Energy, Politics & Money - 02 November 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we look at the latest report by Ellen MacArthur Foundation and the United Nations Environment Programme on corporate efforts to reduce plastics usage. Most corporate voluntary efforts in this regard are behind target, it found.
EPM expects that this news will be used by environmental groups to push harder for a global plastic treaty. Our strategic advice is that companies in the plastics value chain should put more effort into building up and out the waste management part of this value chain – something most have completely disregarded so far, mistakenly arguing it’s not their responsibility but their consumers’. This strategic blunder lies at the heart of the current issue. The real issue is plastics waste management, not plastics in and off themselves.
But because plastics waste is not managed properly, companies in the plastics value chain now face the real threat of a global plastics treaty not about plastic waste management, but plastics production and usage!
Furthermore, we look at:
Vitol’s assessment, which is aligned with our own here at EPM, that Russian crude oil exports will drop significantly this coming winter as a result of the next wave of EU / US sanctions
An increase in concern about debt-defaults in Asia, exactly as we at EPM forewarned over the summer, and what this will mean for Asia potential economic growth
The effort by the US to make its regional allies adopt semiconductor trade restrictions when it comes to China, similar to its own
The announcement the US and UAE have agreed to invest over $100 billion in renewable energy – which surprisingly came from the US’ secretary of state, which we at EPM believe indicates this is less about business and more about geopolitics.
A follow up from Bloomberg on a subject we discussed at EPM yesterday, Germany’s economic dependency on exports to China, which, as we said yesterday, is an issue as the country is geopolitically aligned with the US
Shell’s acquisition of a biofuel company in Asia
One of the likely topics at COP27, “loss and damage” for the developing world for the climate caused by the developed world, and what this will man for the global climate change agenda
The Oxford Institute for Energy Studies review of the EU plans for capping the price of gas
Vietnam’s shortages of liquid fuels, in no small part due to government interventions in the normal functioning of the market
Germany’s plan to provide legal backing for the government forcefully seizing assets and other properties when it deems this necessary to manage energy supplies
General Energy News
The Financial Times writes, Russia’s oil exports are set to decline by as much as 1 million barrels a day this winter, even as the country expands its “dark fleet” of tankers, according to Russell Hardy, chief executive of Vitol, the world’s biggest independent energy trader.
Macro-Economics
We have mentioned before that the Fed’s policy of monetary tightening, including the drawdown of its balance sheet, will force central banks globally to follow its lead, through its effect on the US dollar exchange rate. That creates a whole range of issues for the world, including a potentiality for a repeat of the 1990s Asian Tiger Crisis. This is the subject of a report by Nikkei Asia, because the recent decline of Asian currencies has now sparked concerns within global financial markets over rising debt burdens among regional governments and corporate borrowers as evidenced by the rise in the costs for five-year credit default swaps. All this (higher interest rates and higher costs for debt-insurance) will mean less money available for investment, and thus significantly affect Asian economic growth.
Geopolitics
The US is urging allies including Japan to follow its lead on restricting exports of advanced semiconductors and related technology to China, writes Nikkei Asia. At EPM we have been following this subject closely, as you know, and we have analyzed the US export regulations in detail earlier. Now, we repeat our view on this subject, which is that if China at present does not have plans to use a military approach to reunite with Taiwan, this economic blockade targeting a critical component of the modern economy might well lead it to change its mind.
Nikkei Asia will be running a number of reports on what it believes China’s likely policy-pillars will be over the coming five years. The first of these reports investigates China’s policy toward Taiwan, and it is titled “Xi Jinping's ‘37-year plan’ for Taiwan reunification”.
The United States and United Arab Emirates have reached an agreement to spend $100 billion on clean energy projects with a goal of adding 100 gigawatts globally by 2035, US Secretary of State Antony Blinken said on Tuesday, according to Reuters. At EPM we feel that the fact this announcement was done by the US’ secretary of state indicates the agreement is less about the climate, and more about the geopolitics, i.e. the “securing of interests globally”.
Further to the subject we discussed yesterday, Germany’s economic dependency on exports to China, which we said yesterday is an issue as the country is geopolitically aligned with the US, Bloomberg carries an opinion piece looking at Chancellor Scholz’s planned visit to the land of President Xi Jinping. It highlights the German economy is even more entangled with China than with Russia, which explains why Scholz won’t even contemplate an “uncoupling” from the Chinese economy of the sort the Americans are urging. At EPM we said yesterday that from the German perspective that might make sense, but the US will simply not allow Germany any other path forward than decoupling. So, Germany will be forced to choose – China or the US, and both will punish Germany if it is not its “chosen one”.
Energy Transition & Technology News
Reuters reports that the latest study by the Ellen MacArthur Foundation and the United Nations Environment Programme has revealed that some of the world's biggest consumer goods companies, including PepsiCo, Mars and Nestle, are almost certain to miss their targets to make plastic packaging more sustainable by 2025. It also revealed that some companies – Including Coca-Cola and Pepsi – are in fact using more virgin plastic despite a pledge to reduce its use. At EPM we expect that this news will be used by environmental groups to push harder for a global plastic treaty, arguing self-regulation by companies has failed. Our strategic advice is that companies in the plastics value chain should put more effort in building up and out the waste management part of this value chain – something most have completely disregarded so far, arguing it’s not their responsibility but their consumer’s. This strategic blunder lies at the heart of the current issue. The issue is plastics waste management, not plastics in and off themselves. But because plastics waste is not managed properly, the companies in the plastics value chain now face the real threat of a global plastics treaty not about plastic waste management, but plastics production and usage!
Shell has acquired Asia-based waste oil recycling firm EcoOils to expand its biofuels production, reports Reuters. EcoOils has a production capacity of 65,000 tonnes per year of spent bleaching earth oil, a type of recycled oil that can be used as feedstock for biofuel production. Bleaching earth is a clay material used to absorb impurities during the palm oil refining process.
Climate Politics
According to Nikkei Asia, developing countries seek compensation for “loss and damage” from global warming at upcoming COP27 summit. Experts say climate change is indeed wreaking disproportionate havoc in developing countries. A June study commissioned by the Vulnerable 20 group, made up of over 50 economies vulnerable to global warming, found that those economies had lost $525 billion, or 22% of their 2019 gross domestic product, in the past two decades due to human-induced changes in temperature and rainfall patterns. Being as hard nosed as we are at EPM, we will put our empathy for the developing world on this matter aside, and just simply analyze: The developed world has underdelivered on promised support for the developing world decades already, and that will not change anytime soon, because the world is slipping into recession. Therefore, the increase in anger in the developing world is likely to cause a rift within the climate change agenda. The developed world will continue to call (others) to do more, but more and more countries will not announce commitments to do more, and more and more will not deliver on commitments.
The Global Energy Crisis
The Oxford Institute for Energy Studies has reviewed the EU plans for capping the price of gas. It concludes that if an effective cap could actually be implemented, the consequences, both financial and physical could be severe for the EU gas market. Multiple trades might not be honored, possibly bringing down the whole market structure at a huge cost. In addition, it says, on the physical side, the most likely outcome of a price cap is that less gas would be delivered to the EU gas market and more gas would remain in storage and would not get withdrawn. Its summary is that if a price cap on TTF cannot be effectively implemented, then it is a waste of time trying to put one in place; while if it can be effectively implemented, Europe is likely to receive less gas and also precipitate a global financial crisis.
Vietnam is experiencing what could result from government interference in the energy market during a supply crisis. Nikkei Asia reports gasoline stations in and around Ho Chi Minh City, Vietnam’s economic engine, are being forced to suspend operations due to shortages of fuel. In Vietnam, the government sets the retail price of gasoline, altering it every 10 days in line with price movements on the international market. The country's refineries must accept the government mandate, which means enduring today's especially volatile international prices.
Meanwhile, Reuters reports, in its race to end reliance on Russian gas, Germany plans to introduce new regulation that will make it possible to expropriate property to link offshore liquid natural gas terminals to the grid. The new law could make it possible to use parts of Gazprom's defunct Nord Stream 1 and 2 pipelines, to link a terminal to the shore. Another planned amendment to the energy law will make it possible to take oil, gas or electricity from a company. EPM highlights that among the unintended consequence of this move will be its effect on the country’s image among international investors, who will now factor the potential of forced seizures of assets more prominently in their decision-making around investments.