The role of geopolitical volatility in maintaining and preserving our energy systems has become clear in the past five years. In the Pandemic, oil prices plunged, for the first time dipping below zero, as capacity issues, supply chain blockages and underuse made preserving oil reserves too expensive. The opposite effect has happened since Russia’s President, Vladimir Putin illegally invaded Ukraine, driving up prices by disrupting production and supply chains. This was then compounded by conflict in the Middle East breaking out in 2023. Energy prices have soared, particularly in the UK.
This has not only made energy more expensive, but also more volatile. As any ‘oilman’ or energy trader will tell you, prices have always been volatile, even in a relatively stable geopolitical climate. This inert order has facilitated increasingly complex energy supply chains. As those chains grew in length, their fragility has been exacerbated. The injection of geopolitical instability has been felt through abrupt price shocks and global interest rate rises. These price spikes have serious implications for the built environment sector. They inflate the cost of running buildings, constructing buildings, and producing the materials we use to make buildings.
A more robust grid
For those of us working in the built environment, there is a key interest in ensuring our electricity networks are less fragile. Not just resilience, but the creation of a dynamic industry able to respond and adapt to evolving challenges. And nowhere is this more vital than in the energy transition.
As we shift towards renewable energy, the old industrial and economic structures that keep up the global energy supply will shift. This will likely be clearer sooner in the UK than much of the rest of the world, given our dependence on energy imports, our statutory commitment to Net Zero – Labour’s manifesto included a pledge to turn the UK into a ‘clean energy superpower’ over the next decade. With both a consumer and industry shift away from fossil fuels towards renewables, there will also be a shift in international relationships, trade, and alliances. This poses political ramifications, reveals new tensions, and potentially thaws old ones as a new order of winners and losers in energy production is established. Renewable energy giants will become richer and more politically powerful, while traditional fossil fuel exporters will have to either radically adapt or lose out on global influence.
Supply chains as cultural artefacts
Our supply chains are inherently cultural. Private companies shape around a global order which is rapidly changing, and that means they will, by hook or by crook, have to change with the politics. Soviet economies were structured around the COMECON, and Marshall Plan funding in the aftermath of the Second World War gave America influence in managing and directing Western European economies. After the Cold War, private Western capital flooded into ex-Soviet areas of influence, building new relationships that have had to be untangled since the invasion of Ukraine. The US-China trade war in 2018 took textile manufacturing to Vietnam. This is cultural economics.
As geopolitics becomes more insular, then, the private sector will likely require a shift from efficiency to resilience. So-called ‘just-in-time’ manufacture and production, which by design emphasises rapidity and hinges on consumer demand, will be replaced by ‘just-in-case’ production, where what was once seen as inefficiency becomes an absorbed de-risking cost. Paying premium prices on materials closer to home — e.g. low-carbon British steel rather than cheaper blast furnace import — might push an increased production cost on the consumer, but with lower logistics cost and lessened price fragility (as well as theoretically prompting economic growth in Britain’s steel industry). Countries like Poland and Spain with growing manufacturing capacities closer to high-wealth low-manufacturing countries, will benefit the most as companies based in the UK and other advanced economies shorten their supply chains.
‘Just-in-case’ production might well also see a greater role for stockpiling and reserve-holding, for capital as well as for produced units. This is increasingly more viable for companies that are more likely to hold stagnant capital under higher interest rates as a way of de-risking against markets than they might have done under 0.05% rates. Another antifragile shift might be the diversification of supply chains, with companies limiting their exposure to fewer markets and centralising both organisationally and geographically. For low-manufacturing countries, this brings a real risk of dominant local companies reshoring or nearshoring, which would almost certainly have negative impacts on industries like construction, which is highly dependent on materials from abroad.
A common argument in favour of globalisation is that, despite increased political volatility, economic interdependence and wider access to transnational communication has led to its continued growth. But this may reflect economic lag, rather than a decoupling of politics from economics. That is to say, in five years’ time, those industries which have failed to reshape supply chains to reflect a new political reality may struggle or fail, just as those which failed to globalise did after the Second World War. It might well be the case that this economic shift becomes the biggest since that time.
Implications for Britain
Britain is in a particularly precarious position in this anti-globalist shift — this is certainly one of the reasons why anti-globalism has so many opponents. The Thatcher government hedged its bets entirely on the globalisation of economies, and Blair’s famous declaration that the inevitability of globalisation is as certain as that autumn will follow summer ratified this sentiment. Even today, as nationalisation is happening before our eyes, the government denies being pro-nationalisation.
In terms of its capacity for protectionism, Britain is far behind many of its neighbours and our undynamic, inflexible economy makes us far less capable of responding quickly than most other developed countries. The cost of borrowing capital, for example, is a challenge that limits both state and private investment. Where we have our strength, however, is in the depth of our industrial knowledge. Our high-skilled engineering sectors mean that we have the potential to innovate and develop in our industries as quickly as any other similar economy. Although our financial capacity to implement innovations is limited, the dexterity and scale of our research capacity is enough that what we innovate can be high-quality and created to be resilient — under the right conditions.