Energy, Politics & Money - 12 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 communique issued by NATO halfway through its meeting in Vilnius. It firmly establishes China and Russia as direct threats to the alliance, calls for a comprehensive military buildup across the alliance members, including an “industrial policy” to ensure the West’s defense industry is redeveloped.
EPM – as we have long argued – views the communique as a further indication the world is breaking apart into regions. The language of the communique appears to leave little to no room for compromise solutions between NATO on the one hand, and China and Russia on the other.
We believe, therefore, that the current conflict will remain and is most likely to intensify. This means no resolution for the Ukraine War is on the horizon, and a significant likelihood of similar conflicts developing elsewhere. The communique also highlights a risk of military conflict between the two camps (and is likely) because that is the usual outcome of a military build-up (with the Cold War being an exception to this general historical rule). So, if you are looking for historical guidance as to where the world is heading, how this will affect the global economy, and how you could best prepare for it, EPM believes the period 1930 – 1940 is the one you should refer to.
Furthermore, we look at:
The impact of the Saudi production cuts, which is not as much reflected in the sweeter and lighter crude grades Brent and WTI, but is becoming more pronounced in the heavy sour grades
The OPEC view on the outlook for all things energy: +23% through 2045
Lower than expected inflation in the US
“Bidenomics”, which is about the new “rules” for government involvement in the economy
Why the developing world is slowly but steadily drifting away from the developed world: because it sees the western powers as selfish, self-satisfied and hypocritical
John Kerry, the U.S. special envoy on climate issues, scheduled visit to China
Toyota’s continued, desperate efforts to create a “hydrogen cars” business, even after the strategy failed in the US
General Energy News
Oil is finally nudging higher, writes Reuters. On Wednesday it extending gains for a second session, as planned supply cuts by the world's biggest oil exporters and hopes for higher demand in the developing world offset wider economic concerns globally. Brent is now approaching $80 per barrel, while WTI is close to $75.
The impact of the Saudi and Russian oil production / export cuts is varied, writes Bloomberg. Supplies of lighter, sweeter oil that’s similar to West Texas Intermediate and Brent, the world’s main futures grades, have been relatively plentiful. But more sour and heavy crudes, which more closely resemble those of the world’s top exporters, prices are shooting up faster as refineries clamor for alternatives to the barrels that the Kingdom in particular has cut. The premium of Norway’s Johan Sverdrup above a regional benchmark surged to a fresh record on Friday, having been at hefty discounts as recently as December. Mars Blend soared to a three-year high last week. Western Canada Select was recently at a discount of $10 to Nymex WTI benchmark prices, which is the strongest level seen since the government of Alberta implemented an OPEC-style production cut of 325,000 barrels a day between 2019 and 2021.
Global demand for all forms of energy is forecast to rise by 23% through 2045, OPEC Secretary General Haitham Al Ghais told a Nigerian oil and gas conference, according to Reuters. Al Ghais said:
Global primary energy demand is forecast to increase by a significant 23% in the period up to 2045, which means we will need all forms of energy. We will require innovative solutions such as carbon capture utilisation and storage, and hydrogen projects in addition to a circular carbon economy, which has received a positive endorsement from the G20.
The global oil industry needs $12.1 trillion in investment during the same period, Al Ghais said, adding the industry was not on track to reach that level of investment yet.
Macroeconomics
US inflation cooled sharply last month, writes Bloomberg, offering fresh hope that the Federal Reserve can soon wrap up the most aggressive interest-rate hikes in decades. The consumer price index rose 3% last month from a year ago, the smallest advance in more than two years, according to data out Wednesday from the Bureau of Labor Statistics. Excluding food and energy, the core CPI — which economists view as the better indicator of underlying inflation — advanced 4.8%, also the lowest since 2021.
Forty years after Reaganomics rejected government intervention in the economy, the US is embracing massive government intervention in the markets, writes the Financial Times. The new approach is spearheaded by three major laws:
The Inflation Reduction Act (passed in August 2022)
The Chips and Science Act (passed in August 2022)
The Infrastructure Investment and Jobs Act (passed in late 2021)
Combined, this legislation offers hundreds of billions of dollars of subsidies, grants and loans to spur new investment in broadband networks, semiconductors, electric vehicles and batteries. But their significance goes well beyond their immediate impact on specific industries as they represent a profound shift in economic thinking in America.
If the Biden approach amounts to a transformation in US economic policy, it has been a shift that has been building for some time. The roots are in the financial crisis of 2008-9, when American confidence in laissez-faire economics was badly dented. The sluggish recovery that ensued was tarnished by anemic labour markets and stagnant household incomes, leading to a sense of malaise that many believe contributed to Donald Trump’s victory in the 2016 election against Hillary Clinton.
Trump used his presidential inauguration address to call for an end to the “American carnage” of “rusted out factories”. He passed a big tax cut that cheered corporate America but on the trade front there was huge upheaval: he forced a high-stakes renegotiation of NAFTA with Canada and Mexico, then launched tariff wars with China, the EU and other US trading partners around the world, in defiance of the traditional Republican approach to global commerce.
By the time Biden entered the White House in 2021, the mood had shifted even further. The pandemic had revealed the potential vulnerability of US supply chains, while geopolitical tensions with China rose sharply. Russia’s full-blown invasion of Ukraine sent major shock waves through global energy markets. And Biden made it his mission to provide massive subsidies for industrial America as the solution to maintaining both US economic primacy in the world and prevent further lurches towards forms of populism that could undermine democracy.
Geopolitics
The communique issued by NATO halfway through its meeting in Vilnius firmly establishes China as an enemy of the alliance:
The People’s Republic of China’s (PRC) stated ambitions and coercive policies challenge our interests, security and values. The PRC employs a broad range of political, economic, and military tools to increase its global footprint and project power, while remaining opaque about its strategy, intentions and military build-up. The PRC seeks to control key technological and industrial sectors, critical infrastructure, and strategic materials and supply chains. It uses its economic leverage to create strategic dependencies and enhance its influence.
EPM find this ironic as the exact same could be said about the US, considering its military buildup in Asia, its sanctions policies, and IRA. As to the Ukraine War, it says:
Russia bears full responsibility for its illegal, unjustifiable, and unprovoked war of aggression against Ukraine. We do not and will never recognise Russia’s illegal and illegitimate annexations, including Crimea. All those responsible must be held accountable. Russia must immediately stop this illegal war of aggression, cease its use of force against Ukraine, and completely and unconditionally withdraw all of its forces and equipment from the territory of Ukraine within its internationally recognised borders, extending to its territorial waters.
At EPM we note this NATO stance unfortunately leaves very little room for a negotiated settlement – not even a talks to enable a ceasefire. As to Ukraine’s future in NATO, it says:
Ukraine’s future is in NATO. Ukraine’s path to full Euro-Atlantic integration has moved beyond the need for the Membership Action Plan.
Meaning that all doors have been opened for Ukraine’s entry into NATO. Which, we at EPM note, Russia says is one of the reasons that it invaded the country. The alliance says this is unjustified, because “NATO does not seek confrontation and poses no threat to Russia.
Unfortunately, it doesn’t matter how often the alliance tells itself that. Russia does not believe it, rightly or wrongly, and its actions are and will continue to be based on what it believes (Russia views NATO as an existential threat to its existence). A true attempt to find a solution for the humanitarian and environmental catastrophe that is the Ukraine War starts with acknowledging the views of the parties in the conflict, such that a search can be launched for compromise in between the different positions. As far as NATO is concerned, it seems this remains off the table, a taboo almost. Which is another reason why we at EPM believe the Ukraine War, and the associated Russian sanctions, is most likely to continue into the medium term.
To deal with the challenge to the “rules-based international order”, NATO members reaffirmed their commitment to spending a minimum of 2% of GDP on defense, and 20% of it on “major equipment”. They agreed this requires “a stronger defence industry in Europe”. The alliance has developed a “Defence Production Action Plan”, an industrial policy type agreement to ensure the defence industry is built out across the alliance members.
Lastly, the communique formally establishes that:
The Indo-Pacific is important for NATO, given that developments in that region can directly affect Euro-Atlantic security.
The EPM view on this is that it is factually correct. However, many other parts of the world are equally important for Euro-Atlantic security – think of the energy coming from the Middle East, or minerals that are mined across Africa. NATO’s line of reasoning therefore indicates that it sees for itself a global role, with the justification being “it is required for security in our part of the world”.
In summary, therefore, EPM views the communique – as we have long argued – as further indication the world is deliberately being broken into separate regions. The language of the communique leaves little to no room for compromise between NATO on the one hand, and China and Russia on the other. We believe, therefore, that the current conflict will remain, and is most likely to intensify. This means no resolution for the Ukraine War on the horizon, and a significant likelihood of similar conflicts developing elsewhere. The communique also highlights the risks of military conflict between the two camps, because that is the usual outcome of a military buildup, the Cold War being exception to this general historical rule. So, if you are looking for historical guidance as to where the world is heading, how this will affect the global economy, and how you could best prepare for it, it is the period 1930 – 1940 that you should refer to, we believe.
The Atlantic Council has asked a number of western reactions for their reaction to the NATO communique, which you can find here. Reuters reports that China responded harshly to the communique. China resolutely opposes NATO's "eastward movement into the Asia-Pacific region" and warned any action threatening Beijing's rights would be met with a resolute response, the Chinese mission said in its statement.
Martin Wolf of the Financial Times looks at the reasons why the developing world, or the Global South, is slowly but steadily drifting away from the developed world, of the Global North. The South views the western powers as selfish, self-satisfied and hypocritical, he says. And, he believes, they are not altogether wrong in that assessment.
Climate Politics
The United Arab Emirates, host of the upcoming UN climate summit, is expected to outline its agenda for COP28 at a ministerial meeting in Brussels this week, writes the Financial Times. COP28 president Sultan Al Jaber, also the head of the Abu Dhabi National Oil Company (ADNOC), is expected to set out his priorities at the meeting this week attended by ministers and high-level representatives from more than 30 countries, including the G20.
In preparation for the event, Al Jaber has written an opinion piece with IEA chief Fatih Birol for Fortune. The world needs to come together at COP28, and fund a just energy transition, they say. Their assessment of the current state is that a high cost of capital weighs heavily on many potential new clean energy projects. Despite solar’s surge, the progress of wind, hydropower, and biofuels is lagging. Electricity grids aren’t expanding fast enough to accommodate increases in supply from renewables. And growth in energy efficiency investment is expected to slow this year. Even more worryingly, they say, is that there is a major global divide in the funding needed for the clean energy transition. Emerging and developing economies account for four-fifths of the world’s population, including all 775 million people who lack access to electricity, as well as the 2.4 billion people who lack access to clean cooking fuels. These are also the economies where future emissions will mostly come from–and where the cost of reducing emissions is cheapest. Yet currently, they represent less than half of global investments in clean energy.
John Kerry, the U.S. special envoy on climate issues, will visit China from July 16-19, writes Reuters. Kerry's trip follows a visit by Secretary of State Antony Blinken last month and will come a week after the departure of Treasury Secretary Janet Yellen.
The Electrification of Transport
Toyota will focus on selling hydrogen-powered trucks and cars in Europe and China, as part of a push to sell 200,000 of these vehicles by 2030, writes Reuters. The decision marks a shift in focus for the Japanese automaker. Until now Toyota's focus has been on passenger cars and the North American market, an approach that had stalled. We at EPM are flabbergasted. 200.000 vehicles? That’s what Tesla sells in a (really) good month! It’s high time for Toyota to accept there is no, and never will be, demand for hydrogen in transportation.