Energy, Politics & Money - 06 & 07 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, EPM reviews the OPEC+ decision to cut output by 2 million barrels per day which was at the high-end of expectations. Most cartel members were underproducing and the real impact of the decision is expected to be somewhere between 0.5 to 0.9 million barrels per day. This is significant, but it is not really dramatic if one assumes a recession coming our way and that talks between the US and Venezuela to end sanctions on the latter’s oil exports. In other words, at EPM we expect crude oil price to overshoot over coming days.
And, EPM examines:
Geopolitical implications of the OPEC+ move, which unlike most analysts, we think are very limited
The United Nations Conference on Trade and Development (UNCTAD) waking up to the fact that the tightening monetary policy of the US Fed and others will cause a recession
The US return to talks with Venezuela with the objective of ending sanctions on Venezuelan crude oil exports
The water challenge facing green hydrogen
The warning of the IEA that even if Europe makes it through the coming winter without energy supply disruptions, it certainly won’t next winter, and why this leaves Europe in Catch 22 situation
General Energy News
OPEC+ OUTPUT CUT
OPEC+ agrees on a cut in its quota that is at the high-end of expectations: 2 million barrels per day. While this has immediately pushed the crude oil price up, as we did yesterday, we at EPM again want to put this number into context. In August, OPEC+ underproduced its quota by 3.6 million barrels per day. So, as we said yesterday, the critical question is not about the total size of the cut, but about its allocation, because that is what makes it real.
Reuters writes, according to Prince Abdulaziz of Saudi Arabia the real cuts would be 1.0 - 1.1 million barrels per day. Analysts from Jefferies said they estimated the figure at 0.9 million barrels per day, while Goldman Sachs put it at 0.4 - 0.6 million barrels per day, saying these real cuts would mainly come from Gulf OPEC producers such as Saudi Arabia, Iraq, the United Arab Emirates and Kuwait. This is of course significant, but not dramatic if one assumes the global recession coming our way (more on that below in Macroeconomics) and talks between the US and Venezuela about and end to sanctions on the latter country’s oil exports (more on that below in Geopolitics). In other words, at EPM we expect the crude oil price to overshoot over coming days.
CRUDE OIL PRICE FORECASTS ON THE RISE
In response to the OPEC+ decision, Goldman Sachs raised its fourth-quarter estimate for Brent by $10 to $110 a barrel, writes Bloomberg. UBS said it expects the oil market to tighten further and Brent to advance above $100 over the coming quarters. ING believes the move will push the market into a deficit in 2023. Citigroup focused on the real cut, which as we said is much more limited than the headline number, and argues it might be self-defeating as the current increase in the oil price could worsen the global recession and its downward effect on crude oil demand.
OPEC’S MOVE = REPRESENTS A GEOPOLITICAL BREACH
The Financial Times writes the OPEC move is evidence of a geopolitical breach under way, with the decades-old alliance between Washington and Riyadh weakening and Riyadh preferring to align with Russia instead. Assessments such as these, EPM believeS, read too much in the headline OPEC+ cut, and show a distinct lack of understanding how the geopolitical process works.
As to the latter, the reality of the geopolitical process, its continuous backroom dealings and attempts to put opponents on the wrong foot, means that most official commentaries on the subject do not indicate what is truly going on. This is how we interpret the US response to the OPEC+ cut, which also The Financial Times says was criticised by the Biden administration as a “shortsighted decision” at a time when “maintaining a global supply of energy is of paramount importance”, and “aligning with Russia”.
Geopolitical relationships are usually built over decades, and therefore do not usually change within months or even years (except perhaps in the case of revolution). And, the special relationship between the effective king in Riyadh and Washington was made very clear when Washington presented him to the world back in 2018.
Macro-Economics
GLOBAL INTEREST RATE, RECESSION RISK, AND STAGNATION
The US Federal Reserve and other central banks risk pushing the global economy into recession followed by prolonged stagnation if they keep raising interest rates, United Nations Conference on Trade and Development (UNCTAD) has said, reports The Wall Street Journal. The agency estimated that a percentage point rise in the Fed’s key interest rate lowers economic output in other rich countries by 0.5%, and economic output in poor countries by 0.8% over the subsequent three years. According to UNCTAD, “We have the tools to calm inflation and support all vulnerable groups. But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession.”
The UNCTAD view confirms EPM’S assessment that this round of monetary tightening will lead to a deep global recession – an assessment we communicated when most other analysts were still talking about “a small chance for a mild recession”. We disagree with UNCTAD, however, that there are easy ways out of the current situation. What we are seeing with “core inflation” was built up during Covid, when people were locked down and given money to stay home, which effectively shut down supply chains. On top of that, the Ukraine war has elevated energy prices by a notch (oil) or two (natural gas, coal), which is worsening inflation and setting the world up for a third inflationary blow, through food as the fertilizer industry is being hammered. If you know an easy way out of this for the global economy, please do let us know, because we can’t see it…
Geopolitics
RUSSIAN OIL PRODUCTION CUTS
Russia could cut its oil production by as much as 3 million barrels per day if the European Union and US proceed with a plan to cap prices, Bloomberg reports. If Russian president Vladimir Putin lives up to his earlier threat, that he won’t sell oil to anyone who agrees with the cap plan, he could shut in as much as several million barrels per day without damaging his oil fields, according to Rapidan Energy Group. This, we at EPM has said on numerous occasions before, is the real risk the US’s price cap plan creates.
US TO SCALE VENEZUELA SANCTIONS BACK
The Biden administration is preparing to scale down sanctions on Venezuela’s authoritarian regime to allow Chevron to resume pumping oil there, paving the way for a potential reopening of US and European markets to oil exports from Venezuela, according to The Wall Street Journal. In exchange for the significant sanctions relief, the government of Venezuelan President Nicolás Maduro would resume long-suspended talks with the country’s opposition to discuss conditions needed to hold free and fair presidential elections in 2024
Energy Transition & Technology News
BIOFUEL - MORE TESTING FOR CARGO SHIPPING
One of the world's biggest ship charterers, Cargill has been testing the operational performance of biofuels in its vessels since the start of the year as it steps up efforts to go green. The company now announced it seeks to boost its use of biofuels in a bunkering trial and plans to order methanol-fueled ships as part of its plans to cut emissions, reports Reuters.
WATER SUPPLY CHALLENGES GREEN HYDROGEN
Reuters looks at a challenge facing the development of green hydrogen that has been largely underreported on: availability of water. It says, large companies including BP , Fortescue Metals and Reliance Industries are leading the charge into green hydrogen, because it’s manufactured using water and renewable energy rather than carbon-emitting fossil fuels, a search for mention of water in the prospective producers’ statements yields nothing. This raises concerns they’re either ignoring the risks, or underestimating how much they’ll need, the challenges of securing it, and how much it will cost, as Reuters provides examples of green hydrogen projects that have already been cancelled for lack of access to water. The IEA states that it takes nine to 10 litres of water to create one kg of hydrogen. That only accounts for the final stage when water’s two elements are split, known as the stoichiometric process. Getting to that point requires a larger amount of water. Yet more is needed to keep the electrolyser cool. All in, Bluefield reckons that could take the total to 24 litres. Engineering consulting firm GHD puts it between 60 litres and 95 litres per kg for freshwater. Yarra Valley Water, a Melbourne utility that unveiled a green hydrogen pilot programme last month, pegs the upper end for the industry as a whole at some 80 litres.
NEW NUCLEAR POWER UNRELIABLE – TOO LONG TO BUILD
New nuclear power plants will take too long to build and governments should not rely on them to play a part in avoiding climate change, the head of the International Renewable Energy Agency told Nikkei Asia. Advocates of greater use of nuclear power view it as a stable, large-scale, low emissions energy source that can supplement the volatility of renewables like solar and wind, whose generation depends on weather conditions, and help governments meet decarbonization and energy security goals. But La Camera of IRENA said nuclear plants generally take years to build and in this sense “what is for sure is that they will not be useful to combat climate change”, he said, as this requires technologies that have an impact this decade.
Climate Politics
TAIWAN CARBON TAX RATE
Taiwan could set its carbon tax at around $10 per ton, which would be higher than most of its neighbors but still well below the level believed necessary to influence behavior to reduce emissions, writes Bloomberg.
UAE TURNS TO SHELL FOR NET ZERO ADVICE
The government of the UAE, meanwhile, has turned to an unlikely advisor to develop its Net Zero roadmap: Shell. “We are currently undergoing an exercise with Shell developing a country sketch to outline the possible pathways, specifically regarding technologies which will enable us to reach net-zero emissions by the year 2050,” Yousif Al Ali, assistant undersecretary for electricity, water and future energy affairs, said according to Bloomberg.
The Electrification of Transport
EV AND AUTONOMOUS DRIVING – A VANISHING ACT
Bloomberg takes a deep look at the unfulfilled promises of autonomous driving. Six years after companies started offering rides in what they’ve called autonomous cars and almost 20 years after the first self-driving demos, there are vanishingly few such vehicles on the road. And they tend to be confined to a handful of places in the Sun Belt, because they still can’t handle weather patterns trickier than Partly Cloudy. State-of-the-art robot cars also struggle with construction, animals, traffic cones, crossing guards, and what the industry calls “unprotected left turns,” which most of us would call “left turns.” This, it seems, is the best the field can do after investors have bet something like $100 billion. Anthony Levandowski, the engineer who more or less created the model for self-driving research and was, for more than a decade, the field’s biggest star, is now developing autonomous trucks for industrial sites. For the foreseeable future, he says, that’s about as much complexity as any driverless vehicle will be able to handle.
The Global Energy Crisis
EUROPE ENERGY CRUNCH WORSE FOR 2023
As if we don’t have enough bad news to deal with for the shorter-term, the IEA yesterday warned Europe may face an even more acute energy crunch next year (2023) after draining its natural gas tanks to get through the cold of this (2022) winter, writes Reuters. At EPM, we recognized this early on, which is what led us to forewarn a deep and long recession for Europe in July and August With supplies disrupted to an extent that they can not be brought back to normal anytime soon, the only structural solution for Europe’s energy crisis is a deep cut in energy demand of 25 – 40%. This cannot be done voluntarily since it equates to shut-in of large segments of industry. So, Europe has to accept structurally higher energy prices, which leave households and industries bankrupt.
Predictably, therefore, the European government are working on intervening in the market, essentially subsidizing heating and electricity. This can be done for some time, but since it causes great damage to public finances, it can only be done temporarily – certainly not for much more than 6 months, let alone the 24 – 36 months that optimistic assessments regarding Europe’s ability to change sources of energy supply! Eventually this will translate into pressure on the ECB to perform another bail out, which will worsen downward pressure on the euro and cause political tensions in the EU. The worst thing about all this is, with the Nordstream pipelines now essentially gone, there really isn’t much Europe can do to get out of this dilemma.
EUROPE – INTERVENTION OR FREE MARKET OPTIONS
An opinion piece in Bloomberg discusses this exact dilemma: either Europe lets energy prices ravage its economy, or it intervenes and thereby risks a sovereign debt crisis that would equally ravage its economy. The piece looks at how both options are likely to play out.
ESG
CARBON TRACKER – 98% DID NOT TRACK IMPACT OF THEIR EMISSIONS
Almost all of the companies most responsible for corporate greenhouse gas emissions do not disclose how climate-related risks might impact them financially, according to a report released by Carbon Tracker, reported on by Reuters. Carbon Tracker found 98% of 134 companies - which it says are collectively responsible for up to 80% of emissions - did not provide sufficient evidence that they had considered the impact of climate matters when preparing their 2021 financial statements.