Energy, (Geo)Politics & Money - 2024.04.17
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & sourced from leading global sources.
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:
Federal Reserve Chair Jerome Powell’s signaling that the Fed will wait longer than previously anticipated to cut interest rates; and the fear that higher for longer interest rates in major economies threatens a painful wake-up call for financial markets
The ties between the world’s two most populous nations, China and India, which are almost completely broken, and likely to deteriorate further; where EPM explains why this relation is of critical importance in geopolitics
The appointment Shell’s former CEO Ben van Beurden as a senior adviser for energy transition investments at private equity group KKR; where EPM notes that Van Beurden’s decisions in these areas have been largely undone by his successor at Shell, Wael Sawan
The new trade task force that the US will establish, aimed at reducing carbon emissions from global commerce and manufacturing; which in the EPM view will drive forward emissions accounting and make “product carbon intensity” differentiator in the market
The global trade in plastic waste, which is transferring a large part of the plastic waste problem to Southeast Asia where waste management is least developed and environmental controls light and little enforced; where EPM explains why we continue to believe this will eventually become a problem for the petrochemicals industry
The efforts to get to the bottom of changes in emissions numbers reported by companies, via a new tool called Splice
The efforts by China’s EV manufacturers to move into the higher segments of the markets, for which BYD has launched 3 new cars; which takes place as Tesla appears to be abandoning its efforts to move into the lower-cost segments of the market, as it scales back its ambitions for the Tesla 2
Photo by Marek Piwnicki on Unsplash
General Energy News
OIL FUTURES TRADING AT $250 PER BARREL
Oil traders have piled into more than 3 million barrels worth of options contracts in a bet that prices will spike to $250 a barrel by June, writes Bloomberg. It’s a low cost bet on an unlikely scenario, that if it materializes would have massive positive implications for the traders concerned.
Macroeconomics
INTEREST RATE CUTS ON HOLD
Federal Reserve Chair Jerome Powell signaled that following a series of surprisingly high inflation readings, policymakers will wait longer than previously anticipated to cut interest rates, writes Bloomberg. Powell said Tuesday,
The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence. Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.
Fear that interest rates in major economies will stay relatively high is creeping back and threatens a painful wake-up call for financial markets, Reuters writes. Global stocks remain near record highs, and demand for debt issued by the riskiest companies is firm, as traders expected summer rate cuts. But asset managers and economists now expect only minimal monetary easing, especially from a U.S. Federal Reserve facing unexpectedly persistent inflation. Traders, who since 2009 have become used to low rates flattering asset prices, are now set for an adjustment in expectations, psychology and beliefs. Wall Street's S&P 500 index, which influences equities worldwide, is priced 32% above fair value based on long-term rate forecasts, says Vanguard, the world's second largest money manager.
Geopolitics
CHINA AND INDIA - RELATIONS AT AN ALL TIME LOW
The New York Times writes that ties between the world’s two most populous nations, China and India, are almost completely broken. This is evident in the narratives surrounding India’s upcoming elections, where prime minister Modi is presenting India as being on its way to becoming a major global power, and China as a fierce geopolitical rival. The competition between the two countries is already underway.
China and India are vying to lead the developing nations of the so-called global south. When India hosted the Group of 20 summit last year, using it to showcase its support of poorer countries, China’s premier Xi Jinping skipped the event. China has also been a major roadblock in India’s campaign to gain a coveted permanent seat on the U.N. Security Council. The NYT notes that this competition has provided an opening for Western nations to expand defense and economic ties with New Delhi, which is a distressing development for Beijing. India signed a series of deals with the United States last year to strengthen military cooperation. India has also drawn closer to the other two members of the so-called Quad, Australia and Japan, as the group works to counter China’s projection of power.
EPM notes that the dominant view among US geostrategic planners is that “as India goes, so goes Asia, and by extension the world”. From the US perspective, bringing India into the alliances based on the Us developed “international rule based order” is of critical importance. If it fails to achieve this, it will be exceptionally hard for the US to maintain its position of hegemony. On the contrary, if it achieves this, it will become very hard for China to outgrow its current role as a regional power and drive the establishment of a new global order.
Energy Transition & Technology News
SHELL FORMER CEO JOINS KKR AS AN ADVISOR
Shell’s former chief executive has joined private equity group KKR as a senior adviser for energy transition investments, writes the Financial Times. The Dutch executive spent 39 years at Shell, including almost a decade in the top job. He stepped down at the end of 2022. As chief executive, he oversaw the $54bn acquisition of BG Group, set Shell’s first climate targets and pushed the FTSE 100 group further into new areas such as biofuels, hydrogen and renewable power. At the risk of sounding cynical, EPM notes that since Van Beurden’s departure, most of his new energy strategy has been cancelled by his successor at Shell, Wael Sawan.
Climate Politics
US ESTABLISHING NEW TRADE TASK FORCE TO REDUCE CARBON EMISSIONS
The U.S. will create a new trade task force aimed at reducing carbon emissions from global commerce and manufacturing, White House senior adviser John Podesta said, according to Reuters. The new task force will focus on addressing carbon leakage, carbon dumping, and emissions associated with upstream manufacturing and production. "Global trading rules incentivize carbon leakage - when manufacturing-related emissions from a country with stronger climate policies shift to a country with weaker policies," said Podesta, the incoming U.S. climate change diplomat. He pointed to China. The task force will also ensure carbon emissions data is available for implementing U.S. climate and trade policies, including taking steps to promote common measurement and high standards on life cycle emissions, he said, emphasizing the group will deepen its dialogue with the United Kingdom, Australia, the European Union and other partners and allies from around the world. In the EPM view, this is important. Reading between the lines, it is an effort to use “product carbon emissions” in order to limit China’s access to western markets. This geostrategic approach will have as a consequence, however, that emissions accounting will be driven forward, and “product carbon intensity” becomes a differentiator in the market.
The Electrification of Transport
CHINA’S BYD UNVEILED THREE NEW PREMIUM EVs
BYD has unveiled three new models, including two concept cars, under its premium brand Fangchengbao, writes Reuters. The move is part of the company’s effort to ramp up sales in higher-priced segments. BYD launched Fangchengbao late last year as one of three brands for upmarket vehicles. The other two brands are Denza and Yangwang. The Bao 8 SUV, Super 3 concept crossover and Super 9 concept sports car made their debut at a live-streamed event on Tuesday night. The company will showcase them at the Beijing auto show, which starts late next week. Most of the Fangchengbao lineup features a plug-in hybrid system called Dual Mode Off-Road (DMO) that BYD developed for improving off-road driving experiences with better fuel economy and high horsepower.
TESLA TO ABANDON LOW COST EVs
Earlier in April Reuters wrote that Tesla appears to be abandoning its efforts to move into the lower-cost segments of the market, as it has significantly scaled back its ambitions for the Tesla 2. Originally touted as “the vehicle to drive Tesla’s next growth phase”, Reuters says the company will now use the Tesla 2 platform for the development of self-driving robotaxis. While Reuters says its sources include current Tesla employees, Musk himself has denied the Reuters report. In the EPM view, Reuters is most probably correct. We suspect Tesla has realized that it can not compete with China’s low cost EV manufacturers. And consequently, that its growth will need to come from the luxury segment and niche application where its competitive edge in technology can be exploited, such as robotaxis.
Other
SPLICE TO REPORT CAUSES OF EMISSION CHANGES
The Center for Active Stewardship, backed by Bobby Jain’s non-profit research organisation Jain Family Institute, is today launching a tool called Splice, which breaks out the causes of changing emission levels, writes the Financial Times. The idea is that total emissions does not provide insight into whether a company is actually working to reduce emissions. Any reported reductions could namely have a number of causes, including downtimes for maintenance, temporary changes in the carbon intensity of the power grid, or energy efficiency measures that prolong the usage of carbon emitting fossil fuels.
PLASTIC WASTE IS STILL WITH US
Although it has been out of the public eye for a while, the problem of plastic waste has not disappeared. Nikkei Asia writes about the subject of “waste trafficking”, which it calls “a trade that stubbornly persists despite attempts to ban it”. It notes that six of the world’s top 10 biggest contributors to oceanic plastic pollution were in Southeast Asia in 2021, where plastic waste is regularly dumped into rivers and canals only to end up in the ocean. Asia overall, home to almost 60% of the world's population, generates more than 80% of global oceanic plastic waste. But Asia is also a destination for plastic waste exports from the developed world. ASEAN countries received 17% of the world’s plastic waste imports from 2017 to 2021. From 2016 to 2018 alone, the region saw plastic waste imports grow by 171%, to 2.26 million tonnes. Numbers have gone up significantly since, since China banned the import of plastic and e-waste in 2018.
Up to 2018, China had imported almost half the world’s unwanted plastic and discarded electronic gear, which was a important reason why the Yangtze at the time was the world’s most plastic-polluted river. For rich countries, exporting trash to Southeast Asia saves money and outsources the disposal problem. The European Union is the world’s largest exporter of plastic waste, accounting for over 40% of the known trade. But that is the official trade, and Nikkei Asia notes there is a significant unofficial trade in plastic waste. And that volume is the most likely to end up being simply discarded into the environment in Asia. What is clear, it says, is that ASEAN is already incapable of managing its own, and outsiders are exacerbating that problem with exports of often unrecyclable trash, including unmonitored plastic in cheap fashion discards and other forms of waste.
The reason for this news, as highlighted by EPM, is that we continue to believe plastic waste will eventually become a problem for the petrochemicals industry. It is a public relations disaster the industry has not fully come to grips with, and that will eventually lead to a regulatory response – either locally, regionally or potentially even globally akin the Paris Climate Accord.