Wednesday 07 Jun 2023
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This article first appeared in Wealth, The Edge Malaysia Weekly on April 25, 2022 - May 1, 2022

In 2003, Tesla’s founders realised that lithium-ion batteries were becoming increasingly powerful and cheap over time. Thanks to the explosion in laptop computers and cell phones, battery costs were falling fast. Soon, thousands of them could be used to power an affordable electric vehicle (EV). 

Tesla’s first model cost over US$1,000. The Tesla Model 3, launched in 2016, costs about US$45,000. The next Tesla model is expected to cost just US$25,000 — but will be probably even cheaper once you factor in autonomous driving and higher utilisation rates. Soaring EV demand has accelerated the drop in battery prices. 

According to the Rocky Mountain Institute, every 70 minutes or so, the world gets enough solar energy to run everything for a year. Sunshine is free. “You simply have to build the infrastructure in the right place to capture the energy that is already there,” says Mark Lewis of Andurand Capital, a commodities hedge fund. From there, economies of scale and technology improvements push solar down the cost curve. 

While 80% of the world’s energy is still derived from fossil fuels — a source of energy more costly and inflationary than solar energy — solar and EV adoption is rising relentlessly, aided by exponential technology advancements. 

Global petrostates, including Saudi Arabia and Russia, have increasingly woken up to the fact that oil will one day be replaced by renewable energy like solar. It could become worthless. This could be partly why various nations are now vying for oil resources while they remain valuable. There seems to be a scramble by certain countries to extract and maximise the value of oil before the fossil fuel era draws to a close. 

Take Ukraine. Home to the world’s sixth-largest coal reserves, Ukraine was once Europe’s third-biggest coal producer. However, its production plunged after the war broke out in 2014, with pro-Russian forces seizing major assets. Beyond coal, Ukraine also has the second-largest natural gas reserves in Europe. The bulk of Ukraine’s coal and gas is in Donbas, where reports suggest the ongoing war between Ukraine and Russia is increasingly concentrated.

Russia’s 2014 annexation of Crimea unlocked access to valuable oil and gas resources in the Black Sea. Mariupol, which Russia says it has just secured, lies along the Sea of Asov, between Russian-held territories in Donbas and Crimea. This city houses key export infrastructure along Ukraine’s coastline and major steel-making facilities. With Mariupol, Vladimir Putin can now create an economic corridor linking Russia, Donbas and Crimea. 

Writing in the The Wall Street Journal, David Knight Legg, an analyst and former principal adviser to Alberta Premier Jason Kenney, notes that Russia is occupying regions holding 90% of Ukraine’s energy resources. 

At current prices, Ukraine’s natural gas and oil assets are worth over US$1.4 trillion. Success in Ukraine, Legg says, gives Putin an “extraordinary strategic geopolitical advantage” — placing Russia at “the centre of global energy supply to vast European and Asian markets for the foreseeable future”.

‘Inside money’ and ‘outside money’

Meanwhile, let’s turn our sight to the concept of “inside money” and “outside money”. According to Zoltan Pozsar, a former senior adviser to the US Department of the Treasury, these are the two basic forms of money.

“Inside money”, Pozsar says, is “someone else’s liability”, including central bank deposits, bank deposits and US Treasuries backed by its government. Meanwhile, gold, oil, Bitcoin and commodities are examples of outside money, especially if you hold the keys to the vault. 

To me, “inside money” is like a monetary system that relies on trust between insiders within a network. It works best if you have good relationships with the network’s owners. Think of how a utility grid works. If you play by the rules, you’ll get electricity. Break the rules, and the lights switch off. 

So, when the US and its allies blocked Russia’s access to its central bank reserves and the SWIFT network, they were effectively kicking it off the grid of “inside money”. Will this speed up the creation of new monetary systems and the dedollarisation of central bank reserves? 

Reportedly, Russia, China, Saudi Arabia and India are working to sidestep the dollar in trade. But while the dollar is losing share in cross-border transactions, storing wealth in fiat — be it the yuan or rouble — is inside-the-box thinking.

This explains the steady build-up of “outside money” reserves in China and Russia. In 2018, Russia held 40% of its central bank assets in the dollar. By 2020, the share of dollar assets had dropped to 22%, while the share of gold rose to 23%, overtaking dollars for the first time. 

Meanwhile, besides buying more gold and acquiring natural resource assets, China has hoarded increasing amounts of agricultural commodities. According to the US Department of Agriculture, the nation has stockpiled half of the world’s wheat reserves, and 60% to 70% of its corn, potentially leading to higher prices for everyone else. 

Proponents of dedollarisation will cheer the fragmentation of reserves and monetary systems. But what this trend really signals, however, is the erosion of international trust and that the world is hurtling towards deglobalisation. 

On top of countries scrambling to control oil, dedollarisation, deglobalisation and the hoarding of “outside money” are factors that contributed to the centralisation of commodities in the hands of a few nations. As a result, commodity prices and inflation soared and are more volatile than usual. 

Paying the price

Globally, the victims of inflation are people living in countries furthest away from the nexus of power. Commodity prices are now soaring worldwide, threatening to unleash a global famine impacting one-fifth of the world’s population. Millions of people have been displaced this year, escalating the global refugee crisis. 

Interestingly, the upshot is that these events could drive people towards a decentralised energy and monetary system. 

In the US, a growing number of citizens are “defecting” from utility grids, choosing instead to install solar panels and batteries to power their homes and vehicles. Chamath Palihapitaya, a venture capitalist, believes such a system will be viable for most US households. He has, in fact, proposed building a decentralised solar grid — a move that could help the US achieve energy independence and reap solar power’s deflationary benefits. 

Monetary-wise, Bitcoin is neutral, decentralised and borderless. When war broke out in Ukraine, ATMs began running out of cash. Electronic cash transfers were blocked. Bitcoin became key to financial survival for refugees escaping the war zone.

Bitcoin, like batteries, is technology. It evolves at the pace of technology, which means the coming years will see innovations built on top of its network. In time, Bitcoin stands to become more useful, cheaper to use and faster. 

Excitingly, decentralised energy and monetary systems have recently converged through the efforts of creative entrepreneurs. Mining Bitcoin and revenue from processing Bitcoin transactions could offset the costs of building out solar infrastructure and battery storage systems, accelerating the green transition. This is an idea that Tesla and Block, two of the US’ most promising technology firms, are working on. 

Based on a news report by CNBC, Block is mining Bitcoin in Texas using the solar and storage technology from Tesla. 

West Texas is known as the Mecca of renewable energy in the US, with extended hours of sunshine and quality wind speed provided. However, there is little incentive for the local government to build renewable infrastructure in that area as energy usage is negligible. This is where Block and Tesla come into play. 

In short, the two companies would use electricity generated by renewable infrastructure in West Texas to mine Bitcoin until they were replaced by new energy buyers. “You can think of Bitcoin miners as temporary buyers who keep the energy assets operational until the grid is able to fully absorb them,” wrote the report. 

If these efforts are successful, we will be witnessing the birth of a new financial system backed by decentralised energy.

Andrew Vong is chief future officer of EquitiesTracker Holdings Bhd

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