Energy, Politics & Money - 09 January 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.
In our first roundup of the New Year, EPM takes a closer look at the outlook for energy in 2023. We bring together the views of a number of expert analysts, and of course add to the mix our own and unique perspective.
The consensus is that the first half of the year will be tough, as China will continue to suffer significantly under the spread of Covid. Thereafter, key will be developments on the monetary front. Will the world’s central bank back pedal on monetary tightening? We at EPM believe this is very likely during the third quarter.
Furthermore, we look at:
Developments in the US – China conflict
Energy Intelligence’s view that, in spite of short-term headwinds, the transition is set to continue its acceleration over the 2020s, led by faster rollout of existing clean energy technologies, and only partly aided by supportive policies
Great Britain’s backtracking on energy subsidies, as the country now recognizes these are “unsustainably expensive” – exactly as EPM forewarned back in 2022, when we said 2023 will be the year households and business in Europe will feel the real pain of the energy crisis
General Energy News
Energy futures for crude oil, refined products and natural gas all plummeted during the first week of 2023, writes Reuters. Brent was down 7.3%, WTI 7.4%. Distillate futures were down 12%. U.S. natural gas tumbled about 18%. Driving the decline are growing concerns about the economy in 2023 coupled with “warmer than average” temperatures in the northern hemisphere.
Part of the concern about global economic growth in 2023 has to do with China. Many expected the relaxations of Covid related restrictions at the end of 2022 to drive growth. At EPM our view was that it would, but only after a period of economic pain as China would first go through what Europe and North America experienced in 2020 as the virus spreads and large segments of the workforce become unable to work with significant consequence on overall economic activity. This is exactly what is happening in China right now and it has led the Chinese government to raise its first batch of 2023 export quotas for refined oil products by nearly half versus a year ago to maintain refining throughputs in the face of weak domestic demand writes Reuters. The government released 18.99 million tonnes of quotas to cover mostly gasoline, diesel, and jet fuel exports up 46% (versus the 13 million tonnes allotted a year earlier). At EPM we expect this situation to remain a dominant influence during the first quarter of 2023 putting downward pressure on refining margins globally and helping in particular Europe manage the fallout of its sanctions on Russian refined products which comes into force early February.
According to hedge fund manager Pierre Andurand, once the Chinese economy returns to a post-Covid normal (is that possible?) oil prices could exceed $140 a barrel. In an interview reported on by Bloomberg, Andurand said oil demand could grow by more than 4 million barrels a day, roughly double the amount expected by leading forecasters.
Further out in 2023 Nikkei Asia writes, Daniel Yergin will be closely monitoring central bank monetary policy to support forecasting energy prices developments. Just as we do here at EPM. Yergin is quoted as saying, “I think the key thing to watch is when the central banks decide they’ve done enough to squeeze out inflation ... because that clearly is weighing on the global economy, and the global energy market and financial markets”. As to what we at EPM believe is the most likely forward trajectory for monetary policy, out view was neatly summed up by Michael Burry – the investor made famous by the 2015 movie The Big Short. He said, according to Bloomberg, “The US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike.”
The Financial Times reports EU nations imported 101 million metric tonnes of LNG in 2022, a whopping 58 percent more than in 2021. This increase was enabled by a reduction in Chinese demand; LNG imports to China in 2022 totaled “just” 64.5 million tonnes. In 2021 it was the largest global importer reaching 79 million tonnes. But, China’s liquefied natural gas (LNG) demand is forecast to recover in 2023 as the country emerges from the COVID-19 crisis; writes Reuters quoting analysts from Rystad Energy, Wood Mackenzie and ICIS. They all say demand is set to rebound to 70 to 72 million tonnes in 2023. This will of course will place upward pressure on LNG prices and affect Europe’s ability to manage the cutoff from Russian gas in the year ahead.
Geopolitics
At Bloomberg, Niall Ferguson explains why the US – China conflict will continue to drive de-globalization and why this will be “inflationary”: “In times of high interdependence (globalization), a great power needs to retain the option to revert to self-sufficiency in time of war. And self-sufficiency makes things more expensive than relying on free trade and comparative advantage.” Beyond this, he also looks at what the future might hold on this conflict, which we at EPM believe will define coming geopolitics over the coming decade: “the US today is in some ways in the situation of the British Empire in the 1930s. If it repeats the mistakes successive UK governments made in that decade, a fiscally overstretched America will fail to deter a nascent Axis-like combination of Russia, Iran and China from risking simultaneous conflict in three theaters: Eastern Europe, the Middle East and the Far East.”
Meanwhile, according to the Financial Times, the US and Japanese armed forces are rapidly integrating their command structure in preparation of a possible conflict with China in general and a war over Taiwan specifically. As part of these preparations, the Philippines plan to allow US forces to preposition weapons and other supplies on five more bases in addition to the existing five to which the US already has access.
Eurasia Group warns that with little to lose from further isolation and Western retaliation and facing intense domestic pressure to show strength, Russia could in 2023 “turn to asymmetric warfare against the West to inflict damage and weaken NATO unity” writes Nikkei Asia. The Eurasia Group also sees a possibility that under president Xi, China’s “wolf warrior” diplomacy will intensify at the expense of effective engagement. At EPM we consider these risks well-considered and reasoned. And if they were to materialize, they would clearly accelerate the trend of “regionalization” of the global economy.
Energy Transition & Technology News
Research from Energy Intelligence’s Energy Transition Service argues that, in spite of short-term headwinds, the transition is set to continue accelerating over the 2020s. This will be led by faster rollout of existing clean energy technologies and partly aided by supportive policies. 2022 saw rapid expansion of low-carbon energy technologies with China leading the way with ultra-fast deployment. Electric vehicle sales again broke records with new plug-in auto sales across China, Europe, the US, Japan, and South Korea hitting about 9 million bringing the combined fleet up to 25 million — growing at an annual rate of over 50% since 2015. Wind and solar also continued their rapid growth with new capacity added globally in 2022 and reaching around 400 gigawatts (more than double the average annual rate since 2010). For other technologies like hydrogen and carbon capture and storage (CCS), burgeoning interest and swelling pipelines of proposed projects may herald a rapid ramp-up this decade.
ENI has set up a new company dedicated to sustainable transport, which will develop bio-refining, biomethane and offer mobility products and services in Italy and abroad, writes Reuters. The move is part of ENI’s broader (Energy Transition) strategy to extract value from its diverse range of businesses by spinning off specific activities and grow them as independent entities. The move follows ENI’s 2021 establishment of Plenitude a subsidiary focused on renewable energies.
The Global Energy Crisis
In 2022, EPM repeatedly stressed European governments would not be able to provide financial support to households and businesses in order to manage energy cost increases indefinitely. And, therefore, the economic fallout of the Global Energy Crisis would begin in 2023 rather than 2022. Reuters now reports Britain’s government will soon set out how it intends to scale back the energy subsidies after finance minister Jeremy Hunt described the current programme as “unsustainably expensive”. The British Finance Ministry added. “No government can permanently shield businesses from this energy price shock”. In response, British manufacturers represented by trade body “Make UK” warned that high energy costs will force them to cut jobs and production this year writes the Financial Times.