Energy, Geopolitics & Money - 2024.01.19
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 exchange of rocket attacks between Iran and Pakistan this week, where we address the question (and growing fear), is the world on the brink of World War 3?
EPM analyses Iran’s motive for attacking its neighbor Pakistan. We see two potential explanations. We assume the Iranian regime: is aware of US-led activity against it from Pakistan (a long time US ally); and, it seeks to redirect public attention away from the tensions with the US and Israel.
In EPM’s view, however, Iran does not want an all-out war with these countries. In fact it wants a negotiated deal with them on terms favorable to Iran. As such, we do not expect further serious escalation in Iran – Pakistan tensions, because if Iran is doing its best to avoid all-out war with the US and Israel, it certainly wants to avoid war with Pakistan. Very recent official responses by both countries confirm this assessment.
The above does not mean we at EPM are optimistic about the world geopolitical situation. As you know, one of our fundamental beliefs is that the world is on a “slow but steady” path toward increasingly worsening geopolitical tensions. This is fundamentally because we are in a period of geopolitical change not seen since World War 2. The current situation is characterized by US hegemony and diplomatic, economic, and military dominance of the global world order.
China in particular is actively challenging the global order established (and dominated) by the US. It, as all hegemons of past eras, will do everything in its power to maintain its position and prevent the Chinese from successfully challenging its position: diplomatically (countering international alliances against China), economically (broad and specific sanctions), and militarily (encirclement). This geopolitical era of change comes with a much greater likelihood of war. It is, for example, what is really behind the Ukraine War.
Furthermore, we look at:
The IEA’s outlook for oil demand in 2024, which is up, but less than OPEC’s expectation; what does the IEA’s view mean for oil prices?; and, why do the IEA’s and OPEC’s forecasts differ?
Why the oil price risk premium has remained steady and limited, despite exceptionally high levels of tension in the Middle East
The view the US (and UK) have, through their attacks on the Houthi’s, placed the Middle East on a course to further escalation; Why this is a major worry for China; Where EPM explains why we believe the appropriate course of action, assuming one really wants to see de-escalation, is diplomatic
The Arab nation’s effort to develop a comprehensive plan to achieve a ceasefire in Gaza, which includes an offer of formal relations with Israel; which EPM views as most likely an effort closely coordinated with and by the US
The continued increase in EV sales in Europe, which have now dethroned diesel powered vehicles as the second most sold type of car
General Energy News
A day after OPEC, the IEA came with its shorter-term outlook for the oil market. Reuters writes that it, yet again, raised its global oil demand growth forecast for 2024, although the projection remains lower than OPEC's expectations. It said the market looked well supplied because of strong growth outside the producer group. It predicts global consumption will increase by 1.24 million barrels per day (bpd) in 2024. This is its third consecutive upward revision in as many months but was below OPEC's 2.25 million bpd projection. The IEA's latest upward demand growth revision, up 180,000 bpd from its previous projection, was linked to improving global economic growth and lower crude prices in the fourth quarter plus China's expanding petrochemicals sector.
For the Financial Times the main take away from the IEA report is its forecast that oil prices are likely to remain under pressure this year, as faltering economic growth hits demand and non-OPEC countries step up production to record levels. The IEA says that while the recent cuts agreed by the cartel “may tip the oil market into a small deficit at the start of the year, strong growth from non-OPEC producers could lead to a substantial surplus”. This outcome is even more likely to occur if additional voluntary cuts in OPEC+ countries were phased out in the second quarter of this year.
As to the difference between the IEA and OPEC outlook, Forbes notes that OPEC bases its projection on stronger global economic growth for 2024, estimating it will rise by 2.8%, as compared to 2.6% for 2023. By contrast, the IEA projects global economic growth to be cut in half in 2024 on a year-over-year basis.
John Kemp of Reuters looks at why the risk premium in the oil price remains stable and limited, despite exceptionally high tensions in the Middle East. Taking a step back from day-to-day events, he summarized the current situation in the following manner. Armed conflict between Israel and Hamas has metastasized to involve Hezbollah in Lebanon, the Houthis in Yemen, Iran, drawn limited military action from the UK and the US. Fighting has already disrupted shipping, with some container vessels, bulk carriers and oil and gas tankers diverted from the southern Red Sea and the Gulf of Aden to the longer route around the Cape of Good Hope. Oil and diplomatic analysts have warned about the potential for escalation to hit the more critical shipping lane through the Strait of Hormuz and exports from the oil and gas producing countries around the Persian Gulf. He notes that despite all this oil and prices have fallen even as the conflict has intensified. Front-month Brent prices are down by $11-15 per barrel (14-16%) while Europe’s gas prices are down by 5-16 euros ($5.43 - $17.36) per megawatt hour (14-33%) since September-October 2023. This is fundamentally because most traders have concluded the risk of unplanned escalation leading to a major confrontation disruption of oil and gas supplies to Europe or Asia remains relatively low. But why? Kemp says traders are focused on routine risks stemming from persistent inflation, interest rates and sluggish economic growth, as well as buffers offered by comfortable inventories and plentiful spare production capacity.
Geopolitics
After Iran launched airstrikes on targets in Pakistan earlier this week, it reciprocated with strikes in Iran on Thursday. Because this leaves many people wondering if the world is on the brink of World War 3, EPM would like to respond to the question, “How are Iran’s interest served by escalating conflict in the direction of Pakistan, while tensions with the US and Israel are at an all-time high?”
We can of course only speculate, but EPM sees two potential explanations. One is, perhaps the Iranians are aware of US-led activity against it from Pakistan (a long time US ally). Another is, perhaps the Iranian regime is seeking to redirect public attention away from the tensions with the US and Israel. As you may recall, EPM’s view is that Iran does not want an all-out war with these countries, in fact it wants a deal with them, on term favorable to Iran. Nikkei writes that following the exchange of rockets, both countries have signaled that they would prefer to de-escalate tensions. The Iranian Ministry of Foreign Affairs stated in a statement on Thursday the government "does not allow enemies to strain the amicable and brotherly relations of Tehran and Islamabad." Rahim Hayat Qureshi, Pakistan's additional foreign secretary for West Asia, echoed the sentiments. "Pakistan and Iran have fraternal [relations] and shall move [forward] to resolve all issues through positive dialogue". So, EPM concludes, no, the rocket exchange between these two countries is not placing the world on the highway to “World War 3”.
Nevertheless, EPM cautions that it does not mean the world is not on a “slow but steady” path toward worsening geopolitical tensions. This, as you may recall, is actually one of EPM’s fundamental beliefs. But this is not due to “rogue countries” such as Iran or North Korea. It is fundamentally because the world is exiting a geopolitical situation dominated by US hegemony. China in particular is challenging the current global world order, and, as all hegemons of past eras have done, the US will do everything in its power to prevent the Chinese from being successful: diplomatically (international alliances against China), economically (sanctions), and militarily (encirclement). This new geopolitical era comes with a much greater likelihood of war. It is, for example, what is really behind the Ukraine War.
As to the tensions in the Red Sea, Scott Ritter over at Energy Intelligence writes that while the US and UK attacks against the Houthi’s are designed to demarcate a clear “red line” (to Iran, EPM adds) and to deter them from further maritime strikes, they are unlikely to succeed. This, he adds, leaves the US trapped in the very cycle of military escalation that Washington claimed it was trying to avoid. The Houthi’s have survived 9 years of bombing by the Saudi’s, and as such should not be expected to back down in response the US and UK bombing efforts. This means the US and UK will likely find themselves compelled to either escalate their attacks or back down, writes Ritter, who says the former is unsustainable while the latter would be tantamount to surrender. EPM agrees with the assessment. We have argued before that the Houthi’s are being directed by Iran. As such, any attempt to address the Red Sea should start with analyzing the question of what does Iran want to achieve using the Houthis? Iran is desirous of achieving a negotiated deal to end US imposed sanctions on the country. Therefore, we say, the appropriate way to deal with the Red Sea issue is diplomacy, not escalatory military violence.
If you have been wondering why the US (the UK and most of Europe) have decided to deal with this issue using military force, instead of finding a diplomatic solution and addressing the root causes (primarily US sanctions on Iran, but also Israel’s attacks on Iranian officials and allies in Syria and Lebanon), Reuters provides some valuable information. China’s economy is heavily dependent on exports to Europe and Africa, its supply lines are through the Red Sea, and it is seeing a significant economic impact of military action there. The rise in shipping costs is eating away at profits for Chinese traders and exporters. Longer term, there is the risk the current situation further incentivizes China’s Western customers to “near shore” manufacturing to reduce exposure to geopolitical stress points, such as, the Red Sea (and the China Sea, Malacca Strait, etc.) by accelerating decoupling of the West from China.
The lastly as to the War on Gaza, Arab states are working on an initiative to secure a ceasefire and the release of hostages in Gaza as part of a broader plan that could offer Israel a normalisation of relations if it agrees to “irreversible” steps towards the creation of a Palestinian state, writes the Financial Times. A senior Arab official said they hoped to present the plan — which could include the prize of Saudi Arabia formalising ties with Israel — within a few weeks in an effort to end the Israel-Hamas war and prevent a wider conflict erupting in the Middle East. This echoes and reinforces the US’ official position and this is why EPM suspects the plan by the Arab states is being developed in close coordination with the US. In evidence, at Davos, US national security adviser Jake Sullivan said Washington remained focused on securing an agreement that leads to Saudi Arabia normalising relations with Israel as part of its plans for the postwar era. “Our approach is and remains focused on moving towards greater integration and stability in the region,” Sullivan said in Davos.
The Electrification of Transport
Battery-electric cars consolidated their position as the second-most-popular choice for buyers in the European market in 2023, and the share of diesel and gasoline-powered vehicle sales continued to shrink below 50% of the market, writes S&P Global. European sales of fully-electric cars, or BEVs, averaged 16% of total car sales in the region last year, above diesel car's share of 12% and below gasoline-powered cars which made up 36% of total sales. Diesel car sales saw their market lose the most ground in 2023, from 15% to 12%, while gasoline cars slipped just 1 percentage point to 36% of total sales.