Energy, (Geo)Politics & Money - 2024.04.25
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:
Why Middle East unrest has not driven oil higher for longer
Chinese state energy giant Sinopec efforts to build its first fully-controlled overseas refinery in Sri Lanka, and what this says about the company’s strategy
Why the Russian economy ministry has downgraded its forecasts for the country's crude oil export prices for the next three years to $65 per barrel
The step up in Israeli military attacks on Gaza, shortly after the US Senate approved further financing support for Israel; where EPM reflects on what this means for the “big picture”
Why the US believes that despite its economic challenges, China will push forward its plan to develop the military capability to invade Taiwan by 2027
Why the US and Germany do not yet see eye-to-eye when it comes to China; and why some analysts believe the Germans are being shortsighted in this
Why the outlook for green hydrogen has severely soured over recent months
Why the White House climate envoy John Podesta’s recent remarks on policy effectively indicate that the US is working to develop a ETS plus CBAM system in order to close the border for Chinese products
Tesla’s very bad, no good quarter; and what the company plans to do in order to return to profitable growth
Why the transition to an electrified fleet for companies in the delivery sector is being slowed down by a lack of supply
Why Europe’s ability to survive a cold winter hasn't been tested yet, and where the risks remain
Photo by Jason Blackeye Unsplash
General Energy News
US OIL IS A MAJOR STABILIZING FACTOR IN WORLD GEOPOLITICS
Both the Financial Times and Barron’s look at the question why Middle East unrest has not driven oil higher for longer.
The Financial Times notes that last Monday, less than a week after the first-ever direct military strikes by Iran on Israel brought fears of a wider regional war, oil prices settled at $87 per barrel — flat versus their level just before a strike on the Iranian consulate in Damascus precipitated the eruption. This crude price calm in the face of this turmoil owes much to events 7,000 miles away in the shale fields of North Dakota and west Texas, it says, as drillers there have left global markets awash with American oil. The fact are, namely, that two decades ago the US produced about 7mn barrels a day of petroleum and consumed 21mn. Gulf countries like Saudi Arabia and Kuwait were then among the US’s most important foreign suppliers. Now the US produces almost 20mn b/d of petroleum, roughly on par with consumption. Imports from the Gulf have plummeted, and the US became a net oil exporter for the first time in 2019. The prolific Permian Basin shale of Texas and New Mexico pumps more oil than Kuwait, Iraq or the UAE, three of OPEC’s powerhouses.
Barron’s interviewed Daniel Yergin, who also says the growth of U.S. crude production has been a stabilizing factor for the oil market in a geopolitically unsettled world. There’s a fundamental stabilizer in the oil price that didn’t exist in previous decades, he says, and that’s the Western Hemisphere and in particular U.S. shale oil. It’s changed the balance not only in the market, but geopolitically and even psychologically. That is one of the things that has kept the price more grounded than it might otherwise be.
SINOPEC MOVES TO GET MORE ACCESS OF SRI LANKA’S MARKET
Chinese state energy giant Sinopec is pushing for greater access to Sri Lanka's market, where it looks to build its first fully-controlled overseas refinery, Reuters writes, and which it believes indicates a change in the firm's global strategy to compensate for slowing demand growth at home. Sinopec, the world's largest oil refiner, is expected to complete a feasibility study by June for a plant at the Chinese-run Hambantota port, after winning Colombo's approval last November. Sinopec is looking to make the refinery focus on domestic Sri Lanka demand, which puts the company into competition with refiners from India who see Sri Lanka as an export market for them. The company is considering either a 160,000 barrel per day (bpd) plant or two 100,000-bpd plants built in phases, which in either case would be geared towards gasoline and diesel fuel.
RUSSIA FORECASTS CRUDE PRICES AT $65
The Russian economy ministry has downgraded its forecasts for the country's crude oil export prices for the next three years to $65 per barrel, writes Reuters. The forecasts, used to compile the federal budget, were cut from previous estimates of $71.3 per barrel for 2024, $70.1 for 2025 and $70 for 2026. The downgrade is likely related to the sanctions on Russia and its energy industry, which is forcing the country to offer discounts in order to find customers. In this regard S&P Global writes, based on comments by US Assistant Secretary of State for Energy Resources Geoffrey Pyatt, that the US is going to keep tightening sanctions to stymie Russia's efforts to develop new ways to export fossil fuels.
Geopolitics
ISRAEL STEPS UP ACTION IN GAZA AFTER US SUPPORT SECURED
Shortly after the US Senate approved further financing support for Israel (and Ukraine), the Israeli military has stepped up its attacks on Gaza, writes Reuters. Amidst some of the heaviest shelling in weeks, the army ordered fresh evacuations in the north of the enclave, warning civilians they were in a "dangerous combat zone". Strikes by air and shelling from tanks on the ground were also reported in central and southern areas of the Gaza Strip, in what residents said late on Tuesday were almost 24 hours of non-stop bombardments.
EPM’s PERSPECTIVE
In the EPM view, this clearly indicates how Israel is “tone deaf”, as in, completely disregarding global public opinion, which EPM believes will have longer term consequences. Through its actions in Gaza, and beyond, the country is essentially losing the global support it once had. And, we add, the same consequence will result from the US’s “unconditional support” for Israel. The wave of protest at universities across the United States, reported on by Reuters, is in our EPM view a good indication of the “public sentiment vis-à-vis Israel and US foreign policy” that is to come.
US CLAIMS CHINA WILL HAVE THE MEANS TO INVADE TIAWAN SOON
According to Admiral John Aquilino, commander of the U.S. Indo-Pacific Command, China aims to have the capability to invade Taiwan by 2027, writes Nikkei Asia. The U.S. did not come up with the date, he said. Rather, the timeline is based on Chinese President Xi Jinping asking "his military to be prepared if tasked to execute in 2027," said Aquilino. He added that he believes China will continue to spend significant resources on the military even in the face of greater economic headwinds.
US POSITION ON CHINA NOT FULLY SUPPORTED BY EUROPE
Foreign Policy notes that the aggressive tone when it comes to China by US officials such as Aquilino, is not supported wholeheartedly over in Europe. This, it says, was made evident by German Chancellor Olaf Scholz’s China trip, that was far more conciliatory in both tone and substance. While there are senior figures in Germany with a hard-headed view of China, not least Vice Chancellor Robert Habeck and Foreign Minister Annalena Baerbock, they did not accompany Scholtz to Beijing. Instead, he took ministers in areas such as agriculture, who favor close cooperation with Beijing, along with a bevy of industrial CEOs promoting Sino-German trade and investment. But FP argues that Scholtz’s “trade first” is shortsighted. China has for decades been the most important and most profitable market for companies such as BMW, Mercedes-Benz, and Volkswagen, but that era is now over it says. Demand for traditional combustion engines is collapsing. China’s BYD now vies with Tesla to be the world’s largest EV maker, producing cars that are roughly as good as and much cheaper than those of its U.S. rival. Accordingly, foreign brands’ total share of the Chinese auto market has plunged from 64 percent to just 40 percent in the short time since 2020. Experts expect this trend to continue into the future.
Energy Transition & Technology News
DESPITE HUGE INCENTIVES AND FUNDING, HYDROGEN INFRASTRUCTURE LAGS
After years of hype, fundraising, and billions of dollars of federal support to get a green hydrogen market off the ground, there’s growing pessimism over how fast the carbon-free fuel can ramp up, writes Forbes. Grey hydrogen is made for as little as $1.06 a kilogram, it notes, while green hydrogen costs about four times as much. But cost inflation in renewables, slower than expected technological innovation, and hesitancy among customers to lock themselves into long term contracts, are all holding back development of the green hydrogen industry.
Climate Politics
US TO TAKE MEASURE TO OPPOSE GREEN DUMPING BY CHINA
An opinion piece by Liam Denning of Bloomberg draws the correct conclusions from White House climate envoy John Podesta’s recent remarks on policy, which EPM covered last week. Podesta essentially called for the creation of a new trading system that protects green subsidies in the US, and in potential partners aligned with Washington, both from legal challenges and so-called carbon leakage. The latter is where a country prices carbon in some way within its borders, raising the cost of doing business there, only to find its domestic manufacturers undercut by cheaper imports from a country with looser climate policies. Podesta rhetorically upped the ante by referring to this as “climate dumping.” What this means is that the US is likely to use “climate” in order to close the border on Chinese products – a US ETC coupled with a US CBAM, effectively. Denning notes this is effectively the end of the postwar “international trade norms” that the US had been pushing via the WTO. EPM agrees. We are entering a structurally different era for international trade, in which “climate” is weaponized, as part of geostrategy.
The Electrification of Transport
TESLA’s LATEST QUARTER ONE OF ITS WORST
Tesla had one of its worst quarters in a long time. CNN writes its first quarter adjusted earnings plunged 48%, falling short of lowered Wall Street forecasts. The company reported a 9% drop in total revenue, which also missed analyst estimates. And its profit margin declined by 2 percentage points.
In order to maintain investor support, the company announced it aims to start production of new models as soon as this year, well ahead of the late-2025 timing it had previously pledged, writes Bloomberg. Investors have been worried that Tesla had killed plans for a long-promised, $25,000 car as Musk pursued his robotaxi vision. EPM covered this topic earlier, based on a Reuters report. Now Tesla says it’s accelerating low cost plans — and can build the new cars at existing factories. It wasn’t immediately clear if Tesla’s “more affordable models” pledge Tuesday was a reference to the long-discussed low-cost car, or if it refers to efforts to drive down costs of the existing Model 3 and Y.
ELECTRIFIED DELIVERY VEHICLES LAG DEMAND
Meanwhile, the transition to an electrified fleet for companies in the delivery sector is being slowed down by a lack of supply, writes Reuters. In particular battery shortages are limiting EV supplies and keeping prices high. UPS is nevertheless sticking with its electrification plan, set in 2016, to rely on EVs and other alternative fuel vehicles to reduce emissions. Those other vehicles include 13,000 step vans that run on renewable natural gas (RNG). FedEx is now also looking for opportunities to incorporate other lower-emission delivery trucks into its fleet.
Other
EUROPE’S ABILITY TO SURVIVE A COLD WINTER UNPROVEN
Despite having successfully survived the worst energy crisis in decades, Europe’s ability to survive a cold winter hasn't been tested yet, senior energy executives say, according to Reuters. The continent came through the last two winters without any risk of energy supply interruption, but this was in no small part due to demand reduction and mild winter temperatures, said executives from top energy firms including France's TotalEnergies and Germany's RWE during talks at the Europe Flame Gas and LNG Conference in Amsterdam. The past two winters offer no guarantees, they say, that a colder-than-usual winter will be manage equally smooth – especially if it were to take place during an uptick in Chinese LNG demand and/or a supply disruption.