Energy, Politics & Money - 12 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, EPM continues our closer look at the outlook for energy in 2023. In response to the analyses of others, today we explain why oil will have a solid floor at around $70 this year, while LNG could well spike above 2022’s record levels– if China LNG use returns to normal, which will leave Europe struggling to find the volumes it needs. The global recession could affect oil demand in a manner similar to 2008 – 2009, but OPEC+ policy seems set to deal with such an eventuality.
Furthermore, we look at:
The first signs that indeed, the decline in transportation fuels will be offset by increases in petrochemical demand for crude oil
The World Bank’s cut to its 2023 and 2024 growth forecasts, which indicate the bank is finally acknowledging what we at EPM have been saying since the summer of 2022, namely that the world economy is on a path to recession
The potential for a real estate crisis in China this year
The background to the American and Chinese diplomatic maneuvers in Asia Pacific, how these are likely to play out, and what this says about the prospect for war in the region
The plan of Russia and Iran to establish a transport hub that would connect the Russian economy with Asia, in particular India but also other non-aligned countries, while bypassing Europe
How the US’s Inflation Reduction Act is spurring on third-party verifications environmental, social or governance performance in the upstream gas sector
The Biden plan for eliminating carbon emissions from the transportation sector by 2050
Australia’s plan to make the country’s biggest polluters slash their emissions by at least 30% over the next seven years
General Energy News
Nikkei Asia agrees with the view we shared yesterday here at EPM, namely that monetary policy and China’s reopening will be key variables in global commodity markets this year – perhaps because that is obvious. It also believes that most commodities are unlikely to soar above the level they reached in 2022.
When it comes to oil, and especially natural gas, at EPM we are not so certain about Nikkei Asia’s views – and of course we talk of averages, not daily spikes.
On oil, OPEC+ policy and US restocking of the Strategic Petroleum Reserve lay a solid foundation below the price, at around $70 per barrel, but there is significant upside potential due to the possibility of China increasing demand.
Similarly on natural gas, where the disruption of supply flows caused by the Ukraine War is more severe – if China LNG use returns to normal, Europe will struggle to find the volumes it needs, which would likely push prices to above 2022 levels.
All that said, EPM’s assessment is that the global economy is in recessionary mode, affecting energy demand, something that is likely to worsen in 2023, especially in Europe, where we believe energy subsidies will soon be curtailed. We see a possibility of monetary policy shifting back into loose territory once the impact of tightening become clearer over the first half of 2023, but even if central banks do lower rates again during the second half of 2023 that itself would unlikely have a significant impact on economic activity in 2023.
Reuters reports that Barclays believes and economic downturn could affect the crude oil price by $15 to $25 per barrel. This assessment is based on a slump in global manufacturing activity similar to the 2008 - 2009 episode and would imply a 1 - 2 million barrels per day reduction in demand.
Over at Bloomberg, Javier Blas looks at the trends affecting demand for crude oil in the US. Interestingly, it seems that will be the first country where the thesis “higher oil demand despite lower fuels demand due to higher demand for petrochemicals” will actually be playing out. He says the EIA estimates that by 2024 American gasoline demand will drop to 8.73 million barrels per day or about 600,000 barrels a day lower than it was in 2018. This fall is to be more than offset by rising consumption of the feedstock used in the petrochemical industry to produce plastics which will hit a record high of about 4 million barrels per day by 2024, up more than 700,000 barrels from 2018.
Macroeconomics
Entirely as we at EPM predicted during 2022, the World Bank slashed its 2023 growth forecasts on Tuesday to levels teetering on the brink of recession for many countries, reports Nikkei Asia. It now expects global gross growth of 1.7% in 2023, the slowest pace outside the 2009 and 2020 recessions since 1993. In its previous Global Economic Prospects report in June 2022, the bank had forecast 2023 global growth at 3.0%. Average growth for the 2020 - 2024 period is now under 2%, the slowest five-year pace since 1960.
Chinese developers are facing growing pressure on debt repayment as 958 billion yuan ($141 billion) of onshore and offshore bonds come due by the end of this year, 70 billion yuan more than last year, writes Nikkei Asia. Of the total, nearly 40 billion yuan of onshore debt and close to 70 billion yuan of offshore debt was issued by developers now considered risky or in distress.
In response, the Financial Times writes, China is moving away from its “three red lines” policy of limiting leverage in the property sector. Beijing is now easing constraints on developer credit and even rolling out potential loans.
Geopolitics
On the US – China conflict, George Friedman of Geopolitical Futures reviews the meeting between China and Philippines last week. “There is a sense in the United States and elsewhere that China is a potentially offensive nation”, he says, but “in fact, it is a fundamentally defensive nation. Its fear is that the US would try, by military action or otherwise, to close China’s ports or prevent its ships from transporting goods. This necessitates from China a military strategy designed to limit U.S. access to the South China Sea and guarantee its own access to the Pacific.” He also says, “it is not Taiwan that Beijing needs to control but the straits north and south of Taiwan. The northern route is flanked by an increasingly powerful Japan, with a force built to block a Chinese adventure.” And “The more interesting gap is the 600 miles (965 kilometers) between Taiwan and the Philippines. It is a broader passage, which is necessarily more difficult to close. The same could be said for the 300-mile expanse south between the Philippines and Indonesia. Indeed, the fact that the Philippines is such a vast congregation of islands creates a multiplicity of routes that China covets. Unlike the northern routes, these southern passes demand defensive forces to be spread much more thinly.” While at EPM we very much agree with the premises laid out here by Friedman, namely that the US is preparing to blockade China, using Japan, South Korea and Taiwan, we don’t believe China has much of a chance to prevent this via diplomacy. Our EPM view is that US influence in the Philippines has been well established for over a century (US – Philippine War of 1899). This is not something that a single meeting between Xi and Marcos will settle. Similarly, the US influence in Japan, South Korea and Indonesia is also well established. China will try, but if it has a weakness, it is an inability to establish relationships of trust with others – at a macro level, everyone wants to do business with China, but nobody seems to really trust China. What this means is that at some point in the future, war will become the only option left for China to establish a route into the pacific. (Nikkei Asia carries a review of the book “Beijing’s Global Media Offensive” by Joshua Kurlantzick, senior fellow for Southeast Asia at the US Council on Foreign Relations, and an expert on China's soft power. It makes the same point. Elites in ASEAN do not trust China.)
Nikkei Asia writes Russia and Iran are working on a new shipping corridor that cuts Europe and its sanctions out of the picture, and are looking to partner with India, which has kept its distance from the Western-led isolation campaign against the two countries. Iran seeks to leverage its potential as a transport hub between Asia, Russia and Europe. Moscow, New Delhi and Tehran signed an agreement back in 2002 laying out plans for the International North-South Transport Corridor, which would connect India and Russia through Iran and Azerbaijan, bypassing the Suez Canal. For Russia, the corridor would provide a major export channel to South Asia without needing to go through Europe.
Also over at Nikkei Asia, an interview with S. Jaishankar India’s foreign minister notes the country does not easily fit into any single geopolitical camp and is by some seen as the new leader of the non-aligned movement. In the interview, S. Jaishankar says India has an ambition to remain unaligned.
Energy Transition & Technology News
S&P Global explains how the US’s Inflation Reduction Act is spurring on blue hydrogen, which in turn is spurring on demand for certified gas, also known as responsibly sourced gas, or RSG, is natural gas produced in a facility certified by an independent third-party for having met certain environmental, social, or governance requirements, such as low methane emissions.
Climate Politics
The Biden administration released a road map Tuesday for eliminating carbon emissions from the transportation sector by 2050, writes the Wall Street Journal. The plan, developed by the departments of Energy, Transportation and Housing and Urban Development, as well as the Environmental Protection Agency, is the first of its kind. It pairs changes to the layout of communities to make Americans less dependent on cars and a switch from gasoline to batteries. In response, our EPM is that while this objective is unlikely to be met, together with the Inflation Reduction Act, this policy will almost certainly drive transformative change in US energy.
Australia’s Labor government on Tuesday proposed to make the country’s biggest polluters slash their emissions by at least 30% over the next seven years, with some leeway for trade-exposed industries, such as aluminium and liquefied natural gas, writes Reuters. Australia’s biggest polluters are 215 oil, gas, mining and manufacturing facilities that annually emit more than 100,000 tonnes of carbon dioxide-equivalent (CO2-e), who together account for 28% of Australia’s carbon emissions. They are forecast to emit 143 million tonnes of CO2-e in the year to June 2023, and the government wants them to cut that to no more than 100 million tonnes of CO2-e by 2030.