creation ex nihilo. To say that God creates is to say that beings now exist that did not exist before. Finite beings are not made “out of God”. They are made, produced, created. There is nothing contradictory in saying that a Creator brings beings into being. He makes to exist what was non-existent without the act of creation!
Evn the verse that chasidim use to defend Pantheism, "the whole world is full of his glory," still there are areas where His Glory does not extend to." It seems basically clear that Torah does not hold of pantheism. He was going with the Ramabm on creation ex Nihilo.However there is a statement in the Lekutai Halachot that seems to state differently.
The evil inclination begins at its lowest level in physical desires and goes upwards until it reaches it root in Satan. the higher one goes in the service of God, that the kelipot [dark forces] get awoken every time one reaches a higher level. Putting these two idea together we can understand that as one gets higher in the service of God that the evil inclination that is awoken against him becomes more evil but less physical.