Energy, (Geo)Politics & Money - 26 February 2024
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 decline in oil prices last week, despite support from a tanker diversion away from the Red Sea, which is temporarily causing a tighter market in Europe and Asia
Qatar’s decision to add a further 16 million tons per year of capacity to its existing natural gas production increase plan, which will bring total capacity up from the current 77 million tons per year to 142 million tons per year by 2030
The end to the decline in residential real estate prices in OECD countries
The coming wave in US semiconductor sanctions on China, which is likely to target “legacy chips”
The view that the world is entering a new era, one of permanent crisis
China’s positioning regarding Israel’s War on Gaza, which is very clearly designed to utilize the opportunity the US stance has created for it to gain in soft power globally
Michael Liebrich’s “bull case” for the energy transition, i.e. why it might be easier to be achieved than is commonly assumed
A very informative but critical perspective on the potential nuclear fusion
The Asian Development Bank’s concerns about Europe’s Carbon Border Adjustment Mechanism
Photo by @borderpolarphotographer
General Energy News
RED SEA SHIPPING DELAYS AND INCREASED COSTS
Red Sea shipping delays and OPEC+ supply cuts are tightening physical oil markets in Europe and Africa, writes Reuters. There has been a pick-up in tanker diversions, which is making the crude balance tighter, it says. Bloomberg writes that the longer crude hauls are causing a shortage of tanker capacity. This will increase shipping rates and thereby increase the price of landed oil, EPM notes. In addition to many vessels sailing around southern Africa instead of through the Red Sea and Suez Canal, a burgeoning dark fleet means that many ships are only available to certain customers, Bloomberg says. EPM notes this would only be a shorter term tightening, as the oil market will adjust once models factor in the longer shipping routes. Nevertheless, this is providing support for the oil price, preventing it from declining too rapidly as the risk premium fades away in line with our EPM forecast.
CRUDE OIL STILL TRENDING DOWN
The above has not offset crude oil’s downward trend, however. Last week it ended 2% (Brent) to 3% (WTI) lower, and during early Monday morning trading in Asia it added to these loses, writes Reuters. Brent crude futures fell to $81.28 a barrel by 0121 GMT, while WTI declined to $76.16 a barrel.
QATAR ENERGY TO INCREASE GAS PRODUCTION BY ANOTHER 13%
Qatar Energy has decided to raise gas production from its Northfield by a further 16 million metric tons per year to its expansion plans. Together with the earlier announced 49 million tons per year expansion plan, which is well underway, this will bring total capacity up from the current 77 million tons per year (tpy) to 142 million tons per year by 2030, writes Reuters. Saad al-Kaabi, CEO, said at a news conference in Doha.
We still think there's a big future for gas for at least 50 years forward and whenever we can technically do more, we'll do more. We see that Europe is going to need gas for a very, very long time. But the growth in Asia is definitely going to be bigger than the growth in Europe, basically driven by population growth.
The Qatari decision is clearly bearish for natural gas prices – especially if and when the US withdraws its moratorium on new LNG export licenses, EPM notes. But Qatar thinks it can pull it off by position itself as a more reliable supplier than the US. According to Bloomberg Al-Kaabi is quoted saying,
Buyers will not go for these sellers if every day the government could stop the process. It’s very difficult to have long-term planning when you have that.”
Macroeconomics
GLOBAL HOUSING DOWNTURN HITS A TURNING POINT
The widespread drop in global house prices that hit advanced economies has largely petered out, according to a Financial Times analysis of OECD data, leading economists to predict that the deepest property downturn in a decade has hit a turning point. Across the 37 industrialised OECD countries, nominal house prices grew 2.1 per cent in the third quarter of 2023 compared with the previous three months, up from near stagnation at the start of last year. Housing prices took a hit in late 2022 after central banks in most economies raised interest rates at the fastest pace in decades to curb inflation. In OECD countries, house prices grew by just 0.6 per cent quarter on quarter at the end of 2022, the lowest nominal rate since 2012. However, that decline has eased or even reversed in many economies as expectations that central banks will cut borrowing costs this year have helped mortgage rates to decline.
A shortage of properties for sale has also helped to prop up valuations and real prices across the OECD returned to growth in the latest quarter. EPM had expected a deeper decline. The fact this hasn’t materialized has to do with the fact that the overall economy did not decline as much in 2023 as we anticipated. This, in turn, has to do with the fact that the US in particular has increased debt based spending significantly (both private and public). In Europe, however, we see a slow but steady decline taking place. As such, the outlook for real estate remains mixed, in our view. Commercial real estate is in bad shape across the OECD. Residential will probably be strong again soon in the US, especially when the Fed lowers rates later this year. In Europe we expect it to remain weak and quite possibly in continued decline to the overall economic weakness.
Geopolitics
US SANCTIONS ON CHINESE SEMICONDUCTORS
The US is considering the next step in its semiconductor sanctions policy against China. So far it has focused on the “cutting edge” chips and associated technologies. But, writes the South China Morning Post, so-called “legacy chips” are becoming an increasing part of public discussion and debate. These are older-generation chips made using 28-nanometre or larger etching technology and used widely in cars, home appliances and consumer electronics. The realization has set in that legacy chips are of strategic value because of their versatility, being used in the production of broadband, factory automation systems, military systems and medical devices. Chinese firms have been stocking up on equipment to make these chips, which has caused concern in the US. The accusation by the US that China is unfairly subsidizing legacy chip manufacturers and dumping products on the world market is the outcome – as well as a harbinger of things to come, SCMP says.
AN ERA OF PERMA-CRISIS
The world is entering an era of permanent crisis, warns Robert D. Kaplan, the veteran foreign correspondent and author, in an interview with the National Post. Political leaders will be faced, not with an easy choice between good and evil (boiled down crudely to a choice between democracy vs. communism and/or fascism) but between what is acceptable, what can be achieved, and whether one alternative is less morally repugnant (e.g., evil) than another, he says.
CHINA SPEAKS OUT ON US POLICY RE: GAZA
EPM has asserted that the US wasting valuable soft power through its stance regarding Israel’s War on Gaza. The position China has adopted is evidence of this assertion. While the US stands opposite global public opinion, China has aligned itself with public opinion. In front of the International Court of Justice (ICJ) China’s Foreign Ministry's legal adviser Ma Xinmin said, according to Reuters,
Justice has been long delayed, but it must not be denied. Fifty-seven years have passed since Israel began its occupation of the OPT (Occupied Palestinian Territories). The unlawful nature of the occupation and sovereignty over the occupied territories remain unchanged.
In EPM’s view, this narrative is very clearly designed to utilize the opportunity the US stance has created for China to gain in soft power globally (and to further legitimize its claim on Taiwan).
TRUMP WINS NORTH CAROLINA PRIMARY
Donald Trump has scored his fifth win in the primary cycle in North Carolina, following Iowa, New Hampshire, Nevada and the U.S. Virgin Islands, writes Nikkei Asia. This means Trump squarely beat his main rival Nikki Hayley in her home state, which puts him on track to his third consecutive presidential nomination and a rematch with President Joe Biden in the November 5 election.
Energy Transition & Technology News
THE BULLISH CASE FOR A SUCCESSFUL ENERGY TRANSITION
In September of 2023, Michael Liebrich laid out the “bear case” when it comes to the energy transition, highlighting the key challenges that will make achieving net zero difficult, perhaps impossible. These were:
poor economics of clean solutions beyond wind, solar and batteries
inadequacy of our current electrical grid;
soaring demand for critical minerals;
political and social inertia; and,
regulatory capture and predatory delay.
Five formidable challenges. In a new update for BNEF, he looks at the causes for optimism, the “bull case”, i.e. why it might be easier to be achieved than is commonly assumed.
The exponential growth in solar, wind and battery technology.
A new era of international rivalry between the US, China, Europe and emerging industrial powerhouses such as India, Brazil, Mexico and Turkey, which he – rightfully in the EPM view – expects to continue drive “New Energy” costs down.
The commonly assumed bottleneck in critical minerals supply is likely overstated, as the technological innovation in New Energy solutions searches for ways and means to steer clear of these – either by doing more with less, switching to minerals whose materials are not bottlenecked, or recycling.
His last and most important argument revolves around the concept of Primary Energy Demand. Essentially this argument says that by switching to higher efficiency New Energy solutions (for example from ICEV to EV, or from a gas boiler to a heatpump), we need less energy to generate the energy we actually use. A LOT less energy, as estimates of “rejected energy”, i.e. energy lost throughout the energy system, can be as high as two-thirds of total energy in the energy system.
DEVELOPMENT CHALLENGES FACING FUSION COMMERCIALIZATION
The special attraction of fusion is of course that it offers a potential source of abundant carbon-free energy that does not generate radioactive nuclear waste. But, writes The Bulletin of Atomic Scientists, just because it would be nice if controlled fusion could work doesn’t mean it’s on the verge of doing so. It says that the hard truth is that scientists and engineers don’t even know yet whether controlled fusion can be achieved to make useful work.
The world has have known about fusion powering the sun since Hans Bethe explained it in 1939. This was also almost exactly when Otto Hahn and Fritz Strassmann discovered uranium fission (and Lise Meitner and her nephew Otto Frisch explained it). Then in 1942, Enrico Fermi and a small number of co-workers demonstrated a controlled fission chain reaction in a squash court at the University of Chicago, for which he spent about $50 million in today’s dollars. More than 80 years later, after the US government already made $35 billion in cumulative fusion expenditure, with probably a comparable investment abroad, it is still not clear whether fusion can truly be harnessed for use.
The main research track today in fusion energy is “magnetic confinement”, configuring magnetic fields to keep in place a plasma of thermonuclear fuel 10 times hotter than the sun’s core within a donut-shaped magnetic “bottle” through machines known as “tokamaks”. Europe’s attempt via ITER is almost a decade behind schedule and 4 times more expensive than planned. Even if it achieves its objectives, it would still be a long way away from anything useful. The Lawrence Livermore National Laboratory’s weapons laboratory in the US pursued another approach of “internal confinement,” to create a fusion reaction at its National Ignition Facility (NIF). NIF uses light pulses from a concentric battery of powerful lasers to heat a small target containing a tiny bead of frozen thermonuclear fuel. This is, in effect, a miniature (secondary) thermonuclear bomb, with the lasers playing the role of the triggering fission reactions (primary). It too remains far away from becoming a true power generating facility. The author’s conclusion is that nuclear fusion as a power generating technology remains a theoretical potential that still needs to be proven in laboratory environments.
Climate Politics
CBAM - AN OFF THE MARK MECHANISM?
A European Union Carbon Border Adjustment Mechanism (CBAM), which will impose tariffs on high-carbon imports, could hurt developing countries in Asia but is unlikely to lead to big reductions in greenhouse gas emissions, the Asian Development Bank (ADB) says according to Reuters. CBAM was introduced to address concerns that the outsourcing of manufacturing had put large parts of the EU's supply chain beyond the reach of its emissions trading scheme (ETS). It was designed to level the playing field and make foreign suppliers pay the same carbon price as domestic ones, even if they are not subject to an ETS or carbon tax at home. ADB said CBAM was expected to cut Asian exports to the EU, particularly from western and southwestern Asia, with steel from India also likely to take a hit. A mechanism to share emission reduction technology would be more effective, it said.