Energy, Geo-politics & Money - 2023.11.21
In this roundup, we look at:
China's pledge to ensure financing support for the property sector and to resolve local government debt risks
The current situation in global real estate, and the risks this creates for the global economy
The meeting between China and a delegation of Islamic countries, led by Saudi Arabia, for discussions on the war in Gaza; where EPM shares its (customary contrarian) view on what this indicates about global alliances
Northvolt’s – very exciting! – new sodium-ion battery, that has no lithium, cobalt or nickel
The impact of the electrification of two- and three-wheelers on oil demand
The revival of the hybrids car in China
Why a repeat of last year’s surge of diesel and gasoline exports from China, which eased then-prevailing fuel shortages in Asia, is unlikely this year
The Oxfam report named “Great Carbon Divide”, which has calculated that the richest 1% of humanity is responsible for more carbon emissions than the poorest 66%
The crackdown by Australia's corporate regulator on greenwashing
General Energy News
After a few days of strengthening, oil prices started to decline again during early morning trading on Tuesday. Concerns over weaker demand amid a slowing global economy now firmly outweigh the prospect of deepening supply cuts by OPEC, writes Reuters.
The United Arab Emirates is getting ready to boost production in 2024, writes Bloomberg. It will increase its output target to 3.075 million barrels a day in January, or about 135,000 barrels a day more than it pumped last month. Abu Dhabi secured the concession at OPEC’s last meeting in June, when it argued that longstanding production limits failed to recognize capacity additions it has made in recent years.
Macroeconomics
China's central bank and financial regulators pledged to ensure financing support for the property sector and to work together to resolve local government debt risks, writes Reuters. Financial institutions will meet reasonable financing needs of property firms and refrain from withdrawing or cutting off loans to them, the securities regulator said, after a meeting held by the central bank and financial regulators. All will further promote stable credit expansion to support its economic growth, and financial institutions will work with local governments to resolve debt risks, by extending, swapping or rolling over debt, the regulator added.
Bloomberg writes that the real estate bonanza of the last few years, which was fueled by cheap debt, is now clearly over. Markets around the world are now caught between sharply higher borrowing costs — likely here to stay — and a shortage of homes that's keeping prices elevated, it says. The US market is a prime example: dominated by 30-year mortgages, it is effectively frozen as homeowners with low rates are reluctant to sell and buyers are squeezed. Bloomberg recognizes the risk - which EPM previously articulated as our base case outlook for many real estate markets around the world. As far as residential housing is concerned, an economic downturn will lead to forced selling of homes, for which there will be few buyers at current interest rates, driving a rapid decline in home valuations, creating financial distress for many on the financial markets. (We note that Paul Hodges of New Normal sees another risk, which is in the large inventory of houses under construction that will soon come onto the market in the US.) Commercial property has become more worrisome, writes Bloomberg, because investors will be faced with refinancing at significantly higher rates.
Geopolitics
China has been hosting a delegation of Islamic countries, led by Saudi Arabia, for discussions on the war in Gaza, writes Nikkei. The meeting was also attended by foreign ministers from Jordan, Egypt, Indonesia and the Palestinian Authority as well as the secretary general of the Organisation of Islamic Cooperation. China has thrown its weight behind Middle Eastern countries frustrated with what they see as Washington's unwillingness to sufficiently pressure Israel to agree to a truce, it says. China sees the visit also as a sign of “trust” from the Islamic nations in China.
EPM has to respectfully disagree with the Chinese assessment. Before we explain our view on how it should be understood, we will share the basis of our thinking. First, we will remind our readers that the Saudi – Iran deal which was brokered in Beijing was brokered there on the request of Saudi Arabia and Iran. The countries had been negotiating for longer, in close collaboration with the US, and approached China once they had reached a deal. Saudi Arabia also confirmed it discussed the meet in China with the US, and remained in contact with the US during the meeting in Beijing. This really means that China did not broker the deal – the US did. China just hosted the signing ceremony. In EPM’s view this means, that in the world of geopolitics, Saudi Arabia acts in collaboration with the US.
Second, if Islamic nations truly want to have an impact on the war in Gaza, they should either act, or approach the nations with leverage over the parties in the conflict, i.e. the US and Iran. Approaching China might seem like a “big move”, and makes for good headlines, but in reality it is an empty gesture that leads to more words but no practical actions (be they diplomatic, economic or military).
Take these together and what you have is a well thought through diplomatic move, orchestrated with US involvement, which makes China think it has friends and influence where in reality it doesn’t, in other words it’s a trap for China; and which gives the Islamic nations the ability to present themselves as peacemakers, and thereby address the significant public pressure they are under domestically, without actually doing anything meaningful in the conflict.
In conclusion, therefore, when we at EPM analyze geopolitics for thoughts on how the world could develop from here, we do not see the diplomatic relations between China and in particular Saudi Arabia as something that will have a significant impact. We keep our eye firmly on the US, as it continues to be the real “mover and shaker”, with China being mostly the reactive party.
As to the real diplomatic action in the war in Gaza, Hamas officials are "close to reaching a truce agreement" with Israel and the group has delivered its response to Qatari mediators, Ismail Haniyeh said in a statement sent to Reuters. EPM notes this information is linked to the Wall Street Journal report from yesterday, which said that Israel and Hamas are close to a deal for a ceasefire, which has been brokered by Qatar as the middleman, operating under direction from the US. "We're closer now than we've been before," White House spokesman John Kirby said of this agreement.
Energy Transition & Technology News
The Swedish industrial start-up Northvolt says it has made a breakthrough in a new battery technology used for energy storage and claims it could minimise dependence on China for the green transition writes the Financial Times. Northvolt developed a sodium-ion battery that uses no lithium, cobalt or nickel — critical metals manufacturers must scramble to obtain, leading to volatility in prices. Sodium-ion batteries are seen as a cheaper and safer alternative to the lithium-based batteries widely used for energy storage because they work better at both very high and low temperatures. But, on the down side, the amount of energy they can produce relative to their size has long lagged behind lithium batteries, making sodium cells currently impractical for most electric vehicles where space is at a premium. Northvolt said this past Tuesday that it had validated a sodium-ion battery at the critical level of 160 watt hours per kilogramme, an energy density close to that of the type of lithium batteries typically used in energy storage. Lithium batteries used in electric cars have an energy density of up to about 250-300Wh per kg while those typically deployed in energy storage have about 180Wh per kg. Northvolt’s sodium-ion batteries instead use Prussian blue, a pigment first used in the 18th century to make blue paint and whose potential for batteries was first spotted by Nobel chemistry prize winner John Goodenough. It is hoping to provide the first samples to customers next year, and would reach full-scale production by the end of the decade. It would need new factories alongside the four factories it has currently planned to produce lithium-ion batteries for vehicles.
Climate Politics
An opinion piece in Nikkei argues that the response of many oil and gas producers who responded to the energy transition and decarbonization conversation by digging in their heels has caused polarization and split the world into nations that want to preserve fossil fuels and those that want to jettison them. This has effectively pit the Global South against the Global North. Fortunately for the oil and gas producers, it says, recent oil and gas market upheaval, stoked by the COVID pandemic, war, geopolitical tensions, sanctions and decelerating investment in the sector, has strengthened the case for more holistic management of the energy transition. Pragmatism dictates that the world does not abandon fossil fuels, the foundation of our energy system, before affordable and scalable alternatives are widely available or at least within reach. The author argues this means that the way forward should be further burning of fossil fuels on the condition that technology is used to capture and store released carbon dioxide.
The Electrification of Transport
The world’s 280 million electric bikes and mopeds are cutting demand for oil far more than electric cars, writes The Conversation. Their popularity is already cutting demand for oil by a million barrels of oil a day, it says.
While in the United States most hybrid powertrains sell at a $1,500 to $2,000 premium to combustion models, in China some hybrids are offered at a slight discount to gasoline models and can be as much as 23% cheaper than pure EVs. That price advantage is driving Chinese consumers to hybrid models, writes Reuters. Two types of hybrids – plug-in hybrid (PHEV) and extended-range hybrid (EREV) - are enjoying strong demand, with their combined shipments surging 85% and outpacing a 14% growth in pure electric car sales this year. A PHEV can be driven directly by the electric motor or the gasoline engine. An EREV has a larger battery pack and runs on electricity only, with its gasoline engine serving as a power bank to recharge the batteries when they run low. The popularity of these hybrids is so strong that the segment is now half as big as the pure EV market and accounts for 12% of total passenger vehicle sales.
The Global Energy Crisis
A surge of diesel and gasoline exports from China in the last northern winter eased then-prevailing fuel shortages in Asia but a repeat performance this year is unlikely, writes Reuters. In the northern winter of 2022-23 China played an outsized role in easing a squeeze on the availability of refined fuels, caused largely by the loss of some shipments from Russia as Western countries sanctioned it over its invasion of Ukraine. This year, China's exports of refined products have eased from high levels in recent months, partly as a result of stronger domestic demand, but a lack of available quotas and shrinking profit margins for fuels have also played a role. Both diesel and gasoline exports were down significantly in November, compared to both earlier this year and the same period last year, it notes. Cracks are down also, as are the export quotes.
Other
The richest 1% of humanity is responsible for more carbon emissions than the poorest 66%, writes The Guardian based on an Oxfam report named “Great Carbon Divide”. This elite group, made up of 77 million people including billionaires, millionaires and those paid more than US$140,000 (£112,500) a year, accounted for 16% of all CO2 emissions in 2019, it says. The report also found that it would take about 1,500 years for someone in the bottom 99% to produce as much carbon as the richest billionaires do in a year. At a country level, the report shows that in 2019 high-income countries (mostly in the global north) were responsible for 40% of global consumption-based CO2 emissions, while the contribution from low-income countries (mostly in the global south) was a negligible 0.4%. Africa, which is home to about one in six of the world population, was responsible for just 4% of emissions.
Australia's Securities and Investments Commission (ASIC) will be cracking down on green washing by investment firms, writes Reuters. The regulator will not check whether investment products met environmental targets exactly, but it says
If you want to go to the market and say 'net zero by 2030', what we want you to produce for us is, 'where is the plan?' Our focus will be on net zero statements and targets made without a reasonable basis, the use of terms like 'carbon neutral', 'clean' or 'green' that are not founded on reasonable grounds.