Energy, Geopolitics & Money - 2024.01.10
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment for you.
In this roundup, we look at:
The outlook for the oil price, which will see steady growth in oil supplies from countries outside the OPEC+ cartel and an uncertain economic outlook keeping a lid on the price; and where EPM explains why we believe the geopolitical risk premium is likely to fade away over coming weeks and months
The under-appreciated resilience of Russia’s oil industry
The World Bank’s analysis which shows the global economy has just experienced the slowest half-decade of GDP growth in 30 years, and is likely to continue to under perform throughout the 2020s
The EU top-diplomat Josep Borrell’s trip to Lebanon, where he learned that Hezbollah does not want things in the Middle East to escalate; and Israel’s continued efforts (so it seems) to make Hezbollah change its mind
The secret meetings between Ukraine’s main backers that are taking place to find a way to end the current war
The Tâmega plant, an electricity storage project of Iberdrola in Portugal, i.e. “pumped storage” or “water battery”
The German €902 million subsidy to Swedish battery maker Northvolt to build a plant in the country
Honda’s plan to catch up in the electrification of transportation
Why the EU’s Carbon Border Tax Adjustment Mechanism (CBAM) is greatly worrying export dependent countries, and how it could potentially alter global trade flows
General Energy News
A steady growth in oil supplies from countries outside the OPEC+ cartel and an uncertain economic outlook are expected to keep a lid on the price of crude this year, writes the Financial Times. It notes uncertainty over how tensions in the Middle East will play out have left analysts reluctant to make aggressive forecasts in either direction of the current oil price. EPM’s view, as you know, is that the situation in the Middle East will not escalate.
We have discussed this extensively under geopolitics, but here is the summary version of our view: While Israel is pushing for regional escalation, the United States is very active diplomatically to prevent that from happening. At the same time, none of the regional actors have anything to gain from escalation. Accordingly, Israel will be eventually be reined in by the US. Leaving us at EPM with the view that the geopolitical risk premium for oil is set to fade away leading to a further depression in overall price.
Russia delivered a second year of record oil drilling in 2023, writes Bloomberg. In the first 11 months of 2023, Russia drilled oil production wells with a total depth of 28,100 kilometers, according to industry data. That’s on track to beat last year’s post-Soviet record. “Russia is substantially more independent in its oil-field services than generally appreciated,” it quotes analysts as saying. “Only some 15% of the nation’s domestic drilling market depends on technologies from so-called unfriendly nations”. The withdrawal of major Western oil-service companies from Russia had minimal impact because it largely left intact their local subsidiaries. These operations “were mostly sold to management, retaining the know-how built up over the years”.
Macroeconomics
According to the World Bank’s latest Global Economic Prospects report, the global economy has just experienced the slowest half-decade of GDP growth in 30 years. Meanwhile, the medium-term outlook has darkened for many developing economies amid slowing growth in most major economies, sluggish global trade, and the tightest financial conditions in decades, it says. Global growth is projected to slow for the third year in a row—from 2.6% last year to 2.4% in 2024, almost three-quarters of a percentage point below the average of the 2010s. Developing economies are projected to grow just 3.9%, more than one percentage point below the average of the previous decade. Low-income countries should grow 5.5%, weaker than previously expected. In advanced economies, meanwhile, growth is set to slow to 1.2% this year from 1.5% in 2023. “Without a major course correction, the 2020s will go down as a decade of wasted opportunity,” the bank says.
Geopolitics
War in Gaza
EU’s chief diplomat Josep Borrell, currently on a diplomatic mission to Lebanon after israel’s assassination of a Hamas leader there, is convinced that Hezbollah is not seeking war with Israel, writes Euractiv. During his pre-planned visit, Borrell engaged in high-level talks with Lebanese leaders as part of his efforts to prevent a war between Lebanon and Israel. He also met with Hezbollah’s parliamentary bloc leader, Mohammad Raad. Borrell said:
I have deduced that Hezbollah is not seeking war, or is not seeking a war of greater intensity and greater extension. My impression, which I hope is not wrong, is that they are perfectly aware of the seriousness of the situation and the consequences that a greater confrontation would have, which could drag Iran into it.
This aligns with the EPM assessment of Hezbollah’s intentions in the current conflict, which we articulated last week after the assassination of El-Arouri. A war with Israel would be very damaging to Hezbollah’s military capabilities and public support in Lebanon, and as such would not serve any of Hezbollah’s objectives, which are, maintain military threat to Israel to prevent Israeli invasion of Lebanon, and influence domestic Lebanese politics to align policies with Iran’s geopolitical strategy.
Meanwhile, however, Israel seems to be doing everything it can to make Hezbollah change its mind. On Monday it assassinated a top Hezbollah commander in a strike on south Lebanon, writes Euractiv. The commander was killed in an Israeli strike targeting his car in the south. In response, Iran confirmed its objective in the current situation is to prevent escalation of the War on Gaza. Iran’s foreign ministry spokesman, Nasser Kanani, strongly condemned the attack and warned against the “efforts of the Zionist regime (Israel) to expand the scope of conflict and war in the region”.
War in Ukraine
As to the Ukraine War, Bloomberg writes a secret meeting took place last month between Ukraine, its Group of Seven allies and a small group of Global South countries, to agree on the conditions for holding peace talks with Russia. The secret meeting of national security advisers on December 16 was held in Saudi Arabia. These discussions come after Ukraine’s counteroffensive last year failed to deliver a major battlefield breakthrough, and the country’s backers find themselves struggling to provide the weapons and ammunition they promised – and that are necessary to hold the current front lines, EPM notes. While top officials from India, Saudi Arabia and Turkey joined the December meeting in Riyadh, other major Global South nations who had come to some of the previous larger sessions — notably China, Brazil and the United Arab Emirates — didn’t send their representatives.
Energy Transition & Technology News
The Financial Times looks at the Tâmega plant, a €1.5 billion electricity storage project of Iberdrola in Portugal, i.e. “pumped storage” or “water battery” technology. It takes excess electricity from the grid, mostly generated by wind and solar power, and uses it to pump water from a lower reservoir to an upper one. Then in peak hours, when the grid requires more power, the system is reversed on demand. A gate opens and gravity brings millions of litres of water thundering back down a tunnel every minute. The pump becomes a turbine and it spins the metal cylinder the other way, generating electricity at zero cost. The upper reservoir has a capacity of 880 megawatts. Because Tâmega can generate for up to 24 hours, the total amount of power stored there is 21GWh, enough to charge 400,000 electric vehicle batteries, or sustain 2.4mn homes in Portugal for a full day. Holding back further development of pumped storage facilities is the fact capital expenditure required is large, and construction can take six years or more – in no small part due to permitting issues.
Climate Politics
Germany will provide €902 million to Swedish battery maker Northvolt, as the first country to make use of the European Commission’s new subsidy “matching” scheme that allows EU countries to counter foreign subsidies with their own offers, writes Euractiv. Northvolt previously considered building its production site in the US state of Nebraska instead of Germany, where it would have received subsidies of €850 million. Now, it has decided on building in Heide, Germany.
The Electrification of Transport
Japanese automaker Honda has announced plans to launch a new electric vehicle series from 2026, as it plays catch-up with global rivals in the shift to battery-powered cars, writes Reuters. Honda unveiled its "Honda 0 Series" and two concept models at the CES trade show in Las Vegas that it hopes will help it reach its goal of having battery-powered and fuel-cell vehicles make up all of its new car sales by 2040. Currently, battery powered vehicles accounted for less than 0.5% of Honda's worldwide sales of about 2.8 million cars over the first nine months of 2023, coming to about 11,000 vehicles.
Other
The Financial Times looks at how the EU’s Carbon Border Tax Adjustment Mechanism (CBAM) could potentially alter global trade flows. As such, EPM could discuss this subject under both Macroeconomics and Climate Politics. So we went for Other… It is widely expected that CBAM will set into motion a wave of countries enforcing similar measures, and on a wider variety of products. For export dependent countries such as China, India Turkey and Brazil, this would be devastating, as CBAM-like taxes would greatly affect its competitive position around the world. “(Chinese) companies are watching this keenly,” says Gao Liqun, partner in carbon tariffs research for Deloitte China. “They are concerned that there will be many other countries — [most importantly] the US and Japan — taking on similar measures.” The end result could be a two-tier system, with products made using clean energy sent to the EU and those produced with coal power being exported to poorer countries with less stringent climate laws.