Energy, Politics & Money - 05 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, we review the OPEC+ discussion on potential production cut. Whether 0.5, 1.0, 1.5 or 2.0 million barrels per day, the key question is how it will be allocated. If it goes primarily to countries that are at present underproducing, it might not materially affect the physical supply demand balance. But, if countries like Saudi Arabia were to volunteer for additional cuts, as it has done before, it would have a real, physical impact.
Furthermore, we look at:
The US administration’s position on a natural gas export ban, which could be interpreted as good or bad.
The options for decarbonizing aviation and marine, and ask whether current efforts in this area might not actually be holding decarbonization back on a macro-level.
Efforts to end methane leakage, which are now not only technologically feasible, but in the current energy environment could of course also be highly profitable
The mighty wax worm, whose saliva might contain an effective solution for the “plastic waste problem” that frequently features in news headlines – if the plastics industry, as we have argued many times, comes together to support establishment of effective plastic waste collection and management around the world.
The outlook for EV manufacturing costs, what this would mean for EV penetration, and a nice theoretical idea by Volvo about what ICEV manufacturers could do to not be affected as much which in practice we feel is totally impossible.
General Energy News
OPEC+ - PROPOSED CUTS
According to Reuters, OPEC+ is mulling production cuts as big as 2 mmbd. Our view at EPM is that irrespective of how much exactly the cut will be, key to watch is who is assigned the cut? That, namely, will make clear if the cut is a token and brings the quota closer to actual production levels that are presently millions of barrels below quota. Or, if it might translate into an actual production reduction, which would happen if a country which is producing its quota, like Saudi Arabia for example, volunteers to take a bigger share of the agreed quota reduction.
US OPPOSES OPEC+ CUTS
The US is apparently against any kind of cut, whether theoretical or practical. Apparently, Washington is arguing to OPEC+ nations that economic fundamentals do not support an output cut, writes Reuters.
NO US BAN ON NATURAL GAS EXPORTS THIS WINTER
Yesterday we reported that as we foresaw, the US is discussing a ban on the export of refined fuels. As to natural gas, the US administration has ruled out any ban or curbs on natural-gas exports this winter, writes Reuters. EPM’S take is that one may take this as “glass half full” or “glass half empty”. “No natural gas export ban” is a message that is good for the global natural gas market, of course. The emphasize on “this winter”, however, makes clear that restrictions might still be introduced at a later date.
EUROPE – NEW SANCTIONS ON RUSSIAN OIL
According to Bloomberg, Europe has agreed new sanctions for Russian oil. Shipping services are excluded from the sanctions package if the transport is of Russian crude oil price at the price cap that the US proposes, writes Bloomberg.
Macro-Economics
GLOBAL ECONOMIC SLOW DOWN TO BE SHORT LIVED
The world’s energy trading houses are optimistic about the global economic outlook. “All the different factors suggest, yes, we may be heading into a slowdown but it will be shorter and shallower than people are expecting”, Trafigura's chief economist Saad Rahim said, according to Reuters.
Energy Transition & Technology News
GREENFLATION – NOT AS HIGH AS YOU’D THINK
Nikkei Asia carries an interview with Jakob Stausholm, CEO of Rio Tinto. Among the subjects discussed is “greenflation”, where the global decarbonization push leads to hikes in the prices of commodity critical for decarbonization. Stausholm says he has few worries. He explained that even though the price of “green” materials is more expensive than ordinary metals, when it comes to the final consumer price, there is only “a 3% to 5%” increase as there are many different elements.
MORE OPTIONS FOR ALTERNATE AVIATION FUELS NEEDED NOW
Aviation needs to accelerate the use of biofuels before new technologies like hydrogen and electric-powered aircraft become viable to limit emissions as demand for travel will not abate, the boss of Rolls-Royce said on Tuesday, according to Reuters. Our view at EPM is that regarding hydrogen and electricity as alternatives to fossil fuels, we agree with the assessment these are not likely to have any impact over the next 10 – 15 years, which means aviation and shipping need alternatives for shorter- to medium-term decarbonization. Biofuels make sense, provided they are from waste and not from dedicated agricultural produce as the latter incentivize deforestation and monoculture. But, there’s not nearly enough of these biofuels in the market. E-fuels might be considered, but of these, there is not nearly enough available either, and they are (incredibly) expensive. This leaves us at EPM with the view that for the shorter- to medium-term, the global decarbonization effort is best supported by focusing on the industries for which a reasonable option for decarbonization exist, and leaving areas such as aviation and marine for the time being, rather than trying to move forward in all areas. This would be a more efficient use of available resources, that would bring a bigger bottom-line decarbonization impact.
NATURAL ENZYMES FOUND TO DEGRADE PLASTIC WASTE
Two enzymes identified in the caterpillar saliva were found to rapidly and at room temperature degrade polyethylene, the world's most widely used plastic and a major contributor to an environmental crisis extending from ocean trenches to mountaintops, writes Reuters. Research found that the enzymes performed this step within hours without the need for pre-treatment such as applying heat or radiation. OUr take is that if these enzymes can be manufactured synthetically, and the plastics industry comes together to support establishment of effective plastics waste collection and management processes around the world, this could resolve the “plastic waste problem” that frequently features in news headlines.
Climate Politics
COP27 – THE WORLD IS SPLIT
According to Reuters, the focus of the upcoming COP27 in Egypt will be the gulf between the Global South and the developed world when it comes to climate effects and mitigation. Developing countries should be expected to increase demands for wealthier, carbon-emitting nations to (finally) pay up for decarbonization in the developing world, as well as climate change mitigation.
AFRICA – NEEDS $ SUPPORT TO GO GREEN ENERGY
Kenya’s President William Ruto, who took office last month, urges Africa to embrace renewable energy, reports Bloomberg, while also calling upon the developed world to provide the necessary funding. At EPM we note, this indicates the debate within Africa is less about the need for funding from the developing world, and more about how to spend it: mitigation of climate change impacts, or development of renewable energy infrastructures?
METHANE EMISSIONS TO ZERO IN TEN YEARS
Reuters also reports that the Oil and Gas Climate Initiative, a consortium of CEOs from a dozen large oil and gas companies, is confident emissions of methane from oil and gas infrastructure could be stamped out within the next 10 years. It noted that technology to detect leakages from oil and gas had been ramping up in the last five years, making mitigation feasible. We at EPM note that the current natural gas markets globally also make capture of methane emissions highly profitable, of the molecules can be brought to market or otherwise utilized on site (small scale GTL?).
The Electrification of Transport
EV COST TO REACH COST PARITY WITH ICE VEHICLES BY 2025
During an interview at the Reuters IMPACT climate conference, the head of Envision Racing forecasted that the cost of making electric cars will reach parity with internal combustion cars by around 2025/26. This is aligned with the view of our EPM team, who also forecasted the “tipping point” would be 2025 – just back in 2015… The importance of this moment is not to be underestimated, for at that moment, the advantages of ICEV versus EV drop to essentially zero. Thus, at that moment, one should expect to see a major acceleration in electrification of transportation. The caveat to bear in mind is the availability of the minerals required for this, such as nickel and lithium.
VOLVO URGES CONSOLIDATION
To stave off the challenge of EVs, the CEO of Volvo unit Aurobay says carmakers should consolidate their legacy internal combustion businesses. Bundling non-electric assets would help to improve hybrid-combustion technology and add scale to save costs, said Michael Fleiss, according to Bloomberg. Our view at EPM is that consolidation is a natural result of disruption, so we have no doubt it will happen. Attempts to pre-empt it, and deliver the consolidation before it is forced upon carmakers by the natural forces of the market are good in theory, but unpractical. Which carmaker would now invest billions to buy up competitors? Would investors not ask if that money is perhaps better spent on furthering the EV side of the business? For if you succeed in that, you can probably buy the same legacy ICEV business for a fraction of their current worth just a few years from now. In addition, voluntary tie-ups are likely to be scrutinized extensively by regulators for their cartel-like appearance.
The Global Energy Crisis
EUROPE – SLOW TO MITIGATE ENERGY CRISIS
The Financial Times asks a pertinent question regarding Europe’s efforts to mitigate the impact of its sanctions on Russian hydrocarbons: if it took EU governments five months to agree on where to find €20bn for a plan aimed at speeding up the transition away from Russian hydrocarbons, how long will it take them to approve larger sums dealing with the multiple crises this winter? At EPM we have before mentioned the lack of solidarity between EU states, and we forecasted it would become apparent when over winter a real energy crisis erupts – whether the crisis is financial (unaffordable prices) or availability of supplies.