growing investment in low-carbon energy projects. High and volatile prices will require a renewed focus on trading capabilities and fungible assets. Metals could be the next growth areas for cash-rich IOCs.
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