Energy, Geopolitics & Money - 2023.12.06
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we look at:
ExxonMobil’s strategy for the energy transition
The US labor report, which indicates a cooling US economy; and the US “buy no pay later” and credit card debt increases; which leave EPM with the impression the US economy is actually in worse shape than the numbers indicate
The EU visit to China, which in our EPM view highlights the fundamental incompetence of the EU political elites that underlies our bearish outlook for the EU region
The different approaches used by the US and China to prevent military confrontation between them, where EPM explains why we believe hot war between the two countries is a bigger possibility than commonly assumed
The international shipping industry's decarbonization prospects
The US led international coalition to drive progress on nuclear fusion, which EPM sees as useful, just not something that has even the slightest chance of supporting the fight against climate changes, since nuclear fusion technology is too immature for it to have a meaningful impact before 2050
Ray Dalio’s view that higher interest rates will slow down the build out of renewable energy, that as a result the world is very likely to miss its 1.5 – 3 degree target, and that consequently an investments opportunity in climate mitigation is being created
General Energy News
Oil prices fell in Wednesday Asian morning trading as markets continue to doubt the impact of OPEC+ cuts and take cues from a worsening demand outlook in China, writes Reuters. Brent crude futures were at $77.12 a barrel and WTI crude futures at $72.19 a barrel.
Reuters summarizes ExxonMobil’s strategy as follows: (CEO Darren Woods) plan aims to balance profits from cheaper barrels of oil closer to home, like Guyana's vast offshore oilfields, with a risky multi-billion-dollar promise to create and sell decarbonizing services at margins akin to oil. Woods is quoted as saying, "Whatever the demand (for oil) is, we're competitive. That's the strategy." The company’s planned future includes pumping more than 4.4 million barrels of oil per day (bpd) by 2027, a goal that will require new technology to squeeze an extra 700,000 bpd or more from its existing shale wells. Woods deal for Denbury fits into an overall $17 billion bet on decarbonization and (blue) hydrogen through 2027. These low-carbon businesses can generate return on investment of between 10% and 20%, Exxon said. To allay investor worries about declining demand for gasoline and other fuels, he has restructured its downstream units to (more) easily switch to chemical from motor fuels. At the same time, the company plans to have a leading role in the vehicle electrification business. In November, Exxon pledged to become by 2027 a large scale producer of lithium, the raw material used in electric vehicle batteries.
Macroeconomics
The Financial Times writes that US job openings fell to their lowest level in more than two years in October. Analysts see the data as evidence the cooling of the economy, which was the objective of the U Fed rate hike policy, is actually happening. As such, expectations for a Fed rate cut are increasing, which is putting pressure on the US dollar exchange rate. US businesses advertised 8.7mn job vacancies in October, down from 9.6mn in September, according to the labor department’s Job Openings and Labor Turnover Survey released on Tuesday. It is the lowest level of openings since March 2021. Lay-offs held steady at 1.6mn and the number of workers quitting remained unchanged at 3.6mn — another indicator of softening in the labour market.
The Financial Times also writes that there has been a surge in the number of Americans choosing “buy now, pay later” payment methods for their holiday shopping. One of the leading BNPL companies, Affirm, told investors that 74 per cent of their gross merchandise volume in the latest quarter consisted of interest-bearing loans. More than 90 per cent of those loans offered up to a maximum annual percentage rate of 36 per cent. Americans’ credit card debts also hit $1.08tn in the third quarter, up $154bn year-on-year and the largest jump since 1999. This data gives EM the impression the US economy might actually appear better than it is, with access to new forms of (largely unregulated debt) enabling people to consume beyond means – which if done at scale, long enough, leads to economic disaster, as we all learned in 2008.
Geopolitics
Ursula von der Leyen, President of the European Commission, Charles Michel , President of the European Council, and Josep Borrell, the EU’s Foreign Policy Chief are on a one-day visit to Beijing to meet with President Xi Jinping and Premier Li Qiang in China this afternoon, writes Reuters. It is expected, that because EU representatives are geared up to lecturing China on a variety of issues, the meetings are expected to be “long on words and short on outcomes”. For example, the EU wants Beijing to use its influence on Russia to stop the war, will stress the need for China to respect Russian sanctions, and will raise the issue of growing arms supply from North Korea to Russia. The EU is also concerned about what it considers "imbalanced" economic relations, saying its near 400-billion-Euro ($431.7 billion) trade deficit with China is a reflection of restrictions on EU businesses. And it says it has questions on Chinese intentions towards Taiwan.
EPM would like to use one of our favorite words in the English dictionary: we are flabbergasted by the unprofessionalism of the EU diplomats. The whole attitude of the EU reeks of the old, colonial mindset. This certainly is not the correct way to approach contemporary China - regardless of what you think of it - that could be argued is both economically and militarily more powerful than the EU. Some humility would suit the EU guests in China, therefore. And, EPM believes, if the EU wants to make progress in its relationship with China, which one could argue would be beneficial to EU interests, it would also be useful. As such EPM believes the event highlights why we are bearish on the outlook for the EU, because at a fundamental level its political elites are out of touch with economic and geopolitical realities, and are therefore unable to formulate policies designed to protect and foster EU interests reflecting these reality they are the weaker power.
The Nikkei notes the US and China not only have opposing views on how to navigate bilateral relations but the approach each pursues for preventing military confrontation are like oil and water. It presents the US as being “tough”, but wanting to maintain communication to avoid war. Meanwhile it presents China as more confrontational, willing to take the chance that its actions lead to war. EPM believes this is a skewed view, and we see things differently. The US policy of a military buildup in the Asia Pacific can not be seen by China as any other than confrontational. This must be obvious to observers, as a similar Chinese military buildup anywhere along the US coastline would not only be seen as confrontational by the US but viewed as an unacceptable escalation of the growing conflict. As such, EPM’s assessment is that one cannot conclude that only China has taken a confrontational stance. Our view is, therefore, that a hot war between the two countries is actually a bigger possibility than is commonly assumed.
Energy Transition & Technology News
Forbes examines the prospect of the international shipping industry decarbonizing global operations. International shipping alone represents roughly 3% of global greenhouse gas emissions. Interestingly, of that amount, roughly 40% of all bulk shipping globally is used to carry coal, oil and gas – which means that a large part of shipping’s emissions will automatically disappear if the world can deliver an energy transition. The remainder will increasingly look for alternative energy sources in order to reduce emissions. These alternatives come at higher costs, and will continue to remain so. If regulations were to force shippers to nevertheless go down this route, the end result could well be more domestic manufacturing and recycling, as their price competitiveness versus imports will improve when shipping rates go up. The conclusion from the article is international shipping is likely to reduce its emissions significantly, if not automatically, if the world indeed delivers and energy transition.
Climate Politics
The Financial Times writes that oil, gas, coal and petrochemical industry representatives outnumbered most of the national delegations at COP28 based on an analysis of data provided by the UN and notes that this is a sign of increasing industry efforts to influence discussions on global climate change policy. The breakdown of attendees identified more than 2,450 people designated as representatives from the fossil fuel sector. Executives and employees paid by traditional oil, gas and coal companies were included in the tally, along with staff of companies dependent on the industry for revenue, as well as the lobby and trade groups that have publicly supported it. EPM would just like to mention that the number of EPM members and subscribers attending COP will remain a closely guarded secret…
US special climate envoy John Kerry launched an international engagement plan to boost nuclear fusion in the fight against climate change. Reuters writes, Kerry said the plan involved 35 nations and would focus on research and development, supply chain issues, and regulation, and safety. EPM loves fusion and international collaboration. But we do not see fusion as something that will become economically viable over the next 20 years, let alone being scaled to meet emissions targets by 2040 or 2050, even with international collaboration. As such, in the fight against climate change, this is a misguided effort. Fusion is useful for other reasons, though.
Ray Dalio notes that rising interest rates have made it harder to get climate projects off the ground, writes Bloomberg. “Is it more difficult to finance now that you might have an 8% cost of funds rather than free money? Yes it is,” he said at COP28 in Dubai. He added that lenders need a real return or else risk creating a bubble. Dalio said it’s unlikely the planet will meet its warming target of 1.5C, meaning there needs to be a greater focus on adaptation, which “will be an area for great investment and great productivity.”