We Choose to go to the Moon

The plan for a deeply connected, just-in-time, global supply chain that will lower costs for everyone took a hard punch when Donald Trump was elected President, but the pandemic and the Ukraine war have now struck mighty blows and ‘the plan’ is getting tossed. The global economy appears destined to undergo major changes in coming years as more production is considered strategic and comes back to the U.S. and/or is re-located in friendly, neighboring countries.

The path of the global economy is taking a new course and that requires a new plan. Unfortunately, this is not a change anyone saw coming, so the change will likely be long and difficult, but it is one we must embrace. The U.S., along with the rest of the world, will be confronting critical decisions that will define how competitive (or uncompetitive) each will be over the next 50 years. From a U.S. perspective, here are the battle lines:

Our current advantage is based on being energy rich (fossil fuels).
Our disadvantage is that in a green energy world, we are relatively poor.
We need political compromise if the U.S. is to be competitive in the green energy world.
De-globalization will be a persistent inflationary force
Technology development must accelerate to meet the challenges ahead

Making the Most of Our Advantage Today

Fossil fuels should, and will, be reduced in the need to reduce greenhouse gases, but the use of and need for oil and gas will not go away. Based on current technology, there is no way around that. Most everything we use is somehow connected to fossil fuels. Buy all the electric cars you desire, but oil is not going away.

The green future is coming, but it may be further off than most believe. The development of the green future is imagined to arrive in a manner much like the semiconductor industry, with rapid gains in efficiency and costs. In the semiconductor world, Moore’s Law states that the speed and capability of computers can be expected to double every two years, as a result of increases in the number of transistors a microchip can contain. For green energy, the presumption is that battery costs will continue to decline in much the same way. Certainly, there are manufacturing and other technology discoveries that will make batteries increasingly efficient, but the faster we embrace electrification, the faster the need to develop the necessary raw material resources to meet that demand. The shift has barely begun; shortages are already developing, and geopolitical competition/conflict appears ready to magnify those shortages. Compounding the long-term supply problem is that many of these materials are simply not available today in what the U.S. would consider ‘friendly’ countries. This lays the groundwork for global political battles to develop in places like the DRC, which produces the bulk of the world’s cobalt (and is often mined indiscriminately).

Our first challenge of the next ten years will be to stop demonizing fossil fuels and use our fossil fuel resources in an increasingly responsible way, giving us the time to develop a modified regulatory structure that will allow us to develop internal sources of green energy resources. That requires re-engaging with the oil and gas industry with an energy ‘Marshall Plan’ as recently proposed by JPMorgan CEO Jamie Dimon.

Green Energy is Not as Green or Easy as We Might Imagine

The materials required for electrification, mostly base and rare earth metals, don’t grow on trees. They need to be mined and processed and that is a dirty business whether these materials are mined here or anywhere else in the world. Although no single country produces all of the materials needed for the green economy, the table below lists all the countries that are among the top five producers of any of these materials and the rough market share of each. It’s not difficult to see that China is currently in a much better position to benefit from a transition to green energy that the U.S. Of course, it does not have to remain that way. Years ago, the U.S. was a major producer of rare earth metals, but the regulatory costs became such a burden that production shifted to China, where regulation is sparse.

It has become very clear that depending on hostile countries for critical materials is not a viable strategy and that we need to re-think our supply chains. If that change is to succeed, part of that process must be some rationalization of strict U.S. regulations. In short, we need to find a balance that protects the environment but still allows development. In the current, divided political climate, that is a very tall order, but it is one we must address if a successful migration to green energy is to occur.

De-globalization Increases Costs and Drives Inflation Higher

The rise of China and the swing to globalization has been a major deflationary force the last 20 years as goods have been increasingly produced in low-cost countries at times to the exclusion of other locations. In the wake of the serious supply chain disruptions caused by the pandemic and the Ukraine war, the globalization trend is clearly ending. The pendulum is beginning to swing back the other way and once it does, there is little that can stop it. As production moves closer to home and in higher cost locations, the deflationary impact disappears and is replaced by an inflationary impulse. The Fed is not blind to this and that only pushes them harder to address inflation in a forceful way.

A Technology Marshall Plan Too?

We can’t help but recall JFK’s speech from 1962: “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win…” JFK galvanized public support and established a policy mechanism to drive investment into the space race.

We are not starting from scratch. U.S. technology resources are already churning out advances that can make this process easier to navigate. Increased use of robotics in manufacturing is a technology that is already here and improving quickly. If renewables and electrification are going to work as we desire, we will need new breakthrough technologies to get there, whether it is more efficient batteries, more efficient equipment or some combination of both. If electrification is our future, we need a higher functioning power grid both in terms of capacity and security. (See the links below for some examples.)

From our perspective, 2022 feels like an inflection point, much like 1962; a time when policy can be a key driver to investment in technological breakthroughs. The global economy appears on the verge of major adjustments and those changes are being imposed on the world, rather than changing organically. That creates stress and risk as these changes require not only economic competence, but also political competence. We need to be up to the task.