Energy, Politics & Money - 11 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 look at:
Citigroup’s contrarian view on the outlook for oil
The effectiveness of the price caps on Russian energy
China’s lower than expected inflation in March, which indicates its economic recovery post-Covid is off to a slower than expected start
The Philippines’ decision to join the US in its confrontation of China, which provides the US with access to strategically located military bases in SE Asia
Japan’s new National Security Strategy, which similarly places it firmly in the US camp an in opposition to China
PTT Group’s investment in green hydrogen, along Saudi Arabia's leading renewable energy company, ACWA Power
South Korea’s revision of its 2030 targets for greenhouse gas emissions, lowering the decarbonization target for heavy industry, due to "difficulties in the supply of raw materials and technology prospects", while raising it for the power sector
Fears for waning public support for Europe’s climate policies
The boom in energy-related lobbying in the US, following the passing of the Inflation Reduction Act (IRA) on the heels of the Bipartisan Infrastructure Law
General Energy News
Citigroup takes a contrarian view on the outlook for oil. Oil prices are likely to fall below $80 a barrel even with OPEC’s recent apparent efforts to support that level with unexpected cuts, according to Ed Morse, the bank’s global head of commodities research, writes Bloomberg. China’s long-awaited recovery has been slower than expected (something EPM covers under Macroeconmics), while the prospect of economic slowdowns in the West is crippling demand, he said. Furthermore, investors may be underestimating how much production growth may come out of Iraq and Venezuela, potentially offsetting some of the cuts that the Organization of Petroleum Exporting Countries and its allies agreed to this month.
Most of the governments which are participating in the Russian price cap policy say it has generally worked as intended. The Urals benchmark stands at a steep discount to the international Brent price, while export volumes seem largely unchanged. But, writes the Financial Times, there are many signs that things are not what they seem. The Urals discount cannot be seen in pricing in Russia’s Pacific ports, where much of the export has been diverted and trades above the cap. It is even unclear how well pricing indices capture real transaction prices. Traditionally based on self-reporting by traders, they are surely less reliable in conditions of economic war given massive incentives to under-report. Even Russia’s ministry of finance is said to worry that oil exporters misstate prices to reduce tax liabilities. The refined products price cap is more complicated still. Loopholes are created by the common practice of blending and the difficulty of establishing provenance. And many different petroleum derivatives are shoehorned into just two price categories.
The cost of Iraqi oil to India dropped in February as a steady flow of Russian cargoes undercut it, writes Bloomberg. The price of crude from Iraq averaged $76.19 a barrel, compared with $78.92 in January, according to data published by India’s ministry of commerce and industry. Russian supplies averaged $72.14, marginally lower than January.
Macroeconomics
Consumer demand in China has stayed persistently weak in March, writes Reuters. This assessment is based on the fact that, in contrast to surging prices globally, China's retail and producer inflation has remained anaemic, as the consumer and industrial sectors struggle to recover from their pandemic hit. The consumer price index (CPI) rose 0.7% year-on-year, the slowest pace since September 2021 and weaker than the 1.0% gain in February, the National Bureau of Statistics (NBS) said on Tuesday.
Geopolitics
Nikkei Asia looks at the role of the Philippines in the US – China confrontation. While former president Duterte was suspected by many of inclining to China, current president Ferdinand Marcos Jr. has doubled down on defense cooperation with the US, giving Washington new access to Philippine military bases, reviving security dialogues and joining new multilateral discussions that also include Japan and Australia. Marcos' decision to expand cooperation with the US under the Enhanced Defense Cooperation Agreement is part of a broader multilateral effort to constrain China. Under the pact, the US is set to gain access to and preposition weapons systems in strategically located facilities in the northern Philippine provinces of Isabela and Cagayan, close to Taiwan, as well as on the island of Palawan, near the South China Sea's Spratly Islands.
Related, one day after China concluded three days of military exercises around Taiwan, simulating precision strikes on the island, the Philippines and the US launched their largest-ever joint military drills, Nikkei Asia writes. 17,600 troops from both countries are taking part in a series of war games until April 28.
Nikkei Asia also looks at Japan, which similarly has clearly chosen to be on the side of the US, in opposition to China. The country’s new National security Strategy sets this out pretty clearly. The strategy describes South Korea as "a highly important neighboring country to Japan both in a geopolitical context and in regard to Japan's security." The words on China are much less rosy. "Both Japan and China have important responsibilities for the peace and prosperity of the region and the international community," the strategy says. "Japan will build a 'constructive and stable relationship' with China through communication at various levels, in which Japan asserts its position and calls for responsible actions." A senior Japanese official explained to Nikkei Asia:
It is a matter of 'us' or 'them.' Whatever personal feelings people may have toward South Korea, at the end of the day, South Korea stands on the side of defending the existing international order. Therefore, they are one of us. That can't be said of China. China is clearly 'them' in everybody's eyes. As long as the Chinese Communist Party is in power, they will probably not become one of us."
Energy Transition & Technology News
State-owned Thai oil and gas conglomerate, PTT Group, will invest $7 billion to produce "green" hydrogen with Saudi Arabia's leading renewable energy company, ACWA Power, Nikkei Asia writes. the project aims to build a plant in Thailand with a production capacity of 225,000 tons of hydrogen per year -- equivalent to around 1.2 million tons of ammonia.
On the topic of hydrogen, China's Sinopec will build a pipeline to transfer green hydrogen from renewable energy projects in China's northwestern Inner Mongolia region to cities in its east, Reuters reports. The pipeline will stretch 400km from Ulanqab in sparsely populated Inner Mongolia to the capital Beijing, and will have an initial capacity of 100,000 tonnes per year. The project is the country's first 'West to East' green hydrogen transmission line.
Climate Politics
South Korea revised its 2030 targets for greenhouse gas emissions, writes S&P Global. The adjustment of the National Basic Plans for Carbon Neutrality and Green Growth was approved by a cabinet meeting on April 11. The final version adjusted targets for two sectors -- lowering the target for the industrial sector while raising the target for the power production sector, with the country's total reduction target kept unchanged at 436.6 million mt of CO2 equivalent by 2030, or 40% from 2018 levels. Under the updated plan, industries will be allowed to emit 230.7 million mt in 2030, more than 222.6 million mt set previously in the nationally determined contributions target unveiled in October 2021. It marks an 11.4% reduction from 260.5 million mt that the industrial sector emitted in 2018, compared with a 14.5% cut seen in the 2021 target. The Presidential Commission on Carbon Neutrality and Green Growth that mapped the target cited "difficulties in the supply of raw materials and technology prospects" as a reason for easing burdens for industries.
A senior Dutch minister has warned fellow politicians in Europe of waning public support for the region’s climate policies, writes the Financial Times. Deputy prime minister Sigrid Kaag, who also serves as minister of finance, told the Financial Times of the increasingly difficult task her government faces rallying some parts of the electorate behind policies with intergenerational ramifications, including the need to reduce nitrogen emissions. Established political parties, she argued,
face a level of resentment, resistance, to actions that are proposed which we believe are in the interests of the country and are intergenerational, but are either poorly communicated [or] poorly understood, and come at a time of great insecurity and uncertainty.
Other
The Economist writes that with up to $800bn in clean-energy handouts up for grabs over the coming decade, lobbyists in the US are in highest-gear. The energy industry as a whole spent nearly $300m last year on lobbying, the most since 2013, with the reason being the passage last year of the Inflation Reduction Act (IRA), on the heels of the Bipartisan Infrastructure Law, which also shovels billions in subsidies towards clean infrastructure. Targets are the Congress, the White House itself, the US Department of Energy, and the Internal revenue Service since it hands out the tax credits the bills include.