Energy, Geo-politics & Money - 2023.11.20
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup of the weekend news, we look at:
Why this time war in the Middle East has not pushed up oil prices
Russia’s decision to end all its temporary restrictions on fossil energy exports
Why OPEC is considering additional production cuts
The outcomes of the APEC meeting in San Francisco; and why the Biden – Xi meeting there will not fundamentally alter the trajectory the relationship between their countries is on
The current status in the war in Gaza, where EPM looks at how our original thesis performed (good on oil market forecast, good on diplomatic forecast, not so good on military forecast); and also discuss the current events, which, we note, indicate that on the diplomatic front things continue to develop as we originally foresaw
Why oil and gas companies have faced virtually no extra borrowing costs compared with less polluting companies, despite ESG pledges by all international banks and lending institutions
The view that the upcoming COP28 meeting in Dubai should focus on the “Energy Trilemma”, and prevent idealism and ideology to dominate discussion of the energy transition
Why ExxonMobil believes that the right decarbonization policy would leave oil companies largely alone, and just provide them subsidies for carbon capture, until “market forces take over”
Why Europe's petrochemical industry Is heading towards extinction
General Energy News
Daniel Yergin writing for the Wall Street Journal says that previously, a war in the Middle East would send oil price through the roof. But not this time, due to US shale, market psychology and the transformation of oil politics, he says. The impact of US Shale is clear. Market psychology has to do with the fact that investors are significantly worried about the impact higher interest rates will have on the global economy in 2024, and thereby on oil demand. As to the politics of oil, he notes the governments of the Middle East oil producers are today more concerned about economic development, and for that engagement with Israel, than on playing geopolitics with their fossil fuels. Yergin notes this could change if there was a horizontal escalation in the Gaza War – but EPM has explained previously why that is a very unlikely scenario.
Russia has lifted restrictions on gasoline exports, writes Reuters, after scrapping most restrictions on exports of diesel last month. The Energy Ministry said there was a surplus of supply while wholesale prices had declined.
With oil prices now almost 20% below where there were late September, OPEC+ is set to consider whether to make additional oil supply cuts when the group meets later this month, writes Reuters based on OPEC sources. Oil has slid to around $79 a barrel for Brent crude from a 2023 high in September near $98. Concern about demand and a possible surplus next year has pressured prices, despite support from the OPEC+ cuts and conflict in the Middle East. Saudi Arabia, Russia and other members of OPEC+ have already pledged total oil output cuts of 5.16 million barrels per day, or about 5% of daily global demand, in a series of steps that started in late 2022. The cuts include 3.66 million bpd by OPEC+ and additional voluntary cuts by Saudi Arabia and Russia.
The above rumours already had an impact on oil prices, writes Bloomberg. Brent advanced 4.1% to settle above $80 on Friday. WTI rose 4.1% to settle near $76 a barrel.
Geopolitics
The APEC conference in San Francisco has wrapped up with a declaration that talks of being committed to “to working together to deliver a free, open, fair, non-discriminatory, transparent, inclusive, and predictable trade and investment environment”, writes the South China Morning Post. The group’s non-binding, consensus oriented structure guarantees that areas of agreement are largely technical and non-controversial, although supporters say it acts as an incubator for regional discussion. Divisions were evident in the release of a separate document, the Chairman’s Statement authored by the United States. This document said that “most members” condemned Russia’s invasion of Ukraine, with evidence of even less consensus on the Mideast.
Beyond the optics of the first meeting in over a year between the leaders of the world’s two biggest economies, not an awful lot had changed in the US – China relationship, writes The Conversation. There was nothing to suggest a “reset” in US and China relations that in recent years have been rooted in suspicion and competition. The two countries remain in an “enduring rivalry” – a term used by political scientists to denote two powers that have singled each other out for intense security competition. Over the past two centuries, such rivals have accounted for only 1% of the world’s international relationships but 80% of its wars. History suggest these rivalries last around 40 years and end only when one side loses the ability to compete – or when the two sides ally against a common enemy. Neither scenario looks likely any time soon in regards to China and the U.S.
Then an update on the war in Gaza. Some five weeks in now, we at EPM are fairly satisfied with our original assessment and forecast. There has been no escalation, and as a result the initial uptick in oil prices has cancelled out again. This is exactly what we forecast. We also forecasted a limited Israeli invasion into Gaza, primarily to restore the country’s prestige, and significant pressure by the US on Netanyahu to fall in line with the US plans for the Middle East: a two state solution, to enable treaties between the GCC countries and Israel, and the US and Iran.
Clearly, the Israeli military response to October 7th has been more severe than we anticipated that the US would allow. As to the timing of fighting, our forecast appears to have been good. We said it was likely to last 4 weeks, and there is now good news coming which says that the military confrontation indeed appears to be approaching an end.
The Washington Post writes that Israel, the United States and Hamas have reached a tentative agreement to free dozens of women and children held hostage in Gaza in exchange for a five-day pause in fighting. The stop in fighting is also intended to allow a significant increase in the amount of humanitarian assistance, including fuel, to enter the besieged enclave from Egypt.
On the diplomatic front things do seem to be developing in accordance with our original EPM thesis. There is significant pressure on Netanyahu to step down, as we reported on earlier. At the same time, the push towards the 2 state solution is also clear, with Biden saying, according to Reuters, the Palestinian Authority should ultimately govern Gaza and West Bank. At the same time, Biden clearly communicated the US does not support any of Netanyahu’s current plans, saying “There must be no forcible displacement of Palestinians from Gaza, no reoccupation, no siege or blockade, and no reduction in territory.”
Energy Transition & Technology News
Oil and gas companies face virtually no extra borrowing costs compared with less polluting companies, according to analysis by S&P Global Ratings seen by the Financial Times. “Environmental concerns seem to be far from the most important factor for funding oil and gas companies,” the rating agency’s analysts said. “It shows lenders are not really baking in premiums for [environmental, social and governance]-related factors.”
Climate Politics
At the upcoming COP28 meeting in Dubai the focus should be o the “Energy Trilemma”, writes Project Syndicate. Energy demand may well plateau at its highest-ever level for some time, rather than quickly beginning to fall, it says. That demand will have to be met. The author argues that allowing idealism and ideology to dominate discussion of the energy transition will lead only to incomplete or unrealistic solutions. Though use of renewables is growing, fossil fuels continue to account for a large share of the global energy mix. And, there is no guarantee that energy demand will fall in the short or even medium term, not least because the developing world’s burgeoning middle class has shown a strong and growing appetite for affordable energy. Therefore, Project Syndicaate says, that if COP28 is to be successful, participants must recognize this and work together to find pragmatic and realistic solutions to the energy trilemma that enable real progress toward a global economy that is dynamic, sustainable, and inclusive.
For obvious reasons, this is also the opinion of ExxonMobil CEO Darren Woods. According to Bloomberg, he says that making Big Oil into “villains” and trying to restrict supply of fossil fuels will slow the path to net zero emissions and keep millions of people in the developing world in poverty. In a speech at the Asia Pacific Economic Cooperation CEO Summit in San Francisco last Wednesday, he said, “The solutions to climate change have been too focused on reducing supply. That’s a recipe, for human hardship and a poorer world.” Woods called for governments to “harness the industry’s capabilities for change” by providing taxpayer support for emissions-reducing technologies like carbon capture before market forces can take over. Attacking oil and gas companies for their role in climate change will only serve to keep net zero as an “aspiration” rather than a reality, he said. In the EPM view, much of what Woods says is correct. Even in the most optimistic energy transition scenarios the world needs oil and natural gas, millions of barrels and SCAFs, for decades to come. A such, the energy transition debate should involve oil and natural gas, rather than just ban them. In this light, decarbonization of fossil fuel production processes and DAC seem reasonable intermediate solutions. However, coming from the CEO of one of the world’s largest oil and natural gas companies, the story actually loses credibility – would one expect him to say anything else?
The Global Energy Crisis
Europe's consumption of naphtha, the cornerstone of the petrochemical industry, will drop in 2023 to a nearly 50-year low, down 40% from its peak, writes Javier Blas for Bloomberg. This is not because of demand. Europe keeps consuming voracious amounts of foams, paints, resins and every other product petrochemical factories make. It’s just replacing indigenous production with imports. The main reason is Europe’s energy related policies, including its geopolitical stances. Petrochemicals are intrinsically energy intensive, and in Europe, natural gas is now about five times more expensive than in the US. As a result, it’s cheaper to buy ethylene, a building block for plastics, in Texas, and ship it across the Atlantic for further processing in Europe than producing it at home. And that’s precisely what petrochemical companies are doing. The net result is loss of economic activity in Europe, an erosion of the bloc’s trade balance in chemical products and, ultimately, the loss of jobs and energy security.