Energy, Politics & Money - 10 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we take a closer look at the US Treasury Secretary Janet Yellen visit to China. In short, our opinion is that the Chinese view on talks has changed. We believe that the following the recent Blinken visit, the Chinese have lost hope that the US could be made to backtrack on its policy of military encirclement and economic decoupling vis-à-vis China through diplomacy. That is why we believe China introduced its export controls on gallium and germanium now, and not earlier. And why we believe China will gradually introduce more such measures, while accelerating its preparations for war, because the US measures are designed to permanently subordinate China to the US. At the same time, we do not believe China will end diplomatic communications with the US. This is evidenced by the fact that it has agreed to a visit by John Kerry to talk climate. But, in these diplomatic engagements, China will sit back and wait, telling every US visitor “first show your goodwill by undoing some of your past decisions” – which no US visitor will agree to doing, we expect.
Furthermore, we look at:
The massive buildout of petrochemicals capacity in China, which will affect oil company profits in the short term, hinder their ability to manage the decline in transportation fuels that results from the electrification of transport in the medium term, and risks creating another western dependency on China over the long term
The view of Patrick Pouyanné, CEO of TotalEnergies, the US could possibly decide to ban hydrocarbon exports, which in his description would be a “super shock” to the global economy
The growth in oil production of the fourth largest oil producer globally: China
The interview with Agustin Carstens, general manager of the Bank for International Settlements
The key elements of the economic support package that China is likely developing at present
Nouriel Roubini’s four scenarios for the global economic outlook
The visit by Russian navy chief Nikolai Yevmenov to China
France’s objections to expanding NATO’s reach into Asia, and why discussions on the subject at the upcoming NATO summit in Vilnius, Lithuania, will provide important insight into how transatlantic relations are likely to develop
The new attention to geothermal in Europe
The IMO adoption of a net zero target for 2050, with 20 – 30% GHG reduction targeted by 2030 and 70 – 80% by 2040
The "Chinese storm" that is looming over Europe's growing electric vehicle (EV) sector, according to Renault Chairman Jean-Dominique Senard
The view that the “minerals constraint” on the electrification of transport might not be a bad as first thought, as EV manufacturers are engineering their cars away from the use of minerals where the constraints are expected to be the worst
The relief the directors of Shell’s board must feel, as the UK High Court throws out a case against them for “allowing Shell to not manage emissions and climate change risk properly”
General Energy News
The plastics industry is staring down years of anemic margins as giant plants in China look set to send a deluge of production into the market, writes Bloomberg. The construction of more than 20 petrochemical projects — to produce raw materials that go into making everything from plastic packaging to clothing and detergents — will be completed across China this year. Unable to take on more at home, China is exporting more cheap plastics into the rest of the region, eating into the market share of traditional manufacturing giants, such as South Korea and Japan. As a result, returns for making petrochemicals such as ethylene and polypropylene are set to shrink, extending a malaise from this year when June margins stood at about 40% below 2019 levels. This will affect profitability of oil companies with (integrated) petrochemical businesses, EPM notes. Additionally, it calls into question the strategy of the oil industry to deal with an expected decline in gasoline and diesel demand due to the electrification of transport, which is to convert many of these molecules into petrochemicals. China’s development raises the question, “will there be demand for these volumes?”. There is also a geopolitical implication, of course. Bloomberg quotes one analyst as saying:
The West will one day wake up to China as the single biggest supplier of all things plastics, as more mature economies in the US, Europe and places such as Australia drastically cut back on production without addressing their continued need for these materials.
Patrick Pouyanné, the chief executive of French oil major TotalEnergies, has said he believes it is possible that the US will ban hydrocarbon exports, writes Reuters
The only thing that could happen, which is a major systemic risk, is that the Republicans decide to stop exporting ... In fact, I am not even sure it would be gas, it could be oil one day. Americans base all their policies on the domestic price of gas or oil, they have resources, and if they feel that exports are driving their prices up, they block us. Now, I can tell you that, if in addition to the Russians, we lose American gas and oil, it is not a shock, it is a super shock.
The Biden administration announced Friday it’s purchasing 6 million more barrels of crude oil for the Strategic Petroleum Reserve as it continues to slowly refill the emergency stockpile, writes Bloomberg.
Spending billions of dollars via its state-owned energy giants China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec) and CNOOC Ltd., Beijing has been able to reverse the decline in domestic oil production that started in 2015, lifting output this year to a near all-time high, writes Javier Blas for Bloomberg. From the low point in 2018 to the peak in 2023, China has added more than 600,000 barrels a day of extra production – to producing more crude than some OPEC+ nations daily. Pumping about 4.3 million barrels a day now, China is again the world’s fourth-largest oil producer, only behind the US, Saudi Arabia and Russia, and ahead of Iraq. It’s an expensive enterprise. Last year, CNPC, Sinopec and CNOOC devoted about $80 billion to capital spending – more than ExxonMobil, Chevron, Shell, TotalEnergies and BP combined. Anywhere else, such colossal spending would be seen as wasteful, particularly when measured in barrels of oil per day. But in China, preserving energy independence takes precedence over the profit and loss accounts of its state-owned energy companies.
Macroeconomics
Nikkei Asia carries an interview with Agustin Carstens, general manager of the Bank for International Settlements. While central banks have been criticized for being behind the curve on responding to the global surge in prices, Carstens said that many different factors besides monetary stimulus have contributed to inflation, including supply chain and commodity market disruptions. "Inflation is not 100% determined by central banks," he said. He also said that "both fiscal and monetary policy are near the limits of what they can do" to stimulate the economy.
The end of COVID-19 lockdowns in China was supposed to unleash a powerful wave of pent-up demand, writes Project Syndicate. With a few exceptions, such as the new-energy-vehicle (NEV) sector, economic activity has remained subdued. As a result, growth has been much weaker than expected. A policy package aimed at supporting the economic recovery is most likely on its way, it says. And, that a recent briefing by China’s National Development and Reform Commission indicated that such a package would include interventions aimed at raising wages and supporting low-income households to boost consumption spending. Funding curbs on property developers may also be loosened, in order to reinvigorate the real-estate sector.
What China will have to deal with that is out of its control, however, is the global economy. There are currently four scenarios for the global economic outlook, says Nouriel Roubini over at Project Syndicate. The most positive is a “soft landing,” where central banks in the advanced economies manage to bring inflation back down to their 2% targets without triggering a recession. There is also the possibility of a soft-ish landing. Here the inflation target is achieved, but through a relatively mild (short and shallow) recession. The third scenario is a hard landing, where returning to 2% inflation requires a protracted recession with potentially severe financial instability (such as more bank distress and highly leveraged agents suffering serious debt-servicing difficulties). If the effort to tame inflation triggers severe economic and financial instability, a fourth scenario becomes possible: central banks wimp out and decide to allow for above-target inflation, risking a de-anchoring of inflation expectations and a persistent wage-price spiral. Roubini is of the view that the risk of a hard landing (scenario three) now appears lower than it was a few months ago, and that the odds of a short and shallow recession over the next year (scenario two) are now higher.
Geopolitics
During her visit to China, Treasury Secretary Janet Yellen’s main talking point, according to Nikkei Asia, was:
Even when the United States and China have disagreements, it is vital that the two countries find ways to work together on issues of shared -- and global -- concern, including debt distress in low-income and emerging economies and climate finance.
Cooperation on climate finance was a "critical" responsibility of "the world's two largest emitters of greenhouse gases and the largest investors in renewable energy," she said. China, classified as a developing country by the United Nations, has long said it was the responsibility of developed nations to help poor countries pay to address climate change. But Beijing says it could contribute to "loss and damage" due to climate change on a voluntary basis.
Yellen’s overall assessment of her trip is that "some progress" toward establishing better communication was made, writes Nikkei Asia. Because, apparently, she is willing to listen to China's perspective on Washington's moves to safeguard U.S. national security. She acknowledged that no specific next steps had been decided, but added that in her view, "No one visit will solve our challenges overnight". "But I expect that this trip will help build a resilient and productive channel of communication", Yellen said.
The EPM view slightly differs from Yellen’s, probably because we have a different understanding of the Chinese perspective on the matter. Fundamentally, China is of the view that America has been working internationally to hold it back. There was Obama’s military “Pivot to Asia”. Then Trump’s Trade War. Biden has continued both, accelerating the US military’s deployment in Asia via AUKUS and deals with Japan, South Korea and most recently the Philippines, while also introducing the semiconductor sanctions. If one were to take a step back and look at how China’s responded to all that, one can only conclude it has shown remarkable restraint. It has communicated its grievances, but held back from tit-for-tat measures in response that would have affected global trade. Our view is that China kept hoping for a diplomatic solution. That, we believe at EPM, has changed since the recent Blinken visit to China, especially since it was followed by Biden calling Xi a “dictator”, which Blinken then said he agreed to. We believe the Chinese has come to the conclusion that the US is not willing to backtrack in any way from its current strategy and policy vis-à-vis China, which is about military and economic containment. That is why we believe China introduced its export controls on gallium and germanium now, and not earlier. And why we believe China will gradually introduce more such measures, while accelerating its preparations for what on the current course becomes an inevitable military confrontation – inevitable from the Chinese perspective, because the US military is encircling it, via multiple “lines of defense”, blocking China’s access to the Pacific, which would have the effect of permanently subordinating China to the US. This is evidenced by the fact that while Yellen visited China, Xi visited the Chinese army, during which he told military representatives that it should "dare to fight, be good at fighting, and resolutely defend national sovereignty [and] security", according to the Manilla Times. At the same time, we do not believe China will end diplomatic communications with the US. This is evidenced by the fact that it has agreed to a visit by John Kerry to talk climate. But, in these diplomatic engagements, China will sit back and wait, telling every US visitor “first show your goodwill by undoing some of your past decisions” – which no US visitor will agree to doing, we expect.
Around the same time as Yellen, the Russian navy chief Nikolai Yevmenov was also in Beijing, writes the South China Morning Post. After discussing naval cooperation with Chinese Defence Minister General Li Shangfu, he met the commander of the Chinese navy Admiral Dong Jun, and visited a major military shipyard in Shanghai which produces Type 054 frigates, Type 075 amphibious assault ships and Type 071 amphibious transport dock ships for China’s People’s Liberation Army. This act of military diplomacy follows talks between Chinese President Xi Jinping and his Russian counterpart Vladimir Putin in March, when they announced they would deepen their “comprehensive strategic partnership of coordination” – a designation that puts Russia above all of China’s other diplomatic ties, writes SCMP. In June, General Liu Zhenli, the head of the Joint Staff Department of the Central Military Commission, China’s top military decision-making body, met his Russian counterpart Valery Gerasimov in a videoconference.
France is holding up a deal to expand NATO’s reach into Asia, opening a split in the Western security alliance, writes Politico. For months, NATO officials have been discussing plans to open a liaison office in Japan, which would represent the allies’ first outpost in the region at a time of growing tension between the West and China. Next week’s annual leaders’ summit in Lithuania —taking place against the backdrop of Russia’s war in Ukraine — was earmarked as a moment for making progress on the plan. But French President Emmanuel Macron has put his foot down, insisting such geographical expansion would risk shifting the alliance’s remit too far from its original North Atlantic focus. According to Nikkei Asia, France’s position will likely result in NATO delaying the opening of an office in Japan, and thereby delay the efforts to “deepen security cooperation with democratic countries in the Asia-Pacific region, such as South Korea, Australia and New Zealand”.
War on the Rocks looks at how China came onto the NATO agenda, and why the upcoming NATO meeting in Vilnius, Lithuania, is so important for the subject. Differences between the United States and Europe on how to approach China loom large in determining the future health of trans-Atlantic relations, it says.
Energy Transition & Technology News
Policymakers and investors in Europe are taking an increasing notice of geothermal, as part of a broader rethink of Europe's energy system in the scramble to ditch Russian gas, writes Politico. Geothermal energy is currently used in just 2 million of the EU's 100 million home heating systems, says the European Geothermal Energy Council (EGEC) lobby. It’s split into shallow geothermal, which links heat pumps to wells up to 500 meters below the surface, and deep geothermal, which can involve drilling 5 kilometers into the ground. The goal is for geothermal to supply a quarter of Europe’s energy needs by 2030.
Climate Politics
Shipping’s international regulator, the International Maritime Organization (IMO), has adopted a net zero target for 2050, with interim “checkpoints” by 2030 and 2040, writes Bloomberg. But, Bloomberg says, the IMO non-binding emissions goals do not align with the Paris Agreement’s stretch goal to limit global warming to 1.5C. The IMO agreed to reach net-zero GHG emissions by or around, i.e. close to 2050, taking into account different national circumstances; to uptake of zero or near-zero GHG emission technologies, fuels and/or energy sources to represent at least 5%, striving for 10%, of the energy used by international shipping by 2030; to reduce the total annual GHG emissions from international shipping by at least 20%, striving for 30%, by 2030, compared to 2008; and to to reduce the total annual GHG emissions from international shipping by at least 70%, striving for 80%, by 2040, compared to 2008.
The Electrification of Transport
A "Chinese storm" is looming over Europe's growing electric vehicle (EV) sector, Renault Chairman Jean-Dominique Senard told Reuters. Senard said:
When I talk about a Chinese storm, I'm talking about the strong pressure today related to Chinese (electric) vehicle imports into Europe. We are capable of making electric vehicles, but we are fighting to ensure the safety of our supplies
Adding China's EV industry and supply chain for raw materials resulted from years of investments that would cost billions of euros to replicate. Senard warned:
If there's a real geopolitical crisis, the damage to battery factories solely powered by products coming from outside will be considerable . That's the issue
In the EPM view, another part of the “Chinese storm” that Renault should be focusing on is that while the European car manufacturers dragged their feet, the Chinese car manufacturers focused on development of EV technology and actually building the vehicles. As a result, they now have a decisive lead in quality and cost, and as we reported before, are working hard to bring their vehicles to European consumers over coming years.
The strong ramp-up in sales for EVs, led by growth in China, means copper demand will continue to grow for the remainder of the decade, but innovation in EVs has emerged as a limiting factor, according to two recent forecasts, writes Reuters. Copper has been seen as a green-energy transition play, in part because of the wiring needed for electric cars. EVs can use as much as 80 kgs (176 pounds) of copper, four times the amount used in a typical combustion engine vehicle. But EV and battery makers have found ways to cut weight and costs that also mean less copper is needed per vehicle, Goldman Sachs and consultancy CRU Group said separately. CRU Group lowered its estimate for copper usage in an average EV to 51-56 kgs between this year and 2030. That was down from its previous forecast of 65-66 kgs over the same period.
Other
The Harvard Law School Forum on Corporate Governance writes that the UK High Court has thrown out a case against the directors of Shell, brought before it by ClientEarth. In short, ClientEarth argued that the directors of Shell had not done their fiduciary duty when it comes to managing Shell’s emissions. ClientEarth said they had failed to adopt a measurable and realistic pathway to meeting the absolute net zero (NZ) emissions reduction target by 2050 set out in Shell’s energy transition strategy; failed to properly manage climate risk; and failed to comply with the May 2021 ruling of a Dutch court ordering Shell to reduce its worldwide aggregate CO2 emissions by net 45% compared to 2019 levels by the end of 2030. The Harvard Law School says that in line with the English courts’ longstanding reticence to interfere in company management, including on climate change matters, the UK High Court judged that ClientEarth had failed to establish a prima facie case. The Court emphasized the array of risks a large and complex global business such as Shell faces, requiring the directors to balance a range of competing considerations in their decision making, in respect of which the courts were ill-equipped to intervene.