State of Geopolitics

Beyond 2040, estimates are wider ranging on whether energy demand will plateau or continue to grow. Some believe that global energy demand will flatten due to increased energy efficiency, growth in electrification, 8 , 9 pervasiveness of renewables, advancements in battery technology, and potential for ace disruptors. Others believe that energy demand will continue to increase due to the growth of the middle class in developing countries, the power demands of a more technologically advanced world, and to meeting the consequences of climate change. However, there is consensus that demand for carbon-based energy sources will have peaked and will begin a trajectory of decline. 10 , 11

In the long term, oil and coal prices are expected to decrease relative to other energy sources. They will be replaced by natural gas and renewable energy production which will reduce CO2 outputs, noxious nitrous, sulphurous and particulate emissions. A specific pressure point is visible in downstream oil refining, namely the prospect of decreasing petroleum and diesel sales for vehicles in urban areas, driven by clean air regulation and public health concerns rather than reductions in CO2 emissions.12 This looming retail challenge is significant but it is debatable that this poses a viability risk to oil and gas companies when viewed in the context of rising demand for their products between now and 2040.

escalate. 14 15 16 17 18

Distribution of fossil fuel reserves is an important part of the value chain. Figure 2 highlights the significance of the Middle East and South America as sources of petroleum and hence the impact on global oil and gas industry of their national companies. Taking the reliance on those regional economies for oil revenues together with global pressures to reduce the consumption of hydrocarbons, the existence of significant geopolitical risk is arguably more salient than traditional economic risk to those economies. The chance of massive disruption to the global production of oil and gas has been growing.

Taking a geopolitical view of the demand side of fossil fuels, it is difficult to overstate the future impact of China, which has steadily expanded the scope, scale and influence of its marine and transportation infrastructure sectors over the past two decades. According to the Financial Times,

8 (Mai et al. 2012) 9 (Citi 2019) 10 (McKinsey & Company 2019) 11 (BP plc 2019) 12 (Oxford Energy Forum 2018) ‘two-thirds of global container traffic passes through Chinese owned or invested ports,’ additionally, ‘Beijing’s shipping lines deliver more containers [throughput] than those from any other country.’ 13. Transportation infrastructure is often developed in Belt and Road Initiative partner nations on terms highly favourable to China and in which China can leverage its geo-economic superiority to gain strategic advantage. Taken together with the modernisation of the Peoples Liberation Army Navy (PLAN), Chinese diversification in the marine and transportation infrastructure sector could prove to be a critical source for manmade risk and shocks if geopolitical tensions were to

13 (Kynge et al. 2017) 14 (Kynge et al. 2017) 15 (Office of the Secretary of Defense 2018) 16 (Thorne and Spevack 2017) 17 (Linden 2018) 18 (Blackwill and Harris 2017)