Energy, Geopolitics & Money - 2024.01.23
Providing you with non-partisan, objective & neutral analyses of intersecting global developments in energy, business & geopolitics curated from leading global sources & resources.
In this roundup, we take a close look at developments in the booming global nuclear industry, dominated by Russia and China, with 60 reactors under construction and a further 100 planned (see below in Other).
Furthermore, we look at:
The slight jump in crude oil prices, as traders took note of the fact Saudi Arabia cut crude production to lows not seen since the depths of the coronavirus pandemic to defend oil prices, under-producing even against its self-imposed 9 million barrels per day cap
The Bank for International Settlements’ belief that the world’s central banks will achieve the “soft landing” they are targeting, that is, avoid a recession while raising interests rates in order to reduce inflation
The War on Gaza which is leaving Israel internally united but internationally isolated
The War on Gaza risks permanently damaging the US’ grand geopolitical "Pivot to Asia" strategy
Chinese Foreign Minister Wang Yi’s recent 6-nation tour and China’s diplomatic objectives
UAE state energy company ADNOC’s decision to increase spending on decarbonisation projects
India’s efforts to build a national emissions trading system, to help its companies avoid the EU’s CBAM taxation
General Energy News
Brent crude oil futures marked gains in mid-afternoon Asia trade on Tuesday, breaching the $80/b mark, writes S&P Global. Behind the increase lies geopolitical concerns, as the US and UK continued their strikes on Houthi targets, while a Ukrainian attack knocked out of service an important Russian export terminal. Additionally, traders took note of the fact that Saudi Arabia has cut its crude production to lows not seen since the depths of the coronavirus pandemic to defend oil prices. It has committed since July to holding its output at 9 million b/d. But in recent months it has under-pumped its target, self-reporting production of 8.82 million b/d in November and 8.94 million b/d in December.
Macroeconomics
Agustín Carstens, the General Manager of the Bank for International Settlements, believes the world’s central banks will achieve the “soft landing” they are targeting, that is, avoid a recession while raising interests rates in order to reduce inflation, writes Reuters.
Economic activity has remained surprisingly resilient, bolstering confidence that economies might be posed for a soft – or at least soft-ish – landing scenario. If that is true, the fight against inflation has come at a remarkably small cost in terms of lower GDP growth or higher unemployment. Once inflation returns to target, and central banks are able to ease up on the breaks, growth rates should return to their long-run potential levels.
Geopolitics
Bloomberg looks at Israel’s War on Gaza, and notes two important things. First, that Israel is standing ever more isolated and alone. Much of the world has now united behind the “vision” for the conflicts consistently articulated by US since the start of hostilities: only surgical strikes targeting Hamas, to avoid civilian casualties; no forced replacement of Gazans; preparations for a final and indefinite two-state solution; and integration of Israel into the wider Middle East via a new set of Abraham Accords, in return for Israel’s acceptance of the two-state solution.
Yet, Israel is doubling down on its attacks in Gaza. At a political level, the Netanyahu government refuses to enter into serious discussions with the US (or others) on the above vision, while the broader Israeli society is united behind a demand for what Bloomberg calls “military vengeance” for October 7. The later point is evidenced by Netanyahu’s commitment to “total victory” being overwhelmingly backed by the public. Israelis in large numbers tell pollsters that the fighting in Gaza and at the Lebanese border with Hezbollah must carry on for as long as it takes — even if the US objects. Bloomberg notes that it remains to be seen how long this situation will last. The Bank of Israel forecasts that the conflict will cost about 10% of the country’s estimated GDP of $530 billion this year, and that Israel’s state revenue will decline by 2%.
In EPM’s view, the more important factor in deciding where the War on Gaza goes next, is the US. We have mentioned before that we are surprised by the US’ leniency toward Israel, because of the way the war in Gaza is being fought is squandering the US’ valuable soft power, and risks it being dragged longer-term into further regional conflicts which it can not afford while its overarching geopolitical strategy is to “Pivot to Asia”. If the US does not adjust its current course - and reverse its lenient views and actions via-a-vis Israel, we believe the pivot to Asia will suffer greatly.
If the US adjusts course, it has all the leverage it needs to force Israel to fall in line with its vision – simply threatening to reduce ammunition supplies to the IDF will already force Israel to “listen and obey”. The longer the US waits with this adjustment, the more permanent the damage to the US (and Israeli) standing in the world we be.
Chinese Foreign Minister Wang Yi recently completed a 6-nation tour, visiting Egypt, Tunisia, Togo, Cote d'Ivoire, Brazil and Jamaica, writes Nikkei. Among the topics discussed were China’s Belt and Road Initiative, “responding collaboratively to global challenges”, Taiwan and Gaza. China invited the countries to participate in BRI. As to “responding collaboratively to global challenges”, Beijing's intent is to create an international order that is not dependent on the US. As to Taiwan, all six countries on Wang's tour expressed their support for the "One China" principle, which states that Taiwan is an inalienable part of China.
Energy Transition & Technology News
ADNOC - the UAE’s state energy company - plans to lift spending on decarbonisation projects, writes the Financial Times. ADNOC’s board, which includes the country’s vice-president and the crown prince of Abu Dhabi, agreed to increase investment in the sector to $23bn by 2030 from the previous $15bn. The capital expenditure also includes investment in sectors such as chemicals and clean energy, as it seeks to diversify its business as the world moves slowly away from fossil fuels.
Climate Politics
India will ask the European Union for concessions that will help align its planned national carbon market with the bloc’s emissions trading system, writes Bloomberg. The aim of harmonizing India’s Carbon Credit Trading Scheme with the EU’s Emissions Trading System would be to help Indian companies cope with the threat posed by the border tax. India’s government has several proposals it will raise with the EU. These include a tax exemption for small- and medium-sized enterprises, to enable credits generated by a local fossil fuel tax to be regarded as equal to Europe’s emissions allowances, and that Brussels recognizes Indian-accredited energy auditors.
Other
The Financial Times conducts a deep dive analysis of the global nuclear industry, another area where energy and (geo)politics collide. The global sector, dominated by Russia and China, is booming, with 60 reactors under construction and a further 100 planned. Russia’s Rosatom is building more than 30 standard nuclear reactors overseas, including in China, Vietnam, Hungary and Bangladesh. Going beyond the construction program, more than a fifth of the enriched uranium fuel required to power the US’ and Europe’s nuclear industry comes from Russia.
In the nuclear fuel supply chain there is another strategic weakness (from the perspective of the West). While China has developed strategic independence, more than a fifth of the enriched uranium fuel required to power the US’ and Europe’s nuclear industry comes from Russia.
The nuclear fuel supply chain begins with mining and milling uranium ore. American production of the ore peaked in the 1980s. While some unexploited deposits remain, the domestic industry has struggled to compete with lower cost rivals overseas. US nuclear plants now import most of the uranium they use, sourcing almost half of supplies from Russia, Kazakhstan and Uzbekistan.
Next is the chemical process of converting the ore into gas and then enriching the presence of the uranium-235 isotope to a level of about 5 per cent, so that the fission process can happen and energy can be released. There are only two major western suppliers of enrichment services, France’s Orano and Urenco, a UK, German and Dutch consortium. China has built enrichment capacity to meet its own needs. This leaves Russia as a dominant player, with almost half the world’s commercial capacity. More than a fifth of the fuel used by the 93 nuclear reactors in the US is supplied through enrichment contracts with Russian suppliers, mainly Rosatom.
The European Union is even more dependent on the company because of its 18 Russian-made reactors in Finland, Slovakia, Hungary and the Czech Republic, which have until recently relied on Russian fuel. In the market for high-assay low-enriched uranium (Haleu), which is more powerful than standard nuclear fuel and used in SMR reactors, Russia’s Tenex holds monopoly control.
Russia and China also have a lead in the next generation of nuclear. They have successfully designed and built Small Modular Reactors (SMRs), while US companies have so far failed to deliver on plans.
The Biden administration is now pursuing a three-pronged strategy to rebuild the enrichment and conversion supply chain: subsidise domestic industry; enlist international partners in a “friendshoring strategy”; and impose sanctions on Russian imports to protect investments by taxpayers. In November it asked Congress to approve an extra $2.2bn to incentivise US-based companies to boost enrichment and conversion capacity. It has also pledged billions of dollars in support to several SMR developers and this month launched a $500mn request for proposals from companies for the supply uranium enrichment services. As a result, some progress has been made. Scientists of Centrus Energy Corp have enriched uranium to a higher level than normal to produce 20kg of Haleu, the first time the fuel has been produced on US soil. The US’s plans for its domestic industry have also attracted support from France, Canada, Japan and the UK, who together have pledged $4.2bn to boost enrichment and conversion capacity globally. But their combined efforts are expected to meet only half of the West’s current nuclear fuel imports from Russia; roughly half of what Russia sells today to the US and Europe will be replaced with the extra capacity.