Energy, Politics & Money - 05 December 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
We take a closer look at the Russian price cap plan – that was agreed by the G7, the European Union and Australia – and set last Friday at $60 per barrel. We expect Russia to live up to its threat to end all crude oil sales to countries who adopt the cap, even if market prices for Russian are below the cap, and therefore it will focus on redirecting its crude flows to China, India and Turkey. Consequently, these purchasers of Russian crude should expect enormous and severe pressure from the US to not further increase purchases. Russia, for its part, has attempted to amass a fleet of vessels to make this redirection into the grey economy possible. This will keep the increased sales under the radar. However, EPM does not expect this to leave total supplies of crude oil unaffected. The impact on crude oil prices over the coming months depends to a large extent on how the global recession and China’s COVID policy impacts demand.
If you don’t have time to read today’s column right away, here are some main points of today’s roundup:
Nouriel Roubini’s view that the mother of all economic crises’ looms and there is little that policymakers can do about it
The European Union’s intent to not allow the subsidies in the US’s Inflation Reduction Act to lure industry away from the European continent to the US making a “subsidy war” a real possibility, but highly unlikely. In EPM’s view Europe needs the US military umbrella and it is basically out of money following implementation of various COVID and energy cost support packages
The dubious assertions of the Dutch government’s plan to build a massive green hydrogen infrastructure to leverage its access to North Sea wind resources and its natural gas pipeline infrastructure
The plan by Japanese government to drive continued private investment in natural gas based power generation. The plan features incentives to overcome hesitancy among private investors due to the unpredictability of LNG prices and the overall movement toward decarbonization
Germany’s plans to allow energy providers to raise prices next year ONLY if they can convince the German government. EPM see this as a wholesale suspension of the normal functioning of a market, as it gives the German government final say in what the price will be – meaning that connections with government officials now become THE avenue to making money
The inventor of the term ESG and his conviction it is a quintessential capitalist concept
General Energy News
The G7 nations, the European Union and Australia last Friday agreed a $60 per barrel price cap on Russian seaborne crude oil (oil flows to Europe through the Druzhba pipeline are not covered), and the agreement came into effect today, Monday. The key question now becomes how will Russia respond?
Russia could remain silent, since it is already a large share of its oil at prices around the cap – Reuters reports Urals are currently trading at $67 per barrel, but we know from earlier reports China and India are getting big discounts to this number.
Or, Russia could carry out its threat to cease oil sales to any country signing up to the cap irrespective of the price at which it is set.
According to Nikkei Asia, Russia seems to be heading in this direction. It writes that Kremlin spokesman Dmitry Peskov said Russia needed to analyze the situation before deciding on a specific response but that it would not accept the price ceiling. Mikhail Ulyanov, Russia's permanent representative to international organizations in Vienna, tweeted: “From this year, Europe will live without Russian oil.” According to Reuters, Deputy Prime Minister Alexander Novak, who’s in charge of oil, gas, atomic energy and coal, said “We are working on mechanisms to prohibit the use of a price cap instrument, regardless of what level is set, because such interference could further destabilise the market. We will sell oil and petroleum products only to those countries that will work with us under market conditions, even if we have to reduce production a little”.
The extent to disruptive the price cap will end up being for the global crude oil markets is contingent on Russia’s ability to steer its crude oil to countries that do not adopt the price cap - primarily China, India and Turkey. As you know, earlier assessments noted that there are simply not enough vessels to manage a large redirection of crude flows. However, the Financial Times writes that Russia has assembled a fleet of tankers to make it possible.
Shipping brokers estimate that more than 100 vessels have been acquired this year by parties aligned with Russia, to transport Russian crude. 20 VLCCs capable of carrying more than 2 million barrels, 31 Suezmax-sized tankers capable of carrying about 1 million barrels each, and 49 Aframax tankers that can each haul about 700,000 barrels. It also says that according to trader estimations, this fleet will reduce the impact of the price cap and Russia’s boycotting of those who support it, but fall short of eliminating its impact on the global supply demand equation. Apparently, for this the Russian would need some 240 vessels.
If you want to know how much this all will affect the crude oil price short term, the next thing to watch is the pressure the US will put on India and Turkey to limit their Russian crude oil purchases (China will ignore the US on this subject anyway).
This is where we at EPM believe the major weakness is in the Russian effort to limit the impact of the price cap plan. In addition to the above-mentioned limitations in shipping capacity, EPM predicts that the US will allow India and Turkey to continue to buy Russian crude oil, but that it will not allow them to buy much more. China is likely to increase its purchases, especially because it is now in an even better position to get bigger discounts from Russia. An option for Russia is to do “shadow deals”, under the radar, using its own delivery fleet. But, it is unlikely that it will be able to redirect all the necessary barrels through that “dark grey hole”. The size of its fleet and the size of potential demand will not leave global supplies unaffected and will result in an upward pressure on the oil price – all other things equal (which EPM knows they never are!).
Amidst this new round of political turmoil on the crude oil market, OPEC+ agreed to leave its oil production targets unchanged on Sunday, reports Reuters. A sensible move, in EPM’s view. This is also the assessment of Clyde Russell at Reuters, who says: “When faced with a myriad of uncertainties the most sensible path is often to sit back and see how events unfold. That is what OPEC+ has chosen to do with the crude oil market.”
But, the Financial Times notes, OPEC+ also said it was ready to “meet at any time”, and could “take immediate additional measures”, if the Russian price cap plan create a situation in the oil market warranting such an intervention.
Macroeconomics
Over at Project Syndicate, Nouriel Roubini writes: “After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.”
Geopolitics
We have been covering the growing anger in the European Union over Biden’s Inflation Reduction Act whose subsidies threaten to lure industry away from Europe to the US. It was a priority topic during French president Macron’s visit to president Biden last week. Now, European Commission president Ursula von der Leyen says the EU must “simplify and adapt” its rules on state aid to counteract the competitive effects of the US’s new $369bn climate package, according to the Financial Times. von der Leyen said that “There is a risk that the IRA could lead to unfair competition, could close markets and fragment … critical supply chains,” and noted that the EU should “take action to rebalance the playing field … [and] improve our state aid frameworks”. Our EPM view is that this is public posturing ahead of trade negotiations between the EU and the US, which are about to get underway. Von der Leyen admitted as much herself when she said: “But does this mean that we will engage in a costly trade war with the United States in the middle of an actual war? This is not in our interest. And nor in the interest of the Americans”. Europe knows it needs the US’ military umbrella, and therefore that it cannot push the US too hard. At the same time, it also knows that financially it is not in a position to do what the US has done with the IRA. Following COVID support packages and energy cost support packages, the EU’s treasury, and that of many European countries, are simply almost empty. At EPM, we therefore do not foresee the US implementing any major changes in its industrial policy, even after discussions with Europe.
Energy Transition & Technology News
Reuters reports on the very ambitious hydrogen plans of the Netherlands and itsplans to add more than 1 Gigawatt (GW) of offshore wind capacity until it achieves 20GW by 2030. Not all of the power that will be generated can be used and the government is exploring alternative ways for storing the surplus electricity. Interestingly, a significant share of energy from these wind parks will be transformed into hydrogen and brought to shore with pipelines because the Dutch government believes that, “over these long distances transport of hydrogen is more efficient than transporting electricity”.
Although we covered hydrogen extensively last week here at EPM, and sincerely intended to focus on other things this week, the Dutch government’s contention that over medium-distances transporting hydrogen via pipelines is more efficient than transmitting electrons via cables, forced us to respond.
Current demand for hydrogen in the Antwerp Rotterdam Area (ARA) is significant because of the size of the refining and petrochemical industry. Many of those operators will be interested in green hydrogen to de-carbonize their operations, and as such, the Dutch could well establish for themselves a first mover advantage by leveraging its offshore wind potential in relatively close proximity to this industrial demand, as well as its existing pipeline infrastructure, to supply this very likely future green hydrogen demand.
The size of demand from this ARA area should not be overestimated. The laws of physics, and resulting economics, we believe make it unlikely to be much more than current hydrogen demand; as for all other potential uses of hydrogen (e.g. for heating) there better alternatives exist (e.g. cheaper).
And this brings us to our third point, the contention that piping hydrogen is cheaper than transmitting electrons, because that seems to indicate the Dutch government is planning on the basis of a view that at the point of use, green hydrogen will be cheaper than the electricity it is made from. For this to be correct, the cost of electricity transmission must be massively higher than the cost of piping hydrogen.
We at EPM call upon our readers to let us know of ANY 3rd party analysis that can assert this claim based on data.
To our knowledge, a gas pipeline infrastructure needs extensive investment to make it capable of piping hydrogen. And, to our knowledge, this has not been done at scale anywhere in the world yet. Therefore, whatever cost estimates do exist in this regard - they are theoretical - and very likely to understate actual expense as the devil is usually in the detail and becomes apparent when you actually start to do it.
EPM notes that electron transmission is an established process, even over long distances through Ultra High Voltage technology (China) on land and below water.
In conclusion, it seems to us the Dutch government is comparing a speculative estimate of what hydrogen piping could potentially eventually cost against proven cost estimates of what electron transmission actually costs to support a political plan around hydrogen. The plan is based on a demand outlook for hydrogen straight out of a strategy consultant’s “hydrogen economy” playbook, pushed by vested interests, to lock in massive government support for a hydrogen infrastructure that once built with government financing will then be used.
According to the report the Dutch government is already preparing around $1.5 billion for this. Tax payers beware …
The Global Energy Crisis
Japan is seeking to enlist private companies in a program to boost the country’s natural gas-fired power capacity by the equivalent of seven or eight power plants to cope with projected power shortages, Nikkei Asia reports. The target is 6 GW of capacity. Government support will be provided, to counter hesitation by corporations to take part due to unpredictable LNG prices and the overall movement toward decarbonization.
Germany plans to allow energy providers to raise prices next year ONLY if “objectively justified”, its economy ministry said according to Reuters. This, we at EPM believe, is a step whose importance should not be underestimated. It effectively means suspension of the free energy market, as it gives the German government final say in what the price will be. Imagine how much money one could make through connections with the government – or lose if one does not have these connections, or another market participant has stronger connections! These considerations used to be applicable only when doing business in the “third world”, but they have now come to Europe.
ESG
Paul Clements-Hunt, inventor of the term ESG, wants the world to understand that ESG is a quintessentially capitalist concept. Capitalism has survived the past 250 years by adapting to the times, and the next phase requires it to price in the risks that ESG issues represent, he said to Bloomberg. He said that the intention of ESG is to preserve profits, make money from things like renewable energy and avoid losses from corporate governance lapses, such as the bankruptcy of crypto exchange FTX, the current struggles at Credit Suisse Group AG and the diesel-emissions cheating scandal at Volkswagen AG from several years ago. “Stripping away the white noise and politics, ESG is simply a way to manage new and evolving risks as a result of policy changes, and mitigate them where you can,” he said.