Energy, Geopolitics & Money - 2023.12.25
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 three factors in the situation in the Middle East:
The Houthi’s disruption of shipping in the Red Sea – it is well known they are supported by Iran and the US has explicitly accused it of being behind the Houthi attacks on vessels. While the objective of the Houthi’s might well be to support the Palestinians, for Iran the whole affair is more likely an opportunity to put pressure on the United States, in order to get a new deal and a lifting of sanctions.
The situation on Israel’s northern border. Israeli officials have been threatening Lebanon with an invasion, because of the presence of Hezbollah on the Lebanese side of the Israel – Lebanon border. On this subject, EPM reminds our valued readers that Hezbollah was founded not to fight Israel in support of the Palestinians, but to protect Lebanon against Israel. As such, in our view Hezbollah poses no “threat of invasion” for Israel. The Israeli “angst” regarding Hezbollah is more due to is dislike of having strong neighbours, which should be an argument in support of the view that the US, for its own interests, should not allow Israel to attack Hezbollah as it is not really a threat to Israel, while such an attack is likely to inflame the broader Middle East which would harm the US ambition to do a pivot to Asia.
The global geostrategic perspective on the whole issue of the war in Gaza, we echo Mohammed El Arian’s view that the US position in the Israeli attack on Gaza is devastating for its reputation and image, and with it the global organization of the world economy that the United States established after World War II. As such, it is likely to accelerate the trend towards regionalization of the global economy.
Furthermore, we look at:
Angola’s decision to leave OPEC
The crisis on Germany’s real estate market, which EPM sees as an indication major, major economic trouble is brewing in not only the Europe’s most important country, but the entire region
China’s focus on developing the “industries of the future”
Hyperloop One’s decision to shut down after 9 years and $450 million in financing
Eni’s decision to sell 9% of its Plenitude renewables unit in a deal that values the unit at €8 billion
General Energy News
Angola has decided to leave OPEC, writes BBC. Mineral Resources and Petroleum Minister Diamantino Azevedo said,
We feel that at this moment Angola gains nothing by remaining in the organisation and, in defence of its interests, it decided to leave. If we remained in OPEC ... Angola would be forced to cut production, and this goes against our policy of avoiding decline and respecting contracts.
Angola currently produces about 1.1 million barrels per day.
Reuters calls the move a “blow to OPEC”. Angola had been unable to produce enough oil to meet its OPEC+ quota in recent years, because of falling investment and a lack of big new oilfield developments. It has struggled to reverse falling output since a peak of 2 million bpd in 2008. Its decision follows a protest about OPEC+'s decision to cut its output quota for 2024.
While EPM does not foresee Angola’s decision to have a structural impact on the global oil market in the shorter term, it does indicate that OPEC has not been proceeding on the basis of consensus, but rather by force of its leading members. This does have the potential to impact markets over the medium term, for if OPEC loses its consensus seeking modus operandi, it will eventually fall apart.
Macroeconomics
All is not well in Germany. Residential property prices continued their fall in the third quarter, dropping 10.2% from a year earlier, in a further grim sign for the real-estate sector in Europe's largest economy, writes Reuters. It was the fourth consecutive quarter of declines and the biggest since Germany's statistics office began keeping records in the year 2000, underscoring the nation's biggest property crisis in decades. Konstantin Kholodilin from the macroeconomics department of the German Institute for Economic Research (DIW) said
Until 2022, there was a speculative price bubble in Germany, one of the biggest in the last 50 years. Prices have been falling ever since. The bubble has burst.
EPM sees this as very, very bad news not only for Germany, but the entire EU region. It is now not only dealing with unsustainably high energy prices, high inflation and high interest rates holding back consumption and investment, and a constitutional court effectively forcing the government to balance its books, but also the “mother of all economic crisis” in the modern economy, a real estate crash which has the potential of causing a banking crisis. Considering the role Germany plays in the EU, all countries should now worry.
Meanwhile, China has set developing “industries of the future” as one of its key missions for the year to come, as it ramps up efforts to turn frontier technologies into a major driving force for China’s economic growth, writes the South China Morning Post. The Ministry of Industry and Information Technology said that it would boost a wide range of tech-heavy sectors from new materials to biomedicines and high-end equipment. Detailed plans include supporting battery-swapping models for new energy vehicles and promoting a comprehensive electrification of public sector vehicles in pilot areas, as well as strengthening standard guidance and quality supervision in the photovoltaic industry. It also pledged to promote high-end applications of rare earths, including in aerospace, electronic information and new energy sectors. It also vowed to promote low-carbon industrial development and strictly restrict new production capacity in iron and steel, cement and flat glass.
A new international (economic) order is unlikely to emerge anytime soon, writes Mohammed El Arian for project Syndicate. Instead, as more and more countries decide to self-insure by building alternatives to the Western-led order, the global economy risks an increased rate in fragmentation thereby eroding America’s leadership role and accelerating a system-wide shift toward disorder. Two developments, in particular, have fueled widespread frustration with the Western-led order this year, he says. First, the limited success of the Russia sanctions regime has eroded the belief that countries around the world have no choice but to be part of the Western-led economic order. Second, America’s role in the ongoing war between Israel and Hamas has, for many countries, exposed the hollowness of the West’s stated commitment to upholding basic human rights and their inconsistent compliance with international law. Should the current international framework be allowed to fail, it will not be replaced by a new system anchored by China but by more global disorder, El Arian warns.
Geopolitics
As to the heightened tensions in the Red Sea, which is severely disrupting global shipping and thereby likely to have the macroeconomic implications which EPM discussed last week. The United States have explicitly accused Iran of orchestrating the whole issue, writes the Financial Times. Now EPM notes that “blame Iran” is a bit of a standard US response. Remember the 7th of October which was also blamed on Iran by the US, without evidence, and as it turned out falsely. But in this case, the accusation is more credible in our view, as the close relationship between the Houthi’s and Iran is well established.
The National Interest provides valuable thoughts as to why Iran and the Houthi’s might be doing what they are doing. While for the Houthi’s themselves their actions might indeed be seen as their best effort to support the Palestinians, for Iran it is most likely different. The National Interest says
… it is crucial to recognize that Iran’s proxy networks are not just tools for regional influence but also key components of its deterrence strategy. By arming these groups, Iran signals to its adversaries the potential chaos that could engulf the region if these proxies are mobilized. In this context, entities like Hezbollah and Shia militias in Iraq and Syria are deemed too vital to risk in conflicts over Hamas. The Houthis, however, hold a different status. Iran has managed to advance its regional objectives for about forty years with minimal reliance on the Houthis, indicating that it could continue to do so. This suggests that, unlike Iran’s other proxies, the Houthis might be considered more expendable in the broader spectrum of Iran’s strategic considerations.
If correct, the issue is less about the Israel War on Gaza and more about the Iranian ambition to normalize relations with the United States such that the sanctions are lifted. The challenging environment the United States currently finds itself in, with the Ukrainians under sever Russian pressure, and the Israeli War on Gaza further demanding the attention of valuable US resources, obviously makes it an opportune moment for the Iranian to create a pressure point to motivate the US to return to the negotiating table.
Now on to US efforts to deal with the problems in the Red Sea. Reuters has documented who will participate in the proposed operation Prosperity Guardian, and how. EPM notes that France, Spain and Italy have explicitly said they would not participate in an American operation, saying they will only join NATO or EU led military operations. Of course, practically speaking NATO is as much led by the US as is the US military itself (in our view NATO is nothing short of an extension of the US military), but this is a clear political signal from the mentioned countries that they do not want to be seen as being on the US side, we believe. Other countries such as Australia, The Netherlands and Norway will be providing only token support to the operation, in the form of a few officers to be stationed in the Middle East.
Washington should take note of the risks of another Israel-Hezbollah war and pressure Israeli officials against any invasion of Lebanon, writes The National Interest (NI) and it notes that Israeli officials have made clear their intentions to take on Hezbollah. War minister Benny Gantz said as much in a meeting with US secretary of state Antony Blinken on December 11 in an official readout: “heightened aggression and increased attacks by Iranian-backed Hezbollah demand of Israel to remove such a threat to the civilian population of northern Israel.” Senior Israeli officials, and not limited to Israel Defense Forces (IDF) Chief Herzi Halevi and Prime Minister Benjamin Netanyahu, have similarly threatened to strike Lebanon in response to Hezbollah’s actions since October 7. Defense Minister Yoav Gallant outlined Israel’s plans in early December on a tour of the disputed northern border, claiming, “When we complete the process of fighting in Gaza, the military effort will be directed mainly to the north.”
NI says any war between Israel and Hezbollah would be a disaster and is not in US interests. Washington understands the risks and US officials are coming out strongly against actions that would lead to such a war. Defense Secretary Lloyd Austin expressed his concern about Israel’s actions along the disputed border to Gallant as early as November 11. Other US officials continue to express similar anxieties, culminating in US energy envoy Amos Hochstein’s multiple November visits to Beirut and Jerusalem to urge restraint. Given this context, it argues, US officials must continue to publicly state that the United States will not engage in an expanded conflict and that it does not want one.
If Israeli officials continue to indicate that a war with Hezbollah is coming, Washington should gradually separate itself from Israel. Here, EPM feels it is important just to remind our valued readers that Hezbollah was founded not to fight Israel in support of the Palestinians, but to protect Lebanon against Israel. As such, in our view Hezbollah poses no “threat of invasion” for Israel. The Israeli “angst” is more due to is dislike of having strong neighbours, which should be an argument in support of the view that the US, for its own interests, should not allow Israel to attack Hezbollah as it is not really a threat to Israel, while such an attack is likely to inflame the broader Middle East which would harm the US ambition to do a pivot to Asia.
Elsewhere, the National Interests goes into more detail as to why a broader Middle East conflict would be so damaging to US interests. It has to do with the Pivot to Asia, and the need for the US to focus on countering China, if it wants to preserve its current position of hegemony. This requires the US minimize its military’s presence in the Middle East. EPM notes that Israel’s War on Gaza gas had the opposite effect. A broader Middle Eastern conflict would force the US to focus squarely on the region leave Asia exposed.
Energy Transition & Technology News
Hyperloop One, the futuristic transportation company building tube-encased lines to zip passengers and freight from city to city at airplane-like speeds, is shutting down, writes Bloomberg. Hyperloop One raised more than $450 million since its founding in 2014. It built a small test track near Las Vegas to develop its transportation technology, and for a time took the name Virgin Hyperloop One after Richard Branson’s Virgin invested. Virgin removed its branding after the startup decided last year to focus on cargo rather than people. DP World, the Dubai-based conglomerate, has backed Hyperloop One since 2016 and owns a majority stake. The startup’s remaining intellectual property will be transferred to DP World.
Italian oil major Eni has agreed to sell about 9% of its Plenitude renewables unit to Energy Infrastructure Partners for €700 million ($766 million), writes Bloomberg. The deal sets an equity value for Plenitude at around €8 billion. Plenitude sells energy to households and businesses, produces renewable power, and runs electric vehicle charging stations. It serves about 10 million retail clients across Europe, operating in 15 countries globally.