Energy, (Geo)Politics & Money - 2024.04.11
We take a closer look at the potential for an Iranian military response to the Israeli bombing of its embassy in Damascus
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 take a closer look at the potential for an Iranian military response to the Israeli bombing of its embassy in Damascus. US officials say this is imminent, which is something EPM can readily believe, and this is supporting higher oil prices at present.
What we at EPM do not believe, however, is that this Iranian response will be non-US aligned. Iran has been communicating with the US via backdoor channels through the Israeli War on Gaza, and continues to do so, after all. EPM has, therefore, a lower assessment of the risk of a wider Middle East than the market.
More importantly, however, our risk assessment is also different. The main risk is not Iran, we believe. In fact, the main risk is the US support for Israel. This is provided in a way that does not deter Israel from striking its enemies around the world, without fear of any consequences. At some stage this will lead to a non-US controlled response, as we mentioned and explained following the Israeli attack on the Iranian embassy.
Furthermore, we look at:
Higher than expected inflation in the US, which is likely to delay a lowering of US interest rates until September
The outlook for the Asian economy
China’s next step towards independence and self-sufficiency in semiconductors, via development of a lithography industry
The warning by the International Monetary Fund that aggressive use of industrial policy by the world’s most powerful economies risks becoming an expensive mistake that could trigger a tit-for-tat subsidy war; where EPM explains why we believe the IMF has hit the nail on the head, why we evertheless foresee that “industrial policy” will continue to remain the trend, and why this will cause the global economy to fall apart into regional economies
How the rise of wind and solar in Europe is not only squeezing coal, but also the nuclear power industry
The EU investigation into subsidies received by Chinese suppliers of wind turbines; where EPM explains why we believe this is in essence protectionism, to enable you to reflect on how this will affect the global economy and the energy transition
Photo by Vishnu Mohanan on Unsplash
General Energy News
OIL INCREASES DUE TO FEARS OF IRANIAN MILITARY ACTION
Oil prices are rising again as market participants fear an Iranian action in response to the Israeli bombing of its embassy in Syria. Reuters writes that on Thursday morning Brent crude futures advanced by 30 cents, or 0.3%, to $90.78 a barrel, while U.S. WTI futures rose 25 cents, or 0.3%, to $86.46 a barrel. This connected to a Bloomberg report that says the US believes major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent. EPM covers this subject in more detail under Geopolitics.
Macquarie Group says Brent will enter a bear market in the second half of the year, as recent gains are unlikely to hold if geopolitical events don’t lead to actual supply disruptions, writes Bloomberg. That, EPM believes, is an excellent assessment.
Macroeconomics
US EXPECTED TO DELAY INTEREST RATE CUTS UNTIL AUTUMN 2024
U.S. consumer prices increased more than expected in March, as Americans continued to pay more for gasoline and rental housing, writes Reuters. As a result, financial markets now anticipate the Federal Reserve to delay cutting interest rates until September. Though the annual increase in consumer prices has declined from a peak of 9.1% in June 2022, the disinflationary trend has virtually stalled in recent months. In the 12 months through March, the CPI increased 3.5%, the most since September. It rose 3.2% in February.
ASIAN ECONOMIC GROWTH EXPECTED TO SLOW DURING 2024
The Asian Development Bank projected that growth in developing Asia will slow this year, despite improved domestic demand, owing to headwinds and weaknesses in China's economy, writes Nikkei Asia. Developing Asia's gross domestic product is projected to expand 4.9% this year and next, slightly lower than the 5.0% that the ADB currently estimates. Southeast Asia and South Asia will fuel growth for the region, according to the ADB. The ADB highlighted weaknesses in China's property market and its fading post-pandemic recovery.
HUAWEI DOUBLES DOWN ON SEMICONDUCTOR R&D
Huawei Technologies is building a massive semiconductor equipment research and development center in Shanghai, writes Nikkei Asia. The center's mission includes building lithography machines, vital equipment for producing cutting-edge chips. The US’s export controls have sharply reduced Huawei's access to this equipment, whose production is dominated by just three companies: ASML of the Netherlands and Japan's Nikon and Canon. To staff the new center, Huawei is offering salary packages worth up to twice as much as local chipmakers. The new R&D center is located in the Qingpu district of west Shanghai, on a spacious campus that also houses a major chip development center and the new headquarters of HiSilicon Technologies, Huawei's chip design unit. There are also research centers for wireless technologies and smartphones on the premises. Total investment for the entire R&D base will come to about 12 billion yuan ($1.66 billion), according to the Shanghai government, which listed it as one of the city's top projects for 2024. Huawei's R&D spending in 2023 reached a record high of 164.7 billion yuan, representing 23.4% of its total revenue.
IMF WARNS SUBSIDY WAR IF INDUSTRIAL POLICIES ARE NOT ALIGNED
Aggressive use of industrial policy by the world’s most powerful economies risks becoming an expensive mistake that could trigger a tit-for-tat subsidy war, the International Monetary Fund has warned, according to the Guardian. Era Dabla-Norris, the deputy director of the IMF’s fiscal affairs department, said:
History shows that getting industrial policy right can be a tall order, and there are many cautionary tales of policy mistakes, high fiscal costs and negative spillovers to other countries.
The IMF highlighted recent initiatives – such as the Chips Act and Inflation Reduction Act in the US, the Green Deal Industrial Plan in the EU, the New Direction on Economy and Industrial Policy in Japan, and the K-Chips Act in Korea – as well as longstanding policies in large emerging market economies such as China as areas of concern. The IMF noted that such “activist government policies” could lead to “misallocation of resources and capture by special interests”, because most approaches relied heavily on costly subsidies. The IMF noted,
Potential gains could quickly run into sizeable losses. Further, we show that discriminating against foreign firms can actually prove self-defeating, as such policies can trigger costly retaliation in most countries. Even major advanced economies rely on innovation that is done elsewhere.
EPM believes the IMF has hit the nail on the head here. The new policies such as the IRA in the US risk on the one hand “capture” by vested interests, and on the other hand retaliation from other countries. Nevertheless, we foresee that “industrial policy” will continue to remain the trend, because the world has entered a new era of geopolitical competition. Industrial policy is therefore one of the reasons why we say the global economy will fall apart into regional economies. Our hope is that this will not occur in the way it did during the interbellum.
Geopolitics
IRANIAN RETALIATION AGAINST ISRAEL EXPECTED SOON
The US believes major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent, writes Bloomberg. It’s not yet clear whether a potential attack by Iran and its proxies would turn the conflict into a broader, more prolonged war or remain contained, Bloomberg says.
But EPM has a view on the matter. Iran has communicated with the US via backdoor channels throughout Israel’s War on Gaza, in order to prevent the kinds of escalation in the conflict that would lead to an all-out war between Iran and the US. No doubt, this continues to be the Iranian objective, as such a war would not serve its objectives. It is, however, what Israel would like to see happen, as a war between the US and Israel’s neighbours in the Middle East would strengthen its position, and this is why Israel has been escalating its attacks on Lebanon and Syrian territory over recent months.
Considering all of this, we expect the Iranian response to be limited, measured, and aligned with the US. EPM has, therefore, a lower assessment of the risk of a wider Middle East than the market. Our risk assessment is also different. The main risk is not Iran, we believe. In fact, the main risk is the US support for Israel. President Joe Biden said on Wednesday,
As I told Prime Minister Netanyahu, our commitment to Israel security against these threats from Iran and its proxies is iron clad. Let me say it again, iron clad - all we can to protect Israel’s security.
What this messaging effectively does, is say to Israel “you can do whatever you want and we will come to your support”. It does not deter Israel from striking its enemies around the world. And at the end of the day, that is where the main risks are, because at some stage this will lead to a non-US controlled response.
Energy Transition & Technology News
GREEN ENERGY CROWDING OUT HYDROCARBONS AND NUCLEAR
Wind and solar parks in Europe are producing more power than ever, which is eating into the share that both nuclear and coal plants send to national grids, writes Bloomberg. Longer term, it’s a warning sign that not only coal, but also nuclear might get increasingly squeezed out, even as countries such as France and the UK plan to spend huge sums on new nuclear plants. Electricite de France, which is just getting its fleet of nuclear plants back on track after years of lengthy outages for repairs and checks, has already had to reduce output and halt plants, or extend stoppages. Over the weekend, the firm idled half a dozen plants as prices turned negative. European Union nations added a record amount of wind power capacity last year. The growth of solar capacity exceeded 40% for a third year running.
Climate Politics
EU TO INVESTIGATE CHINESE RENEWABLE ENERGY TRADE PRACTICES
The EU will investigate subsidies received by Chinese suppliers of wind turbines destined for Europe, writes Reuters. The European Commission will look into conditions for the development of wind parks in Spain, Greece, France, Romania and Bulgaria, the EU's anti-trust commissioner Margrethe Vestager said. A group representing Chinese business interests in Brussels expressed its "profound dissatisfaction" over what it called protectionism and a lack of transparency from the EU as it rolls out its new rules to counter state aid from foreign actors. This is in the bloc's latest move to shield domestic firms from cheap clean tech products, EPM notes, and the Chinese dissatisfaction is understandable since it is on the receiving end of most if not all of it.
EPM noteS, for example, that despite the IRA no US firms have come under investigation. The reality of these EU measures is, therefore, protectionism. That we say not as a moral judgement, but to enable you to reflect on how this will develop over time and impact markets – regionalization of the global economy, and a slower and more expensive energy transition in the areas of the world that are behind in clean tech.
The Chinese finance ministry has issued a statement renouncing the EU and US accusations that it is practicing unfair trade in the new energy area, writes Reuters. Commerce Minister Wang Wentao said U.S. and European assertions of “excess capacity” were groundless, adding China's rise in these new green energy industries was driven by innovation and complete supply chain systems, among other factors. "They cannot win the race, so they try to slow it down," Reuters quotes Li Yong, chief researcher at D&C Think, a Chinese think tank, as saying in reference to the West's rhetoric on overcapacity. "We just do our things, they can do whatever they want – the knife is in their hands."