Energy, Politics & Money - 03 November 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, EPM, of course, analyses the US Fed’s interest rate hike. While some argue it is good news because now smaller hikes are in the pipeline, while others say it is bad news because more smaller hikes remain in the pipeline, we at EPM stay away from this kind of “finance world focused” analysis and instead look at the real-world impact. The rate the Fed ultimately chooses is less important than the impact on the global economy that past and current rate hikes will have. The consequences that EPM warned would result from rate hikes are happening now - the global economy is slowing down fast. We also expect a significant correction in housing markets across the developing world over the coming 6 to 18 months as well as in Europe. The resulting “correction” in housing prices will stress the financial system in no small way.
Furthermore, we look at:
Shell’s ambitions in electricity in Australia
Goldman Sachs forecast for a further drop in natural gas prices in Europe
India’s public debate on whether or not to raise interest rates to deal with a supply side driven increase in inflation
The 10 megatrends of Nouriel Roubini
How the current geopolitical climate is driving regionalization of the world economy
The view that hydrogen isn’t a decarbonization solution, but a global warming problem
The pessimism in finance circles that COP27 next week will deliver anything meaningful
Reuters’ conclusion that de-industrialization is most likely behind the decrease in natural gas usage in Europe and how this is an opportunity for the US to woo Europe’s largest industrial players
BlackRock CEO Larry Fink’s thoughts on “shareholder democracy”
General Energy News
In Australia, Shell is on the lookout for electricity-related acquisitions writes Bloomberg. EPM recalls that in 2019 Shell’s CEO said the company wanted to become the biggest electricity player in the world. But then it worked on strategy over the 2020 – 2021, period, as a result of which the subject disappeared from Shell’s public narrative. Behind the scenes it is not quite dead, it seems however.
At Forbes, Mike Lynch looks at the past, present and possible future of the US’s Strategic Petroleum Reserve. What’s its purpose, Lynch asks: replacing lost imports (in case of a military conflict), guaranteeing supplies for US refiners, or stabilizing global oil markets?
As to natural gas, the Dutch Title Transfer Facility (TTF), Europe’s main benchmark for natural gas prices, traded at around 120 euros per megawatt hour on Tuesday. But Goldman Sachs expects this benchmark to fall to 85 euros per megawatt hour in the first quarter of 2023, thereafter to sharply pick up again once an inventory rebuild begins, according to CNBC. The Goldman Sachs rationale is interesting, but we at EPM never believe their forecasts. We recall, for example, how at the end of 2021 Goldman forecasted oil to hit 100 – which of course it did but because of the Ukraine war and resulting sanctions on Russia, which were not included in the Goldman forecast!
Macro-Economics
The US Fed has raised interest rates by 0.75% again, and said its battle against inflation will require borrowing costs to rise further, reports Reuters. Some commentators focus on the “glass half full” in Powell’s announcement yesterday, such as Bloomberg which runs the headline “Powell Signals Smaller Rate Hikes Ahead on Path to Higher Peak”. Other focus on the “glass half empty”, such as The Financial Times which says “Powell warns US rates will peak at higher level than expected”.
EPM’s view is that the actual rate at which the Fed will end up is of lesser significance than the impact its past and current rate hikes will have on the global economy. Everything we warned that would result from this is already happening, as the global economy is slowing down fast. We also expect a significant correction in the housing markets of the developing world over the coming 6 to 18 months, especially in Europe where households and industries are hit by a “triple whammy” of energy inflation, general inflation and higher interest rates, leading to de-industrialization of the continent, layoffs, and consequently foreclosures, at a moment people cannot afford to buy houses at previous prices anymore since the interest rate is now so much higher. This will create stress in the financial system, by the way. So hold on to your hat, for it is going to be a bumpy ride!
Further on interest rates, Nikkei Asia explains the Monetary Policy Committee of India’s central bank has a mandate to maintain retail inflation at 4%, with a margin of 2 percentage points on either side, and that since January, the inflation rate has remained above the upper tolerance band of 6%. It hit 7.41% on the year in September, the fastest pace since April, due to ripples from the COVID-19 pandemic and the war in Ukraine. Analysts are not certain at this stage whether this will result in a surprise rate hike, since the root causes of the inflation increase are on the supply side rather than the demand side.
We don’t know how we could have missed it, but about a week ago Nouriel Roubini did an extensive interview with German newspaper Der Spiegel. In it, Roubini discusses the 10 “megathreats” he believes the world is facing, and how he is dealing with them. Covered in these megathreats are the ones we at EPM mirrors our analysis and on which we base our outlook on. In the shorter-term, inflation, rising interest rates, unaffordable debt in the economy, leading to a long and severe recession, featuring another real estate crash and the accompanying stresses in the financial markets. Over the longer term, the decoupling of the western economies from China, worsening of geopolitical tensions, efforts to deal with and limit global warming, and population decline, all of which are inflationary pressures.
Geopolitics
Martin Wolf of the Financial Times agrees with EPM that the current geopolitical situation is likely to result in an end to globalization, and a reversal back into regionalization. Just a worse form of regionalization that during the height of the Cold War, he argues.
Energy Transition & Technology News
A review of the new US hydrogen strategy, by the (somewhat) famed energy analyst Michael Barnard, over at Cleantechnica. Barnard argues hydrogen is not a solution for decarbonization, but rather a global warming problem. He points out that hydrogen is not used for energy today, but it is used in industrial processes to refine energy carriers and in industrial processes for manufacturing fertilizer. Other uses include hydrogenation of vegetable oil for edible oil products and a bunch of other things. According to Barnard, the US’ hydrogen strategy makes a fundamental mistake when he argues that burning gases or liquids provides high quality heat only at temperatures at over 300° Celsius. This sets the strategy up for recommending hydrogen as a key pillar for industrial heating, but according to Barnard direct electrification will be a much more efficient and as a result cheaper decarbonization pathway. Banard also reviews the strategy’s recommendations around the use of hydrogen in energy storage, road transport, aviation, marine, rail and residential and commercial heating – all of which are bad ideas he argues.
Climate Politics
In interviews with Reuters, more than a dozen US and European finance leaders expressed pessimism the COP27 climate conference in in Egypt starting November 6 will make clear progress, as global priorities have shifted amid inflation, energy resulting and war.
The Global Energy Crisis
Reuters looks at the drivers behind the reduction in Europe’s natural gas use. We at EPM did the same last week, and cautioned anyone to see this reduction as good news, as we said it is most likely the result of industrial slowdowns and shutdowns, i.e. de-industrialization that will severely damage European prosperity. The Reuters piece comes to the same conclusion (just a little later…), saying, “Europe needs its industrial companies to save energy amid soaring costs and shrinking supplies, and they are delivering - demand for natural gas and electricity both fell in the past quarter. It is far too early to rejoice, though. The drop is not just because industrial companies are turning down thermostats, they are also shutting down plants that may never reopen… executives, economists and industry groups warn its industrial base may end up severely weakened if high energy costs persist.” We at EPM have little doubt that in years to come, the current period will be recognized as fundamental turning point in European history – and not for the better, as the economic devastation underway is likely to have far reaching political implications as well.
An opinion piece in The Financial Times rightly says Europe’s energy crisis is an opportunity for the US to woo European multinationals away from the continent.
Other
BlackRock CEO Larry Fink says a new era of “shareholder democracy” is coming, with investors small and large beginning to take charge of their voting power over companies’ governance and societal stances, reports Bloomberg. Technology is ushering in the ability for asset-managers’ clients to express their views on issues at company meetings and has the potential to fundamentally transform corporate governance, according to Fink. At EPM we challenge the notion that “technology induced change” is always a force for good. In society, technology is one of the reasons for the polarization that is occurring. And we see no reason to believe that when it comes to shareholder voting the outcomes will be any different – with “ESG woke” types pitched against “shareholder capitalism libertarians”, pulling companies in opposite directions, leading to strategic flip flopping.