Energy, Geo-politics & Money - 2023.11.27
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we take a closer look at the outlook for the economy. A a global macro-level, Nouriel Roubini says economic, monetary, and financial threats are rising and interacting in dangerous ways with various other social, political, geopolitical, environmental, health, and technological developments.
We at EPM we see things similarly and that is why we launched EPM - to support you with helping make sense of it all.
The specific drivers are, structurally higher inflation and interest rates; demographic decline in developed economies which will push up labour costs; AI’s ability to transform military technology and disrupt public discourse; geopolitical restructuring, or in other words the slow implosion of the institutions that have managed geopolitical relations over the past 75 years, and the establishment of regional economic blocks; but also debt servicing, which used to be low despite high debt levels but now is high because of high debt levels; income and wealth inequality, which is causing a global backlash against the capitalist economic system; and climate change.
These different shocks influence, strengthen and reinforce the impact on each other. No country can expect to be isolated from their impact.
And no country will have the resources to tackle all of them simultaneously – in part because the solution to one issue often worsens some of the other issues, e.g. the energy transition to fight against climate change will be inflationary; higher interest rates against inflation worsen the debt crisis; etc.
Furthermore, we look at:
The upcoming OPEC meeting, where “to cut (more) or not to cut (more)” will be the question
Chinese president Xi Jinping’s decision to delegate the role “head of the Central Finance Commission” and what this could mean for the economic outlook of China
The anti-green backlash that hovers over the COP28 climate talks, as the economy and geopolitics pressure politicians to address other priorities first
Brazil’s decision to sign onto a deal proposed by the United Arab Emirates, US and European Union for COP28, to triple renewable energy by 2030 while India doubles down, or to be more precise, triples down on coal
Brazil’s Petrobras energy transition strategy
The United Nations’ Food & Agriculture Organization (FAO) Net Zero Roadmap
The “last mile” challenges for hydrogen as a fuel in aviation; and the continued progress of hydrogen’s main challenger in the energy transition, battery technology
Germany’s forced ending of its electricity price support for German consumers, as the fund is one of the off-budget vehicles declared as unconstitutional by the country’s top court last week and dangers the country faces comprehensive de-industrialization and turning into “second world nation”
Why air pollution particles from coal are even more deadly than previously thought
General Energy News
As OPEC ministers get ready to meet on November 30, crude oil prices continue their downward trend. During early morning trading on Monday, Brent slipped 37 cents, or 0.5%, to $80.21 a barrel, while WTI was down 36 cents, or 0.5% to $75.18 a barrel, writes Reuters.
As to what should be expected to result from the OPEC meeting, Barron’s highlights that crude oil’s current predicament, with a downward trajectory for prices despite significant production cuts by OPEC+ members, is caused by higher non-Opec production. US crude oil production reached an all-time high in October of 13.2 million barrels a day. Brazil, Guyana, and other countries increased production. And from May to September, Iran—exempt from OPEC+ quota restrictions—ramped up oil exports to levels not seen since 2019, as independent refiners in China bought discounted volumes. OPEC+ ministers now face a choice between an extension of existing cuts, which is likely to see oil continue falling further, or a steeper reduction.
The latter option has painful implications.
For example, Saudi Arabia’s production would then slip below 9 million barrels, which would severely affect the country’s national budget if not accompanies by the strong increase in oil prices. As such, the most likely outcome is a rollover of existing cuts, perhaps for the first half of 2024, including the voluntary reductions from Saudi Arabia and Russia, although a deeper Saudi cut can not be ruled out.
Russia’s Gazprom said its natural gas deliveries to China have hit a new historic high amid rising demand, writes Bloomberg. Gazprom says it sees its pipeline-gas flows to China matching its historical shipments to Western Europe, which have slumped as European countries moved to diversify their energy imports after Russia invaded Ukraine in 2022. The Russian company sold approximately 120 bcm of gas to Western Europe in 2020. Russia aims to export 30 billion cubic meters of gas to China next year and eventually raise the flows to 38 bcm per year. Separate shipments via a future Far Eastern route are set to reach another 10 bcm per year. Gazprom is also in talks to supply as much as 50 bcm per year via the future Power of Siberia 2 link but the contract hasn’t been signed. And this will contribute to Russia’s economy growing by 3% in 2024 (far ahead of the US and Western Europe).
Macroeconomics
Nouriel Roubini, writing for writing for Project Syndicate, says it is now common knowledge that economic, monetary, and financial threats are rising and interacting in dangerous ways with various other social, political, geopolitical, environmental, health, and technological developments. He adds that there is little reason to believe that today's leaders can manage these multiplying risks on multiple fronts.
Specifically, Roubini mentions global, structural developments leading to a reset are: structurally higher inflation and interest rates; demographic decline in developed economies which will push up labour costs; AI’s ability to transform military technology and disrupt (in a manipulative manner) public discourse; geopolitical restructuring - in other words the slow implosion of the institutions that have managed geopolitical relations over the past 75 years; the establishment of regional economic blocks; and high levels of debt servicing - which used to be low despite high debt levels but are now high because of high interest rates ; income- and wealth-inequality that have combined to cause a world wide backlash against the globalist capitalist economic system; and climate change.
These different shocks influence and strengthen each other’s impact. No country will be isolated from them. And no country will have the resources to tackle them all them simultaneously. Why? In part because the solution to one issue often worsens or exacerbates one or more of the other issues, e.g. the energy transition to fight against climate change will be inflationary; higher interest rates against inflation worsen the debt crisis; etc.
The South China Morning Post notices an important trend in China governance practices. Since becoming top leader, Chinese president Xi has transferred more decision-making power from government bodies to party organs, headed by himself. These “leading groups” covered key areas including national security, cybersecurity and systemic reform. In 2018, all party leading groups led by Xi were upgraded to commissions. And new commissions continued to be set up, all headed by Xi, including one on law and order and another one on auditing.
Now, indications are Xi is delegating some responsibilities, in order to enable a change in policies. Most recently, Chinese Premier Li Qiang was assigned head of the Central Finance Commission, the top planner for the country’s financial system. EPM notes that any student of economic history will tell you that concentrating power in the hands of an individual is a bad policy choice. Mao Zedong was an excellent example. As was Deng Xiao Ping, because he consciously undid Mao’s concentration of power as part of his reforms, which enabled one of the greatest economic transformations in the history of humanity. In light of this history, a new Chinese decision to delegate powers could be seen as improving the economic outlook of the country.
Energy Transition & Technology News
Brazil's state-run oil company Petrobras recently laid out its 2024-2028 strategic plan in which it is seeking to "revitalize" the firm and start the process of energy transition, writes Reuters. The company plans to invest around $102 billion during the period. "Previously you saw a company with no future, not investing and paying exorbitant dividends," CEO Jean Paul Prates said. "Now we are with our eyes and mind on the future". Among the plans is a return to the fertilizer business, in particular green fertilizers. The firm also said it will invest $5.2 billion in solar and wind power with an initial focus on onshore plants, while researching the development of offshore wind in Brazil.
BBC looks at the question, “can airports make hydrogen work as a fuel?”. This is not about the production of hydrogen (in whatever fashionable colour of the moment). This is about moving it the “last mile” to the airplane. For airports to supply SAF is easy, as it can be delivered via existing pipes. But many doubt whether SAF can be produced cheaply enough, or in large enough quantities, to meet the needs of the airline industry. EPM is one of many doubters. Hence the interest in hydrogen. But, BBC notes, to be of any use to the aviation industry, hydrogen needs to be in its liquid form, which involves chilling it to minus 253C. Handling a liquid at that kind of temperature is immensely challenging. Given the chance, liquid hydrogen will "boil-off" and escape as a gas - potentially becoming a combustion hazard.
Liquid hydrogren requires tanks, pipes and hoses that will need to be extra-insulated for keeping the liquid cold. It is all technically possible, the BBC says. However, it admits, that it will not be cheap. One possible solution is to liquify H2 at the production location and shipping the super cooled liquid in special tanks that can be inserted into the airplane directly. This is what the startup Universal Hydrogen is working on. Its modules are extremely well insulated and can keep hydrogen in its liquid form for four days. Two modules would hold 360kg of hydrogen and would be able to fly an aircraft 500 miles, plus an extra 45 minutes of flight time in reserve.
Why hydrogen continues to be praised for its potential, while struggling with its economic realities, advances in battery technology are coming at lightning speed. After a decade focusing on bringing the cost of lithium based batteries down, battery giants are starting to put their money on new mineral solutions, in particular sodium-based technology, to take the next step, writes Bloomberg. In the past week, Sweden’s Northvolt said it made a breakthrough with the technology – something EPM reported last week. Meanwhile, Chinese EV maker BYD signed a deal to build a $1.4 billion sodium-ion battery plant. China’s CATL said this past April that its sodium-based batteries will be used in some vehicles starting this year. While sodium-ion batteries’ low energy density means they’re unsuitable for larger EVs, they could increasingly be used instead of lithium in lower-end, shorter-range vehicles — or for power-grid energy storage, where size isn’t such an issue.
Climate Politics
An anti-green backlash hovers over the COP28 climate talks, writes Politico. The breakdown of the Earth’s climate has for decades been the most important yet somehow least urgent of global crises, shoved aside the moment politicians face a seemingly more acute problem (like expensive oil). 2023 is likely to be no different, with the climate effort facing a bewildering array of distractions, headwinds and dismal prospects.
The best outcome for the climate from the 13-day meeting, which opens November 30, would be an unambiguous statement from the almost 200 participating countries on how they intend to hasten their plans to cut fossil fuels, alongside new commitments from the richest nations on the planet to assist the poorest. But the odds against that happening are rising.
A populist backlash against the costs of green policies has governments across Europe pulling back — a reverse wave that would become an American-led tsunami if Donald Trump recaptures the White House next year. And across the developing world, the rise of energy and food prices stoked by the pandemic and the Ukraine war has caused inflation and debt to spiral, heightening the domestic pressure on climate-minded governments to spend their money on their most acute needs first. On top of that are the global issues caused by the wars in Ukraine and Gaza.
Meanwhile, Brazil has signed onto a deal proposed by the United Arab Emirates, US and European Union for COP28, to triple renewable energy by 2030 and shift away from using coal, writes Reuters. Because Brazil is already a major player in renewable energy, with more than 80% of the country's electricity coming from renewable sources, tripling its renewables use isn’t mathematically possible, the country acknowledges. But it wants to show support for the global ambition expressed by the proposal.
India, on the other hand, plans to revive underground coal mining, as it tries to boost production to meet the country’s fast-growing energy needs despite international pressure to phase down use of the polluting fossil fuel, writes the Financial Times. “India is on a high-orbit growth trajectory, expanding industrially and economically,” Amrit Lal Meena, a senior official at India’s coal ministry, said in a statement. “Coal continues to play a key role in India’s economic growth and development.”
The United Nations’ Food & Agriculture Organization (FAO) is set to announce its Net Zero Roadmap during the COP28 summit, writes Bloomberg. From farm to fork, food systems account for about a third of global greenhouse gas emissions and much of that footprint is linked to livestock farming — a major source of methane, deforestation and biodiversity loss. The Rome-based UN agency, tasked with improving the agricultural sector and nutrition, is seeking to strike a balance between the climate transition and ensuring food security for the growing global population. So as well as calling for less meat consumption for the world’s well fed, the plan would also encourage farmers in developing countries to bolster productivity of their livestock and supply more sustainably.
The Global Energy Crisis
Germany’s €200 billion ($219 billion) fund earmarked to soften the impact of rising energy costs will expire at the end of 2023, Finance Minister Christian Lindner said according to Bloomberg. As of December 31 of this year the Economic and Stabilization Fund will be closed. There will be no more payouts from this. The electricity and gas price brakes will also be terminated.” The fund is one of the off-budget vehicles declared as unconstitutional by the country’s top court last week. EPM notes that if Germany does not find a way to continue the support, January 2024 will be the first month when Germans feel the impact their country’s energy policies has had on its energy markets. And, we foresee, that experience will lead to significant anger among the German population.
At the same time, Germany’s leading industrialists realize what is happening in the country. The Financial Times writes that Gunnar Groebler, CEO of steelmaker Salzgitter, has begged manufacturers of materials needed by industry, such as steel or chemicals, to remain committed to the country, despite unaffordable energy prices. If they were to leave the region due to high energy costs, he said, “you run the risk of losing the whole value chain” of production. His comments come as 32 per cent of surveyed industrial companies in August told the German Chamber of Commerce and Industry (DIHK) that they favoured investment abroad over domestic expansion — double the 16 per cent identified in the previous year’s survey — amid concern over a future without cheap Russian gas.
EPM notes that what the German industrialists now fear, is something we have highlighted as being the natural consequence of the country’s foreign policy regarding Ukraine. Its foreign policy regarding China, a major export market for German industry, will make matters even worse. If one puts the two different pieces of German foreign policy together, then one can not but conclude that Germany’s economic is very, very bad – significantly higher energy prices for households which will cause popular unrest; significantly higher energy prices for industry, which will cause comprehensive deindustrialization and a massive loss in high paying jobs. Unfortunately, EPM sees no way out for the country, as long as it maintains its US alignment based, morality justified, foreign policy. The country needs an independent, national interests’ based foreign policy as soon as possible. Before the current trajectory causes irreparable damage.
Other
Air pollution particles from coal-fired power plants are more harmful to human health than many experts realized, and it’s more than twice as likely to contribute to premature deaths as air pollution particles from other sources, new research demonstrates according to The Conversation. Air pollutants released from coal power plants were associated with nearly half a million premature deaths of elderly Americans from 1999 to 2020, the research says. The key reason is that PM2.5 particles from coal are more toxic than from other sources.