Energy Politics & Money - 02 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we take a closer look at the US diplomacy with South Korea last week, and the Philippines this week. Both meetings were clearly focused on military collaboration and presented in the context of taking a defensive position against aggressive moves by China.
We at EPM note that one could easily make the case, using historical precedents also, that US military alliances in Asia are primarily offensive in nature rather than defensive, and this is undoubtedly how China sees it. It will respond. We, therefore, and already predict that any Chinese response will be presented as an “aggressive move” by the US and its allies.
This is why we here at EPM believe hot war is a matter of time, since the world has already entered the downward spiral where an action triggers a reaction, all toward escalation rather than de-escalation.
Furthermore, we look at:
Declining demand for diesel in the US – another indicator for economic trouble ahead
The details of the JP Morgan – First Republic deal; and the fears among investors that this US banking crisis is far from over
The decision by California regulators to require all medium- and heavy-duty vehicles sold in the state in 2036 to be zero-emission
India plan, backed by China, to let the G20 group allow countries choose a roadmap to cut carbon emissions, instead of setting a deadline to end the use of fossil fuels
General Energy News
US demand for diesel, the lifeblood of the industrial economy, has fallen sharply in recent months, writes the Financial Times, a clear indicator of economic trouble ahead. Demand for distillates including diesel, which is used to power the trucks and trains that transport goods around the country, was about 6 per cent lower in the first quarter of 2023 compared with the same period last year as a trade slowdown bites. Petrol demand, which is more closely linked to consumer travel, has held up so far, with consumption in the first quarter off by 2 per cent versus last year. But there are indications that it is beginning to slip.
Macroeconomics
Reuters looks back at what happened with First Republic Bank. The eventual “solution” was as we at EPM foresaw, with a larger US big bank stepping in to acquire First Republic, in order to bring some stability back to the system, with support from the regulators. We note that this new practice for dealing with banking crises means that since 2008 the US has gone from being concerned about banks being too big to fail, to banks not being big enough to manage upsets in their operating environment.
Bloomberg has a very detailed analysis of the financials of the JP Morgan – First Republic deal, which confirms the above. JP Morgan pays below market value for the assets of First Republic, and as such will post a gain on the deal, and gets a $50 billion credit facility from the seller, the FDIC, who also agreed to a loss-sharing agreement under which it will cover 80% of losses on some assets if and when they occur.
The above does not mean the end of the US banking crisis, however. At least, that is what Top US investors said at the Milken Institute conference, according to the Financial Times. Several prominent investors used the opening day of the conference to predict aftershocks following the recent turmoil. They argued banks would be forced to comply with tougher rules that could crimp their ability to lend just as the US economy is starting to feel the full force of the Federal Reserve’s aggressive interest rate rises.
In an interview with the Financial Times, Charlie Munger, the co-head of Berkshire Hathaway, echoed a similar sentiment. He warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall. Munger noted:
A lot of real estate isn’t so good anymore. We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there.”
He noted that banks were already pulling back from lending to commercial developers:
Every bank in the country is way tighter on real estate loans today than they were six months ago. They all seem [to be] too much trouble.
More people are expected to travel in China during the upcoming five-day May Day holiday than they did before the COVID-19 outbreak, writes Nikkei Asia. The leisure and hospitality sectors will be obvious beneficiaries, and demand for transportation fuels, including jet, should also benefit.
Geopolitics
After the visit of South Korea’s president Yoon last week, this week Marcos Jr., the President of the Philippines, another US ally from Asia, is in Washington. As was the case for South Korea, the focus of the conversations with the Philippines is also on “defense”. The narrative surrounding the visits pitches China as an aggressive state, such as in this statement from Reuters:
The two countries reaffirmed their decades-old security alliance in a trip that marks a dramatic turnaround in U.S.-Philippine relations as both countries seek ways to push back against what they see as China's increasingly aggressive actions near Taiwan and in the South China Sea.
This will allow for the forward positioning of US troops in the Philippines – you may recall the two countries last month agreed to provide the US access to four more military bases in Asia – to be explained as a defensive move. According to Reuters, the US considers the Philippines a potential location for rockets, missiles and artillery systems to counter a Chinese amphibious assault on Taiwan. It is not difficult to understand why China will see things very differently. As in the case of the US – South Korea agreement to allow US nuclear-armed submarine to call port in South Korea, China will see the US military presence in the Philippines as a foreigner threatening its domestic safety and security – also because it sees Taiwan and the South China Sea as “domestic” areas.
Think of that what you will, but at EPM we just want to note the Chinese position is not irrational. Just consider the reasons for the US Monroe Doctrine, or the US response to the Soviets stationing missiles in Cuban. Therefore, what you should take away from the diplomacy over the past two weeks is that the US is taking actions which China will see as aggressive military moves close to its borders, threatening is domestic safety and security. It will respond, therefore, and we can already predict that any Chinese response will be presented as an “aggressive move” by the US and its allies. This is why we at EPM believe hot war is a matter of time, since the world has already entered the downward spiral where an action triggers a reaction leading to escalation rather than de-escalation.
Climate Politics
California regulators approved new rules requiring all medium- and heavy-duty vehicles sold in the state in 2036 must be zero-emission, a day after the California Air Resources Board (CARB) adopted reduced emission regulations for locomotives, writes Reuters. The rules also require transitioning existing fleets to zero-emission vehicles. Big rigs, local delivery and government fleets must transition to zero emission by 2035, garbage trucks and local buses by 2039, and sleeper cab tractors and specialty vehicles by 2042.
India, backed by China, is trying to build a consensus within the G20 group to let countries choose a roadmap to cut carbon emissions instead of setting a deadline to end the use of fossil fuels, writes Reuters. India, the current G20 president, is keen on introducing the phrase 'multiple energy pathways' in a communique to be released at a group summit in September and has been supported by countries including China and South Africa. Multiple pathways for energy transition would enable countries to choose resources, even coal, while working towards plans on net zero emissions.