Energy, Geo-politics & Money - 2023.11.28
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 position of the developing world when it comes to the COP process.
COP28 starts later this week, and the developing world has lost confidence it will deliver anything. This is an element of the global energy debate that EPM has highlighted since we started publishing, and which is driven by a perception in the developing world that the developed world is not doing its fair share – not decarbonizing fast enough, and not offering real support for decarbonization in the developing world, which has suffered the brunt of the effects caused by the climate change that has resulted from the developed world’s emissions over the past 200 years.
The developing world will therefore be looking at how the “loss and damage fund” subject progresses. They want the fund to provide at least $100 billion worth of annual financing by 2030. If this is not achieved in the form of practical concrete progress, which we at EPM see as the most likely outcome (no substantive progress), it is not unlikely that countries such as India will take a big step back from the process.
And we at EPM predict that if India disengages from the process, it will try to engage fellow developing nations and convince them to do the same.
Furthermore, we look at:
The efforts by the OPEC+ Cartel to agree on an additional crude oil production cut in support of oil prices; something investors believe it is unlikely to achieve
OPEC Secretary General Haitham Al Ghais’ response to the IEA report which accused the fossil fuel industry of doing too little in the area of new energies
The Chinese central bank’s interventions on its financial market, and Chinese local government support for smaller banks, both of which are at record levels; where EPM explains why this is happening and what it really means for the wider region
The new “missile age” that has developed in the Asia Pacific region, with thousands of new missiles being deployed by the various actors in the region (not just China and the US, but also Russia, North Korea, Japan, South Korea, India, the Philippines), which obviously raises the risk of war
The first a transatlantic jet flight powered by SAFs, which in the EPM view is a case of “much ado about nothing”
Nissan’s decision to end development of gasoline engines as of 2028, as part of its shift to hybrid and fully electric vehicles
The growth of Ola Electric, India’s main electric two-wheeler manufacturer; the resulting challenges; and why EPM believes this is all evidence of the momentum behind the electrification of two-wheelers in India
General Energy News
OPEC+ is looking at deepening oil production cuts, writes Reuters. Obviously, EPM says in response and building on what we wrote (before) yesterday, the real question is, “Will it be able to establish the necessary consensus?” And if it cannot build a consensus, will Saudi go it alone again and further deepen its voluntary cut beyond the current 1 million barrels per day? Reuters says an OPEC+ source informed it that the Cartel sees an option for a "collective further reduction".
Investors are increasingly pessimistic about the outlook for crude oil prices as doubts grow OPEC+ will cut production enough to offset rising non-OPEC output and a deteriorating economic outlook, writes Reuters. Hedge funds and other money managers have become almost as bearish on crude as they were at the end of June before Saudi Arabia and its OPEC+ partners implemented additional production cuts, it says.
EPM notes that OPEC was not pleased by the International Energy Agency’s (IEA) report we discussed yesterday, in which the IEA accused the oil industry of not investing enough in new energy solutions. Reuters wrote that the OPEC Secretary General Haitham Al Ghais accused the IEA of vilifying the oil and gas industry. In a statement, Al Ghais said
This presents an extremely narrow framing of challenges before us, and perhaps expediently plays down such issues as energy security, energy access and energy affordability. It also unjustly vilifies the industry as being behind the climate crisis. The truth that needs to be spoken is simple and clear to those who wish to see it. It is that the energy challenges before us are enormous and complex and cannot be limited to one binary question.
He said it was regrettable the IEA called technologies such as carbon capture utilization and storage (CCUS) and the promised impact of its implementation an "illusion".
Macroeconomics
Chinese financial authorities have ramped up and increased financial liquidity at an unprecedented pace in recent months in an effort to limit volatility in short-term interest rates, writes Nikkei. The scale of the central bank’s intervention operations has been ballooning as of late, it says. On Monday, the PBOC conducted seven-day reverse repos to the tune of 501 billion yuan ($70 billion), in order to provide liquidity. A reverse repo has the central bank purchase securities from commercial banks with an agreement to sell them back in the future. The net inflow from Monday's reverse repo operation, subtracting matured repos, amounted to 296 billion yuan ($42.2 billion). There have been six week long instances where China has extended net liquidity of more than 1 trillion yuan. Four of those weeks occurred in the months since September. The issue the Chinese central bank is trying to mitigate is rising interest rates in response to an increase in government bond issuances. The central government has issued an additional 1 trillion yuan in sovereign bonds, with a portion of the funds to go toward disaster relief. And local governments have been issuing more refinancing bonds, authorized by the central government, to deal with the hidden debt shouldered by investment entities controlled by the local authorities. This is taking place at a moment when confidence in the Chinese financial system is relatively low, due to the real estate issues that create risk for financial institutions, leading many to hold larger cash balances.
Some of the fund made available by the Chinese central bank are being used by local governments to support smaller banks, which struggle with the fallout from China’s property sector woes, writes Reuters. Local governments in China have sold record amounts of so-called special bonds this year to inject capital into these struggling smaller banks, it says. The governments have raised 152.3 billion yuan ($21.05 billion) via such bonds so far in 2023. Already more than double the 63 billion yuan issued in 2022 and a record, but still modest compared to the banks' needs, analysts say.
An opinion piece in Nikkei argues that South East Asia’s economy is not beholden to China, and that it can grow even when China’s economy does not (as much). It notes that the region's trade ties with China are stronger than ever. Bilateral goods trade surpassed $500 billion in 2019. But the relationship is increasingly unbalanced, with Southeast Asia depending more on Chinese imports and seeing less export growth. Other than Indonesia, whose commodity exports have benefited from strong demand for raw material from fast-growing Chinese sectors such as electric vehicles and solar panels, China's share of the total exports of major ASEAN economies has stagnated over the last decade. This is because a key feature of China's growth since the mid-2000s has been a declining reliance on imports. Rapid on-shoring of manufacturing has made China increasingly less dependent on other countries, including its Southeast Asian neighbors, to meet domestic demand and operate its value chains. It is possible that with China shifting focus toward high-tech manufacturing, it could begin to take in more consumer goods imports from ASEAN economies, in which case China’s growth will affect ASEAN. However, the region's potential to attract supply chains diversifying away from China offsets any worries this could cause.
Meanwhile, the US dollar has dropped to its lowest value in 4 months, as investors position for an expected rate decrease by the Fed, writes Bloomberg. The decline accelerated after Christopher Waller - one of the Fed’s most hawkish policymakers - signaled that interest rates were unlikely to rise further and could be cut if inflation continued to slow. According to the Financial Times Waller told the American Enterprise Institute think-tank “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to [the Fed’s target of] 2 per cent.” In an attempt to temper expectations, in response to Waller’s comments, Fed chair Jay Powell stated the Fed was not thinking about rate cuts “now at all”.
Geopolitics
By the 2030s, the Indo-Pacific region will be filled with thousands of new missiles as the U.S., China, North Korea, South Korea, Japan, Australia and Taiwan race to expand their arsenals, the Carnegie Endowment for International Peace writes in its report "Indo-Pacific Missile Arsenals – Avoiding Spirals and Mitigating Escalation Risks", according to Nikkei. The missile buildup in the region began when the Intermediate-Range Nuclear Forces Treaty expired in 2019 after the US and Russia withdrew, he said. The treaty signed in 1987 between the US and the Soviet Union banned all ground-based missiles with a range of 500 to 5,500 kilometers, but became an obstacle (for the US) as China, who was not part of the treaty, had a free hand to develop its own arsenal. The missile buildup that ensued was conducted not just by the U.S., but also allies like South Korea, Japan and Australia. In the resulting “missile age”, long-range missiles are being developed that can penetrate deep into enemy territory with precision and at a lower cost than fielding large-scale crewed aircraft. Other countries in the region are also active in the arms market. Vietnam, which has legacy Scud-type surface-to-surface missiles, may enter talks soon to buy the Indian-Russian supersonic BrahMos missile. The Philippines, a US treaty ally, has signed a deal to acquire three BrahMos supersonic anti-ship cruise missile batteries.
Energy Transition & Technology News
A lot is being made of a transatlantic flight powered by Sustainable Aviation Fuels (SAF). A Virgin Atlantic plane powered by a blend of waste cooking oil, animal fats and other unorthodox fuels landed in New York on Tuesday, after a flight from London Heathrow, writes the Financial Times. It is the first time a commercial airline operated a long-haul flight entirely powered by sustainable aviation fuels (SAF). Unsurprisingly, the aviation industry hails it as a milestone in its overall push to decarbonise the industry. EPM is of the opinion that this is a case of “much ado about nothing”.
EPM does not see the issue with SAF use on technological grounds; the technology to produce it from organic waste products are well established, tried and tested. Yet, the product itself is in essence a “drop in” replacement for conventional fossil based jet fuel and SAF use required limited (if any) adjustment to jet engines.
The issue with SAF is with supply. Its supply is limited and therefore its costs are very high. And supply is destined to remain limited / constrained (compared to demand) because its primary feed stock will remain limited – unless the world’s remaining rain forests are clear cut to make way for the production of SAF feed stock (soy beans).
EPM notes that Annual SAF production in 2022 was 300 million litres. But the aviation industry will need about 450 billion litres a year of sustainable aviation fuel by 2050 to hit its net zero commitment! We at EPM currently see no credible pathway to achieving those enormous production volumes.
We note that the flight could have been made earlier; it was completed but must have been incredibly expensive and a loss making flight for the airline, because SAFs are so expensive. And it does not herald “things to come”, because SAF supply will remain constrained for the foreseeable future. In other words, consumers will not be happy with higher ticket prices, SAF prices will not necessarily decline with increased production, and the world will suffer greatly with increased deforestation (oxygen anyone?).
Climate Politics
According to an opinion piece on Bloomberg, the developing world has lost confidence in the COP process. This is a element of the global energy debate we at EPM have highlighted since we began publishing. The growing sentiment is driven by a perception in the developing world that the developed world is not doing its fair share – that it is not decarbonizing fast enough and it is not offering real support for developing economies to decarbonization. The developing world suffers the brunt of the effects caused by climate change that has resulted from the developed world’s emissions over the past 200 years. As such, the developing world will therefore be looking at how the “loss and damage fund” subject progresses. They want (if not need) the fund to provide at least $100 billion worth of annual financing by 2030. If this is not achieved, EPM predicts that it is likely that countries such as India will take a big step back from the process – and if it does, it will try to lead the other developing nations to do the same. It is not likely that big progress will be made at COP 28. For example, the US is against mandatory contributions to the fund, whatever the contribution formula may be determined. It wants all contributions to be voluntary. The UK, meanwhile, wants mandatory payments, but EPM notes, it wants everyone but itself to be made responsible for these payments (such as Gordon Brown’s proposal that IOCs and major petro-states pay into the decarbonization fund).
The Electrification of Transport
Nissan Motor plans to cut by 60% the types of engines for cars that will debut in 2028 or beyond, Nikkei writes. The reason is, the company has decided to focus on mini-cars and hybrid vehicles (HVs), which essentially halts the need to develop new gasoline-only engines. Starting with new models in 2028, Nissan will primarily focus on four types of gasoline engines bound for its e-Power brand hybrid vehicles, which integrate a gasoline engine and electric motor. The development of new engines for cars powered solely by gasoline will then end. But since gasoline-powered vehicles will remain in its lineup, the company will continue to manufacture engines. In the U.S., where demand for gasoline-powered pickup trucks and other vehicles is strong, Nissan plans to upgrade existing engines, not develop new ones.
Ola Electric, India’s main electric two-wheeler manufacturer, is targeting a stock-market listing after going from zero to 338,000 e-scooter sales in about two years, writes Reuters. CEO Bhavish Aggarwal says the company, already valued at $5.4 billion, will quadruple its annual production capacity to 2 million e-scooters by early new year. The ambitions don’t come without challenges. Parts of the company's nationwide network of over 400 service hubs which maintain and repair its EVs are showing signs of strain after the surge in sales. Demand is outstripping workforce and/or supply of spare parts. In the EPM perspective, this is a matter of “glass half full or half empty”. In our view, it is certainly half full. The root of the issue is massive demand for electric two-wheelers. As a result, an industry that needs to be built up from zero, is behind in meeting demand. In our view, whenever there is demand, this will eventually happen. As such, we see the current issues not as an impediment to EV uptake in India, but rather as further proof it will – rapidly!