Energy Politics & Money - 03 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, EPM looks at:
The view that inflation and interest rate rises are now starting to affect demand for refined products
The sharp decline in the value of shares of US regional banks, following the collapse of First Republic Bank
The NATO plan to open a liaison office in Tokyo, Japan, which clearly indicates China is now on its list of adversaries, and how China is likely to consider this move
The US battery-material giant Albemarle’s plans to increase its Australian lithium production to the tune of 2 million EVs per year
The recent poll that clarifies that many Europeans indeed want climate action – but less so if it changes their lifestyle
The view of COP28 President Sultan Al Jaber that climate diplomacy should focus on phasing out emissions from oil and gas, leaving the door open for the continued use of fossil fuels if it is coupled with carbon capture; and his focus on “mobilising” private finance and the reform of international finance institutions to ensure the developing world finally receives the $100 billion it has been promised for decades
General Energy News
The scenario that EPM has been warning for since the beginning of the “era of inflation and interest rates rises”, is now happening Marathon Petroleum said according to Reuters. High inflation is reducing demand for diesel fuels, as consumers curb consumption and manufacturers curtail production. "With the inflationary pressures, you do expect to see some demand curtailments, and we do see that manifesting", a company executive said. Still, the company said it believes the recent selloff is a "paradox" that is overdone and not a true reflection of supply and demand fundamentals.
John Kemp of Reuters writes that the futures markets clearly indicate that the bear theory about a business cycle slowdown hitting petroleum consumption, is now dominant among investors. Investment managers have become especially bearish about the outlook for middle distillates, such as diesel and gas oil, which are the most exposed to the industrial cycle, he says.
Macroeconomics
Shares of major U.S. regional banks fell sharply on Tuesday, in the aftermath of the collapse of First Republic Bank (FRB), writes Reuters. Trading in PacWest, seen as one of the weakest of the midsized regional banks, was briefly halted for volatility and closed down 27.8 per cent, writes the Financial Times. Western Alliance fell 15.1 per cent. Comerica and Utah-based Zions Bancorp dropped 12.4 per cent and 10.8 per cent respectively. The EPM perspective is that underlying the event is the fear that all banks are suffering from the fact that their investment in low yield securities during the era of monetary easing, have lost significant value since the start of the rise of interest rates, back in 2022. The big banks might be able to absorb these losses, but the smaller banks such as SVB and FRB are certainly much less able. Coupled with the economic outlook (recession due to the higher interest rates), this spells trouble, incentivizing investors to sell now. What this means is that the US banking system is now dealing with a (minor) panic, which puts the Fed under enormous pressure to lower interest rates, which would of course have negative consequences for the fight against inflation.
Nevertheless, the US Federal Reserve is expected to deliver a further quarter-point rate rise today, in what will be its 10th consecutive increase in just over a year, writes the Financial Times.
Geopolitics
The North Atlantic Treaty Organization (NATO) is planning to open a liaison office in Tokyo, Japan, Nikkei Asia reports. The station will allow the military alliance to conduct periodic consultations with Japan and key partners in the region, such as South Korea, Australia and New Zealand, because China has clearly been added to NATO’s list of adversaries, next to its traditional adversary Russia. Building on our commentary from yesterday, where EPM discussed the US military alliances with South Korea and the Philippines, this is another move that will undoubtedly be seen by China as aggressive forward military positioning demanding a Chinese military response. It is not impossible, we at EPM believe, that the Chinese come to the conclusion from all this that their window of opportunity to bring Taiwan back into the fold is closing rapidly, and thus that action should be taken sooner rather than later, even though this would be very expensive in terms of lives and money, because the alternative, not doing anything now, would likely become even more expensive.
Energy Transition & Technology News
Albemarle is aiming to spend between $1.25 billion and $1.5 billion to double its lithium hydroxide output in Australia, writes Bloomberg. The US battery-material giant plans to build two additional processing trains at its Kemerton plant south of Perth in Western Australia, which could boost its lithium hydroxide production by 50,000 tons annually, a volume that it estimates could supply more than two million electric cars a year.
Climate Politics
Many Europeans want climate action – but less so if it changes their lifestyle, a recent YouGov poll shows, according to The Guardian. The seven-country YouGov survey tested backing for state-level climate action, such as banning single-use plastics and scrapping fossil-fuel cars, and individual initiatives including buying only secondhand clothes and giving up meat and dairy products. The responses, from the UK, France, Germany, Denmark, Sweden, Spain and Italy, suggested many people were happy with measures that would not greatly affect the way they lead their lives, but bigger steps that may be necessary were unpopular. Measures entailing no great lifestyle sacrifice were popular, with between 45% (Germany) and 72% (Spain) backing government tree-planting programmes and 60% (Spain) and 77% (UK) saying they would grow more plants themselves or were doing so already. Between 40% (Denmark) and 56% (UK, Spain and Italy) of respondents would happily never buy products made of single-use plastic again, while between 63% (Sweden) and 75% (Spain) would support a government ban on them. But, responses were more varied when it came to giving up driving altogether in favour of using public transport, walking or cycling. In France, Spain and Italy, 35%, 44% and 40% respectively said they would be willing to make the move. Support was lower in Britain (22%), Germany (24%), Denmark (20%) and Sweden (21%) – although 25% of French, and 28% of Germans, said they already walked, cycled or used public transport rather than driving, against 11% to 16% elsewhere.
Asked whether they would be willing to switch to an electric car, an average of just under a third of respondents across the seven countries surveyed – ranging from 19% in Germany through 32% in Denmark to 40% in Italy – answered positively. An obligatory increase in fuel duty, however, and government legislation banning the production and sale of petrol and diesel cars outright, were not popular. Those opposed to paying more fuel tax outnumbered those in favour in all countries. And asked what they thought of a ban on fossil fuel cars, only in Spain and Italy were more people happy with the idea than opposed to it – with the level of opposition in countries such as France and Germany, at more than 60%, almost double the support.
Meanwhile, COP28 President Sultan Al Jaber said climate diplomacy should focus on phasing out emissions from oil and gas, leaving the door open for the continued use of fossil fuels, writes Bloomberg. “In a pragmatic, just and well-managed energy transition, we must be laser focused on phasing out fossil fuel emissions, while phasing up viable, affordable zero-carbon alternatives,” Al Jaber, who also heads Abu Dhabi National Oil Co. (Adnoc), said at the Petersberg Climate Dialogue in Berlin on Tuesday. The EPM perspective is that production of fossil fuels represents only 20% of the emissions associated with fossil fuels, as the 80% comes from combustion of the fossil fuel. Therefore, the only way to make fossil fuel use truly net zero, is to have massive capacities of Direct Air Capture and other “offsetting” solutions built up. A truly pragmatic climate policy in our view focuses on decarbonization of the existing energy system only for the short-term, which in the world of energy is around 10 years. In parallel, work should start to disincentivize fossil fuel usage, and to build up the capacity of sustainable solutions.
According to the Financial Times, Al Jaber also focused on “mobilising” private finance and the reform of international finance institutions to ensure the developing world finally receives the $100 billion it has been promised for decades – although the original promise was that this would be in the form of a grant, and not in the form of private capital which will expects a return.