Energy, Politics & Money - 10 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we take a closer look at diplomatic moves in China last week, where French president Macron met the Chinese President Xi, who gave the EU Commission President Von der Leyen the cold shoulder, while embracing former Taiwanese President Ma Ying-jeou. The views of Macron and Ma Ying-jeou regarding China are fundamentally at odds with those of the US and its core allies.
In EPM’s view this indicates that there is no solid front on the side of the US and its allies when it comes to China. In most countries allied with the US in its economic and military confrontation of China, there are powerful political forces that disagree with this policy. This means that in many countries local politics are likely to become more unstable due to the US – China rivalry.
Furthermore, we look at:
ExxonMobil’s interest in buying Pioneer Natural Resources, the Permian fracking giant with a $49 billion market cap
China's military drills of an aerial and naval blockade of Taiwan
The true meaning of Saudi Arabia’s recent maneuvers on the international scene
The cracks that are appearing in Europe’s commercial real estate market
COP28 president Sultan Al Jaber’s vision for the next climate meet, which to us at EPM sounds more like a pitch for a conventional “oil & gas company energy transition strategy” than a climate change action plan
Walmart’s plans to add electric vehicle charging stations to its thousands of US stores by 2030
Europe’s failure to lock in long-term contracts for LNG as an alternative to Russian pipeline supply, which may prove costly next winter as a rebound in Chinese demand could sharply tighten the market
General Energy News
ExxonMobil has held informal, early-stage talks to buy Pioneer Natural Resources, the US fracking giant which has a $49 billion market cap, writes the Wall Street Journal. ExxonMobil is flush with cash and, according to people familiar with the company’s plans, has been exploring options that could reshape a swath of the US oil-and-gas industry while pushing it deeper into West Texas shale. Pioneer is the largest oil producer in the Permian and holds vast reserves of oil in America’s most-coveted fracking hot spot.
Macroeconomics
Commercial real estate property owners are having to contend with a rapid increase in borrowing costs, while the post-pandemic era is changing office life, reducing demand for offices. In Europe, this is starting to create issues, writes the Financial Times. Offices are the largest component of a commercial property market which lenders and investors have backed with €1.5tn of debt in Europe alone. About €310bn of new or replacement borrowing is issued to keep the market moving in a typical year. Property prices have already fallen sharply in recent months while older buildings in peripheral locations are becoming much harder to sell. Analysts at Citi warned clients late last month that European real estate values had still not fully factored in rising interest rates and could fall by up to 40 per cent by the end of 2024. In what is now a common phenomenon, the analysis presents a whole range of reasons why “this will not be like 2008”, but in the EPM view this sidesteps the real issue – economic pain is coming and it will have the be borne by someone; and considering the size of this market, it is likely secondary effects will affect almost everyone.
Geopolitics
Politico reviews the meeting between French president Macron and Chinese president Xi in Beijing last week. Macron’s fundamental view, it says, it that Europe must reduce its dependency on the United States and avoid getting dragged into a confrontation between China and the US over Taiwan. To achieve this, Macron calls upon Europe to aim for “strategic autonomy” and become a “third superpower”. The EPM perspective is that this view noticeably differs from the one espoused by European Commission President Ursula von der Leyen, who also was in China at the same time – and very much received the Chinese version of the “cold shoulder”. While Von der Leyen lectured the Chinese, saying “Stability in the Taiwan Strait is of paramount importance” and “The threat [of] the use of force to change the status quo is unacceptable” Macron, on the exact same topic, countered with:
Europeans cannot resolve the crisis in Ukraine; how can we credibly say on Taiwan, ‘watch out, if you do something wrong we will be there’? If you really want to increase tensions that’s the way to do it.
According to Reuters, China jumped on the opportunity to further drive a wedge between the US and Europe, giving Macron an unusually lavish welcome. Von der Leyen, meanwhile, who described China as "repressive" in a critical speech before her trip, received a low-key greeting at the airport and was not invited to some state functions with Xi and Macron.
So, what to make of this all? Well, clearly there is no consensus in Europe on the Atlantic Alliance, and the continent’s position in the Ukraine War. China and Russia should be expected to try and work with France more closely, and unless Germany is won over for Macron’s view as well, this will cause the schism to further in Europe – putting at risk EU support for Ukraine, Nato and even the EU project. So this could be big!
Nikkei Asia reviews the trip of former Taiwanese president Ma Ying-jeou to Beijing over recent weeks. "Our administration continues to lead Taiwan to danger", Ma told reporters at Taiwan's main airport after arriving from Shanghai at the end of his 12-day visit to China. "The future is a choice between peace and war".
In EPM’s view this too indicates that there is no solid front on the side of the US and its allies when it comes to China. In most of the countries that have allied with the US in its economic and military confrontation of China, there are powerful political forces that do not agree with this policy. This means that in many countries local politics are likely to become more unstable due to the US – China rivalry.
Meanwhile, in response to the meeting between Taiwan's President Tsai Ing-wen and US House of Representatives Speaker Kevin McCarthy, China's military is practicing an aerial and naval blockade of Taiwan, reports Reuters. In EPM’s view this provides clear guidance as to what the next step in the escalation towards all-out war over Taiwan will look like. The global economy could not survive a blockade of Taiwan, whose central role in semiconductor industry will impose the consequence that all industries globally requiring semiconductors would very quickly come to standstill in case the island is blockaded by China. Which would leave the US very much incentivized to ask its allies in the region to militarily respond (as well as making extensive investments in micro-chip manufacturing).
Lastly in geopolitics, a review of Saudi Arabia’s recent moves on the international scene, which have caused a large amount of speculation about the US role in the Middle East and the petrodollar. A thoughtful Bloomberg opinion piece says Saudi Arabia is indeed spreading its wings, but it’s doing so within a US umbrella – and it’s being very careful not to challenge the fundamental partnership with Washington.
Climate Politics
The world needs a “business mindset” to tackle the climate crisis, Sultan Al Jaber, the president of the next UN climate summit COP28 in the Emirates, has said according to The Guardian. His self-stated aim is to use the UN talks to set out how the private sector can limit greenhouse gas emissions and give businesses and governments a clear set of tasks and targets. To achieve this, Al Jaber wants the private sector to play a significant role at the summit, arguing that companies – including oil and gas firms – will be pivotal to tackling the climate crisis. He said:
The energy sector must work as a partner with other sectors to help decarbonise entire economies.
Al Jaber also spoke to the Guardian of the need to invest in new technologies such as hydrogen and carbon capture and storage (CCS), which some activists are likely to find controversial:
I want to make sure that Cop28 becomes a rallying point for partnerships across every region to commercialise hydrogen production, transportation and industrial use.
The Guardian notes that Al Jaber’s plans are unlikely to find favour with climate activists at the talks, which is something we at EPM fully agree with, because this narrative sounds more like a pitch for a conventional “oil & gas company energy transition strategy” than a climate change action plan.
The Electrification of Transport
Walmart announced plans to add electric vehicle charging stations to its thousands of US stores by 2030, writes CNBC. Walmart’s more than 4,700 stores and 600 Sam’s Clubs are located within 10 miles of around 90% of Americans. This ties in with EPM’s thesis regarding the electrification of transportation, which rests on two pillars, namely battery technology innovation driving the cost of EV manufacturing down to below that of ICEVs (by around 2025), and charging becoming ubiquitous (at home, at work and at the shop).
The Global Energy Crisis
Europe has not made enough progress in locking in long-term contracts for liquefied natural gas (LNG) as an alternative to Russian pipeline supply, which may prove costly next winter as a rebound in Chinese demand could sharply tighten the market, writes Reuters. Buying LNG to replace curtailed Russian flows helped the bloc weather the first winter of the Ukraine conflict, with Europe importing 121 million tonnes of the fuel in 2022, a 60% increase from 2021. But that came at a cost: Europe bought largely on the spot market, where prices are much higher than those negotiated under long-term deals favoured by seasoned buyers like China. According to the International Energy Agency, the cost of its LNG imports more than tripled in 2022 to some $190 billion. One analyst is quoted saying:
Since the green lobby in Europe has managed to persuade politicians wrongly that hydrogen to a large extent can replace natural gas as an energy carrier by 2030, Europe has become far too reliant on spot and short-term purchases of LNG.
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