Energy, Politics & Money - 10 October 2022
Hard hitting and insightful independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
Happy Thanksgiving to our Canadian readers and subscribers!
In this roundup, we respond to the developing narrative that the recent OPEC+ decision is against US interests and somehow indicative of a (growing) rift between Washington and Riyadh. For us, the OPEC+ decision makes perfect sense, as there is a multi-million barrel per day gap between the quota and actual production, and as the world is staring in the face of a deep recession which will likely start to affect oil demand soon. The US complaints, in our view, are irrational. If high energy prices are a US concern, let them look at their sanctions policy which has caused them. As such, the narrative in our view is mainly “politics”, i.e. an effort by the Biden administration to deflect attention and blame, ahead of the coming midterm elections.
Furthermore, we examine:
The reasons your shorter-term forecast should feature a deep recession
The likely trajectory of China - Russia relations
How the conflict in Ukraine will affect government policy around the world when it comes to energy
A deep dive by S&P Global on the recycling plans of Dow and Eastman
Further evidence of Europe’s main weakness as it tries to confront an energy crisis – which as we mentioned before – is a distinct lack of solidarity between EU member states and how the impact this could have on the continent this winter and into next year
And related, how Europe’s energy crisis is driving de-industrialization.
General Energy News
OPEC+ AND US RELATIONS – NOTHING HAS CHANGED
Reuters continues the narrative that the recent OPEC+ decision is against US interests, and indicative of a (growing) rift between Washington and Riyadh. EPM does not subscribe to this perspective, as we explained earlier. OPEC+ explained the reasoning for its decision, and this makes sense. They are anticipating a recession which will put downward pressure on oil demand, and thus see no need to raise oil production. Additionally, they would like to close the multi-million barrel per day gap between actual production and the quota.
The latter point means the actual impact of the OPEC+ decision is likely to be minimal. We at EPM reported on early assessments of the likely actual impact, which ranged from 30 to 50% of the headline 2 million barrels per day. According to Julian Lee at Bloomberg it could also be as little at 10%. And according to Reuters, Saudi Aramco already communicated to Asian customers it will keep supplies at contracted volumes, irrespective of the quota cut it will be absorbing.
No doubt, this was all factored into the OPEC+ conversation. And we at EPM believe it also featured in the conversations between Washington and Riyadh over September. Our assessment remains, therefore, that the current US stance is mostly about domestic politics. Deflecting blame for high prices at the pump to OPEC is a “traditional approach” by US administrations – which is why OPEC has been around for decades already.
OPEC+ CUTS – UNHELPFUL AND UNWISE?
US Treasury secretary Janet Yellen said the move by OPEC + to cut oil production was “unhelpful and unwise” for the global economy, particularly emerging markets already struggling with high energy prices, writes The Financial Times. Our perspective at EPM is that factually, this is correct. At the same time, it must be remembered that any tightness in the global energy markets at present is due to US sanctions policy: Iran, Venezuela and Russia. Rationally, therefore, it is incorrect for the US to blame OPEC+ for high crude oil prices. So if the US is truly concerned about energy prices in the developing world, it can easily solve this problem by itself, it does not need OPEC+…
NORDSTREAM SABOTAGE – ISOLATING RUSSIA FURTHER
An analysis over at War on the Rocks concludes that the impact of the Nordstream sabotage will be as we at EPM forecasted shortly after the events happened. “The explosions signal a critical juncture in Euro-Russian relations and global energy flows. Indeed, they mark the definitive end of the gas bridge that has linked the fates of Europe and Russia since the 1960s. The violent demise of Nord Stream forces Brussels and Moscow in opposite directions: Europe will now accelerate its clean energy transition and seek closer energy ties with the United States, while Moscow is now China’s gas station. This is not ideal for either side. In the coming years both European competitiveness and Russia’s role on the global stage will diminish.”
PERTAMINA TO LIST GEOTHERMAL ENERGY UNIT
Indonesia plans to list Pertamina Geothermal Energy, a unit of its government-run oil group Pertamina which uses seismic heat to generate electricity in the volcano-studded archipelago, writes The Financial Times. The value the company could be as much as $2 billion, depending on market conditions, according to analysts. State-owned enterprises minister Erick Thohir said the offering would spearhead other capital raisings and strategic partnerships planned for government-controlled companies, including Pertamina’s exploration and production arm Pertamina Hulu Energi.
Macro-Economics
SHORT TERM ECONOMIC FORECAST - DEEP RECESSION ON THE HORIZON
Writing for Project Syndicate Nouriel Roubini says, “Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.” In response to those who say – erroneously in our view at EPM, as you know – that the coming recession will be short and shallow, he says, “the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.” While there is a possibility of, in Roubini’s words, the world’s central banks “wimping out”, we at EPM remain of the opinion that your shorter-term forecast should feature a deep recession as the most likely future.
At present, there are no indications the “wimping out” by central banks will happen any time soon. Bloomberg reports, the Federal Reserve, European Central Bank and most of their peers are set to keep raising borrowing costs aggressively in coming weeks.
CHINA – MULTIPLE BUBBLES DEFLATING SIMULTANEOUSLY?
Bloomberg carries an opinion piece which argues that while air is coming out of the Chinese “everything bubble” at a faster pace than many expected, the bubble should not be expected to pop. As to real estate in particular, it argues the history of China’s real estate sector has been a series of exuberant booms and near-disastrous busts. Every time it appears the end is nigh, policymakers have tweaked the dials on down-payment requirements, mortgage rates, and financing for developers to get things back on track. They’re doing so again, though this time their goal isn’t engineering another boom, but moderating the pace of decline.
Geopolitics
KERCH STRAIT BRIDGE BOMBING
Of course we start with the attack on the Russian bridge across the Kerch Strait to Crimea, early on Saturday. In additional to killing at least three people, it severely damaged a piece of critical infrastructure – an important supply line for the Russian troops stationed on Crimea. According to The Financial Times, Russia’s narrative is that the event was an act of terrorism. Its anti-terrorist committee said a truck exploded on the bridge’s roadside and caused seven fuel tanks on the railway bridge which runs alongside it to ignite. A targeted attack by Ukraine, in preparation for a broader attack to take back Crimea, should not be ruled out, in our view here at EPM, however.
CHINA RUSSIAN RELATIONS – REALLY NOT CLOSE
Nikkei Asia analyses the relationship between China and Russia, in the midst of the Ukraine conflict. The Sino-Russian alliance reached its apex on February 4, when Putin and Xi signed a joint statement declaring that their friendship had “no limits”. But Xi imposed restrictions on China's cooperation with Russia once Putin invaded Ukraine. Although it purchases energy from Russia, China has seemingly refrained from offering weapons or high-tech products to its northern neighbor. It has been reported that Russia has expressed its frustration at China's limited support.
As to the future of Sino-Russian relations, this was a major topic at an international conference held in early September in Tbilisi, the capital of Georgia, a former republic in the Soviet Union. Experts who attended the conference were roughly divided into two groups.
One camp predicted that the close alliance between Russia and China will not last long due to the divergence in their long-term strategic interests. They say Russia is seeking to carve out its future by destroying the existing order, while China is striving to expand its influence over other countries and international organizations within the system.
The second camp said Russia and China will remain close allies because they share the common goal of encroaching on the U.S. sphere of influence. Nikkei Asia’s conclusion that of the two views, the latter is more realistic, is one we at EPM agree with. China is unlikely to split with Russia, at least in the short to medium term. Russia provides China with an opportunity to access natural resources over land, a transportation route that cannot be controlled by the US navy. And, if Beijing abandons Russia over Ukraine, not only would Moscow then harbor a grudge against its giant neighbor for decades, creating a strategic nightmare for China, which would find itself in confrontation with the US on the Pacific front and potentially with Russia on the north side of the country. China would then confront the West alone as this would almost certainly lead to Russia losing the war with Ukraine triggering a collapse of Russia’s current regime.
Energy Transition & Technology News
SAILING TO A LOWER EMISSION FUTURE
In what can only be described as a case of “back to the future”, the Japanese marine shipping industry is latching onto new takes on the wind-blown sail as a way to shrink its carbon footprint, writes Nikkei Asia. Mitsui O.S.K. Lines has unveiled a bulk carrier with a 53-meter-tall 15-meter-wide “hard sail”, which converts wind energy into propulsive force, helping to decrease carbon dioxide emissions. The hard sail automatically extends, shrinks and rotates depending on wind speed, wind direction and strain on the base. Sensors on the base and at the top detect wind conditions. The adjustable sail can effectively convert wind blowing from the front, the back or diagonally into propulsive energy.
RETROFITTING DIESEL FOR HYDROGEN
As a matter of principle, for making progress and delivering results, at EPM we prefer the “multiple sequential small steps forward” approach over the “wait until the one big step / silver bullet” approach. For this reason, we wanted to share with you this information about retrofitting diesel engines to use up to 90% hydrogen, as reported on by TechXplore. (Not because we believe hydrogen for transport is a good idea...) The research underlying this new technology found that by specifically timing the hydrogen direct injection, the mixture condition inside the cylinder of the engine can be controlled to resolve the nitrogen oxide emissions that have been a major hurdle for commercialization of hydrogen engines.
THE PLASTIC RE-CYCLING SUPPLY CHAIN – EASTMAN AND DOW’S PLANS
Chemical, or advanced, recycling of mixed waste plastics, complemented by mechanical recycling, is seen by many of the leading chemical companies as key to achieving the industrial-scale capacity required for recyclate supplies demanded by the market (and regulators). S&P Global summarizes what Dow and Eastman are doing in this area. Both have each unveiled large-scale plans in Germany, France, and the US for chemical and mechanical recycling projects.
EASTMAN – PLASTIC RECYCLING PLANS
Eastman plans to invest up to $1 billion in the phased development of a molecular recycling plant and innovation hub at Port-Jérôme, France. The facility will use Eastman's methanolysis polyester renewal technology to recycle up to 160,000 mt/year of waste plastics into polyethylene terephthalate, which will also be used at a new plastics recycling facility being developed at Kingsport, Tennessee, that will have capacity to process more than 100,000 mt/year of waste plastics.
DOW – PLASTIC RECYCLING PLANS
Dow is targeting up to 600,000 mt/year of advanced recycling capacity by 2030 with partner Mura Technology, and have committed to build five 120,000-metric tons/year facilities across the US and Europe. Dow is also separately building a 26,000-mt/year recycling facility at Dallas, Texas, with partner Atlanta, Georgia-based Nexus Circular. Dow is further investing with recycling partner Valoregen in what it says will be the largest single hybrid recycling site in France, with a planned capacity to process up to 70,000 mt/year of waste plastic into post-consumer resins.
Climate Politics
EUROPE – ENERGY SECURITY AND CLIMATE CHANGE SHARE TOP POLICY CONCERNS
Over at Foreign Affairs, Jason Bordoff and Meghan O’Sullivan write “as a result of the war in Ukraine, energy security has returned to the fore, joining climate change as a top concern for policymakers”. Consequently, they say, countries are likely to increasingly look inward, prioritizing domestic energy production and regional cooperation even as they seek to transition to net-zero carbon emissions. But in addition to economic nationalism and deglobalization, the coming energy order will be defined by government intervention in the energy sector on a scale not seen in recent memory. Based on the US experience from the 1970s, following the Oil Crisis, they warn that the right balance between government involvement and market autonomy must be struck. Governments must focus on addressing market failures. Markets do not incentivize “back up” excess capacities, or emergency storage, or diversification of supplies, for example. Markets neither incentivize decarbonization if CO2 emissions do not carry a cost. And, in what reminds us of the article “Should Energy Security Go Green?” from back in 2017, governments should drive research into new technologies, as well as development of the supply changes these new technology will depend on, through facilitation and enablement.
NET ZERO FINANCING ALLIANCE IS CRUMBLING?
Bloomberg reports the Glasgow Financial Alliance for Net Zero (GANZ), which brings together over 500 finance firms managing more than $135 trillion of assets, has faced possible defections from firms including JPMorgan Chase & Co., Morgan Stanley and Bank of America, as the heavyweights were unhappy with the potentiality of GANZ prescribing binding restrictions on fossil finance. Tensions soared after a United Nations-backed group, Race to Zero, earlier this year proposed such terms as a necessary condition for net-zero claims to be credible. In response, GFANZ said each sub-alliance of the group is “subject only to their own governance structures,” essentially giving them the freedom to ignore such proposals.
EU SUED FOR TAXONOMY ON GREEN INVESTMENTS
The challenge to the EU taxonomy which labels gas and nuclear as “green” investments has gained momentum with a lawsuit filed by Austria against the European Commission, writes The Financial Times. The Commission is already facing two separate legal challenges from environmental groups — one from Greenpeace and one from a coalition including Client Earth and the WWF — over the classification of the fuels as sustainable for investment purposes.
The Global Energy Crisis
EURO ZONE ENERGY SUMMIT – SILENCE ON A WAY FORWARD
EU leaders left myriad questions unanswered last Friday, after concluding a summit in Prague, delaying final decisions on combating sky-high energy prices to future meetings, writes Politico. The meeting, apparently, made no concrete progress on a series of proposals, including a controversial gas price cap. “There is a common will for a common approach”, according to European Council President Charles Michel, who chaired the meeting, but no one can agree on what that common approach should be. This clearly indicates, as we forewarned a few weeks ago, that Europe will be challenged by its lack of cohesion – i.e. the solidarity between member states – as it searches for patchwork-solutions for the energy crisis that has resulted from its sanctions on Russia. An earlier analysis by Politico showed, namely, that the proposed patchwork-solutions risk funneling billions to some countries while leaving others nearly empty-handed.
EURO INDUSTRY TO FACE HUGE ENERGY COST INCREASES
The almost certainty that European industry will be faced with significantly increased energy costs henceforth is already leading many to search for opportunities to shift manufacturing to other locations, reports Reuters. A study by Deutsche Bank saw production in Germany shrinking by 2.5% this year and by 5% in 2023 due to rising energy prices. “If we look back at the current energy crisis in about 10 years, we could see this time as the starting point for accelerated deindustrialization in Germany”, the study said.
ESG
EURO AIRLINES MISLEADING CONSUMERS ON IMPACT OF OFFSETS
According to a new report by the nonprofit Carbon Market Watch, reported on by Bloomberg, Europe’s leading airlines are misleading consumers with claims that they can fly guilt-free by using carbon offsets to neutralize the environmental impact of air travel. These voluntary efforts don’t work, Carbon Market Watch says, because the carriers are relying on cheap, poor-quality offsets that can’t be guaranteed to reduce emissions elsewhere.
Other
THE LOW DOWN ON THE INVESTOR-STATE DISPUTE SETTLEMENT MECHANISM
The Conversation speaks to experts about the investor-state dispute settlement (ISDS) mechanism, how it works, and what implications it can have for energy and decarbonization of the global economy. Fossil fuel investors can use this mechanism to sue countries, if governments make policy decisions they deem to go against their interests.