Energy Politics & Money - 08 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
It’s been a weekend busy with study and analysis for EPM, which has translated to this extensive roundup of the things that matter most in the inter-connected worlds of energy, politics and money. We look at:
Russia’s commitment to its 500,000 barrels per day crude oil production cut
The massive problems made by the trading arms of the world’s largest international oil and gas companies
The disappointment among US and European businesses regarding China’s bounce-back from Covid-19 lockdowns; a feeling we at EPM don’t share as from the beginning our forecast was a slow and gradual improvement
The view of Stanford Graduate School of Business professor Amit Seru that the banking crisis is only just beginning
Nouriel Roubini’s view that fragmentation of the global economy, and decoupling of a US-led bock from a China-led block, are becoming the new normal; with hot war being an outlier possibility
The lay-offs or hiring freezes in Europe, resulting from decades-high inflation and the impact of war in Ukraine
The speech by US National Security Advisor Jake Sullivan, that set out the geostrategic vision of the Biden Administration, what has been termed the “new Washington consensus”
US policy vis-à-vis China, the goal of which appears to be China’s unconditional surrender; as well as the mindset that underlies it, which is similar to the mindset from which US Cold War policy resulted and is “military confrontation” focused
The Global Decarbonization Alliance, an initiative of the organizers of COP28, designed to focus the decarbonization conversation on the oil and gas industry’s scope 1 and 2 emissions, not scope 3
The coming consolidation in China’s EV market
The German economy ministry’s misguided and desperate plan to keep heavy industry alive in the country, by subsidizing 80 per cent of the electricity cost for energy-intensive companies
The Institutional Shareholder Services recommendation to Shell shareholders that they should vote against a proposal to bring the company’s decarbonization strategy in line with the Paris Climate Accord, because that would require “a change in strategy from the one that Shell has adopted”
Crocs’ pushing back of its Net Zero target from 2030 to 2040
General Energy News
Speculators are once again fleeing the oil market, writes Bloomberg. Money managers dumped their net-bullish oil holdings by 19%, the biggest drop in six weeks. The positions are now at the lowest seasonal level in more than a decade, and is linked to the recent decline in oil prices, as well as the surprise shocks caused by among other the OPEC+ quota cut. Bloomberg believes fewer speculators is bad, because historically it has caused larger price swings. OPEC+ disagrees, we at EPM believe, since it said that one of the aims of its recent quota cut was to punish speculators.
Russia is abiding by its voluntary pledge to cut oil output by 500,000 barrels per day (bpd) from February until the end of the year, Deputy Prime Minister Alexander Novak said according to Reuters.
Shell, BP and TotalEnergies made more money buying and selling oil, gas and power last year than the four biggest private energy traders, according to new estimates, writes the Financial Times. The European energy majors’ commodity trading divisions last year contributed about $16.6bn in EBITDA at Shell, $11.5bn at Total and $8.4bn at BP, according to Bernstein Research estimates. In contrast, the four biggest private energy traders — Vitol, Trafigura, Mercuria and Gunvor — made combined energy trading earnings last year of about $34bn. The huge profits were driven by the fallout of Russia’s war on Ukraine, which upended energy markets.
Macroeconomics
US and European businesses say they overestimated how quickly China country would bounce back from Covid-19 lockdowns, writes the Financial Times. “The overall expectation was, following the reopening, the China market was going to bounce back,” Qualcomm chief executive Cristiano Renno Amon told analysts on Wednesday. “We have not seen those signs yet.” At EPM we believe we called this one correctly for our readers, as we said from the beginning that the reopening should not be expected to have an immediate impact. In fact, we said there would be a gradual improvement, which could take 6 months to complete.
In the New York Times Stanford Graduate School of Business professor Amit Seru writes we should be worried about the US banking crisis. The rise in interest rates has caused the value of bank investments to drop significantly, which creates the risk of insolvency (when assets are worth less than liabilities), he says. This is why investors are running away from US banking stocks, causing the collapse on values that we have seen over recent weeks. And he provides a sense of the size of the issue: some $2 trillion in mark-to-market losses, which when accounted for will cause around half of the US’s 4,800 bank to become insolvent. Another cause of concern for professor Seru is the commercial real estate market. Commercial real estate loans, worth $2.7 trillion in the United States, make up around a quarter of an average bank’s assets. Many of these loans are coming due in the next few years, and refinancing them at higher rates naturally increases the risk of default. Together with the Covid-19 induced changes in working patterns, i.e. the increase in working-from-home, this means another significant source for banking stress is building. In the EPM perspective, the professor has provided the valuable numbers that support our thesis that the banking crisis is inevitable, and still only just beginning. We have reported on both causes of this banking crisis over recent months, and recollect from that that they are present not only in the US, but also significantly in Europe.
At Project Syndicate, Nouriel Roubini provides a summary of what he saw and learned at the China Development Forum (CDF) in Beijing, an annual gathering of senior foreign business leaders, academics, former policymakers, and top Chinese officials. China was not convinced by US Treasury Secretary Janet Yellen’s recent comment that the US is not trying to “contain” China’s rise or decouple from its economy, in part because at the same time, the US is reportedly planning to introduce far-reaching restrictions on Chinese investments in the US and on US investments in China. In response to the obvious US maneuverings, China is currently trying to drive a wedge between the European Union and the US, Roubini says, and given that EU-based companies have significant interests in China, many European CEOs attended the CDF – In contrast to the limited presence of American business leaders. He concludes that fragmentation and decoupling are becoming the new normal, the two countries remain on a collision course, and a dangerous deepening of the ongoing “geopolitical depression” is all but inevitable.
Over in Europe, decades-high inflation and the impact of war in Ukraine have forced companies across Europe into lay-offs or hiring freezes, writes Reuters, which also provides an overview of companies that have made announcements in this regard. At EPM, we forewarned this would happen, for the two reasons mentioned by Reuters. Among the knock-on effects we have discussed is the impact on the housing market. Higher interest rates depress the real estate markets, obviously, as they make new loans more expensive. In the best of situations, that push a pause button for the market, as people stop selling knowing that a new property will come at a significantly higher interest cost. In an economic downturn, however, when people become forced to sell as they lose income, this creates a more significant problem. Supply up but demand down will mean prices down hard.
Geopolitics
US National Security Advisor Jake Sullivan set out the geostrategic vision of the Biden Administration during a recent speech at the Brookings Institution. The last few decades revealed cracks in the foundations of the international system built at Bretton Woods in 1944, he says. “A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class. A pandemic exposed the fragility of our supply chains. A changing climate threatened lives and livelihoods. Russia’s invasion of Ukraine underscored the risks of overdependence.” In response, the United States, under President Biden, is pursuing a modern industrial and innovation strategy, he says, a “new Washington consensus”.
The first step is laying a new foundation at home—with a modern American industrial strategy, which identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn’t poised to make the investments needed to secure our national ambitions, and supports them through targeted public investments. At EPM we note, this is where the CHIPS Act and IRA come in.
The second step in the strategy: working with partners to ensure they are building capacity, resilience, and inclusiveness, too. This is where EPM notes the Ukraine War has come in handy from a US perspective, because it provided the US just the argument it needed to drive certain policies that it would like to see at their allies forward, most importantly investment in defense, such that the US allies become stronger allies militarily, and less reliant on the US such that the US can focus its military more on China.
The third step in the strategy: moving beyond traditional trade deals to innovative new international economic partnerships focused on the core challenges of our time. In this area the stated objectives are creating diversified and resilient supply chains; mobilizing public and private investment for a just clean energy transition and sustainable economic growth; creating good jobs along the way, family-supporting jobs; ensuring trust, safety, and openness in our digital infrastructure; stopping a race-to-the-bottom in corporate taxation; enhancing protections for labor and the environment; tackling corruption.
The EPM perspective on this, is that these stated objectives are indeed a different set of fundamental priorities than the bringing down of tariffs that was the objective since the 1990. We also note that there is an important unstated objective, which really underlies all of these, which is about China: ending dependency on the Chinese economy and preventing the Chinese economy from developing further, such that China as a country will never develop the economic, diplomatic and military power that could undermine the US hegemonic role in the world.
In all, the EPM view is that the “new Washington consensus” is excellent from an analytical perspective, for in our view it has analyzed the current situation and what caused it correctly, and offers a coherent set of practical actions to resolve these issues in a way that would benefit the US. Unlike Europe, the US knows what is happening and what it needs to do about it. Europe, on the other hand, seems clueless, divided, and ad-hoc.
An opinion piece over at The National Interest reviews US policy vis-à-vis China, and concludes
Washington is embracing an almost exclusively competitive approach to Beijing that has many of the earmarks of the militarized, zero-sum containment strategy it pursued against the Soviet Union. The goal similarly appears to be China’s unconditional surrender.
The mindset behind the current policy is a copy of the mindset that existed in US policy-making circles during the Cold War, it argues, which includes the belief that China is out for global domination, is preparing for a military confrontation of America, and as such is in essence an aggressive state; not a state which is responding diplomatically, militarily and economically to the environment it finds itself in. As a result of this mindset, diplomacy with China is considered useless at best, a sign of weakness at worst. And peaceful coexistence a fantasy.
Climate Politics
COP28 is likely to feature a new initiative from the global oil and gas industry, writes the Financial Times. Provisionally named the Global Decarbonization Alliance, it will set a goal of reaching net zero emissions by 2050 from direct emissions and emissions derived from the energy the companies purchase, known as scope 1 and 2, an initiating letter seen by FT says.
The Electrification of Transport
Players in the world's largest EV market project that the number of electric-car makers in China will shrink from around 200 to between five and 10 in the coming years, writes Nikkei Asia. The EPM perspective is that, in its usual fashion, in order to drive the industry forward, the Chinese government in the past provided lavish subsidies for EV making and buying over recent years, which created an “oversupply of companies”. As the market matures, the government is now pulling back, leaving these companies to fight it out, in true capitalist fashion. The resulting industry will be more efficient, and stand ready to export their products globally, capturing significant market share in all countries where there is an interest in going electric.
The Global Energy Crisis
The German economy ministry plans to subsidise 80 per cent of the electricity cost for energy-intensive companies, writes the Financial Times. In other words, at least in the EPM view, the German government recognizes that its energy policies of the past year have caused energy prices that leave German industry uncompetitive in the global market place – something we have highlighted and warned for repeatedly. The German governments solution is not to backtrack, and correct past mistakes, but to add a further mistake: more state-intervention in the market through more subsidies. Under a long-awaited and highly contentious proposal published by Green economy minister Robert Habeck, a large part of German industry would be offered electricity at a subsidised price of €0.06 per kilowatt hour (kWh) until 2030. The plan, which would cost an estimated €25-30bn, is aimed at bolstering German manufacturers in sectors such as chemicals, steel, metal and glass, as well as encouraging European investment in industries seen as crucial to reducing EU dependence on China, such as the production of solar panels and semiconductors. How will this €25-30bn be paid for, you wonder? No information has been forthcoming in that regard, but it can not be but through higher taxes on other parts of the economy – a further disruption of the market system.
Other
Proxy advisory firm Institutional Shareholder Services (ISS) has urged Shell shareholders to vote against a proposal of activist investor Follow This to bring Shells decarbonization strategy in line with the Paris Climate Accord, writes Reuters. Shell aims to cut the intensity of planet-warming gases across its portfolio and the use of its products by 20% by 2030 and 100% by 2050. It has ruled out setting absolute emissions cuts targets, including the combustion of its products. This means the company can increase its fossil fuel output and overall emissions, while using offsets or adding renewable energy or biofuels to its product mix. Follow This therefore wants Shell to adopt a decarbonization strategy that aims at reducing absolute emissions. ISS is against this proposal because it would require “a change in strategy from the one that Shell has adopted”. This is among the strangest arguments we at EPM have ever heard off. After all, what’s the point of a shareholder meeting if it is not about discussing changes to a company’s strategy? Anyway. The saga indicates, to us, that a significant portion of shareholders do not really believe in decarbonization, and stand ready to use any opportunity to reduce the focus of energy companies (or any other company, for that matter) to lower the focus on this objective.
Crocs, the maker of the iconic (and weirdly comfortable) plastic shoes, has updated its decarbonization targets. It has pushed back its Net Zero target across all scopes of emissions from 2030 to 2040, writes Edie. The new 2040 goal is “still ambitious” but “more credible and realistic”, the company says.