It's not just about arms industry profits

 It's not just about arms industry profits.

Large-scale military conflicts can have a significant impact on energy markets.

The Russian invasion of Ukraine is a recent example of this, as it has caused energy prices to surge and led to market volatility.

Some countries are considering how their energy policies might be affected by future conflicts.

For example, if China were to become involved in a conflict with Taiwan, it is possible that some energy exporters would embargo China. This would have a major impact on the Chinese economy, as the country is heavily reliant on imported energy.

A full interdiction of seaborne energy imports into China could reduce the country's GDP by 17%.

This would have a significant impact on the transportation, mining, and other sectors that rely heavily on oil and natural gas.

The reduced demand for Chinese crude oil could also have a major impact on global markets.

It could be even more disruptive than the COVID-19 pandemic, which caused a sharp decline in demand for oil. This could strain energy exporting nations, as they would have to find new markets for their oil.

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"Uncertainty" was the key word used at the APPEC event today hosted by S&P Global Commodity Insights in Singapore, with one speaker even going as far as to describe the current market situation as "chaotic". 

The main issues appear to include:

1. What will happen to Chinese oil demand? Will the anticipated rebound in the world's biggest importer actually happen in 2024?
2. Related to Chinese demand is the issue of the country's exports of refined products. Will these increase given the apparent slack domestic consumption as refiners seek to maximize throughput and seize some of the high profit margins for fuels such as diesel?
3. A longer-term concern is the switch to electrifying the vehicle fleet, especially in China. This is likely to result in Chinese refiners producing way more petrol than needed in the domestic market, potentially leading to higher exports.

It is worth noting that the largest investors in Exxon and Chevron (US)  - the two largest energy companies based in the US, ranked by market capitalization - are the Big Three: Vanguard, BlackRock and State Street.  Exxon is in fact one of the largest gas and oil corporations in the world, second only to Saudi Aramco (Saudi Arabia).

While there are many variables and contingencies at play, it is interesting to recall that the Russian invasion of Ukraine caused energy prices to surge. China was the largest destination for Saudi Arabia's oil exports in 2022. It is likely if that supply was interrupted by conflict (or other causes such as economic downturn or increased uptake of electric vehicles) that oil and gas production would be reduced and thus cause prices to rise.

Additionally, China is a major producer of solar panels and other renewable energy equipment, and a conflict could disrupt the supply of these products, which could also lead to higher energy prices. Last year, China made 97% of the silicon wafers that go into solar panels and more than three-quarters of the world's solar panels themselves. Also, when it comes to supply chains for the electric vehicle industry, China is far ahead for the number of batteries and EV cars that it produces. It's also cornered the market on the minerals, metal, cathodes and anodes that go into batteries. China mines more than two-thirds of the world's graphite, extracts 60% of the rare earth. It owns almost half of the cobalt mines and controls a quarter of the lithium. China dominates critical minerals processing, accounting for more than 80 percent of global rare earths production, and holds large investments in lithium and other mining and processing operations in Australia, Africa and South America.

Australia mines about 53 percent of the world's supply of lithium, and virtually all of it is sold to China.