Energy, Politics & Money - 01 February 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, firstly we offer our apologies 😉. EPM’s stated mission is to provide you with market foresight designed so that you can take a position in the market that places you ahead of the crowd. Today is one of those days where a number of our forecasts have been proven correct – and in usual EPM fashion, we are not letting that go by without celebrating! Again we apologize…
As for today’s analysis, EPM takes a closer look at reports that note German industry will be paying 40% more energy in 2023 than it did in 2021. This is one of those things we at EPM predicted. Our commentary therefore focuses on our earlier assessment of how this is likely to impact the German economy. Firstly, any energy intensive industry active in international markets will have to relocate to a lower cost energy environment or be forced to shut its doors. It is that simple. Secondly, it means that price levels in Germany will be on a permanently higher level. This will mean either higher wages, making Germany even less competitive on global markets, or lower purchasing power for German consumers. And of course, as goes Germany, so goes a large part of North-Western Europe…
Furthermore, we look at:
The contraction in Asia’s factory activity during January, which surprised many but not us, as it is pretty much as EPM predicted at the time China announced its post-COVID reopening
Nassim Taleb’s less than rosy outlook for the financial markets, which his colleague at Universa says could lead to events that rival the unraveling of the 1930s era Great Depression given the boom in debt
The current state of the war in Ukraine
Eneos’ new green hydrogen technology, which produces hydrogen as a liquid in the form of methylcyclohexane (MCH) made from water, toluene and renewable energy in a single step
The reason why bioplastics might be good in the fight against unmanaged plastic waste, which pollutes the oceans, but bad for the fight against climate change
The UN reports which says the world’s elites are responsible for a majority of carbon emissions
The change in direction among investors in the Autonomous Vehicles space
General Energy News
Reuters reports Russian crude oil loadings (exports) are on track to hit a multi-month high above 9.5 million tonnes, as FOB prices are below the price cap (less than $50 per barrel), coupled with strong Asian demand, and greater tanker availability.
An opinion piece in the Financial Times argues oil companies should not use 2022s record profits for additional share buybacks. Energy stocks have enjoyed a massive rally; Exxon stock hit a new high last week after climbing some 160 per cent over two years. Chevron, whose shares have more than doubled during the period, is also trading near the record highs set in November. This has left investors already amply rewarded.
Macroeconomics
Asia’s factory activity contracted in January, reports Reuters. This comes as a surprise to many; we noted this at EPM and the contraction is in line with our forecast which said that China’s reopening would take time to have an impact, as the country would first need to go through a Covid wave – or potentially two or three. Meanwhile, demand in western markets remained weak.
Meanwhile, Nassim Taleb expects the Fed to continue increasing rates, according to a Bloomberg report. Taleb is gloomy about this will affect the financial markets. He says a generation of investors has over the past 15 years forgotten the importance of cash flow as the financial crisis unleashed a wave of easy money. That is now all over, obviously. Taleb’s long-time colleague and protege, Mark Spitznagel, Chief Investment Officer of Universa warned investors the market is a “tinderbox-timebomb” that could rival the unraveling of the 1930s era Great Depression given the boom in debt.
Geopolitics
Bloomberg features an excellent review of the war in Ukraine by Hal Brands. For the first six months, Russia had the initiative and at that time the major questions were when, where and with what success would it attack. After the initial invasion, over the following five months, Ukraine held the initiative and analysts tried to divine the location and prospects of its counteroffensives.
Now, Brands says it’s harder to tell what comes next and who has the edge. Both sides may be preparing new offensives. And, both sides are dealing with a mix of battlefield losses and new capabilities that make it more difficult to discern their relative strengths.
In response, Brands argues the US administration is updating its strategy in three ways.
It is more clearly defining America’s aims for the war. Washington’s goal is a Ukraine that is militarily defensible, politically independent, and economically viable; this doesn’t necessarily include retaking difficult areas such as the eastern Donbas or Crimea.
The US is sending Ukraine more sophisticated weapons: Armored personnel carriers, Patriot missiles, and M-1 tanks that can bust through layered Russian defenses.
It is becoming more supportive of Ukrainian strikes in the Crimea, which the US considers the control center of the Russian operation in Crimea.
EPM’s view on the past few months is slightly different. We do not see the increase in weapons delivery as a pro-active action, but rather as a response to the change in the momentum on the battlefield. After conquering Soledar, Russia is now closing in on Bakhmut – which is important for its location and also for its underground cities – making it a possible launching point for further advances into the Donetsk. The US has from the beginning of the conflict tried to maintain a balance on the battle field, and this has led to the requirement for additional and more sophisticated weaponry for the Ukrainians.
Brands argues the US does not want the war to drag on forever because it is turning much of Ukraine into a wasteland while taking a toll on Western treasuries, arsenals, and attention. EPM looks at this in a slightly different way. An end to the fighting requires talks, but the US and the UK have from the beginning signaled they do not see talks as a valid course of action – anyone suggesting it is immediately branded a Russian agent, and Johnson even travelled to Kiev himself when there was word of talks between Kiev and Moscow in Turkey making progress. So rather, we see the objective behind the US position in the UK war as an effort to bring Europe back into the fold of NATO under US leadership and more committed to contributing its fair share to the protection of its own territory than before – just as Trump told Europe to do. This would enable the US military to further develop its focus on Asia with the possibility of a rearmed Europe also supporting US efforts there as part of NATO.
If we at EPM are correct, this means the war is unlikely to end anytime soon. And thus the pressures the war is putting Europe under – in the form of higher energy prices, a worsened refugee crisis, and increased defense expenditures – will continue throughout 2023.
Energy Transition & Technology News
Eneos, Japan’s biggest oil refiner, has opened a small green hydrogen plant in Australia to demonstrate its patented electrolysis technology reports Reuters. Eneos says its technology is low-cost and efficient as it stores hydrogen as a liquid in the form of methylcyclohexane (MCH) made from water, toluene, and renewable energy in a single step without having to first produce hydrogen gas.
Bloomberg explains why bio-plastics might be good in the fight against un-managed plastic waste – a major source of ocean pollution – but bad for the fight against climate change. Regular plastics effectively sequester carbon. Biodegradable plastics, on the other hand, when they break down release this carbon into the environment — particularly in the form of methane (one of the most potent greenhouse gases).
Climate Politics
According to the Financial Times a UN-backed report concludes that 10 percent of the world’s population are responsible for almost half of the annual greenhouse gas emissions behind climate change, thus creating a “strong incentive” for policies that target this elite group. The UN also found that the top 1 percent of global emitters were responsible for nearly a quarter of the total growth in pollution between 1990 and 2019. The report says the concentration of emissions creates strong incentive for policies – such as wealth taxes – to reduce the emissions from this segment of society.
The Electrification of Transport
Reuters writes that as development of fully autonomous vehicles (AVs) – capable of going everywhere – has proven harder and more expensive than expected, investors are funding startups that target simpler self-driving vehicle solutions that are far removed from pedestrians and other vehicles operated by unpredictable humans. Faced with the long-term conundrum that people and robots do not mix well, investors have gone back to basics and support solutions that target less-complex and less cash-intensive forms of autonomy that operate at lower speeds with little to no traffic and with a clearer path to payback. “Full autonomy in every kind of environment is still years, if not decades out”, one investor is quoted as saying: “You need to have a business case that works and you need to make the problem smaller”. EPM’s view is that this is a change in course but not an end to the journey.
The Global Energy Crisis
According to a study by Allianz Trade and reported by Reuters, German industry is set to pay about 40% more for energy in 2023 than in 2021 before the energy crisis triggered by Russia's invasion of Ukraine. In 2022, higher corporate utility bills were contained as long pass-through times from wholesale markets and government interventions mitigated the immediate hit from the EU’s conflict with Russia. The authors of the report nevertheless are optimistic. The finances of German business are well in order, they say, so they can afford a cost increase. And, fears this will lead to de-industrialization and a loss of competitiveness relative to the US are overblown, they say, because labour costs and exchange rates have a bigger impact on manufacturing than energy prices. Not so fast.
EPM predicted this would happen and we’re going to focus on what we said previously as to how we think this is likely to impact the German economy. Firstly, any energy intensive industry that is active in international markets will have to relocate to a lower cost energy environment, or shut its doors. It is that simple, and that is why BASF during the fourth quarter of 2022 said it would permanently downsize on the European continent. The talk of “robust finances” and “other costs are more important” is nonsense and only designed to soften the blow for the German audience. But that is simply not how international business works. Secondly, it means that price levels in Germany will be permanently higher. This will mean either higher wages, making Germany even less competitive on global markets, or lower German consumer purchasing power. And of course, as goes Germany, so goes a large part of North-Western Europe…
Other
Visual Capitalist has developed what is in our EPM a truly wonderful graphic to put the world’s fossil energy use in context. If the world’s tallest tower Burj Khalifa is your reference, then the quantities of oil, gas and coal used annually are…