Energy, Politics & Money - 04 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, we look (again) at the US price cap plan for Russian crude oil. Earlier EPM explained why we believe it will push up prices for countries that go along with the US proposal. The US released a study to argue the opposite – you decide which of two points of view is more firmly grounded in reality. Also earlier, we explained why we believe the plan will be accompanied by US restrictions on energy exports, which, as it turns out, is something the Biden administration is actively discussing with the US energy industry.
Furthermore, we discuss:
The impact of the OPEC+ discussion on production cuts, and why leading oil analyst Fereidun Fesharaki believes this will actually happen.
A review of America’s Inflation Reduction Act, which is likely to push the country to a leading position in Energy Transition technology and manufacturing.
The Toyota strategy, which unlike those of its competitors does not focus squarely on EVs.
The EUs planning to deal with emergency situations over winter, now that Canada has followed Qatar and the US in saying it can not offer the support Europe might have been hoping for.
The ESG based scandal involving UK energy company Dax, which stands accused of cutting down primary forest for woodpellets to produce “renewable energy”.
General Energy News
OPEC+ CUT PROPOSALS ROIL MARKETS
The OPEC+ conversation on cutting production by 0.5 mmbd, 1.0 mmbd, or possiblly even 1.5 mmbd, as we reported on yesterday, had a big impact on the market. Crude oil jumped around $4 dollars per barrel, reports Reuters. Brent crude futures for December delivery rose $3.72 to $88.86 a barrel, a 4.4% gain. US West Texas Intermediate crude rose $4.14, or 5.2%, to $83.63 a barrel.
Fereidun Fesharaki, founder and chairman of FGE, told Bloomberg in an interview “They have to do something, they have no choice. They want to protect something, which is about $90” a barrel, he said.
RUSSIAN OIL PRICE CAP – MIXED RESULTS
Last Friday, 30 September, in our review of the US’s “price cap plan” for Russian crude oil, we forecasted that this would cause disruption to the global crude oil markets, thereby hurting countries that accepted the price cap, and benefitting those countries that ignore it. We also said that “the US, being largely energy independent, is likely to move towards limits to energy exports to protect its domestic industries”. Now, Bloomberg reports this is exactly what the US preparing to do. Senior Biden administration officials pressed executives from some of the largest US gasoline producers to curtail overseas sales during a tense meeting, the report says, suggesting that without voluntary action, the government could force the industry to stockpile more fuel in US tanks.
US PROMOTES OIL PRICE CAP WITH SAVINGS ESTIMATES
The US continues to try and convince the world of its price cap plan for Russia crude oil. Its latest attempt, The Financial Times writes, is a US Treasury estimate that the plan could yield $160 billion in annual savings for the 50 largest emerging markets, as Washington insists the scheme it has championed will keep a lid on energy costs around the world. At EPM we don’t agree with the assumptions underlying the US view, and we have previously explained why. We remain of the view the plan would lead to a disruption of the global oil market that will push prices up for most participants – the ones refusing the cap plan excluded.
Macro-Economics
INDONESIA – EXPERIENCING SIGNIFICANT INFLATION
A little late to the party, but Indonesia, the country of almost 300 million people that was widely expected to be one of the drivers of global economic going forward (alongside in particular India), is now also experiencing significant inflation. Nikkei Asia reports indonesia's inflation rate in September took its biggest leap in nearly seven years amid increasing oil prices. The consumer price index rose 5.95% in September, up from August's 4.69%, with the main driver being gasoline and transportation, following the government’s fuel subsidy adjustment.
CHINA’S REAL ESTATE WOES - BACKGROUND
The Financial Times has prepared a series of deep dives into Chinese real estate challenges. This remains a subject of critical importance to any forecast, as the real estate sector has contributed around one quarter of China GDP over the past decade. The key questions as we see them at EPM are:
· How bad can the situation get?
· To what extent could it burden China’s financial sector?, and
· How much of the prior the Chinese government is willing and able to prevent?
Energy Transition & Technology News
US POLICY – POSITIONED TO UNLOCK $1 TRILLION IN CLIMATE INVESTMENTS
An opinion piece in The Financial Times by the CEO of Moller-Maersk notes that President Joe Biden’s Inflation Reduction Act (IRA) includes “a game-changing” $369 billion for climate and energy funding on top of the $110 billion of funding already channeled into climate investments last year. This is expected to unlock more than $1 trillion in combined climate-related investments. The assessment that with the IRA the Americans have put themselves at the forefront of the race to become world leader in green energy production, is one we at EPM can agree with – together with China, we would add.
EUROPE – HYPOCRITICAL ENERGY POLICIES FOR AFRICA?
Speaking at the Reuters IMPACT climate conference in London, Sudanese-British billionaire businessman Mo Ibrahim accused developed countries of hypocrisy in warning Africans against developing natural gas reserves while also eyeing such investments in response to the energy crisis in Europe, reports Reuters. Speaking last month on the sidelines of an African environment ministers' conference in Dakar, Senegal, US climate envoy John Kerry cautioned against investing in long-term gas projects in Africa. Kerry's comments echoed similar remarks issued in a report last year by the International Energy Agency (IEA), saying such moves could jeopardize the global net-zero goal of 2050. “Now, because of the war, they are running to Africa and saying ‘Oh, can we have more gas?’,” Ibrahim said; he noted. “We are not allowed to use our gas. But half our gas is sent to Europe. This kind of stupidity cannot continue”.
LEVERAGING DISRUPTION FOR ADVANTAGE
At EPM, one of our favorite topics is “how to leverage disruption for one’s advantage”, and we believe the Energy Transition is full of such opportunities. As an example, Nikkei Asia reports on how India's push for solar water pumps is turning out to be a gold mine for Fuji Electric.
The Electrification of Transport
TOYOTA INVESTS BIG IN EVS AND BATTERIES
Toyota, the world's largest automaker, plans to invest $70 billion in electrified vehicles over the next nine years. Half of that will be for all-electric battery ones. While it's a substantial investment in EVs, it's smaller than some competitors' plans, and not as much as some would like given Toyota's global footprint. In an interview with CNBC, Toyota CEO Akio Toyoda explained the thinking behind this strategy. “For me, playing to win also means doing things differently. Doing things that others may question, but that we believe will put us in the winner's circle the longest”. Toyoda said the company’s goal “remains the same, pleasing the widest possible range of customers with the widest possible range of powertrains.” Those powertrains will include hybrids and plug-in hybrids like the Prius, hydrogen fuel cell vehicles like the Mirai. Toyoda reiterated he does not believe all-electric vehicles will be adopted as quickly as policy regulators and competitors think, due to a variety of reasons. He cited lack of infrastructure, pricing and how customers' choices vary region to region as examples of possible roadblocks. Toyoda also believes there will be "tremendous shortages" of lithium and battery grade nickel in the next five to 10 years, leading to production and supply chain problems.
The Global Energy Crisis
CANADA – UNABLE (STILL) TO MEET EUROPEAN ENERGY DEMAND
First Qatar, then US shale, now Canada. Energy Intelligence reports Canada is not able to meet Europe’s request for more gas supplies to make up for the loss of Russian volumes in time. “Our problem and our challenge is that we are behind on building LNG infrastructure”, Alberta’s Energy Minister Sonya Savage said.
EUROPE – PREPARING FOR POWER CUTS AND RATIONING?
The above makes clear that the European Commission need to prepare for power cuts and other energy emergencies within the European Union. According to Reuters, citing a senior EU official, it apparently is. The EU is preparing for two scenarios. In the first scenario, only a small number of member states are affected by an incident such as a blackout and other EU states can supply power to the affected members. If a large number of states are hit at the same time, the bloc’s countries would have to cap their emergency aid deliveries to other members and the Commission could cover the needs through its strategic reserve.
GERMANY – TO SLASH ENERGY EXPORTS TO CONSERVE HOME MARKET
The latter, bigger issue, is a likely prospect, writes The Financial Times, saying Germany may have to slash electricity exports to France and other countries this winter to prevent a breakdown of its power grid, according a senior executive of the country’s largest grid operator has warned. He also said such a scenario was likely to be for a matter of hours rather than days. France imported 6,000 gigawatt hours of electricity from Germany in January to March — equal to 5 per cent of the country’s total power production in the quarter.
ESG
DRAX (UK )– CUTTING OLD GROWTH FORESTS FOR RENEWABLE ENERGY
Drax, the UK power company that has received billions of pounds in green energy subsidies, is finding itself the focus of unwanted attention, after it was revealed the company is cutting down environmentally-important forests for feedstock to produce “renewable energy”, reports BBC. The company says it only uses sawdust and waste wood. But the BBC says it has evidence some of the wood comes from primary forests in Canada.