Motley Fool Hidden Gems Investing - Russia, China, and Global Energy Markets

Episode Date: April 3, 2022

Sanctions go on a whole lot easier than they come off. Daniel Yergin is the Vice Chairman of S&P Global and the author of “The New Map: Energy, Climate, and the Clash of Nations". He’s been studying Russia's and China’s roles in the global energy markets for decades, and shares the implications of Russia becoming an unreliable oil and gas supplier in Europe.  In this conversation with Motley Fool Senior Analyst Ben Ra, Yergin discusses: - Russia’s economic relationship with China - The role of shale for US energy independence - Supply chain obstacles for wide-spread electric vehicle adoption Bonus Resources! Investing in Energy Stocks - https://www.fool.com/investing/stock-market/market-sectors/energy/ Investing in Copper Stocks - https://www.fool.com/investing/stock-market/market-sectors/materials/metal-stocks/copper-stocks/ Host: Ben Ra Guest: Daniel Yergin Producer: Ricky Mulvey Engineers: Rick Engdahl, Brandon Gentry Learn more about your ad choices. Visit megaphone.fm/adchoices

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because you're going to have to have a lot of mining, a lot of mining of minerals at a scale people could barely contemplate to meet these targets. And we're doing a study now on copper that just looks at what the targets are for, you know, electric cars and everything by 2050. and then, well, where's the copper supply to support it? And by the way, it takes 16 years to open a mine. I'm Chris Hill, and that was Pulitzer Prize-winning author Daniel Yergin. You and I may have only recently started paying attention to the global energy markets,

but Dan Yergin's been studying them for decades. In addition to his work as an author and analyst, he's advised U.S. presidents of both major parties on energy policy. Recently, Motley Fool senior analyst Ben Ra interviewed Yergin about U.S. energy independence, Russia's complicated economic relationship with China, and the critical supply chain problems facing electric car makers. I think we should really dive into the whole Russia-Ukraine question. I was reviewing one of your past books, you've been looking at Russia and the Soviet Union back in the day for a very

long time. I think in the 70s, you wrote a book called The Shattered Peace. And then you wrote, I think in the early 90s, it's called Russia 2010, where you sort of imagine the future of Russia at that time. And that future, of course, is kind of our past and our present. If you were to kind of do that for Russia right now in these crazy circumstances. If you were to look at these various scenarios as you did back in the early 90s, how would you map out the different futures that Russia can take at this moment? That's a very interesting question because, you know, in Russia 2010, we had one scenario of a Russian economic miracle like the Japanese and European in Miracles After World War II, but we had another one called the Russian Eagle, Two-Headed Eagle,

where it becomes a very repressive authoritarian state again. And of course, that's what we've seen. In fact, on Putin's villa on the Black Sea, he has the Two-Headed Eagle over the door. That's the symbol of the Tsars. I guess we'd have to look at a scenario that's a post-Putin one, one in which russia's economy really grinds down and it becomes an appendage of china and the other is when it does somehow find its way in a post-putin world to the kind of reform that it it never had but i think after this crisis in and these massive sanctions sanctions don't sanctions are put on more easily than they're taken off and so i think the russian economy is going to suffer for a long time. And I think Western capital, Western business will not have

any enthusiasm at all for engaging with Russia, really trusting it. Because at the end of the day, commerce depends upon trust. And one of the fundamental things that the Russians have been selling in terms of energy is we are a reliable supplier. Putin said that this week. But I think the Europeans, their major customer, about half of their total oil exports and most of their gas exports, has decided it's not only not a reliable supplier, but it's an unwanted supplier. So I think it's going to take some time to restore the links and the confidence with the world, the international economy. Do you have any scenarios for how this conflict ends? Because at the end of the day, I mean, I would imagine some kind of negotiated settlement has to take

place? Do you know? Go ahead. So far, you know, the Russians started this in December with these treaties that were totally unacceptable that they put out there. And then they've had various sham negotiations. It's possible that it does win with Russia gaining control over Ukraine and then having an extended insurgency that continues for quite a long time and really trying to occupy the country. There are more apocalyptic ways it could end, which are scary. If Russia just grinds down, it's just hard to see. People keep talking about off-ramps for Putin, but it's hard to see an off-ramp that he wants or that he would accept because he has war rallies in Moscow. and this is he's invested in an insane way in a crazy way he's invested his his whole future

in establishing that Ukraine is not a separate country and it really should be part of Russia he published an essay last July that when you look at look back on it was really like his declaration of war saying you Russians and Ukrainians are one people and what is he doing he's killing ukrainians um so it's very hard to see what he could either reach a pay pass where it's a stalemate and there's some kind of settlement but terms would be so iris irreconcilable or he just keeps doubling up as uh and uses more and more terrible weapons how significant are the capture of because there's the southern ports in in ukraine cursing and there's a lot of fighting going on in Mariupol. I'm assuming he wants to go for Odessa. How significant is the capture

of those ports? It would basically cut off Ukraine from the sea. And then there's the nuclear plant, Zaporizhia, if I'm... And there's, you know, Mariupol, what he's done is he's basically trying to strangle Ukraine economically. And between them, Russia and Ukraine export 30% of world's wheat exports. And so, I mean, there are a lot of follow-on. You're going to see food prices really skyrocketing in the Middle East because of this. But it's basically, as they say, the Boer constructor is to strangle it and prevent its economy from working. And the last thing they'll try and do is choke off the supply lines that come through Poland. And that may be the most dangerous thing he does of all. Now, you've argued that we are kind of moving past this OPEC versus

non-OPEC world, and we're now in a stage where it's kind of the, I think you called it the big three, where it's China, the U.S., and Russia. Is Russia no longer part of that in your mind? The big three, well, there's several big threes, but the big three on oil is Russia, well, the United States first, and then Saudi Arabia and Russia tied. And then on gas, too, it's the big two, the U.S. Well, the big three are the U.S., Russia, and Qatar. But for Russia, it was very important to create this thing called OPEC Plus with Saudi Arabia, which was a way of stabilizing the oil market coming out of the two price collapse,

the one that began in 2014 and then the one that came with COVID. and both Russia and Saudi Arabia have big investments in that arrangement, and that's the arrangement that's been bringing back 400,000 barrels of oil every month, except it hasn't been bringing back 400,000 because some of the countries don't have the capacity because they haven't invested in development, they haven't invested in maintenance, and so they don't keep hitting their 400,000, which is one reason we have quite a tight oil market right now, even if there wasn't this war going on. But I think that Russia, although Putin once said he didn't like the term, has been an energy superpower, no question. And that's been sometimes more than 40 percent of

his budget, over half of its export earnings. But I think that we've seen a decisive turn, and the most important turn was in Germany, where the Germans said, we're done. We don't see Russia as a reliable supplier anymore. We don't believe that we need to trade with Russia because it stabilizes the relationship. We want to make a turn towards more LNG exports, more renewable energy. And so I think one of the consequences of this is that Russia is going to be a reduced energy power. It'll still be an important player, but it won't have the same weight that it did before because its gas sales to Europe over five years will go way down. And I think its oil sales will as well. It's now, instead of being seen as a reliable supplier, it's seen as an unwanted

supplier. And I imagine they're trying to divert or they're trying to make China is now their biggest customer or they want it to be their biggest customer. And they have, what is it, the power of Siberia pipeline. The first one, I think it was in 2019 that it was completed and they signed the deal for the new one. How fast can that, because from what I hear, the fields that are connected to the European pipelines are not connected to the ones that go to China. How fast can that transition over to China? I think it's not as fast because you do need big, expensive pipelines that take years to construct. But Putin has said Russia's future is in Asia. And in the new map, I explain a lot or try to explain this Russia-China relationship

also in terms of the relationship between Putin and President Xi, and they describe each other as best friends. There was one meeting in Central Asia where it was Xi's birthday, and Putin said, I'm bringing your favorite flavor of Russian ice cream. I mean, these guys have met dozens of times, talk all the time, and really have created a sort of an anti, call it anti-Western European, anti-U.S., anti-West alliance, where they talk about absolute sovereignty and they reject the international order that basically Europe and the United States have put together, and by the way, from which China has prospered enormously. So I think that out of this, likely is that Russia becomes more of an economic dependency of China, and China regards Russia as a source of raw

materials. A lot of, I would say, Cold War statesmen or even experts like, I don't know if you've heard of Kishore Mabubani, who's a Singaporean. And he was predicting, and I think I was predicting as well, that it's inevitable for the U.S. and Russia to get close because there is this China that's the overwhelming force. And we kind of want to balance against China as we wanted to balance against the Soviet Union during the Cold War. Is that still in the cards, you think, in the far future? I think circumstances have changed. Of course, Nixon's opening to China was to balance against the Soviet Union, and it worked. Because remember 1969, people won't remember, but China and the Soviet Union actually went to war. And they were bitter rivals to claim

to be the Vatican for communism, who was the true Rome. But I think that for now, at least, they're very closely aligned. Either way, there was hopes at the beginning of the Biden administration that somehow they could pry Russia away from China. but I think that's going to be very hard. The more critical question which will play out during this crisis is how close does China really want to be to Russia? What are the downsides of it?

What are the risks of sanctions? What are the risks of tying your international position to kind of at least an economically sinking ship? And what we don't know, one of the unanswered questions is, did Putin at the Olympics tell Xi that he was going to invade Ukraine because they signed a statement saying there's no limit to our friendship? Well, you know, that's being tested now. And it may have been that Putin winked at Xi but didn't quite say it. But there are also reports that the U.S. provided intelligence to the Chinese to tell them what the Russians were doing.

but, you know, those are one of those questions we'll never know the answer, whether China was in on the secret. Of course, Putin thought invading Ukraine would be Crimea part two, that he would just walk in and it'll be over in three or four days. I mean, one miscalculation on top of the other. And at this point, after he's been in power for 22 years, there's no one there to tell him he's wrong or give him information that he doesn't want. You know, and Putin also looked at the United States. He looked at January 6th. He looked at a divided country. Biden looked weak. Europe, Germany, they couldn't, it took months to work out a new government. And so in all of that, he said, you know, it's kind of an open door. I'll walk in, I'll take, it'll take

four or five days and the world will protest. And either I'll set up a puppet government or what I really want to do, he probably said to himself, is annex Ukraine and make it part of Russia? Well, I think we should move on to something slightly happier, which is the possibility of renewable energy becoming dominant in the future. So right now, fossil fuels provide, I think, 80% or so of energy consumption. And that's been quite steady, I would say, over the last 10 years or so. I think in your book, you say that in 2050, about 80% or so of new cars will be either electric or hydrogen, new energy vehicles, and that about a third of vehicles on the road are going to be electric or hydrogen, which means that still two-thirds of

the vehicles out there will be, will be ice vehicles. Do you think it's even possible for us to get to say 80% renewable energy? What's your outlook? You know, that's one of the things I really wrestled with in the new map because, you know, well, first let me say how remarkable it is about electric cars. I have a story there of a young technologist, JB Straubel, who suggested to Elon Musk at a lunch in Los Angeles in 2003, electric cars. And, you know, Tesla was an oddity. But last year, it was the 17th best-selling car in America, one of their models. And all the automakers at our conference, we just had the CEO of Ford talking about how they're going all in with their dividing the company in two parts. And electric cars is one part and internal combustion

engines is the other. And all the automakers saying we're going electric. I think a couple of things. One is even in the IEA's very aggressive net zero scenario, oil and gas still are there, the significant energy sources, but the renewable part and the alternatives and the technologies that are not yet commercial or invented, are a growing part. I think that what has really struck me, and I've become quite preoccupied with, is the supply chains for net zero carbon, whether it's solar panels, 80% from China, wind turbines, all the things you need for them. And By the way, hydrocarbons go into both wind turbines and plastics into solar. But electric cars are 20% plastic.

But what I write in the new map is we'll go from an era of big oil to big shovels because you're going to have to have a lot of mining, a lot of mining of minerals at a scale people can barely contemplate to meet these targets. And we're doing a study now on copper that just looks at what the targets are for, you know, electric cars and everything by 2050. And then, well, where's the copper supply to support it? And by the way, it takes 16 years to open a mine. In the U.S., it takes 20 years to not get a permit. So that I think there is a supply chain crunch in there that may inhibit this unless there are really major technological breakthroughs. It's interesting, the fellow J.B. Straubel, who was a chief technology guy for Tesla for 15 years, now has started a new business to recycle your old cell phone and your old electric car battery and draw the minerals out. instead of mining from the earth mining from in a more circular way from batteries but i think this

is a big consideration uh that that could be that could be a constraint you know benjamin when everybody rushes to the same side of the boat at the same time it can tip what's the significance of u.s shale and the u.s becoming a major producer in both oil and gas in this whole story i think it's transformational. And I think there's the rhetoric and the activism and everything around it. And then there's the reality that it took the U.S. from importing 60 percent of its oil to being the world's largest oil producer, largest gas producer. Huge economic benefits. Just think about the money stays in the U.S. economy instead of going into a sovereign wealth fund somewhere else in the world. About 10.5, 11 million people work in the oil and gas industry total

in the United States. It's very significant for revenues, government revenues, state revenues. But it's also changed the U.S. balance of payments position. It would be a lot worse. And I think we've seen now it's a major geopolitical asset. Kind of people didn't pay attention to it. But this year, the U.S. will be the largest exporter of LNG in the world. And without U.S. LNG, Europe would be in a much worse state than it is today. And so it's something that's really changed the game, has changed the calculation. It's become an element, an important foundation for a better relationship with India, which imports oil and gas from the United States. So I think it's a development whose impact is not really recognized.

I was talking to a U.S. senator in a discussion with him, and he said the U.S. should right-size its commitment to the Middle East. And I thought, whether you agree or not, agree, whatever you think. I thought if I raised my hand and said to him, oh, by the way, the only reason you can say that is because shale, because if we're importing 60 percent of our oil, you wouldn't have said it, he would have been shocked. because I don't think people put two and two together and realize that it equals five. And right now, I think we only import like 500,000 barrels a day from Saudi Arabia. I think it's the latest figure there. And on a net basis, we're basically, you know, we export and we import because of the quality of oil and location and stuff like that because of the nature of our

refining system as opposed to shale. But on a net basis, we're essentially energy dependent. And now the Chinese are the biggest customers for Saudi Arabia. I think they recently talked about making payments in RMB. What is the significance of that? I think if this was announced like 10 years ago, it would have been bigger news, made a bigger impact. What's the significance there? Yeah, I think the significance, well, I talked to my colleagues here and point Now, even if it's in yuan, it still gets referenced back to a dollar price. But I think it's symbolic for the Saudis. Who's their biggest customer? China.

Where's the growth? China. So it's a way of moving closer to China. It's a way of distancing themselves a little bit from the United States. And for China, it's a big victory because they, like the Russians, want to displace the role of the dollar in the world. And this is a, even though it's not a convertible currency, they want to, this is a symbolic victory of saying that, you know, the balance of power is changing in the world economy. So a lot of people speculate about, you know, the power of sanctions, of using the dollar as weaponizing the dollar. I think a lot of Europeans have had problems with that, maybe less so now.

But a lot of Europeans have had problems with that. China obviously has problems with that. I think even India has doubts about that. Do you see that this episode of massively using sanctions, using the power of the dollar in such a big way, does that in the long term in any way damage the dominance of the dollar? Will these countries come forward and try somehow to find a way to go around that? I think that's, I think, Benjamin, that's a really important question. You know, in the new map, I quote former U.S. Treasury Secretary saying, be careful about how you use sanctions, because eventually it will somehow get people to try and find alternatives to it. I think what we're seeing now is an extraordinary application of sanctions and their work, because the Europeans are all on board, if it was just the U.S., particularly unilateral sanctions, can really undercut it.

I suspect that the Chinese will set up a research institute in Beijing or Shanghai somewhere to study really carefully how these sanctions were applied and how they worked, because it will be a message about the strength of sanctions and the degree to which they rely on the dollar. So I think there will be a further reaction when this is over, probably by Chinese and others to look at, well, how do you disengage, create a financial system that doesn't run to the U.S. so that you don't have the power of the dollar. It will also, on the other hand, be a message about other territorial issues or other issues

that come up. But this is the, you know, to use a phrase from the nuclear age, this is massive retaliation in terms of use of sanctions. But it really does underscore the power of the dollar. And for those who don't, you know, as China, an exchange rate overtakes the U.S. later in this decade as the world's largest economy, you know, that will be that continuing question about the primacy of the dollar. What about Chinese policies with regard to what they call new energy vehicles? They obviously want to move away from traditional ICE vehicles. They want to be dominant in this newer platform, if you will.

How significant is that? How do you see that progressing? What's the impact on a world scale? I think it's very significant. Of course, we tend to focus on Tesla as the icebreaker. But, of course, the Chinese also were going down the same road themselves. And they had a minister of technology who was really driving it, a Chinese who had gone overseas and worked for Audi and then came back.

Wang Yi, I think was his name. Yeah, exactly. And I think they had three reasons for wanting to go EVs. First, oil imports. They regard that as a huge problem to be dependent. They import 75% of their oil. And they go back to the Korean War when the US actually cut off oil supplies to China. So they worry about their supply lines. That's why they worry a lot about the South China Sea. Secondly, I think it's about a combination of urban pollution and climate change, but particularly urban pollution, because part of the deal with the urban middle class is clean up the environment. So I think that's

the second reason. And then I think the third reason is because they were not going to catch up with the West in terms of internal combustion engine cars, but they saw that they can leapfrog with EVs and be competitive, be a competitive global, compete in the global automobile market. And so I think they had, so it was a range of national security, environmental, and economic mercantile reasons. So I think there's no question, where are half of the world's electric cars? They're in China. And they can push them into the system in a way more easily than we can United States. They're killing many birds with one stone. Yeah. They're achieving a lot of their goals with it.

Yeah. That's fascinating. Benjamin, they tend to be a formidable competitor. Yeah. Companies like BYD, I think their technology is pretty up there. Charlie Munger, for instance, is very optimistic about BYD. I happen to be as well, actually. Are you as well? Do you like it as well? I do like it. They're the only producers that have both the battery technology, they own the battery production, and they have everything else in terms of the EV. They're a battery manufacturer, too, aren't they? They started out with that.

That's really the key. I'm quite bullish on BYD, and that stock hasn't done as bad as all the others, so that makes it better. As you know, markets are volatile. Absolutely. We're seeing that right now. Absolutely. Thank you for this. It's been a fascinating conversation. Thank you for always being ready to talk with the full, and I hope we can talk with you another time in the future I appreciate it I'm very much talking to the Fool

and to the community of the Fool so thank you for the invitation and as times keep changing we'll come back and pick up the conversation sounds good thanks a lot Dan Fool on everyone as always people on the program

may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.