From Russia to Indonesia: How Energy Crises Will Evolve

Russia's invasion of Ukraine quickly created chaos in global energy markets and resulted in increased consumer prices for oil and natural gas. But the shocks have not been limited to fossil fuels alone: nickel prices have been extremely volatile, at one point, almost doubling overnight. A critical component of many electric vehicles and utility-scale batteries, nickel was already surging in demand as the world moves away from high carbon energy sources. Some analysts have concluded that the recent volatility in the market could undermine the long-term plans of electric vehicle manufacturers. These trends have forced many to acknowledge an uncomfortable reality: even if the world weans itself from fossil fuels, energy choices will still impact global security.     

Indonesia is poised to capture the market, but not without help. Because the country has inferior refinement capacity relative to its resource endowment, it has welcomed heavy Chinese investment to add value to its nickel exports. Chinese companies have poured roughly 30 billion into the Indonesian nickel supply chain, mainly in refining capacity. China invested 8.4 billion in mining and smelting operations in 2020 alone. In the same year, U.S. total FDI in Indonesia decreased by 3.2% to $18.7 billion (across all commercial sectors). China has also invested in Indonesian rail infrastructure via its Belt-and-Road Initiative (BRI) and the two countries share reduced trade barriers thanks to membership in the Regional Comprehensive Economic Partnership (RCEP). It's no coincidence, therefore, that the recent volatility in the nickel market was allegedly stabilized after Chinese entrepreneur Xiang Guangda defended his short position to protect Chinese nickel partnerships in Indonesia.    

While China’s growing dominance over Indonesia’s nickel production poses significant concerns, it is even more worrisome given Indonesia's history of domestic instability. With more than 1,200 ethnic groups across 6,000 islands, the country is no stranger to conflict. Since it broke away from the Netherlands in the 1940s, Indonesia has dealt with a succession of insurgent and terrorist campaigns, as well as separatist movements like the one that resulted in the successful independence of Timor-Leste. The movement for West Papuan independence has recently led to increased violence against both military personnel and noncombatants. Not only would a serious bout of civil conflict disrupt the global supply of nickel, but it could easily be used as a pretense for foreign occupation. In such an extreme scenario, it is likely that China would aim to protect its investments.      

The U.S. and its allies are at a fundamental disadvantage. They should immediately diversify and intensify energy investments as a hedge against resource monopolies like the one developing in Indonesia. One positive step is the U.S. decision to invoke the Defense Production Act to shore up domestic production of lithium and nickel. Countries should also invest in technology alternatives that operate on clean and renewable sources of energy, but that are not reliant on nickel. Tesla, for instance, has begun using alternative battery designs that do not require nickel. Similarly, gravity batteries, "reversible rust" batteries and flow batteries all provide promising alternatives. The collision of energy demand, resource scarcity and conflict is currently on full display in Ukraine. Now is the time to begin limiting exposure to the next international crisis.     

Justin Conrad is the Gary K. Bertsch Director of the Center for International Trade and Security (CITS) and Associate Professor of International Affairs at the University of Georgia.  

Chase Duncan is the Energy Security Scholar at the Center for International Trade and Security (CITS) at the University of Georgia.