Deglobalisation: A Blitz Accelerating the Dawn of Solar Satoshis
An edited version of this article first appeared in Wealth, The Edge Malaysia Weekly, on April 25, 2022 — May 01, 2022.
In 2003, Tesla’s founders realised that lithium-ion batteries were becoming increasingly powerful and cheap over time. Thanks to the explosion in laptop computers and cell phones, battery costs were falling fast. Soon, thousands of them could be used to power an affordable electric vehicle.
Tesla’s first model cost over a hundred thousand dollars a pop. The Tesla Model 3, launched in 2016, costs about US$45,000. The next Tesla model is expected to cost just US$25,000 — but will be probably even cheaper once you factor for autonomous driving and higher utilisation rates.
Soaring EV demand has accelerated the drop in battery prices. Deflation is improving the economics of energy storage, boosting the global adoption of solar power.
According to the Rocky Mountain Institute, every 70 minutes or so, the world gets enough solar energy to run everything for a year. Sunshine is free. “You simply have to build the infrastructure in the right place to capture the energy that is already there,” says Mark Lewis of Andurand Capital, a commodities hedge fund. From there, economies of scale and technology improvements push solar down the cost curve.
With oil, the cheapest reserves are exploited first. After these are depleted, “more expensive sources of supply are tapped that are more difficult to access, and therefore more expensive to find and develop,” says Lewis. This makes fossil fuels intrinsically inflationary.
80% of the world’s energy is still derived from fossil fuels. But solar and EV adoption is rising relentlessly, aided by exponential, deflationary technology advancements. And global petrostates have woken up to this fact.
Recall the vicious price war between Russia and Saudi Arabia in early 2020. Saudi Arabia initially wanted the OPEC+ to cut oil production to boost prices, in the wake of the coronavirus outbreak. When Moscow balked at the plan, Riyadh slashed prices and boosted exports, flooding the market with cheap oil.
By shifting from a price-led strategy to a volume-led one, Saudi Arabia was switching gears in preparation for the inevitable. “If you are sitting on the cheapest and most abundant oil in the world,” Lewis points out, “then you have a big incentive to shift as much of it as possible over the next few decades as the global energy system accelerates its transition away from hydrocarbons.”
This puts recent events into context. We are witnessing a scramble to maximise the value of extraction opportunities, before the fossil fuel era draws to an end.
Take Ukraine. Home to the world’s sixth-largest coal reserves, Ukraine was once Europe’s third-biggest producer of the black stuff. Production plunged after war broke out in 2014 and pro-Russian forces seized major assets. Beyond coal, Ukraine has the second-largest natural gas reserves in Europe. The bulk of Ukraine’s coal and gas is in Donbas, where reports suggest the war is increasingly concentrated.
Russia’s 2014 annexation of Crimea unlocked access to valuable oil and gas resources in the Black Sea. Mariupol, which Russia says it just secured, lies along the Sea of Asov, between Russian-held territories in Donbas and Crimea. This city houses key export infrastructure along Ukraine’s coastline and major steel-making facilities. With Mariupol, Vladimir Putin can now create an economic corridor linking Russia, Donbas, and Crimea.
Writing in the Wall Street Journal, David Knight Legg, an analyst and former principal adviser to Alberta Premier Jason Kenney, notes that Russia is occupying regions holding 90% of Ukraine’s energy resources. At current prices, Ukraine’s natural gas and oil assets are worth over US$1.4 trillion. Success in Ukraine, Legg says, gives Putin an “extraordinary strategic geopolitical advantage” — placing Russia at “the center of global energy supply to vast European and Asian markets for the foreseeable future.”
Playing with fire
According to Zlotan Pozsar, a former senior adviser to the U.S. Department of the Treasury, there are two basic forms of money: ‘inside money’ and ‘outside money.’
Inside money, Pozsar says, is “someone else’s liability”: central bank deposits, bank deposits and securities. U.S. Treasuries, which are backed by the “full faith and credit” of the U.S. government, are inside money. Gold, oil, bitcoin and commodities are examples of outside money, especially if you hold the keys to the vault.
To me, ‘inside money’ is like a monetary system that relies on trust between insiders within a network. ‘Inside money’ works best if you have good relationships with the network’s owners. Think of how a utility grid works. If you play by the rules, you’ll get electricity. Break the rules, and the lights switch off. When the U.S. and its allies blocked Russia’s access to its central-bank reserves and the SWIFT network, they were effectively kicking it off the grid of ‘inside money’.
Will this speed up the creation of new monetary systems and the dedollarization of central-bank reserves? Reportedly, Russia, China, Saudi Arabia and India are working to sidestep the dollar in trade. But while the dollar is losing share in cross-border transactions, storing wealth in fiat — be it the yuan or rouble — is inside-the-box thinking.
This explains the steady build-up of ‘outside money’ reserves in China and Russia. In 2018, Russia held 40% of its central bank assets in the dollar. By 2020, the share of dollar assets had dropped to 22%, while the share of gold rose to 23%, overtaking dollars for the first time. Besides buying more gold and acquiring natural resource assets, China has hoarded increasing amounts of agricultural commodities. According to the U.S. Department of Agriculture, China has stockpiled half of the world’s wheat reserves, 60% and 70% of its corn, potentially leading to higher prices for everyone else.
Proponents of dedollarisation will cheer the fragmentation of reserves and monetary systems. But what this trend really signals, however, is the erosion of international trust and that the world is hurtling towards deglobalization.
Paying the price
In ‘The Price of Tomorrow,’ technologist Jeff Booth describes how economies are increasingly leveraging themselves, seemingly to finance growth, but actually to battle the forces of deflation. What happens when this strategy falters? Booth fears policymakers, facing an increasingly restless and polarised society, will turn protectionist and nationalistic. Trump’s trade war, the oil price war of 2020, and now, Ukraine, are all symptoms of this downward spiral.
The promise of globalisation was that the world would share its abundant resources, knowledge, and talent. Technology gave us the Internet and now renewables, which could potentially balance the power equation between consumers and mercurial petrostates. But these innovations are deflationary. Globalisation itself is deflationary — and as recent events show — increasingly incompatible with an addiction to growth at any cost. This conflict has unleashed a scramble for scarce ‘outside money’ assets, the power-up of energy cartels, and the fracturing of the world into spheres of geoeconomic influence.
Playing with fire means paying the price. But those who stand to lose the most, are those furthest away from the nexus of power. Commodity prices are now soaring across the world, threatening to unleash a global famine impacting one-fifth of the world’s population. Millions of people have been displaced this year, escalating the global refugee crisis.
The upshot is that these events could end up catalysing the shift towards deflationary energy and monetary systems.
In the United States, a growing number of citizens are “defecting” from utility grids, installing solar panels and batteries to power their homes and vehicles. Chamath Palihapitaya, a venture capitalist, believes such a system will be viable for most U.S. households. He has proposed building a decentralized solar grid — a move that could help the U.S. achieve energy independence, while enjoying solar power’s deflationary benefits.
Like solar energy, Bitcoin is neutral, decentralized and borderless. When war broke out in Ukraine, ATMs began running out of cash. Electronic cash transfers were blocked. Bitcoin became key to financial survival for refugees escaping the war zone.
Bitcoin, like batteries, is technology. It evolves at the pace of technology, which means coming years will see new innovations built on top of its network. In time, Bitcoin stands to become more useful, cheaper to use, and faster.
Entrepreneurs are now discovering the potential that can be unleashed through the convergence of both technologies. Mining bitcoin and revenue from processing Bitcoin transactions could offset the costs of building out solar infrastructure and battery storage systems, accelerating the transition. This is an idea that Tesla and Block, two of America’s most promising technology firms, is working on. If these efforts are successful, we will be witnessing the birth of a new financial system, backed by decentralized energy.
Andrew Vong is Chief Future Officer of EquitiesTracker Holdings Bhd
An edited version of this article was originally published at https://www.theedgemarkets.com on May 6, 2022.
