Energy, (Geo)Politics & Money - 27 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 boom times in commodities trading, which has left the big trading houses wondering what to do with all their cash
The “spanner in the works” when it comes to the Chevron acquisition of Hess, which comes in the form of the prolific Stabroek oilfield of Guyana
The World Trade Organization (WTO) meeting in Abu Dhabi, which is dominated by pessimism as the new geopolitical reality is causing a fragmentation of the global economy, and making it harder to build the necessary consensus among member countries that would be needed to stop this trend; here EPM also covers China’s plans for the rules the govern international trade
The Pentagon’s realization that China’s defense industry has developed capabilities that vastly exceed the capacity of the US and its allies, even when combined, and what it now plans to do about this
Israel’s military maneuvers deep inside Lebanon; where EPM explains why these attacks are of offensive nature and as such escalatory
The view that the farmers’ protests across Europe are, in their essence, a pushback against the EU’s green agenda
Photograph by @erwanhesry at https://unsplash.com/
General Energy News
COMMODITY BOOM GENERATES MOUNTAINS OF CASH
It’s been an absolute boom time in commodities trading, as geopolitics have cause massive disruptions in trade flows and fluctuations in pricing – the two things that create the playing field in which traders thrive. As a result, Vitol, Trafigura, Mercuria and Gunvor are collectively sitting on billions of dollars, even after paying out record dividends, Reuters writes. Vitol, the world's biggest trader, has increased its total equity to $26 billion even after paying $5 billion in record dividends after earning $15 billion in 2022, its non-public balance sheet, which was seen by Reuters, shows. Mercuria and Gunvor have accumulated around $6 billion each in equity and retained earnings in recent years, sources familiar with their results told Reuters. Trafigura disclosed in its latest report its equity grew almost 2.5 times to $16.5 billion in the last 4 years. "We borrow much less from banks and are waiting for good investment opportunities. But those are slim, especially in loss-making green energy," said an executive at one of the top trading houses.
CHEVRON TAKE OVER OF HESS IN DANGER
Chevron is warning that its planned takeover of Hess in a $53 billion deal might not go through. The reason is related to Stabroek, Guyana’s prolific new oil field. Hess has partnered with ExxonMobil in the field. But ExxonMobil is against Chevron taking over that share, writes the Financial Times. If the talks between the parties do not “result in an acceptable resolution”, Chevron says the takeover of Hess will not close.
Macroeconomics
WTO TO MEET IN ABU DHABI (UAE)
The World Trade Organization (WTO) is meeting in Abu Dhabi this week. At the meetings outset, WTO head Ngozi Okonjo-Iweala, and other delegates, sought to curb expectations, writes Reuters. They did so because of the fundamental new geopolitical reality is causing the global economy to fragment, and make it harder to build the necessary consensus among member countries needed to stop this trend.
Indeed, this is exactly as per the EPM’s thesis regarding the global economy you are familiar with: regionalization under pressure from the geopolitical competition between the US and China. "Let's not pretend that any of this will be easy," Okonjo-Iweala said in her opening speech, describing the atmosphere as "tougher" than the WTO's last 2022 meeting, citing wars, tensions, elections and signs that trade growth will undershoot its own forecasted estimate. She called on ministers to "roll up their sleeves" to complete negotiations, but seemed resigned to rule out any deal in Abu Dhabi for reforming the body's mothballed appeals court.
CHINA PLANS TO CHANGE THE RULES OF INTERNATIONAL TRADE
The Financial Times writes about China’s plans for the WTO, or more precise, the rules that govern international trade. China now has bilateral free trade agreements (FTAs) with countries covering 40% of its exports. None of China’s FTAs include the US or countries inside the EU. Signing bilateral and regional FTAs is a priority of Chinese president Xi Jinping. A Chinese trade official quoted by the FT says
China plays the leading role in free trade while the US and EU are becoming more protectionist. We need to speed up the number of free trade agreements we sign and also assure the quality of these agreements in order to create sufficient room for China’s development.
The ultimate objective over the longer term is to enable a shift in Beijing’s trade away from the developed world towards the developing world. And that, in a nutshell, is the regionalization of the global economy EPM predicted and spoke about. As the countries allied to the US continue to limit access to their markets for Chinese goods, the developed world becomes more integrated with China. Eventually, this creates additional economic power for China vis-à-vis the developed world, hard and soft, which will enable it to become more influential there, further strengthening its position in its competition with the US.
Geopolitics
US AND ASIAN ALLIES - FURTHER INTEGRATING DEFENSE TIES
The U.S. intends to increase defense industrial cooperation with Japan, India and other partners in the Indo-Pacific, to build supply chain resilience in the face of China, Laura Taylor-Kale, assistant secretary of defense for industrial base policy, told Nikkei Asia. The Pentagon's first-ever national defense industrial strategy, released in January and authored by Taylor-Kale, warns that China
became (rather is) the global industrial powerhouse in many key areas -- from shipbuilding to critical minerals to microelectronics -- that vastly exceeds the capacity of not just the United States, but the combined output of our key European and Asian allies as well.
While aiming to build up U.S. domestic production capacity in the long term, Taylor-Kale said that working with allies and partners is crucial for securing critical minerals and other raw materials to produce defense equipment and ammunition in the near term. In 2023, the U.S. concluded bilateral Security of Supply Arrangement deals with Japan, South Korea and Singapore. The deals let the Pentagon request priority delivery for American defense contractors from companies in these countries in emergencies. In addition to those three countries, she cited India and Australia, with which the Pentagon intends to enhance defense industrial cooperation
LEBANON - A GROWING HOT SPOT
Meanwhile, EPM urges its readers to keep an eye on Lebanon. Because that is where we believe the real risk of escalation of the current conflict in the Middle East is. We have mentioned before that in our analysis, Israel would not mind an escalation, as long as it believes the US will join the conflict on its side. This, we believe, has been the rationale behind its highly aggressive stance when it comes to Lebanon and Hezbollah. On Monday, Israeli warplanes struck Lebanon's Bekaa Valley, writes Reuters, which lies 60 miles (100 kilometres) from the Israel-Lebanon border. The New York Times writes that Israeli fighter jets had struck Hezbollah air defenses in the area, in response to a surface-to-air missile attack that downed an Israeli drone over southern Lebanon. EPM notes that if you take a step back and reflect on this information, then you will notice that Israel send a drone across the border into southern Lebanon, and when it got shot down it sent its airplanes across the border to attack a defense system inside Lebanon. This can obviously not be defined as “self-defense”, and as such will seriously inflame anger among the people of not only Lebanon, but also the wider region.
Climate Politics
EURO ZONE FARMERS PUSHING AGAINST GREEN POLICIES
Forbes says the farmers’ protests across Europe are, in their essence, are a push to the EU’s green agenda. EU policy was critical in creating Europe’s current farming industry. It adopted the Common Agricultural Policy (CAP) in 1962, as a result of which agriculture now absorbs a third of the EU’s total budget and costs an estimated €65 billion annually for direct payments, “agricultural market measures” and “rural development”. Half of a typical French farmer’s income is effectively government support. CAP was implemented with the best of intentions: improving productivity, ensuring a “fair standard of living” for farmers, “stabilizing” markets, establishing a secure supply chain with “reasonable” prices, “harmonizing competition rules across all countries”.
Now, the EU has adopted a “Farm to Fork” strategy as part of the Green Deal, which aims to make agriculture consistent with being “carbon-neutral” by 2050. Farmers are pushing against this strategy which has been relatively successful. Since early February, Europe has agreed to scale back on an array of proposed mandates, taxes, subsidies and divestments for promoting “sustainable” farming in an imagined post-fossil fuel “green” future. It dropped the 30% reduction target on greenhouse gas emissions from farming by 2040 compared to 2015; it reversed its quota to halve pesticide use by 2030; and it will allow more land for agricultural use instead of forcing 4 percent of the land to lie fallow “to boost biodiversity and soil quality.” It also agreed to stop advising EU citizens to eat less meat. In both Germany and France, governments delayed cuts to subsidies or planned increases in taxes on diesel for agricultural use.
EPM continues to investigate if this is a harbinger of things to come as far as climate politics are concerned. Will the farmers’ protests be an exception to the rule, or will they turn out to be the first in a wider range of resistance against these plans? Obviously, whatever the answer to this question will be, it will have far reaching implications for the world of energy.