Energy, Politics & Money - 03 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
In this roundup, EPM ends the week looking at:
The drop in crude oil prices – both Brent and WTI
Slowing benchmark interest rate increases
Ever increasing geo-political risks
BP’s net-zero framework – fantasy and fiction
General Energy News
So far this week, Brent has dropped more than 5%, extending a 1% loss from the previous week, while WTI has fallen by nearly 5%, after sliding 2% in the prior week, reports Reuters. Brent is now around $82 per barrel and WTI around $76. Weighing on oil are doubts regarding China’s recovery, with many traders now taking a “wait and see” approach, as initial expectations of an immediate economic boom following Covid reopening have proven incorrect.
Macroeconomics
The European Central Bank not only increased its benchmark interest rate by more than the Fed this week, 0.50% instead of the Fed’s 0.25%, it also struck a decisively more hawkish tone than the Fed, writes the Financial Times. While both Powell and Andrew Bailey, his counterpart at the Bank of England, signaled US and UK rates were close to their peak, Lagarde raised the near-certain prospect of another half-point rise in March — and hinted strongly that eurozone borrowing costs would need to rise further beyond that. Christine Lagarde said inflation was still “far too high”, and underlying price pressures remained “alive and kicking”.
Geopolitics
Political risk consultancy Verisk believes Global political risk is at the highest level in five years. “The war in Ukraine is likely to escalate as both sides prepare for spring offensives; conflict and insecurity will continue to destabilise pockets of Africa; and interstate tensions risk tipping over into fighting in parts of the Caucasus, Central Asia and the Balkans”, it says. Beyond physical conflict, Verisk says state interventionism is on the rise, in part in an effort to manage prices which are under pressure from inflation, and in part as efforts to improve energy security. “2023 will be a year where respect for free markets takes a back seat to state intervention and industrial policy in Brussels, London, Washington and beyond”, Verisk says. Social upheaval is also on the rise, with 48 countries registering a significant uptick in 2022, which is having a tangible impact on political stability in countries across the globe. A total of 25 countries registered a significant reduction in political stability in 2022, including Pakistan, Serbia, Italy and Peru. “As the social pressure cooker proves increasingly unable to contain the discontent of populations facing protracted economic hardship, the frequency and magnitude of the backlash against political institutions will remain near boiling point throughout 2023,” Verisk says. “It is likely no region will be spared, but the Americas will be particularly hard hit.”
Bloomberg looks at the year that has passed since Russian President Vladimir Putin and China’s president Xi Jinping declared that there were “no limits” to their friendship. Just under three weeks later, Russian troops invaded Ukraine, leaving China to grapple with the contradiction between the newly reinforced bond and a clear violation of its cardinal principles of sovereignty, territorial integrity and non-interference. It says that what happened next was worse. Putin’s ill-conceived blitzkrieg turned rapidly into a quagmire, exposing his corrupt, brutal and poorly prepared armed forces. The attack triggered an unprecedented avalanche of sanctions against Russia, suddenly staring at a future of economic stagnation, and a global energy crisis. It turned fears of a more unified West into reality. Nevertheless, Xi hasn’t dropped Putin, and Bloomberg believes he won’t, because the increasingly aggressive US efforts to contain China are leaving Xi and Putin united in anti-US grievance.
Climate Politics
Javier Blas of Bloomberg reviews the Net Zero scenario in BP’s most recent energy outlook, and concludes it is a work of fiction – impossible in reality. It requires global oil consumption to collapse to 21 million barrels a day by midcentury, down from about 98 million today. By 2025, oil demand would need to be 4 million barrels a day lower than it is now. That would mean removing the equivalent of Germany’s entire consumption in 2024 and repeating that feat again the following year. By 2030, oil demand needs to be reduced to 85 million barrels per day, a further reduction of 9 million barrels per day, which is equal to the total consumption of France and Italy combined. Thereafter, the really difficult period starts. BPs Net Zero pathway sees the world using just 70 million barrels a day in 2035, requiring the annual removal of 3 million a day, equals to daily demand of Japan, currently the world’s fourth-largest oil consumer. At EPM we agree with Blas’ assessment that Net Zero by 2050 is very unlikely to be achieved. But, what we’ve also said is that the attempts to achieve it will fundamentally alter the energy markets.