Energy, Politics & Money - 07 December 2022 (Pt. 2)
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 part 2 of today’s roundup, EPM takes a closer look at the visit by Chinese President Xi Jinping to Saudi Arabia where he will take part in a regional summit with Saudi Crown Prince Mohammed bin Salman and other Arab leaders. We look at the conclusion that many news outlets have drawn from this, namely that Saudi Arabia is moving away from the US and trying to align itself more closely with China. We at EPM believe this conclusion is completely wrong.
We remind our readers the spat between the US and Saudi over the OPEC+ cut was largely a political play, designed to support the Democratic Party in the US Midterms. Since then, the Saudis said OPEC+ would adjust output as needed, it provided financial support on the side of the US in the Ukraine-Russia conflict, while the US granted Mohammed bin Salman immunity in the Khashoggi case. These are not signs of truly bad relations. The reality is, China is simply a very important customer of Middle Eastern oil, hence it makes sense for the Middle Eastern countries to court it.
If you don’t have time to read today’s column right away, here are some main points of today’s roundup:
Saudi Arabia’s goal of converting millions of barrels per day of crude oil into petrochemicals
TSMC’s announcement that it will bring the world's most advanced chip production technology to the US through tripling its investments there to $40 billion
Expectations around US renewable fuel production which is expected to double over coming years to 5 billion gallons per year. This translates to around 325,000 barrels per day, i.e. 1 to 2% of US daily oil demand
The IEA’s expectation regarding renewables growth – they predict it will 30% higher than what was assumed last year as the global energy crisis has made the economics of renewable power more attractive
Renewed increases in European power prices
The global Insect Apocalypse, which is likely to disrupt the fertilizer and pesticide industries – and their supply chains
General Energy News
No one is happy with the Russia price cap, except the US, says Bloomberg’s Julian Lee. Russia hates the idea of anyone else determining the price at which it can sell its oil. That’s a view shared by its fellow members of the OPEC+ producer group, who see it as a dangerous precedent for possible future action against them, too. Ukraine, the Baltic states and Poland believe the cap is set too high. The rest of Europe, already in an energy crisis, fears Russian retaliation. EPM’s view is that, indeed, the cap is a success for the US and those that proposed it. It is also a delight for China and India, for if Russian oil is cut off from Western markets, they can probably pressure Russia into granting larger discounts for shipments east.
In the previous post, we noted that Russia is considering three options to counter the price cap imposed by Western powers, Reuters reports. According to Bloomberg, there is a fourth option under consideration, which is a price floor for its international sales of Russian crude oil.
Bloomberg reports Saudi Arabia plans to allocate more than a third of its current oil output to chemical production by 2030, in a bid to squeeze more value from its barrels as the world shifts toward a low-carbon economy. The biggest crude exporter aims to convert 4 million barrels a day into higher-value products such as plastics and fertilizers by the end of the decade, Aramco Chief Executive Officer Amin Nasser said at an event in Riyadh Tuesday. It’s a shift that will require huge investment in its petrochemicals facilities. Eventually, Saudi Arabia wants to sell all of its crude output as oil products or petrochemicals said Abdulaziz bin Salman the Saudi Energy Minister.
Geopolitics
So far, it seems the US push to re-shore critical elements of the supply chain, through the CHIPS and Science Act and the Inflation Reduction Act, is working. Nikkei Asia reports TSMC will more than triple its investment in the US to $40 billion, and bring the world's most advanced chip production technology – 3-nanometer chips – to the country by 2026. From EPM’s perspective, what was most interesting in the news report was the fact that at the announcement President Biden was surrounded by a “who’s who” of technology and semiconductor manufacturing: TSMC founder Morris Chang, Chairman Mark Liu and CEO C.C. Wei, as well the CEOs of Apple, Nvidia and AMD as well as top chipmaking tool companies Applied Materials and Lam Research plus other chip-related players such as Entegris, Synopsys and Arm. This indicates in our view that there is a broad agreement in those industries about relocating manufacturing operations to the US.
Meanwhile in the Middle East, Saudi Arabia is rolling out the red carpet for Chinese president Xi Jinping. Xi will visit Saudi Arabia for several days starting Wednesday, during which he will take part in a regional summit with Saudi Crown Prince Mohammed bin Salman and other Arab leaders, writes Bloomberg. According to Bloomberg, this indicates how low relations between the US and Saudi have sunk, but at EPM we believe that conclusion is “too much too early”. As you know, our view regarding the spat over the OPEC+ quota cut was that it was a show designed for the US domestic audience.
The Saudi message at that time, that OPEC+ can adjust output as needed, coupled with its financial support on the side of the US in the Ukraine-Russia conflict, and most recently the decision by the US to give Mohammed bin Salman immunity in the Khashoggi case, all indicate relations between the US and Saudi aren’t really that bad. China is simply a very important customer of Middle Eastern oil, and increasingly a global player on the global political stage. Hence it makes sense for the Middle Eastern countries to court China. The US has indicated it accepts this, while at the same time clearly communicating there are limits to the relationships it will allow the Middle Eastern countries to have with China. We note that during the Manama Dialogue in Bahrain, Colin Kahl, Undersecretary of Defense, said the Biden administration isn't demanding countries in the region have no relations with China, but warned that if security cooperation with China “crosses a certain threshold... it (will) create security threats for us”.
Energy Transition & Technology News
Agricultural commodities trader Bunge expects US renewable diesel production capacity to more than double by 2024, from about 2 billion gallons today to about 5 billion gallons, reports Reuters. EPM did a quick back-of-the-envelope calculation to determine what this really means. It equals around 325,000 barrels per day, i.e. 1 to 2% of US daily oil demand. This highlights, in our view, the key challenge faced by biofuels – manufacturing plants produce significantly lower quantities than fossil fuel refineries, meaning the supply potential is limited and cannot meet the decarbonization ambitions of the aviation and shipping industries.
Global renewable power capacity growth is set to double over the next five years, driven by energy security concerns in the wake of Russia's invasion of Ukraine, the International Energy Agency (IEA) said according to a Reuters report. The IEA said capacity worldwide is expected to grow by 2,400 gigawatts (GW) – equal to the entire power capacity of China today – to 5,640 GW by 2027. The increase is 30% higher than the amount of growth forecast a year ago. High gas and power prices from a global energy crisis this year have made renewable power technologies more attractive.
The Global Energy Crisis
European electricity prices have surged again to crisis levels as the region faces the first cold spell of the winter, writes Javier Blas for Bloomberg. While day-ahead European wholesale power prices haven’t risen nearly as much as they did in July-August, when they briefly hit €600-€700 per megawatt-hour, they have again breached the €400-€450 zone, a level never seen before 2021-22. That jump will add to growing concerns about the loss of industrial competitiveness and the potential for companies to relocate, he adds. At the risk of sounding repetitive, this is of course what we at EPM said would happen from the very beginning of Europe’s sanctions policy against Russia, namely that it would leave Europe with an unaffordable energy bill for households and industry and this would cause social unrest (in that regard please take note of the coup that was in the making in Germany, as reported on by the Financial Times) and de-industrialization.
ESG
Bluebell, a UK activist investor with a history of taking on big companies has called on BlackRock founder Larry Fink to resign as chief executive over the “apparent hypocrisy” of the asset manager’s use of environmental, social and governance investment factors, writes the Financial Times. They contend that BlackRock has changed positions several times on investing in thermal coal production while failing to live up to Fink’s widely publicized sustainability commitments.
Other
An awareness of the impact of the “modern lifestyle” on the natural environment started growing in the 1960s, and the impact is becoming clearer to more people day to day. In EPM’s view, this is really the heart of the global sustainability. In that regard, EPM recommends close monitoring of public sentiment to see where the growing appreciation environmental awareness will lead the world next. It gave us climate change, which caused the decarbonization and energy transition push. It is going to result in a plastic pollution agreement, pushing for recycling and bioplastics at the expense of producing virgin plastic. The next focus area could well be biodiversity as evidence by this recent Reuters article on the global Insect Apocalypse which is likely to disrupt fertilizer and pesticide industries – and their supply chain.
La France ne sera pas plongée dans le noir cet hiver... Alors que la crainte de tensions sur le réseau électrique français, évoquée depuis octobre dernier, refait surface avec la baisse des températures et l'arrivée des premiers froids, la présidente de la Commission de régulation de l'énergie, Emmanuelle Wargon, est revenue ce jeudi sur les risques de coupures d'électricité dans les mois qui viennent. Miser sur les énergies renouvelables (https://re-2020.tech/la-re-2020-mise-sur-les-energies-renouvelables) serait peut bienvenue ...