Energy, (Geo)Politics & Money - 2024.04.04
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:
McKinsey’s view on commodity trading profits in 2023
Why the US sanctions are making it harder for Russia to repair its refineries, damaged by Ukrainian drone attacks
What the analysis of a variety of oil demand forecasts says about the likely future for the energy transition: it’s not going away, because alternatives are not scaling up fast enough, which will make CCS required to meet climate goals
Why Iran is looking for a way to respond to the Israeli attack on its embassy in Syria, in a manner that will not lead to further escalation of conflict in the Middle East; where EPM notes that it will respond in a symbolic manner only, which is exactly what we predicted in our Tuesday analysis of the Israeli attack
Why the Israeli War on Gaza has not only ended the changes of the India-Middle East Economic Corridor (IMEC) to ever come to fruition, but is also likely to end in a fundamental reset of the US – Israeli relationship
Why REN21 believes the growth of renewables remains significantly what is required for the Paris Climate Accord based targets, and what is needed to close the gap
The two investigations launched by the EU into Chinese solar panel manufacturers, who Brussels says have benefited from market-distorting subsidies; Where EPM explains why we believe this will result in tariffs on the Chinese that make them effectively uncompetitive in Europe
The crazy idea of synthetic gas, and the even more crazy idea of using it as a “carrier for hydrogen”
The Bloomberg analysis of why Hertz’s plan to transform via electrification of its fleet has failed
Photo by Federico Beccari at Unsplash
General Energy News
MCKINSEY BULLISH ON COMMODITY PROFITS IN 2023
The commodity trading industry made record estimated profits of $104bn last year, writes the Financial Times based on a McKinsey report. The surprise increase from 2022, when the fallout from the war in Ukraine pushed up prices and supercharged profits, was driven by a wave of new entrants into the sector — including tech-focused traders and hedge funds — and rising returns from power trading activities. The McKinsey analysis diverges from that of rival consultant Oliver Wyman, which estimated last month that 2023 gross margin across the sector — the amount made on trades before deducting costs such as tax, salaries and bonuses — had dropped by about 30 per cent year on year, but was still about double historic levels.
US SANCTIONS IMPEDE RUSSIAN REPAIRS TO REFINERIES
The US sanctions are making it harder for Russia to repair its refineries, damaged by Ukrainian drone attacks, writes Reuters. Most companies that provide the necessary spare parts, and engineering support, have pulled out of Russia because of the sanctions. Western companies such as UOP and Swiss engineering group ABB have supplied technology and software to all the 40 biggest refineries in Russia over the last two decades. Should Moscow face a steep decline in refinery output, it would be forced to cut fuel exports in favour of crude. But that option would create tension in the OPEC+ alliance, EPM is of the opinion.
FUTURE GLOBAL ENERGY OUTLOOK RELEASED THIS WEEK
The Global Energy Outlook of Resources for the Future was released this week, writes the Financial Times. It combines a plethora of different scenarios modeled by intergovernmental bodies — from the International Energy Agency to OPEC — and major energy companies — from BP to ExxonMobil — on energy trends over the coming decades. Some scenarios assume a rapid energy transition, others a much slower one. Some are designed to hit net zero emissions, others to chart current policies. Lining them up side by side gives a good big picture overview of the route ahead for the energy transition. A majority project hydrocarbon usage will remain significant until at least the middle of the century. Even in many scenarios that are in line with limiting global warming to 1.5C by 2100, there is still a substantial use of fossil fuels until at least 2050. CCSU is key in achieving this outcome. And one of the reasons oil demand remains is that renewables growth is not nearly big enough to meet rising energy demand while enabling also decarbonizing of current energy demand.
Geopolitics
IRAN SEARCHING FOR WAYS TO RESPOND TO ISRAEL’S ATTACK
The Financial Times writes that Iran is looking for a way to respond to the Israeli attack on its embassy in Syria, in a manner that will not lead to further escalation of conflict in the Middle East. It says the danger for Iran is that a retaliation perceived as weak will risk damaging its standing and the morale of its forces, as well as the proxies that include Hamas. Yet a more aggressive response could drag the republic into a direct confrontation with Israel, and potentially the US, which the regime is thought keen to avoid. In the EPM view this confirms our analysis from last Tuesday, where we set out that Iran is likely to listen to the US and do not meaningful, only symbolic. FT notes, however, as did EPM on Tuesday, that maintaining this balance between responding and not escalating is getting harder every time Israel escalates, as domestic pressures are building on the Iranian leadership to respond in more meaningful ways.
LONGER TERM OUTLOOK FOR US ISRAELI RELATIONS
Looking further out, writing for Energy Intelligence Scott Ritter says that the Israeli War on Gaza has not only ended the changes of the India-Middle East Economic Corridor (IMEC), an ambitious sea-rail collaboration designed to link India with Europe via the Gulf Arab states, Jordan and Israel, to ever come to fruition, but is also likely to end in a fundamental reset of the US–Israeli relationship. Israeli actions in Gaza, and Palestine more broadly, have decidedly turned public opinion among a younger generation of American voters against it. Ritter says, eventually this will force US politicians to rethink their relationship with Israel and the Zionist Lobby, in order to remain “electable”. EPM notes John Mearsheimer recently aired a similar view during an interview with Al Jazeera. If, he says, the coming elections end up being decided by the issue of Israel and Palestine, the rethink among the US political elite could come sooner rather than later.
Energy Transition & Technology News
LESS THAN 50% OF NEW RENEWABLES TO MEET CLIMATE GOALS ADDED IN 2023
The world added less than half of the new renewable energy capacity needed to meet its climate goals last year, writes Reuters based on analysis by the Paris-based REN21, a research group that includes national governments and industry associations among its members. Global renewable capacity additions increased by 36% last year to reach around 473 gigawatts (GW), breaking the record for the 22nd consecutive year. But it fell far short of the 1,000 GW per year required to meet the world's climate commitments.
Total global renewable investment reached $623 billion last year, up 8.1% compared to a year earlier, but an estimated $1.3 trillion is required every year to meet climate targets. As to what should be done to further accelerate renewables build out, REN21 says, is a buildout of the grid infrastructure. REN21 said an estimated 3,000 GW of projects still awaited grid connections last year. Providing financial support for developing countries to build renewable capacity also remains a major challenge, with financing costs sometimes as high as 20%, five times higher than those in richer nations.
EU INVESTIGATE TWP CHINESE SOLAR PANEL MANUFACTURERS FOR UNFAIR STATE SUBSIDIES
The EU has launched two investigations into Chinese solar panel manufacturers, because Brussels says they have benefited from market-distorting subsidies, writes the Financial Times. “Solar panels have become strategically important for Europe,” said the EU’s internal market commissioner Thierry Breton on Wednesday. “The two new in-depth investigations on foreign subsidies in the solar panel sector aim to preserve Europe’s economic security and competitiveness by ensuring that companies in our single market are truly competitive and play fair.” The probe will focus on two consortiums bidding for the development of a solar park in Romania, part-financed by EU funds. One includes the German subsidiary of Longi Green Energy Technology, one of the world’s largest manufacturers of photovoltaic cells and solar panels. The other is made up of two European subsidiaries of the Chinese state-backed power company Shanghai Electric. The European Commission said that “there are sufficient indications that both have been granted foreign subsidies that distort the [EU’s] internal market”. EPM has little doubt this will result in tariffs on the Chinese that make them effectively uncompetitive in Europe, because the EU is positioning the whole affairs as of strategic importance to the EU. Meaning, the objective to protect domestic manufacturers.
THE ODDITIES OF SYNTHETIC GAS EXAMINED
Then lastly, one of the oddest ideas in the energy transition is discussed by the Financial Times. It looks at synthetic gas, which is produced by combining captured carbon dioxide with green hydrogen to produce a so-called carbon-neutral fuel that can be distributed to consumers through existing natural gas infrastructure. EPM notes that overall energy efficiency of the process is horrendous, due to various steps involved in the process (capture CO2 via DAC, produce green hydrogen, Fischer-Tropsch, etc). FT names Turn2X and Terraform as companies active in this field. But, FT reveals there is an ever odder synthetic gas idea out there. That idea is touted by Tree Energy Solutions (TES), which proposes to produce synthetic gas in order to transfer hydrogen over longer distances. Which means that upon arrival at destination, TES suggests the synthetic gas is cracked back to its constituent components to enable the hydrogen to be used and the CO2 to be stored (or shipped backed to point of origin). EPM can not imagine how these ideas could have survived even elementary techno-economic modeling to assess their economic competitiveness vis-à-vis alternatives. But if you have money to burn, feel free to invest!
The Electrification of Transport
HERTZ’S FAILED PLAN TO ELECTRIFY RENTAL FLEET EXAMINED
Bloomberg has analyzed why Hertz’s plan to transform via electrification of its fleet has failed. In 2021 the company announced an unprecedented order for 100,000 Teslas and struck an exclusive deal to supply EVs to Uber drivers. The company followed the mammoth Tesla order with five-year agreements in 2022 to buy as many as 65,000 EVs from Polestar, the venture between Volvo Car AB and China’s Geely Automobile Holdings Ltd., and 175,000 from GM. If Hertz went all-in on EVs, so was the strategic reasoning, it could gain a yearslong advantage over Enterprise Holdings and Avis by positioning itself for exclusive deals with ride-hailing services and automakers. It’d be more profitable, too, because EVs were so much cheaper to operate, easier to maintain and safer, the company calculated. In 2022 already problems began to appear. business travelers and vacationers suffered from range anxiety and didn’t want the hassle or worry of having to find a charger in the wild. In 2023, delays due to repair were increasing across Hertz’s entire fleet, and collision costs were jumping. Teslas were indeed cheaper to maintain than a traditional car, but newbie Tesla drivers who weren’t used to the car’s instantaneous acceleration and immediate braking were running into obstacles or getting rear-ended more often. Hertz’s Teslas got into accidents four times more often than the company’s other vehicles, while Tesla didn’t have an extensive network of franchised dealers to help with service and repair. When Hertz was able to get its Teslas fixed, the costs were exorbitant compared with those of repairing other makes. By early 2024 it was clear the massive bet on electrification was a catastrophe. Musk had slashed Tesla prices by as much as 30%, sending the value of Hertz’s EVs plummeting, tripling Hertz’s depreciation costs to $2 billion.
Other
MAJORITY OF CO2 PRODUCTION TRACEABLE TO 57 FUEL & CEMENT PRODUCERS
The vast majority of planet-warming carbon dioxide emissions since 2016 can be traced to a group of 57 fossil fuel and cement producers, writes Reuters based on data from the Carbon Majors database. The 57 entities including nation-states, state-owned firms and investor-owned companies produced 80% of the world's CO2 emissions. The world's top three CO2-emitting companies in the period were state-owned oil firm Saudi Aramco, Russia's state-owned energy giant Gazprom and state-owned producer Coal India, it says.