Energy, Politics & Money - 05 September 2022
News curated from the ever evolving worlds of energy, geopolitics, and money just for you!
In this roundup, we cover the G7 decision to cap the price of Russian crude oil on international markets. Linked to this, we look Europe, where it is no longer possible to deny or ignore that, as we forewarned, the energy crisis – unless resolved – will have a devastating economic and social impact.
General Energy News
G7 CAPS PRICES ON RUSSIAN CRUDE
A major escalation of the Energy Crisis since last Friday. First, the G7 agreed with the America proposal to cap the price of Russian crude oil on international markets, writes CNN. The idea behind the plan is that it would allow Russian crude oil supplies to the market, and thus minimize the risk of supply disruptions, while at the same time minimize revenues for the Russian state. The exact price is yet to be determined, and it also remains to be seen whether China, India and other large crude oil importers will follow the G7 on this.
Ever since this G7 plan was first floated, EPM has argued that it would most likely worsen disruption of the crude oil markets (see our update for Friday, 2 September 2022). Russia has so far consistently responded to sanctions with countermeasures (think for example of the pricing of natural gas sales in rubles, or the restrictions of natural gas supplies) and should be expected to do so again this time. And indeed, in response, Reuters reports, Russia has said it will stop selling oil to countries that impose price caps on Russia's energy resources.
CRUDE OIL FUTURES START TO CLIMB
Of course, this all is offering significant support to the crude oil price, Bloomberg reports. Brent for November settlement rose 2% to $94.91 a barrel on the ICE Futures Europe exchange. WTI for October delivery advanced 2% to $88.60 a barrel on the New York Mercantile Exchange at 11:45 a.m. in Singapore. Expect more to come during trading today.
Our expectation is that Russia will be eager to nevertheless sell its barrels, and as such we can expect to see another increase in the discount offered by Russia to countries that do not sign up to the G7 plan – again, most importantly China and India. Nikkei Asia shares this expectation, and highlights this carries geopolitical risks for China.
RUSSIA HALTS GAS TRANSMISSION TO EUROPE
Another Russian response was on the gas market. It announced, according to Reuters, that Nordstream 1 would not be restarted following the 3 maintenance that began last Wednesday. Expectations are that this will drive a strong increase in natural gas prices during trading today, Monday, writes Reuters.
Europe is now completely cut off from Russian gas, and we will discuss the implications this is having in our Global Energy Crisis section below.
Geopolitics
According to Nikkei Asia, America’s highest-ranking Navy officer, Admiral Mike Gilday, Chief of Naval Operations, says India will be a crucial partner for the U.S. in the future, playing a key role in countering China. “They (India) now force China to not only look east, toward the South China Sea and the Taiwan Strait, but they now have to be looking over their shoulder at India”, he said.
Energy Transition & Technology News
CHINESE EV BATTERY MAKER TO 2ND SPOT
Bloomberg writes BYD jumped to second place in global electric-car battery rankings in July, overtaking LG Energy Solution, primarily as China’s demand for clean cars surges. The Chinese car and battery maker supplied 6.4 gigawatt-hours of batteries in July, behind only giant CATL with 13.3 GWh. LG Energy slipped to third with 4.4 GWh, followed by Japan’s Panasonic at 2.9 GWh
Climate Politics
U.S. CLIMATE POLICY INFORMED BY SOCIAL COST OF CARBON (SCC)
United States policy formulation around the climate is guided by something called the social cost of carbon (SCC). The SCC is an estimate of the economic damages, in dollars, resulting from the addition of an incremental ton of carbon dioxide (CO₂) into Earth’s atmosphere. The last review of the SCC determined its price at $51 per ton. Under current president Biden, a review of the SSC is presently taking place. Resources carries an article which argues that, considering the impact of higher temperatures on mortality, agriculture and sea levels, this price should be raised to $185 per ton.
The Global Energy Crisis
EUROPE’S ENERGY CRISIS
This is EPM’s base case scenario for the shorter-term future for Europe:
Continued significant disruption of the energy equation, making massive increases in the price for heating, electricity and transportation a certainty, and rationing a possibility over winter;
A strong economic recession as a consequence, further worsened by ECB monetary tightening;
Political instability as the life of the average European becomes harder, much harder.
For reference, EPM’S worst case scenario adds the following:
A real estate crisis, as the increase in the cost of living and recession force sales of real estate, while the tightened monetary policy leaves few buyers;
A wave of bankruptcies in the European energy system following the examples of Uniper and EDF;
A full-blown financial crisis (as per 4 and 5 above), forcing another intervention by the ECB, the EU, and European national governments along the lines of the 2000 Global Financial Crisis.
Now that Russia has fully cut supplies of natural gas to Europe, the situation in Europe has developed according to EPM’s base case scenario for some time. And, that the worst case scenario has become a distinct possibility.
This is evident in the focus and tone of the news coming out of Europe. No more talk of inventories of natural gas that are above targeted levels (while ignoring the immense expense this required that will have to be paid by households and industry). Now, reports are about the pain that is present and coming. For example, Bloomberg now reports that the inventories which have been built up – surprise! – might not be enough and that Europe is likely to have to institute rationing.
ENERGY COST BURDENS THE EUROPEAN ECONOMY
Meanwhile, the cost of energy is devastating the European economy. Bloomberg has a report about the metals industry across the continent having to shut down as energy prices leave them uncompetitive, and another report which says 6 out of every 10 factories in Britain are at risk of closure due to the high energy price.
FURTHER PROTEST IN EUROPE
Reuters reports on the first expressions of mass public dissatisfaction. Over in the Czech Republic an estimated 70,000 people protested on Saturday, calling on the government to do more to control soaring energy prices and voicing opposition to the European Union and NATO, effectively putting pressure on Europe over its sanctioning policy vis-à-vis Russia. Deutsche Welle did a very broad poll of public sentiment in Germany. While this indicates continued support for the German stance in the Ukraine conflict, it also signals deep dissatisfaction with government management of the resulting energy crisis.
Clearly this is aligned with our worst case scenario for Europe, and that seems to be the conclusion drawn by European governments as well. For example, The Financial Times writes Sweden has responded by announcing emergency liquidity support to electricity producers, because Russia’s decision to halt gas deliveries to Europe could place its financial system under severe strain. Reuters reports Finland is preparing the same because, according to its economics minister, “This has had the ingredients for a kind of a Lehman Brothers of energy industry”. BBC reports on Germany’s third, €65bn package of measures to ease the threat of rising energy costs, which includes one-off payments to the most vulnerable and tax breaks to energy-intensive businesses.
If the fundamentals of the energy supply – demand balance – are not addressed, it is EPM’S view the measures proposed in Europe will not be enough to prevent economic implosion or major outbursts of public anger. This means the EU will be forced to provide additional support (Reuters reports it will meet on the issue September 9). The ECB will be forced to act eventually –spelling bad news for the Euro.
ENERGY CHALLENGES IN ASIA
Over in Asia, Indonesia raised the price of subsidized fuels by 30% over the weekend, in order to reign in the demands the subsidies were placing on the government budget, reports Reuters. This is a politically sensitive move, because similar increases in the past triggered significant social unrest as the large lower income segment of Indonesian society depends on subsidized fuel. Beyond politics, high energy subsidies did restrain Indonesia's inflation, at 4.69% in August, allowing the central bank to delay raising interest rates until last month, well behind its regional and global peers. Therefore, the new prices for subsidized fuels is also likely to have knock-on impacts, as it will raise inflation and thereby force a policy of monetary tightening upon the Indonesian Central Bank.
I don’t think all Russian has has been cut off. While losing NordStream 1 is indeed hugely important, Russia is still piping gas with the SouthStream and the Ukrainian pipelines. If those were to go to zero as well, then………