Energy, Geopolitics & Money - 2024.01.30
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 take a closer look at the view that war, or at least conflict that is resolved with the use of arms, is becoming the new normal state in international relations.
Examples of armed conflict and/or wars abound, and they are often interrelated in ways not immediately clear to most observers. For example, EPM believes the Ukraine is very important and relevant factor in the US – China competition, because Russia is a key ally of China. This, for EPM at least, means that a weakened Russia necessarily means a weakened China. We have a similar view regarding the war on Gaza, for, as EPM has oft mentioned in previous posts, this conflict is directly tied to the US’ geopolitical strategy and its “Pivot to Asia”.
Additionally, even countries not currently engaged in an active war are preparing for war in ways not seen since the pre-WWII period. Europe, Japan, South Korea, India, Australia and the Philippines are preparing for conflict and in most cases with direct US guidance, backing and/or coordination (based on the purchase of US and European weapons systems). And there is of course China, which is holistically building its military capabilities.
There are immediate economic consequences to this build up. Wars are bad for economic growth – just ask Ukraine and Israel. But also think of how tensions in the Red Sea - as the Houthis fire land based missiles and drones at tankers and supply ships - affects the economies of Europe (increased price inflation!) and China (depressed foreign product demand). War preparations, meanwhile, effectively move spending away from infrastructure and human capital investment and domestic consumption. Therefore, the current geopolitical situation has created major economic risks. And the outbreak of another conflict or war, or escalation of a current one risks pushing the world economy into an uncontrollable descent.
We launched EPM because of the realization that most political analysis and analysts do not provide the deep insight businesses and investors need for “cutting through the fog of war” and to make sense of global developments and events. Our goal is to continue to provide you with the analysis that does.
Furthermore, we look at:
Saudi government’s instruction to Aramco not to increase current oil production capacity from 12 to 13 million barrels (EPM believes this indicates the belief in Riyadh oil demand will be lower in the future)
Kuwait’s decision to raise production (the exact opposite of Saudi) capacity by 1 million barrels per day (from 3 to 4)
India’s planned boom in refining capacity which many expect to be the last boom for India’s refining industry as demand falls away due transport electrification
The Biden administration’s decision to pause approvals for pending and future liquefied natural gas (LNG) projects thereby creating a massive problem for Europe as it switched energy dependency from Russia to the US
The updated IMF outlook for economic growth in 2024 (which in EPM’s view represents the optimistic “if all goes perfect” case)
China’s worsening debt problem
Biden’s decision on how the US will respond to the attack on its base in Jordan (where the US is trying to avoid a wider war in the Middle East and limit the chance of war with Iran (which in EPM’s view is a critically important remark indicating coordination between the US and Iran to reduce the risk of further escalation)
The outlook for the War on Gaza, which is not good as leading Israeli politicians got together to discuss the “voluntary relocation” of the people of Gaza
The outlook for the War in Ukraine, which is not good from the Ukrainian perspective, evidenced by the infighting currently going between president Zelensky and the head of the Ukrainian military
The request from Europe's solar panel manufacturing industry to the European Union to step in with emergency financial support to avoid local firms shutting down under price pressure from Chinese imports
India’s electric vehicle charging bottleneck holding back EV sales growth there
Challenges facing the EU’s ReFuelEU directive which stipulates that by 2030 aircraft leaving the EU must use 1.2% synthetic aviation fuel (e-kerosene) and is the highest cost of available synthetic fuels
General Energy News
The Saudi Arabian government has ordered Aramco not to increase current oil production capacity from 12 to 13 million barrels per day, writes Reuters. The Kingdom had previously ordered Aramco to expand to 13 million bo/d in March 2020, when it was in a stand-off with Russia. As to why the decision was made, there is only speculation. But some say it reflects the government’s view that oil demand is set to start a decline. Others say the decision is most likely to be financial as cost estimates for the expansion project were set at $25 billion and thereby frees cash for other projects or payments to the government’s treasury.
Javier Blas of Bloomberg says the cancellation is likely to save Aramco somewhere between $20 billion and $40 billion in capital expenditures over the next five years. Much of the buildup underpinning the planned increase in production capacity is already underway, he says, including the expansion of several oil fields: Dammam (set to add 75,000 barrels a day starting this year), Berri (250,000 barrels from 2025), Marjan (300,000 barrels from 2025) and Zuluf (600,000 barrels from 2026). The expansion at the Safaniya oil field - slated for 2027 to increase production by 700,000 barrels a day - remains in the planning stages. Aramco now plans to continue with the four projects it has already started. Aramco can offset the increase and keep its maximum capacity unchanged by letting output in other more mature fields decline more quickly than had previously planned and saving on redevelopment CAPEX there. According to Blas, the decision does not reflect a belief that future oil demand will decrease substantially. Rather, he says, it is about recognizing demand for Saudi oil will decrease in the future. The country has already ceded market share with its voluntary production cuts over recent years to prop up global oil prices. The latest government decision will make this permanent as capacity additions will continue in the US, Guyana and Brazil.
Meanwhile, according to an interview with Argus Media, Kuwait's state-owned oil company KPC is embarking on a huge investment programme to expand upstream and downstream capacity. It plans to reach 4mn b/d capacity by 2035 and maintain that through 2040, from a current capacity of 2.9mn b/d. The plan is going to cost about $300bn through 2035.
The world is on the cusp of what’s likely to be the last big refining boom as India embarks on a capacity expansion to accommodate the country’s rising thirst for fossil fuels, writes Bloomberg. The country has set in motion a building blitz at its oil refineries to raise production of traditional transport fuels such as gasoline and diesel by more than 20% over the next five years. State-run refiners will likely have to shoulder most of the responsibility. Reliance — the biggest private oil processor and owner of the giant Jamnagar complex — is seeking to replace gasoline and diesel with clean fuels to take advantage of a transition toward greener energy.
Lastly, an event EPM has not yet covered is the Biden administration’s decision to pause approvals for pending and future applications to export liquefied natural gas (LNG)from new projects. Reuters writes the decision has been met with cheers from environmental campaigners. The Department of Energy (DOE) will conduct a review during the pause that will look at the economic and environmental impacts of projects seeking approval to export LNG to Europe and Asia where the fuel is in hot demand.
In EPM’s view the decision has highlighted Europe has once again exchanged its dependency on Russian energy for a similar dependency on US energy (which may be more palatable politically to European elites). The latter is, however, more expensive and requires billions in infrastructure investments. S&P Global writes that German gas industry has slammed the White House's decision, saying the move would have a particularly negative effect on the LNG market. The US has been the dominant LNG supplier to Germany since the first terminal came online at the end of 2022, with US LNG deliveries totaling 4.1 million mt last year, or 82% of total imports.
Macroeconomics
For what it’s worth, and in the EPM’s view it is not worth much, the International Monetary Fund (IMF) raised its global growth forecast for 2024. The Nikkei Asia writes the World Economic Outlook projects global growth to reach 3.1% in 2024, 0.2 percentage points higher than the previous forecast in October but unchanged compared to last year's growth. It also remains well below the pre-pandemic 20-year average of 3.8% annual growth. "The clouds are beginning to part," IMF Chief Economist Pierre-Olivier Gourinchas wrote in a release accompanying the report. "The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up.” China is projected to grow 4.6% in 2024, an upward revision of 0.4 points, but still below the 2023 growth estimate of 5.2%. India remains the fastest growing major economy with growth projected to be 6.5% in 2024, up 0.2 points on robust domestic demand, but just below the 6.7% growth it saw in 2023. The so-called ASEAN-5 -- Indonesia, Malaysia, the Philippines, Singapore and Thailand -- are forecast to grow 4.7% in 2024, an upgrade of 0.2 points from the previous update and an improvement over the 4.2% figure for 2023. The US is projected to grow 2.1% in 2024, a 0.6 percentage point upgrade from the last outlook. In in EPM’s view the IMF’s forecast represents an optimistic “if all goes perfect” best case scenario. To make the IMF’s forecast happen, central banks should be enabled to lower interest rates soon which requires geopolitical stability via an end to disruptions of supply chains. And, to make it happen, geopolitical tensions generally need to subside and there current conflicts should de-escalate or end, no new additional conflicts, nor should any new trade barriers be imposed. EPM thinks this unlikely and we explain that in more detail under Geopolitics (see below).
More structurally, China's debt-to-GDP ratio climbed to a new record high in 2023 despite the slow pace of borrowing, writes Nikkei Asia. The macro leverage ratio, which measures total outstanding non-financial debt as a share of nominal gross domestic product, rose to 287.8% in 2023, 13.5 percentage points higher than in 2022. The debt ratio held by households rose 1.3 percentage points to 63.5%, while the ratio of non-financial corporate entities increased 6.9 percentage points to 168.4%. The government debt ratio, meanwhile, expanded 5.3 percentage points to 55.9%.
But it is not just China that will eventually have to deal with its structural debt problem. Black Swan author Nassim Nicholas Taleb said the US deficit is swelling to a point that it would take a miracle to reverse the damage, writes Bloomberg. Taleb defined the ballooning debt load as a “white swan,” a risk that’s more probable than a surprise “black swan” event. While he didn’t identify specific outcomes in markets, he did say white swans include both the US deficit and an economy that’s far more vulnerable to shocks than in prior years. Taleb joins a number of observers on Wall Street and beyond voicing concerns about the growing US debt pile. This month, former Treasury Secretary Robert Rubin said the world’s biggest economy is in a “terrible place” with regard to its federal deficits, while BlackRock Vice Chairman Philipp Hildebrand has warned that any default could imperil the dollar as a global currency. EPM notes that Bloomberg could have added Ray Dalio to this list of “doomsayers”.
Geopolitics
Nikkei Asia published a very interesting perspective – in EPM’s opinion – in which it argues “war is the new status quo” in international relations. The list of current wars is long. Ukraine is far from over, the Israel-Hamas conflict is increasingly spilling over into Lebanon, Syria and the Red Sea, tensions are high around Taiwan. On the Korean Peninsula, North Korean leader Kim Jong Un officially renounced the pursuit of peace with South Korea. Peaceful relations between Pakistan and Iran took a sudden turn for worse this month with the two launching tit-for-tat cross-border strikes. Myanmar's civil war is increasingly threatening to pull in India and China. The possibility of war also looms behind new tensions surrounding territorial claims around Guyana and Somaliland.
More important to EPM is that every nation globally is preparing for war. In Europe, calls for "sovereign defense" have returned, with the EU proposing a 100 billion euro ($108.5 billion) fund to build up defense production (which is small potatoes relative to the amount spent by the US of $780 billion). In the Asia-Pacific region, countries like Japan, South Korea, India, Australia and the Philippines have started to formalize mutual defense links with direct or indirect US involvement. China's nuclear arsenal is rapidly catching up to that of the Russia and the US in numbers of missiles and warheads. Iran is feverishly working on producing nuclear weapons, and South Korea is talking about it, too. In EPM’s view the author rightly concludes that a “metamorphosis in geopolitics is underway”. The question of another war is not if, but when. Additional geopolitical pressure cookers will explode, sooner rather than later. It seems as if a domino has been pushed and others are now beginning to fall. Conflicts in one part of the world are having measurable, causal effects on tensions in others. With the global economy teetering toward recession, the outbreak of another war or the escalation of a current one could push the world into an uncontrolled descent. If that happens, all bets are off as to what will take place next. And that is why we launched EPM – we will help you see through the “mist of war” and enable you to make sense of it all.
Looking at current events, following the death of 3 US soldiers in Jordan as a result of a drone attack, Reuters writes US president Biden has told reporters he has made up his mind as to how to respond. Most importantly, Biden said the United States does not need a wider war in the Middle East and does not want a war with Iran. "I don't think we need a wider war in the Middle East. That's not what I'm looking for," said Biden. Asked if Iran was responsible, Biden added: "I do hold ... them responsible in the sense that they're supplying the weapons" to those who carried out the attacks. in the EPM view these are critically important remarks. It indicates coordination between the US and Iran, and acceptance by the US of the Iranian position that it did not instruct nor authorize the attack. Thus, one may conclude that the risk of further escalation of the conflict in the Middle East is now reduced. As to what should be expected, John Kirby, the White House national security spokesperson, said, "It's fair for you to expect that we will respond in an appropriate fashion and it is very possible that what you'll see is a tiered approach here, not just a single action, but essentially multiple actions".
EPM sees no short-term end to the War on Gaza. The remains a significant gap between what the US wants to see happen next, and what Israel under the leadership of Netanyahu wants. This was evidenced over the weekend by a conference in Israel, which was attended by 12 Israeli cabinet ministers according to the Times of Israel, and discussed the relocation of the people of Gaza for the annexation of the area into Israel.
As to Ukraine, all is not well from a Ukrainian perspective, as Ukrainian President Volodymyr Zelenskyy prepares to replace his top general writes the Financial Times. Zelenskyy offered Valeriy Zaluzhny, Commander-in-Chief of the armed forces, a new role as a defence advisor. The general refused his offer. At the root of the friction between Zelenskyy and Zaluzhny, is the latter’s statement that the war has reached “stalemate”. The Ukrainian president castigated him for using the term and decided to make a change based on Zaluzhny’s use of the term (and other things such as the poor performance of the summer counter offensive). Zaluzhny’s removal would cause an uproar within Ukraine’s rank-and-file military and civil society, where he enjoys huge support. In a Ukrainian poll released in December 2023, 88 per cent of Ukrainians said they trusted Zaluzhny compared with 62 per cent who said they trusted Zelenskyy.
Energy Transition & Technology News
Europe's solar panel manufacturing industry has urged the European Union to step in with emergency measures to avoid local firms shutting down under price pressure from Chinese imports, writes Reuters. Multiple European solar manufacturers have announced plans to close factories in recent months, citing pressure from a flood of imports and an oversupply of solar panel parts that have piled up in European warehouses and pushed down prices. The industry has asked the EU to launch emergency measures including a scheme to buy up excess inventories of EU solar modules to ease the oversupply, and change state aid rules to boost government support for local solar producers. If those measures cannot be done rapidly, the EU should also consider "safeguard" measures that could include tariffs and quotas to counter a surge of imports, it says.
The Electrification of Transport
The lack of EV charging infrastructure is proving to be a big factor in Indian buyers opting not to choose an EV, writes Nikkei Asia. This threatens to stymie government efforts to boost EV adoption in the world's third-biggest vehicle market behind the US and top-ranked China. More than 22.6 million vehicles, including scooters, were sold in India last year with EVs accounting for 6.3% of total sales. While that may not sound like much, it is a nearly 50% jump in EV's share of the market from a year earlier. With just 11,000 charging stations nationwide, the government has acknowledged the need to dramatically boost that figure to meet ambitious goals for emissions-free electric vehicles. The Indian government says the country's nine biggest cities, including Delhi and commercial capital Mumbai, each need at least 18,000 public charging stations by 2030, while the Confederation of Indian Industry estimates the vast country needs a minimum of 1.3 million stations by the end of the decade. Key to the effort will be convincing operators to swallow high charging station setup costs despite a relatively low number of electric vehicles on the road.
Last October, EU member states signed off on the ReFuelEU Aviation directive, that stipulated that by 2030, 1.2% of all aviation used by air craft leaving EU airports must be made from synthetic kerosene derived from green hydrogen (a volume of roughly 600,000 tonnes of the e-fuel). Hydrogen Insight writes the supply side is not moving fast enough to be able to deliver this amount and achieve the proposed target. While there are 25 large-scale e-kerosene projects under consideration in Europe representing a combined output of 1.7 million tonnes, none have yet reached final investment decision (FID) and only a handful are in the advanced stages of development. One reason for the slow progress is the aviation industry’s unwillingness to commit to off take the fuel at the premium prices necessary to make the projects economic. Current estimates suggest production costs for e-kerosene are around ten times higher than fossil fuel-derived kerosene. This gap is hoped to come down to 3.5 times that of Jet A by 2030, and 2.5 times in 2050. Another reason for the slow progress on project FIDs, is that the supply of green hydrogen needed by the projects to produce e-kerosene is limited. By 2050, when ReFuelEU mandates 35% of aviation fuel demand must be met with e-kerosene, the demand for green hydrogen would gobble up around 534TWh of renewable energy capacity — 11% of the EU’s total projected renewable electricity supply by that time.