Energy, Politics & Money - 06 February 2023
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.
Lots to look at in this roundup - EPM examines the following developments:
Warning calls the world is moving toward an energy supply crunch due to sanctions and under investment
Russia’s export ability - oil and refined products - seems larger than originally anticipated
The potential upside of “pent up demand” in China over coming months
Nouriel Roubini’s view that de-dollarisation of the global economy will continue, leading to of a bipolar financial system featuring the US dollar and Chinese renminbi
The balloon incident and EPM’s take away that everything involving the US and China seems to be further worsening relations between the two countries
The likelihood of Small Modular Reactors (SMR) becoming a cost-effective and timely solution for decarbonization of the global economy
The US and Brazil joining the India-led International Biofuels Alliance
An analysis of Chinese strategic thinking, which uses electric vehicle manufacturer BYD as an example
General Energy News
The Group of Seven rich nations, the European Union and Australia have agreed to set price caps on Russian refined oil products, writes Reuters. According to Reuters, the price caps are $100 per barrel on products that trade at a premium to crude, principally diesel, and $45 per barrel for products that trade at a discount, such as fuel oil and naphtha.
In what at first sight could appear as a coordinated action, both the International Energy Agency’s head Fatih Birol and Saudi Arabia’s minister of energy Abdulaziz bin Salman warned the world might face under-supply of energy over the coming 6 to 18 month. “If the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their (output) policies”, Birol said according to Reuters. Adding the impact of Russian, Iranian and Venezuelan sanction to the conversation, Minister Abdulaziz said “All of those so-called sanctions, embargoes, lack of investments, they will convolute into one thing and one thing only, a lack of energy supplies of all kinds when they are most needed”, again according to Reuters.
Goldman Sachs’ Jeff Currie gas also repeated his call that oil is set to break $100 again. According to Bloomberg, this time he predicts it will happen in 2023 due to supply issues, which he says will become a major issue in 2024. At EPM we just wish to note that Curry said the same thing late 2021 / early 2022, at which time he predicted the $100 barrel oil in 2022 and supply crunch in 2023 (see here for evidence). This is a case of “if at first you don’t succeed, try, try again”. We are certain his forecast will one day come true…
The “shadow fleet” of ships that transport Russian oil around the world has expanded to around 600 tankers, according to trading giant Trafigura, writes Bloomberg. About 400 crude oil vessels, or 20% of the global fleet, have “switched” from mainstream trades to “ostensibly do Russian business”. For oil product tankers, the company sees the level at 200 tankers, or 7% of the world total. Before we provide the EPM perspective on this news, let’s recap our analysis when the Russia sanctions / price cap was first suggested. We said at the time that there would remain demand for Russian barrels, if they were priced right i.e. significantly discounted, and that the size of this “grey market” would to a large extend depend on:
The barrels Russia is able to move around and
The political pressure placed on potential buyers by the US.
A few months in, and it seems Russia is able to move around more barrels than anticipated. That leaves as the question, who is willing to take these barrels, and how much? China, India and Turkey were the main takers of discounted barrels. But, China thinks strategic and therefore does not want to create a dependency on Russian energy, which limits the further increase. India is under significant US pressure not to increase and the US has actual leverage over Turkey (e.g. the F-16 sale and fleet upgrades). On the whole, therefore, our EPM assessment is that the Russian sanctions / price cap is eating into global supply, but due to the shadow fleet of tankers, probably less than originally anticipated.
Talks to send more US natural gas to Europe have stalled as the continent’s climate goals deter buyers from making long-term fossil fuel supply commitments, says the Financial Times. US gas executives say buyers have largely not been willing to commit to new multi-decade supply deals needed to underpin a fresh wave of project construction on the Gulf of Mexico that would further lift supply in the coming years.
Macroeconomics
An opinion piece in South China Morning Post reviews the suggestion that Chinese growth will be higher than typical later in 2023, due to “pent up demand” from the Covid lockdowns. Chinese bank deposits increased by about 26.3 trillion yuan (US$3.9 trillion) last year. But, it says, in a recent survey 22.8 per cent of Chinese respondents said they would indeed like to buy more things, but 58.1 per cent said they would like to increase their savings and 19.1 per cent said they would like to invest more.
Writing for the Financial Times, Nouriel Roubini says that given the increased weaponisation of the dollar for national security purposes, and the growing geopolitical rivalry between the west and revisionist powers such as China, Russia, Iran and North Korea, de-dollarisation of the global economy will accelerate. He argues that in a world that will be increasingly divided into two geopolitical spheres of influence — namely those surrounding the US and China — it is likely that a bipolar, rather than a multipolar, currency regime will eventually replace the unipolar one.
Geopolitics
The news that US secretary of state Blinken would visit China for high-level talks, including with Chinese president Xi Jinping, offered some hope that the US and China could find a pathway forward that did not directly lead to war. Those hopes appear to have been shattered by the balloon incident, however. The balloon, which Beijing again reiterated is a civilian airship that accidentally strayed into US airspace, has further strained relations and led Washington to cancel a planned visit to Beijing by Secretary of State Antony Blinken, writes Reuters. (Which China now says was never formally agreed, according to Axios.) China has offered strong condemnation of the US’s shooting down of the balloon. The Chinese Ministry of Foreign Affairs said in a statement, “For the United States to insist on using armed force is clearly an excessive reaction that seriously violates international convention”, according to the New York Times. “China will resolutely defend the legitimate rights and interests of the enterprise involved, and retains the right to respond further.” What we at EPM take away from the affair is everything that involves the US and China seems to be further worsening relations between the two countries.
Gideon Rachman of the Financial Times sees it similarly. The balloon incident is particularly inflammatory, he says, given America’s already heated political debate about China. Leading Republican politicians used the balloon’s journey across the US to accuse the Biden administration of weakness towards Beijing. In recent weeks, more moderate voices in both Beijing and Washington had been cautiously trying to restart dialogue between the two countries. Those efforts are over.
Energy Transition & Technology News
Over at Energy Intelligence the former editor of Nuclear Intelligence Weekly argues that the case for small modular rectors has been overblown. Her main points are that most SMR technologies are tweaks of decades old conventional nuclear technologies (some of failed then); costs for nuclear will remain high, with SMR capex possibly lower but opex most likely higher; and time to delivery of actual electrons for SMRs too is so long that even if a full weight was put behind them they would still not be able to have a real impact over the next decade (or two).
The US and Brazil, two of the world’s largest biofuels markets, are joining an India-led initiative, the International Biofuels Alliance, that aims to boost demand for the lower-emissions energy source, writes Bloomberg. The EPM view is that biofuels from organic waste – household, hospitality or agricultural – has a very bright future, because there are sectors of liquid energy demand for which no viable alternatives to the internal combustion engine exist. We also believe, however, that biofuels from dedicated agricultural produce will eventually become targeted for causing deforestation and/or monoculturing the environment and driving up the price of foodstuffs.
Other
The Guardian carries an interview with Jigar Shah, head of the US Department of Energy, which has a budget of $400 billion for loans in support of new energy technology development.
An article in Forbes argues that China has been able to catch up with the western world, and move beyond it, in part due a fundamentally different – and better – approach to strategy. Using electric car company BYD as an example, it recently overtook Tesla as the world’s largest seller of EVs, the article describes Chinese strategic thinking in the following manner:
According to ancient Chinese philosophy, everything is in a perpetual flux, nothing is permanent. The hidden potential of a situation is more relevant than the present state of affairs, which will inevitably mutate. To influence upcoming changes, leaders should work along the lines of least resistance to make things happen with grace and fluidity.”
It summarizes the Chinese approach to global competition over recent decades, it says:
“Chinese leaders have simultaneously downplayed their own strengths and ambitions, exploited the greed of western companies to conquer China’s immense market, and turned the West’s neoliberal ideology to their advantage”.
The article also includes an explanation of how this strategic thinking enabled BYD to develop to its current, globally leading position. Fundamentally, it says, it is about “managing the return on brainpower”, rather than the return on capital. This requires managing intelligence potential, productive mental time, productive collaboration, information velocity, freedom, safety & means to act, and rest time. At EPM we note how this BYD approach is a complete break from the Anglo-Saxon approach to managing corporations. The latter tends to see employees as a form of “capital”, which leads management to a short-term focus, including a shorter-term focus when managing employees (hire during the upturn, fire during the downturn, such that quarterly result targets can be met). This Anglo-Saxon view fails to optimize return on brainpower for a variety of reasons: intelligence potential is a second order objective (below financial returns) and thus never truly optimized; it is never optimally used as the whole organized is set up to manage shorter-term results; and it is never enabled, through and environment of safety and security, to truly blossom.