Energy, Geopolitics & Money - 2024.01.15
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 escalation of the conflict in the Middle East that is the US and UK attacks on the Houthi’s in Yemen.
EPM has shared its analysis regarding why the Houthi’s resorted to disrupting shipping in the Red Sea. We concluded that they were instructed by Iran to undertake this action, such that Iran could strengthen its position in the Middle East, by, on the one hand, presenting itself as the (only) supporter of the Palestinians in the Middle East, and, on the other hand, by applying additional pressure to the US to gain leverage in its negotiations to end the US-imposed sanctions and re-start its nuclear program.
We see the US and UK attacks on the Houthi’s not as a pro-active plan in order to reduce Iran’s influence across the Middle East, but rather as a reaction designed to clearly communicate so-called “red lines”. The fact that the US warned Iran of what it was about to do in Yemen is evidence for this assessment. As such, while the event has increased the risk premium in oil prices, we foresee this effect will be temporary – neither the US nor Iran want to be dragged into hot war at this stage.
Nevertheless, the US and UK have escalated. Since they undertook this step right after a week in which Blinken called upon regional actors not to escalate, we believe will further weaken the US global standing, as around the world people see the attacks as further signs of US hypocrisy. We reiterate out view, therefore, that eventually the US will come to regret its current maneuvering in the Middle East, as it is wasting its soft power capital on a colossal scale, which is a valuable source of power that the US will need in its competition with China (mind you, this criticism has been leveled against the US for many years).
Furthermore, we look at:
The EIA analysis of 2023 oil demand, and its forecast for 2024 and 2025
Why natural gas prices in the US are likely to decline, and why this is likely to support US LNG exports
Germany hitting an economic wall, with bankruptcies set to increase markedly in 2024 (while real estate prices are cratering, EPM notes)
The EU addition of 17 gigawatts of new wind power farms in 2023, which is a record, but still significantly short of what its energy transition plans require
Why the global additions to renewable power have not yet decreased fossil fuel demand
The Biden administration’s plan for a new fee on methane emissions from the oil and gas industry
How EVs are becoming the focus of technological innovation across the car industry; where EPM provides its assessment as to what this means for the electrification of transport
General Energy News
Oil rose last Friday, as an increasing number of oil tankers diverted course from the Red Sea following the multiple air and sea strikes by the US and Britain on Houthi targets in Yemen, writes Reuters. EPM covers this geopolitical event extensively under Geopolitics, so here we will leave it at reporting Brent crude futures settled 88 cents, or 1.1%, higher at $78.29 a barrel, while WTI futures climbed 66 cents, or 0.9%, to $72.68. The Financial Times writes Brent briefly topped $80 following the attacks.
During early morning trading on Monday oil prices continued their upward trajectory, driven by geopolitical risks, writes Reuters. Brent crude futures were up 13 cents, or 0.2%, to $78.42 a barrel by 0405 GMT after settling 1.1% higher on Friday. US West Texas Intermediate crude was at $72.73 a barrel, up 5 cents, or 0.1%.
The United States Energy Information Agency presented its Short-term Energy Outlook last week, which John Kemp of Reuters analysed and summarized. Worldwide consumption averaged 101.1 million barrels per day (b/d) in 2023, narrowly beating the pre-pandemic record of 101.0 million b/d in 2019, it says. Consumption is forecast to rise to an average of 102.5 million b/d in 2024 and 103.7 million b/d in 2025, the agency says. Petroleum producers are likely to be able to satisfy this growth in demand, says the EIA, with ample spare capacity and inventories. As a result, the agency does not see much room for an oil price increase.
US gas has enjoyed an extraordinarily successful two decades, writes Liam Denning for Bloomberg. Production has more than doubled and consumption has risen by almost half, with gas definitively displacing coal as the No. 1 fuel for generating electricity. This imbalance between supply and demand growth was not great for prices, though. Looking out, things are likely to get worse, as US shale and renewables growth both appear unstoppable, he writes. As a result, the US is likely to become an even more attractive exporter of LNG for international centers of LNG demand.
Macroeconomics
German companies are expected to go bust at a higher rate this year following a sharp increase in insolvencies in 2023, as those businesses hit by high energy costs and the end of pandemic aid throw in the towel, writes the Financial Times. Restructuring experts warn that many “zombie” companies kept afloat after the coronavirus pandemic by generous government aid and a suspension of the obligation to file for bankruptcy — which caused insolvencies to drop to unusually low levels — are now collapsing. The ranks of struggling companies have swelled because of German economic stagnation, combined with high interest rates, rising wages, elevated energy prices and a government budget squeeze. EPM reminds our readers that at the same time, German real estate prices are cratering, down 10% 2023 versus 2022. In other words, things could very quickly get very bad.
Geopolitics
The main development in geopolitics over the weekend is, without doubt in EPM’s view, the US and UK attacks on the Houthi’s in Yemen. Reuters reports many attacks have taken place since last Friday.
A lot could be said in response. EPM notes the attacks explain what exactly Blinken meant when he traveled to the Middle East last weeks to prevent further escalation. Clearly this really meant - “no one is allowed to do anything against our plans and actions” - as the US itself, through its attacks on the Houthi’s, acted in an escalatory manner they warned against.
Looking more at how this will change the fundamentals of the current geopolitical situation, firstly, these attacks should not be misunderstood as “a US plan against Iran”. While the Houthi’s are part of Iran’s “Axis of Resistance”, the US is not on the offensive here but on the defensive. As such, the US is responding to an Iranian plan, and not acting based on a plan against Iran. This assessment is confirmed by the Reuters report the US informed Iran of what it would do in Yemen, such as to prevent it leading to Iran escalating. This is important to remember.
As we have explained previously, Iran see the Houthi’s as expendable. EPM, therefore, does not expect the US’ attacks in Yemen to lead to a real escalation, as in Iran coming to the aid of the Houthi’s via Hezbollah.
The situation is fluid and while developments will come quickly, there is a limit to what countries will accept from each other. After multiple assassinations on Syrian and Lebanese soil, followed by large-scale attacks in Yemen, and Iran may undoubtedly be feeling the US and / or Israel had a hand in the terror attacks of the 3rd of January. Further escalatory actions by either Israel or the US could lead Iran to conclude that its core interests are under attack and lead it alter its decision as to how best use its influence across the Middle East.
EPM believes the US’ decision to attack the Houthi’s further erodes its public standing globally much like its public stance regarding Israel’s War on Gaza has done from the very beginning. The US might consider this unimportant. But EPM believe the US will eventually come to regret the wasteful use of built up soft power capital, particularly if and when the conflict with China heats up.
As to our last point, US and UK efforts to defend their strikes on Yemen as legal under international law, reported on by Reuters, will not change anything. Global public opinion is firmly already against the US and UK position on the War in Gaza (over the weekend around half a million people marched against the war in Washington DC and in London). And, most people seem to be aware that the Houthi’s disruption of Red Sea shipping is a response to that war. We note people around the world asking, therefore, if the objective is to protect international shipping, why not simply force Israel to end its onslaught of Gaza, rather than add further military conflict?
Energy Transition & Technology News
In 2023, European Union countries built 17 gigawatts of new wind power farms, the most for any year so far, writes Reuters. The milestone showed how Europe's energy transition is gathering speed and more is needed. At least 37GW of new wind power should be added per year to deliver the EU's 2030 renewable energy target, by Brussels' own estimates. The challenge the Europeans will face is ensuring their is sufficient base load supply and that may require maintaining current hydrocarbon and even restarting nuclear power plants to take full advantage of power generated from renewable energy.
At a global level, things are similar, DNV’s Sverre Alvik writes for Forbes. Over the five-year period from 2017 to 2022, renewables met 51% of new energy demand, he says. That means, obviously, that half of the addition was producing ever more greenhouse gases from burning fossil fuels. Developing economies are responsible for much of the addition of fossil fuels in recent years and that trend will continue, he says. For example, well above 80% of the energy India has added over the last five years is fossil energy. DNV expects the situation to fundamentally change in the 2030s. This decade, renewables will increase its share of the additional energy capacity needed by the global economy, but that will not translate into less fossil-based energy.
Climate Politics
John Kerry, the top US climate diplomat, intends to step down after more than three years, writes Bloomberg. It’s not clear who might replace Kerry.
The Biden administration on Friday unveiled its plan for a new fee on methane emissions from the oil and gas industry, writes Bloomberg. The fee — as much as $1,500 per metric ton in 2026 — was mandated by Congress as part of the 2022 Inflation Reduction Act, but lawmakers left key details up to the EPA, including how charges will be calculated and what companies can do to win exemptions. The Environmental Protection Agency estimates its proposal would have marginal effects on energy production and prices while combating climate change — with natural gas output forecast to decline 0.03% in 2026 and gas costs set to increase less than a percent that year — by 0.052%. The EPA estimates it would stem the release of some 960,000 tons of methane through 2035.
The Electrification of Transport
The best – and most frivolous – car tech is going straight to EVs, writes Bloomberg. As carmakers go electric, they’re sending more resources — in the form of capital budgets and brains — straight to battery-powered models. That means anyone looking for the latest, greatest and most frivolous technology in auto innovation will increasingly find it in an EV and likely only an EV. In EPM’s view, this trend will have big ramifications for the electrification of transport. It means the best cars will soon be electric, while ICE vehicles will be legacy vehicles. Undoubtedly, in our view, this will accelerate EV adoption in developed markets.