This transcript is from a CSIS podcast published on September 5, 2023. Listen to the podcast here.
Joseph Majkut: Hello and welcome to Energy 360, podcast from the Energy Security and Climate Change Program at CSIS. I'm Joseph Majkut, filling in for your regular host, Lisa Hyland. This week is a special episode where I'm joined by two of our colleagues, senior fellows, Ben Cahill and Gracelin Baskaran. This is Gracelin's first appearance on Energy 360, having just joined the program in August as a scholar and our new research director in this conversation, we cover recent developments in oil markets, critical minerals, and the geopolitics of energy. We give a special preview of what we're looking forward to this fall. August is typically a calm month, but this year it has seemed anything, but hopefully Gracelin and Ben can help us understand where we've been and where we might be going. With that, let's get into it.
Well, thank you both for joining me today. It's September 1st. It's the day before the Labor Day weekend, and it feels like there was no real summer in some ways this year. It certainly got hot, but just developments in energy and climate continued to come throughout the summer and our program usually tries to set back as people take holidays in August, but this year we actually published quite a bit. I wanted to take a minute today just to go over some of the stuff that we've been working on here at the program at CSIS, some of the insights that we've been writing about and give an outlook for the fall. So, thank you both Ben and Gracelin for joining me today. Ben, I'd like to start with you where we find ourselves in terms of oil markets, prices are rising. You wrote a piece in mid-August giving a sense of where the global market is at and what the outlook looks like. Maybe you can kind of start there. What's your take on where the market is and where it's going and what U.S. policymakers might be most concerned about?
Ben Cahill: Yeah, thanks Joseph. It's good to be with you on the podcast. The market did tighten in July, so there seemed to be a bit of a flip that happened this summer. By and large, for most of this year, it's been hard for prices to break out of a certain price band and then we saw a lot of upward movement, so the oil price was bouncing around $80 to $85 a barrel, brent crude for quite a while. It broke $85, which was kind of an important psychological marker, and a lot of people were looking towards the last quarter of this year and into next year and thinking, well, the market is going to tighten. If we rewind a little bit to the spring, this is a time when a lot of the oil market really seemed to be focused on negative macro trends. There's a lot of concern about rising interest rates, anything that would depress growth in the rich economies of the world, the market was really responsive to that. OPEC even cut production a couple times, made really deep production cuts in October of 2022 and then again in April, and yet each time they did this, it didn't seem to have much impact. I think this summer we started to see signals that again, the market is tightening. A couple of reasons for that. One, people were starting to look at the prospect of the Fed at least slowing down and tapering the rate hikes. So, the macro signals weight this year and especially into next year seemed to be better, so that's kind of lifting up the backend of the curve. And the other thing that's happened is that these OPEC cuts are starting to become material. So Saudi Arabia, for example, cut production by a million barrels a day starting in July, and they said, we're going to do this for a month and we may renew it depending on how the market shapes up.
They renewed that cut for August and September. Most people in the market think they'll do that for October as well, and that's a big cut. I mean it does have an impact. We're talking about a material tightening, and so prices especially for sour crudes have risen because those crudes seem to kind of scarce in the marketplace and people are feeling like the momentum is more positive now. The big question here is China, and this is what I wrote about in the piece, for several years in the oil market, the focus has been when China would rebound and when China would come back in a big way. And that story has not delivered for several years now. So, in the first half of this year, we saw actually a pretty bullish story in China. Apparent oil demand rose by about 11%.
Oil imports increased quite a bit. Gasoline and jet fuel demand seemed to be pretty strong, less so with diesel and petrochemicals, but overall, it was a pretty positive story and people expected that to continue, it may well continue. I think the big disagreement about where we go from here really centers on China and there's a saying in commodity markets, China's half of everything. When it comes to oil demand, China's more than half of everything. If you look at the IEA demand estimates for this year, for example, IEA predicted 2.2 million barrels a day of oil demand growth. 2.1 of that is from non-OECD countries. So, this is not about the U.S. and Europe, it's the rest of the world. 1.6 of that number is China, so what happens with China really matters. And of course, we've seen a worsening macro picture, big problems in the property sector and real estate, high youth unemployment, property developers potentially going under are looking for bailouts. The government has cut some key interest rates, so the macro signals from China are looking worse, and now that kind of bullish story about China is certainly weakening, but there's very divided opinion about where we go from here. So that's kind of the key issue to watch in the oil market.
Joseph Majkut: And isn't it also true that the sort of rapid electrification of the Chinese vehicle fleet is kind of moving forward? The point at which China itself is looking for, is thinking they'll peak oil consumption. I'm not saying that that's what's happening now, but it seems like if we're in a morass for the next couple of years of slow Chinese growth and electrification, those signals might be harder and harder to separate.
Ben Cahill: Yeah, that's very true. I mean these are both medium term issues, but they start to affect market psychology now. One is EV adoption and we've seen this fast rise in electric vehicle adoption in China. The second is that the Chinese economy is slowing down. I mean, this is only natural, right? The 10% year on year growth of the two thousands is pretty far behind us. So, the type of economic growth we're going to get in China will be slower, will be less dependent on the property sector and real estate, and it'll be less dependent on commodities. And so, you're kind of removing the world's big oil demand engine and over the medium term that starts to really matter. It now creeps into market psychology though because China's been kind of the bulwark of oil demand for so long that there's a shift happening. People think, well, if China slows down what's left?
Joseph Majkut: And where else to go?
Ben Cahill: Yeah, you'll still see strong growth in India. If you add it up collectively around the non-OECD countries, oil demand, its been really robust, but things look a lot worse and it's a huge impact in the kind of perspectives about where the market's headed five, seven years from now.
Joseph Majkut: But over the next few months, it just seems like there's a little bit of ambiguity about how much tighter the market's going to get. Experience over the last few years has been OPEC plus decision-making is cutting, cutting supply, increasing reserve capacity. Any thoughts on what might happen over the next few months or how judgments might change? What considerations are driving that coalition right now?
Ben Cahill: Yeah, I think that the OPEC countries, by making these deep cuts, especially that unilateral Saudi cut to me, they were signaling concerns about the fundamentals and the demand picture, and I think it showed maybe they're not as confident about demand in China and elsewhere. I think they also always want to control messaging to the market and show that they can shift the fundamentals. Well, who can do that the most? It’s Saudi Arabia. They can essentially flip a switch, remove a million barrels a day from the market. That's a big deal. And so, they used that. They were frustrated that making these big production decisions didn't have the impact that they wanted. Now, I think they see the market moving in their direction in the coming months, and these material withdrawals of supply from the market may tighten it but given the economic news of the last couple of weeks from China, maybe it's not enough. We may be in a situation where OPEC+ comes together this fall and says, demand picture is looking worse than we thought, we still have pretty robust production and exports coming from Russia, non-OPEC supply from the U.S. and a bunch of other countries has held up really well this year. From their perspective, I don't think they're out of the woods yet. They're encouraged, but not feeling too comfortable, I would imagine.
Joseph Majkut: Well, I kind of want to stay on geopolitics because another piece we wrote in response to another development of this August was the potential expansion of the BRICS Coalition, right, including Russia and potentially now Saudi Arabia. Gracelin, you and Ben worked on a piece together to try and think about, well, what's the sort of political implication of BRICS expanding? And then you're looking at a concentration not just of oil and gas wealth, but also lithium and critical mineral wealth within a potential BRICS+. What did you two write about and what are you thinking about when you watch this kind of emerging countries ganging up together?
Gracelin Baskaran: Thanks, Joseph. It's great to be here. So, when we look at the expanded BRICS, we have an aggregation of critical minerals. And one of the challenges these countries, with the exception of India, are not in the mineral security partnership, which is where we're seeing investment in trade within the critical mineral space go up. Now, when we take the five BRICS countries that originally were so Brazil, Russia, India, China, and South Africa, and then we add in a country like Argentina, which actually its lithium reserves are growing or it's 6% now it's expected to go up to 16% by 2030, which will make it the second biggest lithium producer in the world, and it has more lithium projects in the pipeline than any other country. It becomes very strategic. Saudi Arabia wants to produce 500,000 electric vehicles a year through 2030. They don't really have critical mineral reserves, so sourcing within the block becomes really important.
And these countries, when you look at the grouping, is going to have a very formidable presence in critical minerals. We're talking over 70% of the rare earth, including three of your five biggest producers, over 70% of manganese, 50% of graphite, over a quarter of nickel, and over 10% of copper, and that's excluding Iran, which has really big untapped reserves. So, what we see is that as President Xi has advocated for arrival to the G7, which has largely not been the rhetoric so far, then you could see something like more of a mineral security partnership block and then a sound critical, or a sound BRICS+ block that are going to strengthen trade ties respectively within them.
Joseph Majkut: I buried the lead a little bit. I should welcome you to your first Energy 360 podcast. You started with us here in the program during August, and I'm sure all of the listeners and our readers will get to know you very well over the coming years, but welcome Gracelin to the program.
Gracelin Baskaran: Thank you. It's been a great first two weeks. I'm so happy to be here.
Joseph Majkut: Let's touch on the oil and gas side of BRICS+, Ben. What implications does an expanding block of emerging markets have for oil market dynamics, particularly in the context of the last couple of years where the oil market has gotten kind of carved up?
Ben Cahill: Yeah, it's striking that Saudi Arabia and the United Arab Emirates could be part of the BRICS+ grouping, right? You're adding two really big oil producers, and some other smaller ones into the mix as well. I think where it connects to oil and gas trade is in the last couple of years we've seen an expansion of energy sanctions on Venezuela, Iran, and most recently on Russia with the EU embargoes on seaborne Russian crude oil and seaborne crude and products, and then the price cap. I mean, it's no secret that energy exporters are really frustrated with this growth of sanctions. They see that the OECD countries are throwing these obstacles at them. They are blocking energy trade, they're increasing the complexity of a driving up costs, and they're also putting pressure on OPEC+ to add supplies to make up for some of the loss volumes. There's this perpetual discussion about whether or not it's possible to move away from dollar trade in oil and gas, and I think it's clear that that's a long way off, but this formation of this larger BRICS group to me is another really powerful signal that countries are interested in exploring these options, especially Iran, which has now been added into the mix.
But across the board, I think there is a desire to explore ways to skirt the U.S. financial sector and exposure to the dollar, start to trade commodities and non-dollar currencies, and move more of this trade outside the reach of the G7 countries. And that's a long process for reasons we can discuss, but we shouldn't ignore those signals. They're actually quite important. One of the things that I found a little bit frustrating. just to editorialize a little bit. is that there was this kind of immediate reaction like, well, this is really a disparate mix of countries. It's like a baggy mix of countries. Should we take this seriously? And I saw a lot of people dismiss it out of hand. And yes, all these issues with commodities trade, they are long-term issues. This is not going to happen in 2024 or 25, but is a signal of where things are headed in the non-OECD world, and the fact that countries have shared interest in these issues around changing the way commodities are traded, means we should look at it and take it seriously, not dismiss it.
Joseph Majkut: Yeah, I completely agree. And it's like, you have all these emerging markets with a rising global power, their combined influence in the global economy 10 years from now is going to be really, really large. And the fact that they don't all share characteristics as exporters or as consumers, I don't think should be a source of comfort, especially as you think about a world where you have more bilateral agreements around critical minerals or sort of more preferential trade around energy in general. You can't be so secure that this isn't going to be a more significant force in the future because it represents a real political urge on the part of the emerging markets have a bigger say in this kind of economy that we're living with.
Ben Cahill: Yeah, that's true. And just briefly, I would say in the last couple of years with the sanctions on Russia and Iran, I mean we have seen more commodities trades settle in Indian rupees or Chinese yuan. Both producers and consumers are interested in exploring this. The barrier is that a lot of these countries have reserves in U.S. dollars and there's not a great comfort level with the Chinese currency, right? There are capital controls, regulation of the financial sector is really opaque, dollars are freely convertible, it's predictable. Everyone feels much more comfortable with that. So, there are real big obstacles that we're talking about, but as you said, this is a big block of countries. It's a big share of the global economy. If they make this a priority, there are a lot of avenues for cooperation.
Gracelin Baskaran: To add into that. Before BRICS even expanded, their aggregate contribution to global GDP was bigger than the G7. So now you add in all of these other countries, especially these oil rich countries, and you actually realize your global share of the economy is significant as I think one point, and I think the second point is we've talked a lot at CSIS about how long it takes to make a mine. You're really talking about a decade from exploring, finding, building to moving to production, and we're seeing things like Saudi Arabia making a 2.6-billion-dollar investment into Brazil's biggest mining company. So even if it's not going to be short term, like Ben said, we're likely to see a lot of these impacts play out in a decade, but that has long consequences, or rather a long impact because life of a mine can be anywhere from 30 to 80 years, so countering that will take even longer.
Joseph Majkut: Well, I'm sure we're going to be watching this stuff for a long time as the U.S. tries to up its game and navigate the formation of that new block and try to find fissures or find ways to work with the countries within that arrangement. Gracelin, critical minerals are everywhere at the moment, I think because a lot of people in the analysis world and in the political world are catching up with the economic reality that if we're going to do energy transition on the speed and pace that countries want to do it, the material resources that are going to be necessary are going to be probably tough to develop and it's going to take some new strategies to do it. Our program did a lot of work on that over the summer. We wrote a lot of commentaries, wrote a fairly large white paper on how the U.S. can try and build a better toehold in that industry and be a bigger contributor to developing necessary resources in a humane and environmentally just way. Thankfully, you're coming aboard because you're an actual expert in the economics and the politics of developing minerals, particularly out of emerging markets, resource rich countries in Africa, and that's the subject of your first commentary with us as a member of our program. Can you give us a sense of why is Africa important when we think about global critical minerals?
Gracelin Baskaran: So, Africa in 2021 was the second, they got the second lowest amount of money in terms of exploration. It's a relatively under-explored region. But despite that, I mean we're talking about 80% of the world's platinum manganese, nearly half of the world's cobalt, a fifth of the world's graphite. So even for having as little exploration as it does, you have significant critical minerals reserves. The important thing is as we're starting to explore more, we're finding a lot. Think about right now, the continent has 4% of the world's lithium, but in the next five years that's going to triple. And that's really indicative of the fact that we're starting to explore and we're finding a lot. Natural gas, great example, 40% of the world's discoveries in the last decade were in Africa. So, in a way, it's a last frontier of mineral development, I would argue, but it's got the reserves that much of the world needs, not just for energy security, also national security.
Joseph Majkut: So, my impression, and I think the public view is that we've kind of lost the race for minerals access in the West to China, right? You don't have to Google too hard to find a lot of New York Times articles about Chinese companies operating in the DRC to develop cobalt mines or beating us on lithium projects. How realistic is that narrative? And if it is real, what tools does the US have to leverage or does the West more broadly have to leverage to compete?
Gracelin Baskaran: That's a very real challenge that we face. China has been there for decades mastering their extraction model. However, there's some key holes that have emerged in that model. So, one really good one is actually there's been a lot of infrastructure for natural resource swap. So, China comes in, builds the infrastructure, and then they get first rights to the resources. However, what we saw in Sri Lanka in the last couple of years going in for that infrastructure, is it generated a certain amount of fear in African countries who don't want to be beholden in the case that they default on their debt as Zambia did during Covid. So, another way that we're starting to see that resistance is nobody wants to be Angola. Angola is the biggest recipient of Chinese money on the continent, but now they're locked into selling all of their oil to China.
So, if countries want to maintain their autonomy and their sovereignty in this decision-making, that model doesn't really work. So, I mean, if we start to think about how do we counter the fact that we don't have first movers advantage or second or third for that matter, it really comes into a couple areas. So, one is infrastructure development, which the U.S. has made strides on. If we look at, for example, power Africa and the amount of energy infrastructure it has built, the second area is investment. One of, what we've seen in the last year is that more and more countries are imposing things like export bans, but they're export bans to the extent that they don't want to export raw resources. They want to process them and get some more benefit domestically; we know that mining is not labor intensive anymore. I need five people to run a mine.
I need 10 people to run a mine. But processing, manufacturing generates the jobs a lot of these countries are looking for. We know that one in four people are going to live in Africa in 2050, which is hopefully in all of our lifetimes. So that's a lot of youth that are entering the workforce. So, I need to create jobs and I need revenue. I mean, the debt crisis is very profound on the continent. So, if the U.S. goes in and says, okay, let's put in these processing facilities so you derive more of the benefit, that's going to be a big differentiator because right now we know we're exporting most of these resources from Africa to China, raw. DRC, biggest producer of cobalt, 100% of it goes to China and it's processed there. And then the third area is trade. We need trade between the two areas, and we need to strengthen that in a way that, again, is bilaterally beneficial and we need to revisit in the new era of critical minerals. Historically, what we've exported from Africa to the U.S. has been t-shirts. We're great textile and apparel manufacturing, right? Low value addition, but the development narrative is sweet. 80% of jobs are to women, but we need to retailer it for the circumstances we're in and make them responsive to the global environment that we're in, and that's going to be really targeted critical minerals.
Joseph Majkut: And what do we need to see from our government to make this happen? I mean, the West has huge financial resources in the private sector. We've got technology companies, so how does the USG step into this environment and really facilitate the kind of engagement that you're talking about?
Gracelin Baskaran: So, there's a little bit of resistance to this extractive model, which isn't a surprise to any of us. So, some of it is starting to say, how do we engage as equals? We want to sit at the same table. The mineral security partnership is largely a signal. It says, we're collaborating together. We're friends and producer countries want to be at that same table. They don't want to be on the other end of the table. So, it's first saying, how do we bring them to that table? And that's potentially thinking about bringing more producer countries into that partnership. A second area is saying, companies want to invest in Africa, but they're not necessarily seeing the economic benefit of it that could counter the risk of investing in some of these countries. And that's going to start to think, how do we build trade agreements so that some of these countries, I might be rewarded by getting benefits from the Inflation Reduction Act or other tax incentives to offset that risk. And then the third thing, which we've already kind of talked about is trade. How do we get our trade up? Do we need to rethink a bilateral trade agreement, for example, to get those critical mineral value chains and bring ties between the two?
Joseph Majkut: Yeah, I really appreciate the way that you are looking at these issues. I think the piece you wrote is a great start because as we did that whole workflow over the last summer, I think a lot of people see this critical minerals challenge in Washington and they go, well, if we could just get permitting reform, we'll dig it up out of the Rocky Mountains and we'll be cool. And we'll have this sort of like they're applying; I think a lot of the similar intuitions from how the U.S. succeeded in oil and gas to the mineral space. And I think there are examples where that's going to be important, but really our strategy needs to be devising a larger and more diverse global supply chain. If part of the task here is meeting energy transition goals, and it creates opportunities for strategic and political engagement, that I think are going to be really valuable throughout the 21st century. So, I look forward to seeing a lot more of work from our program on this and thank you so much for joining us. Let me close. This has been a busy August. It's a holiday weekend coming up. We want to get out of here, but just on things that each of you are looking at for the fall, what should our listeners be watching? What market signals, what political events are you looking forward to? Gracelin, we can start with you.
Gracelin Baskaran: I'm interested to see how the G20 summit plays out in the next couple of months. Critical minerals is going to be a really hot topic on that agenda going forward, especially as we see BRICS countries, G7 countries be part of that debate saying, we really do need to collaborate. It shouldn't be an us versus you dynamic. And I think that's going to be really critical as a first order. We also have the IEA summit coming that's going to focus on critical minerals, and it's really interesting. There's a ministerial mandate on that, which really shows the integration of critical minerals into foreign policy on a global level. So, seeing what comes out of that is going to really shape the critical minerals agenda in the next couple years. So those are a busy few months.
Joseph Majkut: Well taken. Ben?
Ben Cahill: I'll be watching a couple issues related to natural gas. One is the winter outlook for LNG and gas in Europe. Just wrote a piece on that called European Gas Storage is Almost Full Now What?
Joseph Majkut: To be downloaded this week by all of our listeners.
Ben Cahill: And I think the question is inventories are pretty high. So, heading into the winter, things look relatively good. Europe has got a good head start. LNG prices in both Europe and Asia have been surprisingly soft for the last couple months. And industrial gas demand in Europe is still way down. So, there's a greater comfort level certainly heading into this fall and winter than many people had. I don't think we're out of the woods yet. There's still some issues to watch, but I'm really interested in seeing how gas demand shapes up in prices. A second issue is related to emissions and methane specifically. So, we have a couple big oil and gas industry conferences coming up that are kind of setting the table for COP 28 in terms of what the industry is doing on emissions. An issue that I've been tracking for a long time now is the emissions intensity and the methane intensity of traded gas. And there is cooperation happening between the U.S. government, the European Commission, and now an interesting mix of gas consuming countries as well, to try to really get a better handle on emissions across gas and LNG supply chains. This is really complicated technical work. It's something that CSIS will continue writing on, but I think there'll be some important developments in the run-up to COP.
Joseph Majkut: Excellent. And then on my part, I'm continuing to follow two things. One is we're coming out of this really, at least in the U.S. and Europe, a profoundly challenging summer, just climate impacts, Wildfires in Canada and how that relates to the broader climate and energy debate. I think we just have to continue to watch. I'm not a person who believes there's some social tipping point that will hit, but every summer the conversation does seem to shift a little. I'm kind of interested in seeing how that works going into the fall as we look at COP 28 and other annual events. Now, the other thing that I think is going to be really important is watching the IRA's, the Inflation Reduction Act, get implemented towards scale. And what I mean by that is, treasuries writing a bunch of rules. They have to make some fairly important decisions about what role Chinese companies and technology can play, what will receive subsidy and what won't. As we look toward those rules being implemented over time. And I think that there's, what they're going to choose in terms of prioritizing decarbonization, prioritizing domestic employment, and then figuring out some sort of strategy with vis-a-vis China, all those are going to be major decisions we expect to see something of in the fall. And so, thank you both for joining us. I hope that our listeners continue to follow all of our work over the next few months. Congratulations on a busy August and have a great Labor Day weekend. Thank you.
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