Energy, Geopolitics & Money - 2023.12.05
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 challenges facing the aviation industry regarding its Net Zero target. Last week, when Virgin Atlantic completed the world’s first intercontinental flight powered by 100% Sustainable Aviation Fuels (SAF), we at EPM said it was “much ado about nothing”, because the issue with SAF is not that requires further technological innovation, but that it is in short supply and will continue to be so for the foreseeable future. On that specific subject, analysis found that meet the aviation industry’s SAF target for 2030, the world needs an additional 70-80 million hectares of cropland by 2030, an area bigger than the state of Texas. To meet the 2050 target, it needs and area the size of California, Oregon, Washington, Nevada and Louisiana combined. If using waste sources of biomass alone is the objective, there will never be even nearly enough to keep all the world's planes in the air.
EPM sees this as an example of what is likely to happen in many sectors of industry that have announced Net Zero targets (for example the marine industry, whose challenges are the same as aviation’s). Very soon, the realization will kick in that there is no practical pathway to that target, because the envisioned solution cannot deliver at scale while the second-best solution is significantly more expensive. Then economic realities kick in, and EPM is very interested in learning about what will then happen to these ambitious plans? What we observed in 2023, in the UK and Germany in particular, is that when the economic cost of Net-Zero ambitions became clear, companies, governments and citizens took a substantial step back from the ambition.
Furthermore, we look at:
How US Shale is benefiting from the OPEC+ production cuts
Brazil’s backtracking on its membership in OPEC, now targeting to be an observer rather than a full member
Why manufacturing inventories remain at historically high levels, and what this says about the state of the global economy
Why EPM believes that public opinion is being made ready to support negotiations between Ukraine and Russia
Why air-conditioning is likely to become a major source of GHG emissions
The proposed US rules around hydrogen production subsidies, whose “additionality principle” will make things harder for potential projects to qualify
Saudi Arabia’s position on a draft text at COP28 that calls for the phase down of fossil fuels
Why the US’s electric-vehicle promotion efforts are more about decoupling from China than about actually reducing carbon emissions; these efforts will slow down the pace at which consumers can get access to new EV models and while increasing costs
General Energy News
US crude oil production set a record for the second month running in September, writes Reuters. crude and condensate production increased by 224,000 barrels per day (b/d) to 13.24 million b/d in September from August, according to the US Energy Information Administration. Crude and condensate production had increased by 342,000 b/d over the previous three months (annualised growth of 11%) and was 750,000 b/d higher than a year earlier (an increase of 7%). The data highlights how US producers have benefited from repeated OPEC+ cuts that have stabilised prices at a relatively high level and blunted the price signal to cut drilling further. This, in turn, highlights the challenge from US shale to Saudi Arabia and its OPEC+ partners.
Nevertheless, the OPEC+ oil production cuts could be extended past the first quarter of 2024 if needed, Saudi Energy Minister Prince Abdulaziz bin Salman said, according to Bloomberg. Responding to doubts on the financial markets the cut will actually be implemented, the minister also pledged the curbs would be delivered in full.
In what is a correction from earlier reporting, Brazilian President Luiz Inacio Lula da Silva has said that Brazil will never join the OPEC+ group of oil-producing nations as a full member while instead only seeking to participate as an observer, writes Reuters.
Macroeconomics
Big manufacturers worldwide are struggling to bring down the inventories that accumulated during the COVID pandemic, primarily due to weaker demand from China, writes Nikkei. It says that inventories totaled $2.12 trillion at the end of September, up 28% from the pre-COVID level of December 2019, based on a tally of 4,353 companies with comparable QUICK-FactSet data. The March 2023 figure of $2.2 trillion was the highest in 10 years, and the September tally was still up 2% on the year despite efforts to reduce excess stock. In the EPM view, the fact that this is happening while companies are actively working to reduce inventories, provides important information about the true state of the global economy.
Geopolitics
As to the war in Ukraine, EPM’s view is that public opinion is being prepared to support negotiations between the fighting parties. Over recent weeks we have seen the Economist’s interview with Ukrainian general Valery Zaluzhny, in which he said a “stalemate” is developing; then the statement by NATO chief Jens Stoltenberg, reported on by Politico, that “bad news” will be coming from the Ukrainian side of the front, about 2 days ago; and today the news coming out of the US that the country is running out of funds to support Ukraine. Reuters writes, White House budget director Shalanda Young, in a letter to Mike Johnson, the Republican speaker of the House of Representatives, and other congressional leaders, has said that if additional funds are not made available soon, this would effectively "kneecap Ukraine on the battlefield", and increase the likelihood of Russian victories
I want to be clear: without congressional action, by the end of the year we will run out of resources to procure more weapons and equipment for Ukraine and to provide equipment from US military stocks. There is no magical pot of funding available to meet this moment. We are out of money - and nearly out of time.
Energy Transition & Technology News
Last week, when Virgin Atlantic completed the world’s first intercontinental flight powered by 100% Sustainable Aviation Fuels (SAF), we at EPM said it was “much ado about nothing”, because the issue with SAF is not that requires further technological innovation, but that it is in short supply and will continue to be so for the foreseeable future. BBC looked at that particular issue and found our assessment to be correct. The biomass required to make biofuel can come from a broad range of sources, it says, ranging from plant material, food waste to even algae. The problem is the sheer volume of biomass needed to power an industry as fuel-hungry as aviation. If you were to grow sugar cane and use that to make biofuels for commercial jets, you'd need 125 million hectares (482,000 sq miles) of land – roughly equivalent to the surface area of the states of California, Oregon, Washington, Nevada and Louisiana combined. To meet the aviation industry’s SAF target for 2030, the world needs an additional 70-80 million hectares of cropland by 2030 globally, says McKinsey, an area bigger than the state of Texas. And if you tried using waste sources of biomass alone, you wouldn't have nearly enough to keep all the world's planes in the air. Therefore, to deliver the aviation’s industry decarbonization plan, you need e-fuels, in massive quantities, because there simply won’t be enough SAF – ever. But e-fuels are, and will always be, orders of magnitude more expensive than conventional fuels, EPM notes. Why EPM spends so much time on this subject, especially since aviation contributes just 3.5% to annual GHG emissions globally? It is because we see this as an example of what is likely to happen in many sectors of industry that have announced Net Zero targets (for example the marine industry, whose challenges are the same as aviation’s). Very soon, the realization will kick in that there is no practical pathway to that target, because the envisioned solution can not deliver at scale while the second-best solution is significantly more expensive. Then economic realities kick in, and we are very interested in learning about what will then happen to the ambitious plans. What we saw in 2023, in the UK and Germany in particular, is that when the economic cost of the ambition became clear, companies and governments took a step back from the ambition.
Reuters writes that the energy used in cooling and refrigerants accounts for about 7% of global greenhouse gas emissions, and that demand for cooling could more than triple by 2050 according to the International Energy Agency. Dozens of countries are therefore backing a COP28 pledge to reduce cooling-related emissions by at least 68% by 2050 from 2022 levels. But getting, will be hard and expensive. Conventional ACs transfer heat outside by converting gas refrigerants to liquid and back again, which generates cooling. Removing humidity requires cooling air to the point at which water vapour becomes a liquid to be drained. This inability to get rid of humidity without first cooling the air makes conventional ACs of low efficiency. For new technologies to “cool” with lower demand for energy and resulting emissions there are, however, no plans to bring prototypes to market. Japanese company Daikin said material costs and supply chain issues were still obstacles, as market research has shown that people are not willing to pay as much as 150% more for new cooling technologies.
The first draft of the legislation around the subsidies for hydrogen production in the US includes a requirement that hydrogen projects have to be powered by new sources of clean electricity, with a three-year “lookback” window allowing renewable energy generation brought online in the past three years to count, Bloomberg writes. In addition, the draft rules require hydrogen projects be supplied with new, clean power sources operating on the same grid on an annual basis through 2027 and then on a hourly basis starting in 2028, according to the people. “If true, the Biden Administration’s proposed strategy for implementing these provisions will fail to get this new industry off the ground,” Jason Grumet, chief executive officer of the Washington-based American Clean Power Association, said in a statement.
Climate Politics
Saudi Arabian Energy Minister Prince Abdulaziz bin Salman says the kingdom won’t agree to a text that calls for the phase down of fossil fuels at the COP28 summit in Dubai, writes Bloomberg. An agreement to call for a fossil fuel phase out or phase down is a key demand of many countries at COP28 including the US and EU, but the text must be agreed unanimously. Negotiators have been looking at other formulations — such as limiting the shift to “unabated” fossil fuels or tying it to a just transition. Abdulaziz didn’t say whether such a fudge would be acceptable to Saudi Arabia. He also called out countries pushing for a phase out of fossil fuel for hypocrisy, saying that if they believed in it they should just get on with it. “I’m not naming names,” he said. “But those countries who really believe on phasing out and phasing down hydrocarbons, you should come out and put together a plan for how in starting 1st of January 2024.”
The Electrification of Transport
Looking at the new US rules around subsidies for EVs, which EPM discussed last week, Nikkei says it makes clear that the US’s electric-vehicle promotion efforts are more about decoupling from China than about reducing emissions of carbon dioxide and other global-warming gases. The new rules disqualify suppliers headquartered in China, even if they are subsidiaries of American corporations. And a supplier based outside China would still be disqualified if it is at least 25%-owned by a Chinese. Lastly, the rules say that a company can be considered Chinese “if the Chinese government has enough influence over it”. What this means is, for example Ford and its plan to build a 100% owned battery plant in the US, with technical assistance from China’s CATL. Since Ford will wholly own and operate the plant, the company had assumed that EVs equipped with the plant's batteries would qualify for the tax credit. But the new guidance could let the authorities conclude that China is exerting control via technology, rendering the batteries ineligible.