Energy, Politics & Money - 10 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of Wednesday 10 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we look at:
Bearish and bullish factors at play in the price of crude oil
Opinions that explain why Taiwan will not lead to a Chinese-US conflict (in the next 18 months)
Issues impacting global supply chains are normalizing
China over takes the US and UK with 27% the world's top 1% of most cited papers
Micro-grids vs. Macro-grids - Vietnam points to the future?
Non-electric road going vehicles will top out a 1.5 Billion by 2039
The on-going energy crisis in Europe - its going to be a long winter of discontent
Record levels of European consumer energy debt and its only August.
General Energy News
Crude oil prices are being pulled in different directions as traders look to different and competing factors driving prices. Fears for a global recession were strong last week and seem to have subsided somewhat this week, possibly due to unexpected strong US employment numbers. However, Bloomberg reports, that a possible Iran nuclear deal is exerting bearish pressure and so are crude oil inventory numbers -- the American Petroleum Institute (API) reported an unofficial estimate of a 2.2 million barrel increase in the US strategic crude reserve last week and reported new storage hub construction at Cushing, Oklahoma. On the bullish side, concerns remain regarding OPEC+ spare capacity (and ability to bring it to market) and the impact of tightening sanctions on Russia resulting in interruptions on the Druzhba pipeline supplying Russian crude to (Eastern) Europe that brought concerns regarding sanctions back to the forefront yesterday.
According to OilPrice.com, Goldman Sachs’ adjusted its forecast Q3 2022 oil price - resulting from its analysis of these moving parts - lower to $110 a barrel down from its previous forecast of $140. Sachs, however, essentially maintained its original forecast for Q4 2022 at $125, coming down slightly from its original $130 forecast. Of course, in order for oil to hit these numbers, prices would have to go up significantly over coming weeks into $130s territory. We do not see anything on the horizon that would justify such a significant rapid increase but sudden changes in geopolitics can, of course, impact prices overnight.
Meanwhile, Bloomberg reports that Energy Aspects is sticking with its prediction that oil will top $120 by year end and will be driven by supply limitations. But, that’s not an average price, just a call for a moment in time almost 6 months from now. So, if you believe in the thesis that supply limitation will outweigh the impact of inflation on demand destruction, high energy prices, and an economic recession theirs is a reasonable position to hold.
Saudi petrochemical giant SABIC released its earnings this week and provided guidance for the remainder of the year. It doesn’t make for good reading and it effectively argues against crude oil price forecasts discussed above. According to Bloomberg the company said that “Due to slowdown in global GDP growth, lockdowns in China, conflict in Europe and continued supply-chain challenges, we expect margins to be under pressure in the second half of 2022”. Competitors such as BASF are facing similar logistical constraints. SABIC also warned of the impact on a slowing economy on its margins.
The Macro Environment (economics & geopolitics)
Last week we highlighted the opinion piece by James Stavridis, US General (retired) and former Supreme Allied Commander of NATO in Europe, published in Nikkei Asia. This week, Bloomberg featured another opinion piece in which he argues there are five reasons for why a military conflict between the US and China will not occur in the next 18 months (contrary to warnings from alarmists in and outside of the Biden administration). His arguments make sense and we tend to agree with them. It is abundantly clear to both sides that the costs of a China-US conflict would be enormous AND a successful outcome is not guaranteed (if anything, a conflict will result in theatre specific stalemates resulting in an unsatisfactory negotiated settlement). That’s typically not the environment in which wars start.
According to Reuters, after a week of military’s drills around Taiwan, China reported they have been “successfully completed”. The People's Liberation Army's Eastern Theatre Command said, on its official Weibo account, that its troops will keep a close eye on changes in the situation in the Taiwan strait, will continue regular patrols (air and sea), and will continue military training to enhance combat-readiness.
According to The Financial Times, supply chain disruptions are finally easing. After a turbulent 18 months, that it says were triggered by what industry specialists describe as a “perfect storm” of factors ranging from chronic under-investment, world wide Covid-19-induced closures, to a giant container ship getting stuck in the Suez Canal. Recent data points to a return to relative calm and many expect disruptions to ease further in the coming months. But, FT asks the right question: is the improving situation the result from bottlenecks being properly addressed or from a reduction in demand due to inflation? We think its probably a bit of both, but the so-called “Christmas Rush” will provide evidence as to how much current improvements are truly structural.
The Nikkei Asia reports findings from Japan's science and technology ministry that China now leads the world both in the number of scientific research papers as well as most cited papers. It notes that Chinese research accounted for 27.2%, or 4,744, of the world's top 1% of most cited papers. This overtakes the U.S. which is now at 24.9%, or 4,330 while the U.K. came in third at 5.5%.
Energy Transition & Technology News
Nikkei Asia reports a spectacular development involving TotalEnergies on the solar front in Vietnam where it will provide solar power to industrial property developer KCN Vietnam. The deal puts 280,000 square meters of solar panels on factory and warehouse roofs and will pump out 51 gigawatt-hours of electricity a year. TotalEnergies will operate the photovoltaics for 20 years. It is our view that the move to renewables and the electrification of transport creates an environment more suitable for developing micro-grid than macro-grids. Consequently, we see opportunities arising for collaboration between energy companies and real estate developers - future real-estate projects will be designed and built featuring a microgrid. From our vantage, this is exactly what TotalEnergies plans to do in Vietnam.
The Electrification of Transport
Bloomberg New Energy Finance’s transport research tends to focus on decarbonization and how drive trains are evolving. It is also focused on the number of Internal Combustion Engine (ICE) vehicles on the road. It predicts that the ICE vehicle fleet will continue to grow for at least another decade - from 1.2 billion to a record of just over 1.5 billion by 2039 - with annual sales peaking in 2036. The limiting factor, BNEF say, is population growth. Europe’s working-age population will drop 11% by 2040 while Japan and South Korea’s will shrink by more than 20%. China — the world’s largest auto market — will see its working-age population contract by 14%. Over the same period the share of the global population 69 years or older will rise to 10% from 4%. Urbanization in developing countries is another limiting factor. The BNEF expects many new urbanites to prefer two-wheelers over cars. And, the third limiting factor is market penetration and adoption of autonomous electric vehicles. These are likely to be robotaxis - available 24/7 - with usage rates at levels much higher than privately owned vehicles.
The Global Energy Crisis
On Monday we highlighted problem high energy prices are causing Dutch households which are showing themselves in increasing numbers of contracts that are in arrears. Bloomberg reports the UK is experiencing something similar. UK households are a record £1.3 billion in debt to their energy suppliers ahead of winter when bills are expected to surge yet again. Consumers typically build up credit with their providers during the summer — when energy usage eases — limiting the financial shock of higher consumption during the winter. But, soaring gas and power prices have made this summer expensive and have fueled warnings of an even bigger crisis in the coming colder months.
Meanwhile, over in Germany Reuters reports the gas network regulator - the body in charge of gas rationing in the event of a supply emergency - has received scores of exemption requests from across industry. This clearly indicates how damaging the energy crisis is and can be for the German economy – something we believe is currently underestimated by many.
An opinion piece in The Financial Times argues that Europe, including Germany, is capable of managing the energy crisis over the coming winter. But, only if efforts on energy substitution, conservation, and solidarity can be successfully delivered. Gas substitution - primarily by moving to coal - is already underway (with of course awful implications for increasing emissions, but we will put that aside for the moment). Conservation will happen, simply because prices will make electricity and heating unaffordable for many households and businesses and force them to (partially) cut consumption. This might be construed as a “victory in the energy crisis”, but we see it as a loss – in the broader context this development means increased suffering for European citizens and an increased threat of economic crisis for European industry. As to solidarity - we discussed this point earlier - when we stated we are not optimistic. It is a necessary move, but Europe has a poor history and track record in solidarity efforts and we expect this to be reaffirmed when gas shortages become reality.