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Episode 9: What's next in 2023?

"We are coming out of a period of uncertainty," says David Bailin, Chief Investment Officer at Citi Global Wealth. In the latest Living Beyond Borders podcast, Bailin and Ian Bremmer discuss what we might look forward to in the back half of the year and into 2024.

Listen: "We are coming out of a period of uncertainty," says David Bailin, Chief Investment Officer at Citi Global Wealth. "We've all been thinking it would go much faster than it has, but in the event we get to a more normal economy in 2024, given how vastly impactful COVID was, I think that that's a pretty fast outcome."

In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Bailin is joined by Eurasia Group President Ian Bremmer to discuss what's happened so far on the economic and political stage, and what we might look forward to in the back half of the year and into 2024.

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Episode 8: Global food (in)security

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Listen: Following shortages that came out of the COVID pandemic as well as the war in Ukraine, the dual food problems of affordability and availability persist. While temporary impacts may be waning, the experts also discuss the longer-term impacts of the global food production system on the environment and what will - or won't - be sustainable going forward, including the food system's massive dependence on fossil fuels. In the latest episode of Living Beyond Borders, Peter Ceretti, Director of Global Macro Geo Strategy at Eurasia Group, Harlin Singh, Global Head of Sustainable Investing, and Malcolm Spittler, Global Investment Strategist, and Senior US Economist, both at Citi Global Wealth Investments, discuss the latest causes and ripple effects of food shortages around the globe.

In Planting for Tomorrow: Weaving sustainability into the path toward food security, a report from Citi Global Wealth and Eurasia Group/GZERO Media, we take a deep dive into the challenges and the innovations in sustainable agriculture. This newsletter gives you an essential look into the future of food.

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Transcript

Listen:"We need to keep that investment flowing to come up with better ways to do this so that everyone is fed within the constraints of what the planet is able to bear," says Peter Ceretti, Director of Global Macro Geo Strategy at Eurasia Group.

In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Ceretti is joined by Harlin Singh, Global Head of Sustainable Investing, and Malcolm Spittler, Global Investment Strategist and Senior US Economist, both at Citi Global Wealth Investments, to discuss the latest causes and ripple effects of food shortages around the globe.

Following shortages that came out of the COVID pandemic as well as the war in Ukraine, the dual food problems of affordability and availability persist. While temporary impacts may be waning, the experts also discuss the longer-term impacts of the global food production system on the environment and what will - or won't - be sustainable going forward, including the food system's massive dependence on fossil fuels.

This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.

Transcript: Season 4, Episode 8: Global food (in)security

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Harlin Singh: Affordability and accessibility have become much more top of mind for investors and policymakers. It's not just about the amount of food and just total calories to keep people alive, but there's certainly a great deal of focus on innovation.

Peter Ceretti: We need to keep that investment flowing to come up with better ways to do this so that everyone is fed within the constraints of what the planet is able to bear.

Malcolm Spittler: Disruption is always the force that we hear about these days, but it is just as true in something as seemingly traditional as agriculture as it is in the high-tech space.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.

The world today has major hunger pains. According to the United Nations, an estimated 670 million people across 89 countries are experiencing what's known as acute hunger. That means severe undernourishment and at risk for starvation. In some countries like Afghanistan, Haiti, Somalia, it's truly an emergency, and the reasons for this are many. Food prices, which were already high, following disruptions during the pandemic, climbed up even further in the wake of Russia's invasion of Ukraine.

Ertharin Cousin, former head of the UN World Food Program joined a GZERO livestream exactly one year ago, and she said this:

Ertharin Cousin: 12 months from now, what is now being suggested is that we move from a food affordability crisis to a food availability crisis, that is not about high-priced food, it is about food being unavailable.

Shari Friedman: Affordability and availability are both affected by many factors, ranging from the war in Ukraine, to supply chain disruptions, to climate change. To dig into all of these food topics, I'm joined by two guests from Citi Global Wealth Investments. Harlin Singh is the Global Head of Sustainable Investing. Hi, Harlin.

Harlin Singh: Hi, Shari. Thanks for having me.

Shari Friedman: And Malcolm Spittler is Global Investment Strategist and Senior U.S. Economist. Welcome.

Malcolm Spittler: Hi. Thanks for having me.

Shari Friedman: We also have my Eurasia Group colleague, Pete Ceretti here, he is Director of Global Macro Geo Strategy. Hey, Pete.

Peter Ceretti: Hi, Shari.

Shari Friedman: Pete, I want to start with you and kind of the big picture. Let's start on the scale of the food crisis itself. What is the scope of this globally and where are the needs the most acute?

Peter Ceretti: So we're seeing pressure on household budgets and on the ability to afford food affecting people all around the world in countries at all levels of income. Something like 90 out of 150 countries that were reporting data in March had food inflation rates above 10%. In some cases, those food inflation rates are even higher. They're above 20%, and a few cases, we have countries with food inflation that's running over a hundred percent. The interesting thing here is that it is not just countries like Lebanon, like Venezuela, countries that are facing conflict like Sudan, that have these very, very high food inflation rates. Even in Europe, we see wealthy countries like the UK, like Sweden, like Germany, with food inflation running at close to 20% or in some cases higher.

Now, the countries that are really feeling this the most, that are at the greatest risk here are the poorest countries with social safety nets that are not able to shield the population, and especially those countries that have governance issues or are facing conflict. In terms of the absolute number of people who are facing really, really extreme and severe deprivation, it's countries like the DRC, Ethiopia, Afghanistan, Nigeria and Yemen that are the worst hit. But just to give you kind of a sense of the numbers, the UN and other organizations estimated that something like 193 million people in 2021 were facing extreme forms of food distress. That number increased to 258 million people around the world last year.

Shari Friedman: As you said, there was already a baseline food disruption, and could you explain why the war in Ukraine caused additional disruption and to what extent are efforts by the UN and others to broker agreements on grain transport, to what extent have those been successful?

Peter Ceretti: So the reason that the war in Ukraine had such a big impact on food prices around the world is partly due to the success of Russia and Ukraine in becoming major agricultural kind of powerhouses over the last 30 years or so. Before the war, Russia and Ukraine accounted together for something like 75% of world exports of sunflower oil. About 30% of exported wheat and barley were coming from these countries, and it's something like 17% of the world's corn exports. It was mainly food importing countries in the Mediterranean basin, countries like Egypt, Algeria, Tunisia, Lebanon, Syria, that were buying large quantities of food from these countries. When the war started, we saw a lot of people leave the farmland to go fight.

We saw transit disrupted, shipments stopped from the Black sea and energy prices, transport prices went sky high overnight. So all of this meant that for one thing, food supplies were disrupted to a lot of countries that were dependent on food imports. And then for another, once shipments resumed, prices were much, much higher.

Another thing to note here is that Russia and Belarus in particular are big suppliers of fertilizers to countries around the world. Nitrogenous fertilizers in the case of Russia. In Belarus's case it's potash and phosphorous-based fertilizers. So those phosphorous-based fertilizers coming out of Belarus were sanctioned by the EU, and Russia continued to export nitrogenous fertilizer, but nitrogenous fertilizer uses natural gas as its key feed stock. Most of the chemicals that are used to make these fertilizers are broken down from natural gas as the starting ingredient. And so when oil and gas prices go high, natural gas prices end up feeding into higher fertilizer prices too. So there's an indirect effect, that it's hard to procure fertilizer, harder to farm, and food prices go up as a result.

Now, UN efforts have made a difference here in the sense that along with the efforts of Turkey and other countries, helped to broker a deal so that we got this Black Sea Grain Initiative, which was able to restart shipments through the Black Sea from Ukraine and Russia as well, so that food exports could get out to countries that are trade dependent on the Black Sea region, and we can see grain and oil seeds continue to flow. Russia has made increasing noise about upending that deal. We at Eurasia Group don't think that that's likely over the near term, although the situation is rocky. And ultimately that's probably not going to be enough to totally mitigate the upward pressure that we've seen on food prices as a result of the war.

Shari Friedman: I want to go over to Malcolm for a moment. Food commodity prices on the global markets have fallen since last year, but inflation is still there and it's still a major factor. So could you break down the affordability part of this problem?

Malcolm Spittler: So for a household, they have an amount of money to spend on things, and even if there's some inflation in some area other than food, it still constricts their ability to spend on food. Additionally, we've seen a very strong pickup of the U.S. dollar, and that pickup in the U.S. dollar, which is the currency that a lot of these commodity prices are set in, means that in local currency terms, often we are actually seeing higher prices due to this currency factor, even as we are seeing dynamics shift a bit in terms of what is happening with the underlying commodities.

The other thing is it takes quite a time to actually get a crop ready for market. So fertilizer prices, for instance, have fallen substantially. Nitrogen prices are often measured basically with ammonia on the commodities market and in many key countries around the world in both developed and developing markets, ammonia prices are now back largely to their pre-Russia war level. But you actually have to get a crop into the ground, have to give it time to grow and then bring that product to market before you can actually have the full effect in terms of the end product that is consumed by people around the world. So we still have a backlog to get through, but there are promising signs.

Additionally, with the U.S. looking like it's set to potentially start easing in terms of financial policy in the next few months, we may see a reversal in terms of the U.S. dollar, and that's something that we're looking at more largely as an investment trend, but it has the opportunity to maybe mitigate some of the pressure on consumers around the globe.

Shari Friedman: Harlin, there's a lot of contributing factors beyond the war and beyond inflation and some of these venture into your world, which is sustainability. You can't lay out all the problems at the doorstep of climate change, but you can touch on where climate change and also biodiversity loss have played a role. So what are you seeing there?

Harlin Singh: Yeah, that's a great question Shari, and you well know that we can't talk about food security and food production without talking about climate. Some of what Pete and Malcolm mentioned, the geopolitical and macro environment obviously is what I think brought food security into kind of front and center front of mind for many people over the last year or so. But we know that 95% of food comes from soil and soil degradation is the result of pollution, urban expansion, long-term climate changes. All of these factors playing a huge role in terms of agricultural yields. And then there are also short-term impacts associated with climate that can be catastrophic to food security.

We saw last year the droughts and wildfires across California and Europe, flooding in Pakistan that were all due to extreme weather and changing weather patterns, and they're impacting planting season, harvesting season, so they're completely impacting yields and are a huge part of food security, especially in emerging markets.

The flip side of that is: guess what? Agriculture itself is a huge contributor to climate change and as an industry it contributes to about a quarter of greenhouse gas emissions. And when you add in the emissions associated with transport fertilizer distribution, you're looking at close to 35% of emissions coming from food systems. And to make matters worse, agriculture also drives 80% of biodiversity loss.

And so when we think about agriculture and the food systems as a whole, it's a threat to the stability of the earth system, which then has a knock on effect, of course, to everything else. And when we look at land use, we look at how much of the oceans are industrially fished, the amount of freshwater that's used for agriculture. Conversely, the fact that fertilizer over application and pesticide poisoning are causing a lot of issues with clean water as well and leading to everything from ocean acidification to human health concerns, it's really two sides of the same coin.

So they're both completely linked, right? Food security and climate, and this should really matter to consumers, to policymakers, to economists for a few reasons because on the back of what agriculture is causing in terms of climate, there's also a move towards pricing carbon. And so as governments start to expand their policy and reach on carbon pricing, food systems will have to find a way to decarbonize or food will just continue to get more expensive. So adding to that inflationary pressure, the cost of food production also is threatened by climate change and by some of these inflationary pressures.

About a third of topsoil is already operating at reduced productivity due to degradation, and over three quarters of global food crop relies on animal pollination. So when we think about some of those inflationary drivers and fertilizer prices - compounded by the inefficient use of it and pesticides that are having unintended consequences, we're going to continue to see that price be paid in terms of the cost of production of food. Right, I mean, you look at bees and pollinators and the incredible impact that that will have towards a loss of food production over the course of time, if we're not mindful of it, is going to be very, very significant.

And then, of course, the cost of transportation and cold chain delivery as the planet continues to warm, that's going to become a much more critical part of getting food to rural areas, you know, especially in emerging markets where we're starting to see the temperatures rise quite significantly. So I do think we need to think about these two issues, and we need to be careful when we think about solutions on how one may impact the other.

We don't want to end up creating and compounding the issue in an unintended way, especially when we think about human health, human health and solving it through addressing food crisis and nutrition, right. We also have to be careful that not everybody can afford organic food. We saw what happened in Sri Lanka when they banned the use of fertilizer. It's quite a significant impact then on a negative kind of feedback loop.

Shari Friedman: Yeah, I think that companies are really grappling right now, not just agricultural but all of them, on how do you address all of these various crises and the solutions to all of them without, kind of like a balloon, without squeezing on one and creating more pressure on the others. I've had a quick round question for you all, because I'm curious to know if you think that we are better off at this moment than we were at this moment last year in terms of agriculture and food security?

Malcolm Spittler: I think in terms of the outlook, we are in a better position because we have actually started to have the availability of a lot of these commodities coming out of Ukraine and Russia, and we've seen the kind of pinch point prices fade, but that doesn't mean that the human costs are any lower. In fact, right now the human costs are probably more acute than they were a year ago in the immediate, but, I guess, we can see the other side of the pain point.

Peter Ceretti: I think we're definitely better off in part for the reasons that Malcolm cited, right, that essentially the worst of the spike in prices and the upward trend that we saw last year in terms of international food prices has reversed. We're now seeing international prices fall and we're dealing with kind of an affordability problem rather than availability problem in terms of food supply as worldwide. It's still significant though. I mean even if international food prices are falling, the median food inflation rate around the world's about 12% right now. So it will take some time for these issues to work themselves out. But I do think we're in a better spot than we were last year.

Harlin Singh: I do think that things are better, not just from the economic standpoint, but I do think that given what's gone on in the world over the last three years, first the focus on human health and COVID and what we dealt with there and then the war that broke out, and now you know, it seems to me that over the last several years that this idea of affordability and accessibility have become much more top of mind for investors and policymakers. It's not just about the amount of food and just total calories to keep people alive, but there's certainly a great deal of focus on innovation, education, and so that makes me feel that we're in a better place because the capital is starting to flow in the right direction.

Shari Friedman: So Pete, I want to kind of go back up onto some of these larger issues and food is a globally-traded commodity. I know you track all the different markets. If you look at Pete's computer at any given time, it has a lot of different graphs all over it, but it's also a piece of human survival and food shortages have this humanitarian component and it can also create dangerous unrest in a lot of countries. You touched upon this in the paper that you wrote last year. What is the political and geopolitical impact of hunger?

Peter Ceretti: I should note that Shari contributed a good piece to that paper as well, as did many of our colleagues. Yeah, I think the key thing to watch here is the risk of unrest and ultimately change in regime in some countries and the geopolitical instability that would flow from that if we see persistent hunger around the world.

So we did see protests in 2011 that were sort of the beginning of the Arab Spring protests that in some cases were touched off by runaway food prices. We had similar events in 2007 to 2008. I don't think anything like that is on the cards over the next few months or the next year.

But it's important to note that food inflation at very high rates, particularly spikes in food inflation are associated with unrest. Typically, social scientists look at high food inflation as the straw that breaks the camel's back. If there are governance issues, if there's corruption, if there's economic malaise and a whole lot of other things going on in a country that mean that the people are suffering, right, often folks will go to the street and say, "All right, we can't even buy basic foodstuffs to feed our families. This is enough, now we go out to the street."

Shari Friedman: So it's never all that simple. It's not one factor.

Peter Ceretti: It's always multi-causal and it's hard to really predict when food inflation will be the thing that leads to protests, but it's certainly a risk factor.

Shari Friedman: So I want to move over to some solutions. And Harlin, this is probably where you live the most as an investor, looking for some of the opportunities. Could you describe some of the innovation you're seeing, both financial innovations and also technologies? What are you really excited about right now?

Harlin Singh: There's a ton of innovation going on in terms of ag tech specifically, which is focusing on improving crop yields while reducing environmental impacts. So we're seeing everything from genetic technology to precision farming, controlled environment farming such as vertical farms, improving efficiencies and supply chains, which is probably the more boring end of it, but also really interesting in terms of how much innovation is going on there as well as in transport. There's a lot going on in earlier stage companies. We're seeing a lot going on in private equity and venture.

One area I think that most listeners will be familiar with are plant-based proteins, and this is an area that I think is really ripe for disruption, because so far what we've seen is many of these products are premium products. They're not actually solving the food security issue. They're expensive, they're not available everywhere, nor have they really gone totally mainstream, even within wealthy countries. So if there's greater innovation to find scale here, we'll see decreased pressure on land and emissions reduction that will be incredibly significant and at a cheaper price point, it can also help solve some of the issues around food security.

Other areas that I think are very exciting are innovation within fertilizers, both in terms of the fertilizer itself being more sustainable, as well as the use of precision agriculture to reduce dependency on fertilizer, which also has a positive impact in terms of water contamination and soil health.

Gene editing, which is certainly an area that I think has gotten such a bad rap over the course of time, but it's also very exciting if you start to look and dig a little bit deeper. So gene editing and sequencing can not only offer better yields, for example, turning wheat into a perennial crop versus an annual crop, that would result in greater yield, but it would also use less energy and water because of the deeper roots of the crop itself. But it can also result in crops with higher nutritional content.

So when we're talking about food security, nutrition's a huge component of it, and we're starting to see that in tomatoes that have nutrients that result in lower blood pressure, for example. And the food that's produced with gene editing often doesn't face the same regulation as other genetically modified crops because a lot of that editing or a lot of those changes could also occur naturally. So that's an area that I think will be exciting. I mean, it's still quite nascent and not quite investible for the mainstream investor.

And then going back to regenerative farming and project finance that's starting to turn either land that's been over farmed or that's just not being productive at all to bring back health to that land using methods such as crop rotation and grazing animals to naturally maintain that soil health.

I think that's a really exciting area as well when we start to think about the investment landscape. I was actually not too long ago researching a sugar farm and sugar, obviously not necessarily the crop that comes first to mind when we're thinking about food security, but what the farm was doing was really interesting and a really great example of the innovation within farming.

And motivated by actually financial results and profitability, they implemented GPS trackers to allow them to apply fertilizer in a much more targeted manner to reduce their costs. It improved their environmental impact. They also were very careful about maintaining soil health, so built a laboratory to really analyze the soil on an annual basis, introducing new crops and rotating them to maintain optimal nutrient levels that resulted in better and healthier sugar cane, also improved the soil, which is an incredible carbon sink.

They had an issue with rats, and I kind of laugh when I say this because I live in New York City. They had an issue with rats, which they were treating with rodenticide, but then found that barn owls actually can do the trick, are much cheaper and a much healthier way to let nature run its course.

Think about how all of these components have not only improved the sustainability attributes, but also improved profitability for the company. So when we think about kind of exciting areas for investment, it's both how companies operate their existing businesses as well as what that exact innovation is that helps to achieve the results that we need to achieve in terms of food security.

Shari Friedman: This is a really interesting mix between the technical and the totally non-technical. So you've got crop rotation and barn owls, and then you have digital precision farming and gene editing. It's like it's completely, you're just running the spectrum on the mad scientists versus the farmer. So Malcolm following what Harlin is saying, what does this mean for the bigger picture? How are you thinking about food as an economist and as an investment strategist?

Malcolm Spittler: Well, it's always dangerous to ask an economist about food. We have a long history of being very, very depressing. Going back to Thomas Malthus with his amazing insight that was true for the entirety of human history until basically the moment he was alive, which was basically that the land's productivity grew with a number of acres under cultivation and population was growing exponentially.

And so he saw this as a formula for perennial starvation. We have shown for the last 200 years that that is not the fate of humanity, and that has been a wonderful thing to prove incorrect. But perhaps most excitingly, we are now seeing global population growth slow meaningfully. The global population is now growing at about a half percent a year in that ballpark. We haven't peaked. The number of people is growing very quickly in terms of numbers because the base level is so high, but the growth rate is much smaller than it has been in the past.

Even as recently as 1960, the global growth rate of population was 2%. So that's four times as fast. Well, that means you have to double the amount of food you produce globally much, much more quickly. So with this lower population growth, we actually can sort of see the target of having enough food for everyone and having food security in a way I think that is fundamentally new for humans.

I mean, the fact that we are having a conversation about how to make everyone on the planet food secure is something that would've been unthinkable in any century in the past. And now we feel bad because we have stepped back and we have these recent crises that have exacerbated the problem, but in the thrust of history, we are making very, very good progress. So looking at this a little bit more granularly, there are some major challenges. Harlin articulated the fact that we are going to be needing to solve this food security issue in the context of global warming, in the context of weaning ourselves off of fossil fuels.

Well, for the last 110 years, fossil fuels have been the beating heart of increasing food production through the Haber-Bosch process and the creation of synthetic nitrogen fertilizers. It's been estimated that about half of the calories that are consumed by everyone in the world is coming from nitrogen that was fixed with the Haber-Bosch process. We need a system that isn't fed on natural gas. The good news is we now have technologies that are capable of fixing nitrogen using just electricity as an input and not using natural gas. The flip side is they're not currently economical.

So this becomes not a question of what or how, but how to afford it and where can the money go that will drive the innovation that will put those things within reach. I think it's safe to say that we have gotten very good at scaling things up as a species and making something that seemed impossible, not only possible, but easy. And so I have great hope that we will be seeing the Haber-Bosch process as being this kind of wonderful thing that allowed us to not have mass starvation in the 20th century, but something that we move beyond relatively early in the 21st century.

And as Harlin articulated, the ability to use less nitrogen in the form of fertilizers through targeted ag has the ability to shrink the kind of runoff problem and the problems that happen in the global drown stream from all of agriculture, that is happening absolutely everywhere, and that can be curtailed by this sort of smart agriculture.

I also want to note one last thing, which is globally the number of rural inhabitants according to the UN has peaked and is now in actual decline. This means around the world there will be fewer people to be available for farm labor. As we've seen in the developed world, this meant a radical shift between capital and labor as the productive potency that drove farming. And this is going to be both the key to producing enough food to feed the world, but also to be able to produce enough food cheaply to feed the world. And it's always a complicated thing, but there is this idea that we can substitute in for a lot of the least productive labor where people do not have access to the tools and the know-how, and we can actually bring a lot of land into more productive and perhaps less damaged use. I see this as a moment of optimism. There are a lot of big changes that are coming, but a lot of them are problems that will be solved by targeted investment in this space.

Shari Friedman: Pete, Malcolm noted that we have the potential to actually solve the food security problems. So where does politics and geopolitics come into here? What are the solutions in that area that might help us more toward having global food security? And another point that we haven't really touched upon is, are the G7 countries doing enough to help developing nations?

Peter Ceretti: So I think from a geopolitical perspective, we do need to see more of a partnership and more leadership from wealthy countries like the G7 in supporting developing countries, in being able to produce enough food cheaply enough for their populations. There's a list of things that we could potentially do better, but let me run through a few of these that I think are most important.

One would be supporting smallholder farmers. This is really important because there's a big overlap in terms of the smallholder farmer population around the world and the extremely poor population around the world. So if you support smallholder farmers, you're effectively targeting a large proportion of the population that is least able to afford food as well. A related point is that we need to do more to support agricultural production closer to the countries that need food and that are large net food importers rather than outsourcing food aid to the most efficient producers.

It made a lot of sense for the World Food Program to buy an awful lot of wheat from Ukraine prior to the war, but we saw that a geopolitical event or some sort of unexpected disruption can mean that if all of our eggs are in one basket, then countries that are going hungry, like Yemen, can't get enough wheat at the prices that they should be able to pay for those things. We need to diversify a little bit and begin to support agriculture closer to the countries that need help in terms of food.

Innovation is a really, really important one. And so this means investing in technologies like climate smart agriculture or regenerative agriculture as Harlin was saying. The efficiency gains that we could see here are really critical, and this isn't necessarily a sexy thing from a global innovation standpoint, but investment in agricultural technologies is really critical, as Malcolm said, right? We need to find a cleaner, more efficient way to make fertilizer and perhaps also to make fertilizers that want to plant in a targeted way, and two are less polluting.

Reducing waste is really critical. Again, not necessarily a sexy topic, but something like a third of the food that's produced for human consumption around the world goes to waste. The last point that I think is really critical for wealthy countries to look at when they think about development aid and supporting developing countries is to think beyond number of calories. Harlin mentioned this before and she hit the nail on the head, there are countries where number of calories and food related distress are the issue, but there are many others where it's sort of poor diets or insufficient diversification in terms of the micronutrients that people are getting that are the issue. So making sure not just that people are fed enough, but also that they get proper nutrition is really key.

Shari Friedman: What do you all say to investors in this space? What is one thing to be excited about and one thing to look out for that people might not be seeing?

Harlin Singh: I'm going to come back to something Pete just said actually around food waste. I think not only is it not typically very interesting to talk about, but it is a critical component of meeting that need or that demand, expected demand, increased demand for food. And also, it's not just an issue for food security, but food waste is a huge contributor of methane gas, which is 25 times more potent than CO2. So when we're thinking about it in terms of the linkages with climate, coming back to your earlier question, Shari, it's an incredibly important piece to tackle. And by the way, most of the food waste is not coming because your kids are not finishing the food on their plate. It's because we're actually losing a lot of food just going from the farm to the supermarket because of cosmetic food waste. So it's a huge, huge problem.

And then just in terms of what I think investors should really start to think about in this space, particularly in my world, which is working with high net worth individuals and family offices, is that there are many pools of capital that can be used to influence progress in addressing food security, so everything from taking traditional pay for success models that are historically seen as kind of being more philanthropy like or more private placements. We're seeing these show up now in securitized models. We saw one last year in wildlife conservation, and I think that these will start to play a more critical role in terms of capital allocation.

So it doesn't always have to be venture, but we can start to think more creatively about how liquid markets can be used as a tool as well. And then really thinking about how philanthropy, public funding, policy and advocacy all play a role in tackling some of these large issues. It's not just one thing or one part of an investor's pool of influence call it, but it can certainly be something that can be complimented through a variety of different ways.

Peter Ceretti: What I'd like to talk about is sort of the story that Malcolm alluded to, that if you're going to invest in food and agriculture, at a surface level, it may not seem like the sexiest newest thing, but this is the ultimate productivity story. This is an area where innovation and productivity literally saved us as a human population from going hungry decades ago. This is the ultimate success story in terms of what people have been able to do in terms of getting more productive. And we need to keep that investment flowing to come up with better ways to do this so that everyone is fed within the constraints of what the planet is able to bear.

Malcolm Spittler: I guess the threat and the opportunity I see for investors is the same. It's that disruption is real. Basically, we have now 110 years of dependence on one technological breakthrough at the beginning of the 20th century that freed us from mining bat guano off of islands in the South Pacific. We are now living in the 21st century. Everything else has changed, and yet we are still dependent on this same chemical process that came about before our grandparents were born. The moment we have an economically viable alternative, we will see a radical reduction in the global demand for natural gas. We will see dramatic shifts in who are the major players in the fertilizer market, and it will have ripple effects around the globe.

So that is both the cause for great optimism, but also for caution in terms of portfolios that are currently invested in areas that have been successful on the back of that now long in the tooth technology. So disruption is always the force that we hear about these days, but it is just as true in something as seemingly traditional as agriculture as it is in the high tech space.

Shari Friedman: So food loss innovations, productivity, and disruption, those are the things that investors are going to need to look out for. Harlin Singh, Global Head of Sustainable Investing, and Malcolm Spittler, Global Investment Strategist and Senior U.S. Economist, both from Citi Global Wealth, thank you.

Harlin Singh: Thank you for having me.

Malcolm Spittler: Thank you for having this great conversation.

Shari Friedman: And thanks to Pete Ceretti, Director of Global Macro Geo Strategy at Eurasia Group.

Peter Ceretti: Thank you, Shari.

Shari Friedman: And that's it for this episode of Living Beyond Borders. Check out all this season's episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find episodes on the GZERO World podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening..

Listen: In June of 2020, the world is facing an unprecedented two-fold crisis we didn't see coming just months ago. Global health experts are racing [...]

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Episode 7: How AI is changing our economy

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Listen: "We're entering into another leg of a continued industrial revolution which is going to be marked by collaboration between humans and machines," says Archie Foster, Managing Director and Head of Thematic Equities at Citi Investment Management. "This will include industrial automation, robotics, and AI," he adds.

In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Foster is joined by Dev Saxena, Director of Eurasia Group's Geo-technology Practice, to go beyond the hype surrounding generative AI and ChatGPT to understand how it can truly affect the economy and our political systems in the coming months.

While the fears about job losses may be overblown or premature, there is no question that the use of this technology is changing jobs and industries. As tech giants increasingly adopt AI to improve productivity, we'll look at the main challenges they face, as well as what regulators need to keep in mind as elections around the world continue to be susceptible to misinformation.

This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.

Transcript: Season 4, Episode 7: How AI is changing our economy

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Archie Foster: In my view, we're entering into another leg of a continued industrial revolution, which is going to be marked by collaboration between humans and machines. This will include industrial automation, robotics, and AI.

Dev Saxena: Just in the same way that there's been a tremendous uptick in the development and deployment of these technologies, in the last couple months and weeks actually, we've also seen an uptick in terms of policymaker and regulators' appetites in terms of signaling some of their direction.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, managing director of Climate and Sustainability at Eurasia Group.

It's the technology Bill Gates called Revolutionary and compared to the game-changing inventions of the personal computer and the mobile phone, artificial intelligence, more specifically generative AI. By now you've probably heard of ChatGPT. It's been on nearly every news program and was even featured on the cover of Time Magazine. And there are many similar competitors hitting the market globally.

So what is generative AI? Well, let's ask ChatGPT.

I’m typing the question into the OpenAI program now. Here’s what it produced:

AI Voice: Generative AI is an exciting and rapidly evolving field that has the potential to revolutionize the way we create and interact with digital media. However, it also raises ethical concerns such as the potential for malicious actors to use these technologies to spread disinformation or manipulate public opinion.

All right, so what are the implications of the so-called age of AI and what does it mean for jobs, the economy, and even democracy itself? That's what we're here to talk about today. My guests are Archie Foster, Managing Director and Head of Thematic Equities at Citi Investment Management. Welcome Archie.

Archie Foster: Thanks for having me.

Shari Friedman: And Dev Saxena, Director of Geopolitics and Technology at Eurasia Group. Hey, Dev.

Dev Saxena: Hi, Shari. Great to be here. Looking forward to the conversation.

Shari Friedman: So Archie, first let me ask you about your title because it's relevant to this discussion. Define thematic equities for our listeners and how it applies here.

Archie Foster: From my perspective, it's really a focus on companies tied to longer term secular changes in how society lives and how companies operate. It captures changes in things like how we work, where we live, what we experience, how we experience things, and how we spend our time and so on. It's longer term in nature and it's different than investing based on economic cycles or short-term trends. Regarding its relevance to this discussion, it's very early days, but AI has the potential to eventually impact in varying degrees, almost everything we do from work to healthcare to mobility to entertainment and so on. So it's very, very relevant thematically.

Shari Friedman: So it sounds like you have a lot of overlap with what Eurasia Group does. You're looking at the general trends that are going to have material impact on your investments. So to both of you guys, there's this enormous amount of enthusiasm and also some trepidation about the rapid expansion of generative AI technologies. Is this a revolutionary moment or is it really too soon to tell?

Dev Saxena: So it's certainly a noteworthy moment, there's no doubt about that. Whether or not it's revolutionary, I think we'll only know in retrospect. But there's no arguing that the pace of commercial innovation that's been happening over the last couple months has been incredible in the generative AI space. Almost on a daily basis, we're seeing new product launches, new strategic partnerships, very large financing rounds for companies in this space. The biggest technology players in the world have released multiple products that feature generative AI. So those are firms like Google, Microsoft, AWS, NVIDIA. They're scaling it very, very quickly. And so the technology's becoming increasingly ubiquitous.

We're going to see in the next couple months that it'll be integrated into everyday products that we use, whether it's our emails or productivity tools like Word documents. And all of a sudden, I think we'll realize that we're using it just as any other technology that we use daily. And at the same time, there's also going to be, and currently is, a new wave of startups that will focus on deploying generative AI technologies at the enterprise level as some of these companies become more and more specialized. So we're going to start seeing this technology be pushed further and further into the market. And when we look back on it in retrospect, I think we will see this as a moment where there was an inflection point for AI and the use of AI in our everyday lives.

Archie Foster: The thing you got to think about is AI has actually been around for a while. It's been evolving for decades really. It started in World War II. What's changed is that previously AI could only really read and write and now it's evolved to being able to understand and create content as well. I think we have to be a little bit careful about some of the big assumptions that are being made, particularly around the degree of change and importantly sort of how soon changes are likely to happen. The hype machine is revving up pretty good at the moment. And we have seen similar movies before where the promise of parts of tech either sort of never arrives or takes a lot longer than people expect it to arrive.

But that being said, in the case of AI, things are moving very fast. Each subsequent model becomes more and more powerful by sort of a number of degrees. And with the shift in AI towards being able to understand and create, we seem to be at an inflection point in terms of what it can do. And given the degree of improvement in each iteration from here, I'd imagine that we've sort of crossed the Rubicon as it were.

It also to me seems that the path to monetization here may be shorter than other previous tech sea changes because something that Dev already mentioned, we're seeing the initial use cases as being additive to technology that's already available in the marketplace.

So to me, adoption and monetization is likely to be relatively fast. And that's not to say that fascinating and exciting new use cases aren't coming. They definitely are, but the fact of the matter is that there's a large amount of productivity that can be released by making current, already powerful technology tools more intuitive and useful to the layperson.

As an example, the average person using PowerPoint or Excel or Bloomberg is really just scratching the surface in terms of what these tools can actually do because they're hard to use. Generative AI makes it more simple. So to me there's a lot of low hanging fruit that can be harvested pretty quickly. So it's been evolving for some time, but it's at the point where it probably does become revolutionary, most certainly in what it's going to be able to do well into the future, but importantly, what it may be able to do now.

Shari Friedman: So let's unpack both these opportunities andd the challenges right now. Archie, the biggest concern most people have is jobs and how AI is going to affect the labor market both in the U.S. and globally. So what do you see as the short-term and long-term implications?

Archie Foster: First of all, there is a whole lot of hyperbole which is out there that I think we need to cut through a little bit. There are headlines screaming that AI is going to cause 300 million job losses and so on. I think that's a very simplistic way of looking at things and it also implies that we'll see mass job losses immediately, which I don't believe.

We've got a significant demographic issue in many areas of the world as the population ages. So we have to think about AI and what it can do in the context of this. I'd say that because of that, we're going to need some help in order to keep output going at the level that we need it. And that's on a global basis.

Labor scarcity is a real issue and I'm not sure it's just a cyclical or COVID phenomenon. So AI will help in this way. Also, all types of automation, including AI, is going to be needed to pick up the slack as the population ages. So in other words, we're going to need scarce labor resources doing more productive jobs. Second, technology has been "taking jobs" since the start of the First Industrial Revolution. Ask yourself, where did all the telephone operators go? Ask yourself where the painters and welders on the auto floor went? There's lots of examples of this. So this is a continuation of something that's been going on for a long time. And guess what? Job growth has continued through all of this. It's just that we've moved to different types of jobs.

So when you're looking at AI and you're looking at jobs, realize that we're not operating in a vacuum. There are lots of other things going on here. The difference this time is that this particular technology has the propensity to disrupt parts of the knowledge economy. It's not just manufacturing. And this I think has caught the attention of some people as it does seem like a bit of a shift. But even here I note that it's not unprecedented. The PC and internet ages ushered in a heck of a lot of change in white collar areas as well. So for instance, compare what the floor of the NYSE looked like 30 or 40 years ago versus what it looks like now, it's very different and there are less people there. In my view, we're entering into another leg of a continued industrial revolution, which is going to be marked by collaboration between humans and machines. This will include industrial automation, robotics, and AI.

So for the foreseeable future, I would envision much of AI being used collaboratively, sort of increasing the productive output of knowledge workers versus displacing them. There's a debate right now about whether AI is going to lead to companies doing the same amount of work with less people or doing more work with the same amount of people. And logically, I kind of come down on the latter.

That's not to say that there is not going to be displacement or disruption in parts of the labor force. There will be. There are going to be jobs that don't exist anymore. I'd imagine that jobs performing basic research and data analysis function will be in jeopardy. Things like credit analysis, insurance claims, media planning, customer onboarding, back office, and things like even textbook writing and call center employees, that's where you're going to see some disruption, absolutely. But I don't think it's a zero-sum game.

Dev Saxena: One important nuance to add to this discussion is particularly in the early phases of the deployment of a new technology, we won't see individual jobs being lost immediately. Where we will initially see the augmentation is around tasks. The modification of tasks as people start adopting new technologies like generative AI into their day-to-day workflows. As time passes and we understand what the implications of that or how workflows change, then you'll start seeing the nature of jobs change.

So we're kind of in the early days of this. And as these products get deployed, we'll start understanding where the initial use cases are, which tasks are being impacted, which jobs have the most tasks, which are impacted, and how that can impact wages and the value of particular jobs. And that'll be a function of where companies are trying their best to create use cases.

As the technology becomes more ubiquitous and there's more innovation in this space and it starts flowing across the economy more broadly, then we'll understand the broader technological impact on other sectors.

The other piece I think that's really important is this has been an area that's been a challenge for policymakers to solve in many other cases. So if we think about other major disruptive factors to economies, you can use the analogy of globalization as a major macro trend, which is a confluence of a number of different policies coming together both on the technological innovation side and on the trade side.

You could also talk about climate as people talk about climate adjustment to particular communities and jobs, but it'll be a challenge for policy makers to successfully and in a targeted way transition employees or people who have jobs that are impacted by this technology in a way where they develop a skillset that can then accommodate new technologies. I mean that is the challenge that policymakers face. They've done it with varying degrees and different geographies in the past, but I think it's an area that should be of more focus in trying to bring new ideas to the table in how we can properly transition some of the workers that are most impacted by these technologies.

Shari Friedman: Yeah. The economy is dynamic and I think it's very difficult to be able to predict how that's going to play out in a very dynamic economy. And Dev, you had mentioned that this is similar to other sectors. Back when I used to do macroeconomic modeling around climate change, it was very difficult to understand the impact of reducing carbon because you could only tell what the definite impact was going to be or the predictive impact was going to be on the sectors that we saw, but you couldn't tell what the new sectors were going to be or what the shifts of the balloon were going to be. As you squeezed one side of the balloon, where was that going to go?

Dev, you spend your days talking with companies across the economy: financial institutions, corporations. I'm curious to know what do you see the overall impact is to different pieces of the private sector? What do you say to corporations, or for that matter, any large organization about what the technology changes will mean for them?

Dev Saxena: Yes, this is a question that we're talking to our clients about almost on a daily basis. And so what we're seeing is from an opportunities' perspective, a smaller subset of companies are eager, they're willing to be first adopters and are trying to understand how they can deploy generative AI into their workflows or into their customer facing applications. Right now, the primary form of this technology being deployed is through chatbots. And so that kind of to some degree limits the extent to which this technology is initially being deployed. That'll change as we come up with more interesting and innovative use cases. But at the same time, there are a number of risks that companies are assessing which are to some degree preventing or at least slowing the adoption of this technology.

At the company specific level, we break those risks down into three buckets. There's operational risks that haven't been worked out yet, and some of those risks are associated with the technology being prone to making errors. Some are using the term hallucinating. But effectively, when you use these technologies, sometimes they can come up with just completely inaccurate and wrong responses in terms of the chatbot. And so to the degree that companies are open to operationalizing this technology, they also need to figure out a way to due diligence it and to make sure that the tasks that are incorporating this technology still have a quality control function associated with them. And so that's kind of being worked out right now.

There's also a set of court cases that are being worked through U.S. courts right now. So there's kind of some legal questions or some legal risks that needs to be kind of worked out a bit further. At the moment, the legal questions are around intellectual property and copyright because these technologies are ingesting and using tremendous amounts of data, the rights to that data, there's a bit of debate around the degree of compensation that some of the original data creators or content creators are entitled to. And so that's being worked out in courts. The developers of this technology at the moment, that burden is falling on them, but increasingly it's possible that some of the deployers of the technology, even if you're using an API to deploy a model that was developed by another company, you potentially could be liable as well. So some of our clients are kind of waiting to see how that will play out.

And then lastly, there are some reputational risks that are associated with using the technology in this current phase until it evolves a little bit further. So sometimes the outputs of these chatbots can be quite toxic, sexist, racist. There's been a number of news articles or news stories about particular negative outputs.

And so in situations where chatbots powered by generative AI and large language models are being put directly in front of customers, but with a white label branding of enterprises, there certainly is a risk element. And so again, I think we can expect that companies that are developing this technology will be putting more of a focus on quality control to try to address some of these risks.

But in the meantime, it's kind of incumbent on companies that are willing to adopt it to also start applying risk management frameworks. And so there are some well thought through risk management approaches that companies should be looking at to understand and start operationalizing and building out governance, quality control type of policies internally, both whether they're developing technology or just adopting it with respect to AI.

Shari Friedman: Archie, Dev just outlined pretty comprehensively a series of different risks that companies need to be looking at. And then you will take those risks and figure out what shifts need to be happening. And so what are the big opportunities that you are seeing economically? What sectors stand to gain the most and what does that look like?

Archie Foster: The productive capacity of the economy at large is going to benefit. There are lots of numbers getting thrown around that we have to sort of take with a grain of salt, but directionally are sort of all pointing in one direction, talking about the potential for one and a half percentage point increase in productivity growth over the next 10 years, which seems reasonable. So the benefits are expected to be pretty far-reaching eventually as this develops.

Immediately, the initial beneficiaries are those that build and train the models as well as companies providing the infrastructure and hardware used to build and train them. To take it a bit deeper in terms of building and training models, I see three sort of barriers to entry right now, which are cost, compute power, and data. Building and evolving an AI model is extremely expensive. It requires immense amounts of high-quality data as well as immense amounts of computing power.

So while I'd like to say I've discovered some sort of hidden gem in the public markets that is sort of the next big thing in AI, I haven't. In other words, at the moment, pure AI opportunities are really not there, at least in the public markets. I'm sure that in the private markets they're there and they're lurking. But for now, the ones with the deepest pockets, the ones with the access to the most data, the best data, access to the compute needed are the big tech platform companies. And they've also been working on AI for quite a long time.

Beyond the platform players, select companies that provide compute power and infrastructure to drive growth in AI are also likely to benefit. So here we're thinking about advanced semiconductors and cloud infrastructure providers. On the application layer, they will be sort of a wide-range in opportunity here using generative AI and deep learning to enhance all sorts of processes, all the way from sort of grading exams on one end to writing code and developing complex medicines on the other hand. But as we sort of noted, I think initially we're going to see the biggest boost from companies that can integrate AI into current products. So increasing the use and/or quality of output and providing immediate sort of productivity enhancement.

We've mentioned things before like data analysis software, marketing, search. I think search is interesting because I think that what this might do is really allow the promise of voice enabled search and voice assistance to actually come to the fore here a little bit and they should improve vastly and things like software development. So those are some areas. Finally, an area that I think is going to benefit greatly, and this is unfortunate, is cybersecurity. AI is likely to increase the ability of bad actors that may not be particularly tech-savvy to write malicious code or generate more sophisticated phishing schemes and the like. So both the number of instances of cybercrime and the sophistication of those instances is probably going to increase. So I'd imagine that the reliance on better and better sort of cybersecurity is likely to increase as well.

Shari Friedman: So Dev, that Time Magazine article that I cited in the intro referred to an AI arms race. It's long been believed that the US is way ahead of China on AI development. Is that still the case? And what does the geopolitical competition entail right now?

Dev Saxena: AI is certainly a technology of focus to both countries and it fits into the broader strategic competition in part because we know that AI can have a tremendous number of applications both on the economic side and will lead to a lot of wealth creation and value creation. But also as a dual use technology, it can also be applied to improve and optimize a number of national security defense and intelligence capabilities. And so for that reason, both China and the US have highlighted AI as a technology of focus and both countries are also allocating a large amount of resources to the development of technology, both from a skills perspective, from an R&D perspective, from a procurement and adoption perspective as well.

I think it's really important for us to remember that there's a number of different varieties of AI application. Generative AI is one subcategory, machine learning, computer vision. There are a number of kind of subcategories which can then be applied and adopted into commercial uses or security uses in different ways. And so I think from our perspective, it's actually quite competitive. There are areas where China is advanced, there are areas where the US is advanced. So I think that both countries will continue to focus on this technology and to the degree that they can create edges for themselves, at least that will certainly be the case. We know that they've outlined this in various policies.

A really well-known Chinese policy is the Made in China 2025, which outlined a desire to be a global leader in AI. Subsequently, the U.S. established National Security Commission on AI, which had a number of recommendations which were adopted both from a fiscal perspective and from a policy perspective. And more recently, there's been a pretty big push by the Biden administration, both from an offensive perspective in terms of developing domestic capabilities by industrial policy. So we think about the CHIPS Act as well as some very strategic targeted measures intended to limit Chinese access to some of the key ingredients required to develop AI at a large scale basis. And so we saw export controls on particular semiconductors on some of the key value chain supply chain components that are required to develop chips within the domestic country.

So we can anticipate that this will be a space where there'll be more investment from both countries and also more competitive gamesmanship and tactics to try to constrain development strategically going forward. But I think this'll be something that we'll certainly see in the short and medium term to continue.

Shari Friedman: Important both security wise and also economically. So there'll be that competition continuing. Archie, it's fair to say that the regulatory environment has not, in most cases with perhaps the EU being an exception, caught up to the realities of this new technology. How do you see regulation affecting the sector?

Archie Foster: In terms of AI oversight, we're really only barely getting started. And I think it's a bit ironic that the industry itself seems to be pushing the narrative. And it's not just those that might need to sort of catch up. As you might know, the CEO of OpenAI and the chief privacy officer from IBM were just in front of the House basically pushing them for oversight in some of the questions. And there's a reason for that. There's serious potential issues to contend with like disinformation, deepfakes, potential political bias and other biases and models, intellectual property theft, cyber crime, et cetera.

The question is, what does regulation actually look like? You don't want to regulate to the point of choking off what could be a very important sort of game-changing technology before it gets started, but there's also enough risk that something has to be done. The good news is AI is still relatively early and so you have a little time, but the bad news is it's moving fast and it's likely to be pretty far-reaching. And it's also complex. So there's a large learning curve that needs to be navigated by the lawmakers, but you just sort of hope that it doesn't take a bad issue to get everybody moving in with a proper sense of urgency.

That being said, there are some common sense rules that are being talked about. Mostly they're about disclosure and transparency regarding both the output of generative AI and the inputs and training. Basically, the thought is that sort of anything created in altered by AI should be sort of forced to be disclosed. So the end user knows, for instance, an image is not real. I'd say that's relatively important.

So you're drawing a line there between what's human generated and what is machine generated. Additionally, models need some sort of oversight or audit function. So some sort of disclosure and oversight needs to be done as to what the inputs are to the models to try and identify biases. So there are sort of common sense solutions being talked about, but it really needs to move into another gear as far as I'm concerned. And I'd also imagine that really this is sort of just the tip of the iceberg. As AI becomes more pervasive and powerful, regulations and safeguards are going to have to evolve, which again is a risk. I think there's a path to reasonable regulation that can provide sort of evolving guardrails that won't hamstring innovation. But the risk is that if we wait too long, if bad outcomes occur, that push sort of rush regulation that's not particularly well-thought-out. So it's early days and it could be a big issue. At the moment, as I said, it's barely getting started, but it really has to.

Shari Friedman: I mean, what I'm hearing you say is that it is at least technically possible, which is, I think opinions differ. Some people say, "Look, this is an unregulatable space."

Archie Foster: Yeah, I've used sort of the low hanging fruit analogy. And there is some low hanging fruit. I think some of these things are common sense. I think that we're in early days that we can tackle some of these things. The question I have or the challenge is going to be, I think as it becomes more pervasive and it can do more and more things, will regulation keep up?

Shari Friedman: Dev, taking this to a specific example, 2024 is a massive year for elections globally, including in the U.S. as we head into another presidential cycle. How big a concern is generative AI in terms of being a “weapon of mass disruption” as Eurasia Group has called it this year? And do you think it's possible to have regulations or anything that can curb this?

Dev Saxena: We do see the 2024 election both in the U.S. but in a number of major democracies globally as a sign posts for the impact on generative AI in terms of destabilizing democracies and potentially having impacts on geopolitics. And so we had kind of signaled this risk earlier in the year but our hypothesis was that the U.S., which has principally been an exporter of democracy historically, and U.S. technology, which has generally been a liberalizing force around the world or from a globalization perspective, now is a primary exporter of some of these technology tools which are undermining democracies. Whether or not that's intentional, that's certainly been a consequence if you think about some of the impact of social media platforms and deepfakes which leverage AI.

So it's very likely we think that generative AI will accelerate that trend in the sense that it provides low cost, high quality tools to some of the bad actors that Archie had mentioned. And so it'll likely accelerate disinformation and cybercrime. So the U.S. presidential elections, we've already seen a couple examples of generative AI powered images and videos being used in pretty sensitive political discussions and being picked up on social media and going viral. This will very likely also be the case during the election timeframe, both in the U.S. but also in other major democracies like India, Indonesia, Taiwan has an election, in the Eu there's a parliamentary election coming up. We may also have parliamentary elections in Canada and the UK. So I think countries we're already kind of struggling with how to police or regulate or mitigate these fundamental risks to democratic processes.

And unfortunately, this technology both in its application in that it replicates or creates very authoritative in some cases sounding or photorealistic videos and images, which can be viewed as being accurate, both it powers it and also it makes it quite ubiquitous, like it's quite easy to get access to these tools. In some cases, you just have to pay a pretty low cost or they're free. These types of technologies will scale this year and be well distributed in the years when these elections are coming up. There has not really been thoughtful or particularly effective processes which countries can use to try to mitigate that risk. So it'll be quite challenging. With respect to your question on the regulatory front, it's not that these technologies are unregulated because right now they actually are being regulated. It's a question about how effective the regulation is. And so just in the same way that there's been a tremendous uptick in the development and deployment of these technologies, in the last couple months and weeks actually, we've also seen an uptick in terms of policymaker and regulators' appetites in terms of signaling some of their direction. There's a couple different models that we're seeing that I think are important for some of our listeners to understand.

In the European Union, they're actually quite advanced in their development of legislation related to artificial intelligence. In that case, it's a comprehensive piece of legislation that focuses on particular use cases of technology. The challenge that they've faced, which is kind of perennial for all lawmakers, is that the technology sector moved so quickly. So they kind of were caught in a place where when generative AI went viral, it wasn't particularly framed into the existing legislation. And so they've had to quickly kind of try to figure out how to adopt it in. But we can anticipate that the EU legislation will be finalized this year or certainly next year.

Canada's also in the middle of putting through some comprehensive legislation on AI. And in the U.S. we've seen some interesting activity over the last couple weeks. U.S. regulators, for example, at the FTC, at the Department of Justice, have actually been very proactive recently to try to point out that existing laws can be used to try to mitigate some of the harms associated with AI. So if you think about what the DOJ can do on discrimination, what the FTC can do on deception and some other regulators like the CFPB on credit lending, AI and being used in credit, AI being used in hiring. So they've been quite keen to try to signal the markets that there is a police on the beat. How effective that is, we'll see when they bring forward cases. And then simultaneously, U.S. lawmakers in Congress have been more recently putting forward different frameworks. For example, Senate Majority Leader Schumer has foreshadowed that he intends to bring something forward.

Our view on this at EG is that currently that's very low likelihood in terms of federal legislation at the US level just as a function of congressional gridlock. So there's a low likelihood around that. But it'll be really interesting to see how domestic policy makers, particularly in the US, try to frame this issue because historically and previously, AI risk mitigation and AI regulation was done in a very technical manner by organizations like NIST, standards development organizations like ISO, IEC or in more of a normative or principles based way at the OECD. So there's been a bit of a disconnect from this very technical or high-minded approach, and now we're trying to get where the rubber's hitting the road in terms of practically putting out regulation that'll really impact innovation and impact firms on the day-to-day. We're going to try to figure out how to do that at the same time as this technology is being deployed and becoming quite ubiquitous.

Shari Friedman: Archie, what's your best advice for investors who are wondering what AI means for their portfolios and where the possibilities of peril might be in the coming years?

Archie Foster: First, as I mentioned earlier, the hype machine is gearing up and you need to make sure you understand that. I see increasing headlines about the coming sort of robot apocalypse, but I don't see many about AI sort of, I don't know, helping to cure cancer or something like that. So I'd suggest taking sort of a level-headed approach to these when you see them. And that's not necessarily on a portfolio level, just on a day-to-day level.

Second, as with any exciting new technology, while there will be some wonderful new companies born from it, there will also be a number of companies with less than fully baked models that are still able to attract funding. So my suggestion is to be thorough as opportunities to invest arise and scratch beneath the surface as you're doing the due diligence, because what might be on the theme, might not be what's in the product. I've got a saying that I use with my thematic team at Citi Investment Management, which is great theme, bad stock. And in my mind, AI is a great theme and it will be for some time, but there will be sort of both very good and very bad stocks tied to it. So go into investing in the theme with your eyes wide open and realize that it's kind of early days at this point.

Finally, you need to look at generative AI both from sort of the opportunity side and the risk side for your current holdings. The winners, at least in the early days, as we sort of mentioned, are likely going to be those who will be able to embed AI into their current products, which will drive usage and margins as its companies can upsell people to better versions of their product. The losers are those that either lag behind the integration and lose share, or whose models are based largely on areas that are likely to be disrupted, which is just sort of what we've mentioned earlier. It's very real. It's likely to move pretty fast, and investors need to be thinking about the companies in their portfolios now and figure out what side of the opportunity they fall on.

Shari Friedman: I love that idea, great theme, bad stock. You can pretty much apply that to any new trend.

Dev Saxena: I love that, Archie. If you had told me about that earlier, you would've saved me a lot of money because I wouldn't have bothered in the first place.

Shari Friedman: Well, we're going to have to wrap this up. Archie Foster, managing director and head of Thematic Equities at Citi Investment Management, and Dev Saxena, director of Geopolitics and Technology at Eurasia Group, thanks to you both.

Archie Foster: Absolutely. Thank you for having me.

Dev Saxena: Thanks, Shari. Great to be here. Great conversation.

Shari Friedman: And that's it for this episode of Living Beyond Borders. Listen to all the seasons episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find episodes in the GZERO World Podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.

Transcript Listen: “The equivalent of what we spent in World War II was spent in the course of a year and a half to support the US economy, and that [...]

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Episode 6: Can the US and China find common ground?

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Listen: "I think we're entering into a period when it will be more attractive to invest outside of the US and to invest in China and Pan-Asia than we've probably seen in the last few years," says David Bailin, Chief Investment Officer at Citi Global Wealth.

In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Bailin is joined by Ian Bremmer, President and Founder of Eurasia Group and GZERO Media, to get the latest on the relationship between the United States and China, and their power over the rest of the world.

With competing motivations, the superpowers are both looking at ways to protect themselves - from the 2022 CHIPS and Science Act in the US to President Xi Jinping's increasing diplomatic moves with Europe and elsewhere. But the countries are also intertwined, and they are each looking to navigate a delicate balancing act on the global stage.

This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.

Transcript: Season 4, Episode 6: Can the US and China Find Common Ground?

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

David Bailin: I think we're entering into a period when it will be more attractive to invest outside of the US and to invest in China and Pan-Asia than we've probably seen in the last few years.

Ian Bremmer: What we see is a lot of countries around the world that want more access to American military equipment and know-how, but also want more access to Chinese investment and the Chinese marketplace. I see both of those trends continuing at the same time.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this podcast, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.

It's a topic we discuss frequently on this podcast and arguably the biggest geopolitical showdown of our time, the US and China. As the COVID-19 pandemic took hold in early 2020, an already rapid move toward a decoupling of the two nations in the technology sector threatened to become a much larger risk to each nation's respective economy.

And the Biden administration has made some bold and hawkish policy moves to further curb China's influence in tech, including last year's CHIPS and Science Act. But in recent weeks, we've heard what sounds like a softer, more nuanced message.

Here's President Biden's National Security Advisor, Jake Sullivan, discussing an evolving relationship in China in what has become a very talked-about speech delivered at the Brookings Institution in late April.

Jake Sullivan: Now, when you zoom out from economics, we are competing with China on multiple dimensions, but we are not looking for confrontation or conflict. We’re looking to manage competition responsibly and seeking to work together with China where we can. President Biden has made clear that the United States and China can and should work together on global challenges like climate, like macroeconomic stability, health security, and food security.

Shari Friedman: So, is the Biden administration lowering the temperature in the simmering relationship with China? And what does that mean politically and economically? Today, we're welcoming back to the program David Bailin, Chief Investment Officer at Citi Global Wealth. Hi, David.

David Bailin: Thank you for inviting me.

Shari Friedman: And Ian Bremmer, President and Founder of Eurasia Group and GZERO Media. Hey, Ian.

Ian Bremmer: Great to be with you both.

Shari Friedman: Ian, I want to start with Jake Sullivan's remarks and get your take on what they mean. Is this the US signaling a substantial shift in policy and strategy or is this just a new way to describe the status quo?

Ian Bremmer: It's reflecting what has become a substantial shift in policy, starting with the Trump administration and continuing under Biden. It's a focus on industrial policy, which means the global economy through more of a national security lens, which is hard to do for an administration that doesn't have great relationships with CEOs. A little easier to do because the administration is closer to most American allies than its predecessor had been. But the big point here is that Biden has been trying to put, as he says, a floor under the US-China relationship because he doesn't want a new Cold War, but that floor is being tested by politics among both the Democrats and the Republicans to take a harder line against China.

And I do think that Jake Sullivan's remarks in this regard were rather more hawkish than we saw from Treasury Secretary Janet Yellen just a week before and shows that the administration continues to not fully agree on what the state of its China policy should actually be.

Shari Friedman: Moving over to some of our partners also, when you look at Xi Jinping's meeting with Emmanuel Macron or European Commission President Ursula von der Leyen saying that the West should de-risk but not decouple, does it sound like the US is standing alone on China? Is this part of why the tone may have changed, at least in parts of the US administration?

Ian Bremmer: When you look at the last year, the highest priority for US foreign policy has been Russia and the war in Ukraine, the invasion. There is almost 100% alignment between the United States and all of its G7 allies on that policy. China is continuing to become more important over time. I would say that right now, it is battling with Russia for top priority among all of the US policymakers.

But on China, the US is not standing alone, but I would say that the alignment among the Japanese, the South Koreans, the Europeans, really everyone but Canada and Mexico who have no choice but to follow US policy is maybe 60 or 65%. It's not 90, 95%. These are countries that are closer in orientation to US corporations and banks than they are the foreign policy establishment and the Biden administration. I think that that is a challenging thing for the US administration to try to balance.

Shari Friedman: So David, Ian described this much more complex, nuanced approach of the countries. It's not all in, all out. It's a much more subtle alignment. I'm wondering if there is this policy shift happening inside of the US, what does this mean for the broader economy? How do you view it?

David Bailin: Well, this is a profound change and we have to go back a few years to really understand how big a difference it is. We used to use the word globalization all the time. We used to assume that the benefits of globalization, which were the single supply chain, lower cost, lower inflation, that is where we were a decade ago and even actually predominantly five years ago. Now, we have policy associated with the idea that technology is directly related to national security and therefore how it's developed and how it's procured and how it's protected has become predominant as you've already talked about and as Ian discussed.

And that has changed the trading dynamics between the countries, because essentially, what the US did in cooperation with all of its allies ultimately is to have a policy that really draws a hard line on what is allowable, what can be transferred in terms of technology and IP, how it can be produced, where it can be produced under the presumption that it is in the West's benefit not to transfer that technology for lots of different reasons.

That has had two, I think, large impacts. One is it's called into question the nature of the trading relationship and the economics of that trading relationship. That is going to make it more costly for both the East and West, because you have to build a new supply capability for building CHIPS, for developing IP, and you also have to put up walls to protect that between the US and China. Those walls include limiting investment, for example, by venture capital firms in China. So, as a result of that, you have this bifurcation or de-globalization taking place very specifically in technology and in the investments associated with that.

And now, you've had the spending policies change both in China and the US where China has committed to developing its own technology base, it has to do that, and where the US and Europe and others have also agreed that they're going to shift where they build chips and other key elements back closer to their homelands.

So, this has created I think an investment opportunity on the one hand, but also I think higher friction and therefore higher inflation. That is a profound change. Then there are the attendant knock on impacts simply about how China is viewed or how China views the US as their reliability as a training partner.

And then lastly, there are the demographic issues, which is the fact that in changing the supply chains, you're going to see all of the South Asian countries be beneficiaries of the fact that not everything should be produced in China from a reliability standpoint.

So, these are profound economic changes. We could talk about what it means for markets, but between just the technology change alone I think is going to really be the story of the next 10 to 20 years in terms of what actually happens in China's ability to produce the technology that it needs in order to sustain its rapid economic growth.

Shari Friedman: So Ian, Xi Jinping, in addition to the economics, seems to be making diplomatic inroads in Europe, Latin America, and in a lot of emerging markets. So, building on what David has been saying about their maybe tempered economic growth, do they have the ability to be able to be dominant in some of these markets? What impact does this have in the US? Is there a reordering of influence and power taking shape here?

Ian Bremmer: Well, there's a bifurcation of influence and power. On the security side, the United States is the dominant power globally. The US outspends the next 10 countries in the world combined on defense spend. China, of course, is becoming a much more powerful military country in Asia, and that means that American allies that need the US security umbrella are relying more on the US, not less.

And by the way, China only has the ability to project military power in Asia, nowhere outside Asia to any extent. The Americans are the only country in the world that can send their soldiers, their sailors, their military equipment everywhere. So, that matters, but that doesn't translate into economic and trading power.

And the fact is that on the commercial side of things, the Chinese dominate the United States in trade and investment, particularly across the entire global south. So, what we see is a lot of countries around the world that want more access to American military equipment and know-how, but also want more access to Chinese investment and the Chinese marketplace. I see both of those trends continuing at the same time. So, no one gets to be truly dominant except with some countries like Mexico and Canada for the US like Cambodia and Laos for China. But if you were to make a broad statement, if you wanted to make a judgment on this, you would say that in the global south, the Chinese have been increasing influence.

That's particularly true in the Middle East where the United States is playing less of a role, where the Americans are major energy exporters themselves. So, they're competitors now with the Middle East and with the Middle Eastern economies, where because of Biden's orientation more towards human rights rule of law, they're seeing less political alignment with the Americans and the Chinese are becoming by far the most important consumers of their product and investors. I would argue that the Chinese are starting to displace the American role in the Middle East.

Shari Friedman: Honing down on one area, specifically the technology space, David, I'm curious to know how you see the battle over CHIPS going. In the US, the 2022 CHIPS and Science Act provided $280 billion in funding to develop the American semiconductor industry. So, what is the purpose of this, and is this going to have a big impact?

David Bailin: Well, Ian talked earlier about the fact that people perceive this as an unfriendly government to business. I would say in one way, it's unfriendly, because it created this uniform tax regime where there were going to be minimum taxes so that US corporations couldn't avoid them by moving money around the world. On the other hand, there's this CHIPS and Science Act that I think is a direct involvement by the US government in industrial policy in the United States.

And they're not offsetting to one another. I'm sure the taxes are probably more onerous, but the fact is that the passage of the CHIPS and Science Act is designed to both onshore the production of CHIPS, but also to provide resources to ensure that there's adequate investment in the actual IP.

And the US already had a lead, of course, in this area before. The idea is to create a sustainable lead that goes way out into the future. So, the different aspects are different amounts of money that are being allocated through this, but it's a direct benefit to industry and a direct benefit to venture capital that I think is going to have a profound impact in the future, both in terms of being able to more rapidly move the production onshore, but also to ensure that the way this technology gets integrated, the way it's actually utilized is very much to the US advantage or to the advantage of the West I would say more broadly.

And specifically when we take a look at how this technology is going to be used, it has two very large benefits. One, industrial, in other words, commercial interests, which is the idea that we'll have a better infrastructure, technology infrastructure, which in the land of AI and in the land of what's coming in the future in terms of the need to protect and create an infrastructure that's resolute, I think that's important.

But the second has to do with military. This is an act that actually is in my mind directly related to the need to have a better and more prepared military technologically. We've read about a whole variety of different single technologies that the Chinese and others have developed, but the fact is that there was the perception that the US was behind in certain key military technologies and this act is one way of bringing industry and military alignment.

Shari Friedman: So Ian, aside from these economics, we've talked so far about this trend of US and China decoupling and Eurasia Group has scenarios where this is likely to continue perhaps at an accelerated rate and there's a few things that could accelerate it. One of them being Taiwan. Where are we right now with the potential for a war in Taiwan and what are the signposts that we should be looking at?

Ian Bremmer: I've been rather more sanguine about the prospects for relations over Taiwan than the headlines. Certainly, we saw when Kevin McCarthy decided not to travel to Taipei instead meet President Tsai in California, which was at her request, because she didn't want to be bearing the brunt of Chinese punishment for such a trip the way that she had in her country had after the Pelosi visit to Taiwan a year ago. What we saw was that the Chinese diplomatic response, economic response, and military response, Taiwan was dramatically more intentionally incremental. This was not a crisis. Both sides signaled very clearly that they don't want unnecessary provocations in this relationship, and I think that's helpful. I think Biden also supports that.

Now, the proximate danger in the relationship is next year's Taiwanese elections. If the Kuomintang, which is the more I would say pragmatically, do more business with the mainland Chinese party, comes into office, then frankly, the likelihood of conflict and confrontation over Taiwan in the coming several years will diminish significantly from what it has been.

If the DPP, the present party comes in with the new president and turns out to be more nationalist, more pro-independence and inclination, then I think we have a more substantial risk. That's a coin flip. That's 50/50. But I want to be clear, one more point is that the principal risks over Taiwan are not military risks. The Chinese have seen that it's very difficult to engage in an amphibious successful operation across a 100-mile straight.

The Taiwanese are well-trained. They're well defended. The Americans, the Australians, the Japanese, and others are standing up their military support for Taiwan. TSMC, the most important strategic company in the world, the Taiwanese semiconductor manufacturing company, would be devastated by such a military conflict.

So, if there were to be an escalation of tensions, it would be the Chinese government using their extraordinary commercial leverage over Taiwanese business interests that do enormous amounts of business much more than with the US in the mainland, to say, "If you don't change your way of doing business, if you don't support, become politically loyal to the Communist Party, we're going to put on export controls, we're going to sanction you." I think that that will be a very effective way for the Chinese to change the status quo in their favor.

Shari Friedman: Would that trigger a US response?

Ian Bremmer: I think it would trigger a US response, but the US response is also not going to be about war. So, yeah, at the margins, could we see some level of targeted sanctions against the Chinese? Sure, but the Americans are going to be reluctant to do that, because keep in mind, between China and Taiwan, there are asymmetric economic interests that are dramatic and yawning. So, it's much easier to put tough sanctions against the Taiwanese if you're China.

It's like the Americans, it's easy to put tough sanctions against Russia, because the Americans don't rely on the Russians for anything. Where when you talk about the US and China, the interdependence is much larger. The dangers of a tit-for-tat escalatory Cold War style economic posture is much more dangerous for both sides.

Shari Friedman: Another factor that could incite a US reaction in terms of the China relationship is China's involvement in the Russian invasion of Ukraine saying that it's a friendship with no limits. How do you see this potentially playing out and is this a threat to a more accelerated US-China decoupling?

Ian Bremmer: It's been one of the most quoted statements of the last year and a half when Xi Jinping and Putin got together February 4th a year ago and said that they had a friendship without global limits. I would say that that relationship now that Xi Jinping has made his three-day state visit to Moscow a month ago, that relationship is very much back to where it was before. It is a strong strategic partnership. It is the Chinese providing the Russians with a lot of cover in terms of the war, but the Chinese also feeling like they want to be seen as the statesmen who can eventually get a ceasefire, can promote negotiations.

Keep in mind, Xi Jinping has now also had a one-hour phone call directly with the Ukrainian President Zelensky on the anniversary of the Chernobyl disaster. So, Xi Jinping can now plausibly say, "I'm the only leader of global stature that can speak with both the Russian and Ukrainian leadership at the highest level and maybe get something done." I mean, the only other person that really can say that is Turkish President Erdoğan, who's had major health problems and is fighting for his life in a very tight run election right now.

So, Xi is in a better diplomatic position. One place that you could see the US relationship with China get unhinged by Russia is if the Chinese decide that they are going to proceed with sending military equipment directly to Russia, something had they had been thinking about doing, maybe planning on doing covertly, but the Americans, the UK and NATO publicized that intelligence much to the Chinese chagrin and embarrassment.

I think the only way the Chinese would do that is if the Russians were to substantially lose militarily on the ground. If the Ukrainians were able to break their land bridge between Russian Crimea or threaten Crimea in a more existential way. That is very unlikely. So, for the coming, let's say six months, China's position on Russia-Ukraine actually looks a lot better than it did six months ago.

Shari Friedman: So there are a few red lines to watch. Just shifting a bit, the US Treasury Secretary Janet Yellen recently said that the US and China need to find common ground on key global issues for the sake of the world. Ian, you had referenced this a few minutes ago. Do you think that this is possible, given everything you guys have spoken about, and where are some of the areas that you might see this loosening up?

Ian Bremmer: Well, of course, it's possible. It's just that both sides don't really want to talk about it, because the politics are so toxic that showing that you're cooperating with each other has domestic negative consequences. It's very perverse, but that is where we presently are.

Having said that, Kerry, Climate Envoy is planning a trip to China now. It is very obvious that on global climate change, the response needs to be coordinated between the two largest carbon emitters in the world, the United States and China - by the way, not in that order. Secondly, of course, the pandemic, a response to a global pandemic and to future pandemics, you need a robust US-China relationship in the World Health Organization. That's profoundly broken right now.

You may have seen recent news about the China anti-espionage law. The Chinese and the Americans need to coordinate in having good economic data on what the two largest economies in the world are actually doing and how they're performing. Unfortunately, that's not happening now either. In fact, the Chinese are tightening up and they're not producing remotely close to the amount of data they were producing 10 years ago, even though their economy is much larger. So, yes, there needs to be common ground in some areas. There are plenty of aspects of common ground that I can see playing out, but the trajectory is bad and the willingness to talk about it is virtually non-existent.

Shari Friedman: David, do you agree with this?

David Bailin: First of all, I guess that the answer is yes, and I think that the war will eventually end. And what Ian said, if you project it out, right, the President Xi is able to broker the war, that's the end of the war, that is a good outcome depending on what the terms of that are. There's a huge economic benefit to the end of the war.

And then things get back to the economics of the world, in which case lots of opportunities for benefit and climate change is actually an investment that the world has to make in saving itself. If you take a look at one of the benefits of higher energy prices as an example, it's been the benefit to those producing alternative energy products of every single kind that are now without any subsidization valuable in their rollout. Just as an example, you know, Germany is going to change its entire energy policy in terms of how it utilizes existing technologies to reduce its reliance on natural gas.

And there's benefit there for climate change as an economic matter, right? Forget about a social issue matter, to become something that's addressed by both China and the US And again, had the Trump administration not come in, that cooperation may already have been signed by decree, when the United States backed away from the accords. So, once the war is, God willing, behind us, I think that will open up opportunity in this area.

And frankly, one of the real benefits, if you take everything that Ian's talked about, of having the war be over is it creates enormous common interests. I think that's remarkable.

The one thing that we didn't talk about briefly, which is the West's response in support of Ukraine, which has been wildly substantial, ever-increasing. It's a huge sign to China about the willingness of the West to respond in a unified way with extraordinary amounts of money and with considerable effort, logistical effort.

And I do think that that message, which was probably unanticipated two years ago, is also a benefit net to the world, because the cost of a Chinese action against Taiwan is now demonstrably higher. So, if you think about it, the end of the war, the West response in support of Ukraine and its resolve, I think, are backdrops to what could be better times ahead once this war ends for both countries. I'm curious as to whether or not Ian agrees on that.

Ian Bremmer: Interesting. The Chinese, they have a relationship with Iran. The Americans don't. The Chinese have a better relationship with Saudi Arabia right now than the United States do, and the Iranians and the Saudis essentially allowed their diplomatic entente to be brokered by the Chinese. They didn't need the Chinese, but they let him do it. The American response to that was, "Well, it's better to have the Chinese engaged than not because we like the outcome." That's a pretty mature response. It's unclear that that's going to persist over time. If the Chinese engagement in Russia-Ukraine were to get a ceasefire, on balance, I would say there are a lot of Europeans that would like that outcome because they're paying a lot for this war.

I'm thinking particularly the French, the Germans, and others. But you mentioned before, David, a lot of that depends on what the outcome specifically is going to be. My concern is that any ceasefire that comes will not lead to overall diplomatic breakthrough like we presently have with the Saudis and the Iranians. It will not lead to the Russians paying reparations for war damages. It will not lead to trials for war crimes that have been perpetrated in Ukraine and will also not lead the Russians to leave all of their territory that they've occupied even since February 24th, never mind previously occupied territories, illegally occupied territories in Ukraine.

All of which means that the outcome of a China brokered "deal" means that Russia is still a rogue state. Russia is still having hundreds of billions of their assets frozen by the Europeans, the Japanese, and the Americans, still has their gas cutoff, still treated as a pariah by the West. In that regard, I am less optimistic about what the future of US-China relations will be on the back of what the Chinese may or may not be able to get done with Russia and Ukraine.

Shari Friedman: Following onto that, both of you had noted the great need for the US and for China to be collaborating on climate change. So, my question is, which is going to be the driving factor? Will that need to collaborate drive a better relationship or will the deterioration of the relationship harm their ability to collaborate?

David Bailin: So I would say that if you think about the interest of both countries, right? There are now harder lines about where cooperation can and can't happen. But if you take a look at the US political system and the chaos that's going on here right now, the fact is that only if the US can develop some consistent policy toward China can there be a real efficiency, if you will, in the outcomes. Meaning beneficial outcomes for both require some type of consistency. The Chinese, of course, in a one-party system have much greater ability to have a long-term view on how they're going to build relationships.

A lot of what Ian's talked about today is the fact that they can build these alliances in part because of the fact that the US itself is fractured in terms of its foreign policy and its ability to execute that policy. So, I would say that the inconsistency of the US and the consistency of China and the ultimate fact that there are lots of economic benefits that attended in regular markets, right? The trade of all sorts of things, being normalized and well-handled, plus certain common interests that you've talked about today in climate change would seem to me to be beneficial if you were to look out over time and actually more stabilizing.

Ian Bremmer: It's such a hard question. I guess I would say, because I believe that the baseline US-China economic integration is going to persist the trading relationship, the exposure of China to US treasuries, the recognition that that interdependence cannot be broken apart, that creates more space for both sides to continue to play politics in lots of other areas. It makes me more pessimistic that there is an action forcing event that a crisis of sufficient magnitude that suddenly builds trust and forces more alignment on the broader issues that I was discussing, where we really need global US-China alignment.

I mean, you think about the fact and no one's talking about it really, where China's about to go from 400 nuclear weapons to 1,500 nuclear weapons by 2035 in just over a decade. The Russians are exporting all the enriched uranium China needs to make that happen. There are no arms agreements of the equivalent between the US and China on nukes that the US set up with the Soviets and that the Russians have now walked away from. There's very little direct military to military coordination at a high level between the US and China. I mean of all the things that the world has tried to ensure over the last 50, 75 years, it's been avoiding mutually assured destruction with these thousands and thousands of nuclear warheads.

China's now going to do more than any other country to add to that danger globally. The likelihood that the Americans and the Chinese cooperate for the purposes of making the world a slightly safer place seems to me de minimis over the next say 5 to 10 years. So, yeah, I think it's precisely because the relationship is at base very strong and resilient that both sides feel like we can take it for granted. I think that's a problem.

Shari Friedman: So things are changing very fast and a lot of these power shifts and economic developments happen over years, if not decades. You spoke a lot about the opportunities around climate. And heading into the third quarter of 2023, what should investors be looking at in terms of the US and China competition in economies?

David Bailin: I'm going to put the answer to that question in a larger context. We haven't talked about the fact that the dollar is in its third largest rally in the last 50 years. So, it's a currency with a lot of value. And after the Fed does its thing and raises its rates to a maximum, we're going to see a period, I think, of the dollar declining in value, and that is going to make the attractiveness of investing outside of the United States in general better.

The United States at its peak was 62% of the total market capitalization of world indices, which is ridiculous if you think about the need, the actual value of what's being produced and where it's being produced.

The Chinese have had the exact opposite experience. Their actual capital markets have shrunk. The interest in the West and investing in those markets has become much smaller. The willingness to invest in a country which manipulates both what its companies can do and where its inhabitants can invest has clearly deterred capital formation. And in that regard, the Chinese are going to have to make a decision, which is to eventually either tilt toward markets in which case capital gets attracted to China, which I think ultimately is in its strategic interest or not.

From an investment standpoint, we've been overweight China and like that market, because we presume that that market would open, that they would make those policy shifts.

So, we believe that ultimately, that's where the ball's going to go and that money will return to China, but that's not assured. And our confidence level is obviously less than it was 5 or 10 years ago. So, if you think about it from a policy perspective, again, I think open capital markets benefit China. The ability to raise capital for their own companies from other investors around the world would be a boom to them. That is something that's not happened for years now.

And then secondly, we've talked a lot about this today, whether it's the CHIPS Act or the bifurcation of this technology competition that we've discussed, that is I think an investible theme. We've talked about digitization for the last four years as being a major unstoppable trend.

I think we're entering into a period when it will be more attractive to invest outside of the US and to invest in China and Pan-Asia than we've probably seen in the last few years.

Shari Friedman: This has been fascinating. I think people often talk about this US-China relationship in binary terms. It's all good, it's all bad. It's decoupled, it's not decoupled. I think you guys both brought in a much more nuanced view with opportunities in different places depending on where you're looking.

So, David Bailin, Chief Investment Officer at Citi Global Wealth, and Ian Bremmer, President and Founder of Eurasia Group and GZERO Media, thanks to you both.

David Bailin: Thank you very much.

Ian Bremmer: Thank you. See you soon.

Shari Friedman: That's it for this episode of Living Beyond Borders. Check out all of the season’s episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab, or you can find the episodes in the GZERO World Podcast feed or wherever you get your podcasts.

For GZERO, I'm Shari Friedman. Thanks for listening.

Transcript Listen: “The equivalent of what we spent in World War II was spent in the course of a year and a half to support the US economy, and that [...]

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Episode 5: Energy transition today

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Transcript

Listen: "It actually all comes down to one thing and that's money," says Raad Alkadiri, Managing Director of Energy, Climate and Resources at Eurasia Group. "Will there be the money for investment in renewables, in energy efficiency made available? And I'm not just talking about the industrialized world, I'm talking about globally."

In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Alkadiri is joined by Malcolm Spittler, Global Investment Strategist and Senior US Economist at Citi Global Wealth Investments, to look at where the energy transition to renewable fuels stands globally, after setbacks from the pandemic and geopolitical instability.

They discuss the increasing need for energy security being a big driver for renewable energy in regions like Europe, how the war in Ukraine is still affecting energy markets, and what kinds of investments need to happen in technology and infrastructure to realize more sustainable and cleaner energy globally.

Transcript: Season 4, Episode 5: Energy transition today

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Malcolm Spittler: Our general rule of thumb is when there's a gold rush, don't go digging for gold, invest in the makers of the picks and shovels.

Raad Alkadiri: It actually all comes down to one thing and that's money. Will there be the money for investment in renewables, in energy efficiency made available? And I'm not just talking about the industrialized world, I'm talking about globally.

Today we're talking about a highly flammable topic, in more ways than one: fossil fuels and the transition to cleaner energy. In the short term, energy prices and energy security have dominated the discussion over the past year. It's mostly because of the ongoing war in Ukraine and the knock-on impacts of inflation, especially in Europe.

In developing nations, there's been an issue of availability and affordability of energy. The IEA, the International Energy Agency, reported that for the first time in decades, the number of people living without electricity rose last year, standing today at 775 million globally.

We're going to unpack all of this and discuss new regulations in the U.S. and Europe that are hastening the shift toward alternative energy sources. Joining me now are Malcolm Spittler, senior U.S. economist and strategist at Citi Global Wealth Investments. Welcome Malcolm.

Malcolm Spittler: Thank you very much for having me.

Shari Friedman: And Raad Alkadiri, Managing Director of Energy, Climate, and Resources at Eurasia Group. Hey Raad.

Raad Alkadiri: Hi Shari. It's great to be here.

Shari Friedman: So first, Raad, let's start off with you. There's a lot of talk about energy security and how it plays out in the current discussions. Let's start with defining what we mean by energy security.

Raad Alkadiri: That's actually ax more complicated question than you might realize, and I think it's like the old comment about the theory of relativity, that the more you think about it, the harder it gets. Generally, I think energy security is understood as having sufficient energy supplies to meet countries consumption needs and maintain economic growth. But really, when you start to sort of unpack it, that's far too simplistic a definition, I think, to do justice to the complexities of the issue.

Energy security means different things to different states depending on what those states are like, what's their resource base, what types of energy the economy is based on, the stages of development that a particular country has reached and crucially, I think whether a country is a net consumer or producer of energy. And I think that last facet is often very much misunderstood in the debate over energy security. You know, for a producer, state energy security is all about ensuring demand. It's got nothing to do with ensuring flows and supplies.

Shari Friedman: That's really interesting about the difference between an energy consuming state and an energy producing state in terms of energy security. And this difference also translates over with inflation. And Malcolm, while inflation is still an issue almost everywhere in the globe right now, where are we with energy prices, particularly in Europe, and where do we see that heading for the rest of 2023?

Malcolm Spittler: Yeah, Shari, that fits really tightly with what Raad is saying, that Europe is largely an energy importer, and they've had a really extreme experience in the last year where there's been obviously the conflict in Ukraine that has radically shifted where they're getting their energy from and it has had dramatic impacts on the economics of transition.

Basically, the price that is seen to be reasonable for green energy went up drastically and simultaneously, going back to that idea of energy security and its links to national security, the idea that Europe can continue to rely on its historic sources of piped natural gas from Russia, of transported oil across oceans. This is a radical remaking and a reimagining that we have to see happening where Europe is now deciding that it is worth basically investing in green energy and simultaneously seeing prices where green energy is very, very competitive. For those people who have already adopted green energy in Europe, there have been, if anything, windfall gains from this high energy price environment that has been going on.

That being said, the prices are subsiding a lot. Looking ahead at this coming winter: January, 2024, natural gas price futures in Germany are at about 60 euros. That's down substantially from where they peaked last August at 340 euros. This is an evolving environment where a lot of the big challenges that were facing Europe from this invasion of Ukraine and the utter disruption of business as normal, are actually being handled with surprising grace.

None of the worst-case scenarios that economists were anticipating for this last winter came to pass. The kind of large slush funds of cash didn't have to be tapped to backstop consumers in the same degree that was anticipated. And it's actually been a lot more of a, I don't want to say optimistic scenario, but a better scenario than feared.

Additionally, when we look forward, there is this idea that this is an untenable situation to be put into as an economy. And this gets into energy security and how it ties into national security, which is the idea of being a recipient of energy, whether you're India or China or any other nation-state that is entirely beholden on foreign actors is a dangerous scenario that we're going to likely see a lot of entities putting basically national security level dollars into energy security moving forward.

Shari Friedman: Raad, do you feel like we're out of the woods, specifically Europe, on the impact of having to transition away from Russian gas?

Raad Alkadiri: I don't think Europe's going to be out of the woods, no, for a while, and that's primarily because of how reliable, oddly enough, the supply of Russian gas was. And I think in hindsight there are questions that are being asked about European dependence, but the reality is that that Russian gas flowed for decades and it was relatively low cost. Where Europe is now is in a situation financially and economically of having to resource its gas from areas further around the globe and at higher prices.

And Malcolm mentioned the $60, that's still significantly more expensive than Europe was paying for its energy, paying for its gas prior to the war with Ukraine. So I think Europe has some way to go. It's really in many ways going to come down to a couple of things.

It's going to come down to the availability of alternative supplies on a regular basis and not just for Europe, but also for the markets that Europe has backed out. I think it's also going to come down to a question of politics in Europe and the extent to which Europe can drive energy efficiency gains and can drive gains in terms of seeking alternative supplies and entrench them, make them structural. Europe's done a great job of reducing gas demand by 18% last year. How much of that is structural and how much of that is actually by necessity and forced upon industries and consumers we have yet to see. But the more structural it becomes, the more it can be maintained, the less challenges Europe is going to have.

Shari Friedman: Following up also on what Malcolm was saying about kind of this shock making everybody realize that there is a risk on these highly integrated energy markets, how do you think, Raad, that the war in Ukraine has affected the overall energy story and how we purchase and the energy flows globally?

Raad Alkadiri: I think we could probably have a podcast or several podcasts on each of the points that come out of that but let me try and do something I'm not renowned for and be succinct. Look, I think if you had to look at it, there's probably three key ways at least that I would point to.

One immediate and two a couple more that are more structural. And I think they pull on what Malcolm was saying. That disruption of supplies from what was one of the world's biggest oil and gas producers. And not just the supplies that we lost, but the fears that those losses could be even greater, I think, is probably the most immediate impact that we've seen over the last 14 months.

And you know, that's what drove up prices for oil and particularly for gas, which is where we've actually, ironically, seen the biggest disruption. We haven't seen a great deal of loss of Russian oil. we have seen over 110 BCM of Russian gas loss from the system and replacing that is going to take time and is going to be costly. All of that disruption added to inflationary pressures, and that has had an economic impact, as I mentioned, and not least on energy-intensive industries and where those industries are going to place themselves. That was the immediate one, but I think the two structural ones are equally interesting.

What you've had as a result of this is a greater politicization of energy markets and that goes with the energy security issue. You've had a rewiring of the system and that's likely to last. And that rewiring has been shaped by politics, not markets. There's no market reason why Russian Urals barrels are going to Asia and not to Europe. If the market was left to its own devices, that wouldn't happen.

But you've also seen readjustments in what's not available to countries and the pricing out particularly of emerging markets and the implications that's had on energy policy there. Going with this greater politicization has also been something that is the greater political intervention in markets by consumers. I mean if you think about it, when OPEC makes a cut nowadays, the first question is will the U.S. use its SPR? That wasn't the case 14 months ago.

Shari Friedman: And SPR, that's strategic petroleum reserve, yes?

Raad Alkadiri: That's, that’s right. And as you've seen consumers using price caps, using SPR, using sanctions, et cetera to influence the flow and cost of energy and politics defining what is good and bad oil. I think the third issue and the second structural issue is also just how much I think this makes collective action on issues like climate and emissions more difficult.

I mean, again, this is a product of energy security and critically how energy security is defined differently. We've talked about the EU where it's been about availability. I mean, energy security in the U.S. is about price. In Asia, it's about the reliability of supplies. So as it's defined differently, it leads to different policies, and that has not only exacerbated, I think, the tension between the industrialized world and the global majority, but I think as consumers look inwards and as they're more short-term focused in what they are prioritizing, agreeing the type of long-term multilateral measures for solutions to climate becomes much more difficult.

Shari Friedman: So Malcolm, Raad was just teeing up this idea also of kind of integrating climate change into the idea of energy security, and this past year has also had this shift toward so-called clean energy. First of all, it would be good to discuss what we're talking about when we're talking about clean energy and what do you see this acceleration look like?

Malcolm Spittler: So generally we define clean energy and it is - it's difficult, some people include nuclear, some people don't. We generally see it as carbon neutral energy. I think this last year has been, if anything, an unambiguous win for the acceleration of this transition. So something that was really brought to fore by the events in Europe was that no country in the developed world that has the ability to deal with it will let its consumers go cold in the winter. That almost no price is too high to pay, whether it's through government subsidies, whether it's through kind of moving heaven and earth to bring energy into the country, this is seen as a central bedrock element of being a developed nation.

And that meant that over this year, prices that people were paying prices that governments were effectively subsidizing in many locations for heat were incredibly high. This means that I think one of the least sexy but most exciting technologies is suddenly having a moment, heat pumps. These are literally just a more efficient way to move heat from outside even when it's quite cold to the inside of your home. They've had a moment where the break evens in Europe have been reached and they are much cheaper to operate than a traditional gas heater in this type of high gas price environment that we're experiencing. And that has meant a dramatic shift.

The thing that we all fail to imagine when we're imagining energy security, and we're imagining energy in general because it is so kind of primitive feeling, is that almost half of global energy is used for heating. So an efficiency gain on how we heat, like heat pumps, which are currently in terms of state-of-the-art, about 300% efficient. That means you put in one joule of energy, you get out three joules of heat because they're actually moving heat instead of producing heat.

Well, there are already pipeline technologies that push that to 500%. And as a theoretical limit number, I've seen maybe 20 times efficiency - that's a theoretical physical limit as opposed to an engineering limit. But even if we just go to that five X efficiency that is currently in a testing stage for many of these companies, that would mean half of global energy could become an equivalent amount of electricity of 10% of the current global. That is a transformative event and that is something that has been hastened by these high prices and those are going to become more cost competitive over time.

This is not something that could happen quickly. Obviously, replacing the heating system in every building in the world is a many decades-long project, but it's a many decades long project that is now cost competitive. Renewables have really depended on things being shifted from consumable fuels to electrification and the heat pump technology that has suddenly reached a maturity means that nearly half of global energy consumption is now within reach.

Shari Friedman: Malcolm talked a lot about how we're going for some of the solution technologies and then the other piece of that is weaning globally ourselves off of fossil fuels, which is something that there's been a lot of contention of in the discussions on COP 27 and we anticipate continuing in COP 28. I'm wondering, Raad, as you've tracked these markets a lot, how realistic do you think it is in the short term and midterm that the world weans itself off of fossil fuels?

Raad Alkadiri: It depends how you want to define short and medium term. I mean, I agree with Malcolm absolutely. I think the Ukraine War has given a fill up to energy transition plans and to the acceleration, particularly in the industrialized world. But the experience of the last 14 months has also underscored something else that energy producers, hydrocarbon produces are very keen to point to. And that is that oftentimes energy security requires quick fix action and over the past 14 months it's been fossil fuels that have been relied on to fill the gap. Now that won't always be the case, but it reinforces, I think, their importance and it reinforces and shows the tension between short-term and long-term measures.

I think in the short term it is going to be difficult. And you know, hydrocarbons do have a role in energy transitions as well as transition fuel and also in final production. So beyond the host of countries that have a vested interest in keeping that production up, I think the importance of keeping economies going also points to you will use what energy is available.

But to me, it actually all comes down to one thing and that's money. As we are talking about these things, beyond the policy aspect, will there be the money for investment in renewables in energy efficiency made available? Is there going to be the money for investment in infrastructure? And I'm not just talking about the industrialized world, I'm talking about globally. Particularly in the global majority in emerging markets.

Shari Friedman: I mean this is a great place for Malcolm also to comment as an investor working at Citi, I'm wondering if you could talk about the timeframes. Are you seeing that there is an increase in investible low carbon solutions in emerging markets as Raad had noted? And where are you seeing maybe the timeframe where you're going to see this flip over where there will be more investment and a phasing out of renewable energy from your perspective?

Malcolm Spittler: Well, I believe we actually had the moment where globally, we have switched to having more money being invested in renewables than fossil fuels earlier this year. Obviously, that global figure is highly, highly concentrated in the developed market. But I think there's something that is so exciting about markets, which is basically they pile on. This is something that can be quite devastating, but it also means that as soon as it is cheaper across the board to produce new energy and for the developed world, it's about replacement. Whereas for the emerging market it's, to a very large degree, about producing increased capacity because they're still much lower consumers of energy than the developed world. So I get very excited looking at the developing world and thinking, okay, we now know it is cheaper to build a renewable solar plant or a renewable wind plant than it is to build a new coal plant.

So I don't see, I think to Raad's point, a phasing out in the developing world of fossil fuels nearly as fast as in the developed world. But what I do see is in new projects and kind of the expansion of the electrification in that world shifting more to these projects that now have a shorter payback and lower cost situation. Whether we see large amounts of money flowing in that direction from the developed world in terms of financing, there's an open question. But there is a lot of policy that is moving that direction and there's a lot of kind of political will.

I will also add that something that's quite different about installed renewable energy as opposed to flow-based fossil fuels where in a downturn, you can slow down the amount you're extracting of fossil fuels, you can pump less oil, you can dig less coal. It does not have the same kind of economic incentive to shut down solar plants. So we're actually going to see probably supply holding up on electricity from renewables through an economic cycle in a way that we haven't historically.

And I think that actually has the chance of increasing volatility in fossil fuel prices both to the downside during recessions, which is the stage of the economy that we see next for the United States and with a little bit of a delay into Europe, but also potentially to the upside and to the degree that fossil fuel participants in the market are already seeing this, namely OPEC has decided to already start cutting production even in advance of a start of a recession in the United States.

That becomes a good thing, not just for them and their ability to produce more energy, but also for their competition. Because in this scenario, energy prices stay higher through the business cycle and basically you get a boosted profit margin for renewables where fossil fuels are just fighting to stay even, which is a remarkable opportunity and something that I think we'll be playing out in every business cycle from here until we have moved past fossil fuels.

Shari Friedman: And as we look at this transition, there's longer term factors that are affecting the energy transition. We have climate change and all of the surrounding new regulations coming from policies like the Inflation Reduction Act and Europe's Fit for 55.

Raad, first let's talk about the realities of climate change and the now increasingly unlikely prospect of reaching 2030 goal for net zero. Are you seeing shifts in fossil fuel companies and energy-intensive industries that indicate that we are going to see a sufficiently rapid decarbonization?

Raad Alkadiri: I don't think we're going to see a sufficiently rapid decarbonization to meet 2030 goals, no. But I think you are seeing a shift in the hydrocarbon industry and you are seeing a shift in energy-intensive industries. I mean they're being brought along kicking and screaming in some cases and with a healthy dose of greenwashing in others. But the reality is that they are being brought along and you're seeing a significant shift in their business strategies. I think for them there's now suddenly a willingness to be part of energy transitions rather than to try and stop it. And obviously they're trying to ensure that they're not pilloried as the problem as opposed to being potentially part of the solution.

But in terms of their strategies in the oil and gas companies, for U.S. companies and for some of the national oil companies, the big ones like Saudi Aramco or Abu Dhabi's ADNOC, what they're focusing on is what they will call technology plays, it's decarbonizing hydrocarbons or making the barrel or the molecule cleaner. And it's essentially how do you reduce your emissions from production transport and the processing of oil and gas. And there you're seeing money going into things like CCUS to reducing flaring to stopping fugitive emissions.

And for some of them, and particularly some of the Middle Eastern national oil companies sort of looking at longer term solutions and more expensive solutions like direct air capture or how you can use carbon in a circular carbon economy. But their strategy is essentially how long can you produce oil and gas if you make it cleaner, if you make the process cleaner in terms of scope one and scope two, can that extend the life cycle of oil and gas and that's what they want to do.

I think the European companies and the super majors there have been trying to reshape themselves. They're more sort of on the energy provider track and that's involved moving downstream and focusing, as Malcolm mentioned, on electrons and focusing also on retail. But changes that Shell have introduced recently, that BP have introduced recently to their strategy shows how difficult it is to reinvent the business, particularly when you're trying to deliver the types of dividends and returns to shareholders that have been demanded by those investors and in the timeframe that they demanded. And that's the bit that is stymieing oil and gas companies, I think, is they have a responsibility to shareholders. They need to deliver returns either as profits or as national revenue, state revenue. And for that they are intent on investing in what they see in the short term as the most profitable assets and to develop the most profitable natural resources of the state.

Shari Friedman: So Malcolm, how do you see the fossil fuel companies reacting to both the potential for more stringent regulatory environment and the increasing extreme risks of climate change?

Malcolm Spittler: I think it really depends on the time horizon you are speaking about. And I think Raad is absolutely right on the short time horizon, they have this responsibility to their investors and actually a kind of sworn duty to do what is in the best interest of their investors. But that gets very complicated as we shift out in the time horizon, and this is where we see a lot of companies starting to try and position for a different world.

I'm going to step back and I'm going to step way back and think about when we first started seeing oil coming on. Basically, prior to the emergence of oil as an energy source, we were using a whole lot of whaling ships around the globe. They were going out and finding whales and producing energy for people's lights. And that was a major industry.

It took 60 years for there to be no more whaling ships after the first petroleum and the first kerosene product became available competing in that domain. But there were no new whaling ships for those 60 years. Basically it was a one-way ticket.

I think the companies that are looking at the future and saying, we want to be here when the century turns over are taking a very different course of action right now than the companies that are saying, let's enjoy it while it's good. And I think that's going to be something that plays out very dramatically.

There's just no way to maintain those really high margins for the next 60 years like they have been enjoyed for the last 60 years. And I think we're starting to see, and I think genuinely seeing in a real way, firms trying to build out a post oil future in their own imaginations.

Shari Friedman: And so this follows onto, I guess, in a short-term and a long-term perspective on how, Malcolm, you're looking at fossil fuel companies from an investor's perspective. What do you look at when you start evaluating a company? And how do you see this trend going?

Malcolm Spittler: Well, we're really evaluating it in two different timeframes. We have a relatively positive view on oil and gas companies in the short term, basically on the back of this Ukrainian crisis. But we don't have a very positive longer-term view. We see there are potential legal hurdles. I mean will there be lawsuits kind of like we saw in the tobacco industry that place large amounts of old profit up for grabs by nation-states. There would likely in that scenario be a major competition between different countries in trying to sue the major actors. This is a very complicated environment in terms of that sort of liability. There are a lot of kind of legacy assets associated with oil and gas that are going to become big question marks in the decades to come.

For instance, what's going to happen with all of the gas stations across the world as we move to electric vehicles? Clearly the number of gas stations is going to not need to be the same level 10 years hence as it is today and 20 years hence we probably will have almost none. Each one of those gas stations is a liability because it takes a substantial amount of work to take it offline, clean it up, and meet the standards of the locality, whether it's a high standards location like the United States or Europe or a place where it can be kind of buried and forgot, which is sadly going to be a very common phenomena.

But somebody is going to be held accountable for that. And it may, in many cases, end up being local governments. It may be nationalized. That's a big question. But it does mean that in the long term there are issues of accountability that could really cloud the profitability scenario for oil and gas companies even beyond the price picture.

Shari Friedman: So I want to zoom out a bit and leave the specific fossil fuel conversation and talk just about the energy transitions in general. There's going to be some nations that are better positioned for energy transition and some that are going to be caught in some of these liabilities that we've been talking about. So Raad, I'd like to start with you and who do you think is better positioned right now and who might be less well positioned in the near term and in the long term during energy transitions?

Raad Alkadiri: It depends on what the definition of winners and losers are in terms of this.

Shari Friedman: I didn't say winners and losers.

Raad Alkadiri: Who is better positioned and who isn't? I mean I think this possibly sort of goes with my Eeyore type mentality, but I think one of the biggest losers is the world at this moment in time. But that's partly because we don't look like we're going to hit 2030 goals. But more importantly, the difficulty from a political level of reaching common agreement and common action. I mean this is a global issue and it does require a certain level of coordination and that becomes more difficult as energy security comes to the fore and as you get sort of countries looking inwards as they protect their energy and national security.

But I think if you look at which countries are best positioned ironically or perhaps not as obviously given the emission levels there, I would say China is. Just simply because it is spreading its bets and it's putting a great deal of money into various different sources of energy to ensure reliability, but backing renewables very heavily. And there is a political agenda as well that is linked to the environment and that is linked to the quality of growth in China that will help that. I mean we keep going back to Europe and Europe is certainly better placed. The question there is going to be can Europe produce the regulation and the policy to go with its very, very high ambitions.

And I think the U.S. has clearly taken advantage of the past 14 months and the Biden Administration has used the changing situations globally and in energy to push its own agenda. I mean that is, in some ways one of the issues that the Ukraine War has changed and how it's helped energy transition fans. It's a second-order impact. But as it's exacerbated U.S.-China tensions, you have had this focus of us and the Biden Administration on industrialization, on onshoring, et cetera, which is given a push to green transitions because that's been an important element of it.

As for the countries less well produced, again, those that don't have access to the investment and certainly in the developing world, those that are priced out of some of the transitions and transition policies and that, you look at the cost of LNG and what that's done to countries like Pakistan, those kind of implications.

And one of the biggest losers out of all of this is going to be Russia. Having started this spat, Russia's lost influence in leverage. It's getting less for the hydrocarbons it's produced, those hydrocarbons are seen as politically tainted and it's going to struggle with sanctions for probably many years to come.

Shari Friedman: Malcolm, when you look at this from an investment perspective, how are you looking at energy transitions in terms of investing and how would you advise on both the institutional and also the individual level for companies who want to make sure that they have access to capital?

Malcolm Spittler: Yeah, I think it's really crucial to see this as a transformation, but it's also a transformation where there's a little bit of a gold rush element. And our general rule of thumb is when there's a gold rush, don't go digging for gold, invest in the makers of the picks and shovels. So we really like a lot of the entities that are producing the input materials and the input technologies to the new green infrastructure. Kind of the necessary outcome of an energy transformation is that energy prices will go down.

In fact, I would go out on a limb and say over all of human history, there have been little tiny wiggles, but otherwise energy prices go down. The amount of human work that is necessary to produce energy is on a multi-thousand year downward trajectory and I don't see any shift to that. And so ultimately this transition is one where I see the other side as having radical energy abundance and very low-priced energy. So kind of in the longer run I'm thinking who benefits from that more than energy consumers.

So we're wondering what entities are currently spending the most on energy and thus have the most to gain from that shift in the longer time. So short term, absolutely oil and gas, we have to meet the demands of today. Unambiguous there are business cycle dynamics that are at work and we have to focus on those and pay close attention. Medium term picks and shovels, long-term energy consumers. That's how we've been kind of framing it internally.

Shari Friedman: Malcolm Spittler, senior U.S. economist and strategist at Citi Global Wealth Investments and Raad Alkadiri, Managing Director of Energy Climate and Resources at Eurasia Group. Thanks to you both.

Malcolm Spittler: Thank you so much for having us.

Raad Alkadiri: This was great.

Shari Friedman: And that's it for this episode of Living Beyond Borders. Listen to all the seasons episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find episodes in the GZERO World Podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.

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