Energy, Geopolitics & Money - 2024.01.26
Providing you with a non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
In this roundup, we look at:
How Red Sea instability has affected tanker rates, where EPM notes the impact is higher landed prices for European and Asian customers and much higher than the Brent and WTI ticker prices indicate
Saudi Aramco’s continued ambition for refining and chemicals deals in Asia, to secure long-term buyers for its crude
China’s economy, which is struggling with a severe lack of confidence, which its central bank hopes to (partially) undo via a cut to the reserve ratio for banks
The ECB’s decision to leave interest rates unchanged and reaffirming its commitment to fighting inflation
The very strong performance of the US economy in the 4th quarter of 2023; where EPM discusses the importance of the economy for the 2024 presidential elections
Reports China is pressuring Iran to reign in the Houthi’s disruption of Red Sea shipping (where EPM provides a geostrategic analysis providing insight into how the issue in the Red Sea could possibly develop from here)
The mood on the Arab street; where EPM explains why and how this is likely to have severe geopolitical consequences for the US (and UK) over the medium to longer terms
A detailed analysis of the aviation’s ability to decarbonize, and, as EPM previously discussed over recent days, conclusions the immediate future favours SAF but that electrification of short haul flights will be possible by 2040
Why government bans on the use of single-use plastics often backfire
Tesla’s expectation that sales growth will decrease in 2024, and its preparations for the launch of a new EV model in 2025
Elon Musk’s view that Chinese automakers would "demolish" most of the world's other car companies if there were no trade barriers
Apple’s struggles to bring an autonomous EV to the market
General Energy News
The cost to ship refined products from the Middle East to Japan has increased to $101,000 a day under influence of the Red Sea instability, writes Bloomberg. That’s the highest for that route since 2020, when a pandemic-induced glut saw traders rush to store oil on every kind of vessel they could find. EPM notes that shipping rates have been substantially more impacted by geopolitics than the actual crude price. Either way, for customers in Europe and Asia this means landed prices are significantly higher – more than the Brent and WTI ticker prices indicate.
Saudi Aramco continues to seek refining and chemicals deals in Asia, as it looks to rapidly expand the business and secure long-term buyers for its crude, writes Reuters. The company is looking at China and India for more acquisitions, president of the downstream unit, Mohammed Al Qahtani, said. The state-run company, which has made more than $80 billion of downstream investments since 2016, is already making moves in China. It bought a stake in one company last year and is in talks for two others. “Really, the big growth markets for us are China, India and southeast Asia,” Al Qahtani said in an interview in Dhahran, Saudi Arabia. The company is looking for “organic and inorganic” opportunities, he said, referring to acquisitions and expanding existing projects. “As we speak today we have teams in China negotiating deals.”
Macroeconomics
China’s stock market has lost $6 trillion in value over the past three years. This, Bloomberg writes, reveals a painful truth for President Xi Jinping’s government: People are hopelessly gloomy about the outlook for the world’s second-largest economy, and their pessimism is becoming increasingly hard to ignore.
In order to turn things around, China's central bank has said it will cut the amount of money that commercial lenders must hold as reserves, to allow more cash to be circulated in the economy, writes Nikkei Asia. The cut in the reserve requirement ratio, or RRR, of 0.5 percentage point for all banks should release 1 trillion yuan ($140 billion) of long-term liquidity to China’s financial market.
There is positive news for China’s economy also. Clean energy accounted for 40% of China’s economic growth last year, writes Bloomberg. The green economy contributed a record 11.4 trillion yuan ($1.6 trillion) to China’s gross domestic product in 2023, a 30% jump from the previous year. Solar power, and manufacturing of panels, electric vehicles and batteries were the main investment drivers.
Over in Europe, the European Central Bank left interest rates unchanged on Thursday and gave no hint of a possible reduction, reaffirming instead its commitment to fighting inflation, writes Reuters. The bank reiterated its key rate would stay at 4% for some time, and ECB President Christine Lagarde reiterated in a press conference after the decision that policymakers needed to be more confident that inflationary pressures really had subsided before moving towards cutting rates.
In the US the economy grew faster than expected in the fourth quarter amid strong consumer spending. Reuters writes that gross domestic product increased at a 3.3% annualized rate last quarter after advancing at a 4.9% pace in the third quarter, leaving growth for the full year 2023 at 2.5%. EPM sees two import implications. Firstly, on the economic front, financial markets expect this will delay a Fed decision to cut rates. Secondly, on the political front, the state of the economy is one of the key determinants for US presidential elections, as historically anything short of a strong economy has placed the sitting president at a significant disadvantage. It will be of critical importance for president Biden to maintain the current performance, and as such we expect the Biden administration to pressure the Fed to re-adopt a “pro economy” stance in favor of its current “anti inflation” stance, and reduce rates sooner rather than later.
Geopolitics
Reuters writes that Chinese officials have asked their Iranian counterparts to help rein in attacks on ships in the Red Sea by the Iran-backed Houthis, or risk harming business relations with Beijing. The discussions about the attacks and trade between China and Iran took place at several recent meetings in Beijing and Tehran, Reuter’s Iranian sources said, who declined to provide details about when they took place or who attended. A senior US official said Washington had asked China to use its leverage with Iran to persuade it to restrain the Houthis, including in conversations Secretary of State Antony Blinken and National Security Advisor Jake Sullivan had this month with senior Chinese Communist Party official Liu Jianchao.
EPM notes that from the perspective of the global economy, this would be good news. From a geostrategic perspective, this would not be the wisest move of China. Its interest would be better served by free movement for vessels transporting Chinese goods, and continued disruption of all other vessels, i.e. close behind-the-scenes collaboration between China, Iran and the Houthi’s. Undoubtedly China is aware of this, and as such we reserve judgement on how the current issue in the Red Sea will develop. Events on the ground will inform whether or not China has indeed done what the US has asked from it.
As to how Israel’s War on Gaza is changing the geopolitical landscape, the Financial Times reports on the strong support on the “Arab street” for the Houthi’s actions. The Houthis have been gaining new fans across the Arab world, many of whom know little about the Islamist group’s history or increasingly repressive tactics in their home country. Their popularity, which seems to transcend religious divisions, has surged since the war between Israel and Hamas erupted in October. The mood on the Arab street also includes anger directed at the US for its support of Israel. This has only sharpened since its strikes on the Houthis. EPM sees this as aligned with our earlier analysis that the US is wasting valuable soft power in the Gaza conflict, which is likely to have longer term geopolitical implications. This is not likely to have an immediate impact on geopolitics, as the political elites in the Arab world continue to be closely aligned with the US and Great Britain, but the gap between them and their people’s is growing, raising the possibility of another “Arab Spring” like eruption which would jeopardize the US and UK influence in the region, or at a minimum their ability to use it as a force in their conflict with China.
Energy Transition & Technology News
Over recent days EPM discussed the potential to electrify aviation. We said the sector should not be looked at as a “single whole”, but rather as composing of a number of sub-sectors, each with very different demands and constraints when it comes to energy. While the sub-sector that most of us are familiar with, the one of intercontinental flights that take us on vacation, has demands for which no technological alternatives to the existing fossil fuel powered jet engine exist, other sub-sectors could potentially make a switch.
On that topic, Forbes writes that three-quarters of flights average 3,000 kilometers or less. And, it says, with silicon battery energy densities and hybrid SAF generators, 3,000 kilometers range with divert and reserve is achievable by 2040. Because battery electric aviation will always have materially lower operation and maintenance costs, any routes that can electrify, will eventually electrify, it believes. Until then, Forbes writes, sustainable aviation biofuels will dominate the sector’s decarbonization, made mostly from waste biomass from agriculture, food, lumber and livestock industries. As to hydrogen, it is a dead end as an aviation fuel, it says. Gaseous hydrogen is far too low energy density by volume to provide any range. There is no path to certification for liquified hydrogen at 20° above absolute zero in the fuselage with human beings. There is no path to balancing center of gravity with liquified hydrogen inside a narrow body fuselage as it is consumed, so planes that flew any distance would nose down and fall out of the sky. The logistical complexity and cost of liquified hydrogen in aviation quantities in airports boggles the imagination. Synthetic fuels made from electrolyzed hydrogen and carbon captured will always be much more expensive than biofuels or batteries.
INEOS has started marketed bio-based, high-density polyethylene (HDPE) pipes, writes Forbes. It's made from wood processing residues from the paper industry, which are subsequently transformed into tall oil, a bio-naphtha. The tall oil is then turned into bio-ethylene in INEOS Cologne and transported to the company's polymer plant in Lillo, Belgium, where it is used to manufacture bio-based HDPE. The end result is a polymer with a significantly lower carbon footprint than conventional fossil-based polymers.
Climate Politics
According to Bloomberg, government bans on the use of single-use plastic bags often backfire. Old-style disposable shopping bags, typically made from thin films of polyethylene, have disappeared from many stores in recent years. In their place, have come reusable carriers made from thicker, glossy polyethylene, waffle-like non-woven polypropylene, brown paper, or natural fibers such as cotton and jute. The problem is that many reusable carriers tend to be re-used only very little. As a result, Usage of plastic for grocery bags in New Jersey increased threefold after a 2022 ban. The same thing was observed after a 2016 California bag ban and a 2011 rule in the Australian capital Canberra. UK supermarkets sold 1.58 billion reusable plastic bags in 2019, according to Greenpeace — equivalent to more than one per household per week, with the same environmental footprint in each home as hundreds or even thousands of traditional single-use carriers.
The Electrification of Transport
Tesla expects sales growth for its electric vehicles to be “notably lower” in 2024, due to flagging consumer demand, intensifying competition and ongoing high interest rates, writes the Financial Times.
Tesla is preparing to bring another model to market, writes Reuters. The company has told suppliers it wants to start production of a new mass market electric vehicle code named "Redwood" in mid-2025. The model is described as a “compact crossover”. Tesla sent "requests for quotes," or invitation for bids for the "Redwood" model, to suppliers last year, and forecast weekly production volume of 10,000 vehicles. Production would begin in June 2025
Chinese automakers would "demolish" most of the world's other car companies if there were no trade barriers, Tesla CEO Elon Musk said, according to Nikkei Asia. "Our observation is generally that the Chinese car companies are the most competitive car companies in the world," he said at a Tesla earnings call when asked if he saw any opportunities for partnerships with Chinese manufacturers. "I think they will have significant success outside of China, depending on what kind of tariff or trade barriers are established," Musk said, adding that without trade barriers, Chinese carmakers would "pretty much demolish" their foreign rivals.
Meanwhile, Apple is seriously struggling to bring an autonomous EV to the market, writes Bloomberg. After previously envisioning a truly driver-less car, the company is now working on an EV with more limited features, in order to finally bring an electric vehicle to market. The car will use what is known as a Level 2+ system. That’s a downgrade from previously planned Level 4 technology — and, before that, even more ambitious aims for a Level 5 fully autonomous system. Level 2+, EPM notes, would under perform versus what a Tesla provides today. Even with these changes, Apple looks to introduce the car in 2028 at the earliest, roughly two years later than previously targeted.