Energy, Politics & Money - 04 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money newsfeed of Thursday 4 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we look at:
OPEC+ raises its production quota by 100K (because it can’t provide more) and eased the decline in crude prices.
Energy giants will return $30 Billion to investors
Developments on the the world scene: Pelosi’s visit to Taiwan, former German Chancellor’s Schroeder’s meeting with Putin, and UK’s increase in interest rates
Emerging worries about the potential negative impact of Hydrogen on the environment
The economics behind the adoption of EV’s
Whether burning wood pellets for energy production is green?
General Energy News
Reuters reports on yesterday’s OPEC+ decision to raise its production quota by 100,000 barrels per day. This is what we predicted Tuesday - a small increase in the quotum was the most likely outcome because it enables OPEC+ to manage political pressures (mainly from the US). Now this has happened, that is also the Financial Times’ explanation of the decision. But we also said, “As to whether a potential OPEC+ quota increase would translate into meaningful increases in oil supply, we also see this as very unlikely. Russia, Iran, Venezuela could increase supplies significantly, but are under sanctions, something OPEC+ can’t fix. As to the other countries, a few have a little spare capacity left, but that won’t dramatically move the needle on the global supply the demand balance.” According to a Bloomberg report this is essentially how OPEC+ justified to the US its small quotum increase: “Idle supplies in the Middle East are down to razor-thin levels of about 2 million barrels a day, or 2% of world demand and this severely limited spare production capacity should only be used with great caution in response to severe supply disruptions”.
The OPEC+ meeting of course turned traders’ attention away from the economic recession worries that have been driving crude oil down for the past few weeks, and focused it back on the supply / demand balance, in particular the supply side of the equation. Consequently, as reported by Reuters, the OPEC+ announcement halted crude oil steady decline. Brent crude futures rose 42 cents, or 0.4%, at $97.20 a barrel by 0250 GMT, while West Texas Intermediate (WTI) crude futures was last up 49 cents, a 0.5% gain, at $91.15.
White House press secretary Karine Jean-Pierre is of course spinning this outcome as a victory. “We wanted to see some increases in the production before we announced the trip and we actually saw that in that first week of June”, she said according to Reuters.
Now that all crude oil Majors has announced earnings, Reuters has a deep dive on how they intend to spend it. After reporting bumper profits in the second quarter of the year, following the surge in energy prices, the energy giants are now set to return a record $30 billion to investors. The companies are shying away from increasing investment in new production, either conventional or renewable, as they weigh the impact of recession and climate change on future fossil fuel demand, Reuters concludes.
The Macro Environment (economics & geopolitics)
In our coverage of the Pelosi visit of Taiwan we shared our view that this will accelerate the trend towards de-globalization and the start the breakdown of the global economy into regional blocks. Over in Germany, Der Spiegel published an analysis of what this would mean for the country, whose dependency on international trade (in particular) is as great as its dependency on Russian gas.
Further on geopolitics, Ukraine was in the spotlight yesterday as former German chancellor Gerhard Schroeder, one of the architects of the Russian – German energy relation, reported on his recent visit to Russia and meeting with president Putin. According to Bloomberg and the Financial Times, Schroeder, who established a personal relationship with Putin and who since leaving office worked for Gazprom, Rosneft and the company behind the Nord Stream projects, said “The good news is that the Kremlin wants a negotiated solution”. As to what the basis for such a negotiated solution should be, Schroeder said Ukraine should surrender its claim to Crimea, and its NATO aspirations, while Russia should agree that the eastern Donbas region should remain part of Ukraine. This negotiated deal could underpin a full reopening of the Nord Streams, which would solve Germany’s natural gas crisis.
As to macro-economics, Reuters reports the Bank of England is expected to raise interest rates by 50 percentage points on Thursday, the most since 1995, to 1.75%. This highlights that the global trend of monetary tightening in response to high-inflation is not over yet.
Energy Transition & Technology News
Recharge News reports on a study by the US-based Environmental Defense Fund (EDF) on Hydrogen’s impact on global warming. The molecule is considered key in de-carbonizing heavy industry, and to a lesser extent heavy duty transportation such as shipping (in the form of ammonia). But, EDF scientists Ilissa Ocko and Steven Hamburg write in a peer-reviewed paper, Climate consequences of hydrogen emissions, published in the journal Atmospheric Chemistry and Physics, hydrogen is about 11 times more powerful a greenhouse gas than CO2 over a 100-year period (or 33 times more powerful over 20 years) because it reacts with other greenhouse gases in the atmosphere to increase their global warming potential (GWP). This fact, coupled with the relative ease with which the Hydrogen molecule (eight times smaller than a methane molecule) can leak, creates a potential scenario where the usage of Hydrogen ends up worsening global warming.
Bloomberg dedicates an article to the plan of China’s state grid company to spend $22 billion on additional Ultra high Voltage (UHV) long-distance power lines, to create an electrical super grid that delivers clean power across the country. Critics argue, however, that creation of regional grids would be a more cost-effective solution.
The Electrification of Transport
Although the Nikkei Asia report that Japanese truck maker Hino Motors, a unit of Toyota Motor, said on Tuesday that it has been falsifying data related to engine emissions and fuel performance for a longer period of time and on more models than previously admitted, is not, strictly speaking, about EVs, we are highlighting it under out “Electrification of Transport” section as it will have implications for the electrification of transport. Apparently, falsifying records has been going on for 20 years and for a simple reason, it takes significant investment in R&D to make engines meet ever tightening emissions specifications. That makes it relevant for this section of our daily news feed, because of our fundamental belief is that transport electrification will take place because of economics.
ESG
A team from the Financial Times investigated whether burning wood pellets instead of coal for power generation can be considered “green” or not. They did this by investigating Drax - a UK power company - dropped from the S&P Global Clean Energy Index. Apparently, getting to the bottom of this subject is not an easy task, which highlights the challenges facing ESG focused investors.
The Global Energy Crisis
In response to the current Global Energy Crisis, according to an Energy Voice report newly elected Philippine president Ferdinand Marcos Jr., announced his vision for managing the increasing electricity needs of his country: more exploration for domestic gas, an additional push for nuclear in the country, and support for renewable energy.