Energy, Politics & Money - 04 July 2023
Providing independent, objective, & always politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment
In this roundup, we look at:
The latest coordinated effort by Saudi Arabia and Russia to support oil prices
Why China has not yet been able to grow domestic consumption, and why this is unlikely to change anytime soon
Why interest rate rises have not yet tamed inflation
China’s response to the US restrictions on semiconductors and related technology exports to the country, which is an export restriction on two materials crucial to making semiconductors and other electronic components, gallium and germanium
The water challenge facing the world’s green hydrogen plans
S&P Global’s deep sea mining infographic
The EU’s plan to tackle emissions aviation and marine emissions that take place in “international” areas
The United Arab Emirates’ plan to invest as much as $54 billion on renewables over the next seven years, to reach net zero emissions by 2050
Toyota’s claim of a “technological breakthrough” in the area of solid-state batteries
Ray Dalio’s view that the world is on the brink of major disorder
General Energy News
Saudi Arabia has said it will extend the 1 million barrels-a-day production cut announced last month for July into August, while Russia has said it will also make a “voluntary” supply cut of an additional 500,000 b/d next month, writes the Financial Times. Brent crude initially jumped almost 2 percent following the announcement on Monday, but by lunchtime it was up less than 1 percent at $76 a barrel. US benchmark West Texas Intermediate was up a similar amount near $71 a barrel. In the EPM view, this timing of this announcement indicates that Saudi Arabia is disappointed by the market reaction to its original 1 million barrels-a-day production cut announcement from June. The alignment with Russia indicates both parties continue to collaborate closely on the issue of oil price management.
At the same time, however, Bloomberg reports that Russia’s seaborne crude oil flows to international markets rose sharply last week to hit a seven-week high. So far, therefore, there has been little evidence that an initial output cut that was due to come into effect in March has had any material impact on crude flows out of the country. In the latest four-week period, seaborne exports were still running about 25,000 barrels a day above their average level in February, the baseline month for that reduction, despite a slump in the week to June 25.
Macroeconomics
Yesterday, EPM reviewed the challenges China’s “dual circulation” economic development strategy is facing. We explained that behind the strategy is an ambition to make the country less dependent on exports, by growing the share of domestic consumption in the national economy. Today, Nikkei Asia features an opinion piece that analyses in greater detail why China has not yet been able to grow domestic consumption – and why this is unlikely to change anytime soon. Beijing knows that Chinese households earn too little, spend too little and save too much, it says. As early as 2007, then-Prime Minister Wen Jiabao already described the Chinese economy as increasingly unstable, unbalanced, uncoordinated and ultimately unsustainable, namely. But things have not gotten better since then, as efforts to rebalance the economy by increasing consumer spending, at the expense of investment and exports, have largely failed. Whereas real household consumption makes up 53% of Japan's gross domestic product and 70% in the U.S., in China the figure in 2021 was just 40%, up from 34% in 2007. Among the reasons why Chinese families prefer to save than to spend, is that public services and the country's social safety net are underdeveloped. So people feel a need to save more for “a rainy day”. Also, outside of real estate, there are few options for investment by Chinese families. As a result, income from household investments represents more than 18% of U.S. GDP against just 4% in China. When doing real estate investments, Chinese families typically target capital gains rather than rental incomes, and thus often leave properties unoccupied rather than renting them out. This is one of the reasons why China, unlike all other developed economies, did not experience a boom in consumption during its boom in real estate.
The Financial Times looks at the question, why are interest rate rises not taming inflation? One reason is that monetary policy always comes with a lag, taking about 18 months for the impact of a single rate increase to fully seep through into spending patterns and prices. A long-term shift away from manufacturing towards services, which require less capital, could also mean slower transmission of a tighter monetary policy. In the real estate sector, fixed-rate mortgages are now more popular than flexible ones, where higher central bank rates feed through to households’ spending power almost instantly. Lastly, labour markets are tight, enabling labour to negotiate wage increases to offset the impact of inflation on purchasing power.
Geopolitics
China will impose new export restrictions on two materials crucial to making semiconductors and other electronic components, gallium and germanium, writes Nikkei Asia. Compound semiconductors that use gallium are essential for electronic devices as they help reduce power loss. Gallium nitride is used for lasers and other applications, and the material is expected to become more widely used in power semiconductors for electric vehicles. The move is seen as China’s response to US restrictions on semiconductors and related technology exports to China, who produces 98% of the world's gallium.
Reuters has more detail as to the products affected by the Chinese export measure. It will apply to eight gallium-related products:
gallium antimonide
gallium arsenide
gallium metal
gallium nitride
gallium oxide
gallium phosphide
gallium selenide
indium gallium arsenide
It will also apply to six germanium products: germanium dioxide, germanium epitaxial growth substrate, germanium ingot, germanium metal, germanium tetrachloride and zinc germanium phosphide.
Reuters furthermore dives deep into where gallium and germanium is produced, and what it is used for. Around 80% of global gallium production is in China. China produces around 60% of the world's germanium. Gallium is used to make gallium arsenide for use in electronics. Only a few companies - one in Europe and the rest in Japan and China - can make it at the required purity. Semiconductor wafers made with gallium arsenide rather than silicon can operate at higher frequencies and are heat resistant. They also produce less noise than silicon devices, especially at high operating frequencies, making them useful in radars and radio communication devices, satellites and LEDs. Germanium is mainly used in fibre optics and plastics as well as infrared radiation. The metal and its oxides are used in military applications like night-vision devices as well as satellite imagery sensors.
Energy Transition & Technology News
The Biden administration's hydrogen agenda is facing an unexpected challenge, writes Reuters. Green hydrogen is produced from water, and that’s where the challenge lies: water scarcity. Nine of the 33 projects on the Department of Energy shortlist for the hydrogen hubs are in highly water-stressed regions. Those locations include Southern California, Colorado, Kansas and New Mexico as well as Texas. Globally, the picture is even worse, with more than 70% of proposed green hydrogen projects located in water-stressed regions like the Middle East. This means the green hydrogen projects can only move ahead if supported by desalination plants, which are not only costly, but also have a significant environmental impact, including GHG emissions due to their high energy usage. The impact on sea water salinity is also significant, and severely affects the ecosystem. At EPM we note that green hydrogen production through electrolysis of sea water is a technology under development.
S&P Global has produced a wonderful infographic on deep sea mining, saying the industry is moving closer to reality.
Climate Politics
The current United Nations accounting system is focused on emissions generated within a country’s territorial boundaries. Ships and planes that emit CO2 outside the jurisdiction don’t usually get counted. CO2 emissions from shipping and aviation fall in this category, notes Bloomberg. They accounted for roughly 5% of the global total in 2021. Both are expected to grow under business-as-usual scenarios, with aviation expected to at least double. As a first, the EU’s latest climate legislation includes targets to cut emissions from international shipping and aviation. The bloc will account for emissions from ship and plane journeys that end in or originate from its territory, irrespective of where they actually occur.
The United Arab Emirates, which is leading the organization of COP28, plans to invest as much as $54 billion on renewables over the next seven years as part of efforts to reach net zero emissions by 2050, writes Bloomberg. It is targeting a threefold increase in the share of energy produced from renewable sources over the period and will focus on hydrogen as a source for clean power.
The Electrification of Transport
Toyota claims it has made a “technological breakthrough” to resolve the durability issues of solid-state batteries, and “a solution for materials” that would allow an EV powered by a solid-state battery to have a range of 1,200km and charging time of 10 minutes or less, writes the Financial Times. And by reducing the number of processes required to make battery materials, the cost of solid-state batteries could be lowered to similar or cheaper levels than liquid-based lithium-ion batteries, the company added. Mass-production of these solid-state batteries for EVs should start by 2027 or 2028.
Other
Ray Dalio in Time says the world today is similar to 1930 – 1945, from the perspective of debt (amount of debt, the rates of debt growth, and the amounts of central bank printing of money and buying debt), gaps in wealth and income, and international great power conflict (US versus China). Based on this he predicts major upheaval in the global economy (with the fight against inflation causing debt and consequently economic contraction), US politics (with more partisanship, creating the possibility of some kind of a civil war) and intensified international conflicts (in particular between the US and China).