Hi dear colleagues!
The state of affairs at the end of 2020 will entail serious geopolitical repercussions throughout 2021. Actually, such risks threaten to change the balance of global political forces forever. The COVID-19 pandemic gave fresh impetus to geopolitical changes which had already been underway. Today let's figure out 5 major risks which could affect the energy market.
Risk 1. The new era is around the corner when producers of fossil fuel and renewable energy sources will enter a fierce competition. Importantly, renewable energy sources will be backed by governments around the world. The biggest threat for oil exporters, including Russia, is that they will be forced to scale down supplies of oil and gas to China and the EU. Certainly, this does not mean the end of the oil era. Nevertheless, even Saudi Arabia will be forced to diversify its economic activities.
Judging by the global shift of energy priorities, the world has entered the stage of the energy transition that will give birth to a new cartel which will put OPEC on the back burner. Hydrogen fuel that is a zero carbon fuel burned with oxygen will enjoy growing popularity. The EU gives priority to this so-called "green hydrogen" whereas the production of hydrogen from natural gas is not even mentioned in the EU normative documents.
The new cartel is sure to overhaul the global trade in energy commodities and create a new category of energy exporters. Likewise, Israel has revised its regional geopolitics with the focus on gas exports.
Saudi Arabia is planning to set the tone in the next energy cartel. The Kingdom is injecting massive cash into renewable energy sources, including hydrogen. In fact, the Saudis are about to launch the project worth the whopping $5 billion which will become the world's largest project for the "green hydrogen" production. The project is expected to generate 4 GWt of renewable energy sources that will ensure nationwide hydrogen production for public buses and trucks. The gigantic facility will be built on the Northwest of the Kingdom, next to the Red Sea. The plant is likely to be launched in 2025.
Saudi Arabia is not the only influential contender for the leadership in the cartel of clean energy. The key market players like Australia, France, Germany, Japan, South Korea, and Norway have already set out their national hydrogen policies. Nowadays, liquid hydrogen is supplied from Brunei to Japan.
At the same time, Russia is significantly lagging behind other countries in developing its own hydrogen program. On the one hand, Russia has a low population density that does not allow it to use efficiently the whole vast area. On the other hand, the population is too big for available natural resources. Commodity prices, especially oil prices, are greatly dependent on the OPEC+ deal.
Thus, Russia's economy rests mainly on commodity production with a low added value as well as commodity exports. At the current production rates, Russia is set to be firmly trapped at 40-50 ranks in terms of living standards. To make things worse, if Russia loses the status of a large energy exporter, the living standards could go down.
Risk 2. China is on the way to the global economic superiority. The top Asian economy is steadily reinforcing its power across other countries and continents. The only threat to China at the moment is its own hi-tech giants which provide vital opportunities to China and pose a danger to the ruling Communist party.
China is leading games in various fields in parallel. It makes deals and wins over allies in the Persian Gulf in exchange for crude supplies. In 2020, China concluded contracts with Iran, Iraq and is poised to deal with Saudi Arabia.
In turn, China and the EU have also entered into agreement according to which China becomes an important player in the market of renewable energy sources. Beijing enticed EU policymakers, granting European companies access to China's market.
Risk 3. Truce between Israel and Saudi Arabia. Apart from the global energy transition, there is a strong likelihood that monarchies of the Persian Gulf could make a truce in 2021. First of all, this is about Saudi Arabia and Israel. Iran and Yemen remain troubled spots on the Middle East map. The political vacuum, which has been left by the US removing its forces from the region, is gradually being filled in by China and Russia. So, these countries could reinforce their presence in the Middle East. If the truce is eventually signed, this could lead to merging the sides which used to confront each other – the radical Shiites and the Sunni Muslims. They are capable of founding a violent union, combining their efforts to destroy Israel.
Risk 4. Further isolation of Iran poses a threat of armed clashes. This year could pose a tough challenge to Iran. In fact, Joe Biden's administration strives to revive the nuclear deal. However, such endeavors could entail both counteraction from the Israeli lobby in the US and Iran's disagreement with new conditions. Citing some sources, Israeli military has already warned Biden's administration that they are ready to strike Iran in case the US makes an attempt to resume the negotiations on Iran's nuclear program.
Amid standoff between Iran and Israel, the alliance between Moscow, Beijing, and Tehran is getting more resilient. Meanwhile, despite US sanctions, Tehran is ramping up its oil exports and making huge investments in oil exploration and drilling. The Islamic Republic expanded oil output in January that could lead to a glut in the global oil market.
Risk 5. Fight for resources in the Mediterranean Sea. The peace treaty between Saudi Arabia and Israel could unleash a full-blown war for oil and gas in the Mediterranean Sea where Turkey found itself in complete isolation and started interference in Israel's internal affairs. Turkey's conflict with Greece over developing the oil and gas shelf plate as well as President's Erdogan intrusion in Libya where Turkey is acting on the side of the government headed by Fayez Mustafa al-Sarraj could trigger regional geopolitical tensions. At the same time, Libya remains a large player in the oil market. Even though Libya's oil exports slumped to nearly zero, the country's oil sector has enormous momentum.
The balance in the Mediterranean Sea is too fragile, so the region is on the verge of war. The prospects of a serious conflict became evident in 2020. The odds are that tensions will escalate in 2021 when Turkey will be forced into a corner.
Turkey urgently needs a new gas field on the continental shelf. Once Israel began its gas exports, Turkey lost any influence in the energy balance. This is the reason behind all Turkey's challenges towards Cyprus, Greece, and Syria. If Israel, Greece, and Cyprus implement their plans to build an underwater pipeline that will deliver humongous volumes of gas to Europe from Levantine Basin, this will wreck all Erdogan's dreams of reviving the Ottoman Empire.
For this reason, Turkey intruded into Syria which also possesses a part of Levantine Basin. Besides, Erdogan supports Libya's government led by al-Sarraj. Moreover, Turkey delivered a blow to Cyprus, having entered a new Mediterranean maritime border pact. On top of that, Erdogan interferes in drilling on the territory of the Exclusive Economic Zone of Cyprus as well as bullies Greece.
Supposedly, Turkey could agree on a pact to create an exclusive economic zone with Israel. In parallel, Israel provides large investments in China's infrastructure project called One Belt One Road.
In case Turkey is not able to come to terms with Israel and forges ahead with its aggressive policy in Libya, Syria, Greece, and Cyprus, such hostilities could lead Turkey to the point of no return as early as this year.
Be cautious and sensible! Make sure you follow money management rules!
