Energy, Politics & Money - 08 November 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in chaotic times!
In this roundup, EPM takes a look at the overall tone at COP27. The narrative and conversation have been framed, more and more so now, as an urgent matter of life and death. We at EPM understand why: the global macro environment (driven by fear of war or coming war, energy insecurity, and inflation) has shifted priorities away from climate change to matters such as keeping the lights on, keeping warm in winter, and finding affordable food for nourishment – not only in the developing world but also in the developed world. At EPM, we’re not in the habit of judging which issue is more important, but certainly the latter are more urgent. The ratcheting up of the language at the latest COP will not change the direction of actual policy, we therefore believe, and it will worsen polarization in society about the issue of climate change, decarbonization and the energy transition more broadly.
Furthermore, we look at:
How the mid-term elections in the US could affect the global energy markets, considering how Trumpists appear to be truly changing the Republican Party in the US
Shell’s new commercial deal with Raízen about biofuels from second-generation ethanol (E2G) technology
Tesla’s industry leading earnings per car, on which measure the company not only outperforms Toyota but even companies such as Mercedes and Audi
A Bloomberg summary of our EPM view as to how the global energy crisis will play out, and the long-lasting effects it will have on the economy, society, and (geo)politics including climate change and the energy transition
The financial stress experienced by European households, with one in four describing their financial position as “precarious”, more than half see a serious risk it will become so over the coming months, and 80% have already been forced into hard spending choices
General Energy News
Over at Forbes analysts from Wood Mackenzie review how a Republican victory and – resulting – control of the US Congress could affect energy policy as America heads to the polls for mid-term elections. In summary, a Republican victory will usher in a change in priorities. Broadly, one-third of the members of the Energy and Commerce Committee could change. This will shift the national debate from Democrat-led policies that focus on emissions reductions to Republican priorities focused on maximising American hydrocarbon resources as outlined in the House Republican energy and climate strategy.
Macro-Economics
In an interview, Paul Hodges of New Normal explains the recent decreases in chemicals margins, arguing they are a sign the global economy has indeed entered a recession.
Geopolitics
The Financial Times looks at how the Republican Party in the US is changing, saying it is doubling down on Trumpist candidates, as many of Trump’s preferred candidates for office prevailed in primary contests across the country, setting them up as their party’s standard bearers. This, we at EPM believe is a key issue: as far as the subjects that really matter go, in particular geopolitical subjects, historically there has been surprisingly little difference between Democrats and Republicans in the US, which explains the amazing longer-term continuity in US foreign policy, despite elections every 2 years. For this reason we are used to not paying much attention to the language that is used by either side during election times, which typically casts the parties as on opposite sides which – again, on critical issues – they rarely truly were. But this assessment regards the traditional Democratic and Republican politicians. Traditional Republicans (in the tradition of Nixon, Reagan, Bush) are being steadily pushed out by the growing Trumpian faction inside the Republican Party, which seems to have fundamentally different perspective on matters that are of critical importance, geopolitics included.
Energy Transition & Technology News
Shell and Raízen have announced that Shell has agreed to buy a total of 3.25 billion litres of sugar-cane cellulosic ethanol under a long-term agreement from Raízen. The low-carbon fuel is expected to be produced by five plants that Raízen plans to build in Brazil, bringing its total portfolio of cellulosic ethanol facilities to nine. The low carbon fuel is made from sugar-cane waste. We at EPM are excited about this approach to making biofuels because it does not compete with food production or incentivize deforestation, but instead makes use of a waste product that otherwise gets landfilled or burned. By making use of sugar-cane waste, Raízen’s second-generation ethanol (E2G) technology can produce about 50% more ethanol from the same amount of land. Raízen expects to invest around $1.5 billion in the new plants, the first of which is expected to be operational by 2025 and the last by the end of 2027.
Climate Politics
An update on development at COP27. Another major energy producer has formally committed to decarbonization, as Kuwait says it will be carbon neutral in the oil and gas sector by 2050, and in the whole country by 2060, reports Reuters.
The overall tone at the conference, Reuters reports, frames climate change as a battle for survival, with the head of the United Nations declaring a lack of progress so far had the world speeding down a “highway to hell”. This will not do much to change the current course, we at EPM believe, however. Priorities have shifted, as they only can during a period of significant upheaval. The subject energy security is back with a vengeance, inflation is having a devastating impact on households, while the global economy is being pushed into recession by monetary policy around the world. In this economic environment, less and less of the commitment will translate into concrete action, at the country and company level. EPM explained how and why over the past week another example of this is the news Japan will delay plans to revise how it taxes carbon to focus government efforts on the fight against surging living costs instead, as reported by Bloomberg. It is natural for climate change focused politicians to address this by ratcheting up the language, but this will only increase polarization in society, not change priorities.
Another reason we at EPM believe COP27 will not translate into more action on the ground, just more promises and commitments, is that practical reality stands in the way of doing much more. Again Reuters reports the developing world will require $1 trillion per year to cut emissions, boost resilience, and deal with damage from climate change including restoration of nature and land. Obviously, this is an impossible amount, and will incentivize many in the developing world to conclude, “if it is practically impossible for us to totally decarbonize then why bother with it at all, let the developed world who caused the current issue to deal with it first!”.
Comments such as those by former UK prime minister Boris Johnson, who was quoted by The Financial Times as saying “per capita, people in the UK put a lot of carbon in the atmosphere, but what we cannot do I’m afraid is make up for that with some sort of reparations, we simply do not have the financial resources”, only serve to convince the developing world that they are morally justified in de-prioritizing the climate agenda.
The Electrification of Transport
Tesla earned eight times as much profit per vehicle as Toyota in the July-September quarter, while being outsold more than 7 to 1, a Nikkei Asia analysis has shown. Tesla’s success stems largely from the profitability of each of its cars. The Toyota group sold 2.62 million vehicles in the quarter, 7.6 times as many as Tesla’s 344,000. But its net profit per vehicle came to around $1,200 -- just one-eighth of Tesla’s $9,570. Tesla is believed to lead the industry in terms of net profit per vehicle sold, even ahead of players like Mercedes-Benz. Key to Tesla’s success is it brand, which has enabled it to raise prices to pass on higher material costs to customers, unlike many conventional car manufacturers. Other factors are Tesla manufacturing process (e.g. the so-called Giga Press casting machines to reduce the steps needed for assembly, which could undercut quality but speed up mass-production) and approach to marketing (directly online rather than through dealerships).
The Global Energy Crisis
Bloomberg looks at how the global energy crisis is likely to play out holistically, looking at the economic, social and (geo)political implications, as well as the impact on climate change and the energy transition. At EPM we note, Bloomberg’s analysis is in essence a fantastic summary of everything we forewarned over recent months. Europe will survive the winter, It’s bought enough oil and gas to get through the heating seasons, but bills will be high, causing harm in society and deindustrializing the content. Even deeper costs will be borne by the world’s poorest countries, which have been shut out of the natural gas market by Europe’s suddenly ravenous demand. This has left emerging market countries unable to meet today’s needs or tomorrow’s, and the most likely consequences — factory shutdowns, more frequent and longer-lasting power shortages, the foment of social unrest — could stretch into the next decade. The strong US dollar has only complicated the situation, forcing developing nations to choose between buying fuel and making debt payments. Under these circumstances, a shift to coal is rational, meaning that in addition to worsening the global economic recession, the energy crisis will also cause global emission to rise and efforts at decarbonization to reduce.
One in four Europeans describe their financial position as “precarious”, more than half see a serious risk it will become so over the coming months, and 80% have already been forced into hard spending choices, according to a survey reported on by The Guardian. French anti-poverty NGO Secours Populaire, which organized the survey through Ipsos, painted an alarming picture of “a continent on the brink”. Obviously, we say at EPM, this will cause a broad economic problem for Europe, as energy and general inflation is “crowding out” a large part of discretionary spending. Beyond economic ramifications, the political implications should not be underestimated – especially if this winter were to turn colder than usual.