Energy, (Geo)Politics & Money - 2024.02.22
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.
In this roundup, we look at:
The crisis in the US natural gas business
The boom of the Japanese stock market; which EPM sees as a likely case of “easy come easy go” which leaves us worried about how the in our view inevitable strong decline of the Nikkei will affect the real Japanese economy
Former CIA director and secretary of Defense Robert Gates’ view that Russia has broken the stalemate in Ukraine and is getting ready to go on the offensive across the 600-mile frontline; where EPM notes that the most likely outlook for the conflict is an accelerating degradation of Ukraine’s ability to hold on to its positions
Donald Trump’s plans for the US’ economic warfare against China, and beyond this, his plan for a "universal baseline tariffs" for essentially all goods from all countries, including Europe, Japan and South Korea
Steel giant ArcelorMittal’s assessment that its European plants will not be competitive when using green hydrogen to produce green steel, despite being granted billions of euros of EU subsidies
The decline in heat pump sales in Europe
General Energy News
US Natural Gas Price Fall:
US natural gas prices this month fell to an inflation-adjusted 30-year low of $1.59 per thousand cubic feet, writes Reuters. In response, US gas firms last year cut drilling 22%. But the flows keep coming. The US will pump 105 billion cubic feet a day of gas this year, up 2.5 billion cubic feet a day in the last year. That increase is enough to fuel 12.5 million U.S. homes for a day. The main cause is relentless output gains from oil companies that pump gas as an oil byproduct. EPM notes that the Biden administration’s pause on LNG export permits is contributing to the problem, as it is preventing US natural gas to find homes away from home.
Ukraine and Oil Trade Flows:
S&P Global has performed a deepdive analysis of how western sanctions on Russia fpllowing its invasion of Ukraine have changed global crude flows. Its main takeaways: They have had a profound impact on sour crude export destinations, and increased the appetite for sweet crudes among European refiners.
Macroeconomics
Japan’s Stock Market is Hot:
Japan’s stock market has soared 16% so far this year, which enabled the Nikkei 225 to break through its previous intra-day record set in 1989, just before the epic crash of the Japanese economy, writes Bloomberg. It is the result of the return of inflation to the Japanese economy, which had since the 1990s been struggling with a deflationary trend.
But in the view of EPM, probably more important is the exit of foreign money from China, which we discussed when reviewing the Chinese stock market’s massive decline over the past 18 months. A lot of this money has gone into Japan. In our assessment, therefore, most of the Nikkei’s value increase is artificial, having little to do with a significantly improved outlook for the Japanese economy or its major firms – in fact, the economy formally entered recession during the fourth quarter of 2023.
The recent gains can therefore be easily lost again, if and when international investors decide to take their profit and head off to another destination, for example India. EPM does not share the exuberance of many, therefore, as we focus more on how the in our view inevitable strong decline of the Nikkei will affect the real Japanese economy.
Geopolitics
Russia Regains Momentum in Ukraine:
Robert Gates, former CIA director and secretary of Defense, said Wednesday, says Russia has effectively broken the stalemate in Ukraine via its victory in the battle for Avdiivka, writes The Hill. Gates said,
It’s no longer a stalemate. The Russians have regained momentum. Everything I’m reading is that the Russians are on the offensive along the 600-mile front.
As you know, this is also the EPM assessment, which, in turn, is based on the analysis work of John Mearsheimer. Ukraine is trying to hold up in this war of attrition, but the reality on the ground is that it is outnumbered and outgunned, says Reuters. In the EPM view, barring a horizontal or vertical escalation by the western backers of Ukraine, the most likely outlook for the conflict is therefore an accelerating degradation of Ukraine’s ability to hold on to its positions.
War on Gaza:
As to Israeli War on Gaza, EPM has previously noted that elite international sentiment has turned against the Israeli’s. In further evidence of this assertion, the UK is considering restricting some arms exports to Israel if it launches an offensive on the Palestinian city of Rafah or obstructs aid trucks from entering Gaza, writes Bloomberg. Bloomberg concludes from this, correctly in the EPM view, that western nations are ratcheting up the pressure on Prime Minister Benjamin Netanyahu’s administration. The US’ schizophrenic behavior in this regard – disagreeing with Israeli policy but continuing to provide diplomatic backing at the UN as well as military supplies to enable the actions it is speaking our against – we see as indicative of the extent to which organizations such as AIPAC have developed influence inside institutions.
US Elections:
EPM has promised to start covering the US elections, because we believe more is at stake this time around than “normal”. In our assessment, Donald Trump represents a real shift in policy, unlike for example Barack Obama. Earlier this week we discussed how Trump would change US energy policy. Today we look at what he has released in plans for the US’ economic warfare against China.
Trump will likely consider a two-step plan to sharply increase duties on Chinese goods if he is elected president again in November, writes Nikkei Asia, in part based on comments by Clete Willems, who served as deputy assistant to the president for international economic affairs in the first Trump administration. These new duties would likely target semiconductor devices and other electronics, steel and pharmaceuticals -- products for which Trump aims to gradually reduce imports from China to zero over four years. The second piece of the plan is to revoke China's most-favored-nation trading status, under which the U.S. gives the country the same trade advantages as its other trading partners under World Trade Organization rules. Ending this would put China alongside such hostile nations as North Korea and Cuba. Beyond China, Trump has proposed "universal baseline tariffs" on most foreign products. He mentioned 10% as a possible rate last summer.
Energy Transition & Technology News
ArcelorMittal - Status in Europe:
Steel giant ArcelorMittal has said it cannot operate its European plants using green hydrogen, despite being granted billions of euros of EU subsidies to install equipment to do so, writes Hydrogen Insight. The main reason is that despite the subsidies, the resulting green steel would still be unable to compete on international markets. “We already know that hydrogen will be expensive in Europe,” Geert van Poelvoorde, head of ArcelorMittal’s European operations, said. “We will not be able to use it because we would catapult ourselves completely out of the market.” ArcelorMittal needs green hydrogen prices of close to €2/kg in order for H2-derived green steel made in the EU to be competitive, said van Poelvoorde. Until this is achieved, the company will use natural gas instead of hydrogen in its operations. At present, European electrolysis schemes can only produce hydrogen at around €6-7/kg, van Poelvoorde asserted, possibly €5/kg with some optimisation. Even green hydrogen imports would not be feasible, he added, noting that it costs €1.50/kg just to transport it from Africa, where it is cheaper to produce. ArcelorMittal will likely shift its focus hydrogen based green still initiatives away from Europe to the US, where green hydrogen production is guaranteed a subsidy of up to $3/kg.
Europe’s Green Hydrogen is Uneconomic:
On a levelized cost basis, green hydrogen produced in Europe is currently almost three times as expensive as gray hydrogen: $6.44 per kilogram versus $2.35/kg, according to Energy Intelligence data. The EU currently produces around 8 million-9 million tons/yr of gray hydrogen out of a total global market of nearly 100 million tons/yr. The world’s current production of green hydrogen is minuscule, at around 20,000 tons/yr.
Major Heat Pump Sales Drop in Europe:
European sales of heat pumps declined by about 14% in the third quarter, writes Bloomberg, which notes that the decline would have been greater were it not for a large backlog of orders in Germany, where sales have since begun to contract by as much as 40%. Fourth-quarter European sales are expected to have declined 28% year-over-year. Among the causes for the decline are lower subsidies, higher interest rates, and declining gas prices (which reduces the economic advantages of heat pumps compared to conventional gas-based solutions). As to the outlook, Bloomberg nots that heat pumps risk being caught up in the “culture war”. Public support for policies promoting heat pumps has dropped due to European governments communicating plans to ban boilers, and have been used by opposition parties across the continent to argue against energy transition policies more general.