Energy, Politics & Money - 04 November 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in chaotic times!
In this roundup, we analyse the decision by the G7 to set a fixed price for Russian crude oil, rather than adopting a discount to an index. EPM noted, from the beginning, that this plan is likely to cause significant disruption of global energy markets, for a variety of reasons (see more below).
Furthermore, we look at:
US crude sales to Asia, which are growing as a replacement of Russian crude
Saudi Arabia’s decision to lower its oil prices for Asia, a clear sign of the global economic slowdown
The IEA’s “better late than never” warning to Europe about its gas situation in 2023, echoing EPM’s warning made earlier this year.
Canada’s decision to force three Chinese firms to exit lithium and other rare earth minerals deals, which some analysts consider an unnecessary move
The visit of Germany’s Chancellor Olaf Scholz to China
The cancellation of Elon Musk’s hyperloop project with SpaceX
Sumitomo and PTT Chemical’s venture into biofuels, using bagasse, a left-over from, as feedstock
India’s likely climate change policy
The UN’s analysis which says developing countries need up to $340 billion a year to adapt to climate change
General Energy News
The Group of Seven rich nations and Australia have agreed to set a fixed price when they finalize a price cap on Russian oil later this month, rather than adopting a discount to an index, reports Reuters. At EPM we have said from the beginning this plan is likely to cause significant disruption of global energy markets, for a variety of reasons. On the physical side, we expect Russia to live up to its promise to not send oil to countries that accept the price cap – which is likely to result in over a million barrels per day of product leaving the market as there is not sufficient shipment capacity available to give these barrels an alternative destination. On the financial side, the settlement of derivatives contracts will be disrupted, and there is no guidance whatsoever as to how this will be dealt with.
Meanwhile, deliveries of US crude oil to Asia are set to touch a record 1.8 million barrels per day this month, reports Reuters. Refiners in China, India and South Korea are returning as big U. crude oil buyers after several months of scooping up cheap Russian barrels. Asia’s renewed buying reflects soaring demand for crude to produce diesel fuel and comes as Europe continued to stock up in the aftermath of Western sanctions on Russian purchases.
To deal with the inflow of US crude, as well as weakening demand due to the global economic slowdown, Saudi Arabia lowered most of its oil prices for its main market of Asia, reports Bloomberg.
As to natural gas, the IEA must have thought “better late than never”, because it has now also warned Europe about its gas situation in 2023, writes The Financial Times. In response to the recent decline in natural gas prices on the continent we at EPM immediately said this was (a) not a good news sign as it was due in part to slowdown and shutdown of European heavy industry, and (b) it doesn’t change the fact European maximum inventories cover only 30% of demand in a typical winter. The IEA agrees, apparently, and now warns European leaders not to become complacent following the recent fall in prices and urging them to take immediate action to ensure supplies for next winter.
Geopolitics
Canada’s government has ordered three Chinese companies to divest their investments in critical minerals companies on grounds of national security, reports Nikkei Asia. The government ordered the divestitures after a “rigorous scrutiny” of foreign companies by Canada's national security and intelligence community, Industry Minister Francois-Philippe Champagne said in a statement.
Sinomine was asked to sell its investment in Power Metals.
Chengze Lithium was asked to divest itself of its investment in Lithium Chile.
Zangge Mining is required to exit from Ultra Lithium.
This is another indication the most likely forward trajectory of US – China geopolitical conflict is regionalization of the global economy.
Liam Denning of Bloomberg believes the Canadian decision is unwise. Canada can keep Chinese investment dollars without losing control of critical minerals, he says. A lithium deposit is just stuff in the ground, after all. It cannot be floated across the Pacific en masse. And if relations with China sour into outright hostility, it can be seized by dint of the fact that it sits in the host country’s territory, not China’s.
EPM will cover Olaf Scholz ,Germany’s Chancellor visit to China. As we noted previously, Germany has maneuvered itself into an impossible “ménage a trois” that cannot work to its advantage in the current (and likely future) geopolitical environment. Germany is dependent on:
Russia for energy
China for exports
The US for geopolitical direction and defense
Reuters reports that Chinese President Xi Jinping touted the need for greater cooperation between China and Germany amid “times of change and turmoil” in his first meeting with the Scholz. Further talks are expected to be on Russia’s war on Ukraine, climate change and further development of economic ties.
Energy Transition & Technology News
While Elon Musk still says he wants to build a Hyperloop, the project with SpaceX has been indefinitely shelved, reports Al Arabiya. The other Musk company working on the project, the Boring Co., still has expansive plans for its Las Vegas transportation network, but there hasn’t been any sign of a return to the ambitious dream of superfast pods with which things started a few years ago.
Nikkei Asia reports Japanese trading house Sumitomo will back a project in Thailand to build Asia’s first plant for mass-producing biofuel that does not reduce food stocks. Project partners include Global Green Chemicals a subsidiary of Thai petrochemical group PTT Global Chemical. The partners are discussing commercial production of bioethanol made from bagasse, which is left over after sugarcane is crushed for its juice. EPM takes a keen interest in biofuels because we see it as a massive growth opportunity for energy companies as demand will likely outpace supply for at least a decade. But, we have said from the beginning, success in the space requires a feedstock based on waste products, as anything else is likely to be challenged by environmental activists and regulations. Within the waste management industry, the smart players have essentially cornered the market for used cooking oils which leaves the conversion of agricultural waste into fuels as the major remaining opportunity.
A few days ago, at EPM we covered the news that the world’s major plastics users are under delivering on their promise to reduce virgin plastic usage and increase the use of recycled plastics. Related, S&P Global has a report on the likely future of recycled plastics. Demand for recycled plastics in the first half of 2022 had been lukewarm, it says. And, recycled resin markets are likely to see limited upside moving into 2023, with buyers not seeing much incentives in using recycled plastics.
Climate Politics
Over at Nikkei Asia an informative deep dive on India’s climate change policy. It will continue to prioritize uplifting the poor and downtrodden and giving them livelihood opportunities. But even while doing so, India is focused on keeping its per capita emissions below that of developed economies. At the same time, India recognizes that mitigation policies can bring undeniable economic and social benefits, especially for youth and women, which means that decarbonization will certainly remain a political topic and not be discarded altogether.
The Financial Times reports, developing countries need up to $340 billion a year to adapt to extreme weather, according to the United Nations. The world is clearly far off track in meeting this need.
The Global Energy Crisis
When the European governments first stepped into the continent’s energy market, to provide support to households and industries and bailout energy companies, we at EPM forewarned this would not be a sustainable solution, that the liabilities taken on the these governments would soon overwhelm them, and thus risk a sovereign debt crisis in the EU. Now, Reuters reports Uniper, which has been nationalised by the German government, has posted a record euro 40 billion net loss so far this year – all to be paid by Germany’s taxpayers. This gives a good indication of the extent of the liability Europe’s governments have taken on. Perhaps Germany, as the largest economy on the continent, is able to manage it. But clearly, most European governments will not be.