Energy, Geopolitics & Money - 2023.12.13
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 final text out of COP28, which says the represented nations agree to begin reducing global consumption of fossil fuels. However, a closer look at the text reveals, in the EPM view, that it is in fact an agreement to continue using in particular oil and gas, and to refrain from regulatory interventions to force a shift in the global energy market.
The document “calls on” the world to act, which is the weakest of all exhortations used in diplomatic language. Furthermore, the wording "transitioning away" indicates the call is demand focused, which allows oil producing countries to stick to “business as usual” as long as there is demand. Then there is the point that “the transition needs to be achieved in an ‘orderly’ fashion”, which also adds a further hindrance to reduced oil demand – while also allowing OPEC engagement in the market to keep prices stable (at elevated levels, some would say). The communique also seems to specifically create room for natural gas in the energy markets until 2050, as it says “that transitional fuels can play a role in facilitating the energy transition while ensuring energy security”.
Furthermore, we look at:
The US EIA’s decision to lower its 2024 price forecast for Brent crude by $10 a barrel
The view that oil demand will not peak “during our lifetimes”
The current state in the “chip wars”, where a closing of the gap between leaders (Taiwan, South Korea, United States) and followers (China) has been observed, which EPM discusses under Macroeconomics because of the critical nature of the semiconductor in the global economy
The US expectations regarding the next phase of Israel’s war on Gaza, and its work to manage an end to the full-scale war and the period that is to follow it
Kishore Mahbubani’s view that something profound is happening in the world, namely a kind of metaphysical detachment of “the West” from “the rest”, what this means for the future of geopolitics, and what western countries need to do in order to prevent this from leading to conflict
South Korea’s strategic, $29 billion investment in the battery value chain
The competition between China’s BYD and CATL in the low-cost lithium-iron-phosphate (LFP) batteries space
The competition that is starting in the electric vehicle charging space
General Energy News
Shorter term, the US Energy Information Administration (EIA) on Tuesday lowered its 2024 price forecast for international benchmark Brent crude by $10 a barrel, despite a recently announced oil production output deal from OPEC+, writes Reuters. Brent will average $83 per barrel in 2024, according to the EIA forecast it issued in its monthly report, versus an estimate the administration published last month of $93 per barrel. US crude output is expected to rise by 1.02 million bpd to a record 12.93 million bpd this year, the EIA said, overtaking the previous peak of 12.3 million in 2019. Production in 2024 is due to rise by 180,000 bpd to 13.11 million bpd, it added.
Medium term, OPEC+ will need to carefully control oil supplies for another five years to avoid a “meltdown” in crude prices, says the Rapidan Energy Group according to Bloomberg. Supplies from outside OPEC — particularly the US — are growing much faster than previously estimated, it says. Non-OPEC supplies will increase by 700,000 barrels a day each year to 2030 — rather than the declines the consultant previously forecast — thanks to growth in the US, Guyana and Brazil. Longer term, Rapidan doubts that improved fuel efficiency and the adoption of electric vehicles will be enough to cap oil demand so soon. As a result, it does not see oil demand peaking over the next decade.
Even longer term, JPMorgan's top energy strategist says the world will not see peak oil demand “during our lifetime”, writes Market Insider. "That intrinsic demand that is not visible is so significant that we don't see demand peaking - I don't think we'll see demand peaking in our lifetimes," said Christyan Malek. "Particularly as demand growth in [emerging markets] continues to surprise the upside." That prediction sharply contrasts that of the International Energy Administration's Fatih Birol, who expects fossil fuel demand to peak this decade. Malek, however, thinks "invisible," unobservable demand from energy-poor nations is highly underestimated, and that growth (which is less predictable) will steadily outpace supply (more predictable), creating tightness in the market.
Macroeconomics
The race to make ever tinier and faster chips has seen a handful of companies, such as TSMC, Intel of the US as well as South Korea’s Samsung, amass a huge lead over competitors, creating what is essentially a two-tiered industry where the top players race ahead to produce 2-nm chips by 2025. Meanwhile the laggards, like Chinese chip manufacturers, have struggled to stay in the game, particularly in the wake of US export controls announced in 2019 and further tightened several times since, writes Nikkei. But is there a limit to how much transistors can shrink, it asks? Chiang Shang-yi, former head of research and development at TSMC, said:
If Moore’s law really reaches its limit, it will bring a huge impact to the semiconductor industry. The slowdown (in the pace of semiconductor improvement) will likely give those trailing behind in the race, such as China, the opportunity to catch up
And indeed, according to an analysis by Nikkei, the technological gap is narrower than it ever has been between Intel and SMIC, China’s top chipmaker. While this is partly due to China’s determination to advance its chip capabilities amid US export curbs, it is also the result of the long-feared slowdown in cutting-edge innovation by the industry frontrunners, Nikkei says. TSMC and Samsung are now churning out 3-nm chips, while Intel is at the 5-nm mark. All three are racing to produce 2-nm chips by 2025. Beyond the 2-nm chips expected in two years, leading makers are already developing 1.4-nm chips and aiming for 1-nm chips by 2032. China’s SMIC aims to push chip production beyond its current 7-nm technology toward 5-nm chips.
Here, EPM would like to note here two things: SMIC’s 7 nm chip is considered by many to have a performance similar to the 5 nm chips coming from Taiwan and elsewhere and, the manufacturing cost of SMIC’s chips is significantly higher than those of comparable chips from Taiwan and elsewhere.
In order to maintain the lead, the companies connected to the Western hemisphere are now looking at “packaging” chips, essentially stacking them to further improve performance. For example, earlier this year, Intel, for the first time in 40 years, redesigned the architecture of its flagship PC chipset to take advantage of advanced packaging techniques. Four “tiles” – responsible for central processing, AI computing, graphics and data transmission interface – have been combined into one chip, to be released later this week. Nvidia's H100 chipset, the powerhouse behind OpenAI’s popular ChatGPT, epitomizesthis trend. Its integrated design directly connects a graphics processor with six high-bandwidth memory chips, with the advanced packaging tech provided by TSMC. But, Nikkei notes, because chip packaging is less technologically demanding than manufacturing, the barriers to entry and advancement are lower.
Geopolitics
Washington expects the most intensive phase of Israel’s war on Hamas in southern Gaza to be scaled back and become more targeted as soon as early January, US officials said according to the Financials Times. “Now is the most intense phase . . . at some point the approach will be different with fewer boots on the ground but [they] will go in when they have to,” a senior US administration official said on the condition of anonymity. This “official leak” comes at the time when Jake Sullivan, national security adviser to President Joe Biden, is set to travel to the region, to discuss the war and preparations for what will follow it.
EPM notes the US’ expectation is almost a month away. In addition to that being a humanitarian disaster, as aid agencies have said Gaza is on the brink of starvation, we also reiterate a comment we made earlier. We don’t understand why the US is wasting its soft power in the manner that it is. There are many commentators saying the US can not arm both Israel and Ukraine at the same time, and that the effort to do so depletes stock needed by the US army. But the speed at which the US is depleting its inventory of “goodwill and support among the people of the world” is significantly worse, we would argue – and much harder to replenish in the future. We really do not see what US national interests are being served by the Biden administration’s positioning in Israel’s war on Gaza. In the midst of the transition toward a multi-polar world, we believe the day is not far off when the US will come to see this policy decision as having more harm than good.
Kishore Mahbubani writing for the Financial Times says it’s not just the US, but the West more generally, that is wasting valuable soft power. And not just recently, but since longer already. It wasn’t western values that made the west pre-eminent, he says, but performance. Superior performance enabled the comparatively small population of the west to pull ahead of the rest of humanity for 200 years and to use its technological superiority to colonize all corners of the globe. Furthermore, Mahbubani notes, in the postwar period in particular, most western societies were stable and well-ordered, enjoying both consensual democracies and sustained economic growth. Their leaders, even when not inspiring, were sensible.
Today things are different with incompetence replacing competence. Societies that were once well-ordered have become deeply troubled and politically volatile. This is not a cyclical upset, Mahbubabi says, but a structural change. European leader should commit to memory that from 2010 to 2020, Mahbubani says, the ASEAN bloc of south-east Asian nations, with its $3tn gross domestic product, contributed more to global economic growth than the EU with its $17tn GDP. His conclusion is that something profound is happening in the world — a kind of metaphysical detachment of the west from the rest. Where many people in the rest of the world once saw the west as the answer to their problems, they now realise that they will have to find their own way.
And Mahbubani advises, to prevent this structural change from causing conflict, the nations of the world have to start speaking to each other as equals. EPM agrees wholeheartedly with this view. We are reminded of last week’s EU visit to China, where we mentioned the EU officials still behaved as imperialists, talking as though they can dictate to China what China needs to do, not realizing China is today more powerful than is the EU, and less dependent on the EU than the EU is on China.
Energy Transition & Technology News
South Korea will provide 38 trillion won ($29 billion) in financing to strengthen its battery industry over the next five years, writes Reuters. The country plans tax incentives and loan support for South Korean firms investing overseas to secure mining rights for minerals and other battery materials, and strengthen financial support for companies that refine and reuse minerals. It also plans to increase financial support such as loans, guarantees and insurance from institutions like the Export-Import Bank of Korea to battery industry firms, including those investing in North America to meet the terms for tax allowances under of the US Inflation Reduction Act (IRA).
Climate Politics
Representatives from nearly 200 countries agreed at the COP28 climate summit on Wednesday to begin reducing global consumption of fossil fuels, writes Reuters. The deal calls for "transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner ... so as to achieve net zero by 2050 in keeping with the science." COP28 President Sultan Al Jaber called the deal "historic" but added that its true success would be in its implementation. "We are what we do, not what we say," he told the crowded plenary at the summit. "We must take the steps necessary to turn this agreement into tangible actions."
EPM notes that it will now, most likely, take a few more COPs for the represented nations to agree on how they will reduce consumption of in particular oil and natural gas. As such, we do not see COP28 as an event that will have a shorter- or medium-term impact on the global energy business.
Javier Blas of Bloomberg nevertheless sees the COP28 declaration as “the strongest-ever call for the fossil-fuel industry to change”. But, he also says, little of what’s agreed at the annual United Nations conference translates into real policies — particularly when it costs money. Going into the details, he notes the document “calls on” the world to act. In United Nations parlance, calling on is the weakest of all exhortations used in diplomatic language. It's an invitation to do something, rather than an actual demand. Furthermore, by using the wording "transitioning away" the call is demand focused, which allows oil producing countries to stick to “business as usual” as long as there is demand.
Then there is the point that “the transition needs to be achieved in an ‘orderly’ fashion”, which also adds a further hindrance to reduced oil demand – while also allowing OPEC engagement in the market to keep prices stable (at elevated levels, some would say). The communique also seems to specifically create room for natural gas in the energy markets until 2050, as it says “that transitional fuels can play a role in facilitating the energy transition while ensuring energy security”.
The more important element in the document, in Blas’ view, is the agreement to “tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030”. Because it is a specific action with a due date. In the EPM view, it all adds up to an agreement to continue using fossil energy, in particular oil and gas, and refraining from regulatory interventions to force a move away from these sources of energy.
The Electrification of Transport
China's electric vehicle powerhouse BYD is emerging as a strong rival to CATL, the leading producer of EV batteries, by taking over as the top seller of a low-cost lithium-iron-phosphate (LFP) batteries, writes Nikkei. In the first half of the year, BYD commanded a leading 43.7% share among vehicles running on LFP batteries. In the months between January and November, BYD held a 41.1% market share, besting CATL's 33.9% share. The driving force behind BYD's rise in the LFP space is the Blade Battery the company manufactures independently. Blade batteries are thin and lengthy, allowing for efficient space utilization for extra energy storage capacity.
Electric vehicle charging companies in Europe and the US have started fighting over the best spots for fast public chargers, writes Reuters. There are more than 900 EV charging companies globally. The sector has attracted over $12 billion in venture capital funding since 2012. Many current EV charger companies are backed by long-term investors, and more are expected to launch. Looming bans in various countries on cars powered by fossil fuels have made the sector more attractive to infrastructure investors like M&G's Infracapital and Sweden's EQT. Competition for the best sites is becoming fierce and site hosts can switch between operators before settling on a winner.