Diving into the world of material and chemical sciences has drawn me outside of my comfort zone, but it’s critical to understanding the conditions of possibility that are shaping the long arc of future developments. I can only thank my colleagues in the “hard sciences” for their teaching and forebearance as we work together to fuse our mutual understandings.

As jet fuel prices surge amid geopolitical shocks in the Middle East, a quiet laboratory advance in Shanghai has taken on fresh urgency. Scientists at the Shanghai Advanced Research Institute of the Chinese Academy of Sciences have demonstrated a promising iron-based catalyst — modified with potassium and aluminum — that improves the direct hydrogenation of carbon dioxide into long-chain hydrocarbons suitable for jet fuel. Published in ACS Catalysis, and reported on in the South China Morning Post, the work moves the “reverse combustion” concept closer to industrial relevance by enhancing selectivity for the C₈–C₁₆ molecules aviation demands, while showing reasonable stability over extended testing.

This feels quite magical but it’s not. The first law of thermodynamics is ironclad: no process creates energy. The synthetic fuel’s energy content originates from the electricity used to split water into hydrogen, which then reacts with captured CO₂ over the catalyst. The real story, therefore, lies in cost relativity and comparative advantage.

Global oil markets illustrate the point. Brent crude has traded recently in the US$110–120/bbl range, with jet fuel averages around US$179/bbl and spot prices in some markets climbing toward or beyond US$4–5+/gallon (higher at retail in stressed regions). These levels reflect supply disruptions and risk premiums far above the US$70–90/bbl comfort zone of recent years. For airlines, where fuel can comprise 20–40% of operating costs, sustained higher plateaus change investment calculus across the board.

Enter green hydrogen — the critical input. Producing 1kg of synthetic jet-range fuel typically requires roughly 3.5–4kg of H₂. In a back-of-the-envelope estimate (see below), at a green hydrogen cost of US$2.50/kg (achievable in China’s best renewable-rich regions), hydrogen alone contributes about US$9–10 per kg of fuel output before other expenses. At US$3.50/kg H₂, that rises to US$12–14/kg. Adding CO₂ capture, synthesis capex and upgrading, optimistic near-term production costs for e-kerosene in favourable conditions land in the US$2.50–4.50/litre range today. Compared to fossil jet fuel at pre-surge levels (~US$0.7–1/litre wholesale equivalent), this was a steep premium. At current elevated prices, the gap narrows substantially. If oil volatility persists, the relative economics shift in favour of domestic synthetic routes, particularly where hydrogen can be produced cheaply at scale.

China is structurally well-positioned here. It leads global green hydrogen deployment, with operational renewable hydrogen capacity exceeding 250,000 tonnes per year and total built or under-construction capacity surpassing 1 million tonnes annually as of early 2026. Domestic alkaline electrolysers cost US$300–450/kW — a fraction of Western equivalents — thanks to manufacturing dominance (China controls 60% of global electrolyser capacity). Policy reinforces this. The 15th Five-Year Plan elevates green hydrogen as a strategic industry, with pilots targeting end-user prices below 25 yuan (US$3.50)/kg nationally by 2030, and lower (~15 yuan/US$2.10) in optimal inland provinces with abundant solar and wind.

Cheap, scalable electrolysers paired with massive renewables rollout give China a meaningful edge in the hydrogen bottleneck that has long constrained Power-to-Liquid (PtL) pathways. The Shanghai catalyst complements this by addressing selectivity challenges in CO₂ hydrogenation — a modified Fischer-Tropsch approach that previously overproduced methane or short chains. Better chain growth means higher carbon efficiency and less waste, trimming effective costs and improving the yield of on-spec jet fuel components (paraffins, isoparaffins with suitable freezing points and energy density).

None of this makes e-fuels a free lunch. Overall process efficiency from electricity to finished fuel often sits at 45–55%, reflecting thermodynamic losses in electrolysis (~50–60kWh/kg H₂ practical) and synthesis. Direct air capture of CO₂ adds further energy and cost penalties compared to industrial point sources. Capital for large integrated plants remains significant. Yet when fossil benchmarks rise and stay elevated — whether from conflict, underinvestment, or energy security premiums — the comparative math improves. A sustained US$1–2/gallon increase in jet fuel can shave hundreds of dollars per tonne off the required green premium.

Aviation is hard to electrify at scale for long-haul routes; energy-dense liquid fuels remain essential. Sustainable Aviation Fuel (SAF) mandates in Europe and elsewhere already push blending targets upward. E-fuels offer a pathway that recycles carbon rather than releasing new fossil stores, potentially delivering 70–90% lifecycle emissions reductions when powered by low-carbon electricity. For nations dependent on imported oil, domestic production from air, water, and renewables enhances resilience.

China’s advantages extend beyond hardware. It combines policy coordination, industrial CO₂ streams for early deployment, vast renewable potential in western provinces, and a willingness to invest at scale. While Western efforts emphasise innovation in electrolyser efficiency or novel synthesis, China’s focus on cost reduction through manufacturing scale and integration creates a different kind of momentum. If the new catalyst proves durable at commercial conditions, it could accelerate pilot-to-plant transitions.

Still, it’s worth noting challenges including full life-cycle assessments, catalyst longevity under real impurities, infrastructure for hydrogen transport/storage, and the sheer volume of clean electricity required for meaningful substitution. Thermodynamics imposes limits; cheap hydrogen remains the pivotal variable. Projections suggest that with continued cost deflation in renewables and electrolysers, best-case PtL costs could approach or achieve effective parity with fossil fuels (especially under carbon pricing) in the 2030s.

The broader lesson is economic pragmatism. Energy transitions succeed when low-carbon options become competitively attractive under realistic price signals. Surging oil costs act as a natural stress test. They highlight vulnerabilities in concentrated fossil supply chains while rewarding those who have built optionality in hydrogen, catalysis, and carbon utilisation.

The Shanghai team’s work is incremental but timely — another step in taming CO₂ hydrogenation for aviation-grade molecules. Situated against China’s green hydrogen build-out and today’s volatile oil markets, it underscores a strategic bet: invest in the technologies that turn abundance (renewables, industrial know-how) into energy-dense liquids when conventional sources falter. In a world of recurring price shocks and decarbonisation pressure, the nations mastering cheap clean hydrogen and efficient synthesis will hold a lasting edge in hard-to-abate sectors.

Whether and when this particular pathway scales commercially depends on execution, further data and sustained market conditions. Yet the underlying arithmetic is clear. Nothing creates energy, but relative costs evolve. When fossil plateaus rise, the value of domestic, recyclable alternatives grows. China appears determined to test that proposition at scale. We continue to watch with keen interest.

Appendix: Back-of-the-Envelope Calculation (April/May 2026 context)

Key assumptions:

• Jet fuel energy content: ~43 MJ/kg or ~11.9–12 kWh/kg (lower heating value).

• Hydrogen requirement: ~3.5–4 kg H₂ per kg of synthetic hydrocarbon fuel (accounting for stoichiometry in CO₂ hydrogenation/Fischer-Tropsch-type routes, plus real-world selectivity/losses; the Shanghai iron-based catalyst aims to improve chain growth selectivity, reducing lighter byproducts).

• Electrolysis efficiency: ~50–60 kWh electricity per kg H₂ (practical today; theoretical minimum ~39–42 kWh/kg).

• Overall Power-to-Liquid (PtL) efficiency: 45–55% (electricity to final fuel energy), meaning significant losses in electrolysis, reverse water-gas shift, synthesis, and upgrading.

• Green H₂ cost in China: Best sites (strong renewables in Inner Mongolia/Xinjiang/Gansu) ~$2–3/kg today; national average ~$3–4/kg. Targets aim for <$3.5/kg by 2030, with electrolyser capex at $300–450/kW domestically (vs. much higher elsewhere).

• CO₂: Assume low-cost industrial/point-source capture (~$20–50/tonne) for near-term; direct air capture (DAC) adds more cost/energy.

• Other costs (capex amortisation for synthesis plant, catalysts and refining): ~30–50% of total in early commercial stages.

• Current fossil jet fuel: Brent crude ~$110–114/bbl recently; global average jet fuel $179/bbl ($4.26/gallon in some indices), with U.S. spot/retail equivalents pushing $4–8+/gallon amid surges from Middle East tensions. Pre-surge “normal” was often ~$2–3/gallon.

Rough cost breakdown per kg of e-jet fuel:

• Hydrogen alone: At $2.50/kg H₂ × 3.7 kg H₂/kg fuel ≈ $9.25/kg fuel.

• At $3.50/kg H₂: $13/kg fuel.

• Electricity input equivalent: ~200–250 kWh electricity per kg fuel (depending on efficiency). At very cheap renewable power ($15–25/MWh in prime Chinese sites), this is manageable but still dominant.

• Full production cost today (optimistic China scenario with good catalyst selectivity, point-source CO₂, scale): Likely $2.50–4.50/litre (~$9–17/kg, since jet fuel density ~0.8 kg/L), still a premium over fossil but narrowed by high oil prices.

• At sustained $5+/gallon fossil jet (~$1.32+/litre or ~$10.5+/kg equivalent energy basis), the green premium shrinks dramatically. With China’s electrolyser cost advantage and policy push, break-even or near-parity becomes plausible in best locations by late 2020s/early 2030s under carbon pricing or mandates — especially if the new catalyst boosts carbon efficiency and reduces downstream processing.

Sensitivity: If oil/jet fuel plateaus 30–50% above pre-2026 averages due to persistent supply risks, e-fuels’ relative economics improve by hundreds of dollars per tonne. Hydrogen remains 50–70% of costs, so further drops to $1.5–2/kg H₂ (via cheaper renewables + electrolysers) would be transformative. The Shanghai breakthrough helps on the selectivity side (longer chains, less methane waste), trimming the efficiency penalty.

This is simplified — real levelised costs require full LCA, capacity factors, financing and scale. But it shows that thermodynamics fixes the energy debt; relative fossil prices and H₂ cost determine viability.

The mainstream narrative advanced by various commentators from the UK, US and Europe in particular posits that large and persistent current account surpluses, particularly China’s, represent a fundamental distortion in the global economy. High savings rates, repressed household consumption, and policy-driven investment in surplus countries allegedly generate excess savings that must be absorbed by deficit countries, primarily the United States and parts of Europe. This absorption manifests in unsustainable debt, deindustrialisation and financial fragility in the deficit nations. This line of argumentation frames these as structural “imbalances” with normative weight, often invoking Joan Robinson’s interwar writings on beggar-thy-neighbour policies to warn of potential conflict. Accounting identities from the balance of payments lend an aura of technical inevitability to the story.

This framework is conceptually flawed, historically selective and ideologically inconsistent. It inverts causality, misapplies historical analogies, obscures the agency of deficit-country capital and associated regimes of accumulation, and applies the language of “imbalance” in a manner that elides long-run patterns of uneven development and North-South extraction.

Conceptual Flaws: Accounting Identities, Causality and the Neglect of Production

The mainstream model rests heavily on the national accounts identity: (S – I) = (X – M), where a savings-investment gap equals the current account balance. Surplus countries, so the argument goes, by suppressing consumption (via financial repression, wage restraint or unequal income distribution), generate excess savings that flow abroad, forcing deficit countries into corresponding current account deficits and capital inflows. This is presented as the prime mover driving global distortions.

This approach treats accounting tautologies as causal explanations. The balance of payments identity — current account + capital/financial account ≈ 0 — holds by definition but says nothing about directionality. In a fiat reserve currency system dominated by the US dollar, the United States creates liquidity ex nihilo through its monetary and fiscal institutions. US firms and households then choose to import goods because they are competitively priced and available. Exporters (including those in China) accept these dollars and recycle them into US assets (Treasuries, equities or other claims). The deficit is jointly enabled by domestic demand absorption and monetary issuance in the deficit country, not unilaterally imposed by foreign savings.

Savings are a residual, not an autonomous behavioural driver. Investment (or autonomous demand) generates income, which in turn produces saving. Reversing the arrow — treating “excess savings” in surplus countries as the exogenous force — flattens the dynamics of production, competitiveness and spatial reorganisation of global value chains. One cannot export what one does not produce efficiently, nor import abundantly what one produces competitively at home. The framework assumes production “simply is,” ignoring how comparative and absolute advantages evolve through investment, policy and corporate strategy. The framework is also ontologically flawed as it cannot explain where the “savings” come from in the first place; again, they “just are.” It’s as if China’s accumulated US dollar surpluses just appeared!

Empirically, China’s gross national savings rate has been high (peaking near 50%+ of GDP and remaining at around 42-44% in recent years), with household consumption as a share of GDP comparatively low, but rising. Yet capacity utilisation in Chinese industry has hovered stably around 70-75% (73.6% in Q1 2026, averaging ~74.4% in 2025) amid rapidly expanding absolute output. The export-to-GDP ratio has declined sharply since its mid-2000s peak (from over 60% trade-to-GDP to around 20% recently), indicating growing orientation toward domestic markets. Indeed, China’s manufacturing exports-to-production ratio is roughly 13%, according to trade and value-added data compiled by organisations like CEPR. Claims of chronic “overcapacity” lack rigour when viewed globally: efficient specialisation means not every country maintains viable domestic industries in EVs, solar or electronics. Stable utilisation in an expanding economy reflects successful industrialisation more than wasteful glut.

Share

The Misappropriation of Joan Robinson

In presenting arguments about trade imbalances, Joan Robinson is often invoked. Yet, these repeated invocations are particularly ironic and misplaced. Robinson’s 1937 essay “Beggar-My-Neighbour Remedies for Unemployment” analysed competitive devaluations, tariffs and export promotion in the specific context of the 1930s characterised by widespread unemployment, the rigidities of the gold standard (or its collapse), deflationary pressures and contracting global output following the Great Depression. In that environment, one country’s attempt to improve its trade balance could indeed shift unemployment abroad, prompting retaliation and a downward spiral in world trade. Robinson highlighted how such policies, in a zero-sum environment of stagnant or declining aggregate demand, could exacerbate global problems.

Context matters. After 1929–33, world trade collapsed by roughly two-thirds. Prices fell faster than quantities, and primary-exporting countries saw catastrophic declines in foreign-exchange earnings. This meant that balance-of-payments pressures were universal. Export revenues evaporated and imports became harder to pay for. Yet, external debts (especially dollar- and sterling-denominated) remained fixed resulting in rapid reserves drainage. Gold standard rules imposed deflation on countries trying to defend parity. Robinson’s framework was shaped by the fact that every country’s external constraint tightened simultaneously. Thus, she saw a systemic inevitability: when the global economy contracts, each country attempts to push the burden of adjustment onto others.

Robinson’s central point was that the classical gold-standard story of “automatic adjustment” had failed. Deficit countries were forced into severe deflation. Surplus countries (notably France and the US early on) sterilised gold inflows instead of allowing domestic price increases. At the time, on her view, there was no symmetrical pressure on surplus nations. This breakdown helped drive governments to take active steps to regain external control. So in her view, the “movement” toward controlling external accounts was not philosophical — it was forced by structural constraints and the collapse of any cooperative mechanism.

Robinson’s insight is subtle. She did see countries as inevitably trying to correct external-account deficits. But she saw this not as an equilibrium-restoring process; rather, it was a desperate competitive strategy produced by deflationary collapse. Her “beggar-my-neighbour” argument is precisely that when world demand collapses, each nation will seek to expand exports or contract imports, and in doing so, shifts unemployment onto others. This is why she thought the struggle for external-account control is endemic during global depression.

In sum, the 1930s were characterised by a >60% collapse in world trade volumes (1929–33), ubiquitous deflation coupled with mass unemployment, a catastrophic fall in commodity prices and a breakdown of the gold-standard adjustment mechanism. In that world, countries had to fight for external surpluses just to maintain employment and access foreign exchange.

Today’s context differs fundamentally in at least three respects. First, the international monetary system is fiat-based, with floating (or managed) exchange rates and no gold anchor (theoretically) imposing automatic deflationary adjustments. Second, global output has generally expanded, even amid slowdowns, rather than contracted. This point is actually key, because her observations were conditioned by the reality of global contraction. Third, large surpluses today often coexist with commodity imports that benefit exporters elsewhere, and private capital flows play a larger recycling role.

In the 1930s, the US was on the gold standard, whereby its external deficits required gold outflows. As such, gold scarcity imposed contractionary pressure. In this environment, countries feared losing reserves and facing capital flight. Achieving or the pursuit of external balance was a question of survival.

By way of contrast, in the 2020s the U.S. issues the global reserve currency and faces zero external financing constraint. Its current-account deficit is financed in its own currency. Treasury issuance is not a balance-of-payments issue — it is a domestic policy choice. The US can run deficits as long as the world accepts USD-denominated assets. So, these days, the U.S. is not fighting for foreign exchange; it is exporting the dollar as a global asset. This is structurally the opposite of the 1930s balance-of-payments problem Robinson analysed.

Furthermore, the 2020s environment is defined by rising global GDP (even with cyclical slowdowns), structurally expanding global consumption demand, growing South–South trade, expanding demand for manufactured goods, electronics, machinery, green tech, energy equipment, services, travel, etc., a US economy with record employment and high consumer spending, and a large proportion of global growth driven by Asia and increasingly in parts of Africa. In other words, the world economy of the 2020s is not a shrinking pie. It is an expanding one. The competitive zero-sum logic of the 1930s is structurally absent. As such, applying Robinson’s warnings as a general normative prohibition on surpluses in a growth context stretches the original analysis beyond recognition.

Today, no major economy faces a Robinson-style external account constraint, other than some emerging markets. This contrasts directly with the conditions of the period in which she wrote her famous article. Then, everyone was reserve-constrained; indeed, even the UK and US faced gold pressures. Germany, Italy and Japan were foreign-exchange poor, and primary producers were devastated by a collapse in commodity prices. Contrast that with today, when the Eurozone and Japan have structural surpluses, and China’s reserves exceed US$3 trillion. Meanwhile, the U.S. is a currency issuer with no external constraint and most emerging markets hold large FX reserves relative to the 1930s.

The only countries that still behave in a Robinson-style external-constraint world are a small group of FX-dependent emerging markets (Sri Lanka, Pakistan, Argentina and Egypt to name some). I don’t wish to diminish the extent of challenges these nations face, but the fact remains that the world today is vastly different to that in which Robinson opined about the risks of countries pursuing beggar-thy-neighbour policies.

The drivers of today’s trade tensions are very different to those of the 1930s. A century ago, as noted, we were dealing with a world of global contraction and gold constraints with a need for FX earnings. These days, however, we are dealing with a world in which there is extensive high tech strategic competition, a revival of sorts in industrial policy, ongoing energy transition and restructuring, questions about supply chain resilience in a highly networked world, geo-economic rivalries, big questions around digital trade and data governance and such like. These are growth strategies, not desperate attempts to push unemployment onto trading partners.

So when analysts claim “we’re entering a new beggar-thy-neighbour era,” they’re wrongly importing a zero-sum depression logic into a growth-restructure context. Whereas Robinson spoke of a world in which countries fight for external surpluses because global demand has collapsed, FX is scarce and unemployment is exported from one nation to the next, today’s tensions take place in an environment of growing global demand, largely non-existent FX scarcity amongst major economies and no external constraint on U.S. dollar issuance. Thus the current geopolitical-economic dynamics (U.S.–China rivalry, industrial policy, friend-shoring, and supply-chain reconfiguration) are not explicable through a Robinson 1930s depression lens. They are driven instead by strategic competition in a high-growth, structurally transforming global economy.

More damningly, perhaps, this use of Robinson contradicts her deeper theoretical framework. Robinson emphasised that saving is a residual determined by the level of investment and output via the multiplier. Investment drives saving, not vice versa. In her growth models and critiques of neoclassical theory, she stressed effective demand, historical time, uncertainty and the centrality of production and accumulation. Treating “excess savings” in surplus countries as the causal driver — independent of investment decisions and production location — reverses her logic. Robinson would likely view savings as endogenous to the accumulation process and income distribution, not an exogenous glut forcing deficits elsewhere. The mainstream argument has the causality ass-about.

Subscribe now

Historical Sequencing: Offshoring as the Root Dynamic

The mainstream narrative treats Chinese industrialisation and surpluses as an exogenous shock (the “China Shock”) driven by internal distortions. Chronology and ownership data reveal the opposite. Significant US and Western offshoring to China accelerated in the 1980s–1990s, intensifying after the 2000–2001 granting of Permanent Normal Trade Relations and China’s WTO accession. This was not passive exposure to “Chinese competition” but an active strategy by American (and other foreign) capital seeking lower costs, lighter regulation and higher margins.

Foreign Invested Enterprises (FIEs) dominated Chinese exports in the critical period — often 50–60% or more in the 2000s to mid-2010s, especially in processing trade and electronics. The pattern is show in the figures above, drawn from data available from China’s Annual statistics yearbook. National accounts record these as Chinese exports, but control, value capture (design, IP, branding etc.), and profit repatriation frequently accrued to foreign multinationals. US firms expanded affiliates in China while contracting domestic operations. The so-called “China Shock” in US manufacturing employment (sharp losses post-2001) was, to a substantial degree, a self-inflicted outcome of American corporate strategy under financialised incentives — shareholder primacy, short-term returns and capital mobility.

The “revenge of the rentier” better describes this regime of accumulation than foreign mercantilism.

It wasn’t until the mid-2010s that domestic Privately Owned Enterprises (POEs) achieved export levels that exceeded those of the FIEs. Later indigenisation of Chinese capabilities (declining FIE export share to ~28–30% recently) evolved the pattern, but the foundational spatial reorganisation and deficit creation originated in deficit-country choices, or more to the point, the decisions of American and other western industrial capital. US liquidity creation and consumption-led growth then absorbed the resulting supply. No exporter compelled the importers to buy, it should be emphasised. The mainstream line obscures this agency, portraying surplus countries as the primary distorting force. And perhaps the real culprit isn’t China’s export surpluses per se, but the emergence of Chinese PIEs in the past decade as the principal exporting entities that has caused such western anxiety.

Share

Selective Normativity: “Imbalances” and Historical Double Standards

The language of “imbalance” implies deviation from a neutral ideal of balanced trade, yet large imbalances are not novel. Recent historical research by Gastón Nievas and Thomas Piketty documents Europe’s massive net foreign asset accumulation pre-1914 (reaching ~70% of European GDP), built on colonial transfers, unequal exchange, forced labour, and depressed commodity prices that benefited the North at the South’s expense. The Global South ran structural deficits amid wealth extraction. Today’s East / South surpluses represent partial catch-up within ongoing unequal bargaining dynamics.

This empirical work, while valuable, arrives late to a field long occupied by critical scholars. For decades, a rich body of left-wing and heterodox literature analysed precisely these neo-colonial imbalances. Samir Amin’s theory of unequal exchange and “imperialist rent,” Andre Gunder Frank’s “development of underdevelopment,” Immanuel Wallerstein’s World-Systems Theory, and the dependency school all demonstrated how structural trade and financial asymmetries systematically transferred value from the periphery to the core. The Third World debt crisis of the 1980s further exposed these dynamics: Southern nations were compelled into austerity and export-oriented adjustment under IMF/World Bank programs, generating surpluses for Northern creditors while entrenching dependency.

Far from a new phenomenon requiring urgent correction only when the direction reverses toward the West, persistent global imbalances have long characterised the world-economy. The selective outrage today — framing Eastern surpluses as uniquely pathological — reveals a striking historical amnesia. It conveniently forgets how Northern wealth was built on, and continues to benefit from, the very mechanisms now decried when they operate in the other direction.

Western complaints about contemporary deficits with China ring hollow without acknowledging this legacy. Deficit countries cannot pathologise current surpluses while naturalising or ignoring the centuries-long patterns that built Northern wealth through extraction and dependency. The framework selectively applies normative concern to recent Eastern surpluses, downplaying how the post-1970s/80s accumulation regime — financialisation, reserve currency privilege and offshoring — facilitated the very production shifts now lamented. It focuses on class dynamics within surplus countries (repressed wages) while under-emphasising international power relations and the co-creation of global value chains by Western capital.

Share

Toward a More Coherent Framing

The mainstream line on current account “imbalances” as the central problem is not merely incomplete; it is symptomatic of a deeper refusal to confront the primacy of production. The frequent references to Ricardo also fail to understand that Ricardo’s treatise on trade was embedded within a wider concern about production and the circulation of surplus. Trade was a distributional question amongst classes, as much as anything else. Furthermore, a singular fixation on trade flows conveniently ignores the capital account, where accumulated surpluses are actually deployed. In a fiat system, China’s surpluses do not “force” deficits; they are symptoms of fiat issuance by nations that don’t produce enough, and manifest as claims on deficit-country liabilities. These surpluses can, and in principle should, recycle into productive investment — augmenting capacity, infrastructure, and technology in the US and EU — closing the very loops that accounting identities describe. Instead, the dominant narrative pathologises only one side of the ledger.

This one-sidedness has real consequences. The EU, unable to ratify the Comprehensive Agreement on Investment negotiated in principle in late 2020 and frozen since 2021 amid sanctions and geopolitical tensions, blocks deeper capital integration with China. The United States, burdened by national security paranoia and expansive CFIUS reviews, has effectively choked off significant Chinese FDI. Rather than welcoming surplus capital into tangible productive assets — factories, R&D or critical infrastructure — the US channels recycling overwhelmingly into financial assets, Treasury securities, equities and the ever-expanding circuits of fictitious capital: asset price inflation, speculative vehicles, and non-productive debt accumulation.

As I have argued elsewhere, trade is fundamentally about energetic surpluses and the capacity to engage in more complex forms of energetic and material transformations. Accounting balances must, at a system-wide level, net to zero; they are secondary epiphenomena. What matters is how global production systems generate and distribute real energetic value to enhance societal reproductive and developmental capabilities. Blocking productive money capital recycling in the name of security paranoia simply diverts flows into fictitious capital circuits, undermining the very industrial dynamism required for long-term resilience and accelerating the cascade into financial crisis.

This reveals the original analytical sin: treating production location, corporate offshoring decisions and the spatial organisation of global value chains as secondary to accounting residuals. A coherent framework must therefore integrate both accounts, acknowledge the historical co-creation of today’s patterns through Western offshoring and financialised accumulation regimes, and recognise long-run North-South asymmetries.

Policy should prioritise competitiveness revival for trade-exposed sectors, targeted industrial strategies, infrastructure renewal and pragmatic channels for cross-border finance capital to support the development and upgrading of genuine productive capacity. Deficit countries always retain the option of consuming less by restraining system liquidity expansion — cutting government spending, raising interest rates and imposing stricter fiduciary requirements on private credit creation. Rather than demanding that surplus countries simply “consume more” while evading domestic reforms and historical accountability, analysts and policy makers must address real production dynamics. Production, not tautological bookkeeping, remains the heart of the matter.

As China reported 5% GDP growth in Q1 2026, industrial profits of major enterprises surged 15.5% year-on-year, reaching 1.696 trillion yuan. High-tech manufacturing profits soared 47.4%, equipment manufacturing performed strongly, and producer prices (PPI) turned positive after years of deflationary pressure. Yet the familiar chorus of “overcapacity” echoed once again in Western commentary. This static diagnosis — focused on snapshots of factory utilisation, inventory levels, and export volumes — fundamentally misunderstands the dynamic processes underway in the world’s largest industrial economy.

What appears as overcapacity is in reality the transitional overlap of industrial vintages: older, lower-productivity fixed capital from previous investment waves continues operating, generating intense price competition (known in China as neijuan or involution, which I have discussed in detail previously), while newer green, digital, and high-tech capacities scale up. This interregnum is messy and painful in the short term, but it reflects a purposeful process of demand-led structural transformation that is raising the economy’s long-run productive potential.

The Central Role of Kaldor-Verdoorn Dynamics

At the heart of this transition lies the Kaldor-Verdoorn (K-V) law, one of the most important empirical regularities in heterodox economics. First observed by Dutch economist Petrus Johannes Verdoorn in 1949 and later developed by Nicholas Kaldor, the law establishes a strong positive relationship between output growth and labour productivity growth. Unlike the conventional neoclassical view — in which technical progress is largely exogenous and supply-driven — the K-V perspective sees productivity and innovation as largely endogenous to demand expansion.

In their important 2025 paper published in the Review of Political Economy, Suranjana Nabar-Bhaduri and Matías Vernengo provide robust empirical confirmation of these dynamics in China (and India) over the period 1991–2019. Using two sophisticated approaches — partitioned regression analysis and structural vector autoregression (VAR) — the authors demonstrate that output growth powerfully “pulls” productivity growth. For China, they estimated Verdoorn coefficients between approximately 0.89 and 1.05. In practical terms, this means that for every percentage point increase in GDP growth, labor productivity growth rises by nearly the same amount. GDP/output shocks accounted for over 80–90% of the forecast error variance in productivity, while short-term cyclical effects linked to unemployment (Okun’s law) were small and statistically insignificant.

For non-specialist readers, the mechanism works as follows. Autonomous demand — in China’s case, heavily driven by public and strategic investment in infrastructure, industrialisation, and now green and high-tech sectors — acts as the initial catalyst. This demand induces private investment through the accelerator principle and expectations of sustained market growth (a process formalised in Sraffian supermultiplier models). Firms first respond by raising capacity utilisation rates on existing plant and equipment. When high utilisation is sustained over time, several productivity-enhancing processes are activated:

1. Increasing returns to scale: Larger production volumes allow more efficient use of resources and specialisation;

2. Learning-by-doing: Workers and engineers gain experience, discovering incremental improvements in processes;

3. Embodied technical change: New investment incorporates superior machinery, software, and methods; and

4. Division of labor and structural transformation: Resources shift from lower- to higher-productivity activities.

Intense competition then accelerates the process by pressuring firms to innovate or exit, driving the progressive replacement of obsolete technologies. The result is cumulative causation: demand expansion begets productivity growth, which supports further demand and investment in a virtuous cycle.

In China today, this dynamic is visible in the data. High-tech manufacturing value-added has grown significantly faster than the overall industrial average of 6.1%. Profits have rebounded strongly in upgrading segments even as traditional sectors face margin pressure. The gradual positive shift in PPI signals that newer, more efficient production modes are gaining pricing power as older vintages are progressively rendered obsolete through retrofitting, upgrading programs, and selective scrapping. Policy initiatives such as large-scale equipment renewal and “new quality productive forces” represent a deliberate effort to manage this obsolescence in an orderly fashion rather than through chaotic market-driven collapse.

This demand-led view stands in sharp contrast to mainstream narratives that treat technical progress as an exogenous force and capacity as a fixed constraint. Static “overcapacity” metrics — simple comparisons of output to some estimated efficient level — ignore these temporal and evolutionary realities. They mistake the symptoms of creative destruction during a technological transition for permanent inefficiency.

Share

Short-Term Geopolitical Headwinds; Structural Upgrading Continues

The ongoing war in Iran introduces additional near-term pressures. Disruptions to energy supplies are pushing up input costs (see rising Producer Prices chart below), which may temporarily dampen some investment plans and slow global demand. For China, higher prices (rising CPI, see chart below) could paradoxically encourage a drawdown of household savings to maintain material consumption volumes. Tapered real wage and household income growth — the mirror image of rising profit shares during this capital-deepening phase — reinforces this adjustment (see final chart below showing rising business revenues and profits, which I have also discussed previously). Stronger corporate profits, particularly in upgrading sectors, provide resources for continued reinvestment in new technologies. Well-calibrated policies to support domestic consumption and equipment modernisation can help bridge the transition. (Charts from National Bureau of Statistics of China.)

China’s industrial sector showed solid resilience in the first four months of 2026, per the National Bureau of Statistics release on 18 May, 2026. Industrial value-added for enterprises above designated size grew 5.6% year-on-year. Equipment manufacturing rose 8.7%, while high-tech manufacturing surged 12.6% — that’s 7 percentage points faster than the industrial average. Specific high-tech segments posted impressive gains: production of 3D printing devices (+50.9%), lithium-ion batteries (+36%), and industrial robots (+25.7%). High-tech investment grew 6.1%, with standout increases in aerospace vehicle and equipment (17.9%), computer and office devices (13.9%), and information services (18.1%). Industrial profits in Q1 rose 15.5% to 1.696 trillion yuan, driven by a remarkable 47.4% jump in high-tech manufacturing profits.

These figures highlight ongoing momentum in upgrading sectors even as overall fixed-asset investment declined 1.6% (largely due to ongoing real estate laggardness). Producer prices (PPI) also recovered meaningfully: +0.2% for Jan–April, accelerating to +2.8% in April alone, with purchasing prices up 3.5%. This ends a long deflationary stretch and points to improving pricing power in advanced segments (again, see the chart above).

The ongoing war in Iran has pushed up global energy and commodity costs, raising input prices for energy-intensive industries and creating short-term headwinds for investment and margins. Despite this, high-tech and equipment sectors have largely weathered the storm, supported by sustained demand-pull, policy-backed equipment renewal and productivity gains from upgrading. The resilience underscores that Verdoorn-style dynamics — where output expansion drives learning, scale and embodied technical change — remain active in strategic areas.

Beyond manufacturing, China is experiencing a broader structural shift. The services production index grew 4.9% year-on-year in Jan–April, with modern services leading: information transmission, software and IT services (+10.9%), leasing and business services (+9.3%) and finance (+6.7%). Service retail sales rose 5.6% — significantly faster than overall consumer goods retail (1.9%) — with strong growth in communication information services, tourism/cultural/sports/leisure, and transportation services. Online retail of services increased 8.3%.

This reflects an ongoing reorientation of consumption growth away from traditional tangible goods retail toward a broader, digitally enabled services category (distinct from pure commodity sales). Growth is concentrating in experience-based, information-intensive, and high-value services rather than volume-driven goods. This dual transformation — higher-tech, more energy-efficient production coefficients on the supply side, and a services-oriented consumption shift on the demand side — marks the ongoing unfolding of structural change. It aligns with the move toward “new quality productive forces,” where productivity gains from high-tech manufacturing support rising living standards through diversified services consumption.

Overall, the January–April data paints a picture of an economy that is reasonably successfully navigating transitional frictions and external shocks while advancing its evolutionary path: legacy capacity slowly but surely yields ground to newer, more efficient modes, and consumption patterns evolve in tandem. Sustained policy support for domestic demand and technological transformation will help consolidate these gains.

International Implications and Policy Choices

The international reaction to China’s transition reveals two distinct paths. Advanced economies with mature but increasingly obsolescent industrial sectors, such as those in the EU, have leaned toward heavy protectionism — tariffs, subsidies and investment screening on Chinese EVs, solar panels, batteries, and related goods. This approach is misguided. Many of these economies are simultaneously pursuing remilitarisation while practicing relative fiscal austerity. The combination dampens domestic demand-pull, weakening the very conditions needed for local Kaldor-Verdoorn effects. Rather than blocking Chinese advancements, a more productive strategy would be (selective) openness to Chinese firm investment and technology collaboration. This would accelerate technical propagation, speed the green transition, and allow these economies to capitalise on cost and efficiency gains generated by China’s scale. Chinese firms remain open to expanded investment in the EU, evidenced by the fact that Chinese investment in Europe in 2025 hit a seven year high.

On the other hand, developing economies with limited industrial bases face a different opportunity. Chinese productive capabilities — delivering affordable renewables, machinery, transport equipment, and infrastructure goods — provide powerful tools for their own structural transformation. Recent trade patterns confirm this. Chinese exports have increasingly oriented toward the Global South and Belt and Road partners, now accounting for over half of China’s total trade. While advanced economies remain preoccupied with current account balances and “dumping” concerns, developing nations are harnessing these flows to build industrial foundations.

Subscribe now

Moving Beyond Static Tropes

The “overcapacity” debate ultimately reflects a deeper methodological divide. Neoclassical frameworks favour equilibrium analysis and exogenous supply factors. Alternative approaches, grounded in the Kaldor-Verdoorn tradition, emphasise cumulative causation, demand-led growth and evolutionary technical change. China’s experience since the 1990s — and the strong econometric results in the Nabar-Bhaduri and Vernengo study — provide compelling evidence for the latter.

As older industrial modes gradually yield to newer ones, the current period of involution will ease. Q1 2026 indicators — accelerating profits in advanced manufacturing, recovering producer prices and resilient high-tech momentum despite external shocks — suggest the transition is advancing. Understanding this process as demand-induced, competition-driven obsolescence rather than simple excess capacity offers a far more accurate guide for policymakers.

For China, the priority remains sustaining autonomous demand while managing orderly upgrading. For the world, the wiser course is complementary industrial policies that harness rather than resist the global productivity wave. Development is not a zero-sum optimisation problem but an evolutionary process of structural transformation. Static snapshots obscure more than they reveal. Dynamic analysis points toward higher systemic efficiency and shared potential gains — if the politics can catch up with the economics.

In the shadow of escalating geopolitical tensions and resource constraints, Huawei’s announcement on May 25, 2026, at the IEEE International Symposium on Circuits and Systems (ISCAS) in Shanghai marks more than a technical milestone. By unveiling the τ (Tau) Scaling Law, the company is reframing semiconductor progress around minimising time constants — signal propagation delays, data movement, and execution efficiency — rather than relentless geometric shrinkage. This pivot from size to compute/energy/time as the defining metric is not mere adaptation to U.S. export controls. It represents a deeper alignment with the physical realities that will determine long-term information viability in an era of thermodynamic limits.

For decades, Moore’s Law and Dennard Scaling guided the industry: pack more transistors into smaller spaces, drive down costs, and reap performance gains. Those paradigms are fraying under atomic limits, economic pressures, and power walls. Huawei, led by semiconductor president He Tingbo, proposes replacing geometric scaling with time-domain optimisation. The τ Scaling Law targets the RC (resistance-capacitance) delays that dominate both latency and energy waste. Through innovations like LogicFolding — which “folds” logic circuits to shorten interconnects — and full-stack co-optimisation from devices to systems, the company claims substantial gains: up to 41% better energy efficiency in mobile SoCs, 55% higher effective density on existing nodes and a path to 1.4nm-equivalent transistor density by 2031. Over six years, these principles have already informed 381 mass-produced chips, with new Kirin processors arriving this northern hemisphere autumn.

The power dissipation focus here is critical. Dynamic power scales with capacitance and voltage squared; static leakage and interconnect losses add further burdens. By systematically reducing τ, Huawei attacks these at their root: shorter paths mean less parasitic capacitance, lower resistive heating and more operations per joule. In a world where AI data centres are projected to consume hundreds of additional terawatt-hours annually by 2030 — potentially rivalling entire nations’ electricity use — this is no incremental tweak. It is a strategic response to the hard thermodynamic ceiling facing compute-intensive economies.

This shift resonates profoundly with thermoeconomic principles. As outlined in my book Thermoeconomics in a Time of Monsters, complex systems — economies, civilisations and technological ecosystems — thrive or falter based on their capacity to generate negentropy: order, information processing, and adaptive organisation extracted from energy flows while managing entropy production. Information is not free. Its viability hinges on the efficiency of converting energy into useful work over time. High τ means more energy dissipated as useless heat; low τ amplifies net negentropic yield. Compute/energy/time becomes the decisive threshold for sustained performance.

Huawei’s approach operationalises this. It decouples progress from exclusive reliance on the most advanced lithography tools (increasingly restricted by geopolitics) and emphasises architectural and systemic efficiency. This is engineering as applied thermodynamics: minimise dissipative losses to maximise the surplus available for complexity and innovation. In thermoeconomic terms, it enhances the “profitability” of information systems — where benefits (negentropic output in the form of faster decisions, denser intelligence and better control loops) exceed the energetic and entropic costs.

The implications for energy sovereignty and resilience are immediate and asymmetric. China enters this contest with a structural advantage in electricity. As of early 2026, China boasts among the world’s lowest power generation costs, driven by scale in renewables (solar installation costs projected to fall toward $388/kW by 2030), abundant domestic coal reserves for baseload stability, and centralised planning that treats energy as critical infrastructure rather than a volatile market commodity. Chinese electricity prices are roughly half those in the U.S. in many contexts, with far greater stability.

This matters enormously. AI and high-performance computing are voracious. Global data centre electricity demand, already around 415 TWh in 2024, could more than double by 2030, with AI workloads driving much of the surge. In the United States and Europe, power grid constraints (such as those caused by shortages in transformers), permitting delays, public opposition and higher marginal costs from gas volatility or renewable intermittency (without equivalent scale) create bottlenecks. China’s ability to deploy low-cost, reliable power at volume — bolstered by manufacturing dominance in solar, batteries and related supply chains — turns energy abundance into a competitive multiplier, as I have previously discussed.

Lower effective compute costs, achieved through τ-optimised architectures, amplify this edge. Efficient chips stretch every kilowatt-hour further. For data centers, edge devices, autonomous systems, and industrial intelligence, this translates into lower operational expenses, reduced thermal management burdens, and greater deployment flexibility. In a fragmented world — marked by supply chain weaponisation, “monsters” of geopolitical rivalry, resource nationalism and climate pressures — nations or blocs that master compute/energy/time ratios gain systemic resilience. They can sustain denser information flows, faster innovation cycles, and more robust coordination without collapsing under self-generated entropy (heat, cost and fragility).

Critics may dismiss this as catch-up innovation under duress. Huawei’s path is undeniably shaped by sanctions limiting access to EUV lithography. Yet necessity has mothered invention before. The West’s focus on bleeding-edge nodes, while powerful, risks over-optimisation for a narrow metric (feature size) while ignoring broader thermodynamic and economic realities. Architectural leaps like those in τ Scaling can deliver meaningful PPA (power-performance-area) gains even on mature processes. Early claims of clock speed uplifts alongside efficiency improvements suggest real-world traction.

Broader questions loom, however, and are worth bearing in mind. Validation through independent benchmarks on the upcoming Kirin chips will be essential. I doubt that Huawei would have made the announcement on Tau’s law if it wasn’t confident of passing such validation. Thermal challenges in folded architectures require careful management. Design complexity rises, demanding sophisticated EDA tools and talent — areas where China continues heavy investment. Yet the direction is clear: post-Moore progress will increasingly favour those who engineer within physical constraints rather than against them.

For the global order, this accelerates a multipolar technology landscape. Energy sovereignty — control over affordable and reliable power — becomes as strategic as chip fabrication itself. Nations investing in both efficient compute paradigms and domestic energy scale (renewables + firm capacity) position themselves for advantage. Those mired in regulatory gridlock or high-cost energy risk ceding ground in AI, advanced manufacturing, and future intelligence applications.

In Thermoeconomics in a Time of Monsters, the core insight is that systemic viability in turbulent times demands reckoning with energy-entropy-information linkages. Huawei’s τ Scaling Law is a practical demonstration. By prioritising time- and energy-domain optimisations, it lowers the thermodynamic cost of computation and leverages China’s electricity strengths. This does not guarantee dominance, but it tilts the field toward resilience for systems that align design with physics.

The monsters of our era — fragmentation, scarcity mindsets and power competitions — will not be tamed by denial of limits. They yield to those who navigate them intelligently. Reframing semiconductor futures around compute/energy/time is one such intelligent navigation. It signals that the next phase of technological competition will be won not solely by those who build the smallest transistors, but by those who most effectively convert (scarce) energy into enduring negentropic order.

The coming years will test this thesis in silicon, post-silicon technologies and on the grid. For policymakers, strategists and technologists, the message is that energy abundance paired with computational efficiency is the foundation of sovereignty in the information age. Ignore it at your peril.

China’s major industrial enterprises recorded total profits of 1.696 trillion yuan in the first quarter of 2026, a solid 15.5% increase year-on-year and a modest acceleration from the January-February pace. High-tech manufacturing delivered a striking 47.4% surge, contributing nearly 8 percentage points to the overall gain. Equipment manufacturing rose 21%, adding 6.8 points, while private enterprises posted a robust 25.4% advance and share-holding firms grew 20.9%. Sub-sectors such as electronics (up 124.5%) and certain raw materials segments showed even sharper momentum. Conventional explanations — liquidity injections, cyclical recovery and targeted policy support — describe important surface forces. Yet they remain incomplete. They overlook the deeper systemic reconfiguration underway in the Chinese economy: the way production costs are advanced, price claims are asserted, and — decisively — those claims achieve closure through actual market sales.

In a monetary production economy, enterprises must commit resources upfront — wages for labour, payments for materials and energy, plus outlays for finance — before any revenue can return. The prices they set constitute forward-looking claims on social validation. A price, however, is not yet realised value. Realisation occurs only at the moment of closure: a buyer appears, the transaction executes, costs are recovered in full, and a monetary surplus (profit) emerges. Profits represent the trace left when the circuit of production successfully closes. What stands out in the Q1 data is not merely higher reported profits or expanded liquidity, but evidence of a rising probability that price claims convert into completed transactions at meaningful scale, particularly within strategic industrial nodes.

From Advance to Closure

Firms advance concrete resources — labour power, raw and intermediate materials, energy and financial claims — in anticipation of future realisation. The price tag attached to output is an assertion awaiting confirmation by the market. Until closure occurs, those costs remain exposed and the claims aspirational. The circuit resolves only when a willing buyer commits, the transaction clears, revenue is realised, advanced costs are fully recovered, and a net surplus appears.

Liquidity plays an essential dual role here. As flow, it lubricates the transactional moment itself, enabling producers to bring goods and services forward and buyers to complete purchases. As stock, a net expansion of liquidity across the system is required, by simple accounting identity, for aggregate profits to rise. In a closed monetary circuit, one firm’s realised surplus must ultimately be matched by expanded purchasing power somewhere in the economy; absent that, gains in one quarter simply offset losses or deferred obligations elsewhere.

Liquidity is therefore necessary, yet far from sufficient on its own. The decisive variable is how effectively the system directs both the stock and the flow toward high-probability closure in productive, value-adding activities.

Liquidity as Enabling Condition, Not Sole Driver

Were undifferentiated liquidity expansion the primary driver, one would expect broad-based profit growth, often accompanied by generalised price pressures or speculative excess. The Q1 2026 pattern is more selective. Growth concentrated heavily in high-tech and equipment manufacturing clusters, with relative price stability prevailing outside recovering pockets and pronounced divergence between lead sectors and the remainder of industry. This suggests that liquidity — both the net stock increase and its directed flow — is being filtered through a structured industrial architecture rather than broadcast indiscriminately across a homogeneous market. The result is targeted realisation: advanced costs convert more reliably into recovered value and monetary surplus within specific, strategically important segments of the economy.

RMB Appreciation and the Compression of Reproduction Costs

One under-appreciated contributor to this outcome is the renminbi’s gradual strengthening against the US dollar over the past year, with the currency moving into a firmer range (broadly discussed in forecasts as potentially testing 6.70–7.05 levels). In a globally integrated production network, RMB appreciation directly compresses the domestic-currency cost of imported energy, industrial commodities, intermediate components and specialised capital equipment.

Standard exchange-rate analysis assumes a straightforward trade-off: currency appreciation raises the foreign-currency price of exports and therefore erodes competitiveness. That framing works reasonably well when competition rests almost entirely on price and margins are structurally thin. China’s current industrial configuration, however, increasingly departs from those assumptions.

The RMB Paradox: Appreciation as Margin Expansion

In practice, RMB appreciation is generating a paradoxical expansion of profitability and underlying competitiveness through three interlocking mechanisms.

First, it compresses reproduction costs at the material base. Lower RMB-denominated prices for key inputs enlarge the margin space available to producers. Firms can elect to maintain export prices in foreign currency terms, absorb limited competitive adjustments, or retain a larger share of the gain as internal surplus — without any mechanical requirement to pass savings through as lower selling prices.

Second, structural upgrading in lead sectors has reduced sensitivity to marginal price fluctuations. In electric vehicles, advanced batteries, high-end machinery, and integrated technological systems, competition now centres on differentiation: technological performance, supply-chain reliability, ecosystem compatibility, and long-term system value. Buyers weigh these attributes more heavily than small differences in unit cost, weakening the classical link between exchange rates and export competitiveness.

Third, active price discipline prevents the dissipation of gains. Earlier phases of rapid industrialisation frequently saw cost reductions eroded through intense “involution” — aggressive price undercutting that redistributed surplus back into the market. Current conditions feature stronger implicit and explicit restraints on this kind of destructive competition, alongside policy encouragement of consolidation and quality-based rivalry. As a consequence, a greater proportion of cost savings flows through to realised profit rather than being competed away.

I have explored these paradoxes in separate articles previously (here and here) for those interested in further details.

Subscribe now

Structured Competition and the Architecture of Closure

These dynamics directly influence realisation probability. In an environment of unrestrained price warfare, asserted claims are repeatedly undercut, margins erode prior to sale, and closure remains probabilistic even when physical output is abundant. China’s emerging system does not eliminate competition; it structures it. Enterprises increasingly vie on technology, scale, integration and reliability rather than pure price aggression. This raises the likelihood that price claims survive long enough to encounter willing buyers and complete the circuit — shifting the economy from apparently chaotic, low-probability realisation toward more predictable validation of value.

Stable costs and disciplined pricing still require effective demand if closure is to occur at scale. Here, China combines several anchoring mechanisms: sustained export demand in high-value manufacturing, domestic infrastructure and industrial investment, and large-scale programs supporting electrification and the energy transition. These are not blunt, aggregate demand stimuli. They are targeted toward sectors that align closely with advanced productive capacity, thereby increasing the probability that output will be absorbed at prices sufficient to recover costs and generate surplus.

At the household level, nationwide per capita disposable income rose 4.9% nominally in Q1 2026 (4.0% in real terms), with rural incomes advancing faster at 6.1% nominally (5.4% real). Wage and salary income grew at a comparable pace. By accounting definition, however, the sharp profit expansion in lead industrial sectors is offset at the system level by moderated claims on the part of labour in the form of wages. This distributional dynamic keeps overall household income growth steady but below the pace of profit growth in high-surplus nodes.

Conventional rebalancing arguments contend that any relative tapering of wage growth will structurally hinder efforts to lift household consumption as a share of GDP. The logic rests on national accounting: without a rising labour share, household income cannot keep pace with the expansion of productive capacity, leaving demand suppressed.

Yet this perspective underweights the role of existing household liquidity stocks. Chinese households have accumulated substantial dormant savings buffers over the years. When real disposable income continues to rise modestly — even as wage claims are moderated relative to profit realisation in key sectors — these buffers can be mobilised to sustain or accelerate consumption expenditure. In circuit terms, moderated labour claims facilitate higher monetary surplus realisation for enterprises upstream; those realised profits, once recirculated through investment, dividends or broader liquidity channels, enlarge the pool of resources from which households can draw.

If households respond by drawing down savings — particularly to meet consumption needs in the face of modest system-wide cost pressures (for example, those stemming from oil market disruptions or flow-on effects in transport fuels and industrial chemicals) — then the very mechanism of profit-led realisation can function as a channel for raising consumption’s share of GDP. The net outcome is not necessarily a purely wage-driven rebalancing, but a savings-augmented closure of the demand circuit. Advanced production finds validation not solely through targeted industrial and export demand, but also through household spending financed partly from accumulated stocks and / or reduced savings from earned income rather than current income flows alone.

This pathway does not remove the long-term importance of sustainable income growth. In the present configuration, however, it offers a more resilient route to higher realisation probability than frameworks that treat accelerated wage-share expansion as the only viable lever. The system can convert a higher profit share into broader demand absorption precisely because households possess latent purchasing power that can be activated without immediate upward pressure on unit labour costs or erosion of industrial margins.

Lead Sectors as Realisation Nodes

The pronounced concentration of profit growth in high-tech and equipment manufacturing underscores their function as high-closure-probability nodes within the wider system. These sectors combine ongoing productivity advances that lower unit costs, technological differentiation that stabilises pricing power, economies of scale that facilitate absorption, and policy alignment that secures financing and infrastructure. They do not merely generate potential surplus; they systematically realise it by converting advanced costs into validated monetary value at elevated rates.

Taken as a whole, the Q1 profit surge points to a material transformation in the conditions of reproduction and realisation. Liquidity creates monetary space for advance and transaction. RMB appreciation compresses the material base of reproduction costs. Industrial policy and behavioural discipline curb wasteful price competition. Targeted demand anchors, together with household income growth tempered by distributional offsets, support absorption. Lead sectors concentrate closure capacity.

This architecture does not rely on undifferentiated expansion. It raises the system-wide efficiency with which production claims convert into realised monetary surplus through structured, selective mechanisms.

Share

The Political Economy of Realisation

China’s first-quarter industrial profit performance is best understood not as a transient liquidity-driven rebound or simple cyclical uptick, but as the expression of an evolving political economy of closure. Reproduction costs are being structurally compressed, price claims strategically disciplined, demand actively anchored — including through the mobilisation of household savings buffers — and exchange-rate movements aligned in ways that reinforce rather than undermine margins.

Prices are claims. Sales constitute the critical moment of closure. Profits are the monetary record of successful realisation.

What is advancing is the system’s organised capacity to ensure that the concrete resources committed in production are more reliably recovered — and exceeded — through sale. In this configuration, the probability of converting productive effort into realised surplus is rising in a targeted manner, supported by a resilient foundation of household liquidity that can help sustain consumption even amid moderated wage shares.

That is the deeper, systemic significance of the Q1 profits data. It suggests a pathway in which profit realisation and consumption expansion need not stand in strict opposition, provided the circuit’s stock-flow dynamics are managed with attention to both industrial upgrading and household buffers. For policymakers and analysts, the challenge lies in sustaining the conditions that raise realisation probability without allowing short-term distributional tensions to undermine long-run reproduction.

In 2025, China’s transformer exports reached a record 64.6 billion yuan (approximately $9.29 billion), surging nearly 36% year-over-year. Average export prices rose about one-third to roughly 205,000 yuan per unit. Many manufacturers report order books filled through 2027, particularly for data centre applications.

While headlines often focus on rare earths or semiconductors, mundane power transformers illustrate a deeper structural reality in global supply chains. These unremarkable devices — essential for stepping voltage up or down in grids and facilities — have become a critical bottleneck. Their constraints reveal how small frictions, amplified through complex systems, can derail ambitious technological and industrial goals. Jay Forrester’s insights from Industrial Dynamics (1961) explain why these effects matter so profoundly.

The Transformer Crunch in Context

Global electricity demand is rising rapidly due to AI-driven data centres, electrification, renewables integration and grid modernisation. In the United States, data centre power consumption has grown sharply and is projected to reach significantly higher shares of total electricity use in coming years. Aggregate needs for additional firm capacity have been estimated to be in the order of 100 GW over the next few years. Large power transformer lead times now average 128 weeks (over two years), with generator step-up (GSU) units stretching to 144 weeks or even 3–5 years in extreme cases. Distribution transformer waits have extended from pre-pandemic norms of 8–12 weeks to 30–50 weeks or more.

China dominates production, holding roughly 50–60% of global transformer manufacturing capacity. It also leads in key inputs like grain-oriented electrical steel (GOES), which forms the efficient cores of transformers. China accounts for over half of global GOES output, with strong vertical integration from raw processing to finished equipment. This scale enables faster delivery and competitive pricing compared to more fragmented Western capacity.

U.S. imports of transformers and components remain substantial, even as domestic production expansions (e.g., investments by Hitachi, Siemens, GE Vernova, and others totalling nearly $2 billion in North America) are underway. New capacity, however, takes years to permit, build, qualify and ramp. Upstream constraints on materials like GOES — where U.S. domestic production is limited — compound the issue. The result is a seller’s market where Chinese suppliers hold significant scheduling power.

Forrester’s Lens: How Small Delays Become Systemic Crises

Jay Forrester’s system dynamics framework models industrial systems as interconnected stocks, flows, delays and feedback loops. His famous “bullwhip effect” shows how modest variations in downstream demand amplify dramatically upstream. Information distortions, ordering policies, and lead-time delays turn small signals into large oscillations in inventory, production, and pricing.

Applying this to transformers, we can see that delays function as system stabilisers. Inherent manufacturing and qualification times for large power transformers already span years. Administrative “paperwork” frictions — heightened inspections, certification reviews, licensing pauses, or customs holds — add weeks or months without formal bans. These are low-visibility and deniable. We then see how these delays are amplified through loops. A one-month delay on a critical shipment prompts utilities and data centre developers to over-order or seek alternatives frantically. This creates phantom demand spikes. Suppliers see inflated signals and adjust pricing or allocation. Competing projects bid against each other for limited slots, further extending queues.

These effects are reinforced through feedback that then create path dependency effects. Once timelines slip, recovery is nonlinear. A delayed substation idles downstream investments worth billions. Renewables integration slows, power prices rise and financing costs increase. Parallel AI projects compete for the same constrained pool of skilled labour, testing facilities and grid interconnection slots. Early delays lock in longer-term disadvantages.

Forrester’s simulations repeatedly demonstrated counterintuitive outcomes. Policies that ignore systemic structure often worsen problems. In today’s tight-coupled systems, repeated small frictions erode timelines for AI buildout, EV infrastructure and grid resilience far more effectively than isolated shocks. A fortnight here and a month there compound into quarters or years of slippage. In a context in which the U.S. is at least 100 GW of firm capacity short, these compounding effects can play havoc with AI scaling ambitions.

Scale and Upstream Nodes: The Determinative Advantage

China’s position stems from unmatched scale and control over upstream nodes. Transformer production depends on specialised GOES for low-loss cores, high-purity copper windings, insulators, tap changers and integrated assembly. Alternatives in Europe, Japan, South Korea, or the U.S. exist but operate at smaller scale, higher cost, and with their own constraints. Many non-Chinese producers still rely on Chinese inputs for components or raw materials.

This creates “congestion dominance.” In a seller’s market, the economic agent controlling capacity nodes decides allocation, lead times and priorities. Passive-aggressive measures — administrative delays rather than outright bans — exploit system sensitivity without crossing into overt economic warfare. The Global South benefits in this environment, gaining reliable, affordable access for its own electrification and infrastructure needs, while Western markets face premium pricing and queues.

Limited global alternatives amplify the effect. Building new GOES or transformer capacity requires massive capital, technical expertise, permitting and time; often 3–5+ years. Decades of underinvestment in heavy manufacturing in the West left thin buffers. Explosive new demand from AI has exposed the lag.

Raw Material Chokepoints: Copper and the Sulphur Connection

Even China’s advantages face limits. Copper is critical for windings and conductors. Global copper supply, in turn, depends heavily on sulphuric acid for leaching oxide ores. Sulphuric acid derives largely from sulphur, a byproduct of oil and gas processing.

Disruptions in the Strait of Hormuz — through which a large portion of global seaborne sulphur trade flows — have tightened this upstream link. Closures or blockages drive up prices and constrain acid availability. This ripples into copper smelting and refining worldwide, raising costs and potentially slowing mine output and processing. The chain is clear: Hormuz tensions → sulphur/acid constraints → copper tightness → higher costs and delays for transformer windings → further pressure on overall equipment availability. These effects interact with transformer-specific bottlenecks. A system already sensitive to delays becomes even more fragile when multiple layers face simultaneous stress.

How Transformer Bottlenecks Compound U.S. Electricity Supply Network Augmentation

The real-world impacts of these shortages are visible across U.S. electricity networks, where transformer constraints create cascading delays that slow grid modernisation, renewable integration and new load accommodation far beyond isolated project setbacks.

Nearly half (or more than half in some estimates) of U.S. data centres planned for 2026 face delays or cancellations — not due to lack of money capital (with hyperscalers committing over $650 billion in AI-related spending) but because of shortages in transformers, switchgear, related electrical equipment and availability of skilled labour. A single missing high-voltage transformer can hold up a multi-billion-dollar campus for a year or more. AI deployment cycles often target under 18 months, but transformer lead times of 2–5 years clash dramatically with that pace. Developers in regions like Silicon Valley have completed facilities only to leave them idle while awaiting grid connection equipment.

We then have delays to grid interconnection and transmission upgrades. The U.S. interconnection queue holds over 2,000–2,600 GW of proposed generation and storage — roughly double current installed capacity — with average wait times approaching five years. Transformer shortages exacerbate this with new substations and transmission lines requiring large power transformers and GSUs that utilities cannot procure quickly. Projects that clear studies still face multi-year equipment waits, leading to high attrition rates. In PJM and other RTOs, delayed network upgrades triggered by transformer scarcity inflate interconnection costs, sometimes making projects uneconomic.

Renewables developers report projects postponed 1–2 years or more due to transformer unavailability. Aging infrastructure replacement adds pressure as over half of U.S. distribution transformers are 33+ years old and nearing end-of-life. Extreme weather events, such as hurricanes knocking out hundreds of units, force utilities into desperate scrambles in an already undersupplied market. EV charging networks, heat pump adoption and industrial reshoring compete for the same limited pool, creating allocation battles that prioritise certain loads while stalling others.

Add to this the compounding effects in certain regions. In constrained grids (e.g., PJM, ERCOT or California), a delayed 500 kV substation transformer can bottleneck entire clusters of data centres or renewable farms. Costs have risen sharply — prices up 77% or more since 2019, with some reports of 4–6x increases for certain units — raising electricity rates and project financing hurdles. Utilities resort to costly workarounds like temporary diesel generators or curtailment, which undermine reliability goals. Forrester-style amplification is evident as one delay signals scarcity, prompting others to hoard or accelerate orders, further congesting factories and logistics.

These bottlenecks do not act in isolation. A transformer delay at the substation level ripples upstream to generation interconnection and downstream to end-user energisation, multiplying opportunity costs across the network. The asymmetry is stark. Software and chips scale in months, but heavy electrical infrastructure operates on multi-year physical cycles.

Strategic Implications

Transformers exemplify a broader pattern: great-power competition increasingly plays out in the “grey zone” of mature industrial supply chains. Scale, vertical integration and control over key nodes confer quiet leverage. Flashy critical minerals matter, but so do “boring” enablers like electrical steel and copper windings.

Mitigation demands structural thinking. It would involve accelerating domestic and allied capacity for GOES, transformers and related gear. To shorten qualification times, design standardisation would also be required, no tall order. Supply chain orchestration to smooth demand and deliver better supply chain visibility would be needed to buttress the establishment of reserves for long-lead items. All of this is easier said than done. And last but not least, innovation is needed in grid efficiency to stretch existing assets.

Relying on tariffs or reactive policies risks backfiring by distorting signals further. Rebuilding resilient production ecosystems for heavy electrical equipment is a multi-year endeavour. As I have discussed previously, the challenge is that all of this is pitted against a rapidly moving target. In Forrester’s world, system structure produces behaviour. The current transformer congestion — exacerbated by upstream raw material vulnerabilities — warns that America’s AI ambitions rest on fragile foundations. Without addressing these chokepoints, small frictions today will dictate constrained outcomes tomorrow. The window for meaningful correction is narrowing as demand accelerates through 2027 and beyond. Uncorrected, the overall cost disadvantage that U.S. AI systems already face will only compound. Meanwhile, strong usage doesn’t translate into immediate revenues, placing further pressure on cash flow and market valuations.

Dear Warwick Powell,

Just a quick message to say thank you. I have just read your latest book, Thermoeconomics in a Time of Monsters, and it was an absolutely marvellous read. I’m—as I think many are—struggling to make sense of an increasingly “difficult” world, and the book, despite being an intellectual challenge, was strangely calming. Not because it predicted peace on earth, of course, but because it used a very rational approach to looking at economics, energy transitions, and more—one that is not steeped in ideology or weaponized moral language.

There is a reason for the argument to avoid moral language. It is not because justice, equality, or fairness are unimportant. It is because, as the philosopher Hans-Georg Moeller argues in The Moral Fool: A Case for Amorality, significant societal transformations rarely occur through moral appeals. Morality, in Moeller’s analysis, functions less as a driver of change and more as a tool for positioning—a way for individuals and groups to assert superiority, assign blame, and reinforce existing identities. It heats up discourse while leaving structures untouched.

The Western debate about economic justice has been trapped in this dynamic for generations. The left makes moral claims: inequality is unjust, poverty is cruel, extraction is exploitative. The right responds with its own moral claims: freedom is sacred, individual effort deserves reward, redistribution is theft. Each side asserts its virtue. Neither side changes the economic logic. The moral argument becomes a ritual that substitutes for structural transformation.

This is not a call for cynicism. It is a call for clarity. The thermoeconomic argument advanced in your book does not ask anyone to become a better person. It does not appeal to compassion, solidarity, or guilt. It simply states that an economic model grounded in the laws of thermodynamics—treating energy and material flows as the foundation of social reproduction rather than commodities for private accumulation—is the only arrangement that can sustain a complex society over time. Collective stewardship of primary inputs is not more just. It is more functional. The neoclassical model is not immoral. It is entropic. It consumes its own substrate.

By moving the argument from moral justification to structural necessity, something shifts. There is no hero to admire and no villain to condemn. There is only a system architecture that works within biophysical limits, and one that cannot. The question becomes not “whose values should prevail?” but “what actually functions long-term?” And that question, unlike the moral one, has an answer that physics will enforce regardless of whether we find it ideologically congenial.

One outcome of a society practicing an economy based on thermodynamic philosophy is, I think, that it will inherently become substantively democratic. That is, it is overwhelmingly likely to lead to decisions that deliver benefits to the general population, regardless of the political system. But that is another discussion, albeit an important one. Living in Australia—a Western nation—I find it almost inconceivable that our societies will be willing or even able to adopt the thermodynamic lens, which is somewhat concerning.

Regards and Take Care

Erik Dilling

Territorial and Operational Picture

Russian forces maintain methodical pressure on the Donetsk “fortress belt,” with notable intensity around Kostiantynivka. Local group of forces command estimates, reflected in Russian reporting, indicate control of approximately 50% of the city through infiltration tactics, footholds in southern and eastern districts, and incremental urban gains. Ukrainian accounts describe heavy fighting on the outskirts and in contested urban pockets but report continued resistance efforts. Progress remains grinding and localised.

Broader Russian estimates place overall Donbas control near 90%, with ongoing pressure toward Sloviansk and Kramatorsk approaches. Northern Sumy Oblast features continued border infiltrations and buffer-zone activity. Western Zaporizhzhia sees probing. These patterns reflect localised erosion of Ukrainian defensive density rather than uniform acceleration.

Losses and Replenishment

Body exchange ratios (frequently 25–35:1 Ukrainian to Russian in recent swaps) support elevated effective Russian infliction rates (β in the 0.0018–0.0025 range). Ukrainian manpower strains are pronounced, with understrength brigades (often 40–60% infantry), high AWOL rates, recruitment shortfalls, and efforts to lower the compulsory mobilisation age further toward 23. These steps signal deepening difficulty in generating sufficient replacements to sustain force density.

Russia recruited approximately 127,000 contract soldiers in the first four months of 2026 (averaging 800–1,000+ per day early before moderating), sustaining net r_R of roughly 500–800 lethal units per day after losses, supported by stocks and foreign recruits. Fire ratios of 5–10:1 in active sectors continue to amplify Ukrainian equipment and positional losses.

Model Update, Localised Tipping and Global Timing

Current Ukrainian effective force: ~320,000–380,000 lethal units (continued drawdown). Net daily loss rate: 900–1,700 units, aligned with fire dominance and body exchange indicators. Threshold density (coherence declining toward 65–73% of prior peaks) faces acute localised pressure, especially in sectors such as Kostiantynivka.

The original July–September 2026 tipping window remains realistic. Collapse will emerge through localised failures where Ukrainian reserves cannot contain concentrated pressure, rather than a simultaneous front-wide event. Kostiantynivka illustrates this dynamic where thinning density and partial control create conditions for potential southern exploitation toward Mykolaiv if connected with Zaporizhzhia/Kherson thinning. Parallel Sumy preparations lay groundwork for northern pushes that could eventually threaten the Dnipro line and Kyiv directions. These pockets would activate the non-linear multiplier (γ ≈ 2–2.5× losses) once containment is exceeded.

Sustained localised tipping (widespread breaches and accelerated positional losses) in 1.5–5 months from May (late June–October 2026), centred on July–September, remains the probable trajectory. This timeframe aligns with several external pressures: (1) ongoing global energy market dislocations from the Strait of Hormuz disruption (blocked since late February 2026), which have driven sharp oil price increases and inflationary effects that could constrain Western aid budgets and political bandwidth; (2) mounting scrutiny of highly valued US AI stocks amid concerns over infrastructure spending sustainability and potential valuation resets; and (3) positioning approximately two months ahead of the US midterm elections on November 3, 2026, a period when policy priorities and resource allocations often face heightened domestic review.

A number of oil market analysts, including Americans Art Berman and Chris Martenson, have pointed to the July-September window being a “crunch” moment for the U.S. economy, when inventories begin to run close to bottom, and replenishments — from seaborne and domestic production — simply doesn’t arrive in time. I have also explained previously why the U.S. is not immune from the impacts of the war in the Persian Gulf.

Put directly, Q3 2026 shapes as a vector in which multiple American exposures come home to roost.

These convergences could influence r_U parameters (e.g., via aid fatigue, political backlash in the face of rising gasoline or diesel prices or competing fiscal demands) without altering the underlying replenishment imbalance. Russian recruitment moderation adds modest variance, but Ukraine’s constraints dominate the ledger. The mathematics of attrition — superior Russian replacement flows (men, munitions and machinery) versus Ukrainian sustainability limits — drive progressive territorial erosion and set conditions for localised breakthroughs where defensive density collapses first.

Time favours the side whose reservoir refills faster. Like it or not, Putin’s confidence, evinced in his recent Victory Day speech, is warranted.

In January 2026, a collaborative Chinese research team published a landmark paper in Science that quietly redrew the material boundaries of power in the 21st century. Led by Wang Jinlan of Southeast University in Nanjing, together with Xinran Wang and Taotao Li of Nanjing University and Suzhou Laboratory, the work introduced “oxy-MOCVD” — an oxygen-assisted variant of metal-organic chemical vapour deposition. By feeding controlled oxygen into the reaction chamber, the process reroutes precursor chemistry through intermediate metal oxides and active sulfur species, slashing the kinetic energy barrier that had crippled conventional MOCVD for over a decade. The outcome: uniform, single-crystalline 150mm (6-inch) MoS₂ wafers grown on miscut sapphire at growth rates more than 100 times faster than standard methods, with zero detectable carbon impurities and domain sizes orders of magnitude larger.

Field-effect transistors fabricated across these wafers delivered average electron mobilities exceeding 100cm² V⁻¹ s⁻¹, with peak values more than ten times higher than conventional material. Uniformity across entire arrays was exceptional. The paper frames the advance explicitly as the bridge from laboratory curiosity to industrial manufacturability, with 300mm (12-inch) scaling already on the roadmap.

This goes beyond being another semiconductor milestone. It is an instance of what we might term the micro materialities of geopolitics and international relations — the atomic- and nanoscale decisions in materials synthesis that cascade through supply chain systems to reshape EROEI trajectories, informational sovereignty, and the distribution of systemic surplus across nations and blocs. In an era when macro-level analyses of supply chains, alliances, and great-power competition often overlook the substrate beneath the silicon, these micro materialities are becoming decisive.

Layered upon this breakthrough are two other maturing 2D technologies — graphene and triboelectric nanogenerators (TENGs) — that together form a synergistic “power combo.” Individually impressive, their convergence creates a self-reinforcing energetic–informational system whose net returns exceed those of the incumbent silicon paradigm precisely where it matters most for multipolar resilience.

Graphene, the zero-bandgap semimetal with record carrier mobility, has long been the perfect complement to semiconducting transition-metal dichalcogenides (TMDs) such as MoS₂. Where MoS₂ provides a direct 1.8 eV bandgap, near-ideal electrostatic control, and sub-60 mV/decade subthreshold swing, graphene supplies ultra-low-resistance contacts and interconnects. Conventional metal–MoS₂ interfaces suffer from high Schottky barriers and Fermi-level pinning, producing contact resistances often above 80 kΩ·µm. Substituting lateral graphene–MoS₂ heterostructures drops that resistance to ~20 kΩ·µm or lower while lifting effective mobilities three- to ten-fold and preserving on/off ratios above 10⁷–10⁸. Graphene simultaneously acts as a tuneable work-function electrode and low-resistance conduit, enabling efficient charge injection without sacrificing the semiconductor’s bandgap advantages.

Vertical and lateral heterostructures expand the palette further: tunnelling transistors, reconfigurable photodetectors, synaptic elements for neuromorphic computing. Because both materials are now compatible with wafer-scale CVD/MOCVD toolsets, monolithic integration moves from lab curiosity to production reality. The oxy-MOCVD advance removes the last major bottleneck on the semiconductor side; graphene growth and transfer are already routine. The combined stack therefore delivers a complete conductor–semiconductor toolkit at atomic thickness — a capability silicon has never possessed.

The third element — triboelectric nanogenerators — closes the autonomy loop. TENGs convert ambient mechanical energy (vibration, wind, human motion, structural flexing) into electricity via contact electrification and electrostatic induction. MoS₂ sits near the negative end of the triboelectric series, making it an outstanding electron-acceptor layer. When incorporated as nanosheets, composites, or textured surfaces, it boosts surface charge density, restricts recombination losses, and improves mechanical durability. Optimised MoS₂–graphene or MoS₂–polymer TENGs now achieve power densities of 1.4–14.6 Wm⁻² under modest, real-world mechanical inputs (4–22 N force, low-frequency motion), with open-circuit voltages exceeding 1,000V in flexible textile formats. Graphene serves as the ideal transparent, flexible electrode, further enhancing charge collection.

Paired with MoS₂ logic and memory operating at femtojoule-to-picojoule per operation, these TENGs render entire edge systems energetically closed-loop. Ambient motion harvested from a shipping-container wall, a sensor mast, or footsteps on a floor directly powers or biases the MoS₂ circuits. Battery and grid dependency collapse.

The energetic implications of this stack are best understood through thermoeconomics — the framework that treats every economic process as an entropic dissipative metabolic system governed by energy returned on energy invested (EROEI). EROEI is not merely a metric for primary fuels; it is the master constraint on all production coefficients within an input–output matrix (in the Sraffa sense). Every inter-industry transaction carries an embodied energy cost. When that cost rises system-wide, the net surplus available for negentropic activities — education, institutional trust-building, innovation, social cohesion-related infrastructure, services and activities — contracts. Information itself is energetic: the negentropy it produces (ordered, actionable knowledge) must exceed the exergy it consumes in generation, transmission, and processing. If the energetic cost of viable information exceeds its benefits, the system slides toward higher entropy. Thus, energy is the control parameter for the extent to which information itself is entropic or negentropic.

Silicon-based compute has entered exactly this plateau. Fabrication of leading-edge nodes demands extreme ultraviolet lithography tools consuming 1–2.5MW each, multi-patterning sequences, ultra-pure chemical regimes, and cleanroom environments whose HVAC and chemical demands push energy intensity per wafer to tens of kilowatt-hours per square centimetre. Operational efficiency per transistor continues to improve, yet system-level EROEI for distributed or edge workloads stagnates because of leakage, heat and the energy penalty of shuttling data to centralised grids or batteries. The result is a thermodynamic bind: ever-greater primary energy must be invested upstream for diminishing marginal informational returns downstream. As overall EROEI declines, social surplus shrinks, manifesting in sectoral, spatial, and demographic distributional tensions.

The 2D–graphene–TENG power combo disrupts this trajectory at its root. Upstream, oxy-MOCVD employs mature, lower-energy deposition tools already widespread in LED and compound-semiconductor fabs — no high-NA EUV, no multi-patterning cascades, and no city-scale power draws per tool. Embodied energy per functional transistor or per wafer therefore falls by at least an order of magnitude once scaled. Downstream, MoS₂ devices deliver femtojoule-per-operation performance with near-ideal subthreshold swing, enabling dense neuromorphic or in-memory computing that minimises data movement — the dominant energy sink in von Neumann architectures. Graphene interconnects further reduce dynamic and leakage power. Add TENG harvesting and the marginal EROEI for edge inference, sensing, and local decision-making flips from negative to positive.

A shipping-container “AI-in-a-box” surfaced with MoS₂–graphene TENG skins can harvest its own vibrational and wind energy to power local large-language-model inference or sensor preprocessing. The information it produces — filtered, sovereign, and actionable — delivers negentropy at near-zero marginal exergy cost. The container becomes a net producer of ordered information rather than a sink. Custom smart-client devices and billion-node IoT meshes built on the same material stack operate for weeks or months on ambient energy alone, enforcing data residency without constant cloud round-trips.

This is the thermoeconomic reform at the heart of the micro materialities. By lowering the production coefficients for the informational layer of the Sraffa matrix, the combo expands the surplus available for other negentropic activities. Localised IoT meshes in agriculture, logistics, or public health preprocess data on-device or at the container hub, consuming ambient rather than grid energy. The entire stack supports flexible, transparent, or 3D-stacked form factors impossible at equivalent performance with bulk silicon.

Silicon retains clear advantages in raw density and ecosystem maturity for centralised, high-throughput training workloads where massive grid power and cooling are available. But for distributed, sovereign, low-power, or off-grid applications — precisely the domains that determine resilience in a multipolar order — the 2D combo offers superior EROEI. It decouples informational capability from the thermodynamic and geopolitical vulnerabilities of ever-more-energy-intensive silicon fabs. Nations or blocs that master this stack gain structural surplus in the very resource (viable, localised information) that modern economies treat as the ultimate production input.

This brings us then to what I have called Digital Westphalia — the deliberate construction of sovereign, nationally governed digital ecosystems that preserve data control, enable interoperability, and bake-in resilience without subordination to extraterritorial platforms or supply chains. At its core, Digital Westphalia requires three material capabilities: (1) deployable, self-contained compute nodes that can operate anywhere; (2) low-cost, customisable edge clients and sensors that scale to billions of units; and (3) energetic autonomy so that these systems do not become hostages to foreign grids, fuels or spare parts.

The killer combo supplies exactly these capabilities. Shipping-container AI nodes become sovereign inference hubs that run national models, filter local sensor data, and enforce policy-defined data flows — all while harvesting their own operational energy. Low-cost IoT meshes enable agricultural optimisation, smart infrastructure, or public-health monitoring under national governance, with raw data never leaving sovereign territory. Custom client devices deliver battery life measured in weeks or months, running local inference or acting as thin clients without constant cloud dependency.

In thermoeconomic language, Digital Westphalia becomes feasible because these micro materialities reform the EROEI trajectory of the informational sector itself. Declining system-wide EROEI no longer automatically translates into shrinking social surplus; instead, targeted investment in the 2D stack generates negentropic dividends that can be redistributed locally — to education, institutional capacity, demographic stabilisation or spatial development, for instance. The distributional consequences of energy constraint are mitigated rather than amplified.

The crescendo is therefore unmistakable. What began as a materials-science advance in Nanjing laboratories has, through complementarity with graphene and TENGs, produced a self-reinforcing energetic–informational system whose net returns exceed those of the incumbent silicon paradigm in the domains that matter most for multipolar resilience. By 2030–2035, nations that integrate this power combo into their digital infrastructure will possess a structural advantage measured not merely in transistors per watt but in negentropy per joule invested — the ultimate currency of thermoeconomic and geopolitical viability.

Digital Westphalia, a conceptual framework for sovereign digital order, now rests on a concrete materials foundation. The 2D–graphene–TENG stack does not merely compete with silicon; it bypasses its EROEI plateau, enabling a parallel ecosystem in which information once again produces more order than the exergy it consumes. In an age when declining systemic EROEI threatens to tighten distributional conflicts along every sectoral, spatial and demographic axis, this micro materiality of geopolitics offers a pathway to expand the surplus rather than ration it.

That is the promise of the power combo — and the reason it stands as a cornerstone for any serious project of multipolar technological and economic autonomy.

U.S. kidnapping Venezuela’s president and securing American control of that country’s oil; increasing incidence of attacks on Russia’s Black Sea oil refineries and storage facilities; American and European piracy on the high seas; and now, the blockade of the Strait of Hormuz blockade. American triumphalists and critics of U.S. foreign policy are agreed that all these events are held together by a common thread: a grand strategy, of multiple dimensions, for the U.S. to become the world’s energy superpower, to recover and consolidate primacy and to contain China. In the end, it’s always about China, right?

The presupposition of strategic coherence — anchored by common or allied objectives — is sufficient, on these interpretations, to render American strategy complete. The ends rationalise and cohere around a set of means. Yet, this is not an entirely persuasive line of reasoning for the simple reason that coherence of objectives, even when there are associated actions, does not necessarily make a plan viable. Thus, the U.S. may well have a coherent plan but this does not mean its means-end calculus is correct. The analysis that follows shows that whatever the putative objectives, whatever the hypothesised coherence of a master plan, the reality and geography of oil and gas sector structures, resource availability, industrial capabilities, chemistry and thermoeconomic systemic flux, the means-end gambit is not at all coherent. One doesn’t have to ask whether there is or isn’t a coherent master plan; what’s needed is an analysis of the conditions of its execution. Whether or not there is a master plan, or whether the U.S. political and economic elite harbour primacy preservation ambitions, is somewhat immaterial if market and sector structural conditions don’t support the hypothesis. They may indeed have such plans, probably do, but the proof of the pudding is always in the eating.

The discussion addresses the oil and LNG sectors separately, before drawing things together.

Oil

Scale of Disruptions

The Middle East/Hormuz crisis of 2026 has produced the larger shock, with multi-million barrel per day losses at peaks and disruption of roughly 20% of global seaborne oil trade. This has driven significant price volatility. Russian refinery and export infrastructure attacks have generated more contained net effects. Russia has adapted by rerouting exports, which limits the overall global volumetric impact while accelerating eastward shifts and creating notable regional imbalances. Global oil demand stands at approximately 100–105 million barrels per day, with 2026 forecasts revised downward due to elevated prices.

Russia: Disruptions, Adaptations and Regional Effects

Much of the recent narratives point to the impact of Ukrainian attacks on Russian refineries, particularly on the Black Sea. For triumphalists, this is seen as a massive boost to America’s relative importance in global oil and for the hegemony theorists, this is accounted for as part of an orchestrated attack on non-US energy states. Even if the attacks are orchestrated and supported by U.S. intelligence, their significance in the global scheme of things should not be over-estimated.

Russia operates approximately 38–48 major refineries in addition to many smaller facilities, with total nameplate primary distillation capacity of roughly 6.3–6.8 million barrels per day. The Tuapse refinery on the Black Sea coast, has a capacity of about 240,000 barrels per day (roughly 3.5–4% of Russia’s total refining capacity). This export-oriented facility produces diesel, fuel oil and naphtha. Repeated Ukrainian strikes in 2026 have caused outages, fires and reduced operations at Tuapse and nearby ports.

Gross offline capacity has periodically reached 15–20% or higher, with some snapshots approaching 38–40% idle when maintenance is included. Net throughput fell sharply in April 2026 to approximately 4.69 million barrels per day — a 16-year low since December 2009. This represented a drop of roughly 600,000–630,000 barrels per day (around 11–12%) from typical March 2026 levels of about 5.3 million barrels per day. These reductions contributed to Russian crude production cuts of 300,000–400,000 barrels per day in April. Russia has mitigated some losses through spare idle capacity inherited from the Soviet era, increased crude exports, and repairs slowed by sanctions. Repeated targeting of the same sites has prolonged downtime.

Attacks on export terminals temporarily removed up to 40% of export capacity in March peaks before easing to around 20%. Russia has accelerated its shift toward Arctic and Pacific routes, including the Kozmino terminal via the ESPO pipeline system and the Northern Sea Route. Although these routes face bottlenecks and seasonal constraints, they have supported growing Asia-bound volumes. In the first quarter of 2026, China and India absorbed approximately 90% of Russian crude exports (China roughly 48–51%, India 37–38%), while direct EU imports remained minimal. (I will address the Arctic in more detail in a future essay.)

This eastward pivot has strengthened Russia’s position in Asia. China has consistently ranked as the top buyer, with significant year-on-year growth in imports of discounted Urals and ESPO blends. India continues large-scale processing in its refineries. Singapore has emerged as a key hub, recording sharp increases in Russian fuel oil imports for bunkering and transshipment, while Malaysia’s Petronas has negotiated direct crude purchases. Broader Southeast Asian interest from countries such as the Philippines, Indonesia, Vietnam, and Thailand has also risen. These developments enhance Russia’s economic and diplomatic ties in key growth markets, even at discounted prices.

Regional impacts remain uneven. Europe faces greater vulnerability to refined product tightness, particularly diesel and jet fuel, due to historical reliance and post-sanctions reshuffling, resulting in higher sourcing costs. Asia is better positioned to absorb discounted Russian crude and products through its own refining capacity and trading hubs. Globally, the net volumetric effect of Russian disruptions stays below 1% of world demand, largely offset by increased crude exports. Put plainly, the impacts of attacks on Russian capacity is effectively a pin-prick in terms of the global state of play.

Share

U.S. Export Contributions to the Global (Non-U.S.) Market

The United States satisfies most of its domestic refined product demand internally. Its exports therefore supply the rest of the world. Crude oil exports have reached record levels of 5.2–6.44 million barrels per day in recent peaks, while refined product exports average around 7 million barrels per day. This has occurred as strategic reserves have been drawn down. The U.S. is an importer of crude oil, necessary for refinery balancing to achieve the product output mix necessary for domestic requirements. Usually, the U.S. is a net importer of crude. Combined crude and product exports often total 12–14 million barrels per day or more. U.S. crude exports represent roughly 5–6.5% of global demand. These volumes provide meaningful flexibility, especially to Asia and Europe, but they remain far from dominant.

Key Constraints on U.S. Leverage

Several structural factors limit U.S. leverage.

Geologically, the Permian Basin — the main engine of recent growth — is maturing, with Tier 1 locations depleting and production shifting to lower-productivity acreage. Economically, full-cycle breakevens sit in the mid-$60s per barrel and trend higher for marginal wells, while diminishing energy return on energy invested raises the real cost of each incremental barrel. Capital discipline continues to prioritise shareholder returns over aggressive volume growth. Oil corporations in the U.S. have so far rejected or resisted political pressure to increase output. Chemically, light sweet U.S. shale crudes suit gasoline production but mismatch many global refineries configured for heavier, sourer grades from the Middle East, Russia or Venezuela.

Domestically, high pump prices (national averages of $4.06–$4.24 per gallon in April 2026; reportedly rising to as high as $8 in California and $6 in Chicago) have increased household costs and contributed to demand destruction. Middle East disruptions have also driven sharp rises in fertiliser prices (see map above), pressuring the U.S. farm sector through higher input costs and tighter margins. Reports in Forbes estimate that some 70% of American farmers cannot afford to plant their crops this year. These domestic effects generate political and economic headwinds that could offset any potential external gains. How they play out in the midterm elections (November 2026) remains to be seen.

LNG

We can now turn briefly to the situation in the LNG market.

The recent disruptions to Qatari LNG production and shipping — stemming from Iranian attacks on Ras Laffan facilities in March 2026 — have created a significant supply shock in global liquefied natural gas markets. Qatar, traditionally accounting for around 18-20% of global LNG trade (roughly 77-80 million tonnes per annum pre-disruption), saw approximately 17% of its export capacity (about 12-13 mtpa) knocked offline, with repairs potentially taking 3-5 years. Combined with effective disruptions in the Strait of Hormuz affecting broader Middle East flows (up to ~20% of global LNG), this created an immediate gap.

U.S. exporters have stepped in effectively in the short term. Between January and April 2026, U.S. LNG exports reached a record 32.15 million tonnes, up 28% year-on-year. This surge more than offset the estimated 6.93 million tonne decline from Qatar in the same period. Global seaborne LNG exports still hit a new high of just over 149 million tonnes for the period (+6% YoY), with the U.S. playing a key balancing role.

Pre-disruption, in 2025, the U.S. had already become the world’s largest LNG exporter with record volumes around 111 million tonnes, representing roughly 25% of global trade. Post-disruption, its share has risen further. In the Jan-Apr 2026 window, the U.S. accounted for a record portion of the elevated global total, with annualised run-rates and peak utilisation pushing effective market share into the 28-35% range in affected periods — approaching or hitting around one-third in some analyses. Facilities have run near or above nameplate capacity, with feed gas flows averaging ~18.9 Bcf/d year-to-date and peaking higher.

This has been a commercial boon for U.S. producers and exporters. Higher international spot prices (driven by tightness) have widened spreads versus the U.S. Henry Hub benchmark, incentivising maximum output. Europe, in particular, has absorbed a large share of US volumes — often 60%+ of US exports and up to 60% of Europe’s own LNG imports in early 2026 data — solidifying American LNG as a structural replacement for Russian pipeline gas.

However, significant constraints limit further near-term expansion and undermine notions of “global energetic hegemony.” US liquefaction capacity, while the world’s largest and most flexible, faces physical bottlenecks. Current peak export capacity sits around 18-19 Bcf/d. Terminals are already operating at very high utilisation rates (often 95%+ during peaks), leaving limited headroom without new optimisations or phased ramps.

Key limitations include:

• Maintenance and seasonal factors: Scheduled turnarounds, plus reduced efficiency during Gulf Coast summer heat (affecting cooling and operations), cap upside;

• Feed-gas and pipeline constraints: While shale production is robust, takeaway capacity from key basins (e.g., Permian) and delivery to terminals has limits; and

• Loading/unloading and shipping: Terminal berth availability, vessel scheduling, and global shipping dynamics add friction. New capacity additions in 2026 (e.g., Corpus Christi Stage 3, Golden Pass initial trains, and Plaquemines ramps) provide incremental relief but ramp gradually and won’t transform the picture overnight.

EIA forecasts for 2026 average US LNG exports around 17.0 Bcf/d — strong growth but not an unlimited surge. Projections see the U.S. share rising toward ~33% by the end of the decade with further projects, but this is incremental, not monopolistic.

Europe is the clearest area of US influence. With long-term contracts and destination-flexible cargoes, US LNG has Europe “well and truly within the control” of American exporters in the near-to-medium term. European reliance has grown substantially post-2022, and disruptions have accelerated it. However, even here, diversification persists via remaining Norwegian pipeline gas, other LNG suppliers (Australia plus rerouted volumes), and demand-side responses. Europe continues pursuing energy security through multiple avenues, not total US dependence. Whether European economies can successfully diversify remains to be seen.

Globally, the picture is far more fragmented. Asia — historically a major buyer of Qatari LNG — has felt acute pressure but sources from Australia (a steady ~19-20% supplier), Malaysia, Russia, Indonesia, and others go some way to alleviating the stress. Buyers maintain portfolios with long-term contracts and spot flexibility; they are not forced into exclusive “Buy American” arrangements. China, in particular, has geopolitical and pricing reasons to diversify away from heavy U.S. reliance. Global LNG trade remains multipolar, with Australia, a recovering Qatar (partial restarts possible), Russia, and smaller players ensuring alternatives exist. Indeed, data indicates that Russian gas exports for 2026 to date increased by 8.6% compared to the same period last year.

LNG itself is only one component of the global energy mix. Natural gas (pipeline and LNG) competes with oil, coal, renewables, nuclear and emerging alternatives. The U.S. is a top oil producer and refined products exporter, but its share of global oil trade and refined product markets remains modest (often in single digits for many categories). OPEC+, Russia, and other producers retain massive influence over crude markets. Claims of coercive power through energy dominance overlook this broader fungibility and buyer diversification strategies. Disruptions raise prices and create opportunities for flexible suppliers like the U.S., but markets adjust via rerouting, demand destruction (e.g., fuel switching in Asia), efficiency gains and new supply investments.

Overall Assessment

Perspective and proportions clearly matter. While U.S. LNG suppliers have increased global market share to around 33-35% of late, the reality is that when we render LNG and oil to the common denominator of joules we see that LNG trade energy content is approximately 9-12% of global oil consumption. Global oil consumption is on the order of ~2 × 10^20 kJ annually. Global LNG trade is roughly 2.2 × 10^19 kJ — or about 1/10th the scale. Oil markets are vastly larger in absolute energy throughput. In terms of global primary energy share on conventional measurement basis, oil comprises ~32-34%, total natural gas ~25%, with LNG as a subset of gas (~5-8% of total fossil energy or less). Put plainly, when it comes to oil and gas (and LNG as a subset), global energy is about oil far more than it is about gas.

So, firstly, disruptions to the global oil market are unlikely to enable durable U.S. energy domination.

While the United States benefits from temporary export opportunities and higher prices, multiple structural limits — including the scale of global demand, production constraints, quality mismatches, rising marginal costs and domestic pressures — prevent it from cheaply or indefinitely filling large supply voids. Russia’s successful eastward pivot, particularly deepened ties with China, India, Singapore, Malaysia and broader Southeast Asia, further diffuses power and creates new interdependencies. Impacts of attacks on Black Sea refineries are in volume terms relatively minor. Naval interdictions are also minor, and as the conflict in the Persian Gulf shows, the U.S. navy cannot act unconstrained. The truncation of the so-called Operation Freedom, after two days, also suggests limits to American naval power. China’s own de-risking over the past two decades, coupled with its central role in accelerated global electrification (see figure above, showing the spike in demand for Chinese green technology since the beginning of March), also suggests that in the medium term, oil’s relative importance in energy terms will continue to decline.

As for LNG, we can say that U.S. LNG exporters are indeed “making hay while the sun shines.” The Qatar outage has enabled record volumes, higher revenues and an elevated market share approaching one-third in the current tight environment. This demonstrates the agility of U.S. shale-linked LNG and its value as a swing supplier. Yet physical constraints — terminal utilisation nearing practical limits, maintenance, seasonal effects and gradual new capacity — mean this cannot expand dramatically in the near term. Long-term growth is expected, but even at 30-35%+ of LNG, it falls well short of global dominance, particularly in the broader context of global primary energy mix. Europe feels the strongest pull, yet even there it is not absolute. Across the wider energy landscape, US LNG leverage is real but far from hegemonic.

Narratives framing recent geopolitical events as a deliberate strategy to “force everyone to buy American gas” overreach the evidence. Commercial gains in LNG markets amid supply shocks are clear, but the data reveals a competitive, adjusting global market rather than unilateral control. Buyers retain choices, constraints bind all suppliers and energy security imperatives drive ongoing diversification. The U.S. energy export boom strengthens its position, particularly in Atlantic LNG flows, but does not deliver the coercive global dominance some claim. Markets, as always, prove more resilient and multipolar than absolutist interpretations suggest.

Triumphalist narratives overstate unilateral U.S. control and misunderstand the scale and structure of global energy systems, while “grand chessboard” theories overlook real-world frictions and unintended consequences such as stronger Russia-Asia links, elevated European energy costs and domestic U.S. pain. They also misunderstand relative scale, which ultimately dwarfs the impact of any single nation’s oil production and refining capacities. So, while it is conceivable that the U.S. is pursuing its interventions with a mind to transforming the global energy system in its favour, the reality of market size, composition, fundamental thermoeconomics and ongoing structural change simply means these plans are fantasies.

Neither the American triumphalists nor the “grand plan” critiques are persuasive. To harbour ambitions is one thing, even if the ambitions are coherent; to have access to, or be able to marshall the, relevant resources to close the ambition-outcomes / means-ends gap is another. The real world is messier and actually more fragmented. The U.S. is actually not as important in global markets, let alone omnipotent, as these analysts often presume. This does not mean that targeted nations should not be wary; I am sure they are. They aren’t without agency or capacity, and we witness this daily as well. Furthermore, this does not mean that there won’t be intensified conflict, particularly as the strategy for energy domination fails to deliver on the ambitions. Failure has a habit of leading to escalations and double down whenever it comes to Washington’s ambitions. Indeed, we are likely to see more rather than less incidence of conflict, including a rising number of dirty interventions, sabotage, terrorist attacks and such like, as the foundations of American and the political west’s dominance continue to ebb away.

These are some of the monsters of the interregnum.

The Strait of Hormuz is, right now, the world’s most commented upon 21 nautical miles. Since early March 2026, Iran has been able to throttle commercial traffic through the chokepoint that carries roughly one-fifth of global seaborne oil, a large proportion of gas and a host of other critical chemical products. What began as a wartime closure has hardened into an unfolding management system; a selective-access regime in which “coordination” with the Islamic Revolutionary Guard Corps Navy, inspections, approved corridors and de facto tolls are necessary for safe passage. Traffic today is a fraction of historic volumes. The two-week US-Iran ceasefire announced in early April has stumbled on, now into its fifth week, failing so far to deliver a decisive detente. The first round of peace talks in Pakistan ended without agreement. And then, as of 10 a.m. Eastern Time USA, 13 April, the United States moved to enforce a naval blockade of traffic entering or leaving Iranian ports in the strait. This blockade remains in place (5 May 2026). On 4 May 2026, U.S. President Donald Trump announced “Operation Freedom”, ostensibly offering vessels in the Persian Gulf coordinated and escorted safe passage. Whether this operation is conceived to involve USN escorts is unclear. Either way, Iran has responded that no such passage will be provided without Iran’s say-so. Early reports point to Iranian missile hits on a US naval vessel, though CENTCOM denies this. There are also reports of attacks on UAE infrastructure. In any case, the “fog of war” has yet to fully lift, as of the time of posting.

Doctrine

What we are observing, regardless of the veracity of these reports, is a live demonstration that international law, however elegant on paper, ultimately bends to raw power.

Some have accused Iran of breaching international law through its exercise of the Hormuz weapon and the levying of a charge. However, Iran’s legal position is more robust than many Western commentators would care to countenance, let alone admit. Tehran never ratified the United Nations Convention on the Law of the Sea (UNCLOS). Upon signing in 1982 it explicitly rejected the novel “transit passage” regime in Part III, which grants broad, non-suspendable rights of passage — including to military vessels and aircraft — through straits used for international navigation. Iran insists the older regime of “innocent passage” from the 1958 Geneva Convention applies instead. Under that narrower rule, coastal states retain greater authority to regulate traffic for security reasons. Even if one argues that transit passage has crystallised into customary international law, Iran qualifies as a persistent objector: it has objected consistently and publicly since the 1980s. In international law, persistent objection is a recognised escape hatch. Iran therefore possesses a foundational doctrinal argument that its actions are not simple piracy but sovereign regulation of waters overlapping its territorial sea. That’s the argument, though of course, not everyone would agree with it.

History shows that such doctrinal arguments, if they aren’t accepted upon promulgation, matter only when backed by power — and that exceptions to UNCLOS and such like arrangements are forged in the crucible of war. Consider the Turkish Straits. The 1936 Montreux Convention, negotiated after decades of conflict and great-power rivalry, grants Turkiye the right to regulate warship passage and to charge standardised fees for lighthouse services, pilotage, rescue and medical facilities. These are not mere “tolls for permission to exist” but cost-recovery mechanisms tied to a post-conflict bargain. The convention remains in force because Turkiye demonstrated, through geography and military posture, that it could not be ignored. Similar dynamics produced the Suez and Panama arrangements. No treaty descends from heaven; each reflects to one extent or another some sense of the balance of strength at the moment it was signed.

The Strait of Hormuz is undergoing the same process in real time. Iran’s persistent-objector doctrine provides the legal scaffolding. Its asymmetric capabilities — mines, coastal missiles, drones, fast-attack boats and fleet of mini-submarines — provide the enforcement muscle. The United States, for all its “on paper” air and naval superiority, called the test of strength and blinked. Weeks of escalation culminated in a fragile ceasefire precisely because the costs of sustained convoy operations and potential losses to swarming tactics proved prohibitive. The USS Abraham Lincoln was pushed over 1,000 km away, and the USS Gerald Forde limped away citing “laundry fires.” Washington has now opted for a blockade of Iran’s blockade, hoping to apply economic pressure to Iran and others. The message is clear: even the world’s pre-eminent air and naval power finds the price of restoring unrestricted transit via conventional military means too high. Power has spoken. New rules are being written on the water.

Hiatus

Following the April 2026 hostilities and Pakistan-mediated talks, a two-week ceasefire (since extended) holds tenuously. The US maintains a naval blockade of Iranian ports, while both sides engage in rhetoric and limited diplomatic contacts. Satellite and tracking data indicate ongoing US military build-up in the region. Imagery from the stars also confirms that tankers continue loading at Kharg Island (refer image above, courtesy of Javier Blas at Bloomberg).

The centrepiece of US strategy is economic strangulation via the blockade. Officials aim to trigger an implosion of Iran’s oil sector as storage fills, deprive the Iranian government of hard currency, and force concessions on nuclear and regional issues. The U.S. President and Secretary of the Treasury have both, on a number of occasions, claimed that Iran’s oil production, pumping and storage systems are on the verge o collapse. Meanwhile, President Trump has rejected Iranian proposals to prioritise Strait of Hormuz reopening, insisting the pressure continues until a broader deal. Claims suggest daily losses in the hundreds of millions of dollars for Iran.

This approach rests on shaky assumptions. Iran endured multi-year collapses in oil exports under prior sanctions — dropping sharply post-2012 and after 2018 JCPOA withdrawal — without governmental collapse. The Bloomberg chart shows this clearly.

Long accustomed to sanctions, Tehran has developed non-USD payment channels, barter arrangements and alternative trade networks. Overland routes mitigate maritime restrictions for essential imports. Iran reports around 85% food self-sufficiency, underscoring that it is far more than an oil-dependent state; its diversified (if challenged) economy and societal resilience have been tested by decades of hardship. This food self-sufficiency lays the bedrock for systemwide resilience; after all, a functional society must first and foremost ensure that there’s food for people.

Expert commentary from the oil industry experts, such as Robin Mills from Columbia University’s Center on Global Energy Policy, questions dramatic near-term risks to wells and pipelines from temporary shutdowns. Past resilience suggests additional weeks or months of pressure are unlikely to break either the government in Tehran or popular resolve. Meanwhile, global oil prices have spiked (Brent briefly over $126), raising costs for consumers, including in the U.S., and risking broader economic ripple effects that could rebound faster on the blockader than the target.

Meanwhile, every time Trump extends the ceasefire timelines, he signals a reluctance to re-engage kinetically; this points to deeper concerns. Retaliation risks remain high: Iran could inflict massive regional damage, targeting infrastructure in allied states (including the facilities of the UAE, which have recently exited OPEC to the applause of Washington) and disrupting global energy flows. That the U.S. was unable to defend its regional military bases, now demonstrated clearly by a recent recent report from CNN, is evidence that regional critical infrastructure is these days more vulnerable than ever. A prolonged conflict risks a quagmire — costly, inconclusive and bogging down US forces as well as draining an already depleted magazine — without a clear path to decisive victory. A wide cross-section of analysts, myself included, conclude that the war — initiated by the U.S. — has been a disaster from its perspective, to a point of being already a defeat of strategic proportions. The stasis now embodies what I have framed as the “decent interval” problem: the domestic political necessity of buying time for an exit that avoids immediate humiliation while material realities (Iran’s staying power, global pushback and economic blowback) erode the leverage of maximalist demands. Add to this millenarian apocalyptic zealotry and there’s every reason to believe that there’s little room for the Trump administration to move.

Washington’s blockade-centric pressure campaign appears premised more on hope than robust evidence of rapid Iranian capitulation. Tehran’s demonstrated endurance, adaptive economy, and credible retaliation options tilt the contest of resolve in its favour over the medium term. The standoff highlights the limits of coercive diplomacy when mismatched against a hardened, self-reliant adversary. Negotiations may yet yield a grand bargain, but only if the U.S. confronts these asymmetries and deals with Iran by recognising that Iran has emerged as a regional power, rather than doubling down on unproven levers.

For now, for the reasons I have explained in detail in a recent essay on the escalation trap, eschatological zealotry and the “decent interval” problem, the prospects of the U.S. yielding anything in the near term are remote.

Subscribe now

Effects

The latest escalation — that is, the US blockade of Iran’s blockade — of course compounds the disruption to global energy flows. CENTCOM insists the measure is “impartial” and will not impede vessels transiting between non-Iranian ports. In practice, however, the distinction is porous. Insurance markets have already frozen, tanker owners are diverting, and any vessel perceived as aiding Iranian exports risks boarding or worse. Oil flows will be further curtailed, and are in any case subject in part to Iranian protocols.

Yet the impact will not be evenly distributed. Chinese-bound or Chinese-flagged tankers are likely to be partially insulated. Beijing has already secured pragmatic understandings with Tehran; its vessels enjoy a certain degree of preferential access, though this isn’t unfettered or unconditional by all accounts. China’s Foreign Minister, Wang Yi, for instance recently remarked that China had some 70 tankers still upstream, yet to be able to come through the Strait (that’s about 8.5 days of oil for China, by the way, or 2.3% of annual demand, to keep things in context).

Other nations have done the same. Any American attempt to interdict Chinese ships would risk direct confrontation with China — the one direct kinetic escalation Washington, one presumes — trepidatiously, I might add — wishes to avoid. Chinese response through supply-chain strangulation, rare-earth export bans or financial retaliation is a lever the US would be reluctant to lightly trigger. That said, the U.S. is increasingly “trigger happy” and the possibilities of U.S. initiated escalations are both real and slowly rising.

As for American sanctions on Chinese firms buying Iranian oil, these have elicited a direct response from Beijing: sanctioned companies have been instructed to ignore the unilateral declarations of the Americans. Financial mitigations domestically have been guaranteed in the event of losses, but the significance of this response lies elsewhere — it is an explicit drawing of a line, laying the groundwork for a potential maritime encounter. The announcement from Beijing also puts foreign entities on notice: acceding to U.S. sanctions in ways that countermand international law or which adversely impact Chinese sovereignty may well run foul of China’s laws. For companies whose revenues and profitability depend on business with China, they will be watching this space very closely.

Meanwhile, there are reports that at least 34 vessels have slipped the U.S. cordon as of 21 April 2026, with other reports indicating that a further 70 vessels have slipped the blockade since. The result is porosity with Iran’s “friendly countries” — and others, like Japan, to boot — benefiting while others continue to scramble. The short take-out of this situation is straightforward, insofar as immediate implications are concerned: total global oil supplies will fall compared to pre-28 February levels; the U.S. blockade won’t be 100% effective; and modest offsets from increased crude supplies from Russia and the U.S. will partly compensate reductions in flows from the Persian Gulf. Losing in net terms somewhere in the order of 10 to 12 million barrels a day, perhaps a little more, in aggregate terms, when total pre-war global demand was in the order of 105m bpd, isn’t a mosquito bite. Chris Martinsen’s excellent interview on Deep Dive with Daniel Davis is recommended viewing, on this front.

Share

Nowhere is this scramble more acute than in Singapore, with flow-on implications for those national economies tethered to Singaporean refiners. The city-state’s three main refineries on Jurong Island — ExxonMobil, Singapore Refining Company and the integrated petrochemical complexes — were built for a diet of Middle Eastern light-sour crudes. These barrels possess exactly the API gravity, sulfur content and contaminant profile that maximise yields in the complex hydrocrackers, reformers and desulfurisation units that define Singapore’s competitive edge. Talk of “simply sourcing more crude from the U.S.” ignores basic chemistry and engineering. It also ignores the reality that the U.S. is a net importer of crude in normal conditions, as I have discussed elsewhere, with present exports taking place through draw-downs in the nation’s strategic reserves.

American shale crudes are typically lighter and sweeter; heavier Venezuelan or Brazilian alternatives bring different contaminants and require costly process tweaks. Refineries running at 50–60% utilisation — already the reported reality — are operating below stable turndown thresholds. Distillation towers suffer poor fractionation, vacuum units coke prematurely and downstream units see cascading instability. Blending mismatched crudes accelerates fouling and corrosion. Catalyst life shortens. Yields of high-value products — naphtha for petrochemicals, jet fuel and ultra-low-sulfur diesel — fall. Fixed costs are spread over fewer barrels. The economics turn ugly fast.

Singapore is not an isolated victim. It is the pivot of Asia’s downstream supply chain. The island refines and exports gasoline, diesel, jet fuel, bunker oil and chemical feedstocks that keep planes flying, ships bunkering and factories running from Southeast Asia to Australia and beyond. When Singapore runs short, regional prices spike, availability thins and supply chains fracture. Australia, which sources roughly one-fifth of its refined products from Singapore, feels the pain immediately. But so do Thailand, Malaysia, Indonesia, the Philippines and India’s coastal markets. There are no quick substitutes. New tankers take weeks to arrive; alternative crudes require months of trial-and-error reconfiguration; and no other Asian hub possesses Singapore’s scale and integration.

And in this short essay, we haven’t even looked at all the other products affected — fertilisers (see chart below), sulphur, naphtha, natural gas, helium and other assorted industrial chemicals and the like. These create mounting pressures globally, as well as in the U.S. where mid-term elections are sure to test the electorate’s patience and capacity to absorb economic pain.

Outlook

A protracted blockage — whether Iran’s selective choke or the new US-Iran layered restrictions — will not stop at higher pump prices. It will trigger demand destruction on a global scale, though in uneven ways. Oil at sustained triple-digit price levels accelerates inflation, squeezes margins across manufacturing and transport and forces central banks — through the prism of their dominant conceptual frames — into an impossible trade-off between growth and price stability. Industries already teetering, like petrochemicals, aviation and long-haul logistics, will likely see curtailed or suspended operations, and eventual closures. Demand destruction will keep a lid on inflation, of course. Further, shipping lines may well reroute permanently around the Cape, adding thousands of miles and millions in costs. This will drive further transformations in global ship manufacturing, in which China occupies prime position. Refiners worldwide will idle capacity or retool at enormous expense.

There is, of course, a deeper lesson; and that is structural. For decades the world has treated cheap, reliable Middle Eastern oil as a given. That assumption is now shattered. A prolonged crisis will compel painful restructuring: accelerated investment in electrification, hydrogen and nuclear, massive efficiency gains in transport and industry, strategic stockpiling on a scale never before attempted, and diversification of supply chains away from single chokepoints. Nations that treat this as a temporary inconvenience will pay a heavier price. Those that accept the new reality — that power, not parchment, ultimately governs the oceans — will begin the hard work of de-risking their oil dependency now. This transition can be partly cushioned by expanded Russian supplies particularly into the Asian markets, even as Russian refineries on the Black Sea are disrupted by Ukrainian attacks. (I will publish another piece in the near future addressing these dynamics.)

In time, the settlement of a new power structure will deliver ballast to the new rules defined by parchment; but for now, things are in flux. And oil will continue for decades to come to be an important part of the global energy mix.

The Strait of Hormuz has always been more than a waterway. It is a mirror. In it we see the limits of the so-called rules-based order enforced by American unipolar hegemony when the rules collide with geography, capability and will. Iran has demonstrated that a determined coastal state, armed with both legal cover and credible force, can rewrite the terms of passage when compelled to. The United States has shown that even a superpower cannot always enforce the old terms without unacceptable cost.

The rest of us — whether they be Singapore’s refiners, Asia’s manufacturers, Australia’s motorists, Europe’s chemical plants, American farmers and households across many parts of the world — are left to adapt to the new map being drawn in real time. American crude suppliers are exporting to capitalise on higher prices, by dipping into the nation’s strategic reserves. Monetary signals mask depleting real available inventories, not to mention declining EROEI at a structural level.

History tells us that the global economic system will adapt; value flows inevitably do. Moves to innure industries and nations from oil shock risks will intensify. Electrification will accelerate; Chinese technical capability and production capacity is key. Some are better placed than others in this scenario. Prospects of returning to the status quo ante are, however, zero. America’s attack on Iran and Iran’s response have changed reality forever. The only question is how much pain we endure, and who endures it the most, before we begin the structural transformations that these new circumstances call for. The issue isn’t confined to a question of nation-v-nation; ultimately, the effects also are domestically distributional — who within each national economy will be impacted the most and who will make-off as they exploit and manipulate paper markets and plunder desperate firms and households.

In geopolitics, the question of class is never ever far away.

Three decades and some of American post Cold War unipolarity coincided with the entrenchment of political and economic discourse in the political west, and in global institutions dominated by the west, framed by the nostrums of mainstream neoclassical economics and the unquestioned superiority of parliamentary democracy as the finality of the political form. Perfecting markets and some idealised notion of a multiparty plebiscitarian institutional construct became the benchmarks against which “reform” economically and politically would be judged. Both promised the nirvana of Reason’s “cunning” — the apotheosis of the unfolding of “freedom” as History found its most advanced embodiment in western economic and political civilisation. Yet, as we enter the second quarter of the 21st century, such promises have faltered and we are witnessing what can perhaps be called liberalism’s denouement.

The political battles that defined the latter half of the 19th century and the first few decades of the 20th — liberalism, socialism and fascism — seemed like a distant, almost imagined, memory. When in late 1918 / early 1919 Rosa Luxemburg spoke of the choice between “barbarism and socialism,” she crystallised and distilled the politics of friend-enemy that would later swirl through Europe with the emergence of the monsters of Gramsci’s interregnum. On the other side of the political fence, Carl Schmitt in his The Crisis of Parliamentary Democracy (1923) and other writings laid bare the fragilities and limitations of bourgeois parliamentarism as he argued the legal and philosophical case for the National Socialists’ usurpation of power in Germany. Meanwhile, the German SDP - at the time, arguably, western Europe’s most cohesive and arguably successful socialist party organisation - itself had become paralysed by unresolved internal debates about whether adherence to parliamentary politics was sufficient to advance the political and economic cause of socialism.

The debate between Eduard Bernstein and Karl Kautsky within the German SPD in the early 1900s epitomised the political, strategic and theoretical conundrums that ultimately conditioned the ways in which post-war socialism became embedded into the fabric of liberal parliamentarism.

Bernstein, the revisionist, argued that Marx’s predicted immiseration had not materialised; instead, rising living standards, trade union gains and universal suffrage meant socialism could be achieved ethically and gradually through parliamentary democracy, rendering the revolutionary final goal secondary to the movement itself. Kautsky, a orthodox Marxist, countered that the bourgeois state remained a class instrument — reforms could improve workers’ lives but could never transcend capitalism without a revolutionary break. Yet Kautsky was no Leninist: he still saw parliament as a tactical arena to strengthen the proletariat until the final crisis, not as a path to socialism itself. The SPD never formally chose between them. Its Erfurt Programme remained rhetorically revolutionary, but its daily practice — massive electoral machinery, trade union networks and a focus on cooperatives — drifted steadily toward Bernstein’s reformism.

By 1914, the party’s vote for war credits sealed Bernstein’s de facto victory. The ambiguity persisted: revolutionary language at conferences, but with parliamentary action on the ground. This unresolved synthesis — revolutionary in form, reformist in substance — would later prove fateful. When the Nazis rose to power, adherence to parliamentarism offered the SPD no protection; its leaders were rounded up, killed, or driven into suicide and exile.

After 1945, the West German SPD drew a different lesson. In the 1959 Godesberg Program, it formally abandoned Marxism, embraced the social market economy, and declared itself a Volkspartei of liberal capitalism. The Bernsteinian path, once a heretical revisionism, became the uncontested foundation of postwar social democracy — embedding socialism into parliamentarism not as its antagonist, but as its loyal left wing.

Elsewhere the end of the Second World War saw the consolidation of a moderated capitalism — ordoliberalism, Keynesian-welfarism, social democratic mixed-economies — in the political west, buttressed by an international political economy that preserved the extractive substrate of pre-war imperialism but, this time, dressed up with a de-colonialisation gloss. The Bretton Woods settlement reflected the dominance of war’s victors; the IMF and World Bank did little to alleviate global imbalances. They often made them worse, usually compounding poverty in developing countries rather than alleviating it, and prosecuting policies and prescriptions that amplified western-cum-American power.

Until the Oil Shock 1.0 of the early 1970s national and global capitalism appeared to have been stabilised. The brutality of unbridled markets had been offset by welfarist interventions, and so-called Keynesian macro-economic policy. Labour’s claim on total value add in the advanced economies had risen to historically unprecedented levels; and income inequality within western nations had compressed concomitantly. So much is clear from detailed studies by many scholars, crescendoing with Picketty’s 2014 Capital in the 21st Century. Internationally, Bretton Woods strictures coupled with neocolonial arrangements (eg., French financial control of west Africa via the African Franc; American global capital expansion exploiting low cost labour across Asia while claiming profits; first world dominance of raw materials supply chains etc.) ensured pre-war inequalities and imbalances globally remained largely in place. It’s no wonder that so called third world debt problems have never been solved (see for example James O’Connor’s 1973 The Fiscal Crisis of the State and for a more recent treatment Ann Pettifor’s work for example).

The new political and economic settlement to emerge post Oil Shock 1.0 coincided for the most part with the tail end of the USSR (1975-89), the eventual dismantling of the Soviet Union and the rise of American unipolarity (1990-). We can argue about the nuances to which unipolarity was absolute or not, as Radhika Desai (2013) in Geopolitical economy : after US hegemony, globalisation and empire reminds us, but this should not be read as implying that somehow the U.S. did not straddle the globe like a modern day colossus or leviathan. No system of power is absolute, and all power relations imply opposition or resistance, for sure, but the U.S. was, for a period, floating on the sugar highs of unipolarity. It largely did as it pleased, and launched more military intervention on average per year than it had ever done (see Duffy Toft and Kushi 2023 Dying by the Sword, which I reviewed here).

The political economy of the New Right emerged as a salve to stagflation. Thatcher and Reagan epitomised the shift; Milton Friedman’s monetarism was the new doctrine. As Graeme Thompson’s 1986 The Political Economy of the New Right documents beautifully, however, the practice of new right economics wasn’t always about doctrinal purity; far from it in fact, but politically it successfully unwound the political-social settlement that defined much of the post war period leading up to the Oil Shock. Labour’s gains in share of total value add were eaten away, as organised labour was routed. The hollowing out of industry accelerated, on the back of expansive privatisation programs — particularly in the UK — as Fordism and its social accoutrements were dismantled. Boyer and others from the Regulationist School spoke of a post-Fordist regime of accumulation, while Ernest Mandel argued the case for “late capitalism.” Lash and Urry would point to the emergence of “disorganised capitalism” while Piore and Sabel looked for silver linings by way of a “second industrial divide” and what they dubbed “flexible specialisation.” Whatever one’s school of thought, there was no doubt that change was afoot. (See also the excellent 1989 collection edited by Jonathan Zeitlin and Paul Hirst Reversing Industrial Decline?, for details and experiences across multiple western economies.)

The dismantling of the Soviet Union also dismantled a left — in the political west at least — that could think questions of political democracy beyond the limits of parliamentarism. Narrow parliamentary systems became de rigeur the democratic touchstone, beyond question or critique. When former eastern bloc nations raced to embrace parliamentarism western style, the jury had — at that moment in history, at least — delivered a verdict. Efforts by some in the western left to provoke a more radical rethink - amongst others, British associationalism (Paul Hirst) / European associationalist socialism (Roberto Bobbio) / American communitarianism (Amitai Etzioni) in particular - gained limited to little practical organisational traction in this environment. Things appeared settled, once and for all.

Yet, the post Cold War economic and social settlement was not settled; domestically in the political west or internationally. History didn’t end, so to speak; it barely rested.

The Asian Financial Crisis of 1997 and the Global Financial Crisis of 2007–08 exposed the fragility of this supposedly settled order, revealing that financialised capitalism had not abolished crises at all. Studies of U.S. industry show that across virtually every sector — manufacturing, retail, telecommunications, media, finance, agribusiness — ownership has consolidated into fewer and fewer hands, while Germany’s storied Mittelstand, once the backbone of that economy, has been steadily eroded by global competition, private equity absorption, and succession failures.

Simultaneously, stock ownership in the United States, as Federal Reserve data confirms, has concentrated sharply: the wealthiest 10% now hold well over 90% of corporate equities and mutual fund shares, leaving the bottom half of households with negligible direct stake in the equity of those listed firms their labour sustains. Financialisation and manufacturing’s hollowing out proceeded as two halves of the same process: finance demanded liquid, short-term returns, while offshoring offered cheap labour and regulatory arbitrage. As I have documented elsewhere, the former actively drove the latter, with shareholder value logic penalising long-term industrial investment.

Global outsourcing became the default corporate strategy, creating what John Urry termed the “global outsourcing regime” — supply chains stretched across continents, invisible to consumers but exquisitely vulnerable to pandemic, war, or political shock. Widening economic inequality followed mechanically. Real wages flatlined across the OECD from the 1980s onward even as productivity doubled and tripled. Households, as Johanna Montgomerie and her collaborators have shown, responded not by reducing consumption but by borrowing, trapped under the “tyranny of earned income” — the cruel arithmetic whereby stagnant wages meet rising costs for housing, healthcare and education, with debt the only available shock absorber. Private debt was sold as liberation from this “tyranny” as wage earners and consumers were reconstituted as “financially literate” agents.

Political alienation and anomie spread alongside private indebtedness. Disenfranchisement took both formal and informal forms: voter turnout declined, party membership collapsed, and a new class of the permanently precarious emerged, unrepresented by legacy institutions of left and right alike. Drug addiction, homelessness and suicide have all increased in the U.S. and elsewhere in the political west.

Geopolitically, the post-Cold War settlement unravelled on multiple fronts. NATO’s eastward expansion — however much it was ostensibly justified on security grounds to its architects — was read in Moscow as strategic encirclement, a breach of assurances allegedly given in 1990. China’s emergence as a global manufacturing and technological power radically disrupted global value flows, undermining the uneven distributional architecture of neocolonialism that had enriched Western capitals while extracting surplus from the Global South. The Belt and Road Initiative, developmental lending, and industrial policy created the conditions for a revitalised Global South, no longer content with primary commodity roles in a Western-dominated division of labour.

Russia’s own renaissance defied the post-1991 script. Despite efforts in the 1990s and early 2000s to reach a post-Cold War détente with the political West — seeking partnership with NATO, joining the G7, accommodating Western investors — Moscow was repeatedly rebuffed, from Kosovo’s independence to missile defence to the broken promises of a pan-European security architecture and the debacle of Ukraine. The reemergence of Eurasianism within Russian political and economic discourse followed as a consequence. As Richard Sakwa has argued, Russia did not choose confrontation from a position of strength but from a perception of existential vulnerability; and as Glenn Diesen has traced, the intellectual shift toward Eurasianism has transformed not only Russian foreign policy but the very contours of global geopolitical economics and thermoeconomics — the politics of energy flows, pipelines, Arctic routes and the material infrastructure of power.

So now, in the present moment, against the backdrop of the thirty-plus-year conjuncture of American unipolar hegemony and its accelerating decline — manifested in growing economic fragility, income precarity, supply-side shocks occasioned by Oil Shock 2.0 initiated by the U.S. attack on Iran on 28 February 2026, undergirding the risk of stagflation, and the prevalence of rising geopolitical tensions and wars — the ghosts of pre-WW2 dynamics return to haunt national politics in the West, and global politics more broadly.

Among the most potent of these returning ghosts is the rise of right-wing nationalism across the Western world — not as a fringe phenomenon but as a mainstream political force reshaping governments from Budapest to Rome, across Germany and France, through to The Hague and onwards to Washington. This is a politics of national revival and nostalgia: the promise to restore a mythologised past of cultural homogeneity, industrial dignity and sovereign control, against the perceived depredations of globalisation, mass migration and cosmopolitan elites. Yet beneath the surface of restorationist rhetoric lies a deeper, more volatile current: millenarian apocalyptic energies, wherein the nation is cast as besieged, in terminal decline, and ultimately redeemable only through purifying crisis.

These movements draw on what the historian Eric Hobsbawm called the “invention of tradition” — but the invention now is not of Victorian pageantry but of civilisational last stands. Post-liberalism, as a self-conscious intellectual current, argues that classical liberalism has exhausted itself, producing only rootless individualism, demographic collapse and cultural decay. Its political vehicles — whether France’s National Rally, Germany’s Alternative für Deutschland, Italy’s Fratelli d’Italia, or a transformed Republican Party under Trump — are not simply conservative but proto-fascist in their structures: the cult of the leader, the demonisation of an internal enemy (migrants, leftists and the “deep state”), the celebration of violence as political purification, and the systematic undermining of the erstwhile institutions of the liberal settlement: independent courts, free media and electoral integrity. They are a reaction, and self-consciously so, to the perceived failures of the post-Cold War political economy to deliver on its promises: flatlined wages, deindustrialised landscapes, precarious labour, housing unaffordability and a political class that offered managerial neoliberalism as the only horizon of possibility.

Sound familiar?

The interwar period witnessed a not dissimilar conjunction: economic crisis, humiliated national pride, elite delegitimisation, and the seduction of authoritarian solutions dressed as national rebirth. Then, as now, centrist and liberal parties and movements proved disastrously slow to recognise the danger, mistaking fascist movements for protest votes that would fade once prosperity returned. But there is a crucial twenty-first-century difference. The emergence of the Global South — economically empowered by China’s rise, demographically youthful and politically self-confident — adds a wholly new dimension compared to the interwar period. Then, the European empires could still extract colonial resources to soften domestic class conflict; today, the extractive architecture of neocolonialism is fraying. The Global South no longer automatically defers to Western financial institutions, media narratives or military alliances. BRICS expands; dollar hegemony is contested; the SCO consolidates; African states court multiple partners; many across Latin America and Asia hedge.

This creates a double pressure on the political West: internally, the old post-war social contract — which rested in part on super-exploitation of the periphery — cannot be restored; externally, the West can no longer project power as a unified bloc commanding automatic deference.

The ghosts of the 1930s return, but they return to a world where the stage is crowded with new actors who remember colonialism and intend to write their own futures. Whether the Western left can marshal a meaningful anti-fascist politics based on a defence of liberal parliamentarism without the material legitimacy it has squandered — and without falling into the very authoritarian traps it claims to oppose — remains the open question of this terrifying start to the 21st century.

Threats to parliamentarism have been growing because these institutions are palpably failing; they now symbolise the shortcomings rather than function as beacons of a new social settlement; the mainstream left’s tepid response in the west is to seek to mollify markets à la the 1950s and 1960s with its own version of nostalgia but in truth, none of this is viable in a polity dominated by finance and technology capital and a political elite that remains wedded to or constrained by the discourses of neoclassical economics. Political fragmentation and the progressive decline in major parties’ popular support are symptomatic of a diminished legitimacy of parliamentarism. Yet, as I have argued elsewhere, these new rightist-verging on-fascist reactions to liberalism’s failures do not offer a viable program of genuine social and economic renewal. They are a mirror image of liberalism’s limitation, not a means of its transcendence.

An anti-fascist politics is needed. But, an anti-fascist politics cannot be viably created if the aim is to somehow return to a status quo ante within the parameters of existing economic settlements, parliamentary institutions and prevailing coalitions of political constituencies. The rise of fascism is precisely against the institutions of the status quo ante. Old political coalitions are fragmenting. New constituencies need to be defined and curated.

Berstein may well have won the battle a century and a bit ago, but Kautsky’s counterpoint is back, because the battle did not define the war. Liberal parliamentarism has run up against its limits. Schmitt’s diagnosis of parliamentarism’s inherent fragility was prescient and sharp, regardless of one’s political affiliations; and, as with the passing of time, was Kautsky’s critique from an entirely different counterpoint. Fascism’s answer appealed to Schmitt’s sensibilities and clearly appeals to a growing body of public opinion today.

The question is whether a new left relevant to contemporary conditions, not afflicted by a nostalgia for the days when it became comfortable as part of the status quo, can emerge from the ashes of the Bersteinesque compromise, discover something in Kautsky, so as to give effect to a “rupture” that Walter Benjamin may recognise. Otherwise, that rupture may well belong to fascism. Again.

In response to Iran’s demonstration of the Hormuz weapon, whereby ship movements through the Strait must now be authorised by Iran, the U.S. moved to impose its own blockade. A “blockade of blockades,” so to speak. In part, this was part of intensified armed bargaining, after the first round of failed peace negotiations in Islamabad, Pakistan, as the U.S. and Iran sought to intensify pressure on the other to make concessions. As things have panned out, so far (as of 30 April 2026), Iran’s proposals to open the Strait on the proviso that the U.S. ceases its blockade have been rebuffed by Trump. Reports indicate that Trump is preparing to commit to a long-term blockade, which we can understand through the rubric of the escalation trap and associated dynamics (which I have discussed previously). Despite the blockades, there are growing reports that Iran permits ships to pass safely, and many now manage to evade the American blockade. The Financial Times reported that at least 34 ships secured passage out to the Indian Ocean (23 April 2026) and more recent reports, of 29 April 2026, indicate that over 52 Iranian ships have made safe passage within the previous 72 hours. The U.S. blockade is porous as tankers adopt assorted tactics to slip through.

In this context, eyes have turned to China. China has accumulate substantial reserves, which continue to hold it in good stead to cope with the disruptions to oil traffic. Two questions, at least, arise deserving of some attention.

The first goes to how it is that we can interpret and understand China’s accumulation of reserves. Some commentators have suggested that the accumulation can be understood not as part of some strategic approach of the Chinese state, but as a desire by Chinese financial authorities to hide the growing accumulation of foreign exchange. This essay addresses this in some detail, by demonstrating that oil reserves accumulation is actually a part of a wider set of strategic initiatives launched a couple of decades ago, to inure China from exogenous energy risks. This goes back to the now famous observation by then President Hu Jintao about the “Malacca Dilemma.” That China’s state over the millennia has a demonstrated track record of reserves hoarding to enable the state to manage commodities prices, sets the longue duree stage for this strategic disposition. As such, the idea that oil reserves accumulation is not due to strategic considerations but is a function of nefarious efforts to conceal foreign exchange is palpably nonsensical.

The second issue goes to U.S. “grand strategy.” In short, so the argument goes, everything that we are witnessing today — from the war in Ukraine, the destruction of Nord Stream, the capture of Venezuela and now the war against Iran — is all in the aid of a wider American ambition to contain China. That much, and arguably the overwhelming proportion, of American foreign policy is in some respect connected with American hostilities towards China goes without saying. One only has to listen to the utterances of American politicians or read the various reports coming out of Congress or the plethora of think tank papers over the years, which provide the talking points, to realise that China “lives rent free” inside the heads of those inside the Beltway. Yet, this observation — and the plethora of “grand strategy” or “secret plan” elaborations we now see — doesn’t provide analysis so much as it affirms the permanent presence of a China psychosis. Whether or not there is strategic intent or ambition is somewhat by the by; let’s say there is. The issue of interest and concern is whether the means-end dynamics are grounded in reality or not. The American security state may have certain ideas, many well-known, but they aren’t the only ones that get to play. This essay strongly suggests that on question of choking China’s access to oil from the Persian Gulf — either by way of interdictions in the Gulf of Oman, or by some proposed blockade of the Strait of Malacca — that horse has already bolted. When President Hu observed the “Malacca Dilemma” almost a quarter of a century ago, it was in effect a call to action. And action there has been.

Addressing these two issues is done through a dispassionate analysis of the economic and energy security implications of a potential full curtailment of Persian Gulf (Middle East) crude oil flows to China, incorporating primary energy accounting methods, import diversification, inventories and substitution trends. The key conclusion is that a complete loss of Persian Gulf-origin oil would directly affect between ~5–7% of China’s primary energy supply under conventional metrics (even less under substitution accounting) today, and that the impact diminishes in the out-years. Large strategic and commercial inventories (~100–130+ days of import coverage at a minimum), Russian overland/pipeline capacity, and accelerated domestic electrification/substitution limit impacts to a short-term inconvenience — manageable price volatility, refinery adjustments and localised friction — rather than systemic economic damage. China’s preparations over the past two decades (diversification, stockpiling, electrification, renewables scale-up) have demonstrably paid off.

This assessment draws on EIA, IEA, CNPC-linked forecasts, customs/Kpler data, and recent statements. Numbers can shift with exact disruption scope or policy responses; real-world outcomes would also depend on global market reactions and diplomacy. However, based on reasonable assumptions, the probability of the accuracy of the conclusions drawn from the analysis below is high.

Share

Current Oil Position in China’s Energy Mix

China’s total primary energy consumption is approximately 160–162 quads (or ~6 billion tonnes coal equivalent), with fossils still dominant but non-fossils rising rapidly. Using the Direct Equivalent Method (standard international/EIA/IEA approach, fossils counted on gross input basis, primary electricity on output basis):

• Coal: ~58–62%;

• Oil (petroleum and other liquids): ~17–19% (Sinopec-linked forecasts ~17.2% for 2025; broader estimates ~19%);

• Natural gas: ~8–9%; and

• Non-fossil (hydro, nuclear, wind, solar, etc.): ~19–21% (recently edging past oil in some metrics).

This methodology has ain interesting quirk; it classifies coal, oil and natural gas as inputs, whereas electricity from non-fossil fuels is classified as electricity outputs. This means that we are not actually comparing apples with apples, the effect of which tends to overstate the proportionate role of fossil fuels in China’s energy mix and understate the role played by non-fossil fuels.

A corrective is to adopt the Substitution (or Partial Substitution) Method, whereby renewables/primary electricity are credited with the fossil (typically coal) input they displace, using ~38–40% average thermal efficiency for China’s coal fleet. This multiplies the non-fossil contribution by ~2.5×, enlarges the total primary energy denominator, and reduces relative fossil shares (including oil and coal). Oil’s effective share falls into the mid-teens percent range or lower as electrification accelerates and wind/solar/hydro/nuclear displace thermal generation. This method better reflects “apples-to-apples” displacement of chemical energy inputs and aligns with your earlier point on consistent treatment of capacity/generation.

In terms of China’s oil demand the data indicates that it was ~16.5–16.7 million barrels per day (mb/d) in 2025 (~760–765 million metric tons), with CNPC forecasting a peak/plateau around 2025 (some projections extend modest stability into 2027–2030 before gradual decline). IEA sees demand largely flat at ~16.7–16.9 mb/d through 2030, driven by petrochemical feedstocks offsetting sharp contractions in gasoline/diesel (already peaked or near-peak due to EVs and LNG trucks).

It is estimated that ~70–75% of crude is imported. Total crude imports reached a record ~11.6 mb/d in 2025. Domestic production stabilised near 4.2–4.3 mb/d. Of this, Middle East/Persian Gulf’s share is estimated to be ~45–55% of crude imports (Saudi ~14%, Iraq ~9–11%, Iran ~12–14% often rerouted via Malaysia/Indonesia, plus UAE/Oman/Kuwait). Roughly 35–45% of total crude supply (imports + domestic) traces to Hormuz-linked flows in recent periods, with trackers noting a declining share due to Russian increases.

We can thus undertake a foundational vulnerability calculation, which shows:

• Oil ≈ 18% of primary energy (mid-range direct method);

• 73% imported × 50% Persian Gulf/Middle East average ≈ 36.5% of total oil supply vulnerable;

• 18% × 0.365 ≈ 6.6% of primary energy; and

• On the substitution method basis, we can estimated that oil’s share is closer to 15% oil share, meaning that its share of primary energy is closer to ~5.5%.

Thus, prima facie, we can estimate that China has between ~5–7.5% of primary energy directly exposed. Under substitution accounting, this percentage shrinks further as the non-fossil denominator grows. By 2030, with oil demand plateauing/declining modestly while total energy and GDP grow, and non-fossil electricity penetration rising (electricity already ~32%+ of final energy and increasing), the proportional exposure falls into the low single digits.

Share

Diversification and Rerouting Capacity (Russia & Central Asia)

Russia is China’s top crude supplier (~18–20% of imports in 2025, with volumes ~2.0–2.2+ mb/d including seaborne and pipeline). A significant and growing portion arrives via the ESPO pipeline (capacity ~700,000 b/d to Mohe, with spur lines; this route is expandable) and other overland/rail routes that fully bypass Hormuz and Malacca. Additional flows via Kazakhstan-China pipelines (~200,000 b/d from Rosneft) and Russian Far East ports add resilience.

Central Asia provides incremental overland options (e.g., Kazakhstan routes), though smaller than Russian volumes. These pipelines avoid maritime chokepoints entirely.

In this context, we can note the comment of Russian foreign minister Sergei Lavrov during his Beijing visit, where he explicitly stated that Russia has the capability to “make up for the resource shortfall” or “fill any energy resource gap” China might face from Middle East disruptions, citing existing reserve and planned capacities. This aligns with deepening Russia-China energy ties (ESPO expansions, Power of Siberia gas lines, discounted barrels). While not an unlimited instantaneous offset, Russia’s ability to redirect volumes (especially overland) provides a credible partial-to-substantial hedge for Gulf losses in a crisis, supplemented by Brazil, Angola, and other sources. We can note that Urals crude has similar chemistry properties to Gulf crude, making it more or less a direct substitute.

In a Malacca blockade scenario, rerouting via longer Cape routes (if feasible/insured) or increased Russian/Central Asian overland flows could offset 20–40%+ of a Gulf shortfall over months, depending on logistics and pricing.

Buffers: Inventories and Operational Flexibility

China entered any potential disruption with exceptionally strong buffers. Note the following:

• Total strategic + commercial inventories are estimated to be ~1.4 billion barrels as of end-2025 (EIA estimate), with government-held SPR ~360 million barrels and commercial/refinery stocks ~1 billion barrels. Aggressive builds averaged ~1.1 mb/d added in 2025. Some trackers put total storage near 1.4–1.5 billion barrels, with capacity headroom toward 2 billion;

• These reserves provide coverage of roughly 100–130+ days of import protection (exceeding IEA’s 90-day benchmark). This is equivalent to 3–4+ months of breathing room for drawdowns, rerouting, and adjustments at full truncation of Gulf flows; and

• China has the ability to govern oil consumption to adjust for shifting priorities: Teapot refineries, bonded/floating storage, prioritised allocation to military/essential uses, demand suppression (non-essential transport), and accelerated substitution (EVs, LNG trucks, industrial electrification) enhance resilience. Petrochemical feedstocks (growing share of oil use) are less time-critical than transport fuels.

  Share

Implications of Hormuz/Malacca Blockade

Within the public domain, there’s been a bit of excitement around the recent U.S.-Indonesia defence agreement, with many observers rushing to claim that this represented a key “chess piece move” enabling the U.S. to contain China via blockage of the Strait of Malacca. I won’t examine the military dimensions of such a blockade; this can wait for another day.

For now, we can note that disruption at one chokepoint largely nullifies the other for Gulf-to-China flows: no oil exits Hormuz to reach Malacca (with some flows going via the Cape, perhaps), and a blocked/risky Malacca removes incentive for Gulf departures to Asia. A sustained blockade event would spike global and domestic prices, raise insurance/logistics costs, and force refinery adjustments.

So, what are the economic impacts, insofar as China is concerned, likely to be of prolonged blockages to flows of Persian Gulf oil?

In direct terms, assuming full cessation of flows (demonstrably implausible given the porosity of the blockades, noted above), the direct energy impact on China would be in the order of ~5–7% of primary energy, with impacts concentrated in transport fuels and petrochemicals, with obvious propagation implications through supply chain networks.

In the short term, we could expect some price volatility and friction (logistics, and certain manufacturing sectors would be impacted). Inventories help buffer against these volatilities. Time is on China’s side, in this context, as inventories enable mitigations to be put into place. The 3–4+ months of stocks buy time for Russian rerouting (Lavrov offer), overland scaling, Cape alternatives (in the event of a Malacca blockade), and ongoing demand-side shifts. Accelerated domestic substitution (EVs, renewables-powered industry, and increased efficiency) would be catalyed, further decoupling oil from growth.

In the longer term, say by 2030, oil’s plateau/decline + electrification/renewables growth shrinks the relative slice even more. Substitution accounting makes the decoupling appear faster. Overall, therefore, it’s reasonable to conclude that the effects would be a short-term inconvenience at worst — somewhat painful but non-existential. There is no threat to core economic functioning.

Strategic Context and Payoff from Preparations

Hu Jintao’s 2003 reference to the “Malacca Dilemma” highlighted vulnerability to maritime chokepoints. Since then, China has systematically reduced exposure through a range of measures:

• Diversification (Russia as top supplier with overland routes; broader sourcing);

• Massive stockpiling (now among the world’s largest inventories);

• Electrification and renewables buildout (wind/solar capacity surging; electricity penetration rising; non-fossil share growing); and

• Domestic production stability and refinery flexibility.

These measures, combined with substitution accounting revealing faster fossil decoupling, have transformed the risk profile. A Gulf disruption today tests resilience rather than threatening foundations. Russia’s willingness to offset (per Lavrov) further underscores the strategic partnership buffer. The bottom line is that China’s ~5–7% primary energy exposure (which is declining), robust ~100–130+ day inventories, Russian/Central Asian rerouting capacity, and ongoing electrification/renewables substitution render a Hormuz/Malacca-driven Gulf oil curtailment manageable and arguably anachronistic. Impacts would be contained to short-term volatility and adjustment costs. Post-2003 preparations have demonstrably strengthened energy security, aligning with your thesis.

Incidentally, this preparation should put the kibosh on arguments about China’s supposed “over investment” in areas such as EVs and electrification. It is precisely these “over investments” that have put China in a position where it can cope with major disruptions — caused either by “natural events” or by geopolitical interventions. As for U.S. “grand strategy,” what we can say is this: if, in fact, these wars are part of a wider “it’s all about containing China” strategy, then the evidence on the ground suggests that the foundational assumptions underpinning American means-ends calculus are flawed; they are empirically falsifiable. This does not discount American motivations and subsequently actions, but does indicate that such interventions are unlikely to work; they may even backfire. Recent experience in the field of semiconductor restrictions should remind us that American policy making is often blind to evidence, and is driven by a psychosis of exceptionalism.

The situation in Iran would appear to fit this pattern. China, so it would seem, has been ready.

This essay focuses on the Nigerian shea butter supply chain, where my colleagues at Smart Trade Networks and I have been retained to provide strategic enabling assistance to deliver long-term transformations.

Nigeria stands as the world’s largest producer of shea nuts, contributing nearly 40% (and in some estimates up to 45%) of global output with annual production between 350,000 and 500,000 metric tonnes. Yet despite this dominance, the country captures less than 1% of the estimated $6.5 billion global shea market. Official export earnings from raw shea nuts have often hovered around or below $65 million annually, while the potential for value-added processing could generate hundreds of millions - and ultimately billions - in revenue through shea butter and derivatives used in cosmetics, food, and pharmaceuticals. This stark disparity exemplifies postcolonial economic structures that lock developing nations into raw commodity exports while foreign-owned processors, brands and retailers downstream capture the lion’s share of value. As economist Fadhel Kaboub has powerfully documented in his analyses of “cocoa colonies” and Tunisian olives, these patterns are not accidental but systemic features of global value chains shaped by colonialism, unequal trade rules, and concentrated corporate power.

The Commodities Development Initiative (CDI) of Nigeria, working in tandem with government policy, is spearheading reforms to shift this dynamic. A key pillar is digitalisation: platforms enabling coordinated “single-desk” selling through the Nigeria Commodity Exchange (NCX), enhanced traceability for buyers and financiers, and better producer bargaining power. Recent policies, including the 2025 ban on raw shea nut exports (extended through 2027), mandate that all shea trade routes through the NCX, aiming to curb informal cross-border losses and force domestic processing. This essay examines the challenges and opportunities of reforming Nigeria’s shea sector, situating it within the broader struggles of agricultural commodities in the developing world - cocoa in West Africa, olives in Tunisia, and coffee in East Africa to name but a few. While formidable barriers remain, strategic digitalisation, industrial policy, and regional solidarity offer pathways to greater local value creation and economic sovereignty.

The current state of Nigeria’s shea industry reveals deep structural weaknesses rooted in its upstream position in the global chain. Shea trees grow wild across a vast belt spanning over five million hectares in 20+ states, primarily harvested by rural women collectors who gather fallen nuts seasonally. Production remains fragmented among millions of smallholders with minimal organisation, leading to inconsistent quality, high post-harvest losses (up to 90,000 tonnes lost annually to informal trade), and vulnerability to middlemen. Domestic processing capacity stands at around 160,000 tonnes but operates at only 35-50% utilisation due to unreliable power, poor infrastructure, inadequate technology, and limited access to finance. Most nuts are exported raw to Europe and Asia for refining into shea butter (which commands 10-20 times the price of raw kernels), where multinational firms control fractionation into stearin and olein for high-margin applications.

The 2025 export ban, while visionary in intent, exposed immediate challenges: nut prices plunged by up to 33% initially, disrupting established trade networks and hitting women collectors hardest. Processors lacked capacity to absorb the surplus, underscoring the gap between policy ambition and implementation readiness. Broader issues include meeting international standards for cosmetics and food-grade products, climate variability affecting tree yields, and gender dynamics - shea is often a critical income source for women yet receives little investment in training or credit. These mirror systemic postcolonial traps: capital and technology remain concentrated abroad, while producers bear price volatility and environmental risks.

Kaboub’s framework illuminates why such imbalances persist across commodities. In Tunisia - the world’s second-largest olive oil producer in good years (up to 500,000 tonnes) - producers export the vast majority in bulk to EU countries like Spain and Italy. European firms (Deoleo, Sovena, and Acesur) blend, bottle, brand, and distribute under premium labels, capturing value in marketing and retail while Tunisia earns commodity prices. EU quotas (e.g., 56,700 tonnes duty-free annually, often exhausted quickly) enforce “managed access” rather than free trade, locking Tunisia at the bottom of the hierarchy despite producing the raw value. This is no market failure but a “well-oiled colonial machine” of global value chains.

Cocoa offers an even starker parallel. West Africa produces 71-74% of global beans, with Côte d’Ivoire and Ghana dominant. Yet farmers receive less than 9% of the final chocolate bar’s value; supermarkets in Europe capture ~42%, while multinationals like Barry Callebaut, Cargill, Olam (grinding), and Hershey, Mondelez, Nestlé (branding) reap high margins (17-26% operating profits). Even local grinding capacity - now ~30-50% in these countries - often remains foreign-controlled, with profits repatriated. Price risks and climate impacts (e.g., swollen shoot virus) fall on smallholders. Kaboub terms this “cocoa colonies versus chocolate empires.”

Coffee in Ethiopia and Uganda follows suit: 1.7-1.8 million smallholders dominate production, yet quality premiums rarely reach farmers due to fragmented aggregation, weak cooperatives, and buyer-driven chains controlled by global traders. Local roasting and branding remain limited; most value accrues in consuming countries through roasting, packaging, and retail. Common threads across shea, cocoa, olives, and coffee include tariff escalation (higher duties on processed goods), sanitary-phytosanitary barriers, and corporate concentration that stifles upstream bargaining. Colonialism - introduced cash crops, extractive trade pacts, and lack of downstream infrastructure - perpetuates dependency.

Reforming these sectors faces multifaceted challenges. Economically, scaling processing requires massive capital for factories, energy and logistics - Nigeria’s installed shea capacity illustrates the underutilisation trap. Politically, policy consistency is elusive; the shea ban’s short-term disruptions sparked calls for review amid livelihood concerns. Socially, organising millions of dispersed smallholders (especially women) for collective action is difficult amid low literacy and trust deficits. Technically, achieving traceability and certifications (e.g., for EU deforestation rules or organic claims) demands technology many lack. Globally, entrenched buyer power and competition from established processors resist change. Climate change exacerbates vulnerabilities across all crops: erratic rains for shea and olives, pests for cocoa, and shifting suitability for coffee. In Kaboub’s view, incremental reforms (larger quotas, niche branding) fail without confronting the structural hierarchy.

Yet opportunities abound, particularly through digitalisation and coordinated policy. Nigeria’s NCX mandate for shea exports creates a de facto single-desk mechanism, enabling price discovery, warehouse receipts, grading, and aggregation that strengthen producer negotiation. Digital platforms - to be advanced via the CDI - facilitate traceability from farm to fork using blockchain or mobile apps, delivering the transparency buyers and financiers demand for premiums. This leapfrogging technology reduces middlemen, links smallholders directly to markets, and unlocks credit against verified stocks. Local value addition to shea butter could multiply earnings while creating jobs, especially for women, in refining, cosmetics formulation, and packaging. The ban, paired with government financing schemes and industrial incentives, aims to expand capacity rapidly.

Broader lessons from peers are instructive. Ghana has modestly increased cocoa processing shares and shea exports through targeted support; Ethiopia’s coffee cooperatives demonstrate how organisation improves quality premiums. Tunisia could pivot via AfCFTA to intra-African and South-South markets, bypassing EU quotas. Kaboub advocates regional blocs for collective bargaining, sovereign development finance for downstream plants, and strategic industrial policy to own grinding, bottling, and branding. For shea, Nigeria could target cosmetics giants with certified, traceable supply while building domestic and regional demand for shea-based products. Sustainability angles - biodiversity in shea parklands, ethical sourcing - align with global “clean label” trends, commanding premiums.

Digitalisation is transformative across commodities: coffee traceability apps in Uganda, cocoa blockchain pilots in Côte d’Ivoire, and olive oil platforms in Tunisia all enhance coordination and value capture. In Nigeria, integrating NCX with farmer apps and CDI support could coordinate selling at scale, attract investment with certainty, and enable financing innovations. Combined with the export ban’s push for processing and AfCFTA market access, this positions shea as a model for decolonising commodity chains.

In conclusion, reforming Nigeria’s shea sector is fraught with challenges embedded in postcolonial structures - fragmentation, capacity gaps, and foreign dominance - but the opportunities are profound. Through CDI-led initiatives, digital single-desk platforms, traceability, and value-addition policies, Nigeria can move from raw exporter to processed powerhouse, potentially multiplying earnings from tens to hundreds of millions (and beyond). Parallels with cocoa, olives and coffee underscore that success requires more than isolated reforms: sustained political will, gender-inclusive organising, climate resilience, and Global South solidarity to reconfigure value chains. As Kaboub argues, true sovereignty demands repositioning from colonies to empires of one’s own making. Nigeria’s shea renaissance, if realised inclusively, could inspire a broader agricultural transformation across the developing world, fostering jobs, forex stability and equitable development in an era of global economic rebalancing.

As the April 2026 ceasefire in the Iran conflict frays beneath a fully implemented US naval blockade of the Persian Gulf, renewed troop surges, and Iranian counter-threats to widen disruptions across the Strait of Hormuz, two rival frameworks dominate analysis of the present moment. Robert Pape’s “escalation trap” diagnoses American horizontal escalation as a self-defeating gift to a resilient adversary. Analyst Anusar Farooqui (otherwise known popularly as @policytensor) counters that these same moves constitute armed bargaining aimed at a grand bargain that acknowledges Iran’s structural victory. Both perspectives are focused on the short-term “event.” To set this debate within context I mobilise Fernand Braudel’s tripartite historical method and add a thermoeconomics edge: the event (the war’s immediate kinetics), the conjuncture (medium-term cycles of power transition), and the longue durée (deep structural and biophysical rhythms). Only by nesting the event within these deeper layers does the open question crystallise: can material reality force rationality faster than zealotry and fear of humiliation can prolong the “decent interval”?

Pape’s escalation trap, honed through decades of studying coercion from Vietnam to Kosovo, identifies a recurring pattern. A superior power’s incremental escalation — decapitation strikes, precision campaigns, naval interdiction etc. — fails to extract decisive political concessions while inviting the weaker side to broaden scope and duration. Tactical wins become strategic liabilities. In the 2026 Iran war, the February 28 US-Israeli opening strikes were meant to reset the regional balance; instead, Iranian retaliation horizontalised the theatre to the Gulf chokepoint and proxies. The stumbling Islamabad talks (April 11–13) and subsequent blockade enforcement exemplify the trap: each new lever of pressure merely raises the stakes, generates blowback in oil markets (which are manipulated via announcements and Treasury interventions), and erodes the very credibility Washington seeks to restore.

Farooqui offers a bargaining-theoretic alternative. This is not entrapment but coercive diplomacy under duress. Iran’s “Hormuz weapon” cannot be disarmed at acceptable cost; its low-cost asymmetric arsenal grants it endurance dominance. Blockade and deployments are leverage-generation moves intended to extract a security consolidating grand bargain — non-aggression assurances, sanctions relief, and formalised energy-flow arrangements — while both sides acknowledge Iran as a confirmed regional great power. Rationality, he implies, will eventually prevail because the material ledger is unforgiving. The U.S. cannot win and must therefore cut a deal.

Share

The debate is consequential. It determines whether the United States can still steer multipolarity on its own terms or whether it must accept the limits of hegemony. Yet the parameters of discussion remain limited by its event-level focus. Braudel insisted that surface events only become intelligible when situated within the conjuncture — the medium-term rhythms of economic cycles, geopolitical alignments, and power transitions — and ultimately within the longue durée of geography, climate, demography, and biophysical constraints.

The conjuncture here is the closing act of the thirty-year post-Cold War unipolar moment. From 1991 until roughly the mid-2010s, the United States enjoyed unprecedented freedom of action: no peer competitor, a dollar-centric financial system, and the ability to project power into the Middle East with minimal external restraint. US-Israeli strategic ambitions in the region — securing energy corridors, neutralising the “axis of resistance,” and preventing any single actor from dominating the Gulf — operated within this permissive environment. The 2003 Iraq invasion, the containment of Iran, and repeated Israeli operations against Hezbollah and Hamas were all expressions of unipolar overmatch. Some would go so far as to argue that this strategic map, articulated in think tank strategic reports like those of Brookings Institute’s Paths to Persian (2009), aims ultimately at neutering regional rivals so as to clear the way for the creation of a greater Israel. In this frame, Iran remains the final roadblock.

That era has now visibly decayed. China’s rise — economic, technological, and military — has redrawn the global correlation of forces. Beijing’s Belt and Road infrastructure, its dominance in critical minerals and renewables supply chains, and its deepening partnership with Russia have created alternative poles that the Global South increasingly orbits. Russia’s re-emergence, accelerated by the 2022 Ukraine conflict, has further eroded the post-Cold War settlement: energy markets are no longer a Western monopoly, and military-technical cooperation with Iran (drones, missiles, satellites etc) has measurably strengthened Tehran’s asymmetric capabilities. The 2026 Iran war is therefore not an isolated crisis but a conjunctural test of whether the United States can reassert hegemony over global oil flows and the petrodollar architecture in the face of this broader multipolar drift. Russian foreign minister Sergei Lavrov’s repeated characterisation of the campaign as an attempt to punish the “World Majority” for choosing BRICS-led alternatives captures the stakes precisely. The event is the latest chapter in a thirty-year arc of unipolar over-extension meeting structural counter-pressure.

Beneath the conjuncture lies the longue durée: the thermoeconomics of financialisation and the secular decline in relative energy return on energy invested (EROEI) in the U.S.. Since the 1970s, advanced capitalism has undergone a profound shift from industrial production to financialisation — rent-seeking, asset inflation, and the detachment of monetary claims from underlying energy and material throughput. This has hollowed out the industrial base required for sustained high-intensity conflict. Parallel to this is the biophysical reality of declining EROEI in the U.S.. Conventional oil fields that once yielded 30:1 or 100:1 net energy ratios have matured; unconventional sources (shale, deep-water and tar sands) deliver far lower returns once extraction, refining, and infrastructure costs are subtracted. The same logic applies to the broader energy system supporting military power projection: precision munitions, satellite constellations, carrier strike groups, and global logistics chains all rest on an eroding net-energy foundation. Financialisation masks the problem temporarily through debt and monetary expansion, but it cannot repeal the second law of thermodynamics. Wars, in this longue durée view, are ultimately contests over who can sustain energy-and-materials throughput longer.

The “decent interval” problem, which I have previously discussed in the context of the unfold war in Ukraine, slots directly into this layered analysis. Many, though by no means all, elites in Washington and allied capitals understand, at the conjunctural level, that unipolar dominance has passed. This is the source of great displacement anxiety. They further comprehend that a ground war to disarm Iran would require over one million troops — an expeditionary commitment politically and logistically challenging if not impossible. Farooqui, among others, have estimated that such numbers are inconceivable, even with a politically controversial draft. Yet the optics of accepting Iranian terms — lifting sanctions, tolerating enrichment under oversight, formalising a non-aggression pact, accepting Iranian control over the Strait of Hormuz and removal of American bases from the Persian Gulf etc. — would crystallise the narrative of imperial retreat. Domestic political incentives, international alliance management and the need to project strength toward China all demand that defeat be deferred. The interval therefore stretches: more blockade enforcement, more rhetorical escalation and more performative deployments.

Zealotry intensifies the distortion. Segments of the American foreign-policy elite are animated by a millenarian exceptionalism that frames every conflict as existential and every setback as apocalyptic. This is not mere nationalism; it is a civilisational theology in which the United States is history’s indispensable actor, and retreat is tantamount to moral failure. Millenarian exceptionalism — framing the conflict as an existential civilisational struggle or a biblical war in some versions rather than a conjunctural adjustment — converts the decent interval into a moral crusade. Apocalyptic language about the survival of the “rules-based order” or the imperatives of scripture short-circuits the feedback between material signals and policy. It is easier to stoke the fires than to admit that the unipolar conjuncture has closed and that the longue durée now constrains American options more tightly than at any time since 1945. The same rhetorical register that once cast Saddam Hussein or the Taliban as existential threats now casts Iran as the linchpin of an axis that must be shattered to preserve the “rules-based order.” Zealotry short-circuits the feedback loop between battlefield reality and policy adjustment. It converts the decent interval from a tactical delay into a moral crusade, making rational off-ramps politically radioactive.

The ultimate discipline, however, arrives through the thermoeconomics of war sustenance — the point where longue durée meets event. The United States entered this campaign with magazine depths already stressed by Ukraine and Indo-Pacific commitments. Hundreds of Tomahawk cruise missiles and JASSM-ER standoff weapons were expended in the opening phase; annual production rates remain in the low dozens to low hundreds. THAAD and Patriot interceptors have been drawn down at rates that will take years to restore. Supply-chain bottlenecks in rare-earths, propellants and microelectronics compound the problem. Iran, by contrast, fights on the low-EROEI side of the ledger that now favours the defender: its Shahed-class drones and ballistic missiles are cheap to produce, resilient to dispersal, and quick to reconstitute. It has absorbed initial strikes, maintained launch cadence, and forced the far more expensive US arsenal to burn itself out in defence.

The Hormuz weapon remains the decisive structural fact. Closing or even threatening the Strait imposes immediate global energy shocks that the United States cannot neutralise without a ground commitment of staggering scale. Short term market manipulations through Trump’s late Friday and early Monday signalling, coupled with Treasury market interventions, don’t resolve the problem of diminishing global stocks as flows diminish. Rising prices and demand destruction are two sides of the one coin, which speak to significant economic pain. Disarming Iran’s coastal missile batteries, mine-laying capabilities, and proxy forces would require not surgical strikes but sustained occupation of key terrain — an operation that military analysts estimate would demand over one million troops, years of logistics, and acceptance of casualties and costs that dwarf anything seen since Vietnam. Reportedly, Trump is balking at the prospects of such losses. Even then, success is not guaranteed: history is littered with great-power expeditions that foundered on local resilience and asymmetric tactics. The Hormuz weapon exists as long as Iran retains sovereignty over its coastline and the political will to use it. No amount of escalation short of that commitment can disarm it.

This is where thermoeconomics becomes the final arbiter. Wars end not when one side achieves a Clausewitzian “decisive battle” but when one side’s sustainment curve collapses relative to the other’s. The United States can impose pain but it cannot do so indefinitely without cannibalising its own strategic reserves and causing major global economic disruptions with feedback loop effects on its own economic vitality and viability. Oil prices volatility, inflation rippling through global markets, and mounting opportunity costs vis-a-vis China all place pressures on American calculus, and those of erstwhile allies. Iran, betting on attrition and endurance, is playing the same game the Vietnamese, Afghans and Iraqis played before: outlast the stronger power’s political clock.

In Braudelian terms, the event (blockade, stumbling talks and expanded troop movements) is epiphenomenal. The conjuncture (unipolar decline, China’s ascent, Russia’s re-emergence and US-Israeli regional ambitions colliding with multipolarity) sets the parameters of possible outcomes. The longue durée (financialisation’s erosion of industrial capacity, and secular decline in relative EROEI) supplies the biophysical ceiling that neither ideology nor coercion can breach. Material depletion — already visible in precision-munitions burn rates — will eventually force “rationality.” The only variable is the length of the decent interval that zealotry can extract before exhaustion imposes the new settlement or the trap snaps shut. The decent interval may stretch months or years, zealotry may keep the rhetorical fires burning, but the material ledger is merciless. Depletion rates, replenishment timelines and the irreducible geography of the Gulf impose a hard stop that no exceptionalist narrative can repeal.

History suggests the interval can be dangerously long when shame aversion and hegemonic nostalgia dominate. The monsters of the interregnum are on the loose. Yet biophysical systems do not negotiate with ideology. The thermoeconomic ledger is already written in the declining net-energy yields of the industrial base, the fragility of financialised supply chains and the geography of the Gulf.

The open question, therefore, is temporal and I restate it: can material reality force rationality faster than zealotry can prolong the interval? If the blockade’s economic ripple effects, the visible drawdown of precision stocks, and the sustained Iranian counter-pressure concentrate minds in Washington toward a grand bargain, the United States may yet extract a face-saving exit before the trap fully snaps shut. If hubris and shame aversion prevail, the decent interval becomes a longer, costlier demonstration of why Pape’s warning has proven durable across decades of conflict. Either way, the thermoeconomic verdict is already in: Iran cannot be coerced on American terms without costs the American-led system itself cannot bear indefinitely. The only variable left is how much pain American elites are willing to impose on their own society — and those of allies, to the extent that they even feature in Belting thinking — before acknowledging the limits that geography, industrial capacity and physics have already imposed.

Whether Washington recognises this faster than the fires can be stoked will determine if the 2026 Iran war becomes a manageable conjunctural adjustment or the latest chapter in a longue durée story of imperial overreach meeting material limits. The fires may rage, but the fuel — both literal and metaphorical — is finite.

There are moments when a society stops merely adapting to history and begins, instead, to make history in a new way. It does not just respond to inherited constraints; it reorganises the material conditions of life so that new possibilities become thinkable, practical and eventually normal. My proposition is that China, especially over the past decade and a half, has been doing precisely this. It has been building the future in plain sight.

I do not mean “the future” in the glossy, trivial sense of gadget fetishism or techno-utopian fantasy. I mean something more grounded and more consequential: the patient construction of a new energetic basis for economic life. In the language I have developed in my book, China has increasingly behaved as a thermodynamic state. That is to say, it has approached development not simply as a matter of GDP growth or industrial output, but as a long-term project of energetic renewal: improving the efficiency with which energy is produced, transformed, circulated, stored and used across the whole social metabolism.

Over many years, and especially since the global financial crisis, China has been engaged in a multi-dimensional reorganisation of its productive system around higher energetic efficiency. It has sought to harness more of the energy latent in nature, apply human knowledge and technical capacity to that potential, and transform it into lower-cost, higher-throughput, more socially enabling systems. When Chinese policymakers speak of “new productive forces” or “dual circulation,” they are not only talking about industrial upgrading or domestic demand. At a deeper level, they are describing a civilisational effort to lift the energetic return on economic organisation itself.

Electrification

The clearest expression of this is accelerated electrification.

This electrification story begins, obviously, with generation. Here China’s achievements are now so large that even critics who resent them cannot ignore them. Wind and solar are the headline sectors, and rightly so. China has not merely installed large quantities of renewable capacity; it has built dense, interlinked ecosystems of production around them. The panels, turbines, inverters, rare earth processing, battery inputs, transmission equipment, engineering know-how, financing institutions, and the logistical capacity: these aren’t isolated achievements. They form a system.

That matters. A country can import technologies. It can subsidise adoption. It can even produce impressive targets on paper. But it is something else entirely to create a living industrial ecology capable of reproducing and improving those technologies at scale. China has done that. It has made clean energy not a decorative adjunct to an oil civilisation, but the basis of an alternative developmental trajectory. China’s government expects that China’s peak oil consumption will be reached during the 15th Five Year Plan (2026-2030); and with the unfolding challenges arising from the US war against Iran, greater effort is likely to be made to accelerate this trend.

And crucially, this is not a story of naive substitution; of one fuel type for another in some one dimensional “transition” narrative. China’s development strategy has been far more sober and more dialectical than many of its critics allow. Coal has not disappeared. Rather, its role has been progressively altered. Cleaner and more efficient coal technologies have improved the performance of legacy systems, while in many cases coal has shifted away from the old ideal of permanent baseload dominance toward a more contingent standby function within a broader and increasingly renewable-heavy mix. Nuclear, too, has continued to develop, not as an ideological badge but as part of a pragmatic portfolio approach to energy security, decarbonisation and long-term reliability. And on the horizon sits fusion research, where China is again positioning itself not simply to catch up, but to help define what comes after the current renewables revolution.

This is worth pausing over. Too often, Western commentary on China swings between caricatures: either China is portrayed as a polluting relic because it still uses coal (and a lot of it), or as an industrial predator because it has become too good at producing the technologies needed for decarbonisation. The contradiction is revealing. What unsettles many critics is not merely China’s emissions profile, but the fact that China is increasingly shaping the material architecture of a post-oil future.

Yet generation is only one part of the story. Energy must be stored, moved and used. And here, too, China’s transformation has been profound.

It is one thing to harvest electricity. It is another to distribute it across enormous territories, between cities and regions, into factories and homes, across varying demand conditions, and with sufficient resilience to support a modern economy of extraordinary scale. China’s electricity network, the largest in the world, is not simply vast; it has become increasingly intelligent, distributed and efficient. In parallel, advances in battery technologies have widened the scope of what electrification can actually do.

We have already seen successive waves of development: from early lithium-ion systems to more advanced lithium chemistries, then onward toward solid-state and sodium-ion possibilities. Each step matters because storage is not a technical footnote. It is the hinge upon which electrification turns from aspiration into lived reality. Storage makes intermittent generation more manageable. It makes remote delivery more viable. It enables micro-grids and distributed energy systems. It supports resilience in places once considered too marginal, too distant or too expensive to serve well. It makes the grid not merely bigger, but more socially productive.

And of course it underpins the rise of electric vehicles, which have become one of the most visible symbols of China’s ability to bring future systems into the present. In China today, electrified mobility no longer feels experimental. It feels normal. That is the key point. The future is not really “the future” once a society has built the infrastructure, industrial base and consumer ecosystems that allow it to become routine.

I have travelled through Chinese cities and smaller urban centres over the years, and in recent weeks, and have repeatedly been struck by this quality of normalisation. What appears to outsiders as futuristic often appears to ordinary Chinese people as mundane. Electric vehicles, app-based mobility, digitally integrated logistics, automated warehousing, cashless payments, rapid delivery and platform-mediated services: these are not dazzling novelties in everyday China. They are simply how life increasingly works. And that, perhaps, is the surest sign that a society has moved ahead of its critics. It is no longer debating whether the future is possible. It is already living inside parts of it.

This same dynamic is now opening into hydrogen. If solar and wind continue to fall in effective cost, and if hydrocarbon fuels become structurally more expensive and geopolitically insecure, the economics of green hydrogen change. Here the broader geopolitical environment matters. The war against Iran, and Iran’s response with the Hormuz Weapon, has heightened awareness of the fragility and cost of gas-dependent systems. In that context, the possibility of lower-cost green hydrogen takes on real strategic significance. Hydrogen is not a silver bullet, but it can become an important part of a broader electrified and post-oil circulation regime, especially in hard-to-abate sectors and long-distance transport.

That matters for road and rail, but also for maritime systems and increasingly for aerial platforms, including drones. Circulation is not a secondary matter in political economy. How goods, services, information and people move determines the effective metabolism of an economy. China’s electrification push is therefore not just about cleaner generation; it is about reorganising circulation itself.

Share

Digitalisation

This brings us to digitalisation, which is often discussed as though it floats above material reality, as though “the digital” were somehow immaterial. It is not. Digital systems are energetic systems. They depend on power, transmission, storage, processing, cooling, minerals, materials and physical infrastructures. Their expansion depends, in no small part, on whether a society can lower the energetic cost of capturing, processing and acting on data.

China’s digital transformation has been made possible by this energetic foundation. For ordinary people, that shows up as convenience: cashless transactions, on-demand services, seamless e-commerce, the ability to transact and organise “anywhere, anytime.” For firms, it shows up as a reduction in friction: better logistics, more automated production, more efficient inventory management, better agricultural yields, smarter routing, new service platforms, improved customer matching, lower operating costs.

But the real significance lies deeper still. As the energetic costs of data systems fall, data can play a genuinely negentropic role. It can reduce disorder in production and circulation. It can coordinate dispersed activities with less waste. It can make possible a denser informational mesh across an economy, where decision-making is pushed closer to the edge, closer to where real processes are unfolding.

Pushing Frontiers

This is where frontier developments become especially interesting. China is not only scaling established technologies; it is pushing into new areas that may further lower the energetic and material costs of digital civilisation. Triboelectric nanogenerators, advanced materials including graphene, and breakthroughs in areas such as ferroelectric field-effect transistors all point toward a future in which sensing, computation and connectivity become more distributed, more efficient and more embedded in ordinary environments. The more that data capture and processing can occur at the edge, the more communities, enterprises and networks can act with local intelligence while remaining connected to wider systems.

The implications are enormous. Entire regions previously marginal to high-value digital flows can be brought into the main game. Smaller cities and towns need not remain peripheral. Spatial enablement becomes possible. New incomes can be generated beyond the old metropolitan cores. Economic participation widens. Shared prosperity becomes less of a slogan and more of a material possibility.

This is one of the least appreciated aspects of China’s developmental experience. Western observers often see scale and imagine centralisation alone. But the deeper achievement is that scale has been used to enable proliferation. Large systems have helped generate the conditions under which distributed participation becomes more viable. That is not accidental. It reflects a developmental logic in which infrastructure, industry, state capacity and technological learning are aligned toward widening the field of practical possibility.

Global Capacity; Pricing People In Through Abundance

It is also why the familiar Western complaint about Chinese “overcapacity” misses the point so badly. The accusation rests on a parochial assumption: that productive capacity should be judged against the purchasing patterns and profit expectations of the existing world economy, rather than against what humanity actually needs. But humanity does not need less capacity in solar, batteries, electric vehicles, grids, power electronics, transmission systems and low-carbon industrial equipment. It needs dramatically more.

What critics call overcapacity is often better understood as civilisational surplus capacity in the making: the productive base required to accelerate a transition away from oil dependence, carbon lock-in and geopolitical vulnerability. The world’s problem is not that China can make too much of the machinery of energetic renewal. The problem is that too many other countries still cannot.

This is why China’s experience matters beyond China.

The lesson is not that every country can or should mechanically copy the Chinese model. Historical trajectories are different. Social structures are different. Resource endowments are different. Political traditions are different. But the larger lesson is transferable: modernisation in the twenty-first century must increasingly be understood as a question of energetic reorganisation. Nations that fail to build higher-EROEI systems of production, circulation and use will remain trapped in low-efficiency, high-cost, externally vulnerable development paths. Nations that can progressively electrify, digitalise and upgrade their energetic metabolism will possess greater room to raise real living standards, widen opportunity and reduce dependence on volatile hydrocarbon chokepoints.

That is why the stakes are so high in the emerging era of Oil Shock 2.0. As oil and gas insecurities deepen, the need for practical alternatives becomes urgent. China’s modernisation lessons are therefore not just of domestic relevance. They are globally enabling. They offer the Global South, in particular, something precious: not a sermon, not an austerity lecture, not a fantasy of degrowth imposed by the already-developed, but a set of practical clues about how to build prosperity on a different energetic basis.

That, in the end, is what is most striking. China has not waited for a perfect future to arrive. It has been assembling it, piece by piece, inside the present. It has done so through factories and grids, via new batteries and platforms, expanding rail and renewables, and developing logistics systems and digital services, through materials science and statecraft. It has done so unevenly, imperfectly, and with contradictions, of course. No real historical process is otherwise. But the direction of travel is unmistakable.

China has been creating the future today: a future less organised around the combustion of ancient sunlight stored in oil, and more around the direct harnessing of contemporary flows from sun, wind and atom; a future in which data, infrastructure and energy form a more efficient web of life; a future in which development is not the privilege of a few core economies but can become more widely shared.

Others do not need to admire China uncritically to learn from this. They simply need the confidence to see what is already there. The future is no longer a distant abstraction. In important respects, it is already under construction. And China, more than any other country, has been showing what that construction looks like.

Introduction

Oil functions as a basic commodity in the Sraffian sense - it enters directly or indirectly into the production of every other commodity. A sharp, sustained increase in its effective cost (via physical scarcity or scarcity rent) therefore propagates through the entire price system and, via demand destruction, through the quantity system. Within a thermoeconomics frame, the economy is understood as an open dissipative structure that maintains order by continuously dissipating high-quality energy (exergy). Oil’s unique combination of high energy density, portability, and historically favourable energy-return-on-energy-invested (EROEI) has allowed complex, energy-intensive supply chains to proliferate. When this flow is disrupted, the system must either reconfigure its technical coefficients, shed low-viability activities, or contract. The following sections formalise this process and explore its differential expression across four heuristic ideal-type economies, with special emphasis on how financial feedbacks can paradoxically entrench legacy structures.

Theoretical Framework

The thermoeconomic approach views production as a transformation of energy and matter governed by the laws of thermodynamics. Economic activity is not merely a circular flow of value but a set of irreversible processes that degrade exergy while generating useful work and structure. Oil, as a concentrated, high-power-density exergy carrier, occupies a privileged position: it enables activities that electricity or other carriers cannot easily replicate at the same scale and cost without substantial capital embodiment.

As discussed in more detail in my Thermoeconomics in a Time of Monsters (Part 1), Piero Sraffa’s Production of Commodities by Means of Commodities supplies the base structural scaffolding. The price system is given by

p = (1 + r)pA + wl,

where (p) is the price vector, (r) the uniform rate of profit, (A) the matrix of production coefficients, (w) the wage (numeraire), and (l) the direct labour vector. An oil shock enters as an exogenous increase in the primary/value-added component of the oil sector (or an effective inflation of the oil row of (A).

The quantity side is simultaneously determined via the Leontief inverse:

x = (I - A)^-1d

where x is gross output and d final demand. Demand destruction appears as threshold reductions in (d_j): at certain price levels, specific activities become thermodynamically and economically unviable (marginal exergy benefit falls below exergy cost), causing abrupt rather than smooth contraction.

Crucially, producers respond to the new relative prices and compressed profit rate by selecting cost-minimising techniques. At each sector (j), the column (a_j) is replaced by an alternative (a_j*) if

p . a_j* + wl_j < p . a_j + wl_j.

This endogenous change in (A) triggers second- and higher-order propagations through both price and quantity systems. The “absorb–swap–kill” taxonomy emerges naturally: margins absorb part of the shock; viable swaps (e.g., electrification) rewrite coefficients; non-viable activities are killed, reducing d and x.

Financial feedbacks introduce a further layer: elevated exchange values (spot prices, export arbitrage, valuations) can redirect capital toward sustaining upstream hydrocarbon activities, even as biophysical use values (net exergy surplus) erode due to declining EROEI. This can delay or dampen technique switching, reinforcing high oil/gas coefficients in A.

Share

The Model and Heuristic Ideal Types

The analysis uses a stylised four-sector closed system (Oil/Gas, Electricity, Transport, Industry) whose baseline A matrices differ markedly across four ideal-type economies. The shock is a large exogenous rise in oil’s primary cost, calibrated to mimic sustained major-supply disruption. Adaptation occurs via partial or full technique switches (primarily electrification of transport and distributed power) once relative prices cross profitability thresholds. Demand destruction is modelled as kinked reductions in final demand once sectoral prices exceed viability thresholds derived from thermodynamic and economic minima.

1. Type 1 – Oil-intensive with limited electrification: High baseline oil/gas coefficients, especially in transport and industry; legacy infrastructure and upstream extraction lock in liquid- and gaseous-fuel dependence.

2. Type 2 – Highly electrified: Low oil/gas coefficients already achieved through widespread electrification of transport and industry; electricity / renewables form a larger share of the matrix.

3. Type 3 – Low-energy-intensity greenfield: Minimal overall energy coefficients; modern, low-exergy-intensity techniques adopted from the outset.

4. Type 4 – Oil-dependent distributed generation: Heavy reliance on diesel generators for electricity (high oil coefficient in the Electricity sector itself); transport also oil-intensive. However, generation is modular and geographically dispersed, lowering the capital barrier to microgrid substitution (solar + storage).

Subscribe now

Cascading Effects Across Ideal Types

Short-term (price percolation and first-round demand destruction)

In all types the oil price surge raises downstream costs in proportion to direct and indirect coefficients. Type 1 experiences the largest absolute and relative price increases in Transport and Industry, pushing marginal activities across viability thresholds and triggering 15–30% contractions in final demand for those sectors. Type 4 sees pronounced effects in Electricity (diesel gensets) and Transport, but the distributed nature limits immediate systemic collapse. Types 2 and 3 exhibit far smaller downstream price movements and correspondingly modest demand destruction.

Medium-term (technique choice and second-round propagation, including financial feedbacks and upstream lock-in)

Rising p_oil/gas / p_elec and compressed r would normally induce technique switches where alternatives exist. However, a key paradox arises, particularly in Type 1 baselines: elevated exchange values from the shock (higher spot prices, LNG export arbitrage opportunities, and associated financial windfalls) can channel capital and policy attention back into upstream hydrocarbon activities. This reinforces or even temporarily expands oil/gas coefficients in A, delaying the profit-rate threshold for switching to electric or other low-exergy-intensity techniques.

In Type 1 economies, this upstream lock-in plays out as follows. High prices generate surplus margins and fictitious capital (credit expansion tied to valuations and export revenues), lowering the immediate hurdle for sustaining or modestly expanding extraction, liquefaction and midstream infrastructure - even in maturing plays with declining EROEI. Capital is preferentially allocated to drilling, LNG terminals and related services rather than to costly electrification retrofits or grid upgrades. Downstream sectors still face viability thresholds and demand destruction (e.g., marginal freight routes or energy-intensive manufacturing become unviable), yet the reinforced upstream matrix partially offsets quantity contraction in x by maintaining intermediate demand for oil/gas services. The net result is maladaptive absorption: short-term stabilisation of certain gross flows at the expense of accumulating system-wide entropy (higher energy intensity required for the same net output). Second-round propagations are thus muted or perverse - new interdependencies within the fossil matrix (e.g., gas-fired backup or LNG infrastructure) crowd out resources for viable swaps, prolonging overall demand destruction and raising the eventual cost of reconfiguration. The divergence between exchange values (monetary signals) and use values (net exergy available for reproduction) becomes pronounced, subsidising a depletion treadmill rather than enabling negentropic reconfiguration. I explore this divergence in the case of the US LNG sector in a separate essay.

Type 2, already near the electric frontier, is far less susceptible to this lock-in dynamic; upstream hydrocarbon nodes are small, so price signals primarily reinforce existing electricity-sector expansion without major disruption. Technique switching remains incremental and positive for system stability.

Type 3, with negligible baseline dependence on hydrocarbons, largely sidesteps upstream feedbacks. Any minor cost increases pass through without triggering significant capital reallocation toward legacy activities, preserving resources for non-energy expansion.

Type 4 benefits from modularity despite initial oil dependence. High prices accelerate the economic case for microgrid substitution (distributed solar + battery storage), as the distributed nature of diesel systems imposes lower retrofit barriers than centralised or large-scale hydrocarbon infrastructure. The Electricity column can be rewritten relatively rapidly, converting the shock into an acceleration of decentralised renewable deployment. Second-round effects here tend to be mildly expansionary: lower long-run energy costs support broader activity rather than entrenching contraction.

Longer-term divergence

The four types diverge structurally. Types 1 and (to a lesser extent) 4 undergo the most visible “creative destruction,” but in Type 1 the process is retarded by upstream lock-in: obsolescence of some downstream activities occurs, yet legacy coefficients persist longer, compressing feasible r and widening the competitiveness gap. Types 2 and 3, already closer to the post-shock optimum, experience less turbulence and gain relative advantage. Leapfrogging is most pronounced in Type 3 (greenfield) and Type 4 (modular distributed), where the absence or modularity of sunk-cost infrastructure allows immediate selection of thermodynamically superior techniques. Overall, the shock can widen global divergence between legacy oil-intensive structures (vulnerable to lock-in) and those able to reconfigure rapidly.

Share

Discussion and Implications

Within the thermoeconomic frame, the oil shock is not merely a price event but a test of the economy’s exergy metabolism. Activities whose marginal EROEI falls below the system’s reproduction threshold are shed; surviving processes must operate at higher overall efficiency. Electrification emerges as the dominant viable swap because it substitutes a versatile, high-exergy carrier (electricity) for a portable but increasingly expensive one (oil), albeit at the cost of new infrastructure that itself embodies past energy.

The heuristic ideal types, particularly the detailed dynamics in Type 1, demonstrate that baseline technical structure and financial feedbacks determine both the severity of demand destruction and the speed of adaptation. Where electrification infrastructure is already embedded or can be added modularly (Types 2, 3, 4), the shock catalyses transition rather than paralysis. Where legacy coefficients are deeply entrenched and reinforced by upstream windfalls (Type 1), short-term contraction may be accompanied by delayed adaptation, prolonging dissipative losses. Second- and higher-order propagations - new inter-industry linkages, shifts in profit-rate viability, changes in final-demand composition and capital misallocation - amplify these differences, producing path-dependent structural divergence.

From a policy and investment perspective, the framework underscores the value of maintaining optionality in technique choice and mitigating lock-in mechanisms (e.g., through targeted incentives for swaps that realign exchange and use values). Economies that preserve flexibility in their production matrices (modular generation, scalable storage and adaptable transport) are thermodynamically and economically more resilient to basic-commodity shocks. The analysis also highlights why sustained high oil and gas prices may not deliver uniform acceleration of transition - they can subsidise entropy in vulnerable baselines while rewarding reconfiguration elsewhere.

By integrating Sraffa’s structural price–quantity system with a thermoeconomics understanding of the economy as a dissipative structure, and by explicitly accounting for financial feedbacks that can entrench upstream lock-in, this essay offers a rigorous yet accessible lens for tracing the full cascade of an oil shock. The four heuristic ideal types illustrate that the same exogenous disturbance produces markedly different outcomes depending on initial technical coefficients, the feasibility of profit-rate-guided substitution, and the interaction between price signals and capital allocation. The ultimate implication is unmistakable: in a world of recurrent basic-commodity stress, structural preparedness - measured by the flexibility of nested supply chains, the exergy efficiency of available techniques, and the alignment of exchange and use values - determines not only short-term resilience but long-term competitive position. This conceptual scaffold equips analysts and decision-makers to discuss the possible implications of major energy shocks in terms that respect both economic interdependence and thermodynamic reality.

Building on the systemic analysis in my previous discussion of graphene’s industrial transformation, an intriguing downstream implication emerges in the realm of energy conduction. Graphene’s superior electrical conductivity - up to 100 MS/m compared to copper’s 58 MS/m - positions it as a potential substitute in wiring, cables, and interconnects. While my 2024 co-authored paper focused on graphene’s tactile sensing capabilities, its conductive prowess could reshape material hierarchies in power transmission, electronics, and electrification. This essay explores the flow-on effects on the copper market, emphasising the 10-20 year horizon (2036-2046). Drawing from Sraffa’s supply chain framework, I examine how graphene’s integration as an input could cascade through interdependent sectors, potentially leading to divergent outcomes: accelerated efficiency gains in high-adoption scenarios versus sustained copper dominance if scaling barriers persist.

The Copper Market: Current State and Near-Term Projections

Copper has long been the backbone of electrical conduction, accounting for about 60% of global usage in wires, cables, and electronics. In 2025, refined copper demand stood at approximately 25-27 million metric tons (Mt), driven by traditional sectors like construction and consumer goods. However, the energy transition - encompassing electric vehicles (EVs), renewables, AI data centres and grid infrastructure - has supercharged growth. Projections indicate demand surging to 42 Mt by 2040 and potentially 49-53 Mt by 2050, a near-doubling from current levels. This represents a compound annual growth rate (CAGR) of 2.2-3.1% through 2035, with energy transition sectors contributing 20% of demand by then, up from 10% today.

Supply constraints exacerbate this trajectory. Global production is expected to peak at 33 Mt around 2030 before plateauing or declining due to aging mines, declining ore grades (down 40% since 1990), and extended development timelines (now averaging 16 years). Recycling will double to 10 Mt by 2040, but deficits could reach 10 Mt annually by then, creating a 24% supply gap. Prices have already hit records in 2025, with forecasts for $10,000-12,500 per ton in 2026, potentially climbing to US$15,000 by 2035. In the next five years, copper remains bullish, fuelled by an “electrification super-cycle” that graphene itself may initially accelerate by enabling more efficient systems.

Yet, this demand surge sets the stage for substitution pressures. Traditional alternatives like aluminum (already twice as conductive as copper by weight in transmission lines) have capped copper’s dominance, with substitution thresholds kicking in when copper prices exceed 3.5-4 times aluminum’s. Graphene introduces a more disruptive vector, particularly in high-performance applications where conductivity, weight, and thermal management are paramount.

Graphene’s Advantages in Energy Conduction

Graphene’s properties outstrip copper’s: it offers 70% higher conductivity (up to 100 MS/m), 200 times the strength, and superior thermal dissipation (5,300 W/m·K vs. copper’s 400 W/m·K). By weight, graphene is 5.8 times more conductive, making it ideal for lightweight applications in EVs, aerospace, and power grids. Innovations like graphene-copper composites enhance copper’s performance: adding trace graphene (18 parts per million) reduces resistance by 11% without compromising conductivity, enabling 1% efficiency gains in EV motors. More advanced composites achieve 41% higher conductivity and 450% greater current-carrying capacity.

Aluminum-graphene (Al-Gr) hybrids pose an even greater threat, combining aluminum’s cost and weight advantages with graphene’s conductivity boost. These could displace copper in power lines, building wiring, and automotive components, offering massive efficiency and material savings. Production advancements, such as flash Joule heating, have made graphene more scalable, with costs dropping and green methods reducing environmental impacts. While current applications are niche (e.g., IC interconnects below 20 nm), broader adoption in conductors is projected as costs fall below copper’s in high-volume scenarios.

Share

Substitution Timelines and Market Impacts

In the next 5-10 years (to 2036), graphene’s impact on copper will be limited. Scalability remains a hurdle: graphene production is still in tons, not the millions needed for global wiring. Copper demand will peak amid electrification, with deficits driving prices higher and incentivising recycling and minor substitutions (e.g., aluminum in grids). Hybrids like ultraconductive copper-graphene may even bolster copper usage initially, extending its role in motors and transmission.

The 10-20 year horizon (2036-2046) marks a potential inflection. As graphene matures down the cost curve, annual demand destruction for copper could exceed EV market growth. Projections suggest graphene could capture 15-30% of copper’s conductive market share by 2040, particularly in EVs (lighter wiring reduces battery needs) and grids (higher efficiency cuts losses). This substitution could shave 2-5 Mt off annual copper demand by 2045, turning structural deficits into surpluses in optimistic scenarios.

Impacts include:

• Cost and Price Dynamics: Copper prices may peak in the 2030s ($15,000/ton) before declining 20-30% as substitutes proliferate, easing mining investments but hurting producers;

• Efficiency and Speed: Graphene enables faster transmission (higher electron mobility) and lighter systems (50% weight reduction), boosting EV range by 10-15% and grid efficiency by 5-10%;

• Environmental Effects: Lower material use reduces mining footprints (copper extraction is water-intensive), but graphene production must scale sustainably to avoid new bottlenecks; and

• Supply Chain Shifts: China, dominating both copper refining (47% by 2030) and graphene patents, could leverage this for geopolitical advantage. Mining nations like Chile and Peru face revenue drops, prompting diversification.

Sraffa-Inspired Systemic Cascades and Divergent Paths

Through Sraffa’s lens, graphene acts as a transformative input, altering technical coefficients across chains. In electronics, reduced copper needs lower input costs, cascading to cheaper EVs and renewables, amplifying output in transport (GDP +1-2% via multipliers). Divergences arise: In a “fast-adoption” path (graphene scales by 2035 via policies like China’s innovation centers), copper faces obsolescence, with mining countries suffering economic shocks (e.g., 10-20% GDP hit in Chile). A “slow-adoption” scenario (barriers like regulation delay to 2045) sustains copper bulls, but risks energy transition stalls due to shortages.

Geopolitically, this could fragment chains: Western reshoring vs. China’s dominance. Environmentally, it aids decarbonisation but risks “reswitching” to dirtier alternatives if graphene falters. Socially, job shifts from mining to advanced manufacturing could widen inequalities.

Conclusion

Graphene’s conductive applications herald a paradigm shift for copper, transitioning from short-term symbiosis to long-term rivalry. By 2036-2046, substitutions could erode copper’s market, capping prices and reshaping chains, with Sraffian cascades driving efficiency or disruption. Policymakers must foster hybrid innovations and recycling to balance these flows, ensuring the energy transition’s resilience.

In the escalating arena of geopolitical resource competition, tungsten has become a stark emblem of Western vulnerability. Once a niche metal valued for its unmatched hardness and heat resistance, tungsten now commands record prices amid severe shortages, with Western manufacturers - particularly in civilian sectors - bearing the brunt. As of early 2026, prices for key intermediates like ammonium paratungstate (APT) have surged over 200%, hitting $1,350 per metric ton unit in Europe. This isn’t mere market fluctuation; it’s in part the result of China’s export controls, which have slashed global supplies by up to 40% while prioritising domestic industries. Western defence sectors and a number of civilian applications, accounting for over 60% of global demand, are reeling from higher costs, extended lead times, and production bottlenecks. More alarmingly, for the west, there is a dawning realisation that the American “war machine runs on Tungsten,” as recently put by Foreign Policy magazine.

Drawing on Piero Sraffa’s framework in Production of Commodities by Means of Commodities, this crisis underscores the intricate interdependencies of modern economies. Sraffa posited that prices and outputs emerge from a web of production inputs, where disruptions in foundational commodities ripple system-wide, altering the entire structure. Tungsten, as a “basic” input entering nearly all industrial processes, exemplifies this: shortages don’t isolate; they propagate constraints, inflating costs across sectors and triggering a reverse “Dutch Disease” effect. Here, resource scarcity forces reallocations that crowd out non-essential activities, leading to congestion, inflationary cascades and long-term deindustrialisation.

The West’s predicament is acute - insufficient time and resources to diversify supply without exacerbating these dynamics. At the core lies a vicious cycle: shortages drive price surges as defence outbids civilians, only to inflate exploration costs and hamper the very alternatives needed to escape the trap. Compounding this, policy responses themselves act as a “sink,” drawing scarce manpower, equipment, and capital away from other critical minerals, propagating Dutch Disease feedbacks system-wide. This essay examines tungsten’s civilian downstream impacts, focuses on how shortages elevate costs in manufacturing and mining exploration, dissects this self-perpetuating loop, explores the policy sink’s broader implications, and maps the ensuing Dutch Disease effects.

The Tungsten Crisis Unfolded

China dominates tungsten production, controlling 80-83% of global mine output and over 90% of processing. In 2025, mining quotas were slashed by 6.5%, declining ore grades raised extraction costs, and export licenses for “dual-use” items like APT and carbide powders were tightly rationed. Exports plummeted 40% year-on-year, funnelling supply inward to meet China’s surging demand from semiconductors, EVs, and precision tools - now absorbing 35,000-40,000 tonnes annually. Global demand is poised to exceed 95,000-130,000 metric tons in 2026, with deficits of 16-19% projected.

Western buyers face premiums of 30-100% and frequent unavailability, with lead times stretching months. This asymmetry allows China to capture economic rents while forcing the West into scramble mode. New mines outside China, like Kazakhstan’s Bakuta or Canada’s Mactung, are delayed until 2026 or later, offering scant relief. Recycling covers only 5-20% of needs, and substitutes like molybdenum are often inferior.

Civilian Downstream Activities at Risk

While defence applications - munitions, aerospace components - consume about 10,000-11,000 tonnes in the U.S. alone, civilian sectors dominate, using tungsten in forms like carbide for tools and alloys for high-performance parts. Over 60% of demand stems from EVs, renewable energy, and precision manufacturing, with growth rates of 5-10% annually. Shortages are inflating costs by 20-50% in these areas, leading to delays and reduced outputs. Consider the following:

• Manufacturing and Machining Tools: Cemented carbide tools - drills, mills, blades - account for 50-60% of tungsten use. Price spikes have doubled costs from $340 to mid-$600 per MTU, forcing manufacturers to pass on 20-50% hikes. In automotive and electronics assembly, this delays lines by 10-20%, raising vehicle and device prices by 5-15%. Small enterprises, without stockpiles, risk shutdowns, contributing 1-2% to inflation in goods.

• Electronics and Semiconductors: Tungsten’s role in interconnects and sputtering targets is critical. Shortages extend fab tool replacement by 30-50%, inflating operational costs and potentially hiking consumer electronics prices by 5-15%. R&D in solid-state batteries faces 6-12 month delays.

• Renewable Energy: Solar production relies on tungsten for wire saws and components; costs up 10-20% could cut 2026 installations by 5-10%, hindering energy transitions and raising electricity rates.

• Agriculture and Medical: Farm machinery wear parts see 10-15% cost rises, pressuring food prices. Medical devices like X-ray tubes face similar hikes, increasing healthcare expenses by 5-10%.

All of this is causing consternation in the American political ecosystem.

Feeding Back into Mining Exploration and Manufacturing Costs: The Vicious Cycle Emerges

The shortage’s self-reinforcing nature is evident in mining and manufacturing feedback loops, creating a vicious cycle that entrenches dependency. Mining consumes 30-31% of tungsten for carbide drill bits, crushers, and excavation tools. With tool costs doubling, exploration expenses rise 20-30%, slowing new projects for commodities like copper and gold. This perpetuates broader mineral deficits, as delayed mines mean less supply of inputs for other industries. In oil and gas, higher drilling costs could add $0.05-0.10 per gallon to fuel.

This cycle begins with the initial shortage and price surge, driven by China’s quotas and environmental curbs, with ore grades as low as 0.28% inflating extraction costs. Global demand surges 5-10% annually from EVs, semiconductors, and defence, but with exports squeezed, Western prices hit $1,350 per MTU, up 200% from early 2025. Defence contractors, backed by vast budgets, outbid civilians, paying 30-100% premiums under initiatives like the U.S. Defence Production Act to secure stockpiles for munitions and aerospace. This crowds out sectors like tools and renewables, extending lead times to 6-12 months and forcing production cuts or inferior substitutes.

Critically, these inflated prices feed back into exploration costs, sabotaging long-term alternatives. Tungsten comprises up to 75% of drillbit costs in mining; with prices at 210% annual peaks, exploration ROI plummets, deterring investments in new tungsten mines or recycling facilities. Projects like Canada’s Mactung or Kazakhstan’s Bakuta, already on 3-5 year timelines, face further delays amid broader mining inflation of 6.25% for operations. Supply growth lags at 2.5% CAGR versus 7-8% demand, locking in deficits. Defence’s short-term hoarding thus undermines resilience, perpetuating the cycle: shortages beget outbidding, which sustains high prices, inflating development costs and delaying escapes.

In manufacturing, elevated tool costs cascade similarly: An EV factory’s machining expenses rise, delaying output and inflating prices, which ripple to logistics and consumer goods. Environmental regulations and energy costs amplify extraction hurdles, pushing per-ton costs over 100,000 yuan in China.

Share

The Policy Sink: Drawing Resources and Propagating Dutch Disease Across Critical Minerals

Policy responses, while well-intentioned, often exacerbate the bind by acting as a “sink” that draws finite resources - manpower, equipment, capital, and time - away from other critical minerals, creating feedback loops akin to Dutch Disease across the broader ecosystem. Initiatives like the U.S. Defence Production Act invocations, $12 billion stockpiles (e.g., Project Vault), and tariffs on Chinese tungsten aim to secure supply but inadvertently pull expertise and funding from REEs, copper, lithium, and others. The EU’s Critical Raw Materials Act and similar frameworks face parallel issues, stretching thin across multiple minerals.

Manpower shortages are acute: The mining sector anticipates over 221,000 retirements by 2029, with mining-related degrees down 40% since 2016, shrinking the talent pipeline for engineers, geologists, and specialists. Prioritising tungsten diverts skilled workers from copper or lithium projects, where demand surges 30-500% by 2040 but supply lags due to labor gaps. Equipment constraints compound this: Supply chain vulnerabilities and inflation (6.25% in operations) mean tools and machinery for tungsten exploration are bid up, leaving less for other minerals. Time lags - 3-7 years for permitting and development - ensure that focusing on one mineral delays others, as regulatory bandwidth is finite.

Throwing money at tungsten - via subsidies or stockpiles - propagates problems: It inflates non-tradable sectors (e.g., services), appreciates real exchange rates, and crowds out investment in non-priority minerals, mirroring Dutch Disease in resource-scarce contexts. For instance, U.S. efforts to quadruple missile production divert resources from EV battery minerals, risking deficits in lithium (22,000-80,000 tonnes) or copper (330,000 tonnes in 2026). This zero-sum dynamic underscores that the West can’t “do it all, all at once.” Policy sinks create systemic congestion, where gains in one area amplify vulnerabilities elsewhere.

Subscribe now

A Sraffa-Inspired Lens: Interdependencies and Propagation

Sraffa’s model views the economy as a circular system where basics like tungsten underpin a large proportion of production. A shortage alters technical coefficients, reshaping prices and outputs. Tungsten deficits hike tool costs, which feed into manufacturing, then consumer prices - a chain where unresolved constraints reduce viability across nodes. This isn’t equilibrium adjustment; it’s persistent disequilibrium, with outputs contracting and distribution skewed toward resource holders.

The vicious cycle and policy sink exemplify Sraffian propagation: Defence outbidding and targeted subsidies distort the price vector, embedding higher costs system-wide. Mining cost increases slow commodity supply, raising inputs for electronics, which delays renewables, inflating energy costs back to manufacturing. Western economies, reliant on imports, face amplified effects, with no quick fixes due to 3-7 year lags in new facilities. Meanwhile, the rest of the world isn’t sitting idly by.

Share

The Twin Crunches: Time and Resource Insufficiency

Diversification demands billions - U.S. initiatives like stockpile programs cost $12 billion - but stretch thin across sectors. Time is the bind: new capacity won’t scale until 2027-2030, leaving years of deficits. This congestion bids up scarce resources, cascading costs to non-essentials like consumer durables, while the cycle’s feedback - defence priorities inflating exploration - further delays alternatives. The policy sink amplifies this, as investments in tungsten exacerbate manpower and equipment shortages in parallel mineral efforts.

Classic Dutch Disease sees resource booms appreciating currencies and crowding out tradables. Here, shortages invert it: “reverse Dutch Disease,” where constraints reallocate resources, inflating non-essentials while deindustrialising. The vicious cycle and policy sink supercharge this.

1. Resource Movement Effect: Capital and labour shift to priority areas (e.g., defence tools and tungsten mining), starving civilian manufacturing and other minerals. Tool shortages contract tradable by 10-20%, reducing outputs in autos and electronics. Defence outbidding and policy sinks accelerate this, hoarding supplies and perpetuating civilian squeezes.

2. Spending Effect: Government subsidies for alternatives inflate non-tradables (services), appreciating real exchange rates and eroding competitiveness. SMEs shutter, widening inequality, as cycle-driven costs and policy sinks compound.

3. Propagation to Non-Essentials: Mining cost hikes raise commodity prices, feeding into logistics and food - agriculture up 10-15% - creating consumer inflation. The feedback loop and policy sink ensure these cascades persist, as hampered exploration delays relief across minerals. This is all the more acute as fertiliser costs rise, as a result of the war against Iran.

4. Long-Term Deindustrialisation: Foregone productivity in manufacturing slows growth 0.5-1% annually, widening trade deficits. The cycle’s entrenchment and policy sinks risk a decade of Chinese dominance.

5. Vicious Cycle Reinforcement: Shortages beget outbidding and higher costs, demanding more resources, deepening deficits and strategic vulnerabilities. Policy sinks propagate this, as tungsten focus starves other minerals, fuelling inequality, rent-seeking, and potential conflict.

Breaking the Trap? Western Policy Imperatives

To escape, the conventional response from the West is to disrupt the cycle and mitigate policy sinks. Thus, we see subsidised exploration via grants under acts like the U.S. Critical Minerals Policy to offset inflated costs. The challenge is to do this while, at the same time, allocating support holistically across minerals to avoid zero-sum trade-offs. The west speaks of accelerating processing through partnerships, imposing tariffs to nurture industries, and mandating recycling / R&D. Alliances like the Minerals Security Partnership ostensibly aim to diversify sources, while workforce programs address talent gaps through education incentives.

The problem is multifold, and multidimensional. Reacting to perceived challenges in one or a set of materials is likely to catalyse shortages and bottlenecks elsewhere. When this happens, the result is a “whack a mole” approach that accelerates production system unravelling and constraints propagated across more supply chains. The problems emerged as a result of a half-century’s shift in economic focus to the development of hyper-financialisation. They aren’t resolved through more of the same.

In March 2026, Iranian strikes on Qatar’s Ras Laffan and Mesaieed facilities triggered force majeure, halting roughly 17% of global LNG capacity for an estimated 3–5 years. The immediate beneficiary is obviously American liquefied natural gas exporters. U.S. terminals redirected flexible cargoes to premium European and Asian markets, driving spot prices higher and delivering windfall revenues to operators such as Cheniere, ExxonMobil and Venture Global. Yet this financial boon, measured in exchange-value terms - stock prices, export earnings, and GDP contributions - masks a deeper biophysical reality: the secular decline in Energy Return on Energy Invested (EROEI) across U.S. shale gas plays that underpin LNG. As reserves deplete and production shifts to lower-quality rock, the “stock” of gas can sustain gross flows into the early 2030s, but net-energy surplus erodes. By around 2035, many analysts project EROEI thresholds that render continued large-scale extraction energetically marginal.

This paradox is not an anomaly; it is a textbook illustration of the divergence between exchange values (monetary claims and market prices) and use values (energetic and material capacities that sustain metabolic reproduction). As developed in my book Thermoeconomics in a Time of Monsters: Rethinking Theory, China and International Geopolitical Economy (available now on Amazon), economies are fundamentally energetic systems engaged in a perpetual struggle against entropy. Systemic Exchange Value (SEV) integrates three circuits: the material-energetic loop (use values), the monetary-financial loop (exchange-value claims), and the informational loop (coordination that reduces waste). When these circuits decouple, fictitious capital inflates claims on future energy far beyond real biophysical capacity. The U.S. shale-LNG episode demonstrates precisely this misalignment: short-term exchange-value gains accelerate entropy by raising downstream costs across global supply chains while deferring investment in higher-EROEI alternatives.

The contrast with China’s energy model sharpens the point. While the U.S. financialised hydrocarbon system chases marginal shale gains amid the Iran-induced disruptions, China’s coordinated, supply-chain-coherent approach - centred on rapid electrification and the strategic ramp-up of green hydrogen, amongst other things, under the 15th Five-Year Plan (2026–2030) - positions it structurally to weather (and even leverage) global oil and gas shocks. This is reflects a thermoeconomic alignment of circuits that augments use-value surplus and energy sovereignty. As I argued in “When Hydrogen Gets Cheap” (27 September 2025), the arrival of cheap green hydrogen marks an abundance shock that accelerates decarbonisation, redistributes industrial power and detaches economies from volatile fossil markets; this is precisely the trajectory China is engineering.

The Qatari Shock and the Exchange-Value Boom

Qatar had been one of the world’s top three LNG exporters, supplying roughly 20% of traded volumes alongside the United States and Australia. The Iranian attacks - in response to US-Israeli attacks - damaged key liquefaction trains, erasing the anticipated 2026 global surplus and tightening markets. European TTF prices and Asian JKM benchmarks spiked; U.S. exporters, unbound by destination-specific contracts, captured the arbitrage. Capacity expansions already underway (Plaquemines, Golden Pass, and others) accelerated, with U.S. LNG exports projected to approach 28–35 Bcf/d by 2029–2031.

Financial metrics tell a compelling story. Higher netback prices improved margins on spot and short-term cargoes, reduced cancellation risks, and lifted valuations for midstream and upstream players. Wall Street analysts projected multi-year revenue tailwinds, reinforcing America’s self-image as the “swing supplier” of global energy security. In SEV terms, this is pure exchange-value expansion: endogenous credit and futures markets mobilised capital to drill more wells and build more terminals, generating paper claims on future production. Yet the underlying use-value foundation - net energy delivered after subtracting extraction, processing and liquefaction energy costs - continued its long-term erosion.

Share

EROEI Decline and the Depletion Treadmill

Natural gas EROEI has declined historically as conventional reservoirs gave way to unconventional shale. Early 20th-century conventional gas yielded returns exceeding 100:1; by the 2010s, U.S. shale plays operated closer to 10–15:1 at the wellhead, with full LNG-chain figures (including liquefaction’s 8–12% energy penalty) even lower. Recent field-level data confirm the trend. Shale gas, now ~79% of U.S. dry gas output, exhibits steep decline curves: horizontal wells lose 60–80% of output in the first 1–3 years. Sweet spots in the Marcellus, Utica, Haynesville and Permian-associated plays are maturing rapidly; estimated ultimate recoveries (EURs) per well have fallen 17–31% in newer versus legacy developments.

U.S. dry gas production reached a record ~118.5 Bcf/d in 2025, but non-associated shale plays posted their first annual decline since tracking began. The Energy Information Administration (EIA) forecasts modest growth or plateau into the early 2030s, driven by LNG export pull, before potential inflection. Independent assessments that adjust for overstated reserves and hyperbolic decline curves are more pessimistic. By the mid-2030s, Tier 1 inventory exhaustion will force operators into lower-quality rock, requiring greater energy and capital inputs per unit of output. Analyses suggest marginal supply costs will rise sharply post-2035, pushing effective EROEI below societally “acceptable” thresholds (often cited around 5–10:1 net, where surpluses become too thin to support complex industrial metabolism without massive subsidies).

This is not “running out” of gas in volumetric terms. Proved reserves hover near 600 Tcf, with technically recoverable resources in the thousands of Tcf. The stock - existing wells, infrastructure and price incentives - can sustain flows for years. Yet the quality of that stock deteriorates. More energy is diverted upstream (fracking fluids, longer laterals, sand and water treatment) and downstream (liquefaction and marine transport), shrinking the net surplus available for power generation, manufacturing and export. In thermoeconomic language, this is entropy accumulation: the system expends ever-greater effort merely to maintain gross output while net available energy in potential (AEP) contracts.

Thermoeconomic Analysis: The Misalignment of Exchange and Use Values

Classical political economy distinguished use value (utility derived from a good’s material properties) from exchange value (its market price). Thermoeconomics reframes this biophysical: use values are energetic and material forms that enable societal reproduction - heat, motive power and chemical feedstocks - while exchange values are monetary claims that allocate those flows. SEV reveals how these circuits interact. High-EROEI systems produce abundant, cheap use values that support low prices; declining EROEI systems generate scarcity that inflates exchange values, even as real energetic return falls.

The U.S. shale-LNG case exemplifies divergence. Elevated global prices - driven by the Qatari outage - boost exchange-value metrics: revenues, share prices and export earnings. Financial markets treat LNG as a high-margin growth story. Yet the biophysical ledger shows rising energy intensity. More rigs, more diesel for drilling, more electricity for compression and more gas consumed in liquefaction; these all reduce net use value delivered to end-users. This gap widens via fictitious capital: futures contracts, leveraged infrastructure financing and ESG-tinted investment vehicles create claims on future energy far exceeding probable net output. As I argue in Thermoeconomics in a Time of Monsters, such decoupling is not market failure but an endogenous feature of mature, financialised hydrocarbon systems. Price signals that appear to reward efficiency actually subsidise entropy by incentivising marginal drilling rather than systemic redesign. This is also the basis of my argument that price caps are an insufficient - and potentially a wrong-headed response - to rising fuel costs.

Subscribe now

Rippling Costs Across Domestic and Global Supply Chains

The exchange-value boom does not remain contained. Higher wellhead and LNG prices transmit upstream and downstream. Domestically, U.S. industrial users - chemicals, fertilisers, glass and steel - face elevated feedstock costs. This flows through to downstream users. Power generators, already competing with renewables, see gas-fired margins squeezed or passed through in wholesale electricity prices. Households confront higher heating and electricity bills, compressing real wages and consumption. These cost ripples amplify inflation in energy-sensitive sectors, eroding competitiveness. The income for one is, after all, the cost for another.

Globally, the effect is amplified. Europe, desperate to replace Russian pipeline gas, locks in long-term U.S. LNG contracts at premium prices, embedding higher energy costs into manufacturing and transport. Asian importers (Japan, South Korea and China) divert cargoes, tightening regional balances and raising petrochemical and power costs. Supply-chain fragmentation follows. Just-in-time models that assumed cheap, abundant energy become fragile. The very flexibility that benefits U.S. exporters imposes volatility elsewhere, catalysing secondary effects - deindustrialization pressures in Europe, accelerated debates in Asia about reshoring and energetic structural change, and heightened geopolitical tensions over energy corridors.

In SEV terms, this is informational and energetic waste. Markets generate “noise” (speculative trading and hedging instruments) that consumes resources without augmenting use-value coherence. The result is higher systemic entropy, slower metabolic reproduction and reduced resilience. What’s good for the LNG sector isn’t necessary good for anyone else in the U.S. or elsewhere.

Share

Deferral of Higher-EROEI Alternatives

Perhaps the most counter-productive outcome is temporal: the financial success of shale-LNG defers the expansion of alternatives with superior long-term EROEI profiles. Renewables (solar and wind) plus storage and electrification already demonstrate rising EROEI trajectories in manufacturing and grid integration, especially when designed with supply-chain coherence (as in China’s model of deliberate industrial policy). Nuclear, geothermal, and advanced biofuels offer high-density, low-entropy pathways. Yet elevated gas prices and revenues create lock-in: capital flows preferentially to proven LNG infrastructure rather than the notionally riskier, longer-payback transition technologies. Policy distortions compound the effect; subsidies, permitting fast-tracks, and national-security framing prioritise hydrocarbons in the west.

As detailed in my analysis, mature energy systems exhibit institutional and political inertia. Fictitious capital in real estate and finance threatened contagion in 2008; today, shale-LNG plays an analogous role, sustaining GDP optics while widening the gap between monetary claims and biophysical reality. The U.S. financialised model thus traps itself in a declining-EROEI loop, contrasting with systems that prioritise energetic augmentation through electrification and circular supply chains. The Qatar-induced LNG boom buys political and economic breathing room in certain respects, yet at the cost of accelerating the very entropy it seeks to outrun. Inflation’s effects are uneven, and those benefiting from rapidly rising prices do so at the expense of those being forced for pay these prices.

Subscribe now

China’s Thermoeconomic Advantage: Electrification, Green Hydrogen and Disruption Resilience

Where the U.S. model reveals entropy accumulation through fictitious capital and declining net-energy returns, China’s approach demonstrates negentropic coherence. The 15th Five-Year Plan (2026–2030), adopted in early 2026, elevates green hydrogen to a “core new industry lever” and “future industry with national growth potential”. It is one of the 109 major engineering projects alongside new-type batteries, nuclear fusion and embodied AI. It explicitly targets industrial-scale breakthroughs: scaling renewable-powered electrolysis equipment, accelerating safe large-scale storage and transport, optimising hydrogen infrastructure layouts, and extending the value chain into green ammonia, methanol and sustainable aviation fuels. Applications are prioritised in transportation (hydrogen refuelling stations alongside battery swapping), power generation and hard-to-abate industry. The plan envisions ~100 zero-carbon industrial parks and 10,000 km of zero-carbon transport corridors, where direct clean electricity and green hydrogen supply decarbonised manufacturing clusters. Regional self-sufficiency in renewable and low-carbon hydrogen is a stated goal, treating green fuels as an explicit energy-security hedge amid global disruptions.

This builds on, and accelerates, China’s prior decade of electrification. EVs now dominate new vehicle sales; smart grids and flexible loads integrate electricity with data and industrial operations; and a “new-type energy system” prioritises system-level coherence over siloed fuels. Non-fossil energy is targeted to reach 25% of total consumption by 2030, with massive west-to-east clean-power transmission (420 GW capacity), offshore wind (>100 GW), and nuclear expansion. Renewables already deliver higher EROEI trajectories (solar 10–30:1, onshore wind up to 50:1) than maturing shale, and once installed, they require no ongoing fuel imports, shrinking exposure to chokepoints like the Strait of Hormuz.

The Iran conflict (and associated Qatari LNG outage) tests, and validates, this model in real time. China imports significant oil and LNG via the Strait, yet it is structurally far better placed than Europe, Japan or South Korea, as I argued last June and more recently here. Domestic coal provides a buffer; pipeline imports from Russia (Power of Siberia and expansions) offer overland alternatives insulated from maritime risks; stockpiles built over the past year cushion short-term shocks. Crucially, electrification has slowed oil-demand growth, while domestic gas production has surged >150% since 2010. China’s consumption of diesel peaked in 2024. Analysts note that prolonged LNG tightness could even benefit China relative to regional rivals, as its diversified portfolio (renewables + pipelines + coal) and green-fuel push reduce long-term vulnerability. Green hydrogen is framed explicitly as a security tool. It is not a climate add-on, but a hedge against fossil volatility.

In SEV terms, China’s strategy aligns the three circuits. Use values expand via higher-EROEI renewables and green hydrogen (as detailed in “When Hydrogen Gets Cheap”: cheap H2 triggers an abundance shock, enabling distributed industrial decarbonisation and negentropic surplus). Exchange values are subordinated to biophysical planning - state coordination minimises informational waste (speculative arbitrage and hedging noise) and channels fictitious capital into real infrastructure rather than marginal shale drilling. The result is enhanced energy sovereignty, reduced entropy, and resilience that turns global disruptions into strategic opportunity. As the war against Iran squeezes fossil markets, China doubles down on the very transition that augments net-energy surplus and detaches growth from import dependence.

Toward Thermoeconomic Realism

The U.S. LNG “boon” buys time in a declining-EROEI treadmill: exchange-value metrics glow while use-value quality erodes, rippling costs domestically and globally, and locking in low-surplus infrastructure. China, by contrast, leverages the same disruptions to accelerate a higher-EROEI pathway. Electrification plus green hydrogen (per the 15th FYP and my analysis in “When Hydrogen Gets Cheap”) creates self-reinforcing coherence. Cheaper renewables lower electrolysis costs, enabling cheap hydrogen that further displaces oil/gas in industry and transport. This is thermoeconomic realism where monetary claims track energetic reality rather than diverging from it. The outcome is not just lower emissions but greater systemic resilience, industrial competitiveness and geopolitical leverage.

The U.S. shale-LNG largesse amid Qatari disruption is real in exchange-value terms. Yet thermoeconomics demands we interrogate the use-value ledger. Declining EROEI by 2035 in shale-LNG renders net returns unacceptable without ever-greater subsidies. China’s model - electrification and green-hydrogen ramp-up under the 15th FYP - offers the counter-example: coordinated alignment that turns shocks into surplus. As I concluded in “When Hydrogen Gets Cheap,” abundance arrives not through more drilling but through cheaper, higher-quality energy vectors. The monsters of our interregnum are thermodynamic. Only by prioritising use-value coherence over exchange-value arbitrage can societies sustain metabolic reproduction. The shale-LNG episode does not refute transition; paired with China’s trajectory, it reveals its urgency and feasibility. Gross flows may persist in the U.S., but net-energy quality - and strategic foresight - will ultimately govern what civilisations endure.