JACKSON HEWETT: Why does US President Donald Trump feel safe breaking global trade?

On Thursday, US President Donald Trump will pull America back from its role as the world’s policeman and a vital part of world’s free trade.

Most blame the switch on the personality of Trump but US private equity firm Carlyle says the new US role reflects a dramatic change in the American economy. It was economic self-interest that led the US to create a global trading order to ensure energy security. Now they have it, Mr Trump is set to topple 70 years economic stability.

In 2022 the US switched from a net oil importer to an exporter of oil and petroleum products.

That dramatic turnaround means the US no longer needs to shoulder the security costs of keeping trade routes open for the world’s top two traded commodities – crude oil and natural gas.

That has huge implications for Australia because we are almost wholly reliant on imports of oil, taking in $35 billion worth petroleum from Asia each year. Australia is third largest importer in the world, according to the Observatory of Economic Complexity and if the US withdraws from the region we will have no one to protect our supply chain.

That position was laid bare in the infamous Signal chat between Vice President JD Vance and other top US officials just last week prior to bombing Houthis militants in response to attacks on cargo vessels passing through the Red Sea and into the Suez Canal and on to Europe.

“3 percent of US trade runs through the suez (sic). 40 percent of European trade does,” Vance wrote in the Signal chat. “I just hate bailing Europe out again.”

America already can see it has a competitive advantage over Europe with its energy mix and clearly sees little value in defending energy supply lines to the continent.

New joule order

Carlyle suggests this is the start of a new joule order, one dominated by the need to ensure a diversified mix of energy sources so nations can “insulate themselves from geopolitical, macro and financial risks”.

According to the research note, the global trading system has been dominated by securing energy.

In the 1930s, that led US President Franklin Roosevelt to promote Middle Eastern oil that didn’t fully come to prominence until the 1960s.

In the decades following, America’s need for secure supply lines of oil helped shore up the global trading and monetary system known as Bretton Woods.

“If the dollar was the heart of Bretton Woods and the US Navy its muscle, then oil was the lifeblood flowing through its veins,” Carlyle’s chief strategy officer of energy pathways Jim Currie argues. Previously Mr Currie was global head of commodities research at Goldman Sachs, with 30 years of experience covering energy’s ups and downs.

“Bretton Woods defined the oil age, and Bretton Woods was made possible by oil. This made the world richer, but also more dependent on the United States.

“By shouldering the burden of global security, the United States enabled its allies — and eventually Russia and China — to structure their economies around a stable and predictable oil trade.”

Energy security a global policy

The quest for energy security has played out for centuries.

As Mr Currie notes, Japan’s attack on Pearl Harbour was partly a response to US energy dominance, France and Germany fought over coal fields in Alsace for 70 years until the formation of the European Coal and Steel Community, which laid the foundation for the EU; France turned to nuclear after it lost access to Algeria’s oil and gas, and the US liberation of Kuwait was to protect supply from that country and Saudi Arabia.

China has been rapidly attempting to wean itself off oil for decades, aware of its vulnerability in seaborne trade with the Middle East.

That is why the country has made such a massive investment in solar panels and electric vehicles, in the process sending the price of renewables through the floor. Europe has been a key buyer, now acutely aware of the dangers of relying on Russian gas.

According to Bloomberg, more than half of renewable energy generated globally is in China and Europe, with 83 per cent of electric vehicle sales taking place on those continents.

China has already passed peak oil imports and according to Mr Currie; “have no intention of ever letting their imports exceed 25 per cent of the global seaborne market of crude oil, underscoring the risks of being dependent upon one energy source.”

America’s self-sufficiency, combined with China’s declining demand means we’ve seen the peak of global fossil fuel trade, Currie says.

Since COVID, global energy consumption of traded fossil fuels has declined from 45 per cent to 35 per cent.

And the trend will continue, as the world becomes more insecure.

Australia will not be immune from this insecurity: it is almost wholly reliant on imports of oil, taking in $35 billion worth petroleum from Asia each year, making it the third largest importer in the world, according to the Observatory of Economic Complexity.

The energy transition will shift, Mr Currie says, from Net Zero ambitions, to be propelled by “security first, economic efficiency second, environment third.”

“Energy independence can accelerate transition faster than environmental concerns or even economic efficiency,” Mr Currie writes, pointing to the more rapid transition away from fossil fuels in the 1970s to 1990s when concerns about energy security pushed countries to adopt nuclear and renewables.

That helped reduce fossil fuel consumption from 94 per cent to 85 per cent of “total joule consumption”, while Net Zero took it from 85 per cent to 81 per cent.

Energy needs must be diversified

The unravelling of the global trade in fossil fuels, and the economic order supporting it means more volatility in energy markets, Mr Carlyle believes.

That will only worsen under a Trump presidency.

“Fossil fuels are attractive as they can be traded. If trade is under threat, then so are fossil fuels,” Mr Currie says.

The report recommends that all nations pursue a mix of different energy sources, including fossil fuels, depending on comparative advantage but believes there is “no diversification without electrification”.

Energy demand will not go away, with global energy consumption rising 2.5 per cent annually over the past 60 years. As people escape poverty, their consumption rises by 66 per cent. The build-out of data centres to power AI will further accelerate energy use.

From an investment standpoint, Carlyle has skin in the game here, as it is a funder of energy infrastructure. Their thesis is that there will be a surge in states building out secure energy supply, driven by electrification to ensure the grid is optimised for all energy inputs.

Energy security will be about having available supply close to centres of manufacturing and populations, meaning production and consumption will not be held up due to issues with the energy supply chain.

That is Mr Trump’s ambition in his new tariff world, re-shoring manufacturing back into the States, and pulling back from a global trading structure, built on the stable, secure supply of oil that has paved the way for China to replace the US as a manufacturing powerhouse.

America already can see it has a competitive advantage over Europe with its energy mix and clearly sees little value in holding defending energy supply lines to the continent.

It was economic self-interest for the US to create a global trading order to ensure energy security – now they have it, the US sees its self-interest heading in the opposite direction.