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
There is much to look at in this roundup, EPM examines:
Shell’s record earnings, and its energy transition… towards natural gas, some of which are the contentious “carbon neutral” kind
China’s crude oil imports in January 2023, which confirms EPM’s forecast immediately after the country released its COVID restrictions, which said that contrary to the dominant narrative at that time, this would not immediately result into strongly higher demand
The EU negotiations to establish price caps for Russian refined products
The US Federal Reserve’s 0.25% rate increase
The announcement of EU’s Green Deal Industrial Plan
The George Friedman view regarding war between the US and China
The declining market share of gasoline and diesel cars in Europe, where during fourth quarter 2022 sales slipped below 50% of total for the first time
General Energy News
Shell delivered a record $40 billion profit in 2022, a record for the company, reports Reuters. And while the company professes to be “in energy transition”, most of this transition is in the direction of natural gas, rather than renewables, reports Bloomberg. In 2022 Shell’s liquefied natural gas business boomed as Europe was forced to quickly pivot away from piped supplies of the fuel from Russia. Newly appointed Shell CEO Sawan said the company delivered 194 LNG cargoes to Europe and the UK in 2022, roughly five times what they would do in a typical year. “Our natural gas business continues to grow in a world that is desperately in need of natural gas at the moment, and I think for a long time to come”, Sawan also said. According to Bloomberg also, Shell is again making some of these LNG cargoes available on a “carbon neutral basis”.
You might recall that we at EPM talked down the bullish sentiment around crude oil that developed immediately after China released its COVID restrictions, arguing that it would be a last a few months before this would translate into significantly higher demand, because China would first have to go through one (or more) COVID waves. Clyde Russel of Reuters says the data shows that the bullish narrative has yet to play out in reality – i.e. that EPM was “on the money” (Yay us!). China’s imports were assessed at 10.98 million barrels per day in January, down from December's 11.37 million barrels per day and November's 11.42 million barrels per day. Part of this decline has to do with Chinese New Year falling in January, which pushed some deliveries into December and others into February. But, the overall message from China’s crude oil imports is that while they are solid, they have yet to accelerate as expected by the bullish China economic narrative. Any acceleration in China’s crude imports is likely only from March onwards.
In what is pretty much a repeat of what happened around the time Russian crude oil was to be sanctioned by the EU, the pro-sanction block is now searching for new ways to keep Russian refined products, in particular diesel, flowing, as a new sanctions package is set to come into force this Sunday, February 5th. EU countries will now seek a deal on price caps for Russian oil products to avoid being locked out from importing these important barrels, reports Reuters. The current proposal is to apply a price cap of $100 per barrel on premium Russian oil products such as diesel and a $45 cap per barrel on discounted products such as fuel oil.
Macroeconomics
The US Federal Reserve has increased its benchmark interest rate by a quarter of a percentage point, writes the Financial Times. This marks a return to a slower, more orthodox pace of rate rises, after the Fed rapidly ratcheted up borrowing costs last year. It is generally considered an indication that the Fed now believes inflation has peaked, as the economy is starting to slow.
Geopolitics
Earlier this week EPM reported on NATO’s agreement with Japan and the US’ agreement with South Korea to increase training and deployment of US military on the Korean Peninsula, where we said both these moves clearly target China – irrespective of official statements. In the news today a new agreement between the Philippines and the US, with the former granting the latter expanded access to military bases on its islands. Statements from the defence ministries of both countries said Washington would be given access to four more locations under an Enhanced Defense Cooperation Agreement (EDCA), reports Reuters.
George Friedman of Geopolitical Futures notes that over the past few days, two senior US officials – General Mike Minihan, the head of the US Air Force Mobility Command, and Michael McCaul, Chairman of the House Foreign Affairs Committee – predicted that war with China could erupt as early as 2025. He says, “That the two are saying the same thing, moreover, suggests to me that someone in Washington has briefed them on the matter. Briefings are not the subject of random gossip.” Nevertheless, Friedman remains skeptical, as he cannot see who would want to start a war, nor does he believe that if there was a plan to start a war, that this plan would target a date as far out as 2025. Our EPM view remains that if two sides are actively preparing for war – and US and its allies clearly are, while China’s building up of its military could equally be considered preparation – eventually war will happen.
Meanwhile, the Daily Beast reports on a study by the Center for Strategic and International Studies that concluded the US Navy would likely suffer heavy losses if the US seeks to defend Taiwan from a Chinese invasion. In the opening days of a conflict, Chinese missiles could destroy US air bases in Japan and Guam and sink two American aircraft carriers and between 10 to 20 destroyers and cruisers, the study’s authors write, noting that “such losses would damage the US global position for many years”. EPM is of the view that if the US were to suffer these losses - and they are significant - the US would be tempted into using tactical nukes in order to re-establish balance if not turn the tide of war back in its favour.
Climate Politics
The European Commission has set out its Green Deal Industrial Plan. It is designed to ensure the European Union does not lose ground in the green tech race and can effectively counter massive subsidies provided by US and China. Reuters published an intriguing facts box describing the details of the plan: faster permitting, loosening of rules restricting subsidies, up to 225 billion euros ($245 billion) of new loans and 20 billion euros of grants, plus an increase of the EU’s network of trade agreements
The Electrification of Transport
A momentous moment over in Europe, where the market share of gasoline and diesel cars slipped below 50% of sales during the fourth quarter of 2022 for the first time in history writes S&P Global. According to the European Automobile Manufacturers Association, or ACEA, the combined market share of gasoline and diesel cars in Europe made up 45.2% of new cars sold in the fourth quarter which is down from 50.5% of total sales in same period a year-ago. Hybrid-electric cars are currently the second most popular powertrain option in Europe behind gasoline, at 22.6% of the market. Sales of fully battery electric cars (BEVs) showed the biggest increase in the quarter, surging 36% to make up 19% of total sales compared with 16% in Q4 2021.