Energy, Geo-politics, & Money - 2023.11.06
In this roundup, we take a closer look at the endgame that has started for the war in Ukraine. US and European officials are reportedly growing concerned that Ukraine is slowly running out of forces, while Russia has a seemingly endless supply. At the same time, public support in the west for continued aid to Ukraine is continuing to slip. It is said this situation is likely to result in a battlefield stalemate, but EPM believes the resulting military situation might actually be worse. We dare to speculate that the real worry in the US, Europe and the Ukraine is that the Ukrainian army might not be able to hold back the steady, relentless push of the Russian army across a broad segment of the front (and force settlement favoring Russia).
EPM is reminded of John Mearsheimer warning by earlier this year. He said that since the Ukraine war is a conventional war and that the country with the most resources will eventually win. And that country is Russia, he said, because it, at present, has a greater ability to produce ammunition and artillery than the US and Europe combined. EPM’s view is that he is being proven right.
How this is likely to play out, then? Russia has (unilaterally) incorporated Ukraine’s eastern provinces, and we think Ukraine will to a certain degree have to accept this. Russia, for its part, might have to accept these regions becoming “confederate states”, i.e. run by a local government rather than directly from Moscow. Additionally, as per the original Russian demand, Ukraine will have to accept a neutral position in the geopolitical conflict between the US and Russia, meaning no formal membership in NATO, possibly coupled with security guarantees from individual NATO member states, which Russia could be made to accept if in return the sanctions are lifted – which obviously would dramatically alter the global energy equation, yet again!
Furthermore, we look at:
Why Saudi Arabia and Russia have decided to extend their voluntary crude oil production cuts
Shipping company Maersk’s decision to cut 10,000 people from its workforce, in response to lower shipping demand and freight rates
Why China’s holding of US Treasury bonds are in (rapid) decline
The UN concerns that countries may be backsliding on pledges to cut greenhouse gas emissions sharply
How and why the US is holding back progress on the “loss and damage fund” that was agreed at COP27 in Egypt
Why Japan is lagging in the energy transition, and why the country’s focus on hydrogen for its further decarbonization makes it doubtful it will be able to take any big steps toward over the shorter- to medium-term
Toyota’s assessment of its hydrogen-powered Mirai car, nine years after launching it, and why the company nevertheless does not intend to give up on hydrogen vehicles
Why, according to a UN standard, only 4% of the world’s top 2000 companies have a meaningful Net Zero plan
General Energy News
Top oil exporters Saudi Arabia and Russia confirmed on Sunday they would continue with their additional voluntary oil output cuts until the end of the year, writes Reuters. Both countries said their cuts would be reviewed next month to consider extending, deepening or increasing it.
In a separate analysis, Reuters says the risk premium associated with the war in Gaza has “completely vanished”, as worries about a wider conflict in the Middle East have eased. This is exactly what EPM forecasted, at the beginning of October. The market's focus has turned to the demand outlook, which is growing ever more uncertain in the EPM view, but this we discuss in more detail under Macroeconomics.
Macroeconomics
Maersk, one of the world's biggest shipping firms, is to cut a further 3,500 jobs due, to lower freight rates and demand, writes BBC. The company already cut 6,500 roles earlier this year as part of "rigorous cost containment measures" but said more redundancies were needed. High inflation and rising interest rates have curbed spending and dampened demand, leading to lower freight rates. "Our industry is facing a new normal with subdued demand, prices back in line with historical levels and inflationary pressure on our cost base," said Maersk chief executive Vincent Clerc. "Since the summer, we have seen overcapacity across most regions triggering price drops and no noticeable uptick in ship recycling or idling."
Reuters says headcount reductions are becoming a trend in Europe. The economic headwinds that are the result of higher interest rates, higher energy prices, and general inflation are translating into companies across the continent laying off staff, it says, and it provides an overview of announcements since April of 2023.
China’s holding of US government debt hit the lowest level in 14 years at the end of August, with the pace of decline accelerating, writes Nikkei. The balance of US Treasury bonds held by China totaled $805.4 billion in August, down 40% from a decade earlier. China once actively bought the securities with its ample foreign exchange reserves, becoming the second-biggest foreign investor in US Treasury bonds after Japan. Given the size of its holdings, China's selling could roil US bond prices, pushing up interest rates. Many analysts believe the decline in the country's Treasury balance is a sign of Beijing's strong determination to defend its own currency. China is facing serious capital flight caused by rising concern about its economic growth and debt burden. In September, capital outflows reached $75 billion, the biggest such monthly amount since 2016, according to an estimate by Goldman Sachs. This exerts strong downward pressure on the yuan, which now trades at around 7.3 against the dollar, the lowest since 2007. Chinese authorities likely urged state-run banks to shore up the yuan against dollars and they responded by selling Treasury bonds to raise needed funds.
Geopolitics
US and European officials have begun quietly talking to the Ukrainian government about what possible peace negotiations with Russia might entail to end the war, writes NBC. The conversations have included very broad outlines of what Ukraine might need to give up to reach a deal, and are an acknowledgment of the dynamics militarily on the ground in Ukraine and politically in the US and Europe, it says. They began amid concerns among US and European officials that the war has reached a stalemate and about the ability to continue providing aid to Ukraine. Ukraine is running out of forces, while Russia has a seemingly endless supply. Ukraine is also struggling with recruiting and has recently seen public protests about some of President Volodymyr Zelenskyy’s open-ended conscription requirements. Further compounding Ukraine’s challenges is slipping support in the West for providing military and financial aid to Ukraine.
Last week EPM reported on the interview of Ukraine’s military commander with the Economist, in which he said the Ukrainian offensive had not succeeded in delivering a breakthrough, and that as a result the war had reached a stalemate. When EPM analyses this information, we are reminded of the John Mearsheimer’s warning from earlier this year. He said that since the Ukraine war is a conventional war, the country with the most resources will eventually win. And that country is Russia, he said, because Russia at present has a greater ability to produce ammunitions and artillery than the US and Europe combined. The EPM view is that he is being proven right. We even dare to speculate that the real worry in the US, Europe and the Ukraine is not so much that a stalemate is developing, but that the Ukrainian army might not be able to hold back the steady, relentless push of the Russian army across a broad segment of the front.
How this is likely to play out, then? Russia has (unilaterally) incorporated Ukraine’s eastern provinces, and we think Ukraine will to a certain degree have to accept this. Russia, for its part, might have to accept these regions becoming “confederate states”, i.e. run by a local government rather than directly from Moscow. Additionally, as per the original Russian demand, Ukraine will have to accept a neutral position in the geopolitical conflict between the US and Russia, meaning no formal membership in NATO, possibly coupled with security guarantees from individual NATO member states, which Russia could be made to accept if in return the sanctions are lifted – which obviously would dramatically alter the global energy equation, yet again!
Energy Transition & Technology News
Bloomberg looks at Japan’s performance in the energy transition. At first sight, it does not look good. The nation that invented the lithium-ion battery, the hybrid car and solar-powered calculator has fallen far behind. It has seen the fossil share of its grid increase over the past decade, while zero-carbon power fell to 28%. Emissions are down just 8.6% as a result. For comparison, in Germany, a renewables boom pushed the zero-carbon share of generation to 58% last year. Emissions per capita fell 21% relative to their level in 2010, even as real gross domestic product rose about 14% per person. Japan’s decision to shut down its nuclear sector post Fukushima is an important explanation for its performance. The countries topographies, and propensity to experience typhoons and earthquakes, are a hindrance to the build out of wind and solar. And there’s regulation, Japan doesn’t have a national grid the way most other countries do. Instead, it has 10 separate companies roughly corresponding to its historic regions, each operating more or less autonomously. As a result, a developer wanting to take advantage of ample solar resources in the southern Kyushu island to supply renewable power to Tokyo must negotiate with five separate utilities to ensure there’s sufficient transmission cables to get the electrons where they’re needed. Lastly, the country’s focus on hydrogen (and its derivatives) for its further decarbonization makes it doubtful it will be able to take any big steps toward over the shorter- to medium-term.
Climate Politics
The UN is concerned that countries may be backsliding on pledges to cut greenhouse gas emissions sharply, writes The Guardian. Amina Mohammed, Deputy Secretary General, said the UN was “absolutely” concerned about backsliding on climate commitments because “there is a lot of it”. Countries made pledges last year, at the Cop27 summit in Egypt, and at the landmark Cop26 summit in Glasgow in 2021, where the 1.5C limit was strongly affirmed. Many countries have since appeared to waver on their commitments, through expanding fossil fuel access after the invasion of Ukraine, or by failing to set strong targets. Ms. Mohammed told the Guardian,
Certainly, the Secretary General will be leaning in to have those conversations with countries like the UK, the US, China, many [others]. It doesn’t stop. We have to keep them in the room [discussing climate action]. We need to get out of everyone the best of the ambition that is expected from us.”
Meanwhile, a fight over a global fund to help countries deal with climate change is set play out at a UN climate summit this month, after the US objected to taking a greater role in the financing of it in a tentative agreement reached at the weekend, writes the Financial Times. The intention to create a loss and damage fund was a key outcome from last year’s UN COP27 climate summit in Egypt. But nations have clashed in talks over the past year about the fundamental questions of where it should be based, who should fund it, and who should benefit. Late on Saturday night in Abu Dhabi, the US absented itself at a critical juncture in the negotiations. The US lead negotiator left the room while other countries on the 24-person committee agreed to a set of recommendations involving financing and structure. The main US issue is with who has to pay into the fund. Developing countries say that developed nations — responsible for about 80 per cent of historical greenhouse gas emissions — should play a lead role, alongside other funding sources such as philanthropy and carbon pricing. But the US has pushed back against any suggestion that developed countries have an obligation to pay.
The Electrification of Transport
Nine years after launching its hydrogen-powered Mirai car, Toyota has admitted that the model has not been a success, writes Hydrogen Insight. Chief technology officer Hiroki Nakajima told the Japan Mobility Show in Tokyo (formerly the Tokyo Motor Show) that that the Mirai has never taken off due to the small numbers of H2 fuelling stations. “We have tried Mirai but not been successful," said Nakajima. "Hydrogen stations are very few and difficult to realise, so Mirai is smaller [in sales volumes].” However, Nakajima said the company “did not want to give up on [H2] passenger cars”, and that Toyota was developing more compact hydrogen tanks and fuel cells so that the technology would fit in a wider range of models.
Other
Half of the world's 2,000 biggest listed companies have set a target to get to net-zero emissions by mid-century, but just a fraction meet tough United Nations guidelines for what constitutes a quality pledge, writes Reuters. Net Zero Tracker, an independent data consortium including Oxford University, said corporate targets from Forbes2000 index companies had jumped 40% to 1,003 in October 2023, from 702 in June 2022, covering two-thirds of revenues, some $27 trillion. However, just 4% of the targets meet the criteria laid down by the U.N.'s Race to Zero campaign, for example by covering all emissions, starting to cut them immediately, and including an annual progress update on interim and longer term targets.