Energy, Politics & Money - 02 December 2022
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, we take a closer look at:
The negotiations around the Russian crude oil price cap, with the December 5 deadline looming
The indications China’s leadership is worried it might not be able to quell protests against its Zero COVID policy, which of course has massive implications for the Chinese economy, the global economy and energy demand
Mohammed El Erian’s warning to the financial markets about Fed monetary policy in 2023
The comments by US president Biden about the conflict in Ukraine, which indicate there is a possibility the US will allow for sanctions against Russian energy to be eased over 2023; as well as about the anger in Europe over the US’s IRA
The comments of Canada’s foreign minister about her country’s determination to “challenge” China, which are of course meaningless words, except that they indicate the US efforts to build a global alliance against China are working
Tesla’s first delivery of its Semi truck
The EU proposal for regulating the voluntary carbon offset markets, which environmental NGOs consider wholly insufficient.
General Energy News
The deadline for EU agreement on a Russian oil price cap looms. As a reminder, if no deal is reached, on Monday December 5 all trade in Russian crude oil will be sanctioned, which for obvious reasons would be a massive disruption of the global crude oil market with far reaching consequences for the global economy. If a deal is reached, its impact will depend on the level at which the price is capped. We have explained our view on these matter in detail here at EPM over past weeks and months, but let us know in case you would like to receive a summary.
Bloomberg reports the EU is closing in on a deal to cap the price of Russian crude oil at $60 a barrel, which Poland – the most ardent objector – seems willing to accept if the EU hardens sanctions on Russia in other areas. Our EPM commentary is that at current price levels, this cap would not severely affect demand for Russian crude, as most of these barrels are already priced at or below this number. But, the question is whether Russia would deliver on its promise to stop selling oil to countries that go along with the price cap, even if this cap is higher than market prices for Russian oil. From an economic perspective one would say, probably not as this would derive Russia from much needed income. From a geostrategic perspective, however, one could say, nevertheless yes as maintaining leverage is of critical importance.
Over at Nikkei Asia, an opinion piece summarizes the problem a price cap will cause: If it is set at a price that drives a redirection of Russian crude, there simply isn’t enough tanker capacity to enable all Russian barrels to find a new home.
In regard to China’s COVID situation, the first response by the government to mass protests was as we at EPM expected: additional repression of public opinion and another push to drive vaccination forward. Nikkei Asia reports that at least some in the Chinese leadership are not rethinking this approach. Central Guangzhou lifted its ban on indoor dining and scrapped PCR test requirements to enter many buildings, while Chongqing loosened travel restrictions in some parts of the city, namely. According to Reuters, China’s central government is set to respond as well, announcing an easing of its COVID quarantine rules in coming days and a reduction in mass testing.
All of the above means that it is at present impossible to predict how the crude oil price will develop over December. On the supply side, the direction of the Russian sanctions and price cap remain unclear. On the demand side, the development of COVID policy in China remains unclear. Meaning that both sides of the equation could go up or down by easily a million barrels per day.
Lastly, a look at petrochemicals margins and what this means for refining. Petrochemicals are the main input for a variety of value chains and the industry is an excellent early indicator of what’s happening in the global economy. The industry has been dealing with sluggish demand for a while, which in our view at EPM is linked to the global recession underway fundamentally caused by monetary tightening and China’s Zero COVID policy. According to Bloomberg, this situation is likely to remain for at least another year. That’s bad news for refiners, which are increasingly geared toward producing petrochemicals in anticipation of an expected decline in traditional transport fuels demand due to the electrification of road transport.
Macroeconomics
The always insightful Mohammed El Erian believes the financial markets are not probably reading the latest comments by Fed chair Powell on the likely forward trajectory of monetary policy. Markets surged on Wednesday after Jerome Powell, the Federal Reserve chair, indicated that the world’s most powerful central bank would slow the pace of rate increases this month, he notes in an opinion piece for Bloomberg, highlighting that the fact that this remarks were balanced with warnings about the uncertain outlook for inflation and policy and were largely ignored.
Geopolitics
US president Joe Biden has said he is “prepared to speak with” Vladimir Putin about the war in Ukraine if Russia’s leader shows an interest in bringing the nine-month conflict to an end, writes the Financial Times. EPM observations are as follows: A negotiated settlement in the conflict would be the best possible news for the global economy, and Europe’s in particular, as it would enable an end to sanctions and thereby the global energy crisis (though the efforts to disconnect from Russia’s energy supplies is likely to remain in Europe, but these would then be spread out over a longer period of time). We also note that the comments by Biden clearly communicate that the US decides whether the conflict in Ukraine ends or not – not Ukraine.
In the same report, the Financial Times also reports the US is willing to make concessions to Europe about its Inflation Reduction Act in order to limit effects on European businesses. Discussions as to how this could be done will take place over coming weeks, which we at EPM see as a logical outcome since the US needs its coalition with Europe in its challenge of China, while Europe needs the US military for absolutely everything.
Canada will challenge China when it disrupts the international order, its foreign minister Melanie Joly said in an exclusive interview with Nikkei Asia. As you know, at EPM we don’t do value judgements (should the world stand up against China, or not?). We focus purely on what things mean for those active in the world of energy with the objective of making money. With that clarified, EPM’s view is that Canada’s narrative will undoubtedly resonate with the country’s voting public, but from a practical perspective it is meaningless. How can Canada, a country of less than 40 million people, possibly challenge China, a country of 1.4 billion people, that is technologically advanced, and determined to leverage that technology for rebuilding it military strength? The answer is, of course, it can’t. Except if it is a member of a global coalition against China. And this, therefore, is the insight we derive from the honorable foreign minister’s ridiculous statement: the US efforts to build a global coalition against China are certainly progressing. Which, in turn, supports our fundamental thesis that the world is in a transition from globalization to regionalization.
Energy Transition & Technology News
This past week featured a significant coverage of hydrogen here at EPM, through which we communicated our view that much of what is discussed in this area is hype. We wanted to end this coverage through sharing the perspective of Steven Geiger, who looked at the question “What’s driving the hydrogen hype?” in a LinkedIn post. In his view, fossil fuels companies, governments, EPC contractors, investors and environmental NGOs have created an “echo chamber” in which enthusiasm for hydrogen is being whipped up for a variety of reasons. EPM would add to Geiger’s list the role of consultants. The three leading strategy consultants have probably designed 90%+ of all hydrogen strategies in the world, meaning just a handful of people are really listened to when it comes to the outlook for hydrogen – a handful of people with a vested interest in pumping up the hydrogen potential for the simple reason that for them excitement equals more business.
Climate Politics
According to S&P Global, the European Commission has proposed the certification of carbon removals on a voluntary basis, in a bid to accelerate deployment of high-quality credits, counter greenwashing and stimulate environmental investment. The objective of the proposed rules is to increase transparency, but environmental NGOs warned that the proposal left key questions unanswered, as it did not address the issue of liability in instances where stored carbon is re-released into the atmosphere, nor did it include monitoring and reporting requirements.
The Electrification of Transport
Tesla delivered its first heavy-duty Semi on Thursday, to PepsiCo, reports Reuters. Tesla did not announce pricing, or provide details on variants of the truck it had initially projected, or provide a date for deliveries to PepsiCo or other customers. In 2017, Tesla had said the 300-mile range version of the Semi would cost $150,000, and the 500-mile version $180,000, but Tesla's passenger electric vehicle prices have increased sharply since then.