Energy, Politics & Money - 10 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in chaotic times!
In this roundup, we look at the possibility of war in the Asia Pacific. Unfortunately, this is getting ever more likely. Both China and the US are preparing for a conflict, which is what increases the risk of war, and both blame the military moves of the other for doing so. It is exactly the sort of vicious spiral downward that led to World War I, also because the US is drawing in its allies in the region, in particular Japan and Australia. For humanity a war between these parties would obviously be disastrous. For certain industries, however, such as the military industry but also energy, it would be a bonanza.
Furthermore, we look at:
How China’s Zero Covid policy is driving concern among crude oil traders
Why there isn’t enough tanker capacity to move all of Russia’s current crude oil production around the world once the next round of US and EU sanctions hit
Plastics recycling and the challenges it faces, where we at EPM propose an alternative pathway forward (which we are certain will not become the chosen way)
Another pledge coming at COP, this time to reduce methane emissions from the energy industry – which we at EPM note makes not only environmental sense but also economic, and is likely to result in calls by Oil & Gas producers for public investment in gas infrastructure
“Green bonds”, which enable an organization to use ESG performance to lower its cost of capital
General Energy News
Crude oil prices have been on a downward trend this week, as fears over demand dominate the market. In particular China is a cause of concern. Post the Communist Party’s congress many were hoping the Zero Covid policy would be loosened, supporting economic growth and thereby energy demand growth, but what is instead has happened is a flare up in cases and additional lockdowns. Brent for January settlement is now below $93 while WTI for December delivery is trading below $85, reports Bloomberg.
Alaska’s crude oil exports to China have almost completely dried up, reports Bloomberg. The reason is economics. Alaskan oil has this year traded at its biggest premium to the US benchmark since 2014, while Chinese buyers can also access Russian crude oil that is selling at a discount due to sanctions.
Julian Lee over at Bloomberg goes into some more detail on a subject EPM raised a while ago, that there isn’t enough tanker capacity to move all of Russia’s current crude oil production around the world once the next round of US and EU sanctions hit. This, we mentioned at that time, is why the planned sanctions will be disruptive for the global crude oil market and push up prices. Lee reports on analysis by analytics company Vortexa, which has calculated that shifting all of Russia’s European crude flows to “friendly” countries — essentially China, India and Turkey — would require 219 tankers of various sizes. That’s three times as many as were used to transport its crude in October, driven by the much longer voyages involved.
Geopolitics
Over recent days Bloomberg has been running a series of articles about how “US partner nations” in the Asia Pacific are affected by / responding to the growing geopolitical tensions between the US and China. What we at EPM believe you should take serious note of is that the whole series focuses primarily on military conflict, which it believes is “increasingly plausible”, as explained by the first article in the series. The second and third article discuss how Japan and Australia are gearing up to fight China alongside the US. As to how this could play out, at EPM we give you a quote from the series: “The prospect of war in the Taiwan Strait is forging Australia, Japan and the US into a latter-day Triple Entente — the pre-World War I coalition that sought to contain Imperial Germany — in the Western Pacific”. That should leave little to the imagination.
Energy Transition & Technology News
The Financial Times looks at whether plastics recycling is necessary, or a “greenwashing” tactic to preserve the status quo. A key challenge is that there are hundreds of different plastics, each with different additives and colourants. This makes mechanical recycling at a scale that would have a real impact almost impossible. The solution would be “design for recycling”, but this would need to be done at a cross-industrial level, with plastics consuming and plastics manufacturing companies all coming together to define standards – something we at EPM do not see as likely. The alternative solution is chemical recycling such as pyrolysis, which can deal with mixed feedstocks. But, this technology remains under development, is expensive, energy intense and thus a significant GHG emitter. In EPM’s view, that leaves two much simpler potential solutions as the rational pathway forward. First, reduce plastics usage in areas where alternatives exist, through “wisening up” the end consumer about plastics usage and taxing it for its externalities such that the alternative solutions also have an economic advantage. Second, manage plastics waste much better, to ensure that whatever plastics do get uses, they all end up in managed landfills.
Climate Politics
Another day at COP, another “pledge”. The United States and European Union plan to unveil a joint agreement to step up efforts to reduce emissions of methane from the fossil fuel sector, reports Reuters. The declaration would build on an agreement spearheaded by the United States and EU last year, the so called “'Global Methane Pledge” to reduce methane emissions 30% by 2030 from 2020 levels. The objective is to stop routine venting and flaring of natural gas, and require companies to fix leaks in their infrastructure. At current and likely future natural gas prices, we at EPM note, this is not only sensible from an environmental perspective, but certainly also from an economic perspective. Next, the “big flarers” are likely to call for government support – i.e. infrastructure investment -- to make it easier for them to bring the methane to market.
Just to highlight the difference between pledge and actual impact, the Financial Times reports on Europe delaying its REACH (“Registration, Evaluation, Authorisation and Restriction of Chemicals”) program. It would oblige manufacturers to remove from sale as many as 12,000 compounds that have the potential to cause cancer, infertility and other serious health problems. Updating REACH is a core component of Europe’s Green Deal,
ESG
Reuters has an interesting deepdive on “green bonds”, which enable an organization to use ESG performance to lower its cost of capital.
https://open.substack.com/pub/finiche/p/portfolio-insights?r=1s05vd&utm_medium=ios&utm_campaign=post