Trading War For Money, For The Moment

energySeven or eight years ago, I gave a speech in L.A. for a friend of mine, Chris Cordoba.

Afterwards, we went out to dinner with some of his friends. They asked economic questions, and eventually the conversation turned to concerns about hotspots around the world.

I had one big worry… the relationship between China and Russia.

The two nuclear powers share a long, sparsely inhabited border, with lots of energy underground. Russia is a nation marked by corruption, waning technological prowess, and an aging population of 142 million people that will soon fall in numbers. China’s economy is on the rise, with expanding technological prowess, a thirst for energy, and a population of 1.1 billion people that includes more than 50 million men with no numerical possibility of finding a mate.

The two countries have a history of acrimony and suspicion, which made me pessimistic. I was wrong. Instead of choosing to square off and punch each other, they decided to join forces. For the moment, they’ve chosen money over war, and they’re speaking in the language of energy.

This week, the Russians will begin operating their new Power of Siberia Pipeline that stretches 1,800 miles from the gas fields in Russia to a port of entry in China. The two countries struck a deal to build the $55 billion pipeline in 2014, just after the U.S. and Europe imposed sanctions on Russia. The two countries signed a $400 billion energy pact.

Sweetening the relationship, China is developing Russia’s 5G infrastructure, and Russia has increased the amount of foreign reserves held in Chinese Yuan.

Maybe humanity has developed beyond the desire for large countries to attack each other, or maybe developed nations are just getting old. Whatever the reason, it looks like the Russians and Chinese are developing a relationship that combines energy, economic growth, and people. The pair could be a counterweight to Western influence, if they can hold on.

Maybe. But I doubt it.

My wife often says that people will hold up their crazy card, or show their true colors, through their actions. Our job is to recognize those signals. The Chinese created the One Belt, One Road Initiative, and the China 2025 program. They take out page after page of advertising space in the Wall Street Journal to tout their economic development. Chinese officials have done everything but print a headline that reads, “We intend to be self-reliant and the number one economic power on the planet.”

It’s hard to see how that will sit well with a Russian leader who is ex-KGB and prides himself on controlling at least part of the geopolitical chessboard.

Vladimir Putin used natural gas as a weapon against Ukraine and Europe a few years ago, and the Chinese have a history of forced technology transfer and stand credibly accused of creating ways to spy on rivals through computer chips. It looks like a matter of when, rather than if, these new best friends will end up at odds and the fight will turn ugly.

In the meantime, the rest of the world will have to adjust. With the new pipeline, Russia will supply China with up to 10% of its natural gas needs, essentially supplanting expensive LNG imports from the U.S. With fracking efforts in the States creating so much natural gas that local spot prices have fallen below zero on several occasions in the Permian Basin, energy producing and transporting companies could be facing a brutal reality next spring. If new clients don’t appear or energy production doesn’t taper off, there won’t be anywhere for the gas to go when we switch back from drawing down inventory during the winter to building inventory during the spring and summer.

While the new hookup between Russia and China is much better than an armed conflict, it can still create winners and losers. Across the energy complex, producers and transport companies are hoping for a rocky relationship between the two countries, and really cold winter.

Note: This article originally appeared at Economy & Markets. The author is Rodney Johnson.


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Category: Commodities

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In Economy & Markets, the Dent Research team, featuring editors Harry Dent and Rodney Johnson use the power of demographic trends and consumer spending patterns to accurately identify economic booms and busts well ahead of the mainstream. Harry & Rodney believe demography is destiny. It is the future that has already been written. You just need to know how to read it.

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