Energy, (Geo)Politics & Money - 2024.02.21
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources
Welcome to EPM, where we take our daily look at the interconnected worlds of Energy, (Geo)Politics and Money. Curated from the world’s leading sources of information, we provide you both the information and the objective, neutral commentary that you need to make sense of it all – and beat the market.
THE ANTWERP DECLARATION
In this roundup, we take a closer look at the Antwerp Declaration. It is the outcome of a gathering of 70 CEOs, all from major European manufacturing companies, in the Belgian city of Antwerp. The executives want a European Industrial Deal, to improve their companies’ competitiveness during the energy transition. The resulting “Antwerp Declaration” is essentially a wish list of 10 steps manufacturers say will help them remain competitive. At the top of their list: less regulatory overkill, fewer reporting obligations and cheap energy.
The event and declaration are connected to themes EPM has been reporting on extensively. For example, in our section “The Global Energy Crisis” we said from the start of Europe’s position-taking in the Ukraine War that the main consequence would not be a lack of availability of energy, but rather elevated energy prices which would make European industry uncompetitive. Under Climate Politics we have forewarned the current backlash among the general public against the EU climate agenda, as we said it would lead to higher costs and thus lower living standards. The Antwerp Declaration fits into this – it is elite business interests fighting back, because climate agenda’s red-tape will raise costs as well.
Our main takeaway is that the pushback is likely to get worse as the EU is clearly entering the recession we at EPM had forecasted for 2023 (based on higher interest rates and elevated energy prices).
Furthermore, we look at:
China’s lowering of its five-year mortgage rate, by the biggest margin since its inception in August of 2019
Germany’s acute economic problems, German companies rush to exit towards the US, leaving the country in a recession; where EPM notes this situation is the result we predicted following the political decisions the country made regarding the Ukraine War and EU proposed policies
The US warning that it will react if China “dumps” its industrial products on world markets; which EPM see as designed to prepare the land for further sanctions and tariffs on Chinese products
The US proposed UN Security Council resolution warning against an Israeli assault on Rafah in the southern Gaza Strip and calling for a temporary cease-fire; where EPM notes the schizophrenic nature of the US response to this subject, through which it does itself severe harm
ExxonMobil’s warning that the EU’s policies and red-tape is making the continent un-investable
The frustration felt by the airline industry about a lack of SAF supply; where EPM explains why this is the case, which in turn explains why governments have begun mandating SAF blends
Why the protectionism-focused response of US automakers in the face of Chinese EV-based competition is unlikely to have the outcome they hope it will have
GENERAL ENERGY NEWS
CRUDE OIL PRICES
Crude oil prices have been relative stable over recent days. After falling 1.5% on Tuesday, Brent returned to $83 per barrel during early trading on Wednesday, while West Texas Intermediate continued to trade just above $77, writes Bloomberg. EPM’s perspective on where things are most likely to go from here is, as you know, down. The risk premium associated with fears that the War on Gaza will escalate was high about 2 weeks ago, but is declining as we speak. The disruptions of Red Sea shipping are still there, but we believe Iran has been very clear, to the point of being explicit about it, that it will not be drawn into a conflict and that it has told its allies across the region to act accordingly. Therefore, barring any further Israeli incitement, in Rafah, Iran directly, or Lebanon, we believe the oil market will soon shift attention away from geopolitics back to the fundamentals of supply and demand. With weak economies in Europe and Asia (China), all eyes will be on OPEC+. It must maintain its current production cuts, as must Saudi with its voluntary cuts, as without these the floor will fall out from under the current oil price level and lead to a return towards the $60s. Which would of course be great for inflation, enable accelerated interest rate reductions, and thereby spur on the economic activity that is needed to lift oil demand and prices again. But, EPM says, always expect geopolitics to throw spanners in the works…
MACROECONOMICS
CHINA LOWERS 5 YEAR MORTGAGE RATES
The People's Bank of China lowered the five-year mortgage rate to 3.95%, from 4.2%, the first reduction since last June and the largest since the policy rate quote was introduced in August 2019, writes Nikkei Asia. Earlier this month, commercial banks' reserve obligations were also reduced by half a percentage point, freeing 1 trillion yuan ($140 billion) in long-term capital. The bank had been widely expected to cut its one-year loan prime rate from 3.45% to ease corporate borrowing costs, but it left the rate unchanged. In the EPM view, this indicates China is very focused in its interventions in the economy. It does not want to cause a further increase in (unsustainable) corporate debt, but it does want to see the property sector being lifted out of its current woes.
GERMANS INVEST HEAVILY IN THE US
The US is luring a record amount of capital investment from German companies attracted by its strong economy and lucrative tax incentives, just as conditions in their home market and China, their largest trading partner, are worsening, writes the Financial Times. German companies announced a record $15.7bn of capital commitments in US projects last year, up from $8.2bn a year earlier, and dwarfing the $5.9bn pledged in China. German companies announced 185 capital projects in the US in 2023, of which 73 were in the manufacturing sector. The largest project was a $2bn investment by Volkswagen’s Scout Motors electric vehicle subsidiary in Columbia, South Carolina. Senior executives at BASF and Siemens Energy — two of Germany’s largest companies — said a combination of pragmatic US government industrial policies, a strong long-term market outlook and increasing focus on supply chains was driving US investment. BASF, the world’s biggest chemical group and a major investor in China, is also expanding its US operations.
GERMANY TO REMAIN IN RECESSION
The warning by the German central bank that the country is likely to remain in recession during the first quarter of 2024, as reported by the Financial Times again, should not come as a surprise, therefore. Germany’s economy shrank 0.3 per cent in both the fourth quarter and over the whole of 2023, making it the worst performing major economy in the world last year. The central bank said there were few signs of a rebound at the start of this year.
As you know, in the EPM view the German’s acute problems are the result of, one, its geopolitical positioning in the Ukraine War, where it chose to make an enemy out of the country that supplied it with cheap energy, while it could also have stepped in a neutral mediator pushing for a ceasefire and peace; and two, its support for the EU Green Deal policies, which are all carrot and no stick, and come with massive administrative burdens, worse than anything elsewhere in the developed world.
US – CHINA COMPETITION
Meanwhile, the US continues to use economics in its geostrategic competition with China. Washington has warned Beijing that the US and its allies will take action if China tries to ease its industrial overcapacity problem by dumping goods on international markets, writes the Financial Times. “We are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China . . . is going to wind up hitting world markets,” said Jay Shambaugh, the under-secretary for international affairs, who recently led an economic team to Beijing. The US is most concerned about advanced manufacturing, and particularly clean energy sectors such as electric vehicles, solar panels and lithium-ion batteries. If you disagree with EPM and do not see these comments as part of geopolitics, then we suggest you look at the US IRA again, which is equally all about “industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from”. In our view, this US announcement is designed to prepare the land for further sanctions and tariffs on Chinese products
GEOPOLITICS
US WARNS ISRAEL REGARDING RAFAH
The US has proposed a UN Security Council resolution warning against an Israeli assault on Rafah in the southern Gaza Strip and calling for a temporary cease-fire, writes Bloomberg. A major offensive in Rafah “would result in further harm to civilians and their further displacement including potentially into neighboring countries, which would have serious implications for regional peace and security,” the text says. EPM notes the schizophrenic nature of the US when it comes to Israel’s War on Gaza. One the one hand, it blocks every UN resolution on the issue not submitted by itself, no matter how well reasoned and cautiously formulated, which together with continued weapons and ammunition supplies gives Israel the idea it has the US’s unconditional support. On the other hand, it calls Israel to change its policy towards the Palestinians and its strategy in the War on Gaza. This approach can, in the EPM view have only one outcome. It does not deter Israel from any actions deemed unwanted by the US, it does not affect Israeli policy, but it does devastate for US international prestige and soft power.
ENERGY TRANSITION & TECHNOLOGY NEWS
ASIAN SYNTHETIC FUEL PROJECTS
Reuters has prepared an overview of SAF (Synthetic Aviation Fuel) projects in Asia. While the fuel is generally considered crucial for the aviation sector to reach its net zero goal by 2050, its adoption remains in a nascent phase, it notes. EPM notes these projects will hardly be noticeable in jet fuel demand across the region.
BOEING FRUSTRATED WITH DEARTH OF SYNTHETIC AVIATION FUEL SUPPLY
Boeing agrees with EPM. It is “frustrated” by the lack of action by the Oil majors on the SAF front, writes Bloomberg. Global supply of SAF meets barely 1% of the aviation industry’s requirements. And, the projects are just not there to significantly raise this share, making it impossible for the airlines to achieves Net Zero targets. Major oil producers “need to lean in harder” and crank up production, Robert Boyd, Boeing’s head of sustainability for the Asia-Pacific region, said in an interview at the Singapore Airshow on Tuesday. “I don’t think they’re doing enough,” he said of the traditional energy sector. In defense of the oil companies EPM notes that the cost of producing SAF is structurally higher, in part due to bottlenecks on the feedstock front. And, airlines are unwilling to pay this higher price if they cannot charge it on to their customer. That is why for example Singapore and the EU are mandating blends of SAF with conventional fuel, to break the resulting deadlock. (Which we then find businesses and the general public – at last in Europe – protesting against. O what a wonderful world we live in…)
CLIMATE POLITICS
THE ANTWERP DECLARATION
Business and industry leaders gathered in Antwerp with a cry for help. The executives want a European Industrial Deal, to help boost competitiveness during the energy transition, writes Bloomberg. The EU has faced growing resistance to its approach to greening the economy, especially as it sets even more ambitious targets for 2040.
Politico adds that 70 CEOs from major European companies gathered for the event. The resulting “Antwerp Declaration” is essentially a wish list of 10 steps manufacturers say will help them remain competitive. At the top of their list: less regulatory overkill, fewer reporting obligations and cheap energy.
You can read the declaration here. EPM understands it as being a complaint about high energy prices, which makes industry in Europe uncompetitive. And the EU style of policy making, which is very prescriptive, detailed, all stick and no carrot, and generates massive reporting requirements that are very expensive to manage.
EXXONMOBIL WARNS EU ON RED TAPE
ExxonMobil has warned about the consequences of its frustration with EU policy. At the meeting in Antwerp it said it is willing to withhold billions of dollars in climate-related investments in Europe unless Brussels cuts environmental red tape, writes the Financial Times. Karen McKee, president of ExxonMobil’s Product Solutions division, said the US oil major had $20bn set aside for decarbonisation projects between 2022 and 2027 but that it was likely to prioritise “other parts of the world” amid increasing frustration at the regulatory burden linked to getting projects off the ground in Europe.
EUROPE SLEEPWALKING TOWARDS OFFSHORING
Jim Ratcliff of INEOS, meanwhile, said that Europe is “sleepwalking towards offshoring its industry, jobs, investments, and emissions”, according to Hydrocarbon Processing. Ratcliff explicitly says the European chemicals sector “struggles to compete” with other markets such as the USA, China, and the Middle East; carbon taxes have been successful in “driving away investment” from Europe; which makes it “impossible” to renew Europe’s 30-50-year-old chemical base with cleaner technology, as is happening in the US.
THE ELECTRIFICATION OF TRANSPORT
US AUTOMAKERS – FLAT FOOTED RESPONSE TO CHINA EVs
An opinion piece by Bloomberg says that the US automakers are making the same mistakes in the face of Chinese EV focused competition, as they did in the 1970s when they were first confronted by competition from Japan. In the 1970s they failed to comprehend the appeal of affordable Japanese cars that sipped fuel, needed minimal maintenance, and came packed with standard features that local buyers were used to finding only as pricey add-ons. Today, the are at risk of similarly underestimating the appeal of low cost-of-ownership Chinese EVs. Just as tariffs and relentless US government pressure on Japan did not, in the end, enable the Americans to win the competition against Japan, so the same protectionism-focused response now is unlikely to protect the US automakers. Detroit can only really defend itself against Chinese EV-makers if it develops products that can compete and undercut them, the author says. That’s the lesson it failed to learn when confronted with Japanese rivals half a century ago. The only way to win this race will be to start competing with the next wave of Asian imports, rather than trying to disqualify it.