Before the United States’ shale revolution, the terms of the world’s geopolitical structure were almost entirely dictated by oil production in the Middle East. The politically tumultuous region had a near-complete chokehold on the world’s petroleum production, resulting in world leaders who previously couldn’t have pointed out the Arabian peninsula on a map suddenly kowtowing to Saudi heads of state. In the early years of the cold war, under the influence of energy security anxieties, U.S. president issued a guarantee of alliance and security to to the Saudi King Ibn Saud: “No threat to your Kingdom,” the president wrote, “could occur which would not be a matter of immediate concern to the United States.”
The energy security fears were well-founded. Over the next couple of decades, political turmoil between and within the Middle Eastern states would leave consumers half a world away in the United States waiting in hours-long gas lines and scrabbling over gas ration coupons.
The gush of cheap and plentiful oil and gas out of the West Texas Permian Basin in recent decades has completely reshaped the world’s geopolitical map, granting the United States newfound energy independence and lessening the need to tightrope-walk fraught diplomatic lines with members of OPEC. But now the shale revolution is over. Growth in the U.S. shale sector has been slowing for years now after a white-hot decade, and the novel coronavirus may well have delivered a coup de grace to the already floundering industry. While shale has bounced back from the dark days of the pandemic that sent oil prices to historic lows -- the West Texas Crude Intermediate reached nearly $40 below zero per barrel in an unthinkable rock bottom on April 20, 2020 -- the global green energy transition is now underway in earnest.
Just this month, the United Nations and the Intergovernmental Panel on Climate Change issued a “code red for humanity” warning that we have reached a point of no return for global warming, and making fossil fuels a thing of the past is a matter of extreme urgency and complete necessity. The move away from oil and toward clean energy tech, however, is facing a serious supply bottleneck: computer chips. Semiconductors around the world are failing to keep up with skyrocketing demand for the tiny little components that are now part of absolutely everything from your kids’ toys to your Tesla.
Not only did the novel coronavirus pandemic catalyze the green energy transition, it also catapulted demand for consumer goods -- especially electronics -- into the stratosphere. This has left industries around the globe waiting in line for shipments of these essential ingredients while bigger and more lucrative clients get priority. And once again the geopolitical map is being redrawn; but this time, oil has nothing to do with it.
“Semiconductors might be the new oil—and that could make the 2020s the new 1970s,” Barron’s reported this week, drawing comparisons between the world’s reliance on the Middle East for oil to today’s reliance on North Asia for chips. Around 80 percent of the world’s semiconductor production capacity is centered in the region, giving these states a newfound sway over the global economy and presenting the world with major potential risks and vulnerabilities in the supply chain of...well...absolutely everything.
In response, world leaders including Joe Biden have pushed to diversify the industry and ramp up chip domestic production, but the barriers to entering the market are significant. “Reshoring any industry, including semiconductors, is a yearslong process that requires billions in capital,” Barron’s writes. “There will be winners and losers. And if it goes on too long, it will filter into the prices of all kinds of goods.”
While the chip shortage won’t last forever, the key role that chips play in nearly every supply chain imaginable is here to stay for the foreseeable future, and major structural and geopolitical changes are already long overdue.
By Haley Zaremba for Oilprice.com
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