As the year comes to a close, we are reviewing some of the geopolitical and geoeconomic highlights that have dominated the news cycle over the last few weeks. We begin with a discussion on rising conflict across the world and whether or not the West is prepared for it. Next, we look at Venezuela’s threat to annex Guyana’s Essequibo region. Then, we examine the prospects of Israel’s offensive against Gaza, and the risk of war expanding to other places in the Middle East. We also touch on how the green energy sector has suffered in this new period of high interest rates. Finally, we end this week’s newsletter with a discussion of the major developments that came out of COP28.

A New Era of Conflict

It’s Not Just Ukraine and Gaza: War Is on the Rise Everywhere

Max Hastings, Bloomberg

Alarm Grows Over Weakened Militaries and Empty Arsenals in Europe

Max Colchester, David Luhnow, & Bojan Pancevski, The Wall Street Journal

European militaries are ill-prepared for the modern world as violent conflict is on the rise globally. Beyond the headline conflicts of Ukraine and Gaza, 2023 has seen the largest number of conflicts at 183. These conflicts run the spectrum from militant groups that control large swathes of poorly governed spaces in regions such as Africa to gang activity and drug-related violence in South America. Still, it is the war in Ukraine that has brought focus to the issue, as European countries scramble to modernize their armed forces, which have decayed since the end of the Cold War. When discussing NATO members specifically, European NATO members spent as much as 3% of GDP during the Cold War, while spending only 1.3% of GDP as of 2014. As Russia and China increase spending and defense production, then, European nations are left playing catchup as they rebuild their military capabilities to meet the demands of the modern era.

Essequibo: Crisis or Show?

Venezuela’s threat to annex part of Guyana

The Editorial Board, Financial Times

Venezuela’s autocrat, Nicolás Maduro, threatens to annex Guyana

The Economist

Guyana Boosts Security, Engages US to Defend Land from Venezuela

Fabiola Zerpa & Patricia Laya, Bloomberg

Venezuela’s strongman president Nicolas Maduro has begun the process of “annexing” Guyana’s Essequibo region after a referendum that positively supported the move, even if turnout may have been low. Specifically, Maduro has ordered the state oil and gas companies to establish drilling rights in the region, redraw the official map of Venezuela, establish a military zone in Essequibo, and create a new Venezuelan state in the region. It is not clear what impact this will have in the region, or if Venezuela is prepared to militarily annex two-thirds of Guyana’s territory in Essequibo. While Venezuela is supported by Russia, China, and Iran, Guyana is supported by the US, with US Secretary of State Antony Blinken pledging full support for Guyana as it increases security measures in response. Though vocally supporting Guyana, the development has put some pressure on Washington, with some calling for the Biden administration to reinstate the sanctions on the Maduro regime that were removed only a couple months ago. Whether the move is a desperate ploy to stave off potential election woes next year for President Maduro or the opening frame in a crisis in the making in South America, remains to be seen.

Fears of Escalation of the War in Gaza

‘Catastrophic’ conditions in Rafah as Palestinians reach the end of the line

Mai Khaled & Heba Saleh, Financial Times

Israel, Palestine and the mirage of a two-state solution

Gideon Rachman, Financial Times

Why Fears of a Broader Middle East Conflict Are Growing in Iraq – The New York Times

Alissa Rubin, The New York Times

Rafah, a Gazan town on the edge of the border with Egypt is becoming dangerously overwhelmed as the Israeli offensive displaces more and more Gazan civilians. 85% of the strip’s 2.3 million people have been pushed south, and Rafah is their last refuge as the Egyptian border is closed. The United Nations (UN) reports that thousands are living on the streets with little access to basic needs. The UN’s own relief agency in the territory, the UNRWA, warns that it is on the brink of collapse – Over 100 of its personnel have been killed in Israeli strikes. Neither the current Israeli government nor Hamas want a two-state solution. But, at some point, the fighting will stop. Who will rebuild and govern devastated Gaza? The White House is working on plans to bring the Palestinian Authority (PA), the nominal government of parts of the West Bank, to run Gaza. The PA, however, is seen as weak and corrupt by nearly all parties involved, even Palestinians themselves. Meanwhile, some members of Israel’s far-right government have openly talked about wiping out Gaza entirely. The conditions for progress toward a two-state solution seem more remote than ever.

Since the conflict began, there have been fears of the war expanding to other places in the Middle East. Iran-backed militias in Lebanon and Iraq have both launched attacks, with the Iraqi-based Khataib Hezbollah launching over 80 drones and rockets at US military sites in Iraq and Syria, wounding over 60 service members. Iran’s regional strategy is to support these disparate militias to augment Tehran’s reach. Iran has also backed political parties in its neighbor, Iraq. In 2021, these parties won enough support to form a coalition government. According to former Iraqi officials, Iran has influence over every sector of Iraq’s security forces, its military, and its provincial governors. Because of Iran’s links across the region and its hostility towards Israel and the US, the risks of an expansion of the war increases as time goes on.

Green Energy Sector’s Problems and Prospects

The renewables business faces a make-or-break moment

The Economist

Green Investors Were Crushed. Now It’s Time to Make Money.

James Mackintosh, The Wall Street Journal

During the few years before the new age of high interest rates, the renewables sector was enjoying a moment of prosperity. The price of solar and wind dropped as technology advanced and economies of scale developed, which made clean energy competitive with dirty energy. Infrastructure investors and utility companies made bets on the sector, pouring money into projects. For a few moments, NextEra, an American energy company that bought in to renewables, had a larger market value than ExxonMobil. Now, the situation is reversed. Renewables have been punished by high interest rates, supply-chain issues, and green protectionism from Western governments. The S&P global clean energy index declined over 32% over the past 12 months, while global stock markets have risen 11%. NextEra is now worth about a third as much as ExxonMobil.

ESG-minded investors were crushed by the damage done to renewables, and it has pushed down stock prices for green companies across the board, with some investors calling it a reality check. However, with the ‘green premium’ gone, there now may be a ‘green discount’ for green bonds, making them a potential opportunity for investors to jump in. Green stocks, on the other hand, are harder to judge; the S&P green index trades at a discount to the global market on some measures but not others. Even so, it seems that market forces have cemented themselves in the renewables sector, opening up a space for investors who care about profits to being considering green stocks once more.

COP28’s Hopeful Developments

COP28’s Historic Deal Cements a Role for Big Oil’s Priorities

Stephen Stapczynski, Bloomberg

Does COP28 Mark the Beginning of the End for Fossil Fuels?

Javier Blas, Bloomberg

COP28, the UN climate talks, were hosted by the UAE this year in Dubai and produced some promising and surprising developments. The President of the talks, Sultan Al-Jaber (an Emirate oil executive) was able to negotiate a historic deal between all 198 parties that pushes for a transition away from fossil fuels. The document, called the “Global Stocktake,” calls on the world to act in reducing its use of fossil fuels, to triple renewable energy capacity, to double the global average annual rate of energy efficiency improvements, and to hasten the phase-down of unabated use of coal. Still, critics found that the language included was weak and provided very few concrete dates for all of these call-to-actions, allowing oil-producing countries and big oil companies to inevitably find loopholes. The document called for a “transition” away from fossil fuels in an “orderly” manner, which addresses petrostates’ concerns about keeping oil prices stable. It also includes ramping up investment in zero- and low-emission tech like carbon abatement, a win for Big Oil which has bet on carbon sequestration (a process that involves taking carbon out of the atmosphere and storing it long-term). Perhaps the biggest loophole critics found issue with was the need for “transitional fuel,” which refers to natural gas since it releases less carbon dioxide than coal when combusted. All in all, the COP28 summit was an exercise in climate diplomacy, navigating the complex motivations of all parties involved. In the end, a flawed but promising agreement reached consensus.